<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 1996
REGISTRATION NO. 333-08909
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
COSTILLA ENERGY, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 75-2658940
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
400 WEST ILLINOIS, SUITE 1000
MIDLAND, TEXAS 79701
(915) 683-3092
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
MICHAEL J. GRELLA, PRESIDENT
COSTILLA ENERGY, INC.
400 WEST ILLINOIS, SUITE 1000
MIDLAND, TEXAS 79701
(915) 683-3092
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
Richard T. McMillan R. Joel Swanson
Cotton, Bledsoe, Tighe & Dawson, Baker & Botts, L.L.P.
a Professional Corporation 910 Louisiana
500 West Illinois Houston, Texas 77002
Suite 300
Midland, Texas 79701
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 30, 1996
PRELIMINARY PROSPECTUS
$100,000,000
COSTILLA ENERGY, INC.
% SENIOR SUBORDINATED NOTES DUE 2006
-----------------
The % Senior Subordinated Notes due 2006 (the "Notes") are being offered
(the "Notes Offering") by Costilla Energy, Inc., a Delaware corporation
("Costilla" or the "Company"). The net proceeds of the Notes Offering, together
with the net proceeds of the other financing described herein, will be used by
the Company to refinance existing indebtedness, to pay certain costs in
connection with the Corporate Reorganization (as defined herein) and for general
corporate purposes.
The Notes mature on , 2006, unless previously redeemed. Interest on
the Notes is payable semiannually on and , commencing
, 1997. The Notes will be redeemable at the option of the Company, in
whole or in part, on or after , 2001, at the redemption prices set
forth herein, plus accrued and unpaid interest, if any, to the redemption date.
Notwithstanding the foregoing, at any time on or before , 1999,
Costilla may redeem up to 30% of the original aggregate principal amount of the
Notes with the net proceeds of an Equity Offering (as defined herein) at a
redemption price equal to % of the principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the redemption date. Upon a Change of
Control (as defined herein), the Company will be required to make an offer to
repurchase all outstanding Notes at 101% of the aggregate principal amount
thereof plus accrued and unpaid interest, if any, to the date of repurchase. See
"Description of Notes."
Concurrently with the Notes Offering, the Company is offering 4,000,000
shares (4,600,000 shares if the underwriters' over-allotment option is exercised
in full) of its Common Stock (the "Common Stock Offering" and together with the
Notes Offering, the "Offerings") pursuant to an underwritten public offering.
The Notes Offering and the Common Stock Offering are each conditioned on the
consummation of the other.
The Notes will be general unsecured obligations of the Company, subordinated
in right of payment to all existing and future Senior Indebtedness (as defined
herein) of the Company, which will include borrowings under the Credit Facility
(as defined herein). As of June 30, 1996, on a pro forma basis after giving
effect to the Corporate Reorganization, the Offerings and the application of the
proceeds therefrom, as described under "Use of Proceeds", the Company would have
had $0.4 million of Senior Indebtedness. No indebtedness of the Company is
expressly subordinated to the Notes. Initially, both the Notes and the Credit
Facility will be effectively subordinated to liabilities of the Company's
subsidiaries. On a pro forma basis, the total liabilities of the Company's
subsidiaries were $6.5 million at June 30, 1996, all of which were operating
liabilities. See "Risk Factors," "Capitalization" and "Description of Notes."
The Notes will be represented by a Global Certificate registered in the name
of the nominee of The Depository Trust Company, which will act as the Depositary
(the "Depositary"). Beneficial interests in the Global Certificate will be shown
on, and transfers thereof will be effected only through, records maintained by
the Depositary and its participants. Except as described herein, Notes in
definitive form will not be issued. See "Description of Notes--Book-Entry,
Delivery and Form."
The Company does not intend to list the Notes on any national securities
exchange. See "Risk Factors-- Absence of Public Market." Application has been
made to list the Common Stock on The Nasdaq Stock Market's National Market
("Nasdaq National Market") under the symbol "COSE".
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF FACTORS THAT
SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Price to Underwriting Proceeds to
Public (1) Discounts (2) Company (1)(3)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Per Note........................................... % % %
Total.............................................. $100,000,000 $ $
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from , 1996.
(2) The Company has agreed to indemnify the Underwriters (as defined herein)
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company, estimated at $600,000.
The Notes are being offered, subject to prior sale, by the Underwriters
when, as and if issued to and accepted by the Underwriters, and subject to
various prior conditions. The Underwriters reserve the right to withdraw, cancel
or modify such offer and to reject orders in whole or in part. It is expected
that delivery of the Global Certificate will be made on or about ,
1996 in book-entry form through the facilities of the Depositary, against
payment therefor.
NATIONSBANC CAPITAL MARKETS, INC. PRUDENTIAL SECURITIES INCORPORATED
The date of this Prospectus is , 1996.
<PAGE>
PRIMARY OPERATING AREAS
[A GEOGRAPHICAL MAP INDICATING WHERE THE COMPANY HAS
OIL AND GAS PROPERTIES AND OFFICES]
IN CONNECTION WITH THIS NOTES OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OPEN MARKET OR OTHERWISE. SUCH
STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION, FINANCIAL STATEMENTS AND OTHER DATA APPEARING ELSEWHERE IN THIS
PROSPECTUS. THE PRO FORMA INFORMATION GIVES EFFECT TO THE CONVERSION OF COSTILLA
FROM A LIMITED LIABILITY COMPANY TO A CORPORATION, CERTAIN MATERIAL ACQUISITIONS
AND THE OFFERINGS AND THE APPLICATION OF THE ESTIMATED NET PROCEEDS THEREFROM.
SEE "-- SIGNIFICANT ACQUISITIONS," "THE COMPANY -- CORPORATE REORGANIZATION,"
AND "USE OF PROCEEDS." AS USED HEREIN, REFERENCES TO THE COMPANY OR TO COSTILLA
ARE TO COSTILLA ENERGY, INC. AND ITS SUBSIDIARIES. UNLESS OTHERWISE INDICATED,
THE INFORMATION IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT
OPTION WITH RESPECT TO THE COMMON STOCK OFFERING WILL NOT BE EXERCISED. CERTAIN
OIL AND GAS TERMS USED IN THIS PROSPECTUS ARE DEFINED IN THE "GLOSSARY" INCLUDED
HEREIN. CERTAIN TERMS USED IN CONNECTION WITH THE NOTES ARE DEFINED UNDER
"DESCRIPTION OF NOTES -- CERTAIN DEFINITIONS." "ADJUSTED EBITDA," AS USED
HEREIN, MEANS NET INCOME (LOSS), PLUS INTEREST, INCOME TAXES, DEPRECIATION,
DEPLETION AND AMORTIZATION, EXPLORATION AND ABANDONMENT COSTS AND EXTRAORDINARY
LOSS FROM EXTINGUISHMENT OF DEBT.
THE COMPANY
Costilla is an independent energy company engaged in the exploration,
acquisition and development of oil and gas properties. The Company's primary
operations are in the Permian Basin area of Texas and New Mexico, the Gulf Coast
and the Rocky Mountain regions. The Company's strategy focuses on increasing
reserves through a targeted exploration program, the exploitation of its
existing properties and selective property acquisitions. In addition, the
Company recently acquired an interest in an entity which has a concession for
the development of mineral interests in the Republic of Moldova, in Eastern
Europe. The Company also has minor interests in the domestic gas gathering and
transmission business.
The Company's predecessor began operating in 1988 with the strategy of
acquiring and exploiting undervalued oil and gas properties, and at December 31,
1992 had net proved reserves of 4.7 MMBOE. Since January 1, 1993, the Company
has successfully closed seven transactions for an aggregate purchase price of
approximately $101 million. As of April 1, 1996, the Company had total estimated
net proved reserves of 16.5 Mmbbls of oil and 112.9 Bcf of gas, aggregating 35.3
MMBOE, with a PV-10 Value of approximately $179.5 million, assuming the 1996
Acquisition (as defined below) had occurred at April 1, 1996. The Company also
has a substantial undeveloped acreage position consisting of 180,704 gross
(165,166 net) acres at June 30, 1996. The Company has identified in excess of
200 drilling locations of which 78 are included in its proved reserves.
Costilla has in-house exploration expertise which uses 3-D seismic
technology as a primary tool to identify drilling opportunities and has
experienced high rates of success in each of its first two major 3-D seismic
drilling programs. Since 1994, the Company has drilled 26 wells based on these
3-D surveys, 23 of which have been productive. The Company has recently
completed two additional 3-D surveys and intends to commence drilling on one of
these acreage blocks in the second half of 1996. The Company currently plans to
drill 81 wells through 1997 based on its 3-D surveys.
Since 1993, Costilla has generated significant growth in reserves,
production and Adjusted EBITDA. The Company increased its estimated proved
reserves from 6.0 MMBOE at December 31, 1993 to 35.3 MMBOE at April 1, 1996 (pro
forma for the 1996 Acquisition), representing a compound annual growth rate of
114%. This reserve growth has been achieved at an average all-in finding cost of
$3.60 per BOE over such period, a level which the Company believes is lower than
industry averages. Concurrently, the Company increased its average net daily
production from 827 BOE for the year ended December 31, 1993 to 10,703 BOE for
the three months ended March 31, 1996 (pro forma for the 1996 Acquisition),
representing a compound annual growth rate of 195%. Adjusted EBITDA increased at
a 240% compound annual growth rate from $1.8 million for 1993 to $20.8 million
for 1995 (pro forma for the 1995 Acquisition and the 1996 Acquisition).
3
<PAGE>
BUSINESS STRATEGY
The Company's strategy is to increase its oil and gas reserves, production
and cash flow from operations through a two-pronged approach which combines an
active exploration program using 3-D seismic and other technological advances
with the acquisition and exploitation of producing properties. The Company seeks
to reduce its operating and commodity risks by holding a geographically diverse
portfolio of properties, the reserves attributable to which are approximately
balanced between oil and gas. The Company also seeks to manage the elements of
its business strategy through the operation of a significant portion of its
properties, the use of a rate of return analysis and the direct marketing and
hedging of its oil and gas production. The elements of the Company's strategy
may be further described as follows:
- - EXPLORATION EFFORTS. The Company uses extensive geological and
geophysical analysis to carefully focus its 3-D seismic surveys. This
focus allows the Company to successfully direct the size and scope of its
exploration program in order to improve the likelihood of success while
managing overall exploration costs. The Company's exploration efforts are
concentrated currently on known producing regions. The Company plans to
drill 24 exploratory wells during the last half of 1996 and 36 exploratory
wells in 1997. Capital budgeted for exploration activities is $8.1 million
for the last six months of 1996 and $10.8 million for 1997.
- - EXPLOITATION ACTIVITIES. The Company is actively pursuing numerous
exploitation opportunities within its existing properties, including areas
where no proved reserves are currently assigned. Exploitation activities
currently in progress include a carbon dioxide flood, recompletions,
workovers, infill and horizontal drilling and a secondary recovery
project. The Company's capital budget for such activities is $8.5 million
for the last six months of 1996 and $9.2 million for 1997, which includes
the drilling of 12 development wells in 1996 and 13 development wells in
1997.
- - PROPERTY ACQUISITIONS. The Company seeks to acquire producing properties
where it has identified opportunities to increase production and reserves
through both exploitation and exploration activities. The Company has
increased the value of its acquisitions by aggressively managing the
operations of existing proved properties and by successfully identifying
and developing previously unproved reserves on acquired acreage. The
Company seeks to acquire reserves which will fit its existing portfolio,
are generally not being actively marketed and where a negotiated sale
would be the method of purchase. The Company does not rely on major oil
company divestitures or property auctions.
- - PROPERTY DIVERSIFICATION. The Company holds a portfolio of oil and gas
properties located in the Permian Basin, the Gulf Coast and the Rocky
Mountain regions. The Company believes that by conducting its activities
in distinct regions it is able to reduce commodity price and other
operational risks. The Company's Moldovan interest is an extension of this
strategy and can be characterized by low initial costs, significant
reserve potential and the availability of technical data that may be
further developed by the Company.
- - CONTROL OF OPERATIONS. The Company prefers to operate and own the
majority working interest in its properties. This allows the Company
greater control over future development, drilling, completing and lifting
costs and marketing of production. At April 1, 1996, the Company operated
wells constituting approximately 65% of its total PV-10 Value (pro forma
for the 1996 Acquisition).
4
<PAGE>
SIGNIFICANT ACQUISITIONS
1995 ACQUISITION. In a $46.6 million acquisition completed in June 1995,
the Company acquired a group of oil and gas properties located in the Permian
Basin, Gulf Coast and Rocky Mountain regions. At the date of acquisition, the
net proved reserves included 7.1 Mmbbls of oil and 44.1 Bcf of gas, aggregating
14.4 MMBOE. From the date of acquisition until March 31, 1996, the Company
produced 1.1 MMBOE from the acquired properties and sold a portion of the
acquired properties for approximately $3.6 million. At April 1, 1996, the net
proved reserves of the remaining properties were 13.4 MMBOE. The acquired
properties also included 103,010 gross (93,786 net) undeveloped acres.
1996 ACQUISITION. In June 1996, the Company acquired a group of oil and gas
properties located primarily in the Permian Basin and Gulf Coast regions for
approximately $42.5 million. This acquisition included properties with net
proved reserves at April 1, 1996 of 5.0 Mmbbls of oil and 33.5 Bcf of gas,
aggregating 10.6 MMBOE. The acquired properties also included 40,092 gross
(14,512 net) undeveloped acres and a pipeline located in Pennsylvania which had
an allocated purchase price of $3.5 million.
DRILLING ACTIVITIES
Exploration efforts since January 1, 1996 include the drilling of eight
wells located on the Company's Edwards/McElroy Ranch Prospect in the Permian
Basin. While two of such wells are in various stages of drilling or completion,
the remaining six wells have been completed as producers. Three of the
productive wells have resulted in separate field discoveries which have
confirmed the Company's seismic interpretation of a significant trend. Since
beginning operations on this prospect, the Company has drilled ten producing
wells and one dry hole. As a result, the Company has identified up to 75
additional drilling locations, three of which are included in the Company's
proved reserves.
The Company has also continued drilling in the McGyver-Green Acres 3-D
Prospect. Since commencing activity in this prospect in July 1994 the Company
has drilled 15 wells, of which 12 have been successful. During June 1996, the
average daily production from the producing wells in this prospect was
approximately 83 BOE per well. The Company has identified 41 additional drilling
locations in the McGyver-Green Acres Prospect, 14 of which are included in the
Company's proved reserves.
The Company has also drilled and completed nine development wells in the
Permian Basin and Gulf Coast regions since the beginning of 1996. Currently, the
Company's principal exploitation activities include a carbon dioxide flood in
the East Goldsmith Unit, infill drilling primarily in the Permian Basin and
horizontal drilling in the Susan Peak Field.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.......................... $100,000,000 aggregate principal amount of
% Senior Subordinated Notes due 2006
of the Company (the "Notes").
Maturity Date............................... , 2006.
Interest Payment Dates...................... and , commencing , 1997.
Optional Redemption......................... On or after , 2001, the Company may
redeem the Notes, in whole or in part, at the
redemption prices set forth herein, plus
accrued and unpaid interest, if any, to the
date of redemption. Notwithstanding the
foregoing, at any time on or before ,
1999, the Company may redeem up to 30% of the
original aggregate principal amount of the
Notes with the net proceeds of an Equity
Offering (as defined herein) at a redemption
price equal to % of the principal amount
thereof, plus accrued and unpaid interest, if
any, to the date of redemption, provided that
at least 70% of the original aggregate
principal amount of the Notes remain
outstanding immediately after such redemption.
See "Description of Notes -- Optional
Redemption."
Mandatory Redemption........................ None, except at maturity on , 2006.
Ranking..................................... The Notes will be general unsecured
obligations of the Company, subordinated in
right of payment to all existing and future
Senior Indebtedness of the Company, which will
include borrowings under the Credit Facility.
At June 30, 1996, on a pro forma basis after
giving effect to the Corporate Reorganization,
the Offerings and the application of the net
proceeds therefrom, the Company would have had
$0.4 million of Senior Indebtedness. The Notes
also will be effectively subordinated to all
indebtedness and other liabilities of the
Company's subsidiaries until such subsidiaries
(the 'Subsidiaries Guarantors") deliver
Subsidiary Guarantees to fully and
unconditionally guarantee the Notes on a
senior subordinated basis (the "Subsidiary
Guarantees"). At June 30, 1996, the
subsidiaries' total liabilities were $6.5
million, all of which were operating
liabilities. The indenture requires each
Subsidiary to deliver a Subsidiary Guarantee
as a condition to its incurrence of
Indebtedness (other than intercompany
Indebtedness). At the date of the Indenture,
there will be no Subsidiary Guarantees. See
"Description of Notes -- Subordination" and
"-- Subsidiary Guarantees."
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Change of Control........................... Upon a Change of Control (as defined herein),
the Company will be required to make an offer
to repurchase all outstanding Notes at 101% of
the principal amount thereof plus accrued and
unpaid interest thereon, if any, to the date
of repurchase. See "Description of Notes --
Repurchase at the Option of Holders -- Change
of Control."
Covenants................................... The Indenture pursuant to which the Notes will
be issued (the "Indenture") will restrict,
among other things, the Company's ability to
incur additional indebtedness, pay dividends
or make certain other restricted payments,
incur liens to secure PARI PASSU or
subordinated indebtedness, engage in any sale
and leaseback transaction, sell stock of
subsidiaries, apply net proceeds from certain
asset sales, merge or consolidate with any
other person, sell, assign, transfer, lease,
convey or otherwise dispose of substantially
all of the assets of the Company, enter into
certain transactions with affiliates, or incur
indebtedness that is subordinate in right of
payment to any Senior Indebtedness and senior
in right of payment to the Notes.
Common Stock Offering....................... Concurrently with the Notes Offering, the
Company is offering 4,000,000 shares of Common
Stock to the public. See "Common Stock
Offering." The closings of the Notes Offering
and the Common Stock Offering are each
conditioned upon the consummation of the
other.
Use of Proceeds............................. The Company intends to use the net proceeds of
the Notes Offering, together with the net
proceeds of the Common Stock Offering (i) to
repay existing indebtedness, (ii) to pay
certain costs incurred in connection with the
Corporate Reorganization (as defined herein),
including redeeming certain membership
interests of the Company's predecessor and
(iii) for general corporate purposes. See "Use
of Proceeds."
</TABLE>
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Notes.
7
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth certain summary historical and pro forma
financial data of the Company. The historical information should be read in
conjunction with the Consolidated Financial Statements and the notes thereto
included elsewhere in this Prospectus. The Company acquired significant
producing oil and gas properties in certain of the periods presented which
affect the comparability of the historical financial and operating data for the
periods presented. The pro forma information should be read in conjunction with
the Pro Forma Condensed Financial Statements and notes thereto included
elsewhere in this Prospectus. Neither the historical results nor the pro forma
results are necessarily indicative of the Company's future operations or
financial results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------ -------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
------------------------------- --------- -------------------- ---------
1993 1994 1995 1995(1) 1995 1996 1996(1)
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $ 4,397 $ 7,836 $ 21,816 $ 52,637 $ 5,573 $ 19,525 $ 28,748
Expenses:
Oil and gas production............................ 1,688 2,351 10,355 26,937 2,413 8,278 13,295
General and administrative........................ 952 1,184 3,571 4,850 1,008 2,809 3,010
Exploration and abandonments...................... 218 793 1,650 2,761 1,007 308 555
Depreciation, depletion and amortization.......... 884 1,847 5,958 14,176 1,367 4,620 6,981
Interest.......................................... 605 1,458 4,591 11,635 1,046 4,156 5,817
Other............................................. -- -- 2 2 -- -- --
Net income (loss) before income taxes and
extraordinary item................................. 50 203 (4,311) (7,724) (1,268) (646) (910)
Pro forma earnings (loss) per common share.......... -- -- -- (0.78) -- -- (0.09)
Pro forma weighted average common shares
outstanding........................................ -- -- -- 9,861 -- -- 10,000
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities.............................. $ 322 $ 1,527 $ 6,366 -- $ (3,040) $ (122) --
Investing activities.............................. (6,731) (12,146) (62,467) -- (57,773) (49,723) --
Financing activities.............................. 6,315 10,618 58,830 -- 62,094 48,143 --
OTHER FINANCIAL DATA:
Capital expenditures................................ $ 6,862 $ 11,868 $ 62,220 -- $ 57,773 $ 49,723 --
Adjusted EBITDA (2)................................. 1,757 4,301 7,888 $ 20,848 2,152 8,438 $ 12,443
Adjusted EBITDA/interest expense (2)................ 2.9x 2.9x 1.7x 1.8x 2.1x 2.0x 2.1x
Ratio of earnings to fixed charges (3).............. 1.0 1.1 -- -- -- -- --
BALANCE SHEET DATA (AS OF PERIOD END):
Working capital..................................... $ 1,612 $ 1,081 $ 2,496 -- -- $ 4,266 $ 13,757
Total assets........................................ 13,365 24,904 87,367 -- -- 135,047 146,434
Total debt.......................................... 12,006 23,613 71,494 -- -- 122,365 100,365
Redeemable members' capital......................... -- -- 12,278 -- -- 13,557 --
Members' capital.................................... 51 (747) (8,147) -- -- (11,712) --
Pro forma stockholders' equity...................... -- -- -- -- -- -- 35,232
ACNTA (4)........................................... 200,923
Ratio of ACNTA to total debt........................ -- -- -- -- -- -- 2.0x
</TABLE>
- ------------------------------
(1) Assumes that the 1995 Acquisition, the 1996 Acquisition, the Corporate
Reorganization (as defined in "The Company-- Corporate Reorganization") and
the Offerings and the application of proceeds therefrom had taken place on
June 30, 1996 for purposes of the Balance Sheet Data (to the extent not
already reflected) and as of January 1, 1995 for purposes of Statement of
Operations Data and Other Financial Data.
(2) Adjusted EBITDA and the ratio of Adjusted EBITDA to interest expense are
presented because of their wide acceptance as financial indicators of a
company's ability to service or incur debt. Adjusted EBITDA (as used
herein) is calculated by adding interest, income taxes, depreciation,
depletion and amortization, exploration and abandonment costs and
extraordinary loss resulting from extinguishment of debt to net income
(loss). The ratio of Adjusted EBITDA to interest expense is calculated by
dividing Adjusted EBITDA by interest. Interest includes interest expense
accrued and amortization of deferred financing costs. Adjusted EBITDA and
the ratio of Adjusted EBITDA to interest expense should not be considered
as alternatives to earnings (loss), or operating earnings (loss), as
defined by generally accepted accounting principles, as indicators of the
Company's financial performance or to cash flow as a measure of liquidity.
(3) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" are net income (loss) before extraordinary loss resulting from
extinguishment of debt, plus income taxes and fixed charges. Fixed charges
are comprised of interest on indebtedness, amortization of deferred
financing costs, and that portion of operating lease expense which is
deemed to be representative of an interest factor. Earnings were
insufficient to cover fixed charges by $4,311,000, $1,268,000 and $646,000
for the historical periods ended December 31, 1995, June 30, 1995 and June
30, 1996, respectively, and $7,724,000 and $910,000 for the pro forma
periods ended December 31, 1995 and June 30, 1996, respectively.
(4) ACNTA means Adjusted Consolidated Net Tangible Assets as defined in the
Indenture. See "Description of Notes-- Certain Definitions."
8
<PAGE>
SUMMARY RESERVE DATA
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF APRIL 1, 1996
------------------------------- ------------------------
1993 1994 1995 ACTUAL PRO FORMA(1)
--------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
ESTIMATED PROVED RESERVES (2):
Oil (MBbls)............................................ 2,365 4,009 10,788 11,479 16,476
Gas (Mmcf)............................................. 21,619 27,512 78,152 79,420 112,920
MBOE................................................... 5,968 8,594 23,813 24,716 35,296
Percent of proved developed reserves................... 67.0% 62.3% 76.1% 73.9% 78.2%
Present value of estimated future net cash flow, before
income taxes, discounted at 10% (in thousands)........ $ 26,377 $ 36,779 $ 113,296 $ 129,091 $ 179,527
Reserve life index (in years) (3)...................... 19.7 14.4 13.6 -- --
RESERVE REPLACEMENT DATA:
Production replacement ratio (4)....................... 513% 549% 969% -- --
All-in finding costs per BOE (5)....................... $ 4.31 $ 3.67 $ 3.43 $ 2.84 $ 3.72
</TABLE>
- ------------------------------
(1) Gives effect to the 1996 Acquisition as if such transaction had occurred as
of April 1, 1996.
(2) Estimates of net proved oil and gas reserves at April 1, 1996 are based on
reports prepared by Williamson Petroleum Consultants, Inc. ("Williamson"),
independent petroleum engineers. The 1995 reserve estimates were prepared by
the Company and such estimates of gross reserves with respect to certain of
the Company's producing properties were subject to a limited review by
Williamson. Prior reserve estimates are based on information compiled by the
Company. See "Risk Factors -- Uncertainty of Estimates of Proved Reserves
and Future Net Revenues" and "Business and Properties -- Oil and Gas
Reserves."
(3) Calculated by dividing year-end proved reserves by annual production for the
most recent year.
(4) Calculated by dividing reserve additions through acquisitions of reserves,
extensions and discoveries and revisions during the year by production for
such year.
(5) The average all-in finding costs over the period January 1, 1993 through
March 31, 1996 (pro forma for the 1996 Acquisition) was $3.60 per BOE.
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
SIX MONTHS ENDED JUNE 30,
HISTORICAL PRO FORMA(1) 1996
------------------------------- ------------- --------------------------
1993 1994 1995 1995 ACTUAL PRO FORMA(1)
--------- --------- --------- ------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Oil (MBbls)................................... 158 330 950 2,085 709 990
Gas (Mmcf).................................... 865 1,600 4,806 11,985 3,504 5,345
MBOE.......................................... 302 597 1,751 4,083 1,293 1,881
AVERAGE SALES PRICE PER UNIT:
Oil (per Bbl)................................. $ 16.93 $ 15.25 $ 15.53 $ 15.75 $ 18.99 $ 18.26
Gas (per Mcf)................................. 1.82 1.63 1.45 1.59 1.91 1.87
COSTS PER BOE:
Production costs, including severance taxes
(2).......................................... $ 5.59 $ 3.94 $ 5.91 $ 6.60 $ 6.40 $ 7.07
Depreciation, depletion and amortization...... 2.93 3.09 3.40 3.51 3.57 3.71
</TABLE>
- ------------------------------
(1) Gives effect to the 1995 Acquisition and the 1996 Acquisition as if such
transactions had occurred as of January 1, 1995.
(2) Production costs per BOE in 1995 and for the six months ended June 30, 1996
were unusually high as a result of relatively high workover expenses with
respect to properties acquired in the 1995 Acquisition which did not produce
related production improvements until subsequent periods. Additionally, the
Company's 1995 production costs were adversely affected by expenses incurred
in connection with plugging wells to comply with applicable regulatory
requirements.
9
<PAGE>
RISK FACTORS
PRIOR TO MAKING AN INVESTMENT DECISION, PROSPECTIVE INVESTORS SHOULD
CONSIDER FULLY, TOGETHER WITH THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, THE FOLLOWING FACTORS.
SIGNIFICANT LEVERAGE AND DEBT SERVICE
As of June 30, 1996, as adjusted for the Corporate Reorganization, the
Offerings and the application of the net proceeds therefrom, the Company's total
debt and stockholders' equity would have been $100.4 million and $35.2 million,
respectively. See "Capitalization." In addition, the Company may currently incur
additional indebtedness under its Credit Facility (as defined under "Description
of Other Indebtedness"). Immediately following the consummation of the
Offerings, the Credit Facility will afford the Company $50.0 million of
available borrowing capacity, none of which is expected to be necessary to
finance the Company's existing business plan. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Description of Other Indebtedness."
The Company's level of indebtedness will have several important effects on
its future operations, including (i) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of interest on its
indebtedness and will not be available for other purposes, (ii) covenants
contained in the Credit Facility and the Indenture governing the Notes will
require the Company to meet certain financial tests, and other restrictions may
limit its ability to borrow additional funds or to dispose of assets and may
affect the Company's flexibility in planning for, and reacting to, changes in
its business, including possible acquisition activities and (iii) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, general corporate purposes or other purposes
may be impaired. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The Company's ability to meet its debt service obligations and to reduce its
total indebtedness will be dependent upon the Company's future performance,
which will be subject to general economic conditions and to financial, business
and other factors affecting the operations of the Company, many of which are
beyond its control. Earnings were insufficient to cover fixed charges by $4.3
million and $0.6 million for the year ended December 31, 1995 and six months
ended June 30, 1996, respectively, and $7.7 million and $0.9 million for the pro
forma year ended December 31, 1995 and six months ended June 30, 1996,
respectively. Based upon the current and anticipated level of operations, the
Company believes, however, that its cash flow from operations, together with
amounts available under its Credit Facility and its other sources of liquidity,
will be adequate to meet its anticipated requirements in the foreseeable future
for working capital, capital expenditures, interest payments and scheduled
principal payments. There can be no assurance, however, that the Company's
business will continue to generate cash flow at or above current levels. If the
Company is unable to generate sufficient cash flow from operations in the future
to service its debt, it may be required to refinance all or a portion of its
existing debt, including the Notes, or to obtain additional financing. There can
be no assurance that any such refinancing would be possible or that any
additional financing could be obtained. The inability to obtain additional
financing could have a material adverse effect on the Company. For example, a
default by the Company under the terms of the Indenture could result in a
default under the terms of the Credit Facility.
SUBORDINATION OF NOTES AND SUBSIDIARY GUARANTEES
The Notes will be subordinated in right of payment to all existing and
future Senior Indebtedness of the Company, including all indebtedness under the
Credit Facility. As of June 30, 1996, after giving pro forma effect to the
Corporate Reoganization, the Offerings and the application of the net proceeds
therefrom, the Company would have had $0.4 million Senior Indebtedness
outstanding and will have $50.0 million available under the Credit Facility,
which, if borrowed, would be included as Senior Indebtedness. In the event of
bankruptcy, liquidation or reorganization of the Company, the assets of
10
<PAGE>
the Company will be available to pay obligations on the Notes only after all
Senior Indebtedness of the Company has been paid in full, and there may not be
sufficient funds remaining to pay amounts due on any or all of the Notes
outstanding. See "Description of Notes -- Subordination."
The Indenture does not require the Subsidiaries to guarantee the payment of
the Notes unless the Subsidiaries incur Indebtedness (other than intercompany
Indebtedness). The Indenture prohibits Subsidiaries that are not Subsidiary
Guarantors from incurring Indebtedness. The Notes will be effectively
subordinated to claims of creditors (other than the Company) of the Subsidiaries
that are not Subsidiary Guarantors, including trade creditors, taxing
authorities and tort claimants. Such creditors generally will have priority as
to the assets of such Subsidiaries over the claims and equity interests of the
Company and, thereby indirectly, the holders of indebtedness of the Company,
including the Notes. At June 30, 1996, on a pro forma basis, the Company's
Subsidiaries had $6.5 million of liabilities, all of which were operating
liabilities. Any Subsidiary Guarantees will be subordinated in right of payment
to all existing and future Guarantor Senior Indebtedness (as herein defined) of
the Subsidiary Guarantors. On the date of the Indenture there will be no
Subsidiary Guarantees. See "Description of Notes -- Subordination" and
"Description of Notes -- Incurrence of Indebtedness and Preferred Stock."
SUBSIDIARY GUARANTEES MAY TERMINATE; FRAUDULENT CONVEYANCE CONSIDERATIONS
RELATING TO SUBSIDIARY GUARANTEES
The Indenture does not require any Subsidiary to guarantee the Notes unless
such Subsidiary incurs Indebtedness (other than intercompany Indebtedness). On
the date of the Indenture there will be no Subsidiary Guarantees. Various
fraudulent conveyance laws have been enacted for the protection of creditors and
may be used by a court of competent jurisdiction to subordinate or avoid any
Subsidiary Guarantee that may be delivered. To the extent that a court were to
find that (x) a Subsidiary Guarantee was incurred with the intent to hinder,
delay or defraud any present or future creditor or that such Subsidiary
Guarantor contemplated insolvency with a design to favor one or more creditors
to the exclusion in whole or in part of others or (y) a Subsidiary Guarantor did
not receive fair consideration or reasonably equivalent value for issuing its
Subsidiary Guarantee and, at the time it issued the Subsidiary Guarantee, such
Subsidiary Guarantor (i) was insolvent or rendered insolvent by reason of the
issuance of the Subsidiary Guarantee, (ii) was engaged or about to engage in a
business or transaction for which the remaining assets of such Subsidiary
Guarantor constituted unreasonably small capital or (iii) intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured, a court could avoid or subordinate the Subsidiary Guarantee in favor of
such Subsidiary Guarantor's other creditors. Among other things, a legal
challenge of the Subsidiary Guarantee issued by such Subsidiary Guarantor on
fraudulent conveyance grounds may focus on the benefits, if any, realized by
such Subsidiary Guarantor as a result of the issuance by the Company of the
Notes. To the extent the Subsidiary Guarantee was avoided as a fraudulent
conveyance or held unenforceable for any other reason, the holders of the Notes
would cease to have any claim against such Subsidiary Guarantor and would be
creditors solely of the Company and any Subsidiary Guarantors whose Subsidiary
Guarantees were not avoided or held unenforceable. In such event, the claims of
the holders of the Notes against the issuer of an invalid Subsidiary Guarantee
would be subject to the prior payment of all liabilities of such Subsidiary
Guarantor. There can be no assurance that, after providing for all prior claims,
there would be sufficient assets to satisfy the claims of the holders of the
Notes relating to any avoided portions of any of the Subsidiary Guarantees.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any such proceeding. Generally, however,
a Subsidiary Guarantor may be considered insolvent if the sum of its debts,
including contingent liabilities, was greater than the fair market value of all
of its assets at a fair valuation, if the present fair market value of its
assets was less than the amount that would be required to pay its probable
liability on its existing debts, including contingent liabilities, as they
become absolute and mature, or if it had insufficient capital to carry on its
business.
11
<PAGE>
POTENTIAL INABILITY TO FUND A CHANGE OF CONTROL OFFER
The Indenture provides that upon the occurrence of a Change of Control, the
Company is required to offer to repurchase any or all of the outstanding Notes
at a price equal to 101% of the aggregate principal amount thereof, together
with accrued and unpaid interest, if any, to the date of purchase. Generally, a
"Change of Control" includes any person or group other than Cadell S. Liedtke,
Michael J. Grella and Henry G. Musselman, the Chairman of the Board, President
and Executive Vice President of the Company, respectively, acquiring 50% or more
of the voting securities of the Company, and certain other events. If a Change
of Control occurs, there is no assurance that the Company will have available
funds sufficient to pay for the Notes tendered for repurchase. See "Description
of Notes -- Repurchase at the Option of Holders -- Change of Control."
If an offer to repurchase is required to be made and the Company does not
have available funds sufficient to pay for Notes tendered for repurchase, an
event of default would occur under the Indenture. The occurrence of an event of
default could result in the acceleration of maturity of the Notes and of all
amounts due under the Credit Facility. In addition, the Change of Control
covenant in the Indenture could have the effect of discouraging a takeover of
the Company by making such an attempt potentially more expensive.
UNCERTAINTY OF ESTIMATES OF PROVED RESERVES AND FUTURE NET CASH FLOWS
There are numerous uncertainties in estimating quantities of proved reserves
and in projecting future rates of production and the timing of development
expenditures, including many factors beyond the control of the Company. The
reserve data set forth in this Prospectus are estimates only. Although the
Company believes such estimates to be reasonable, reserve estimates are
imprecise and should be expected to change as additional information becomes
available. Furthermore, estimates of oil and gas reserves, of necessity, are
projections based on engineering data, and there are uncertainties inherent in
the interpretation of such data as well as the projection of future rates of
production and the timing of development expenditures. Reserve engineering is a
subjective process of estimating underground accumulations of oil and gas that
cannot be exactly measured, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. Accordingly, estimates of the economically
recoverable quantities of oil and gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery, and
estimates of the future net cash flows expected therefrom prepared by different
engineers or by the same engineers at different times may vary substantially.
Moreover, there can be no assurance that the reserves set forth herein will
ultimately be produced or that the proved undeveloped reserves will be developed
within the periods anticipated. Variances from the estimates contained herein
could be material. In addition, the estimates of future net revenues from proved
reserves of the Company and the present value thereof are based upon certain
assumptions about production levels, prices and costs, which may not be correct.
The Company emphasizes with respect to such estimates that the discounted future
net cash flows should not be construed as representative of the fair market
value of the proved oil and gas properties belonging to the Company, because
discounted future net cash flows are based upon projected cash flows that do not
provide for changes in oil and gas prices or for escalation of expenses and
capital costs. The meaningfulness of such estimates is highly dependent upon the
accuracy of the assumptions upon which they were based. Actual results may
differ materially from the results estimated. Prospective purchasers of Notes
are cautioned not to place undue reliance on the reserve data included in this
Prospectus.
ACQUISITION RISKS
The Company's rapid growth in recent years has been largely the result of
acquisitions of producing properties. The Company expects to continue to
evaluate and pursue acquisition opportunities available on terms management
considers favorable to the Company. The successful acquisition of producing
properties requires an assessment of recoverable reserves, future oil and gas
prices, operating costs, potential environmental and other liabilities and other
factors beyond the Company's control. Such an assessment is necessarily inexact
and its accuracy is inherently uncertain. In connection with such an assessment,
the Company performs a review of the subject properties it believes to
12
<PAGE>
be generally consistent with industry practices. Such a review, however, will
not reveal all existing or potential problems, nor will it permit a buyer to
become sufficiently familiar with the properties fully to assess their
deficiencies and capabilities. Inspections may not be performed on every well,
and structural and environmental problems are not necessarily observable even
when an inspection is undertaken. The Company is generally not entitled to
contractual indemnification for preclosing liabilities, including environmental
liabilities, and generally acquires interests in the properties on an "as is"
basis.
VOLATILITY OF OIL AND GAS PRICES
The Company's financial results and, therefore, its ability to service its
debt, including the Notes, are significantly affected by the price received for
the Company's oil and gas production. Historically, the markets for oil and gas
have been volatile and may continue to be volatile in the future. Prices of oil
and gas are subject to wide fluctuations in response to market uncertainty,
changes in supply and demand and a variety of additional factors, all of which
are beyond the control of the Company. These factors include domestic and
foreign political conditions, the overall level of supply of and demand for oil
and gas, the price of imported oil and gas, weather conditions, the price and
availability of alternative fuels and overall economic conditions. The Company's
future financial condition and results of operations will be dependent, in part,
upon the prices received for the Company's oil and gas production, as well as
the costs of acquiring, finding, developing and producing reserves. To reduce
its exposure to price risks in the sale of its oil and gas, the Company enters
into hedging arrangements from time to time. Although the Company hedges a
significant portion of its production, any substantial or extended decline in
the price of oil and gas would have a material adverse effect on the Company's
financial condition and results of operations, as well as reduce the amount of
the Company's oil and gas that could be produced economically. Moreover, if oil
and gas prices fall materially below their current levels, the availability of
funds and the Company's ability to repay outstanding amounts under its Credit
Facility and the Notes could be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CONFLICTS OF INTEREST
The Company has a continuing relationship with A&P Meter Sales and Services,
Inc. ("A&P"), a corporation in which Messrs. Liedtke, Grella and Musselman own
60.0% of the outstanding common stock. A&P owes the Company $437,000 (including
accrued interest through December 31, 1995) pursuant to a promissory note under
which the Company is not entitled to any principal or interest payments until
December 31, 2004. A&P also owes the Company $247,000, which is represented by a
promissory note payable upon demand. See "Certain Transactions."
Under the Company's current credit arrangements, Messrs. Liedtke, Grella and
Musselman are each liable for a portion of the Company's existing debt (see
"Description of Other Indebtedness") pursuant to limited guaranties. However,
these individuals will not be liable for, or guarantee amounts due under, the
Credit Facility or the indebtedness represented by the Notes.
DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on the services of Messrs. Liedtke,
Grella and Musselman. The loss of the services of any of Messrs. Liedtke, Grella
or Musselman could have a material adverse effect on the Company's operations.
Pursuant to employment agreements which are to be effective upon the
consummation of the Offerings, Messrs. Liedtke, Grella and Musselman have agreed
not to compete with the Company for a one-year period should they voluntarily
leave the Company's employment or should their employment be terminated for
cause within the initial three-year term of each employment agreement. The
Company believes that its success is also dependent upon its ability to continue
to employ and retain skilled technical personnel. See "Management."
CONTROL OF THE COMPANY
If the Offerings are completed, Messrs. Liedtke, Grella and Musselman will
own directly and indirectly, in the aggregate, 49.2% of the outstanding Common
Stock (or 46.4% if the underwriters'
13
<PAGE>
over-allotment option in the Common Stock Offering is exercised in full).
Accordingly, Messrs. Liedtke, Grella and Musselman may be able to exercise
significant influence over the election of directors of the Company and the
control of the Company's management, operations and affairs. See "Security
Ownership of Certain Beneficial Owners and Management."
FOREIGN INVESTMENT
The Company's investment in Moldova involves risks typically associated with
investments in emerging markets such as foreign exchange restrictions and
currency fluctuations, foreign taxation, changing political conditions, foreign
and domestic monetary and tax policies, expropriation, nationalization,
nullification, modification or renegotiation of contracts, war and civil
disturbances and other risks that may limit or disrupt markets. In addition, if
a dispute arises in its Moldovan operations, the Company may be subject to the
exclusive jurisdiction of foreign courts or may not be successful in subjecting
foreign persons to the jurisdiction of the United States. The Company attempts
to conduct its business and financial affairs so as to protect against political
and economic risks applicable to operations in Moldova, but there can be no
assurance the Company will be successful in so protecting itself.
DRILLING RISKS
Drilling involves numerous risks, including the risk that no commercially
productive oil or gas will be encountered. The cost of drilling, completing and
operating wells is often uncertain, and drilling operations may be curtailed,
delayed or cancelled as a result of a variety of factors, including unexpected
drilling conditions, pressure or irregularities in formations, equipment
failures or accidents, adverse weather conditions and shortages or delays in the
delivery of equipment. The Company's future drilling activities may not be
successful and, if unsuccessful, such failure may have a material adverse effect
on the Company's future results of operations and financial condition.
OPERATING HAZARD AND UNINSURED RISKS
The Company's operations are subject to hazards and risks inherent in the
drilling for and production and transportation of oil and gas, including fires,
natural disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures, and spills, any of which can result in
loss of hydrocarbons, environmental pollution, personal injury or loss of life,
severe damage to and destruction of properties of the Company and others, and
suspension of operations. Although the Company maintains insurance coverage that
it considers to be adequate and customary in the industry, it is not fully
insured against certain of these risks, either because such insurance is not
available or because of high premium costs. The occurrence of a significant
event not fully covered by insurance could have a material adverse effect on the
Company's financial condition and results of operations.
COMPETITION
The Company encounters substantial competition in acquiring properties,
marketing oil and gas and securing trained personnel. Many competitors have
substantially larger financial resources, staffs and facilities. See "Business
and Properties -- Competition and Markets."
GOVERNMENT LAWS AND REGULATIONS
The Company's operations are affected from time to time in varying degrees
by political developments and federal, state and local laws and regulations. In
particular, oil and gas production, operations and economics are or have been
significantly affected by price controls, taxes and other laws relating to the
oil and gas industry, by changes in such laws and by changes in administrative
regulations. The Company cannot predict how existing laws and regulations may be
interpreted by enforcement agencies or court rulings, whether additional laws
and regulations will be adopted, or the effect such changes may have on its
business, financial condition or results of operations. See "Business and
Properties -- Regulation."
14
<PAGE>
ENVIRONMENTAL REGULATIONS
The Company's operations are subject to complex and constantly changing
environmental laws and regulations adopted by federal, state and local
governmental authorities. The Company believes that compliance with such laws
has had no material adverse effect upon the Company's operations to date and
that the cost of such compliance has not been material. Nevertheless, the
discharge of oil, gas or other pollutants into the air, soil or water may give
rise to significant liabilities on the part of the Company to the government and
third parties and may require the Company to incur substantial costs of
remediation. Moreover, the Company has agreed to indemnify sellers of producing
properties from whom the Company has acquired reserves against certain
liabilities for environmental claims associated with the properties being
purchased by the Company, including, without limitation, in connection with both
the 1995 Acquisition and the 1996 Acquisition. No assurance can be given that
existing environmental laws or regulations, as currently interpreted or
reinterpreted in the future, or future laws or regulations, will not materially
adversely affect the Company's results of operations and financial condition or
that material indemnity claims will not arise against the Company with respect
to properties acquired by the Company. See "Business and Properties --
Environmental Matters."
ABSENCE OF PUBLIC MARKET
There is no existing public market for the Notes and the Company does not
intend to list the Notes on any national securities exchange. Although the
Underwriters have advised the Company that they currently intend to make a
market in the Notes, the Underwriters are not obligated to do so and may
discontinue such market-making at any time. Accordingly, there can be no
assurance that an active market will develop upon completion of this Notes
Offering or, if developed, that such market will be sustained. The initial
offering price of the Notes will be determined through negotiations between the
Company and the Underwriters, and may bear no relationship to the market price
of the Notes after the Notes Offering. Factors such as quarterly or cyclical
variations in the Company's financial condition and results of operations,
variations in interest rates, future announcements concerning the Company or its
competitors, government regulation, general economic and other conditions and
developments affecting the oil and gas industry could cause the market price of
the Notes to fluctuate substantially.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects," and words of similar import, constitute "forward-looking
statements". Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Certain of these factors are discussed in more
detail elsewhere in this Prospectus, including without limitation under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business and Properties".
Given these uncertainties, prospective investors are cautioned not to place
undue reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
15
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THE COMPANY
GENERAL
The Company is an independent energy company that is engaged in the
acquisition, exploration, exploitation and development of oil and gas
properties. The Company's primary operations are in the Permian Basin, the Gulf
Coast and the Rocky Mountain regions. The Company recently acquired an interest
in an entity which has a concession for the development of mineral interests in
the Republic of Moldova, in Eastern Europe. The Company also has minor interests
in the domestic gas gathering and transmission business.
CORPORATE REORGANIZATION
Costilla was incorporated in Delaware in June 1996 to consolidate and
continue the activities previously conducted by Costilla Energy, L.L.C., a Texas
limited liability company (the "LLC"), and its wholly owned subsidiaries, to
acquire the assets of CSL Management Corporation ("CSL") (which owns certain
office equipment used by the Company), and to acquire the stock of Valley
Gathering Company ("Valley"). Costilla has been formed solely for the purpose of
conducting the Offerings, and has not commenced operations. Both CSL and Valley
are owned by Messrs. Liedtke, Grella and Musselman. See "Certain Transactions."
Contemporaneously with the closings of the Offerings: (1) the redeemable
membership interests of NationsBanc Capital Corp. ("NBCC") in the LLC will be
redeemed for $15.5 million; (2) the LLC will be merged into Costilla (the
"Merger") and an aggregate of 6,000,000 shares of Common Stock will be issued to
the four members of the LLC; (3) Costilla will acquire all of the issued and
outstanding stock of Valley and the assets of CSL for $0.7 million; and (4) $4.3
million in distributions will be made to the members of the LLC, $3.5 million of
which, in the case of Messrs. Liedtke, Grella and Musselman, will be provided to
such persons for certain estimated income tax effects of the Merger. These
transactions are referred to throughout this Prospectus as the "Corporate
Reorganization." As a result of the Corporate Reorganization, Costilla will have
four wholly owned subsidiaries: (i) Costilla Petroleum Corporation, a Texas
corporation ("CPC"), which operates properties owned by Costilla and owns minor
interests in the same properties; (ii) Statewide Minerals, Inc., a Texas
corporation ("Statewide"), which is engaged in the purchase of small royalty and
mineral interests; (iii) Valley, which owns several small gas gathering systems,
a small gas processing plant, certain salt water disposal systems and gas
compressors; and (iv) Costilla Pipeline Corporation, a Texas corporation
("Pipeline") which owns a gas pipeline in Pennsylvania held for resale. CSL will
be dissolved. Costilla and CPC are the sole members of two Texas limited
liability companies through which the Company's Moldovan operations are
conducted. Costilla also owns a 45.0% interest in a Texas limited liability
company which owns and operates a gas pipeline and associated facilities in
Louisiana.
The Company's executive offices are located at 400 West Illinois, Suite
1000, Midland, Texas, 79701 and its telephone number is (915) 683-3092.
COMMON STOCK OFFERING
Concurrent with the Notes Offering, the Company is offering 4,000,000 shares
of its Common Stock. The Notes Offering and the Common Stock Offering are each
conditioned upon the consummation of the other.
16
<PAGE>
USE OF PROCEEDS
The net proceeds of the Offerings are estimated to be $151.5 million,
assuming an initial public offering price of $15 per share in the Common Stock
Offering ($159.8 million if the underwriters' over-allotment option with respect
to the Common Stock Offering is exercised). Approximately $125.8 million of such
proceeds, including all the net proceeds of the Notes Offering, will be used to
repay all of the existing senior indebtedness of the Company (the "Existing
Debt") incurred in connection with the 1996 Acquisition, and to refinance its
previous credit facility. The Existing Debt matures in June 1999. Approximately
$30.0 million of the Existing Debt currently bears interest at 14.0% per annum
(increasing to 14.5% on September 13, 1996) and the balance currently bears
interest at a rate selected by the Company equal to a base rate (generally the
prime rate established by NationsBank, N.A.) plus 0.75% or LIBOR plus 3.0%. See
"Description of Other Indebtedness." In addition, $20.5 million of the net
proceeds will be used to pay certain amounts incurred in connection with the
Corporate Reorganization, including $15.5 million to redeem certain membership
interests of NBCC in the LLC prior to the Merger, $0.7 million to acquire the
stock of Valley and the assets of CSL and $4.3 million in distributions to the
members of the LLC, $3.5 million of which, in the case of Messrs. Liedtke,
Grella and Musselman, will be provided to such persons for certain estimated
federal income tax effects of the Merger. See "Certain Transactions." The
remaining estimated net proceeds of $5.1 million will be used by the Company for
general corporate purposes. Pending such uses, the remaining net proceeds will
be invested in short-term, investment grade, interest-bearing securities.
The following is a description of sources and uses of proceeds from the
Offerings, assuming the underwriters' over-allotment option in connection with
the Common Stock Offering is not exercised (in millions):
<TABLE>
<S> <C>
Sources:
Notes Offering................................................... $ 100.0
Common Stock Offering............................................ 60.0
---------
$ 160.0
---------
---------
Uses:
Refinance Existing Debt.......................................... $ 125.8
Redeem membership interests...................................... 15.5
Distributions to individual members to pay estimated income tax
liability of such members....................................... 3.5
Pro rata distribution to remaining member........................ 0.8
Purchase of stock of Valley and assets of CSL.................... 0.7
Working capital.................................................. 5.1
Estimated fees, commissions, underwriting discounts and expenses
related to the Offerings........................................ 8.6
---------
$ 160.0
---------
---------
</TABLE>
17
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
as of June 30, 1996, on an historical basis and on a pro forma basis giving
effect to the Corporate Reorganization and the Offerings and the application of
the net proceeds therefrom, as if such transactions had been consummated as of
June 30, 1996, assuming an initial offering price for the Common Stock in the
Common Stock Offering of $15 per share. The following table should be read in
conjunction with the Consolidated Financial Statements of the LLC, the unaudited
Pro Forma Condensed Financial Statements, the related notes, and the other
information contained elsewhere in this Prospectus, including the information
set forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." For further information regarding the terms of the
long-term debt reflected in the following table, see "Description of Other
Indebtedness" and Note 7 and Note 12 of the Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
HISTORICAL PRO FORMA
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Existing debt......................................................................... $ 122,365 $ 365
Credit Facility....................................................................... -- --
% Senior Subordinated Notes due 2006............................................... -- 100,000
----------- -----------
Total long-term debt.................................................................... 122,365 100,365
----------- -----------
Redeemable members' capital............................................................. 13,557 --
----------- -----------
Members' capital and stockholders' equity:
Members' capital...................................................................... (11,712) --
Preferred stock, $.10 par value (3,000,000 shares authorized; no shares issued or
outstanding)......................................................................... -- --
Common Stock, $.10 par value (20,000,000 shares authorized; no shares outstanding
actual, 10,000,000 shares outstanding pro forma)..................................... -- 1,000
Paid-in capital....................................................................... -- 34,232
----------- -----------
Total members' capital and stockholders' equity......................................... (11,712) 35,232
----------- -----------
Total capitalization.................................................................... $ 124,210 $ 135,597
----------- -----------
----------- -----------
</TABLE>
18
<PAGE>
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The unaudited Pro Forma Condensed Financial Statements of the Company have
been prepared to give effect to the 1995 Acquisition and the 1996 Acquisition,
the Corporate Reorganization, and the Offerings and the application of the
estimated net proceeds therefrom as if such transactions (to the extent not
already reflected) had taken place on June 30, 1996 for purposes of the Pro
Forma Condensed Balance Sheet and as if the transactions had taken place on
January 1, 1995 for purposes of the Pro Forma Condensed Statements of
Operations. The Pro Forma Condensed Financial Statements of the Company are not
necessarily indicative of the results for the periods presented had the 1995
Acquisition and the 1996 Acquisition, the Corporate Reorganization, and the
Offerings and the application of the estimated net proceeds therefrom taken
place on January 1, 1995. In addition, future results may vary significantly
from the results reflected in the accompanying Pro Forma Condensed Financial
Statements because of normal production declines, changes in product prices, and
the success of future exploration and development activities, among other
factors. This information should be read in conjunction with the Consolidated
Financial Statements of Costilla Energy, L.L.C. and subsidiaries, and the
Statements of Revenues and Direct Operating Expenses with respect to the
properties acquired in the 1995 Acquisition and the 1996 Acquisition, all
included elsewhere herein.
19
<PAGE>
COSTILLA ENERGY, INC.
PRO FORMA CONDENSED BALANCE SHEET -- UNAUDITED
JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COSTILLA
COSTILLA OFFERING ENERGY,
ASSETS L.L.C. ADJUSTMENTS INC.
- ----------------------------------------------------------------------- ------------- ------------ -----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................ $ 1,164 $ (700)(1) $ 10,655
151,450(3)
(141,259)(4)
Accounts receivable.................................................. 8,785 8,785
Prepaid and other current assets..................................... 2,629 2,629
------------- -----------
Total current assets............................................. 12,578 22,069
Oil and gas properties, using the successful efforts method of
accounting:
Proved properties.................................................... 126,809 125,809
Unproved properties.................................................. 4,615 4,615
Accumulated depreciation, depletion and amortization................. (13,933) (13,933)
------------- -----------
Other property and equipment, net...................................... 1,640 700(1) 2,340
Deferred charges (Note 2).............................................. 2,654 3,850(3) 3,850
(2,654)(4)
Note receivable -- affiliate........................................... 684 684
------------- -----------
$ 135,047 $ 146,434
------------- -----------
------------- -----------
<CAPTION>
LIABILITIES, REDEEMABLE MEMBERS' CAPITAL AND EQUITY
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt................................. $ 98 $ 98
Trade accounts payable............................................... 4,587 4,587
Undistributed revenue................................................ 1,524 1,524
Other current liabilities............................................ 2,103 2,103
------------- -----------
Total current liabilities........................................ 8,312 8,312
Long-term debt, less current maturities................................ 122,267 100,000(3) 100,267
(122,000)(4)
Deferred income........................................................ 2,623 2,623
------------- -----------
Total liabilities................................................ 133,202 111,202
Redeemable members' capital............................................ 13,557 (13,557)(4) --
Members' capital and stockholders' equity:
Members' capital..................................................... (11,712) 11,712(2) --
Preferred stock, $.10 par value (3,000,000 shares authorized; no
shares outstanding)................................................. -- --
Common Stock, $.10 par value (20,000,000 shares authorized; no shares
outstanding historical, 10,000,000 shares outstanding pro forma).... -- 1,000(3) 1,000
Paid-in capital...................................................... -- (2,654)(4) 34,232
(1,443)(4)
(4,259)(4)
54,300(3)
(11,712)(2)
------------- -----------
Total members' capital and stockholders' equity...................... (11,712) 35,232
------------- -----------
$ 135,047 $ 146,434
------------- -----------
------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
20
<PAGE>
COSTILLA ENERGY, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS -- UNAUDITED
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRE OFFERING PRO FORMA
COSTILLA 1995 1996 PRO FORMA COSTILLA OFFERING
L.L.C. ACQUISITION ACQUISITION ADJUSTMENTS L.L.C. ADJUSTMENTS
------------- ----------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 21,816 $ 10,930 $ 19,891 $ 52,637
------------- ----------- ----------- -------------
Expenses:
Oil and gas production................ 10,355 5,473 11,409 $ (300)(1) 26,937
General and administrative............ 3,571 -- -- (172)(1) 4,850
1,451(5)
Exploration and abandonments.......... 1,650 109 1,002 2,761
Depreciation, depletion and
amortization......................... 5,958 -- -- 100(1) 14,176
8,118(6)
Interest.............................. 4,591 -- -- 10,046(7) 14,637 $ 3,002(8)
Other................................. 2 -- -- 2
------------- ----------- ----------- -------------
26,127 5,582 12,411 63,363
------------- ----------- ----------- -------------
Net income (loss) before federal income
taxes.................................. (4,311) 5,348 7,480 (10,726)
Provision for federal income taxes...... 3 -- -- 3
------------- ----------- ----------- -------------
Net income (loss)....................... $ (4,314) $ 5,348 $ 7,480 $ (10,729)
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
Net loss per share......................
<CAPTION>
PRO FORMA
COSTILLA
ENERGY,
INC.
-----------
<S> <C>
Revenues................................ $ 52,637
-----------
Expenses:
Oil and gas production................ 26,937
General and administrative............ 4,850
Exploration and abandonments.......... 2,761
Depreciation, depletion and
amortization......................... 14,176
Interest.............................. 11,635
Other................................. 2
-----------
60,361
-----------
Net income (loss) before federal income
taxes.................................. (7,724)
Provision for federal income taxes...... 3
-----------
Net income (loss)....................... $ (7,727)
-----------
-----------
Net loss per share...................... $ (0.78)
-----------
-----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
21
<PAGE>
COSTILLA ENERGY, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS -- UNAUDITED
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRE OFFERING PRO FORMA COSTILLA
COSTILLA 1996 PRO FORMA COSTILLA OFFERING ENERGY,
L.L.C. ACQUISITION ADJUSTMENTS L.L.C. ADJUSTMENTS INC.
------------- ----------- -------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $ 19,525 $ 9,223 $ 28,748 $ 28,748
Expenses:
Oil and gas production................. 8,278 5,167 $ (150)(1) 13,295 13,295
General and administrative............. 2,809 (86)(1) 3,010 3,010
287(5)
Exploration and abandonments........... 308 247 555 555
Depreciation, depletion and
amortization.......................... 4,620 50(1) 6,981 6,981
2,311(6)
Interest............................... 4,156 2,832(7) 6,988 $ (1,171)(8) 5,817
------------- ----------- ------------- -----------
20,171 5,414 30,829 29,658
------------- ----------- ------------- -----------
Net income (loss) before federal income
taxes................................... (646) 3,809 (2,081) (910)
------------- ----------- ------------- -----------
Net income (loss)........................ $ (646) $ 3,809 $ (2,081) $ (910)
------------- ----------- ------------- -----------
------------- ----------- ------------- -----------
Net income (loss) per share.............. $ (0.09)
-----------
-----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
22
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
NOTE 1. -- BASIS OF PRESENTATION
The Pro Forma Condensed Financial Statements of the Company have been
prepared to give effect to the 1995 Acquisition and the 1996 Acquisition, the
Corporate Reorganization and the Offerings and the application of estimated net
proceeds therefrom, as if such transactions had taken place on June 30, 1996 for
purposes of the Pro Forma Condensed Balance Sheet (with the exception of the
1995 Acquisition which was previously reflected in the balance sheet of Costilla
Energy, L.L.C.), and as if each of the transactions had taken place on January
1, 1995 for purposes of the Pro Forma Condensed Statements of Operations. The
1995 Acquisition and 1996 Acquisition are accounted for by the purchase method.
Costilla L.L.C. -- Represents the consolidated balance sheet of
Costilla Energy, L.L.C. and subsidiaries as of June 30, 1996 and the
related consolidated statements of operations for the year ended
December 31, 1995 and the six months ended June 30, 1996.
1995 Acquisition -- Represents the revenues and direct operating
expenses of the properties acquired in the 1995 Acquisition for the
period from January 1, 1995 to June 12, 1995 (date of the 1995
Acquisition).
1996 Acquisition -- Represents the revenues and direct operating
expenses of the properties acquired in the 1996 Acquisition for the
period from January 1, 1995 to June 14, 1996 (date of the 1996
Acquisition).
NOTE 2. -- PRO FORMA ENTRIES
(1) To record the acquisition of Valley Gathering Company and CSL Management
Corporation from certain members of Costilla Energy, L.L.C. and to record the
related additional depreciation and amortization, and reduction in oil and gas
production and general and administrative expenses.
(2) To reflect the Corporate Reorganization including the transfer of
members' capital to stockholders' equity.
(3) To reflect the issuance of 4,000,000 shares of Common Stock at an
estimated price of $15.00 per share for estimated proceeds of $55,300,000, net
of estimated expenses of the Common Stock Offering, and issuance of the Notes at
$100,000,000; and to reflect payment of related debt issuance expenses of
$3,850,000.
(4) To record the repayment of the Existing Debt and the write-off of
related debt issuance costs, the distribution of cash to certain members, and
the repurchase of redeemable members capital for approximately $15,000,000 from
proceeds of the Offerings.
The redemption amount is composed of the following:
<TABLE>
<S> <C>
Redeemable members' interest subject to preferred return...... $11,000,000
Redeemable members' interest not subject to preferred
return....................................................... 1,500,000
Accrued 15% preferred return including associated 10%
redemption premium........................................... 2,500,000
-----------
$15,000,000
-----------
-----------
</TABLE>
(5) Estimated incremental general and administrative expenses necessary to
administer the properties acquired in the 1995 and 1996 acquisitions and
increased public reporting and administration costs include salary and benefits
for one executive level employee and revised compensation arrangements for the
remaining executives, approximately 29 additional administrative personnel (the
majority of which were added prior to December 31, 1995), directors' fees,
insurance coverage and estimated costs to administer shareholder communications.
23
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. -- PRO FORMA ENTRIES (CONTINUED)
(6) To record estimated incremental depletion expense for the properties
acquired in the 1995 Acquisition from January 1, 1995 through June 12, 1995
(date of the 1995 Acquisition) and for the properties acquired in the 1996
Acquisition from January 1, 1995 through June 14, 1996 (date of the 1996
Acquisition).
(7) To adjust interest expense to reflect additional borrowings for the
properties acquired in the 1995 Acquisition from January 1, 1995 to June 12,
1995 (date of the 1995 Acquisition) and for the properties acquired in the 1996
Acquisition from January 1, 1995 to June 14, 1996 (date of the 1996
Acquisition). The adjustment also reflects adjusted interest expense due to the
Existing Debt. Also included is the amortization of estimated debt issuance
costs of $2,728,000 over a three-year period.
Incremental interest expense includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -----------------
<S> <C> <C>
Additional interest on borrowings associated with the
1995 Acquisition for the period of January 1 to June
12, 1995 (Average rate 10.0%).......................... $ 2,350 $ --
Additional interest on borrowings for the 1996
Acquisition through June 14, 1996 (including Tranche B
interest ranging from 14% to 16.5%).................... 6,750 2,300
Adjustment of average interest rate on previously
existing debt and amortization of loan fees............ 946 532
-------- -------
$ 10,046 $ 2,832
-------- -------
-------- -------
</TABLE>
(8) To adjust interest expense to reflect issuance of the Notes at 11.25%
plus the amortization of estimated debt issuance costs over 10 years ($385,000
annually).
NOTE 3. -- INCOME TAXES
Upon consummation of the Corporate Reorganization, the Company intends to
account for income taxes pursuant to the provisions of SFAS 109. At June 30,
1996, the pro forma tax basis of the Company's assets and liabilities exceeded
the pro forma book basis by approximately $5,000,000. The pro forma temporary
differences are primarily related to the differences in book and tax basis of
oil and gas properties due to the expensing of intangible development costs for
tax purposes and other income tax differences arising from the tax treatment of
oil and gas producing activities.
NOTE 4. -- NET LOSS PER SHARE
Net loss per share is calculated based on the pro forma weighted average
shares outstanding during the respective periods. Weighted average shares
reflect the pro forma issuance of 1,080,008 shares of Common Stock to NBCC on
February 17, 1995 and the pro forma issuance of 4,919,992 shares of Common Stock
to the remaining holders prior to January 1, 1995. In addition, the issuance of
4,000,000 shares in the Common Stock Offering is assumed to have taken place on
January 1, 1995 and assumes that the Underwriters' over-allotment option is not
exercised.
NOTE 5. -- SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
The estimates of proved oil and gas reserves, which are located in the
United States, were prepared by the Company as of December 31, 1993, 1994 and
1995, and Williamson as of April 1, 1996.
24
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. -- SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (CONTINUED)
Reserves were estimated in accordance with guidelines established by the
Securities and Exchange Commission and FASB which require that reserve estimates
be prepared under existing economic and operating conditions with no provision
for price and cost escalations, except by contractual arrangements. The Company
has presented the pro forma reserve estimates utilizing an oil price of $17.79
per Bbl and a gas price of $2.03 per Mcf as of December 31, 1995, and an oil
price of $20.91 per Bbl and a gas price of $2.02 per Mcf as of April 1, 1996.
The pro forma information assumes that both the 1995 Acquisition and the 1996
Acquisition took place on January 1, 1995.
OIL AND GAS PRODUCING ACTIVITIES
Oil and gas reserve quantity estimates are subject to numerous uncertainties
inherent in the estimation of quantities of proved reserves and in the
projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise that those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.
<TABLE>
<CAPTION>
OIL AND GAS
CONDENSATE (MBBLS) (MMCF)
------------------- -----------
<S> <C> <C>
Balance, January 1, 1995.............................................. 17,990 115,281
Revisions of previous estimates..................................... (570) 425
Extensions and discoveries.......................................... 605 8,922
Production.......................................................... (2,085) (11,984)
------- -----------
Balance, December 31, 1995............................................ 15,940 112,644
Revisions of previous estimates..................................... 436 2,614
Extensions and discoveries.......................................... 592 296
Production.......................................................... (492) (2,634)
------- -----------
Balance, April 1, 1996................................................ 16,476 112,920
------- -----------
------- -----------
Proved Developed Reserves:
December 31, 1995................................................... 13,235 87,345
April 1, 1996....................................................... 13,552 84,369
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES
The standardized measure of discounted future net cash flows is computed by
applying period-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves less estimated future production of
proved oil and gas reserves less estimated future expenditures (based on period-
end costs) to be incurred in developing and producing the proved reserves, less
estimated future income tax expenses (based on period-end statutory tax rates,
with consideration of future tax rates already legislated) to be incurred on
pretax net cash flows less tax basis of properties and available credits, and
assuming continuation of existing economic conditions. The estimated future net
cash flows are then discounted using a rate of 10% per year to reflect the
estimated timing of the future cash flows.
Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider
25
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. -- SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (CONTINUED)
probable reserves, anticipated future oil and gas prices, interest rates,
changes in development and production costs and risks associated with future
production. Because of these and other considerations, any estimate of fair
value is necessarily subjective and imprecise.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
Future cash flows........................................................ $ 512,363 $ 572,425
Future costs:
Production............................................................. (239,388) (253,347)
Development............................................................ (20,907) (22,076)
------------ --------------
Future net cash flows before income taxes (a)............................ 252,068 297,002
Future income taxes...................................................... (47,282) (63,418)
------------ --------------
Future net cash flows.................................................... 204,786 233,584
10% annual discount for estimated timing of cash flows................... (64,152) (76,359)
------------ --------------
Standardized measure of discounted net cash flows........................ $ 140,634 $ 157,225
------------ --------------
------------ --------------
</TABLE>
- ------------------------
(a) Present value of estimated future net cash flows, before income taxes would
be $153,373 and $179,527 as of December 31, 1995 and March 31, 1996,
respectively.
Changes in Standardized Measure of Discounted Future Net Cash Flows From Proved
Reserves:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1995 1996
------------ ---------------
(IN THOUSANDS)
<S> <C> <C>
Increase (decrease):
Extensions and discoveries and improved recovery, net of future
production and development costs..................................... $ 9,598 $ 6,002
Accretion of discount................................................. 14,147 3,516
Net change in sales prices, net of production costs................... 2,992 20,807
Changes in estimated future development costs......................... (1,651) (238)
Revisions of quantity estimates....................................... (2,392) 4,694
Net change in income taxes............................................ 1,633 (9,563)
Sales, net of production costs........................................ (27,055) (7,264)
Changes of production rates (timing) and other........................ 1,893 (1,363)
------------ ---------------
Net increase (decrease)............................................. (835) 16,591
Standardized measure of discounted future net cash flows:
Beginning of period................................................... 141,469 140,634
------------ ---------------
End of period......................................................... $ 140,634 $ 157,225
------------ ---------------
------------ ---------------
</TABLE>
26
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial data of Costilla Energy,
L.L.C. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The historical information should be read in conjunction
with the Consolidated Financial Statements and the notes thereto included
elsewhere in this Prospectus. Costilla Energy, L.L.C. acquired significant
producing oil and gas properties in certain of the periods presented which
affect the comparability of the historical financial and operating information.
The historical results are not necessarily indicative of the Company's future
operations or financial results.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues...................... $ 1,623 $ 2,364 $ 4,231 $ 7,637 $ 21,693 $ 5,568 $ 19,445
Total revenues.......................... 2,134 2,887 4,397 7,836 21,816 5,573 19,525
Expenses:
Oil and gas production................ 769 1,340 1,688 2,351 10,355 2,413 8,278
General and administrative............ 354 388 952 1,184 3,571 1,008 2,809
Exploration and abandonments.......... 106 4 218 793 1,650 1,007 308
Depreciation, depletion and
amortization......................... 494 404 884 1,847 5,958 1,367 4,620
Interest.............................. 179 365 605 1,458 4,591 1,046 4,156
Other................................. -- -- -- -- 2 -- --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item..................... 232 386 50 203 (4,311) (1,268) (646)
Net income (loss)....................... 234 368 73 163 (4,314) (1,268) (2,286)
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities.................. $ 276 $ 140 $ 322 $ 1,527 $ 6,366 $ (3,040) $ (122)
Investing activities.................. (2,659) (1,432) (6,731) (12,146) (62,467) (57,773) (49,723)
Financing activities.................. 2,440 1,450 6,315 10,618 58,830 62,094 48,143
OTHER FINANCIAL DATA:
Capital expenditures.................... $ 3,092 $ 3,720 $ 6,862 $ 11,868 $ 62,220 $ 57,773 $ 49,723
Distributions to members................ -- -- 456 961 55 55 --
Adjusted EBITDA (1)..................... 1,011 1,159 1,757 4,301 7,888 2,152 8,438
Adjusted EBITDA/interest expense (1).... 5.6x 3.2x 2.9x 2.9x 1.7x 2.1x 2.0x
Ratio of earnings to fixed charges
(2).................................... 1.3 1.5 1.0 1.1 -- -- --
BALANCE SHEET DATA (AS OF PERIOD END):
Working capital......................... $ (580) $ 185 $ 1,612 $ 1,081 $ 2,496 -- $ 4,266
Total assets............................ 4,602 6,675 13,365 24,904 87,367 -- 135,047
Total debt.............................. 2,870 5,304 12,006 23,613 71,494 -- 122,365
Redeemable members' capital............. -- -- -- -- 12,278 -- 13,557
Members' capital........................ 504 434 51 (747) (8,147) -- (11,712)
</TABLE>
- ------------------------------
(1) Adjusted EBITDA and the ratio of Adjusted EBITDA to interest expense are
presented because of their wide acceptance as financial indicators of a
company's ability to service or incur debt. Adjusted EBITDA (as used herein)
is calculated by adding interest, income taxes, depreciation, depletion and
amortization, exploration and abandonment costs and extraordinary loss
resulting from extinguishment of debt to net income (loss). The ratio of
Adjusted EBITDA to interest expense is calculated by dividing Adjusted
EBITDA by interest. Interest includes interest expense accrual and
amortization of deferred financing costs. Adjusted EBITDA and the ratio of
Adjusted EBITDA to interest expense should not be considered as alternatives
to earnings (loss), or operating earnings (loss), as defined by generally
accepted accounting principles, as indicators of the Company's financial
performance or to cash flow as a measure of liquidity.
(2) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" are net income (loss) before extraordinary loss resulting from
extinguishment of debt, plus income taxes and fixed charges. Fixed charges
are comprised of interest on indebtedness, amortization of deferred
financing costs, and that portion of operating lease expense which is deemed
to be representative of an interest factor. Earnings were insufficient to
cover fixed charges by $4,311,000, $1,268,000 and $646,000 for the
historical periods ended December 31, 1995, June 30, 1995 and June 30, 1996,
respectively.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Costilla is an independent energy company engaged in the exploration,
acquisition and development of oil and gas properties. The Company's predecessor
began operating in 1988 and through mid-1995 had grown primarily through a
series of small acquisitions of oil and gas properties and the exploitation of
those properties. In June 1995, Costilla consummated the 1995 Acquisition for a
purchase price of approximately $46.6 million, and in June 1996, the 1996
Acquisition was consummated for a purchase price of approximately $42.5 million.
To date, the Company has achieved its high rate of growth primarily through
acquisitions. This has impacted its reported financial results in a number of
ways. Properties sold by others frequently have not received focused attention
prior to sale. After acquisition, certain of these properties are in need of
maintenance, workovers, recompletions and other remedial activity not
constituting capital expenditures, which substantially increase lease operating
expenses. The increased production and revenue resulting from these expenditures
is predominately realized in periods subsequent to the period of expense. In
addition, the rapid growth of the Company has required it to develop operating,
accounting and administrative personnel compatible with its increased size. The
Company believes it has now achieved a sufficient size to expand its reserve
base without a corresponding increase in its general and administrative expense.
The Company also believes it now has a sufficient inventory of prospects and the
professional staff necessary to follow a more balanced program of exploration
and exploitation activities to complement its acquisition efforts.
Costilla's strategy is to increase its oil and gas reserves, production and
cash flow from operations through a two-pronged approach which combines an
active exploration program with the acquisition and exploitation of proved
reserves. In addition, Costilla continues to evaluate the acquisition of
undeveloped acreage for its exploration efforts. Costilla has in-house
exploration expertise using 3-D seismic technology to identify new drilling
opportunities as well as for the exploitation of acquired properties.
Costilla has shown a significant increase in its oil and gas reserves,
production and Adjusted EBITDA, especially due to the 1995 Acquisition and the
1996 Acquisition. The following table sets forth certain operating data of
Costilla for the periods presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OIL AND GAS PRODUCTION:
Oil (MBbls)....................................... 158 330 950 233 709
Gas (Mmcf)........................................ 865 1,600 4,806 1,233 3,504
MBOE.............................................. 302 597 1,751 438 1,293
AVERAGE SALES PRICES (1):
Oil (per Bbl)..................................... $ 16.93 $ 15.25 $ 15.53 $ 16.12 $ 18.99
Gas (per Mcf)..................................... 1.82 1.63 1.45 1.47 1.91
PRODUCTION COST (2):
Per BOE (3)....................................... $ 5.59 $ 3.94 $ 5.91 $ 5.51 $ 6.40
Per dollar of sales............................... 0.40 0.31 0.48 0.43 0.43
DEPRECIATION, DEPLETION AND AMORTIZATION:
Per BOE........................................... $ 2.93 $ 3.09 $ 3.40 $ 3.12 $ 3.57
Per dollar of sales............................... 0.21 0.24 0.27 0.25 0.25
</TABLE>
- ------------------------------
(1) Before deduction of production taxes and net of hedging results.
(2) Excludes depreciation, depletion and amortization. Production cost includes
lease operating expenses and production and ad valorem taxes, if
applicable.
(3) Production costs per BOE in 1995 and for the six months ended June 30, 1996
were unusually high as a result of relatively high workover expenses with
respect to properties acquired in the 1995 Acquisition which did not
produce related production improvement until subsequent periods.
Additionally, the Company's 1995 production costs were adversely affected
by expenses incurred in connection with plugging wells to comply with
applicable regulatory requirements.
28
<PAGE>
Costilla uses the successful efforts method of accounting for its oil and
gas activities. Costs to acquire mineral interests in oil and gas properties, to
drill and equip exploratory wells that result in proved reserves, and to drill
and equip development wells are capitalized. Costs to drill exploratory wells
that do not result in proved reserves, geological, geophysical and seismic
costs, and costs of carrying and retaining unproved properties are expensed.
Capitalized costs of producing oil and gas properties, after considering
estimated dismantlement and abandonment costs and estimated salvage values, are
depreciated and depleted using the unit-of-production method. Unproved oil and
gas properties that are individually significant are periodically reviewed for
impairment of value, and a loss is recognized at the time of impairment by
providing an impairment allowance. Other unproved properties are amortized based
on the Company's experience of successful drilling and average holding period.
The Company utilizes option contracts to hedge the effect of price changes
on a portion of its future oil and gas production. Premiums paid and amounts
receivable under the option contracts are amortized and accrued to oil and gas
sales, respectively. If market prices of oil and gas exceed the strike price of
put options, the options will expire unexercised, therefore, reducing the
effective price received for oil and gas sales by the cost of the related
option. Conversely, if market prices of oil and gas decline below the strike
price of put options, the options will be exercised, therefore, increasing the
effective price received for oil and gas sale by the proceeds received from the
related option. The net effect of the Company's commodity hedging activities
reduced oil and gas revenues by $9,000, $80,000, $80,000 and $854,000,
respectively, for the years ended December 31, 1994 and 1995, and the six months
ended June 30, 1995 and 1996 and increased oil and gas revenues by $71,000 for
the year ended December 31, 1993. See "Business and Properties -- Risk
Management."
The Company utilizes interest rate swap agreements to reduce the potential
impact of increases in interest rates on floating-rate, long term debt. If
market rates of interest experienced during the applicable swap term are below
the rate of interest effectively fixed by the swap agreement, the rate of
interest incurred by the Company will exceed the rate that would have been
experienced under the Credit Agreement. The net effect of the Company's interest
rate hedging activities increased interest expense by $8,000 for the year ended
December 31, 1995 and $359,000 for the six months ended June 30, 1996.
The Company's predecessors were classified as partnerships for federal
income tax purposes. Therefore, no income taxes were paid or provided for by the
Company prior to the Offerings. Future tax amounts, if any, will be dependent
upon several factors, including but not limited to the Company's results of
operations.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
The Company's total oil and gas revenues for the six months ended June 30,
1996 were $19,445,000, representing an increase of $13,877,000 (249%) over
revenues of $5,568,000 for the comparable period in 1995. This increase was
primarily due to the 1995 Acquisition which accounted for approximately
$12,300,000 of the revenue increase. Prior to accounting for the impact of the
1995 Acquisition and the 1996 Acquisition, the Company's total oil and gas
revenues for the six months ended June 30, 1996 increased by $658,000 (12%) over
the same period in 1995.
Oil and gas production was 1,293 MBOE in the 1996 period compared to 438
MBOE in the 1995 period. Of the 855 MBOE increase, approximately 800 MBOE was
due to the properties acquired in the 1995 Acquisition. The remainder of the
increase was due to a combination of successful drilling activities and the
enhancement of existing production.
Interest and other revenues were $40,000 for the six months ended June 30,
1996 compared to $5,000 for the comparable period in 1995, representing an
increase of $35,000, which was primarily
29
<PAGE>
comprised of an increase in interest income of $33,000 in 1996 due to increased
funds earning interest. Also in the 1996 period, the Company realized gains of
$40,000 on various transactions for which there were no comparable transactions
for the six months ended June 30, 1995.
Oil and gas production costs in the 1996 period were $8,278,000 ($6.40 per
BOE), compared to $2,413,000 in 1995 ($5.51 per BOE), representing an increase
of $5,865,000 (243%), due principally to the 1995 Acquisition. On a per BOE
basis, production costs increased $0.89 due primarily to costs incurred to
exploit the properties acquired in the 1995 Acquisition which did not produce
related production improvement for the full period.
General and administrative expense for the six months ended June 30, 1996
was $2,809,000, representing an increase of $1,801,000 (179%) from the
comparable period in 1995 of $1,008,000. The increase is primarily due to an
increase in personnel and related costs necessary to accommodate the increased
activities of the Company due to the 1995 Acquisition and in anticipation of the
1996 Acquisition.
Exploration and abandonment expense decreased to $308,000 in the 1996 period
compared to $1,007,000 in 1995. The Company incurred $80,000 of seismic costs
for the six months ended June 30, 1996, compared to $467,000 which were incurred
for the comparable period in 1995. Dry hole costs decreased from $540,000 to
$228,000 for the comparable periods in 1995 and 1996, respectively.
Depreciation, depletion and amortization expense for the 1996 period was
$4,620,000 compared to $1,367,000 for the 1995 period, representing an increase
of $3,253,000 (238%). During 1996, depreciation, depletion and amortization on
oil and gas production was provided at an average rate of $3.57 per BOE compared
to $3.12 per BOE for 1995. The increase was due primarily to the 1995
Acquisition.
Interest expense was $4,156,000 in the 1996 period, compared to $1,046,000
for the comparable period in 1995. The $3,110,000 (297%) increase was
attributable primarily to increased levels of debt which the Company used to
finance the 1995 Acquisition. The average amounts of applicable interest-bearing
debt for the comparable periods in 1996 and 1995 were $77,646,000 and
$25,145,000, respectively.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company's total oil and gas revenues for 1995 were $21,693,000,
representing an increase of $14,056,000 (184%) over revenues of $7,637,000 in
1994. This increase was primarily due to the 1995 Acquisition which accounted
for approximately $12,032,000 of the revenue increase.
Oil and gas production was 1,751 MBOE in 1995 and 597 MBOE in 1994. Of the
1,154 MBOE increase, 1,099 MBOE was due to the properties acquired in the 1995
Acquisition.
Interest and other revenues were $123,000 in 1995 compared to $87,000 in
1994, representing an increase of $36,000 (41%), which was comprised of an
increase in interest income of $59,000 in 1995 due to an increased amount of
funds earning interest, partially offset by a decrease of other income of
$23,000. In 1994, the Company realized a gain of $112,000 on the sale of various
properties for which there were no comparable gains in 1995.
Oil and gas production costs in 1995 were $10,355,000 ($5.91 per BOE),
compared to $2,351,000 in 1994 ($3.94 per BOE), representing an increase of
$8,004,000 (340%). The major portion of the increase was due to increased
production associated with the 1995 Acquisition. In addition, certain acquired
properties required remedial workovers and other activity immediately following
acquisition resulting in unusual operating costs of approximately $600,000
during 1995. In addition, $1,605,000 of operating costs were incurred in
connection with properties acquired in late 1994.
30
<PAGE>
General and administrative expense for 1995 was $3,571,000, representing an
increase of $2,387,000 (202%) from 1994 expense of $1,184,000. The increase is
primarily due to an increase in personnel and related costs necessary to
accommodate the increased activities of the Company due to the 1995 Acquisition.
Exploration and abandonment expense increased to $1,650,000 in 1995 compared
to $793,000 in 1994. The increase of $857,000 (108%) was comprised principally
of $790,000 of seismic costs.
Depreciation, depletion and amortization expense for 1995 was $5,958,000
compared to $1,847,000 for 1994, representing an increase of $4,111,000 (233%).
During 1995, depreciation, depletion and amortization on oil and gas production
was provided at an average rate of $3.40 per BOE compared to $3.09 per BOE for
1994. The increase was due primarily to the 1995 Acquisition.
Interest expense was $4,591,000 in 1995 compared to $1,458,000 in 1994. The
$3,133,000 (215%) increase was attributable to increased levels of debt which
the Company used to finance the 1995 Acquisition. The average amounts of
applicable interest-bearing debt in 1995 and 1994 were $49,972,000 and
$17,632,000, respectively.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The Company's total oil and gas revenues for 1994 were $7,637,000,
representing an increase of $3,406,000 (81%) over revenues of $4,231,000 in
1993. The primary reason for the increase in revenues was due to two
acquisitions of properties in 1994, one of which occurred in January 1994 and
the other in October 1994.
Oil and gas production was 597 MBOE in 1994 and 302 MBOE in 1993. The
increase in production of 295 MBOE was principally due to properties acquired
during 1994.
Interest and other revenues were $87,000 in 1994 compared to $56,000 in
1993. The increase of $31,000 was comprised of an increase in interest income of
$26,000 in 1994, due to increased funds earning interest, and an additional
$5,000 in other income.
Oil and gas production costs in 1994 were $2,351,000 ($3.94 per BOE),
compared to $1,688,000 in 1993 ($5.59 per BOE), representing an increase of
$663,000. The increase in production costs is primarily attributable to two
acquisitions in 1994.
In 1994, general and administrative expense was $1,184,000, representing an
increase of $232,000 (24%) from 1993 expense of $952,000. The increase is due to
an increase in personnel and costs related primarily to acquisitions made in
1994.
Exploration and abandonment expense increased to $793,000 in 1994 compared
to $218,000 in 1993. The increase of $575,000 (264%) was due to an increase in
non-productive wells drilled in 1994 compared to 1993.
Depreciation, depletion and amortization expense for 1994 was $1,847,000
compared to $884,000 for 1993, representing an increase of $963,000 (109%),
primarily due to increased production. During 1994, depreciation, depletion and
amortization expense on oil and gas production was provided at an average rate
of $3.09 per BOE compared to $2.93 per BOE for 1993. The increase was due to
increased drilling and development, and the acquisition of additional
properties.
Interest expense was $1,458,000 in 1994 compared to $605,000 in 1993. The
$853,000 increase was attributable to increased debt levels related primarily to
the Company's acquisition of additional oil and gas properties in 1994. The
average amount of applicable interest-bearing debt in 1994 and 1993 was
$17,632,000 and $8,258,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH USED IN OPERATING ACTIVITIES
For the six months ended June 30, 1996, net cash used in operating
activities decreased to $0.1 million from $3.0 million for the comparable period
in 1995. Cash provided by operations, before
31
<PAGE>
changes in operating assets and liabilities, increased to $4.2 million from $0.1
million for the comparable period in 1995 due primarily to the 1995 Acquisition
and the increase in results of operations therefrom.
NET CASH USED IN INVESTING ACTIVITIES
Net cash used in investing activities for the six months ended June 30, 1996
was $49.7 million. Approximately $42.5 million was used for the 1996
Acquisition, $5.2 million was used for other oil and gas expenditures and $2.0
million was used for other property and equipment. For the year ended December
31, 1995, net cash used in investing activities was $62.5 million. Approximately
$46.6 million was used for the 1995 Acquisition, $10.6 million for exploration
and development activities, $4.3 million for two additional acquisitions of
producing oil and gas properties and $1.0 million primarily for other property
and equipment.
NET CASH PROVIDED BY FINANCING ACTIVITIES
The Company entered into a $125.0 million senior credit agreement in June
1996, against which $122.0 million was initially funded. Approximately $74.5
million was for the extension and refinancing of prior debt, $42.5 million was
used for the 1996 Acquisition and approximately $5.0 million was used for
general corporate purposes.
CAPITAL SOURCES
Funding for the Company's business activities has historically been provided
by bank financings, cash flow from operations, private equity sales, property
divestitures and joint ventures with industry participants. The Company
completed a $10 million private equity placement in February 1995. Subsequently,
the 1995 Acquisition and the 1996 Acquisition were substantially funded by bank
financings. The Company plans to finance its continuing operations and execute
its business strategy with cash flow from operations, net proceeds from the
Offerings and borrowings under the Credit Facility.
While the Company regularly engages in discussions relating to potential
acquisitions, the Company has no present agreement, commitment or understanding
with respect to any such acquisition, other than the acquisition of undeveloped
acreage and royalty and overriding royalty interests in its normal course of
business. Any future acquisition may require additional financing and will be
dependent upon financing arrangements available at the time.
The Company believes that cash flow from operations will be sufficient for
anticipated operating and capital expenditure requirements. However, because
future cash flows and the availability of financing are subject to a number of
variables beyond the Company's control, there can be no assurance that the
Company's capital resources will be sufficient to maintain currently planned
levels of capital expenditures. The Company's historical and pro forma earnings
for the year ended December 31, 1995 and the six months ended June 30, 1996 were
insufficient to cover fixed charges. Although the Company's earnings were
insufficient to cover fixed charges for these periods, the Company does not have
covenants in the Indenture or the Credit Facility requiring the Company to
maintain a specific ratio of earnings to fixed charges. However, if the Company
is unable to generate sufficient cash flow from operations to service its debt,
it may be required to refinance all or a portion of its debt, including the
Notes, or to obtain additional financing. There can be no assurance that any
such refinancing would be possible or that any additional financing could be
obtained. See "Risk Factors -- Significant Leverage and Debt Service."
The Company has received a commitment from NationsBank of Texas, N.A. (the
"Bank") to provide the Credit Facility to the Company following the Offerings.
The Credit Facility will provide for a revolving line of credit with the
availability of funds and letters of credit being subject to a borrowing base
determination at least semi-annually. The borrowing base will initially provide
for availability of up to $50.0 million, none of which is expected to be
outstanding immediately following the Offerings. Borrowings under the Credit
Facility will bear interest at the Company's option at a floating rate
32
<PAGE>
which is at or above the NationsBank, N.A. prime rate or the LIBOR rate,
depending on the percentage of committed funds which have been borrowed.
Interest will be payable quarterly and principal will be amortized in twelve
equal installments commencing two years following the execution of definitive
loan documents. Under the Credit Facility, the Company will be obligated to pay
certain fees to the Bank, including a commitment fee based on the unused portion
of the commitment. The Credit Facility will contain customary restrictive
covenants (including restrictions on the payment of dividends and the incurrence
of additional indebtedness) and will require the Company to maintain a current
ratio of not less than 1.0 to 1.0, a ratio of Adjusted EBITDA to interest
expense of not less than 2.0 to 1.0 and a minimum tangible net worth. At June
30, 1996, on a pro forma basis, the Company's current ratio would have been 2.7
to 1.0, the ratio of Adjusted EBITDA to interest expense would have been 2.1 to
1.0 and the Company would have exceeded the tangible net worth test by $1.4
million. The Company believes it will be in compliance with such covenants on
the date of closing of the Offerings. Borrowings under the Credit Facility will
be secured by not less than 70% of the Company's assets. The Bank's commitment
is subject to certain conditions, including completion of the Offerings and the
Corporate Reorganization and application of the net proceeds therefrom to repay
the Company's prior secured indebtedness. See "Use of Proceeds."
Although certain of the Company's costs and expenses may be affected by
inflation, inflationary costs have not had a significant effect on the Company's
results of operations.
CAPITAL EXPENDITURES
The Company requires capital primarily for the exploration, development and
acquisition of oil and gas properties, the repayment of indebtedness and general
working capital needs.
The following table sets forth costs incurred by the Company in its
development, exploration and acquisition activities during the periods
indicated.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------------- JUNE 30,
1993 1994 1995 1996
--------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Development costs...................................... $ -- $ -- $ 158 $ 607
Exploration costs...................................... 2,017 2,167 5,627 3,881
Acquisition costs:
Unproved properties.................................. 829 1,232 1,742 1,712
Proved properties.................................... 4,665 9,649 52,470 41,791
--------- --------- --------- -------------
Total.................................................. $ 7,511 $ 13,048 $ 59,997 $ 47,991
--------- --------- --------- -------------
--------- --------- --------- -------------
</TABLE>
The Company anticipates that costs incurred for 1996 will be approximately
$64.8 million, of which approximately $42.5 million was expended for the 1996
Acquisition, and approximately $5.2 million was expended for exploration and
development activities during the six months ended June 30, 1996.
DELIVERY COMMITMENT
In November 1995, the Company entered into gas sales agreements whereby it
committed to delivery of a total of 2,379,000 Mmbtu, from December 1, 1995
through December 1, 1996, for a total fixed price of $3,429,610. Income from the
agreements is recognized in the period of delivery.
33
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
Costilla is an independent energy company engaged in the exploration,
acquisition and development of oil and gas properties. The Company's primary
operations are in the Permian Basin area of Texas and New Mexico, the Gulf Coast
and the Rocky Mountain regions. The Company's strategy focuses on increasing
reserves through targeted exploration programs, the exploitation of its existing
properties and selective property acquisitions. In addition, the Company
recently acquired an interest in an entity which has a concession for the
development of mineral interests in the Republic of Moldova, in Eastern Europe.
The Company also has minor interests in the domestic gas gathering and
transmission business.
The Company's predecessor began operating in 1988 with the strategy of
acquiring and exploiting undervalued oil and gas properties, and at December 31,
1992 had net proved reserves of 4.7 MMBOE. Since January 1, 1993, the Company
has successfully closed seven transactions for an aggregate purchase price of
approximately $101 million. As of April 1, 1996, the Company had total estimated
net proved reserves (as defined below) of 16.5 Mmbbls of oil and 112.9 Bcf of
gas, aggregating 35.3 MMBOE, with a PV-10 Value of approximately $179.5 million,
assuming the 1996 Acquisition (as defined below) had occurred at April 1, 1996.
The Company also has a substantial undeveloped acreage position consisting of
180,704 gross (165,166 net) acres at June 30, 1996. The Company has identified
in excess of 200 drilling locations of which 78 are included in its proved
reserves.
Costilla has in-house exploration expertise which uses 3-D seismic
technology as a primary tool to identify drilling opportunities and has
experienced high rates of success in each of its first two major 3-D seismic
drilling programs. Since 1994, the Company has drilled 26 wells based on these
3-D surveys, 23 of which have been productive. The Company has recently
completed two additional 3-D surveys and intends to commence drilling on one of
these acreage blocks in the second half of 1996. The Company currently plans to
drill 81 wells through 1997 based on its 3-D surveys.
Since 1993, Costilla has generated significant growth in reserves,
production and Adjusted EBITDA. The Company increased its estimated proved
reserves from 6.0 MMBOE at December 31, 1993 to 35.3 MMBOE at April 1, 1996 (pro
forma for the 1996 Acquisition), representing a compound annual growth rate of
114%. This reserve growth has been achieved at an average all-in finding cost of
$3.60 per BOE over such period, a level which the Company believes is lower than
industry averages. Concurrently, the Company increased its average net daily
production from 827 BOE for the year ended December 31, 1993 to 10,703 BOE for
the three months ended March 31, 1996 (pro forma for the 1996 Acquisition),
representing a compound annual growth rate of 195%. Adjusted EBITDA increased at
a 240% compound annual growth rate from $1.8 million for 1993 to $20.8 million
for 1995 (pro forma for the 1995 Acquisition and the 1996 Acquisition).
BUSINESS STRATEGY
The Company's strategy is to increase its oil and gas reserves, production
and cash flow from operations through a two-pronged approach which combines an
active exploration program using 3-D seismic and other technological advances
with the acquisition and exploitation of producing properties. The Company seeks
to reduce its operating and commodity risks by holding a geographically diverse
portfolio of properties, the reserves attributable to which are approximately
balanced between oil and gas. The Company also seeks to manage the elements of
its business strategy through the operation of a significant portion of its
properties, the use of a rate of return analysis and the direct marketing and
hedging of its oil and gas production. The elements of the Company's strategy
may be further described as follows:
- - EXPLORATION EFFORTS. The Company uses extensive geological and geophysical
analysis to carefully focus its 3-D seismic surveys. This focus allows the
Company to successfully direct the size and scope of its exploration program
in order to improve the likelihood of success while managing overall
exploration costs. The Company's exploration efforts are concentrated
currently on
34
<PAGE>
known producing regions. The Company plans to drill 24 exploratory wells
during the last half of 1996 and 36 exploratory wells in 1997. Capital
budgeted for exploration activities is $8.1 million for the last six months
of 1996 and $10.8 million for 1997.
- - EXPLOITATION ACTIVITIES. The Company is actively pursuing numerous
exploitation opportunities within its existing properties, including areas
where no proved reserves are currently assigned. Exploitation activities
currently in progress include a carbon dioxide flood, recompletions,
workovers and infill and horizontal drilling and a secondary recovery
project. The Company's capital budget for such activities is $8.5 million
for the last six months of 1996 and $9.2 million for 1997, which includes
the drilling of 12 development wells in 1996 and 13 development wells in
1997.
- - PROPERTY ACQUISITIONS. The Company seeks to acquire producing properties
where it has identified opportunities to increase production and reserves
through both exploitation and exploration activities. The Company has
increased the value of its acquisitions by aggressively managing the
operations of existing proved properties and by successfully identifying and
developing previously unproved reserves on acquired acreage. The Company
seeks to acquire reserves which will fit its existing portfolio, are
generally not being actively marketed and where a negotiated sale would be
the method of purchase. The Company does not rely on major oil company
divestitures or property auctions.
- - PROPERTY DIVERSIFICATION. The Company holds a portfolio of oil and gas
properties located in the Permian Basin, the Gulf Coast and the Rocky
Mountain regions. The Company believes that by conducting its activities in
distinct regions it is able to reduce commodity price and other operational
risks. The Company's Moldovan interest is an extension of this strategy and
can be characterized by low initial costs, significant reserve potential and
the availability of technical data that may be further developed by the
Company.
- - CONTROL OF OPERATIONS. The Company prefers to operate and own the majority
working interest in its properties. This allows the Company greater control
over future development, drilling, completing and lifting costs and
marketing of production. At April 1, 1996, the Company operated wells
constituting approximately 65% of its total PV-10 Value (pro forma for the
1996 Acquisition).
SIGNIFICANT ACQUISITIONS
1995 ACQUISITION. In a $46.6 million acquisition completed in June 1995,
the Company acquired a group of oil and gas properties located in the Permian
Basin, Gulf Coast and Rocky Mountain regions. At the date of acquisition, the
net proved reserves included 7.1 Mmbbls of oil and 44.1 Bcf of gas, aggregating
14.4 MMBOE. From the date of acquisition until March 31, 1996, the Company
produced 1.1 MMBOE from the acquired properties and sold a portion of the
acquired properties for approximately $3.6 million. At April 1, 1996, the net
proved reserves of the remaining properties were 13.4 MMBOE. The acquired
properties also included 103,010 gross (93,786 net) undeveloped acres.
1996 ACQUISITION. In June 1996, the Company acquired a group of oil and gas
properties located primarily in the Permian Basin and Gulf Coast regions for
approximately $42.5 million. This acquisition included properties with net
proved reserves at April 1, 1996 of 5.0 Mmbbls of oil and 33.5 Bcf of gas,
aggregating 10.6 MMBOE. The acquired properties also included 40,092 gross
(14,512 net) undeveloped acres and a pipeline located in Pennsylvania which had
an allocated purchase price of $3.5 million.
35
<PAGE>
PRINCIPAL PROPERTIES
The following table sets forth certain information, as of April 1, 1996 (pro
forma for the 1996 Acquisition), which relates to the principal oil and gas
properties owned by the Company.
<TABLE>
<CAPTION>
PROVED RESERVES
----------------------------------------------------------
TOTAL OIL PERCENT OF
GROSS OIL GAS EQUIVALENT TOTAL OIL
REGION WELLS (MBBLS) (MMCF) (MBOE) EQUIVALENT
- ---------------------------------------------------------- --------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Permian Basin............................................. 1,890 9,200 55,200 18,400 52.1%
Gulf Coast................................................ 968 2,054 38,440 8,461 24.0
Rocky Mountain............................................ 236 4,526 12,886 6,674 18.9
Other..................................................... 428 696 6,394 1,762 5.0
--------- --------- --------- ----------- -----
Total..................................................... 3,522 16,476 112,920 35,297 100.0%
--------- --------- --------- ----------- -----
--------- --------- --------- ----------- -----
</TABLE>
PERMIAN BASIN. At April 1, 1996, 52.1% of the Company's proved reserves
were concentrated in the Permian Basin, an approximately 70-county region in
West Texas and Southeast New Mexico. The Company's production comes from well
known fields such as the Spraberry Trend, Sawyer Canyon, Goldsmith Unit and
Susan Peak. The majority of the Company's producing intervals in the Permian
Basin range from 4,500 feet to 9,500 feet in depth.
The Company has several exploratory projects in the Permian Basin based
primarily on 3-D seismic surveys. The most significant include:
EDWARDS/MCELROY RANCH PROSPECT, ECTOR AND CRANE COUNTIES, TEXAS. Costilla
has identified 75 drilling locations on the Company's 9,849 gross (4,334 net)
acres in this prospect based on 3-D seismic data. Since January 1, 1996, the
Company has drilled four successful wells on this prospect which have resulted
in three separate field discoveries. In addition, these wells have confirmed the
Strawn and Wolfcamp trends defined by the Company's extensive approximate
50-square mile 3-D seismic project undertaken jointly with Texaco Exploration
and Production Inc. ("Texaco"). Two additional wells are being drilled or
completed on seismic delineated features. The Company plans to drill 25 wells in
this trend through 1997. The Company's working interest in this prospect is
approximately 44%.
Costilla and Texaco are also developing a Queen Sand field identified from
the Edwards/McElroy Ranch seismic program. The four producing wells drilled
through June 30, 1996 are producing an aggregate of approximately 80 Bbls of oil
per day and the Company has participated in the drilling of two additional
productive wells subsequent to June 30, 1996. Drilling of six additional Queen
Sand wells is anticipated through 1997, with the field ultimately being
developed on a planned waterflood pattern in order to maximize recovery of the
oil in place.
MCGYVER-GREEN ACRES PROSPECT, HOWARD COUNTY, TEXAS. The Company has
identified 41 drilling locations in this prospect based on information derived
from approximately 30 square miles of 3-D seismic data that the Company acquired
on the area in 1994. The Talbot Fuller well was the first well drilled by the
Company on this prospect and was completed in the Canyon Lime formation at 8,200
feet in August 1994. Since completion, the well has produced 62,000 Bbls of oil
and 207 Mmcf of gas, and averaged 77 Bbls of oil per day and 320 Mcf of gas per
day during June 1996. Subsequent to the first well, 14 additional wells have
been drilled on this prospect of which 11 are productive. The Company intends to
drill six additional wells during the balance of 1996 on its 9,148 gross (6,587
net) acres. The Company's working interest in this prospect averages
approximately 72%.
The following two 3-D programs currently being undertaken by the Company in
the Permian Basin are expected to provide additional drilling locations:
WILSON RANCH 3-D PROJECT, PECOS COUNTY, TEXAS. The Wilson Ranch is located
in northeastern Pecos County, approximately 10 miles west of the Yates field.
The Company recently completed an approximate 17-square mile seismic survey on
the project. A second phase will be initiated in the first
36
<PAGE>
quarter of 1997. The project presents several potential exploration targets,
including the Queen, San Andres, Wolfcamp, Devonian and Ellenberger formations,
found at depths ranging from 1,600 to 8,000 feet. The Company has agreed to
lease 3,750 gross acres on this 50,000 acre ranch. Upon acquiring the lease, the
Company intends to sell up to one-half of its approximate 75% working interest.
The Company believes that there is significant additional potential in this
area.
DAVAN UNIT 3-D PROJECT, STONEWALL COUNTY, TEXAS. The Company has completed
another 3-D seismic project with Texaco to further develop the Company-operated
Davan Unit. The project involves a 3-D seismic evaluation of approximately 3,200
gross acres adjacent to a Company-operated waterflood which has produced in
excess of three Mmbbls of oil. An exploratory well is scheduled on this prospect
for the first quarter of 1997.
Two examples of the Company's current exploitation efforts in the Permian
Basin include:
EAST GOLDSMITH FIELD C02 PROJECT, ECTOR COUNTY, TEXAS. The Company owns
3,053 gross (2,073 net) acres in this field located 20 miles northwest of
Midland, Texas. Since its discovery, the field has produced in excess of 17
Mmbbls of oil from seven formations. The most productive zones in the East
Goldsmith Field have been the San Andres and Holt formations, both of which have
been subject to secondary recovery by waterflooding. The Company has been
analyzing a tertiary recovery project in those formations using CO2, and intends
to initiate the project in the fourth quarter of 1996. The Company's working
interest in this project averages approximately 87%.
SUSAN PEAK FIELD WORKOVER AND HORIZONTAL DRILLING PROGRAM, TOM GREEN COUNTY,
TEXAS. The Company recently completed the first horizontal well in this field
located south of San Angelo, Texas, in which it owns a 100% working interest
until payout. Production from this well drilled in the Strawn formation was 110
Bbls of oil per day and 240 Mcf of gas per day on June 30, 1996. Since February
1996, with only two workovers and the new horizontal well, the Company has
increased Susan Peak production from approximately 30 Bbls of oil per day and
700 Mcf of gas per day to a current rate of approximately 130 Bbls of oil per
day and 1,400 Mcf of gas per day. Two possible horizontal drilling locations and
additional workover candidates remain on this 7,461 gross (3,730 net) acre
lease. The Company's working interest in this project ranges from 50% to 100%.
GULF COAST. At April 1, 1996, 24.0% of the Company's proved reserves were
concentrated in the Gulf Coast region. The Company's production in this region
primarily comes from known formations such as Frio, Yegua, Austin Chalk and
Wilcox.
The Company plans to use its expertise in aggressively developing 3-D
opportunities on the extensive acreage position it holds in the region. Examples
of such exploration projects in progress include:
SEALY PROSPECT, AUSTIN COUNTY, TEXAS. The Sealy Field, consisting of 3,534
gross (1,767 net) acres, was acquired in the 1995 Acquisition. The Wilcox
formation in this field has produced over 66 Bcf of gas and there are subsurface
indications of the presence of several fault blocks that lie untested. The
Company's working interest in this prospect is 100%. The Company is currently
attempting to acquire additional acreage in this prospect prior to initiating a
3-D survey in late 1996 or 1997.
SOUTHWEST SPEAKS, LAVACA COUNTY, TEXAS. This project, consisting of 5,078
gross (2,539 net) acres, was also acquired in the 1995 Acquisition and is held
by several shallow Company-operated wells. Multiple producing horizons from
shallow depths to below 14,000 feet have produced over 199 Bcf of gas from this
highly faulted field. A recent well was completed in the Rainbow Wilcox sand on
acreage adjoining Costilla's lease. A well, in which Costilla holds a 5%
interest as a result of a farmout, has also been completed on Costilla's lease.
The Company's plans are to conduct a 3-D survey in the Speaks area in late 1996
or 1997. The Company's working interest in this prospect is approximately 50%.
BORCHERS FIELD, LAVACA COUNTY, TEXAS. This field was acquired by the
Company in the 1996 Acquisition. The property is on trend with the Speaks
project and is also a highly faulted field
37
<PAGE>
providing opportunity for further development. The Borchers Field has produced a
total of 17.5 Bcf of gas from two Wilcox sands. Costilla has a 100% working
interest in this field consisting of 1,321 gross and net acres. The Company
plans to conduct a 3-D survey in the Borchers Field in 1997.
Examples of exploitation activities in this region include:
JOSEY RANCH LEASE, HARRIS COUNTY, TEXAS. Two examples of the Company's
production enhancement of Gulf Coast properties were undertaken on this
prospect. When the lease was acquired in the 1995 Acquisition, production had
nearly ceased. Through a series of workovers, the Company has improved daily
production, as of June 30, 1996, to 63 Bbls of oil per day and 73 Mcf of gas per
day. In addition, Costilla has participated in a 13,000 foot test well on the
Josey Ranch lease to test the Wilcox formation. The well was completed in April
1996 and has consistently produced approximately 1,000 Mcf of gas per day. The
Josey Ranch lease covers 1,661 gross (649 net) acres, and the Company's working
interest in this prospect is approximately 39%.
PERSONVILLE, LIMESTONE COUNTY, TEXAS. The Company has recently completed an
11,200 foot Cotton Valley well, which is currently producing 0.7 Mmcf of gas per
day. The Company is preparing to stimulate the well in order to increase its
production. The Company is preparing to drill an additional well on this
prospect. Costilla leases 412 gross (111 net) acres in this prospect, and has
identified two additional drilling locations. The Company is the operator of
this prospect and its working interest is approximately 30%.
AUSTIN CHALK, BRAZOS, BURLESON, FAYETTE AND LEE COUNTIES, TEXAS. Costilla
acquired the majority of the working interest in nine gross Austin Chalk wells
in the 1995 Acquisition and an additional 80 gross Austin Chalk wells were
included in the 1996 Acquisition. The Company intends to enhance production on
certain of these wells through stimulation and workover activities, and analyze
further development potential. Costilla has 30,414 gross (20,985 net) acres in
the Austin Chalk area, and its working interest in this area averages
approximately 69%.
ROCKY MOUNTAIN. At April 1, 1996, 18.9% of the Company's proved reserves
were concentrated in the Rocky Mountain region, which includes Montana, North
Dakota, Wyoming, Colorado and Utah.
The Company has a number of opportunities in the Rocky Mountain region
involving 3-D seismic surveys, exploratory drilling and exploitation activities.
Examples of each of these opportunities are:
RAYMOND FIELD, SHERIDAN COUNTY, MONTANA. Since its discovery in 1972, the
Raymond Field has produced over five Mmbbls of oil from five different
formations. Daily production from the field has increased from 180 Bbls of oil
per day since its acquisition in June 1995 to 369 Bbls of oil per day at June
30, 1996 primarily as a result of the Company's improved operations. The Company
plans a 3-D program on its 960 gross and net acres in this field. The Company
owns a 100% working interest in this prospect.
OUTLOOK FIELD, SHERIDAN COUNTY, MONTANA. The Company undertook its first
Rocky Mountain 3-D seismic survey in the Outlook area to further develop the
field. Three drilling locations were identified from the data. The Company
anticipates commencing an Outlook test well in September 1996 that will be
drilled to 10,500 feet, a depth sufficient to test several different formations.
Costilla leases 5,168 gross (1,292 net) acres in the Outlook prospect, and owns
an approximate 25% working interest in this prospect.
NATURAL BUTTES FIELD, UINTAH COUNTY, UTAH. The Company owns a 100% working
interest in 1,280 gross and net acres in this prospect. Development by prior
owners was on 640-acre spacing while offset acreage has been developed on
80-acre spacing. Low gas prices in the area have precluded the assignment of
proved reserves to any undeveloped acres. As gas prices improve, the Company
plans to drill additional wells on the prospect.
38
<PAGE>
The Company owns an interest in significant acreage positions in the Rocky
Mountain region which are operated by third parties and are the subject of
active exploitation efforts. The most significant property is:
CIRCLE RIDGE FIELD, FREMONT COUNTY, WYOMING. The Circle Ridge Field, in
which the Company has an approximate 18% working interest, is operated by
Marathon Oil Company. This field is an approximate 1,100 acre waterflood located
in the Wind River Basin of Wyoming, approximately 30 miles north of Riverton,
Wyoming. There are 97 active producing wells and 10 active injection wells in
the field. Production originates from the Phosphoria, Tensleep and Amsden
formations that are present at depths ranging from 500 to 2,000 feet. Since
January 1995, 45 projects have been completed in the field. These projects
include recompletions, stimulation treatments and reactivations, which have
increased production from 1,469 Bbls of oil per day in January 1995 to a rate of
1,778 Bbls of oil per day for June 1996. The operator has several other projects
scheduled for the remainder of 1996 and is evaluating various different methods
of enhanced oil recovery for the field.
MARKETING ARRANGEMENTS
The Company utilizes an active marketing program for a portion of its crude
oil production in order to enhance the net price it receives. The Company sells
its crude oil production from operated properties in North Dakota, Montana and
Wyoming, at the lease level to an oil transportation company for the posted
price, plus an agreed upon bonus, with a corresponding agreement to repurchase
this production at its delivery point (typically, Cushing, Oklahoma) for a price
equal to the then posted price for West Texas Intermediate crude oil less an
agreed upon deduction for transportation and quality differentials, if any,
between the repurchased crude oil and West Texas Intermediate crude oil. The
Company then employs a broker to resell its crude oil to end users (such as
refineries) on a month-to-month basis. The lease level sales and repurchase
contracts are typically of six months duration. With respect to its other
operated oil production (primarily located in Texas), the Company employs a
similar price enhancement strategy, although the repurchase feature is absent.
Instead, the lease level purchaser resells the crude oil to end users at the
delivery point for the account of the Company. While these arrangements have the
effect of increasing the net price the Company receives for its crude oil, such
arrangements do not have the effect of limiting the Company's exposure to
movements in crude oil prices. The Company markets its gas production at the
lease level pursuant to month-to-month contracts. No single purchaser of oil or
gas accounted for in excess of 10% of the Company's consolidated revenues for
the year ended December 31, 1995.
RISK MANAGEMENT
The Company typically employs a strategy of purchasing put options on a
portion of its anticipated oil and gas production. This strategy is designed to
protect the Company from significant downward movements in commodity prices
while preserving the benefit of rising prices. The Company does not establish
hedges in excess of its anticipated production. Upon consummation of the
Offerings, substantially all of the Company's debt will be fixed rate. The
Company's current position with regard to its 1996 commodity hedges is as
follows:
OIL SALES. The Company has purchased put options to provide a floor price
for 3,000 Bbls of oil per day of its oil production for August 1996 through
December 1996. These put options currently in place represent approximately 52%
of the Company's estimated oil production for August 1996 through December 1996.
The floor price the Company has an agreement to receive is $18.00 per Bbl,
irrespective of the prices actually paid by purchasers of the oil at the lease
level.
GAS SALES. The Company has purchased put options which provide a floor
price for 900,000 Mmbtu's per month of its gas production through October 1996.
The put options currently in place represent approximately 84% of the Company's
estimated gas production for July 1996 through October 1996. The floor prices
with respect to such put options varies from $1.65 to $1.75 per Mmbtu depending
on the area in which the gas is produced.
39
<PAGE>
OIL AND GAS RESERVES
The Company's estimated total proved and proved developed reserves of oil
and gas as of December 31, 1993, 1994 and 1995, and as of April 1, 1996 were as
follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------------ PRO FORMA
APRIL 1,
1993 1994 1995 1996 (1)
---------------------- -------------------- -------------------- --------------------
OIL GAS OIL GAS OIL GAS OIL GAS
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
----------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Proved developed producing... 1,785 13,268 2,632 15,757 8,338 50,542 13,122 76,439
Proved developed non-
producing................... 0 0 0 583 228 6,851 429 7,930
Proved undeveloped........... 580 8,351 1,377 11,172 2,222 20,759 2,925 28,551
----- --------- --------- --------- --------- --------- --------- ---------
Total proved............... 2,365 21,619 4,009 27,512 10,788 78,152 16,476 112,920
----- --------- --------- --------- --------- --------- --------- ---------
----- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Assumes that the 1996 Acquisition had been consummated at April 1, 1996.
The following table sets forth the future net cash flows from the Company's
estimated proved reserves:
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
--------------------------------- APRIL 1,
1993 1994 1995 1996(1)
--------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Future net cash flows before income taxes....................... $ 47,213 $ 68,596 $ 188,337 $ 297,002
Future net cash flows before income taxes, discounted at 10%.... $ 26,377 $ 36,779 $ 113,296 $ 179,527
</TABLE>
- ------------------------------
(1) Assumes that the 1996 Acquisition had been consummated at April 1, 1996.
The reserve estimates reflected above for 1993, 1994 and 1995 were prepared
by the Company. The Company's 1995 estimates of gross reserves with respect to
certain of the Company's producing properties were subject to a limited review
by Williamson of the Company's engineering analysis covering approximately 54.0%
of the Company's proved reserves at such date. The pro forma estimates for April
1, 1996, including the properties acquired in the 1996 Acquisition, were
prepared by Williamson and are part of reports on the Company's oil and gas
properties prepared by Williamson, a summary of which is set forth herein as
Appendix A.
The reserve data set forth herein present estimates only. In general,
estimates of economically recoverable oil and gas reserves and of the future net
revenues therefrom are based upon an number of variable factors and assumptions,
such as historical production from the subject properties, the assumed effects
of regulation by governmental agencies and assumptions concerning future oil and
gas prices and future operating costs, all of which may vary considerably from
actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable oil and gas reserves attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenues expected therefrom, prepared by different
engineers or by the same engineers at different times, may vary substantially.
The Company therefore emphasizes that the actual production, revenues, severance
and excise taxes, development and operating expenditures with respect to its
reserves will likely vary from such estimates, and such variances could be
material.
Estimates with respect to proved reserves that may be developed and produced
in the future are often based upon volumetric calculations and upon analogy to
similar types of reserves rather than
40
<PAGE>
actual production history. Estimates based on these methods are generally less
reliable than those based on actual production history. Subsequent evaluation of
the same reserves based upon production history will result in variations, which
may be substantial, in the estimated reserves.
In accordance with applicable requirements of the Securities and Exchange
Commission, the estimated discounted future net revenues from estimated proved
reserves are based on prices and costs as of the date of the estimate unless
such prices or costs are contractually determined at such date. Actual future
prices and costs may be materially higher or lower. Actual future net revenues
also will be affected by factors such as actual production, supply and demand
for oil and natural gas, curtailments or increases in consumption by natural gas
purchasers, changes in governmental regulations or taxation and the impact of
inflation on costs.
EXPLORATION AND DEVELOPMENT ACTIVITIES
The Company drilled, or participated in the drilling of, the following
number of wells during the periods indicated. At June 30, 1996, the Company was
in the process of drilling two gross (0.49 net) wells and was in the process of
completing three gross (1.16 net) wells as producers which are not reflected in
the following table.
<TABLE>
<CAPTION>
1993 1994 1995
---------------------- ---------------------- ----------------------
GROSS NET GROSS NET GROSS NET
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Exploratory:
Productive....................................... 3 0.83 9 2.27 10 4.58
Dry.............................................. 2 1.06 10 3.73 6 2.57
--- --- --- --- --- ---
Total.......................................... 5 1.89 19 6.00 16 7.15
--- --- --- --- --- ---
--- --- --- --- --- ---
Development:
Productive....................................... -- -- -- -- 1 0.44
Dry.............................................. -- -- -- -- -- --
--- --- --- --- --- ---
Total.......................................... -- -- -- -- 1 0.44
--- --- --- --- --- ---
--- --- --- --- --- ---
Total:
Productive....................................... 3 0.83 9 2.27 11 5.02
Dry.............................................. 2 1.06 10 3.73 6 2.57
--- --- --- --- --- ---
Total.......................................... 5 1.89 19 6.00 17 7.59
--- --- --- --- --- ---
--- --- --- --- --- ---
<CAPTION>
SIX MONTHS ENDED JUNE
30, 1996
----------------------
GROSS NET
----------- ---------
<S> <C> <C>
Exploratory:
Productive....................................... 3 1.74
Dry.............................................. 1 0.72
--- ---
Total.......................................... 4 2.46
--- ---
--- ---
Development:
Productive....................................... 4 1.98
Dry.............................................. -- --
--- ---
Total.......................................... 4 1.98
--- ---
--- ---
Total:
Productive....................................... 7 3.72
Dry.............................................. 1 0.72
--- ---
Total.......................................... 8 4.44
--- ---
--- ---
</TABLE>
The Company does not own any drilling rigs and all of its drilling
activities are conducted by independent contractors under standard drilling
contracts.
PRODUCTIVE WELL SUMMARY
The following table sets forth the Company's gross and net interests in
productive oil and gas wells as of June 30, 1996. Productive wells are producing
wells and wells capable of production.
<TABLE>
<CAPTION>
ACTUAL (1)
--------------------
GROSS NET
--------- ---------
<S> <C> <C>
Oil wells...................................................................................... 2,248 678.54
Gas wells...................................................................................... 1,278 231.11
--------- ---------
Total...................................................................................... 3,526 909.65
--------- ---------
--------- ---------
</TABLE>
- ------------------------------
(1) Does not include royalty and overriding royalty interests owned by
Statewide or the Company. See "-- Other Activities -- Minerals Acquisition
Program." In addition, one well with multiple completions is counted as a
single well.
41
<PAGE>
ACREAGE
The following table sets forth certain information regarding the Company's
developed and undeveloped leasehold acreage as of June 30, 1996. Acreage in
which the Company's interest is limited to royalty, overriding royalty, mineral
and similar interests (such as all acreage owned by Statewide) is excluded.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL
-------------------- -------------------- --------------------
REGION GROSS NET GROSS NET GROSS NET
- ------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Permian Basin.............................. 126,091 50,151 65,741 55,669 191,832 109,819
Gulf Coast................................. 197,650 65,547 46,040 39,713 243,689 105,261
Rocky Mountain............................. 8,534 6,126 24,757 24,650 33,291 30,776
Other...................................... 43,651 26,108 44,166 41,134 87,817 67,241
--------- --------- --------- --------- --------- ---------
Total.................................. 375,926 147,932 180,704 165,166 556,629 313,097
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
OTHER ACTIVITIES
MOLDOVA CONCESSION AGREEMENT. In July 1995, the Republic of Moldova
(located in Eastern Europe between Romania and the Ukraine) granted a Concession
Agreement to Resource Development Company Limited, L.L.C. ("Redeco"), an entity
not affiliated with the Company. The Company has paid Redeco $90,000 and agreed
to bear the first $2.0 million of Concession expenses ($1.2 million of which had
been expended through June 30, 1996) in return for a 50.0% interest in Redeco.
After the initial $2.0 million expenditure, the Company and the other members of
Redeco are each responsible for bearing 50.0% of future expenses. The Concession
Agreement covers the entire country with respect to oil and gas and other
minerals and continues for various time periods depending on the nature of the
activity conducted. In connection with two previously producing but now
abandoned fields, Redeco's exclusive rights continue for 20 years. Redeco's
exclusive period to explore throughout the remainder of Moldova expires in 2005,
but Redeco will maintain exclusive development rights with respect to fields
discovered for a period of 20 years from the date of first production from such
field. The Company has no material fixed financial commitments with respect to
the Concession.
MINERALS ACQUISITION PROGRAM. Statewide, a Company subsidiary, was
organized for the purpose of acquiring overriding royalty interests and other
types of non cost-bearing mineral interests underlying producing oil and gas
fields primarily in Texas. The strategy of such acquisitions is to make blanket
offers to holders of small interests. From inception through June 30, 1996,
Statewide expended approximately $3.3 million in acquiring interests in
approximately 1,400 properties. Through June 30, 1996, Statewide had received
revenues from such interests aggregating approximately $1.5 million, as well as
proceeds from sales of such interests of approximately $150,000.
GAS GATHERING AND TRANSMISSION. In 1996, the Company purchased a 45.0%
membership interest (which reduces to 32.4% when the Company and certain other
members recoup their original investment) in Republic Gas Partners, L.L.C., a
Texas limited liability company ("Republic"), for approximately $800,000.
Republic owns all of the stock of Mid Louisiana Gas Company, Mid Louisiana
Marketing Company and Mid Louisiana Gas Transmission Company (collectively, the
"Midla Companies"). The assets of the Midla Companies include 409 miles of
mainly 22-inch pipeline extending from the Monroe field area south of the city
of Baton Rouge, serving various Louisiana and Mississippi municipal and
industrial customers along its route. Mid Louisiana Gas Company's pipeline is
subject to the jurisdiction of the Federal Energy Regulatory Commission
("FERC").
Valley, a Company subsidiary, owns a small gas gathering system, several
small gas plants, 11 salt water disposal wells located in each of its three
principal regions and compressors used in the compression of gas located in the
Gulf Coast region. For the year ended December 31, 1995, Valley had revenues of
$553,000 and net income of $264,000, substantially all of which were related to
transactions with Costilla.
42
<PAGE>
In the 1996 Acquisition, Pipeline, a Company subsidiary, acquired a 120-mile
gas transportation pipeline in southwestern Pennsylvania for an allocated value
of $3.5 million. The Company regards this asset as non-strategic to its business
activities and is presently marketing the pipeline for sale.
COMPETITION AND MARKETS
Competition in all areas of the Company's operations is intense. Major and
independent oil and gas companies and oil and gas syndicates actively bid for
desirable oil and gas properties, as well as for the equipment and labor
required to operate and develop such properties. A number of the Company's
competitors have financial resources and acquisition, exploration and
development budgets that are substantially greater than those of the Company,
which may adversely affect the Company's ability to compete with these
companies. Many of the Company's competitors have been engaged in the energy
business for a much longer time than the Company. Such companies may be able to
pay more for productive oil and gas properties and exploratory prospects and to
define, evaluate, bid for and purchase a greater number of properties and
prospects than the Company's financial or human resources permit. The Company's
ability to acquire additional properties and to discover reserves in the future
will be dependent on its ability to evaluate and select suitable properties and
to consummate transactions in a highly competitive environment.
The market for oil, gas and natural gas liquids produced by the Company
depends on factors beyond its control, including domestic and foreign political
conditions, the overall level of supply of and demand for oil, gas and natural
gas liquids, the price of imports of oil and gas, weather conditions, the price
and availability of alternative fuels, the proximity and capacity of gas
pipelines and other transportation facilities and overall economic conditions.
The oil and gas industry as a whole also competes with other industries in
supplying the energy and fuel requirements of industrial, commercial and
individual consumers.
REGULATION
The Company's oil and gas exploration, production and related operations are
subject to extensive rules and regulations promulgated by federal, state and
local agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and gas industry
increases the Company's cost of doing business and affects its profitability.
Because such rules and regulations are frequently amended or reinterpreted, the
Company is unable to predict the future cost or impact of complying with such
laws.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas. Such
states also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from oil and gas wells and the
regulation of spacing, plugging and abandonment of such wells. The statutes and
regulations of certain states limit the rate at which oil and gas can be
produced from the Company's properties.
FERC regulates interstate natural gas transportation rates and service
conditions, which affect the marketing of gas produced by the Company, as well
as the revenues received by the Company for sales of such production. Since the
mid-1980s, the FERC has issued a series of orders, culminating in Order Nos.
636, 636-A and 636-B ("Order 636"), that have significantly altered the
marketing and transportation of gas. Order 636 mandates a fundamental
restructuring of interstate pipeline sales and transportation service, including
the unbundling by interstate pipelines of the sales, transportation, storage and
other components of the city-gate sales services such pipelines previously
performed. One of the FERC's purposes in issuing the orders is to increase
competition within all phases of the gas industry. Order 636 and subsequent FERC
orders on rehearing have been appealed and are pending judicial review. Because
these orders may be modified as a result of the appeals, it is difficult to
predict the ultimate impact of the orders on the Company and its gas marketing
efforts. Generally,
43
<PAGE>
Order 636 has eliminated or substantially reduced the interstate pipelines'
traditional role as wholesalers of natural gas, and has substantially increased
competition and volatility in natural gas markets. While significant regulatory
uncertainty remains, Order 636 may ultimately enhance the Company's ability to
market and transport its gas, although it may also subject the Company to
greater competition and the more restrictive pipeline imbalance tolerances and
greater associated penalties for violation of such tolerances.
Sales of oil and natural gas liquids by the Company are not regulated and
are made at market prices. The price the Company receives from the sale of these
products is affected by the cost of transporting the products to market.
Effective as of January 1, 1995, the FERC implemented regulations establishing
an indexing system for transportation rates for oil pipelines, which, generally,
would index such rates to inflation, subject to certain conditions and
limitations. These regulations could increase the cost of transporting oil and
natural gas liquids by pipeline, although the most recent adjustment generally
decreased rates. These regulations are subject to pending petitions for judicial
review. The Company is not able to predict with certainty what effect, if any,
these regulations will have on it, but, other factors being equal, the
regulations may, over time, tend to increase transportation costs or reduce
wellhead prices for oil and natural gas liquids.
ENVIRONMENTAL MATTERS
Operations of the Company are subject to numerous and constantly changing
federal, state and local laws and regulations governing the discharge of
materials into the environment or otherwise relating to environmental
protection. These laws and regulations may require the acquisition of certain
permits, restrict or prohibit the types, quantities and concentration of
substances that can be released into the environment in connection with drilling
and production, restrict or prohibit drilling activities that could impact
wetlands, endangered or threatened species or other protected natural resources
and impose substantial liabilities for pollution resulting from the Company's
operations. Such laws and regulations may substantially increase the cost of
exploring for, developing or producing oil and gas and may prevent or delay the
commencement or continuation of a given project. In the opinion of the Company's
management, the Company is in substantial compliance with current applicable
environmental laws and regulations, and the cost of compliance with such laws
and regulations has not been material and is not expected to be material during
the next fiscal year. Nevertheless, changes in existing environmental laws and
regulations or in interpretations thereof could have a significant impact on the
operating costs of the Company, as well as the oil and gas industry in general.
For instance, legislation has been proposed in Congress from time to time that
would reclassify certain oil and gas production wastes as "hazardous wastes,"
which reclassification would make exploration and production wastes subject to
much more stringent handling, disposal and clean-up requirements. State
initiatives to further regulate the disposal of oil and gas wastes and naturally
occurring radioactive materials are also pending in certain states, including
Texas, and these various initiatives could have a similar impact on the Company.
The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or the site where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. Persons who are or were responsible for releases of hazardous substances
found at the site and persons who are or were responsible for releases of
hazardous substances under CERCLA may be subject to joint and several liability
for the costs of cleaning up the hazardous substances that have been released
into the environment and for damages to natural resources, and it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the hazardous substances
released into the environment. The Company is able to control directly the
operation of only those wells with respect to which its acts as operator.
Notwithstanding the Company's lack of
44
<PAGE>
control over wells operated by others, the failure of the operator to comply
with applicable environmental regulations may, in certain circumstances, be
attributed to the Company. The Company has no material commitments for capital
expenditures to comply with existing environmental requirements.
EMPLOYEES
At June 30, 1996, the Company had 109 full-time employees. None of the
Company's employees is subject to a collective bargaining agreement. The Company
considers its relations with its employees to be good.
LEGAL PROCEEDINGS
The Company is a defendant or codefendant in minor lawsuits that have arisen
in the ordinary course of business. While the outcome of the these lawsuits
cannot be predicted with certainty, management does not expect any of these to
have a material adverse effect on the Company's consolidated financial condition
or results of operations.
TITLE TO PROPERTIES
The Company has obtained title opinions on substantially all of its
producing properties and believes that it has satisfactory title to such
properties in accordance with standards generally accepted in the oil and gas
industry. As is customary in the oil and gas industry, the Company performs a
minimal title investigation before acquiring undeveloped properties. A title
opinion is obtained prior to the commencement of drilling operations on such
properties. The Company's properties are subject to customary royalty interests,
liens incident to operating agreements, liens for current taxes and other
burdens which the Company believes do not materially interfere with the use of
or affect the value of such properties. Substantially all of the Company's oil
and gas properties are mortgaged to secure borrowings under the Company's
Existing Debt Facility and will continue to be mortgaged to secure borrowings
under the Credit Facility. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Liquidity and Capital
Resources," and "Description of Other Indebtedness."
OPERATIONAL HAZARDS AND INSURANCE
The Company's operations are subject to the hazards and risks inherent in
drilling and production and transportation of oil and gas, including fires,
natural disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures, and spills, any of which can result in
loss of hydrocarbons, environmental pollution, personal injury or loss of life,
severe damage to and destruction of properties of the Company and others, and
suspension of operations. See "Risk Factors -- Drilling Risks" and "Risk Factors
- -- Operating Hazards and Uninsured Risks."
The Company maintains insurance of various types to cover its operations.
The limits provided under its liability policies total $21 million. In addition,
the Company maintains operator's extra expense coverage which provides for care,
custody and control of all material wells drilled by the Company as operator.
The Company believes that its insurance is adequate and customary for companies
of a similar size engaged in operations similar to those of the Company, but
losses could occur for uninsurable or uninsured risks or in amounts in excess of
existing insurance coverage. The Company's general policy is to only engage
drilling contractors who provide substantial insurance coverage and name the
Company as an additional named insured. The occurrence of a significant adverse
event, the risks of which are not fully covered by insurance, could have a
material adverse effect on the Company's financial condition and results of
operations. Moreover, no assurances can be given that the Company will be able
to maintain adequate insurance in the future at rates it considers reasonable.
45
<PAGE>
MANAGEMENT
The executive officers and directors of the Company following completion of
the Corporate Reorganization are listed below, together with a description of
their experience and certain other information (ages provided are as of June 30,
1996). Each of the directors serve for a one year term. Executive officers are
appointed by the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE EMPLOYED SINCE POSITION WITH COMPANY
- --------------------------- --- ----------------- --------------------------------------------------------------
<S> <C> <C> <C>
Cadell S. Liedtke 41 1988 Chairman of the Board, Chief Executive Officer and Director
Michael J. Grella 47 1988 President, Chief Operating Officer and Director
Henry G. Musselman 42 1992 Executive Vice President and Director
Jerry J. Langdon 43 n/a Director
W.D. Kennedy 76 n/a Director
Bobby W. Page 53 1996 Senior Vice President, Treasurer and Chief Financial Officer
Clifford N. Hair, Jr. 49 1992 Vice President -- Land and Secretary
Roger J. Wetz 47 1992 Vice President -- Exploration (Geology)
Roger A. Freidline 46 1993 Vice President -- Exploration (Geophysics)
Brian K. Miller 36 1992 Vice President -- Reservoir Engineering
Sal J. Pagano 45 1995 Vice President -- Engineering and Operations
Keith Atwood 42 1992 Vice President -- Field Operations
Celia A. Zinn 48 1996 Controller
</TABLE>
Cadell S. Liedtke entered the oil and gas business in Midland, Texas in 1977
as an independent landman generating oil and gas prospects in the Permian Basin.
He founded the Company's predecessor with Michael J. Grella in 1988 and has
served as managing partner and/or chief executive officer since that time. Mr.
Liedtke has served on the Board of Directors of Texas Commerce Bank-Permian
Basin and has been appointed by Texas Governor George W. Bush to the Oil and Gas
Compact Commission. Mr. Liedtke is a member of the All-American Wildcatters
Association, the Permian Basin Petroleum Association, the Permian Basin Landmans
Association and the Independent Producer's Association of America. Mr. Liedtke
graduated from the University of Texas at Austin in 1977 with a B.A. degree in
economics.
Michael J. Grella has served as Chief Operating Officer of the Company and
its predecessor entities since their formation in 1988. He owned and operated an
independent oil and gas company and has invested in the oil and gas business
since 1982. Mr. Grella is a member of the Permian Basin Petroleum Association,
the Independent Producer's Association of America, the Texas Independent
Producers and Royalty Owners Association and the Permian Basin Landman
Association. Mr. Grella has a B.S. degree in computer science from the
University of California.
Henry G. Musselman began his oil and gas career in 1975 with Musselman
Petroleum and Land Company where he served as Vice President and a Director
until forming Musselman, Owen & King in 1982. For the 10 years until merging his
company into Costilla's predecessor in 1992, Mr. Musselman developed and
acquired oil and gas properties throughout the Permian Basin. Mr. Musselman is a
member and former director of the Independent Producer's Association of America.
Mr. Musselman graduated from the University of Texas at Austin in 1975 with a
B.B.A. degree.
Jerry J. Langdon has previously held positions with WP Corporation, Houston
Pipeline Company, Texas Oil & Gas Corporation and W. Wilson Corporation. In
1980, Mr. Langdon formed Texas IntraMark Gas Company, Inc., an intrastate gas
gathering company engaging in the business of constructing and operating natural
gas gathering, treating and processing facilities. In 1984, Mr. Langdon formed
Langdon & Associates, a natural gas consulting group advising petroleum
resource-oriented
46
<PAGE>
companies, financial institutions and law firms on a variety of technical,
commercial and regulatory issues. Mr. Langdon served as a member of the FERC
from 1988 to June 1993. Since leaving the FERC, Mr. Langdon formed Republic Gas
Corp. to acquire, construct and operate intrastate natural gas pipeline,
gathering, processing, treating and marketing facilities. Mr. Langdon is the
President of both Republic and the Midla Companies. Mr. Langdon is a 1975
graduate of the University of Texas at Austin with a B.S. degree.
W. D. Kennedy has been continually involved in the oil and gas business
since 1948. From 1953 until 1980, Mr. Kennedy was an executive officer and
director of C&K Petroleum, Inc., and its predecessor. C&K Petroleum, Inc. was a
publicly held corporation from 1971 until 1980, when the company was sold for in
excess of $200 million. Mr. Kennedy remains an active investor in the oil and
gas business. Mr. Kennedy is a graduate of the University of Texas, and a member
of the All-American Wildcatters Association, a past president of the Permian
Basin Petroleum Association, a former director of the Texas Mid-Continent Oil
and Gas Association, and an advisory director of Norwest Bank Texas, Midland.
Bobby W. Page began his oil and gas career with MGF Oil Corporation in 1967,
where he remained until 1988, ultimately serving as Executive Vice President,
Chief Financial Officer and a member of the Board of Directors. Following two
years as a self-employed financial consultant, Mr. Page joined Alta Energy
Corporation in 1990 as Executive Vice President, Treasurer and Chief Financial
Officer. From July 1993 until joining the Company, Mr. Page served as Vice
President, Chief Financial Officer and Secretary of Marcum Natural Gas Services,
Inc. Mr. Page graduated from the University of Oklahoma with a B.B.A. degree in
accounting in 1965.
Clifford N. Hair, Jr. has served in district and division landman roles, as
well as a corporate officer with Texas Gas Exploration Corporation, Samedan Oil
Corporation, Henry Petroleum Corporation and Donald C. Slawson Oil Producer. For
the two year period prior to joining the Company in 1992, Mr. Hair was an
independent landman involved in drilling projects in Texas and Oklahoma. Mr.
Hair is a Certified Petroleum Landman's and a member of the American Association
of Petroleum Landmen and the Petroleum Basin Landman Association. Mr. Hair
graduated with honors from the University of Houston in 1971 with a B.B.A.
degree in accounting.
Roger J. Wetz began his oil and gas career with IMCO Services, a division of
Halliburton, Inc. in 1974. He held a variety of geological positions with Gulf
Energy & Minerals Company, TXO Production Corporation and Terra Resources, Inc.
from 1976 to 1989. From 1989 until joining the Company in 1992, Mr. Wetz was an
independent geologist generating prospects in the Permian Basin. Mr. Wetz
graduated from St. Mary's University in 1973 with a B.S. degree in geology.
Roger A. Freidline began his industry career with Union Oil Company of
California. From 1976 until 1985, Mr. Freidline served in various geophysical
capacities with Forest Oil Corporation, Gifford, Mitchell and Wisenbaker and
Heritage Resources, Inc. Mr. Freidline was an independent geophysicist from 1985
until joining the Company, except for a period of employment as district
geologist for Hondo Oil & Gas Company prior to its sale. Mr. Freidline is a
Certified Petroleum Geologist, and a member of the Society of Exploration
Geophysicists, the Permian Basin Geophysical Society and the West Texas
Geological Society. He has co-authored papers which have appeared in Geology and
The Bulletin of the Seismological Society of America. Mr. Freidline received a
B.S. degree with highest honors from the New Mexico Institute of Mining and
Technology in 1972 and a Masters of Science degree in geophysics from the
University of Utah in 1974.
Brian K. Miller entered the oil and gas business as an operations engineer
for ARCO Oil and Gas Company. From 1984 to 1987, he was a reservoir engineer
with First City National Bank of Midland, Texas, and from 1987 to 1989, Mr.
Miller was an independent consulting engineer. Prior to joining the Company in
1992, Mr. Miller served as an oil and gas analyst under appointment to the
Federal Deposit Insurance Corporation. Mr. Miller is a member of the Society of
Petroleum Engineers.
47
<PAGE>
Mr. Miller received a B.S. degree with highest honors in petroleum engineering
from the University of Texas at Austin in 1982 and a Master of Business
Administration degree with honors in finance in 1984.
Sal J. Pagano began his oil and gas career with Amoco Production Company
where he was employed until 1978. From 1978 through 1989, Mr. Pagano was
employed by several independent oil and gas companies in Midland, Texas in a
variety of petroleum engineering capacities. Prior to joining the Company in
1995, Mr. Pagano was employed by Midland Resources Company from 1989 as a vice
president. Mr. Pagano is a registered petroleum engineer and a member of the
Society of Petroleum Engineers. Mr. Pagano graduated in 1973 from the University
of Missouri at Rolla with a B.S. degree in petroleum engineering.
Keith Atwood began his oil and gas career with Otis Engineering Corp. in
1974. Mr. Atwood worked as an independent consultant from 1979 to 1983 when he
joined Musselman, Owen & King Operating Co. to manage field operations. He
served in that capacity until joining the Company in 1992. Mr. Atwood attended
Southwest Texas State University and the University of Texas.
Celia A. Zinn joined the Company in 1996. From 1992 to 1996, she practiced
public accounting in Midland. Ms. Zinn has 18 years experience in the oil and
gas industry, including 12 years as Controller for Clayton W. Williams, Jr.,
Inc. from 1981 to 1992. Ms. Zinn is a certified public accountant. Ms. Zinn
graduated from the University of Texas-Arlington in 1978 with a B.A. in
mathematics.
48
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the names and addresses of each of the
Company's stockholders who beneficially own more than five percent of the
Company's Common Stock, the number of shares beneficially owned by such
shareholders and the percentage of the Common Stock so owned at June 30, 1996,
assuming in each case the Corporate Reorganization had been consummated at June
30, 1996 and that the Common Stock Offering is consummated without the
underwriters' over-allotment option being exercised.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) CLASS
- -------------------------------------- ---------------------- -------------
<S> <C> <C>
Cadell S. Liedtke .................... 2,656,796 26.6%
400 W. Illinois
Midland, Texas 79701
Michael J. Grella .................... 1,558,161 15.6%
400 W. Illinois
Midland, Texas 79701
NationsBanc Capital Corp. ............ 1,080,008 10.8%
100 North Tryon Street
Charlotte, North Carolina 28255
Henry G. Musselman ................... 705,035 7.0%
400 W. Illinois
Midland, Texas 79701
</TABLE>
- ------------------------------
(1) All persons own the listed shares of record.
The following table sets forth information as of June 30, 1996 (assuming the
Corporate Reorganization had been consummated on such date) with respect to the
shares of Common Stock beneficially owned by each of the Company's Directors,
the Chief Executive Officer and the three other most highly compensated
executive officers for 1996 (whose annualized compensation for such year based
on compensation levels following the Offering is expected to exceed $100,000)
and all Directors and executive officers as a group and the percent of the
outstanding Common Stock owned by each, assuming that the Common Stock Offering
is consummated without the underwriters' over-allotment option being exercised.
<TABLE>
<CAPTION>
DIRECTORS AND NAMED AMOUNT AND NATURE OF PERCENT OF
EXECUTIVE OFFICER BENEFICIAL OWNERSHIP CLASS (1)
- -------------------------------------- ---------------------- -------------
<S> <C> <C>
Cadell S. Liedtke..................... 2,656,796 26.6%
Michael J. Grella..................... 1,558,161 15.6%
Henry G. Musselman.................... 705,035 7.0%
Bobby W. Page......................... 75,000(2) 0.7%
All Officers and Directors as a group
(13 persons).......................... 5,554,992(3) 52.2%
</TABLE>
- ------------------------------
(1) For the sole purpose of calculating these percentages, the shares, which
the named person has the right to acquire within 60 days, by exercise of
the options described in these footnotes, are deemed outstanding shares
with respect to that person's percentage ownership and with respect to the
percentage ownership of all Officers and Directors as a group.
(2) Includes 75,000 shares issuable pursuant to an option granted under the
Company's 1996 Stock Option Plan which option will be immediately
exercisable upon closing of the Offerings at a price equal to the initial
public offering price of the Common Stock.
(3) Includes 635,000 shares issuable pursuant to options granted under the
Company's 1996 Stock Option Plan which options will be immediately
exercisable upon closing of the Offerings at a price equal to the initial
public offering price of the Common Stock.
49
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY COMPENSATION TABLE
The following table sets forth information for the Company's Chief Executive
Officer and the three other most highly compensated executive officers whose
annual compensation for the fiscal year ending December 31, 1996 is expected to
exceed $100,000. Information is presented for 1995, and for 1996 on an
annualized basis based on salaries to be effective following consummation of the
Offerings. Information for 1994 and prior years is not comparable since the
Company's predecessor was a general partnership in which the partners received
periodic partnership distributions in lieu of salary.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
------------------------------------------------- UNDERLYING
OTHER ANNUAL OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) SARS(#)(2) COMPENSATION($)
- ------------------------------- --------- --------- --------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Cadell S. Liedtke
Chairman of the Board and 1995 185,700 -- -- -- --
Chief Executive Officer 1996 300,000 -- -- -- --
Michael J. Grella
President and Chief Operating 1995 261,750 -- -- -- --
Officer 1996 300,000 -- -- -- --
Henry G. Musselman
1995 139,800 -- -- -- --
Executive Vice President 1996 215,000 -- -- -- --
Bobby W. Page
Senior Vice President,
Treasurer and Chief 1995(1) -- -- -- -- --
Financial Officer 1996 150,000 -- -- 75,000 --
</TABLE>
- ------------------------------
(1) Mr. Page joined the Company in June 1996.
(2) The amount shown represents the number of shares subject to a stock option
to be granted upon the closing of the Offerings pursuant to the Company's
1996 Stock Option Plan described under "-- Benefit Plans -- 1996 Stock
Option Plan." The option will be granted with an exercise price per share
equal to the initial public offering price of the Common Stock and will be
granted for a 10-year term.
DIRECTORS' COMPENSATION
Compensation for non-employee directors (Messrs. Langdon and Kennedy) will
consist of an annual retainer fee of $10,000, plus a $1,000 fee for each Board
meeting attended and a $1,000 fee for attending a committee meeting held on a
day other than the same day of a Board meeting. In addition, outside Directors
are participants in the Company's Outside Directors Stock Option Plan described
under "-- Benefit Plans -- Outside Directors Stock Option Plan." Employee
Directors do not receive compensation for serving on the Board or the Board's
committees.
EMPLOYMENT AGREEMENTS
Messrs. Liedtke, Grella and Musselman have entered into employment
agreements (the "Founders Employment Agreements") with the Company which will
become effective upon the closing of the Offerings and replace certain existing
agreements. The Founders Employment Agreements are each for three years,
commencing on the closing of the Offerings and each will automatically renew for
successive one-year periods thereafter unless the employee is notified to the
contrary. The Founders Employment Agreements provide for salary levels for
Messrs. Liedtke, Grella and Musselman of $300,000, $300,000 and $215,000,
respectively.
Each of Messrs. Liedtke, Grella and Musselman would receive his salary for
the remaining term of the applicable Founders Employment Agreement if the
Company were to terminate such person's
50
<PAGE>
employment other than for cause. If such person were to voluntarily leave his
employment with the Company prior to the second anniversary of the Agreement no
further payments would be required. If a voluntary termination were to occur
after the second anniversary of the Agreement, such person would be entitled to
one year's salary from the date of termination. Each Founders Employment
Agreement provides that the covered employee will not compete with the Company
for a one year period following his voluntary cessation of employment or
termination of employment for cause, in either case if such event occurs within
the initial three-year term of the Agreement. Competitive activities are defined
as engaging in the oil and gas business in any area in which the Company is then
active.
Bobby W. Page has entered into an employment agreement (the "Page Employment
Agreement") with the Company effective June 30, 1996. The Page Employment
Agreement is for a period of three years from June 30, 1996 and will
automatically renew for successive one-year periods thereafter unless Mr. Page
is notified to the contrary by the Company. The Page Employment Agreement
provides a $25,000 bonus (which includes Mr. Page's cost of relocation), plus a
base salary of $150,000 until January 1, 1997; $175,000 until January 1, 1998;
and $185,000 thereafter. In addition, Mr. Page will receive options to purchase
75,000 shares of Common Stock, certain insurance benefits and other benefits
generally available to the Company's employees. Mr. Page would receive his
salary for the remaining term of the Page Employment Agreement if the Company
were to terminate the Page Employment Agreement other than for cause. However,
if Mr. Page were to voluntarily leave his employment with the Company, no
further payments would be required.
BENEFIT PLANS
OUTSIDE DIRECTORS STOCK OPTION PLAN. The Outside Directors Stock Option
Plan provides for the issuance of stock options to the outside directors of the
Company. A total of 50,000 shares of Common Stock has been authorized and
reserved for issuance under the plan, subject to adjustments to reflect changes
in the Company's capitalization resulting from stock splits, stock dividends and
similar events. Only outside directors are eligible to participate in the plan.
Outside directors are those directors of the Company who are not executive
officers or regular salaried employees of the Company as of the date an option
is granted. Under the plan, an option for 1,000 shares of Common Stock will be
granted to each person who qualifies as an outside director each year that such
person is elected as a director of the Company. The exercise price of each
option granted under the plan will be the fair market value (as reported on the
Nasdaq National Market) of the Common Stock at the time the option is granted,
and may be paid either in cash, shares of Common Stock or a broker-assisted
cashless transaction. Each option will be exercisable immediately, and will
expire ten years from the date of grant. An option granted under the plan is not
transferrable other than by will or the laws of descent and distribution. In the
event a participant in the plan ceases to be an outside director, other than by
reason of death or change of control of the Company, such participant may
exercise an outstanding option under the plan within ninety days after such
termination, to the extent the participant was entitled to exercise the option
on the date of termination. In the event of the death of a participant under the
plan, such participant's option(s) may be exercised by the executors or
administrators of the optionee's estate or by the legatees of such participant
within one year after his death, so long as the term of the option has not
expired. The Company does not receive any consideration upon the grant of
options under the plan. The options granted under the plan are intended to be
non-qualifying options for federal income tax purposes. Because options under
the plan are not generally transferrable, do not appear to be subject to a
substantial risk of forfeiture and the exercise price will be the fair market
value of the common stock on the date of grant, the options should not be
taxable to an optionee until the optionee exercises the option, at which time
the optionee would recognize income on the difference between the exercise price
and the fair market value of the shares on the date of exercise. The grant of
options under the plan should be treated as compensation paid by the Company for
purposes of the Company's federal income tax considerations. The Board of
Directors may amend the plan without the approval of the stockholders of the
Company in any respect other than any
51
<PAGE>
amendment which requires stockholder approval by law and may only modify an
outstanding option, including the repricing of such options, with the consent of
the option holder. The Company currently has five directors, two of whom are
eligible to participate in the plan.
1996 STOCK OPTION PLAN. The 1996 Stock Option Plan provides for the grant
of both incentive stock options and non-qualifying stock options, as well as
limited stock appreciation rights and supplemental bonuses, to the employees of
the Company and its subsidiaries, including officers and directors who are
salaried employees. A total of 850,000 shares of Common Stock has been
authorized and reserved for issuance under the plan, subject to adjustment to
reflect changes in the Company's capitalization resulting from stock splits,
stock dividends and similar events. The plan is administered by the Board of
Directors. The Board of Directors has the sole authority to interpret the plan,
to determine the persons to whom options will be granted, to determine the basis
upon which the options will be granted, and to determine the exercise price,
duration and other terms of the options to be granted under the plan; provided
that (a) the exercise price of each option granted under the plan may not be
less than the fair market value of the Common Stock on the date the option is
granted (and for incentive stock options, 110% of fair market value if the
employee is the beneficial owner of 10% or more of the Company's voting
securities), (b) the exercise price must be paid in cash, by surrendering
previously owned shares of Common Stock upon the exercise of the option or by a
promissory note or broker-assisted cashless exercise approved by the Board of
Directors, (c) the term of the option may not exceed ten years, and (d) no
option is transferrable other than by will or the laws of descent and
distribution. Upon termination of an optionee's employment (other than by death
or disability), an incentive stock option may be exercised prior to the
expiration date of the option or within three months after the date of such
termination, whichever is earlier, but only to the extent the optionee had the
right to exercise the option upon the date of such termination, while the rights
of the holder of a non-qualifying stock option will be set forth in each option
agreement. In the event of the disability of an optionee, the option may be
exercised by such person, his personal representative at any time, but only to
the extent the optionee had the right to exercise the option as of the date of
his disability. In the event of death of the optionee, the option may be
exercised by his personal representative or successor in interest at any time
prior to the expiration of the option to the extent the option was exercisable
at the time of the optionee's death. Incentive stock options may not be granted
under the plan to any individual if the effect of such grant would permit that
person to have the first opportunity to exercise such options, in any calendar
year, for the purchase of shares having a fair market value (at the time of
grant of the option) in excess of $100,000. Neither the Company nor any of its
subsidiaries will receive any consideration for the granting of options under
the plan. Limited stock appreciation rights may be granted under the plan with
respect to specified options, allowing the option holder to receive, in cash,
the difference between the exercise price and the market value in the event of a
change of control of the Company. The Board of Directors may also grant
supplemental bonuses under the plan which are cash bonuses not to exceed the
amount of income tax liability incurred by a plan participant upon the exercise
of a non-qualifying stock option or a limited stock appreciation right with
respect to which the bonus was granted. Incentive stock options granted under
the plan are intended to have the federal income tax consequences of a qualified
stock option. As a result, the exercise of an incentive stock option will not be
a taxable event; the taxable event occurs at the time the shares of Common Stock
acquired upon exercise of the option are sold. If the optionee holds such shares
for the later of two years from the date the option was granted or one year from
the date of exercise of the option, the difference between the price paid for
the shares at exercise and the price for which those shares are sold will be
treated as capital gains income. If the optionee does not hold the shares for
the required holding period, the income would be treated as ordinary income
rather than capital gains income. The non-qualifying stock options granted under
the plan should be taxable when the option is exercised, at which time the
optionee would recognize ordinary income the difference between the exercise
price and the fair market value of the shares on the date of exercise. The grant
of options under the plan will be treated as compensation by the Company for
federal income tax purposes. The Board of Directors may amend the plan, without
stockholder approval, in any respect other than any amendment that
52
<PAGE>
requires stockholder approval by law, and may modify an outstanding option,
including the repricing of non-qualifying options, with the consent of the
option holder. There are currently approximately 100 persons who are eligible to
participate under the plan.
BONUS INCENTIVE PLAN. The Company has adopted the Bonus Incentive Plan to
become effective upon the completion of the Offerings. The plan provides that
the Board of Directors each year may award bonuses in cash, Common Stock, or
some combination thereof, to those officers, directors, employees and advisors
of the Company or a subsidiary of the Company, who the Board of Directors
determines have contributed to the success of the Company. A total of 100,000
shares of Common Stock has been authorized and reserved for issuance under the
plan, subject to adjustments to reflect changes in the Company's capitalization
resulting from stock splits, stock dividends and similar events. All officers,
directors, employees and advisors of the Company or a subsidiary of the Company
who have completed a minimum of 180 days of service and are employed or retained
by the Company or such subsidiary on the last day of the plan year, other than
such persons who own ten percent or more of the outstanding shares of Common
Stock during that year are eligible to participate in the plan. Bonus awards
will be determined based on a number of factors, including performance and
salary level of the participant and the financial performance of the Company and
its subsidiaries. Bonuses will be awarded after review and upon approval of the
Board of Directors, subject to the terms and conditions of the plan.
CERTAIN TRANSACTIONS
A&P supplies meter reading services which measures gas production to the
Company, as well as to unaffiliated oil and gas companies. A&P is also engaged
in the sale of gas meter and regulating equipment, and in certain other oil
field related businesses. For the fiscal year ended December 31, 1995, the
Company accounted for approximately 27% of A&P's gross revenues. From time to
time, the Company has advanced funds to A&P for working capital needs. These
advances have been consolidated into two promissory notes. One note was executed
December 31, 1994 in the original principal amount of $370,000. The note bears
interest at a floating rate equal to the "prime rate" plus 1.0%. No principal or
interest payments are due until the maturity of the note at December 31, 2004.
The note is secured by a second lien on A&P's accounts receivable, inventory and
equipment. The second note is in the original principal amount of $247,000 and
is dated May 22, 1996. The note bears interest at 6.0% per annum, is unsecured
and is payable upon demand. During the fiscal year ended December 31, 1995, A&P
received $612,139 from the Company for meter reading, meter repair, calibration,
flow line installation and other related services provided to the Company. The
Company believes that the services and charges therefor are comparable to those
the Company could have obtained from unaffiliated third parties.
During 1995 the Company paid $440,884 to Valley for gas compression and salt
water disposal charges. During 1995, Valley paid the Company $109,399 for
operating costs of its salt water disposal wells and gas compressors. Also
during 1995, the Company paid CSL $592,920 for management fees and lease
payments on equipment.
During a portion of 1995, the Company leased office space from 511 Tex L.C.,
in which Messrs. Liedtke, Grella and Musselman are the sole members. The amount
of rental payments to 511 Tex L.C. during 1995 was $67,896. The Company no
longer leases office space from any affiliated party.
The Company has agreed that, upon the request of NBCC, on up to two
occasions, the Company will register under the Securities Act of 1933, as
amended (the "Securities Act"), and applicable state securities laws the sale of
the Common Stock owned by NBCC. The Company's obligation is subject to certain
limitations regarding the timing of registrations and certain other matters. The
Company is also obligated to offer to NBCC and Messrs. Liedtke, Grella and
Musselman (collectively, the "Affiliated Holders") the opportunity to include
shares of the Common Stock owned by them in certain registration statements
filed by the Company. In addition, the Company has agreed to indemnify the
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Affiliated Holders and their respective officers and directors against
securities law liabilities arising in connection with such offerings, other than
liabilities arising as a result of information furnished to the Company by the
Affiliated Holders participating in the registration. The Company is obligated
to pay all expenses incident to such registration, except underwriters'
discounts and commissions allocable to the sale of shares by Affiliated Holders
and any professional fees and expenses incurred by the Affiliated Holders
incident to such registration. The Affiliated Holders have agreed that they will
not sell any shares of Common Stock for a period of 180 days after the Offerings
without the consent of Prudential Securities Incorporated.
Certain of the transactions comprising the Corporate Reorganization
represent transactions between the Company, or its predecessors, and its
affiliates. Messrs. Liedtke, Grella and Musselman, the shareholders of Valley
and CSL will sell the stock of Valley and the assets of CSL to the Company for
$0.7 million. The purchase price is based on negotiations between Messrs.
Liedtke, Grella and Musselman, on the one hand, and NBCC, considering the value
to the Company of the stock and assets being acquired. No third party conducted
an appraisal of either Valley or CSL.
Messrs. Liedtke, Grella and Musselman will receive an aggregate distribution
from the LLC of approximately $3.5 million which is estimated to be the federal
income tax liability (as well as the federal income tax liability on such
distribution) which will be owed by Messrs. Liedtke, Grella and Musselman as a
result of the Corporate Reorganization. However, the precise amount of such
liability will be dependent upon a number of factors which cannot be determined
with certainty until subsequent to December 31, 1996. While the amount to be
distributed has been determined in good faith by the Company's tax advisors,
there can be no assurance that the actual tax liability of any of Messrs.
Liedtke, Grella or Musselman will not be less or greater than the distributed
amounts. If the distributed amounts exceed the ultimate tax liabilities, none of
such persons will reimburse the Company. Correspondingly, if the tax liability
exceeds the amount of such distributions, the Company will not make any further
distributions to cover such short-fall. NBCC is also receiving a distribution of
$800,000 which represents its post-redemption ownership percentage of the
distribution made to Messrs. Liedtke, Grella and Musselman. However, NBCC has no
tax or other liability with respect to such distribution. In addition, Messrs.
Liedtke, Grella and Musselman and NBCC will receive an aggregate of 6,000,000
shares of Common Stock in the Merger in exchange for their interests in the LLC.
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DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to an Indenture (the "Indenture") between
the Company and State Street Bank and Trust Company, as trustee (the "Trustee").
A copy of the Indenture in substantially the form in which it will be executed
has been filed as an Exhibit to the Registration Statement of which this
Prospectus is a part. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the Trust Indenture Act for a statement thereof. The following summary of
certain provisions of the Indenture does not purport to be complete and is
qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below and those terms that are made a
part of the Indenture by reference to the Trust Indenture Act. The definitions
of certain terms used in the following summary are set forth below under the
caption "Certain Definitions."
As of the date of the Indenture, Costilla Redeco Energy, L.L.C. and Costilla
Redeco Operating, L.L.C., through which the Company conducts its Moldovan
operations, will be Unrestricted Subsidiaries. However, under certain
circumstances, the Company will be able to designate additional Subsidiaries as
Unrestricted Subsidiaries. If so designated, such Subsidiaries will not be
subject to many of the restrictive covenants set forth in the Indenture. As used
herein, "Subsidiary" refers to any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
PRINCIPAL, MATURITY AND INTEREST
The Notes will be unsecured senior subordinated general obligations of the
Company, limited in aggregate principal amount to $100 million and will mature
on , 2006. Interest on the Notes will accrue at the rate of
% per annum and will be payable semiannually in arrears on and
commencing on 1997, to Holders of record on the immediately
preceding and . Interest on the Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from , 1996. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months. Principal, premium, if any, and interest
on the Notes will be payable at the office or agency of the Company maintained
for such purpose within the City and State of New York or, at the option of the
Company, payment of interest may be made by check mailed to the Holders of the
Notes at their respective addresses set forth in the register of Holders of
Notes; PROVIDED that all payments with respect to Global Notes and Certificated
Securities the Holders of which have given wire transfer instructions to the
Company will be required to be made by wire transfer of immediately available
funds to the accounts specified by the Holders thereof. Until otherwise
designated by the Company, the Company's office or agency in New York will be in
the office of the Trustee maintained for such purpose. The Notes will be issued
in denominations of $1,000 and integral multiples thereof.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes and
the Subsidiary Guarantees thereof will be subordinated in right of payment, as
set forth in the Indenture and the Subsidiary Guarantees, to the prior payment
in full of Senior Indebtedness and Guarantor Senior Indebtedness, which will
include borrowings under the Credit Facility and the guarantees thereof
delivered by any Subsidiary Guarantors, whether outstanding on the date of the
Indenture or thereafter incurred. As of the date of the Indenture, there will be
no Subsidiary Guarantors. As a result, claims of creditors against the
Subsidiaries and the Unrestricted Subsidiaries including their trade creditors
and tort claimants, will effectively have priority to the property and earnings
of such Subsidiaries over claims of creditors of the Company, including the
Holders.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the
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Company or its property, an assignment for the benefit of creditors or any
marshaling of the Company's assets and liabilities, the holders of Senior
Indebtedness will be entitled to receive payment in full in cash of all
Obligations due in respect of such Senior Indebtedness (including interest after
the commencement of any such proceeding at the rate specified in the applicable
Senior Indebtedness) before the Holders of Notes will be entitled to receive any
payment with respect to the Notes, and until all Obligations with respect to
Senior Indebtedness are paid in full in cash, any distribution to which the
Holders of Notes would be entitled shall be made to the holders of Senior
Indebtedness (except that Holders of Notes may receive securities that are
subordinated at least to the same extent as the Notes are subordinated to Senior
Indebtedness and any securities issued in exchange for Senior Indebtedness and
Holders of Notes may recover payments made from the trust described under the
caption "Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in such subordinated securities or from the trust described under the
caption "Legal Defeasance and Covenant Defeasance") if (i) a default in the
payment of the principal of, premium, if any, or interest on Designated Senior
Indebtedness occurs and is continuing beyond any applicable period of grace or
(ii) any other default occurs and is continuing with respect to Designated
Senior Indebtedness that then permits holders of such Designated Senior
Indebtedness to accelerate its maturity and the Trustee receives a notice of
such default (a "Payment Blockage Notice") from the holders or the
representative of the holders of any Designated Senior Indebtedness. Payments on
the Notes may and shall be resumed (a) in the case of a payment default, upon
the date on which such default is cured or waived and (b) in the case of a
nonpayment default, the earlier of the date on which such nonpayment default is
cured or waived or 179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any Designated Senior
Indebtedness has been accelerated. No new period of payment blockage may be
commenced by a Payment Blockage Notice unless and until 360 days have elapsed
since the effectiveness of the immediately prior Payment Blockage Notice. No
nonpayment default that existed or was continuing on the date of delivery of any
Payment Blockage Notice to the Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice.
The Indenture will further require that the Company promptly notify the
Representatives of holders of Designated Senior Indebtedness and Designated
Guarantor Senior Indebtedness if payment of the Notes is accelerated because of
any Event of Default.
As a result of the subordination provisions described above, in the event of
an insolvency, bankruptcy, reorganization or liquidation of the Company, or upon
the occurrence of a Change of Control or an Asset Sale requiring repurchase by
the Company of any Notes, there may not be sufficient assets remaining to
satisfy the claims of the Holders after satisfying the claims of creditors of
the Company who are holders of Senior Indebtedness and claims of creditors of
the Company's Subsidiaries. See "Risk Factors -- Subordination of the Notes and
Subsidiary Guarantees." On a pro forma basis, after giving effect to the
Corporate Reorganization, the Offerings and the application of proceeds
therefrom, $0.4 million of Senior Indebtedness of the Company would have been
outstanding at June 30, 1996. The Notes will also be effectively subordinated to
liabilities of the Company's Subsidiaries that are not Subsidiary Guarantors. On
a pro forma basis, the total liabilities of the Company's Subsidiaries were $6.5
million at June 30, 1996, all of which were operating liabilities. The Indenture
will limit, subject to certain financial tests, the amount of additional
Indebtedness, including Senior Indebtedness and Guarantor Senior Indebtedness,
that the Company and its Subsidiaries can incur. See "Certain Covenants --
Incurrence of Indebtedness and Issuance of Preferred Stock."
SUBSIDIARY GUARANTEES
The Indenture does not require any Subsidiary to guarantee the payment of
the Notes unless such Subsidiary incurs Indebtedness (other than its
Indebtedness existing on the date of the Indenture and certain intercompany
Indebtedness). The Indenture requires the Company to cause such
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Subsidiary to fully and unconditionally, jointly and severally guarantee (the
"Subsidiary Guarantees") the Company's payment obligations under the Notes prior
to the incurrence of such Indebtedness. See "Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock." On the date of the Indenture,
there will be no Subsidiary Guarantors. So long as a Person is an Unrestricted
Subsidiary, such Person will not be required to become a Subsidiary Guarantor or
execute a Subsidiary Guarantee. See "Certain Covenants -- Unrestricted
Subsidiaries." As a result, claims of creditors against the Subsidiaries and the
Unrestricted Subsidiaries, including their trade creditors and tort claimants,
will effectively have priority to the property and earnings of such subsidiaries
over claims of creditors of the Company, including the Holders. The obligations
of each Subsidiary Guarantor under its Subsidiary Guarantee will be limited in a
manner intended to result in such Subsidiary Guarantee not constituting a
fraudulent conveyance under applicable law.
The Indenture will provide that no Subsidiary Guarantor may consolidate with
or merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person) another Person whether or not affiliated with such Subsidiary Guarantor
(other than the consolidation or merger of a Wholly Owned Subsidiary of the
Company with another Wholly Owned Subsidiary of the Company or into the Company)
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Subsidiary Guarantor) becomes a Subsidiary Guarantor pursuant to a supplemental
indenture or other agreement in form and substance reasonably satisfactory to
the Trustee, and (ii) immediately after giving effect to such transaction, (A)
no Default or Event of Default would exist or be continuing and (B) other than
in the case of the consolidation or merger of two or more Subsidiary Guarantors
or of one or more Subsidiary Guarantors with the Company, the Company would (A)
have Consolidated Net Worth immediately after the transaction equal to or
greater than the Consolidated Net Worth of the Company immediately preceding the
transactions; and (B) at the time of such transaction and after giving effect
thereto, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Consolidated Interest Coverage Ratio and the Adjusted
Consolidated Net Tangible Assets to Consolidated Indebtedness Ratio tests set
forth in the first paragraph of the covenant described below under the caption
"Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred
Stock."
The Indenture will provide that (i) in the event of a sale or other
disposition of all of the assets of any Subsidiary Guarantor, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the capital
stock of any Subsidiary Guarantor or (ii) in the event that a Subsidiary
Guarantor is properly designated as an Unrestricted Subsidiary, in each case, in
accordance with the provisions of the Indenture, then such Subsidiary Guarantor
(in the event of a sale or other disposition, by way of such a merger,
consolidation or otherwise, of all of the capital stock of such Subsidiary
Guarantor or the proper designation of such Subsidiary Guarantor as an
Unrestricted Subsidiary in accordance with the provisions of the Indenture) or
the corporation acquiring the property (in the event of a sale or other
disposition of all or substantially all of the assets of such Subsidiary
Guarantor), will be released and relieved of any obligations under its
Subsidiary Guarantee; provided that the Net Proceeds of such sale or other
disposition are applied in accordance with the applicable provisions of the
Indenture. See "Certain Covenants -- Merger, Consolidation or Sale of Assets."
The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee
are subordinated to the prior payment in full of all Guarantor Senior
Indebtedness of such Subsidiary Guarantor (including any guarantee of
Indebtedness of the Company under the Credit Facility) to substantially the same
extent as the Notes are subordinated to Senior Indebtedness. On a pro forma
basis, after giving effect to the Corporate Reorganization, the Offerings and
the application of proceeds therefrom, no Guarantor Senior Indebtedness would
have been outstanding as of June 30, 1996.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to
, 2001. Thereafter, the Notes will be subject to redemption at the
option of the Company, in whole or in part, upon not less
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than 30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest to the applicable redemption date, if redeemed during the twelve-month
period beginning on of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2001............................................................................. %
2002............................................................................. %
2003............................................................................. %
2004 and thereafter.............................................................. 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or before , 1999,
the Company may (but shall not have the obligation to) redeem up to 30% of the
original aggregate principal amount of the Notes at a redemption price of %
of the principal amount thereof, plus accrued and unpaid interest thereon to the
redemption date, with the net proceeds of an Equity Offering made by the
Company; PROVIDED that at least 70% of the aggregate principal amount of Notes
originally issued remain outstanding immediately after the occurrence of such
redemption; and PROVIDED, FURTHER, that such redemption shall occur within 75
days of the date of the closing of such Equity Offering.
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee on a pro rata basis; PROVIDED
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
ceases to accrue on Notes or portions thereof called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest thereon (the "Change of Control Purchase Price") to the date of
purchase (the "Change of Control Payment Date"). Within 30 days following any
Change of Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Notes pursuant to the procedures required by the Indenture and
described in such notice. The Change of Control Payment Date shall be a business
day not less than 30 days nor more than 60 days after such notice is mailed. The
Company will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of the Notes as
a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Purchase Price in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will
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promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; PROVIDED that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Indenture will
provide that, prior to complying with the provisions of this covenant, but in
any event within 30 days following a Change of Control, the Company will either
repay all outstanding Senior Indebtedness or obtain the requisite consents, if
any, under all agreements governing outstanding Senior Indebtedness to permit
the repurchase of Notes required by this covenant. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the Holders of the Notes to require that
the Company repurchase or redeem the Notes in the event of a takeover by any
persons other than the Approved Shareholders, or a recapitalization or similar
restructuring.
The Credit Facility may provide that certain change of control events with
respect to the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Indebtedness to which the
Company becomes a party may contain similar restrictions and provisions. In the
event a Change of Control occurs at a time when the Company is prohibited from
purchasing Notes, the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to repay or refinance the borrowings that
contain such prohibition. If the Company does not obtain such a consent or repay
such borrowings, the Company will remain prohibited from purchasing Notes. In
such case, the Company's failure to purchase tendered Notes would constitute an
Event of Default under the Indenture which would, in turn, constitute a default
under the Credit Facility. In such circumstances, the subordination provisions
in the Indenture would likely restrict payments to the Holders of Notes.
ASSET SALES
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, engage in an Asset Sale unless (i) the Company (or
such Subsidiary) receives consideration at the time of such Asset Sale at least
equal to the fair market value, and in the case of a lease of assets under which
the Company or any of its Subsidiaries is the lessor, a lease providing for rent
and other conditions which are no less favorable to the Company (or such
Subsidiary) in any material respect than the then prevailing market conditions
(evidenced in each case by a resolution of the Board of Directors of such entity
set forth in an Officers' Certificate delivered to the Trustee) of the assets
sold or otherwise disposed of, and (ii) at least 85% (100% in the case of such
lease payments) of the consideration therefor received by the Company or such
Subsidiary is in the form of cash or Cash Equivalents or properties used in the
Oil and Gas Business of the Company and its Subsidiaries.
The Company may apply Net Proceeds of an Asset Sale, at its option, (a) to
permanently reduce Senior Indebtedness other than Senior Revolving Indebtedness,
(b) to permanently reduce Senior Revolving Indebtedness (and to correspondingly
reduce commitments with respect thereto), or (c) to invest in properties and
assets that will be used in the Oil and Gas Business of the Company and its
Subsidiaries. Pending the final application of any such Net Proceeds, the
Company may temporarily reduce Senior Revolving Indebtedness or otherwise invest
such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net
Proceeds from Asset Sales that are not applied within 270 days after the
consummation of an Asset Sale as provided in the first sentence of this
paragraph will be deemed to constitute "Excess Proceeds." When the aggregate
amount of Excess Proceeds exceeds $5.0 million, the Company will be required to
make an offer to all Holders of Notes (an "Asset Sale Offer") to purchase the
maximum principal amount of Notes that may be purchased out of the Excess
Proceeds, at a purchase price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest thereon to the date of
purchase, in accordance with the procedures set forth in the Indenture. To the
extent that the aggregate unpaid amount of Notes tendered pursuant to an Asset
Sale Offer is less than the Excess Proceeds, the Company may use such
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surplus Excess Proceeds for general corporate purposes. If the aggregate unpaid
amount of Notes surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Notes to be purchased on a pro rata
basis. Upon completion of such offer to purchase, the amount of Excess Proceeds
shall be reset at zero.
The Indenture prohibits the Company from directly or indirectly engaging in
an Asset Sale of any Principal Properties to any Subsidiary other than a
Subsidiary Guarantor.
CERTAIN COVENANTS
OWNERSHIP OF CAPITAL STOCK
The Indenture will provide that the Company will not permit any Person
(other than the Company or any Wholly Owned Subsidiary of the Company) to own
any Capital Stock of any Subsidiary of the Company, and will not permit any
Subsidiary of the Company to issue Capital Stock (except to the Company or to a
Wholly Owned Subsidiary) in each case except (a) directors' qualifying shares,
(b) Capital Stock issued prior to the time such Person becomes a Subsidiary of
the Company, (c) if such Subsidiary merges with and into another Subsidiary, (d)
if another Subsidiary merges with and into such Subsidiary, (e) if such
Subsidiary ceases to be a Subsidiary (as a result of the sale of 100% of the
shares of such Subsidiary, the Net Proceeds from which are applied in accordance
with "Repurchase at the Option of Holders -- Asset Sales") or (f) Capital Stock
of a Subsidiary organized in a foreign jurisdiction required to be issued to, or
owned by, the government of such foreign jurisdiction or individual or corporate
citizens of such foreign jurisdiction in order for such Subsidiary to transact
business in such foreign jurisdiction.
UNRESTRICTED SUBSIDIARIES
The Board of Directors of the Company may designate any of its Subsidiaries
as an Unrestricted Subsidiary. A Subsidiary may only be so designated if (i)
immediately after giving effect to such designation no Default or Event of
Default exists, (ii) the Company would, at the time of such designation and
after giving pro forma effect thereto as if such designation had occurred at the
beginning of the applicable four-quarter period, have been permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Consolidated Interest
Coverage Ratio and the Adjusted Consolidated Tangible Net Assets to Consolidated
Indebtedness Ratio tests set forth in the first paragraph of the covenant
described under the caption "-- Incurrence of Indebtedness and Issuance of
Preferred Stock," and (iii) after the date of the Indenture and prior to such
designation, no assets of the Company or of any Subsidiary of the Company
(including, without limitation, Capital Stock of any such Subsidiary) shall have
been transferred, directly or indirectly, to any Unrestricted Subsidiary or any
of its Subsidiaries, other than assets transferred in the ordinary course of
business and on terms that are no less favorable to the Company or the relevant
Subsidiary than those that would have been obtained in a comparable transaction
by the Company or such Subsidiary with an unrelated Person and except to the
extent permitted under the caption "-- Restricted Payments." Any such
designation by the Board of Directors of the Company shall be evidenced to the
Trustee by filing with the Trustee a certified copy of the Board Resolution of
the Company giving effect to such designation and an Officers' Certificate of
the Company certifying that such designation complied with the foregoing
conditions.
Any Subsidiary of the Company shall continue to be an Unrestricted
Subsidiary only if it (a) has no Indebtedness other than Non-Recourse
Indebtedness; (b) is a Person with respect to which neither the Company nor any
of its Subsidiaries has any direct or indirect obligation (x) to subscribe for
additional Equity Interests or (y) to maintain or preserve such Person's
financial condition or to cause such Person to achieve any specified levels of
operating results; and (c) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Subsidiaries. If, at any time, any Unrestricted Subsidiary fails to meet the
foregoing requirements, such Unrestricted Subsidiary shall thereafter cease to
be an Unrestricted Subsidiary for purposes of the Indenture, such Unrestricted
Subsidiary shall execute and deliver a supplemental indenture
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pursuant to which such Person guarantees the payment of the Notes on the same
terms and conditions as the Subsidiary Guarantees and any Indebtedness of such
Unrestricted Subsidiary shall be deemed to be incurred by a Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock," the Company shall
be in default of such covenant).
The Board of Directors of the Company may at any time designate any
Subsidiary, if previously designated as an Unrestricted Subsidiary, to be a
Subsidiary; PROVIDED that such designation shall be deemed to be an incurrence
of Indebtedness by a Subsidiary of the Company of any outstanding Indebtedness
of such Subsidiary and such designation shall only be permitted if (i) such
Indebtedness is permitted under the covenant described under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock," (ii) no Default or
Event of Default would be in existence following such designation and (iii) such
Subsidiary shall execute and deliver a supplemental indenture pursuant to which
such Person guarantees the payment of the Notes on the same terms and conditions
as the Subsidiary Guarantees.
As of the date of the Indenture, Costilla Redeco Exploration, L.L.C. and
Costilla Redeco Operating, L.L.C., through which the Company conducts its
Moldovan operations will be Unrestricted Subsidiaries.
RESTRICTED PAYMENTS
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any distribution on account of the Company's or any of its
Subsidiaries' Equity Interests, other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or dividends or
distributions payable to the Company or any Wholly Owned Subsidiary of the
Company; (ii) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of the Company or any Subsidiary or Unrestricted Subsidiary or
other Affiliate of the Company (other than Equity Interests of the Company, any
Subsidiary or Unrestricted Subsidiary owned by any Wholly Owned Subsidiary of
the Company); (iii) make any principal payment on, or purchase, redeem, defease
or otherwise acquire or retire for value any Indebtedness of (x) the Company
that is PARI PASSU with or subordinated to the Notes (other than the Notes) or
(y) any Subsidiary of the Company that is PARI PASSU with or subordinated to
such Subsidiary's Subsidiary Guarantee (other than Indebtedness secured by such
Subsidiary Guarantee) ("PARI PASSU Indebtedness"), in each case, prior to a
scheduled mandatory sinking fund payment date or maturity date or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the
Consolidated Interest Coverage Ratio and the Adjusted Consolidated Net
Tangible Assets to Consolidated Indebtedness Ratio tests set forth in the
first paragraph of the covenant described below under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries on or after the
date of the Indenture (excluding Restricted Payments permitted by clauses
(ii), (iii), (iv) and (v) of the next succeeding paragraph), is less than
the sum of (i) 50% of the Consolidated Net Income of the Company and its
Subsidiaries for the period (taken as one accounting period) from the
beginning of the first day of the fiscal
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month during which the Indenture was executed and delivered to the end of
the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted Payment
(or, if such Consolidated Net Income for such period is a deficit, less 100%
of such deficit), plus (ii) 100% of the aggregate net cash proceeds received
by the Company as capital contributions to the Company or from the issue or
sale after the date of the Indenture of Equity Interests of the Company or
of debt securities of the Company that have been converted into such Equity
Interests (other than Equity Interests (or convertible debt securities) sold
to a Subsidiary or an Unrestricted Subsidiary of the Company and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock) other than the Common Stock sold in the Common Stock
Offering.
The foregoing clauses (b) and (c), however, will not prohibit (i) the
payment of any dividend within 60 days after the date of declaration thereof, if
at said date of declaration such payment would have complied with the provisions
of the Indenture; (ii) the payment of any dividend on Equity Interests of the
Company (other than Disqualified Stock) payable solely in shares of Equity
Interests of the Company (other than Disqualified Stock); (iii) any dividend or
other distribution payable from a Subsidiary of the Company to the Company or
any Wholly Owned Subsidiary; (iv) the making of any Restricted Investment in
exchange for, or out of the proceeds of, the substantially concurrent sale,
issuance or exchange (other than to a Subsidiary or any Unrestricted Subsidiary
of the Company) of Equity Interests of the Company (other than Disqualified
Stock); PROVIDED, that any net cash proceeds that are utilized for any such
Restricted Investment shall be excluded from clause (c) of the preceding
paragraph; (v) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the proceeds of,
the substantially concurrent sale, issuance or exchange (other than to a
Subsidiary or any Unrestricted Subsidiary of the Company) of other Equity
Interests of the Company (other than any Disqualified Stock); PROVIDED that any
net cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c) of the
preceding paragraph; and (vi) the defeasance, redemption or repurchase of PARI
PASSU Indebtedness prior to a scheduled mandatory sinking fund payment date or
maturity date thereof with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness or the substantially concurrent sale, issuance or
exchange (other than to a Subsidiary or any Unrestricted Subsidiary of the
Company) of Equity Interests of the Company (other than Disqualified Stock) or
the purchase, redemption or acquisition of PARI PASSU Indebtedness prior to a
scheduled mandatory sinking fund payment date or maturity date thereof through
the issuance in exchange thereof of Equity Interests of the Company (other than
Disqualified Stock); PROVIDED, that any net cash proceeds that are utilized for
any such defeasance, redemption, repurchase, purchase or acquisition shall be
excluded from clause (c) of the preceding paragraph.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later
than the date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate of the Company stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant described under the caption "-- Restricted Payments"
were computed, which calculations may be based upon the Company's latest
available financial statements.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Indebtedness) and that the Company will not
issue any Disqualified Stock and will not permit any of its Subsidiaries to
issue any shares of preferred stock; PROVIDED, HOWEVER, that
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the Company may incur Indebtedness (including Acquired Indebtedness) and the
Company may issue shares of Disqualified Stock if: (i) the Consolidated Interest
Coverage Ratio for the Company's most recently ended four full fiscal quarters
for which internal financial statements are available immediately preceding the
date on which such additional Indebtedness is incurred or such Disqualified
Stock is issued would have been at least, during the period until the first
anniversary of the date of the Indenture, 2.25 to 1, and, thereafter, 2.5 to 1,
in each case, determined on a pro forma basis (including a pro forma application
of the net proceeds therefrom), as if the additional Indebtedness had been
incurred, or the Disqualified Stock had been issued, as the case may be, at the
beginning of such four-quarter period; (ii) the Adjusted Consolidated Net
Tangible Assets would have been at least 150% of Consolidated Indebtedness,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom) and (iii) no Default or Event of Default shall have occurred
and be continuing or would occur as a consequence thereof; PROVIDED, that no
Guarantee may be incurred pursuant to this paragraph, unless the guaranteed
Indebtedness is incurred by the Company pursuant to this paragraph.
The foregoing provisions will not apply to:
(i) the incurrence by the Company of Indebtedness under the Credit
Facility (and the incurrence by Subsidiaries of Guarantees thereof) in an
aggregate principal amount at any time outstanding (with letters of credit
being deemed to have a principal amount equal to the maximum potential
liability of the Company and its Subsidiaries thereunder) not to exceed $50
million, less the aggregate amount of all Net Proceeds of Asset Sales
applied to permanently reduce the outstanding amount or the commitments with
respect to such Indebtedness pursuant to the covenant described above under
the caption "-- Asset Sales";
(ii) the incurrence by the Company of Indebtedness represented by the
Notes and of its Subsidiaries of Indebtedness represented by the Subsidiary
Guarantees;
(iii) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund, any
Indebtedness described in the foregoing clause (ii);
(iv) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its Wholly
Owned Subsidiaries or between or among any Wholly Owned Subsidiaries;
PROVIDED that, in the case of Indebtedness of the Company, such obligations
shall be unsecured and subordinated in case of an event of default in all
respects to the Company's obligations pursuant to the Notes; and PROVIDED,
however, that (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than a
Wholly Owned Subsidiary and (ii) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a Wholly Owned
Subsidiary shall be deemed, in each case, to constitute an incurrence of
such Indebtedness by the Company or such Subsidiary, as the case may be;
(v) the incurrence by the Company of Hedging Obligations that are
incurred for the purpose of fixing or hedging interest rate risk with
respect to any floating rate Indebtedness that is permitted by the Indenture
to be incurred; PROVIDED that, the notional amount of such Hedging
Obligations does not exceed the principal amount of the Indebtedness to
which such Hedging Obligations relate;
(vi) the incurrence by the Company of Hedging Obligations under commodity
hedging and currency exchange agreements; PROVIDED that, such agreements
were entered into in the ordinary course of business for the purpose of
limiting risks that arise in the ordinary course of business;
(vii) The incurrence by the Subsidiaries of Indebtedness in existence on
the date of the Indenture; and
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(viii) the incurrence by the Company and its Subsidiaries of Indebtedness
(in addition to Indebtedness permitted by any other clause of this
paragraph) in an aggregate principal amount at any time outstanding not to
exceed $10.0 million:
provided that no Subsidiary may incur any Indebtedness other than Indebtedness
described in the foregoing clauses (iv) or (vii) unless such Subsidiary shall
have executed and delivered a Subsidiary Guarantee and such Subsidiary Guarantee
remains in full force and effect (unless terminated in accordance with the
provisions of the Indenture).
LIENS
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien (other than Permitted Liens but only to the extent
securing obligations not constituting Indebtedness) on any of its assets, now
owned or hereafter acquired, securing any Indebtedness other than Senior
Indebtedness unless the Notes are secured equally and ratably with such other
Indebtedness; PROVIDED that, if such Indebtedness is by its terms expressly
subordinate to the Notes, the Lien securing such subordinate or junior
Indebtedness shall be subordinate and junior to the Lien securing the Notes with
the same relative priority as such subordinated or junior Indebtedness shall
have with respect to the Notes.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Subsidiaries on its Capital Stock or
with respect to any other interest or participation in, or measured by, its
profits, or (b) pay any indebtedness owed to the Company or any of its
Subsidiaries, (ii) make loans or advances to the Company or any of its
Subsidiaries or (iii) transfer any of its properties or assets to the Company or
any of its Subsidiaries, (iv) transfer any of its property or assets to the
Company or any of its Subsidiaries, (v) grant liens or security interests on the
assets in favor of the Holders of Notes, or (vi) guarantee the Notes or any
renewals or refinancings thereof, except for such encumbrances or restrictions
existing under or by reason of (A) the Credit Facility, the Indenture, the Notes
or any other agreement in existence on the date of the Indenture, (B) applicable
law, (C) any instrument governing Acquired Indebtedness of Capital Stock of a
Person acquired by the Company or any of its Subsidiaries as in effect at the
time of such acquisition (except to the extent such Acquired Indebtedness was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired, PROVIDED that the Consolidated EBITDA of such Person is not
taken into account in determining whether such acquisition was permitted by the
terms of the Indenture, or (D) Permitted Refinancing Indebtedness, PROVIDED that
the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
LIMITATION ON LAYERING INDEBTEDNESS
The Indenture will provide that the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Indebtedness and senior
in any respect in right of payment to the Notes.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture will provide that the Company will not, and will not permit
any Subsidiary to, in a single transaction or series of related transactions
consolidate or merge with or into (other than the consolidation or merger of a
Wholly Owned Subsidiary of the Company with another Wholly Owned Subsidiary of
the Company or into the Company) (whether or not the Company or such Subsidiary
is the surviving corporation), or directly and/or indirectly through its
Subsidiaries sell, assign, transfer, lease, convey or otherwise dispose of all
or substantially all of its properties or assets (determined on a
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consolidated basis for the Company and its Subsidiaries taken as a whole) in one
or more related transactions to, another corporation, Person or entity unless
(i) either (a) the Company, in the case of a transaction involving the Company,
or such Subsidiary, in the case of a transaction involving a Subsidiary, is the
surviving corporation or (b) in the case of a transaction involving the Company,
the entity or the Person formed by or surviving any such consolidation or merger
(if other than the Company) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation organized
or existing under the laws of the United States, any state thereof or the
District of Columbia and assumes all the obligations of the Company under the
Notes and the Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee; (ii) immediately after such transaction
no Default or Event of Default exists; and (iii) the Company or, if other than
the Company, the entity or Person formed by or surviving any such consolidation
or merger, or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of the Company immediately preceding the transaction and (B) will, at the
time of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter period,
be permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Consolidated Interest Coverage Ratio and the Adjusted Consolidated Net Tangible
Assets to Consolidated Indebtedness Ratio tests set forth in the first paragraph
of the covenant described above under the caption "-- Incurrence of Indebtedness
and Issuance of Preferred Stock."
TRANSACTIONS WITH AFFILIATES
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, after the date of the Indenture, sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or make any
payment to, or purchase any property or assets from, or enter into or suffer to
exist any transaction or series of transactions, or make any agreement, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each of the
foregoing, an "Affiliate Transaction"), other than Exempt Affiliate
Transactions, unless (i) such Affiliate Transaction is on terms that are no less
favorable to the Company or the relevant Subsidiary (as reasonably determined by
the Company) than those that would have been obtained in a comparable
transaction by the Company or such Subsidiary with an unrelated Person and (ii)
the Company delivers to the Trustee (a) with respect to any Affiliate
Transaction entered into after the date of the Indenture involving aggregate
consideration in excess of $1.0 million, a resolution of the Board of Directors
set forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (i) above and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of Directors
and (b) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $5.0 million, an opinion as to the fairness to the
Company or such Subsidiary of such Affiliate Transaction from a financial point
of view issued by an investment banking firm of national standing.
SALE AND LEASEBACK
The Company will not, and will not permit any of its Subsidiaries to, enter
into any Sale and Leaseback Transaction unless (a) the Company or its
Subsidiaries entering into such Sale and Leaseback Transaction could have
incurred the Indebtedness relating to such Sale and Leaseback Transaction
pursuant to the "-- Incurrence of Indebtedness and Issuance of Preferred Stock"
and "-- Liens" covenants and (b) the Net Proceeds of such Sale and Leaseback
Transaction are at least equal to the fair market value of such property as
determined by the Board of Directors of the Company.
REPORTS
The Indenture will provide that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the Company
will furnish to the Holders of Notes, and file with the Trustee, within 15 days
after it is, or would have been, required to file such with the Commission (i)
all quarterly and annual financial information that is or would be required to
be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company is or were required
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to file such Forms, including a "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that are or would be required to be
filed with the Commission on Form 8-K if the Company is or were required to file
such reports. In addition, whether or not required by the rules and regulations
of the Commission, the Company will file a copy of all such information and
reports with the Commission for public availability (unless the Commission will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon written request.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on the
Notes (whether or not prohibited by the subordination provisions of the
Indenture); (ii) default in payment when due (upon redemption or otherwise) of
the principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination provisions of the Indenture); (iii) failure by the Company to
comply with the provisions described under the captions "Repurchase at Option of
Holders -- Change of Control," "Repurchase at Option of Holders -- Asset Sales,"
"-- Ownership of Capital Stock," "-- Restricted Payments," "-- Incurrence of
Indebtedness and Issuance of Preferred Stock" or "-- Merger, Consolidation or
Sale of Assets"; (iv) failure by the Company or any of its Subsidiary for 60
days after notice by the Trustee or Holders of at least 25% of the aggregate
principal amount of the Notes outstanding to comply with any of its other
agreements in the Indenture or the Notes; (v) default under any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the Company or any
of its Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Subsidiaries) whether such Indebtedness or Guarantee now exists, or is
created after the date of the Indenture, which default (a) is caused by a
failure to pay principal of such Indebtedness at final maturity thereof (a
"Payment Default") or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $10 million or more; (vi) failure by the Company or
any of its Subsidiaries to pay final judgments (not fully covered by insurance)
aggregating in excess of $1 million, which judgments are not paid, discharged or
stayed for a period of 60 days; (vii) certain events of bankruptcy or insolvency
with respect to the Company or any of its Subsidiaries or any Unrestricted
Subsidiary; and (viii) any Subsidiary Guarantor attempts to revoke its
Subsidiary Guarantee or contest its validity or any Subsidiary Guarantee shall
not be in full force and effect (other than in accordance with the terms of the
Indenture).
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency with respect to the Company or any Subsidiary or any Unrestricted
Subsidiary, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Indenture provides
that if a Default occurs and is continuing, generally the Trustee must, within
90 days after the occurrence of such default, give to the Holders notice of such
Default. The Trustee may withhold from Holders of the Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or premium, if any, or interest) if it
determines that withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in
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the payment of interest or premium on, or the principal of, the Notes or in
respect of a provision that cannot be amended or waived without the consent of
the Holder affected. See "Amendment, Supplement and Waiver."
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Subsidiary, as such, shall have any liability for any obligations of the
Company under the Notes or the Indenture or the Subsidiary Guarantors under
their Subsidiary Guarantees or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Notes by accepting
a Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes. Such waiver may not be effective
to waive liabilities under the federal securities laws and it is the view of the
Commission that such waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including nonpayment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of Notes, cash in U.S. dollars, noncallable Government Securities,
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the outstanding Notes on the
stated maturity or on the applicable redemption date, as the case may be, and
the Company must specify whether the Notes are being defeased to maturity or to
a particular redemption date; (ii) in the case of Legal Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no
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Default or Event of Default shall have occurred and be continuing on the date of
such deposit (other than a Default or Event of Default resulting from the
borrowing of funds to be applied to such deposit) or insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 123rd day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company must
deliver to the Trustee an Officers' Certificate stating that the deposit was not
made by the Company with the intent of preferring the Holders of Notes over
other creditors of the Company with the intent of defeating, hindering, delaying
or defrauding creditors of the Company or others; and (vii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel, each
stating that all conditions precedent relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Company, the Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents as well as
certifications, legal opinions and other information and the Company may require
a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note selected
for redemption. Also, the Company is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture, the
Subsidiary Guarantees or the Notes may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the Notes
then outstanding (including consents obtained in connection with a tender offer
or exchange offer for Notes), and any existing default or compliance with any
provision of the Indenture, the Subsidiary Guarantees or the Notes may be waived
with the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a nonconsenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture, or the Subsidiary Guarantees relating to waivers of
past Defaults or the rights of Holders of Notes to receive payments of principal
of or premium, if any, or interest on the Notes, (vii) waive a redemption
payment with respect to any Note (other than a payment required by one of the
covenants described above under the caption "Repurchase at the Option of
Holders") or (viii) make any change in the foregoing amendment and waiver
provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture, the
Subsidiary Guarantees or the Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes in addition to or in place of
certificated Notes, to provide for the assumption of the Company's obligations
to Holders of Notes in the case of a merger or consolidation, to make any change
that would provide any additional rights or
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benefits to the Holders of Notes or that does not adversely affect the legal
rights under the Indenture of any such Holder, or to comply with requirements of
the Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The State Street Bank and Trust Company will be the Trustee under the
Indenture. The Trustee's current address is Corporate Trust Department, Two
International Place, 4th Floor, Boston, Massachusetts 02110.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of Notes, unless such Holder shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to Costilla Energy, Inc., 400 West Illinois, 10th
Floor, Midland, Texas 79701, Attention: Chief Financial Officer.
BOOK-ENTRY, DELIVERY AND FORM
The Notes to be sold as set forth herein will initially be issued in the
form of one Global Note (the "Global Note"). The Global Note will be deposited
on the date of the closing of the sale of the Notes offered hereby (the "Closing
Date") with the Trustee as custodian for The Depository Trust Company (the
"Depositary") and registered in the name of Cede & Co., as nominee of the
Depositary (such nominee being referred to herein as the "Global Note Holder").
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the
Underwriters), banks and trust companies, clearing corporations and certain
other organizations. Access to the Depositary's system is also available to
other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants" or the "Depositary's Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants may
beneficially own securities held by or on behalf of the Depositary only through
the Depositary's Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Underwriters with portions of the
principal amount of the Global Note and (ii) beneficial ownership of the Notes
evidenced by the Global Note will be shown on, and the transfer of such
ownership will be effected only through, records maintained by the Depositary
(with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer Notes evidenced by the Global
Note will be limited to such extent.
So long as the Global Note Holder is the registered owner of the Global
Note, the Global Note Holder will be considered the sole owner or Holder under
the Indenture of any Notes evidenced by the Global Note. Beneficial owners of
Notes evidenced by the Global Note will not be considered the owners or Holders
thereof under the Indenture for any purpose, including with respect to the
giving of
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any directions, instructions or approvals to the Trustee thereunder. Except as
provided below, owners of beneficial interests in the Global Note will not be
entitled to have Notes registered in their names and will not receive or be
entitled to receive physical delivery of Notes in definitive form. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depositary or for maintaining, supervising or reviewing
any records of the Depositary relating to the Notes.
Payments in respect of the principal of, premium, if any, and interest on
any Notes registered in the name of the Global Note Holder on the applicable
record date will be payable by the Company to or at the direction of the Global
Note Holder in its capacity as the registered Holder under the Indenture. Under
the terms of the Indenture, the Company and the Trustee may treat the persons in
whose names the Notes, including the Global Note, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Company nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of Notes. The Company believes,
however, that it is currently the policy of the Depositary to immediately credit
the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
As long as the Notes are represented by a Global Note, the Depositary's
nominee will be the holder of the Notes and therefore will be the only entity
that can exercise a right to repayment or repurchase of the Notes. See "--
Repurchase at the Option of Holders -- Change of Control" and
"-- Asset Sales." Notice by the Depositary's Participants or the Depositary's
Indirect Participants or by owners of beneficial interests in a Global Note held
through such Participants or Indirect Participants of the exercise of the option
to elect repayment of beneficial interests in Notes represented by a Global Note
must be transmitted to the Depositary in accordance with its procedures on a
form required by the Depositary and provided to Participants. In order to ensure
that the Depositary's nominee will timely exercise a right to repayment with
respect to a particular Note, the beneficial owner of such Note must instruct
the broker or other Participant or Indirect Participant through which it holds
an interest in such Note to notify the Depositary of its desire to exercise a
right to repayment. Different firms have cut-off times for accepting
instructions from their customers and, accordingly, each beneficial owner should
consult the broker or other Participant or Indirect Participant through which it
holds an interest in a Note in order to ascertain the cut-off time by which such
an instruction must be given in order for timely notice to be delivered to the
Depositary. The Company will not be liable for any delay in delivery of notices
of the exercise of the option to elect repayment.
The Company will issue Notes in definitive form in exchange for the Global
Note if, and only if, either (1) the Depositary is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days, or (2) an Event of Default has occurred and is
continuing and the Notes registrar has received a request from the Depositary to
issue Notes in definitive form in lieu of all or a portion of the Global Note.
In either instance, an owner of a beneficial interest in the Global Note will be
entitled to have Notes equal in principal amount to such beneficial interest
registered in its name and will be entitled to physical delivery of such Notes
in definitive form. Notes so issued in definitive form will be issued in
denominations of $1,000 and integral multiples thereof and will be issued in
registered form only, without coupons.
CERTIFICATED NOTES
If the Company notifies the Trustee in writing that the Depositary is no
longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days then, upon surrender by the Global
Note Holder of its Global Note, Notes in the form of registered definitive Notes
will be issued to each person that the Global Note Holder and the Depositary
identify as being the beneficial owner of the related Notes.
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Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes represented
by the Global Note (including principal, premium, if any, interest be made by
wire transfer of immediately available funds to the accounts specified by the
Global Note Holder. With respect to Certificated Notes, the Company will make
all payments of principal, premium, if any, interest by wire transfer of
immediately available funds to the accounts specified by the Holders thereof or,
if no such account is specified, by mailing a check to each such Holder's
registered address. Secondary trading in long-term notes and debentures of
corporate issuers is generally settled in clearinghouse or next-day funds. The
Company expects that secondary trading in the Certificated Notes will also be
settled in immediately available funds.
GOVERNING LAW
The Indenture, the Notes and the Subsidiary Guarantees will be governed by,
and construed in accordance with, the laws of the State of New York.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED INDEBTEDNESS" means with respect to any specified Person, (i) any
Indebtedness of any other Person existing at the time such other Person is
merged with or into or becomes a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS" means, as of the date of
determination, without duplication, (a) the sum of (i) discounted future net
revenue from proved oil and gas reserves of the Company and its Subsidiaries
calculated in accordance with Commission guidelines before any state or federal
income taxes, as estimated in a reserve report prepared as of the end of the
Company's most recently completed fiscal year, which reserve report is prepared
or audited by independent petroleum engineers, as increased by, as of the date
of determination, the discounted future net revenue of (A) estimated proved oil
and gas reserves of the Company and its Subsidiaries attributable to any
acquisition consummated since the date of such year-end reserve report, and (B)
estimated oil and gas reserves of the Company and its Subsidiary attributable to
extensions, discoveries and other additions and upward revisions of estimates of
proved oil and gas reserves due to exploration, development, exploitation,
production or other activities conducted or otherwise occurring since the date
of such year-end reserve report which would, in the case of determinations made
pursuant to clauses (A) and (B), in accordance with standard industry practice,
result in such additions or revisions, in each case calculated in accordance
with Commission guidelines (utilizing the prices utilized in such year-end
reserve report), and decreased by, as of the date of determination, the
discounted future net revenue of (C) estimated proved oil and gas reserves of
the Company and its Subsidiaries produced or disposed of since the date of such
year-end reserve report and (D) reductions in the estimated oil and gas reserves
of the Company and its Subsidiaries since the date of such year-end reserve
report attributable to downward revisions of estimates of proved oil and gas
reserves due to exploration, development, exploitation, production or other
activities conducted or otherwise occurring since the date of such year-end
reserve report which would, in the case of determinations made pursuant to
clauses (C) and (D), in accordance with standard industry practice, result in
such revisions, in each case calculated in accordance with Commission guidelines
(utilizing the prices utilized in such year-end reserve report); provided that,
in the case of each of the determinations made pursuant to clauses (A) through
(D),
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such increases and decreases shall be as estimated by the Company's engineers,
except that if as a result of such acquisitions, dispositions, discoveries,
extensions or revisions, there is a Material Change that is an increase, then
such increases and decreases in the discounted future net revenue shall be
confirmed in writing by independent petroleum engineers, (ii) the capitalized
costs that are attributable to oil and gas properties of the Company and its
Subsidiaries to which no proved oil and gas reserves are attributed, based on
the Company's books and records as of a date no earlier than the date of the
Company's latest annual or quarterly financial statements, (iii) the net working
capital (which shall be calculated as all current assets of the Company and its
Subsidiaries minus all current liabilities of the Company and its Subsidiaries,
except current liabilities included in Indebtedness on a date no earlier than
the date of the Company's latest annual or quarterly financial statements) and
(iv) the greater of (I) the net book value of the other tangible assets of the
Company and its Subsidiaries on a date no earlier than the date of the Company's
latest annual or quarterly financial statements and (II) the appraised value, as
estimated by independent appraisers, of other tangible assets of the Company and
its Subsidiaries as of a date no earlier than the date of the Company's latest
audited financial statements, MINUS (b) the sum of (i) minority interests of
third parties to the extent included in the calculation of the immediately
preceding clause (a), (ii) the positive remainder, if any, obtained by
subtracting (I) gas balancing underpayments of the Company and its Subsidiaries
reflected in the Company's latest audited financial statements and not otherwise
included in the calculation of the immediately preceding clause (a) from (II)
any gas balancing liabilities of the Company and its Subsidiaries reflected in
the Company's latest audited financial statements and not otherwise included in
the calculation of the immediately preceding clause (a), and (iii) the
discounted future net revenue, calculated in accordance with Commission
guidelines (utilizing the same prices utilized in the Company's year-end reserve
report), attributable to oil and gas reserves of the Company and its
Subsidiaries subject to participation interests, overriding royalty interests or
other interests of third parties, pursuant to participation, partnership, vendor
financing or other agreements then in effect, other than pursuant to Production
Payments, or that otherwise are required to be delivered to third parties, other
than pursuant to Production Payments.
"ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS TO CONSOLIDATED INDEBTEDNESS
RATIO" means, at any time, the ratio of Adjusted Consolidated Net Tangible
Assets at such time to Consolidated Indebtedness at such time.
"AFFILIATE" of any specified Person means (i) any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person or (ii) any other Person who is a director or
executive officer of (a) such specified Person or (b) any Person described in
the preceding clause (i). For purposes of this definition, "control" (including,
with correlative meanings, the terms "controlling," "controlled by" and "under
common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED that
beneficial ownership of 10% or more of any class, or any series of any class, of
equity securities of a Person, whether or not voting, shall be deemed to be
control.
"ASSET SALE" means with respect to any Person, the sale, lease, conveyance
or other disposition, that does not constitute a Restricted Payment or an
Investment, by such Person of any of its assets (including, without limitation,
by way of a Sale and Leaseback and including the issuance, sale or other
transfer of any Equity Interests in any Subsidiary or the sale or other transfer
of any Equity Interests in any Unrestricted Subsidiary of such Person) other
than to the Company (including the receipt of proceeds of insurance paid on
account of the loss of or damage to any asset and awards of compensation for any
asset taken by condemnation, eminent domain or similar proceeding, and including
the receipt of proceeds of business interruption insurance), in each case, in
one or a series of related transactions; PROVIDED that, notwithstanding the
foregoing, the term "Asset Sale" shall not include: (a) the sale, lease,
conveyance, disposition or other transfer of all or substantially all of the
assets of the Company, as permitted pursuant to the covenant entitled "Merger,
Consolidation or Sale
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of Assets," (b) the sale or lease of hydrocarbons or other mineral interests in
the ordinary course of business and customary in the Oil and Gas Business, (c)
any Production Payment, (d) a transfer of assets by the Company to a Wholly
Owned Subsidiary of the Company (other than any Principal Properties) or by a
Wholly Owned Subsidiary of the Company to the Company or to another Wholly Owned
Subsidiary of the Company, (e) an issuance of Equity Interests by a Wholly Owned
Subsidiary of the Company to the Company or to another Wholly Owned Subsidiary
of the Company, (e) sale or other disposition of cash or Cash Equivalents, or
(f) any lease, abandonment, disposition, relinquishment or farm out of any oil
and gas property that are customary in nature and scope in the Oil and Gas
Business and are entered into in the ordinary course of the Oil and Gas Business
of the Company and its Subsidiaries.
"BENEFICIARY", when used with respect to any individual, means the spouse,
lineal descendants, parents and siblings of any such individual, the estates and
the legal representatives of any such individual and any of the foregoing and
the trustee of any bona fide trust of which any such individual and any of the
foregoing are the sole beneficiaries or grantors.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, capital stock, (ii)
in the case of an association or business entity, any and all shares, interests,
participations, rights or other equivalents (however designated) of capital
stock, (iii) in the case of partnership, partnership interests (whether general
or limited) and (iv) any other interest or participation that confers on a
Person the right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person.
"CASH EQUIVALENT" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities not more than twelve
months from the date of acquisition, (b) U.S. dollar denominated (or foreign
currency fully hedged) time deposits, certificates of deposit, Eurodollar time
deposits or Eurodollar certificates of deposit of (i) any domestic commercial
bank of recognized standing having capital and surplus in excess of $500 million
or (ii) any bank whose short-term commercial paper rating from S&P is at least
A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent
thereof (any such bank being an "Approved Lender"), in each case with maturities
of not more than twelve months from the date of acquisition, and (c) commercial
paper issued by any Approved Lender (or by the parent company thereof) or any
variable rate notes issued by, or guaranteed by, any domestic corporation rated
A-1 (or the equivalent thereof) or better by S&P or P-1 (or the equivalent
thereof) or better by Moody's and maturing within twelve months of the date of
acquisition.
"CHANGE OF CONTROL" means such time as any of the following events occur:
(i) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than Cadell S. Liedtke, Michael J.
Grella and Henry G. Musselman and any of their respective Beneficiaries (the
"Approved Shareholders), is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50%
of the total Voting Stock of the Company;
(ii) the Company is merged with or into or consolidated with another
Person and, immediately after giving effect to the merger or consolidation,
(A) less than 50% of the total voting power of the outstanding Voting Stock
of the surviving or resulting Person is then "beneficially owned" (within
the meaning of Rule 13d-3 under the Exchange Act) in the aggregate by the
stockholders of the Company immediately prior to such merger or
consolidation, and (B) any "person" or "group" (as defined in Section
13(d)(3) or 14(d)(2) of the Exchange Act) other than the Approved
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Stockholders has become the direct or indirect "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of more than 50% of the total
voting power of the Voting Stock of the surviving or resulting Person;
(iii) the Company, either individually or in conjunction with one or
more Subsidiaries, sells, assigns, conveys, transfers, leases or otherwise
disposes of, or the Subsidiaries sell, assign, convey, transfer, lease or
otherwise dispose of, all or substantially all of the properties of the
Company and the Subsidiaries, taken as a whole (either in one transaction or
a series of related transactions), including Capital Stock of the
Subsidiaries, to any Person (other than the Company or a Wholly Owned
Subsidiary);
(iv) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the stockholders of the Company was
approved by a vote of a majority of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in
office; or
(v) the liquidation or dissolution of the Company.
"CONSOLIDATED EBITDA" means, with respect to any Person for any period, the
sum of, without duplication, (i) the Consolidated Net Income of such Person and
its Subsidiaries for such period, plus (ii) to the extent deducted in the
computation of such Consolidated Net Income, the Consolidated Interest Expense
for such period, plus (iii) to the extent deducted in the computation of such
Consolidated Net Income, amortization of deferred financing charges for such
period, plus (iv) provision for taxes based on income or profits for such period
(to the extent such income or profits were included in computing Consolidated
Net Income for such period), plus (v) to the extent deducted in the computation
of such Consolidated Net Income, consolidated depreciation, depletion,
amortization and other noncash charges of such Person and its Subsidiaries
required to be reflected as expenses on the books and records of such Person,
plus (vi) to the extent deducted in the computation of such Consolidated Net
Income, consolidated exploration and abandonment expenses of such Person and its
Subsidiaries for such periods, minus (vii) cash payments with respect to any
nonrecurring, noncash charges previously added back pursuant to clause (v), and
excluding (viii) the impact of foreign currency translations. Notwithstanding
the foregoing, the provision for taxes based on the income or profits of, and
the depreciation and amortization and other noncash charges of, and the
exploration and abandonment expenses of, a Subsidiary of a Person shall be added
to Consolidated Net Income to compute Consolidated EBITDA only to the extent
(and in the same proportion) that the Net Income of such Subsidiary was included
in calculating the Consolidated Net Income of such Person and only if a
corresponding amount would be permitted at the date of determination to be
dividended to such Person by such Subsidiary without prior approval (unless such
approval has been obtained), pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"CONSOLIDATED INDEBTEDNESS" means, with respect to any Person for any time,
the Indebtedness of such Person and its Subsidiaries at such time as determined
on a consolidated basis in accordance with GAAP.
"CONSOLIDATED INTEREST COVERAGE RATIO" means with respect to any Person for
any period, the ratio of (i) Consolidated EBITDA of such Person and its
Subsidiaries for such period to (ii) Consolidated Interest Expense of such
Person and its Subsidiaries for such period. In the event that the Company or
any of its Subsidiaries incurs, assumes, Guarantees or repays or redeems any
Indebtedness (other than revolving credit borrowings) or issues or redeems
preferred stock subsequent to the commencement of the four-quarter reference
period for which the Consolidated Interest Coverage Ratio is being calculated
but on or prior to the date on which the event for which the calculation of the
Consolidated Interest Coverage Ratio is made (the "Calculation Date"), then the
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Consolidated Interest Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption, Guarantee, repayment or redemption of
Indebtedness, or such issuance or redemption of preferred stock, as if the same
had occurred at the beginning of the applicable four-quarter reference period.
For purposes of making the computation referred to above, (i) acquisitions that
have been made by the Company or any of its Subsidiaries, including through
mergers or consolidations and including any related financing transactions,
during the four-quarter reference period or subsequent to such reference period
and on or prior to the Calculation Date shall be deemed to have occurred on the
first day of the four-quarter reference period, and (ii) the Consolidated EBITDA
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, and (iii) the Consolidated Interest Expense attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Consolidated
Interest Expense will not be obligations of the referent Person or any of its
Subsidiaries following the Calculation Date.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, the sum, without duplication, of (i) the consolidated interest expense
of such Person and its Subsidiaries for such period including, without
limitation, amortization of original issue discount, noncash interest payments,
the interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations, but excluding amortization or write-off of deferred
financing charges for such period, and (ii) the consolidated interest expense of
such Person and its Subsidiaries that was capitalized during such period, and
(iii) any interest expense on Indebtedness of another Person that is Guaranteed
by such Person or one of its Subsidiaries or secured by a Lien on assets of such
Person or one of its Subsidiaries (whether or not such Guarantee or Lien is
called upon), and (iv) the product of (a) all cash dividend payments (and
noncash dividend payments in the case of a Person that is a Subsidiary) on any
series of preferred stock of such Person payable to a party other than the
Company or a Wholly Owned Subsidiary, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current combined
federal, state and local statutory tax rate of such Person, expressed as a
decimal, on a consolidated basis and in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting shall be included only
to the extent of the amount of dividends or distributions paid in cash to the
referent Person or a Wholly Owned Subsidiary thereof, (ii) the Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental approval
(unless such approval has been obtained) or, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iv) the cumulative effect of a change in
accounting principles shall be excluded and (v) the Net Income of, or any
dividends or other distributions from, any Unrestricted Subsidiary, to the
extent otherwise included, shall be excluded unless distributed in cash to the
Company or one of its Subsidiaries.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the consolidated stockholders' equity of such Person and its consolidated
Subsidiaries as of such date less (w) the amount of such stockholders' equity
attributable to Disqualified Stock, (x) all write-ups subsequent to the date of
the Indenture in the book value of any asset owned by such Person or a
consolidated Subsidiary of such Person (other than purchase accounting
adjustments made, in connection with any
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acquisition of any entity that becomes a consolidated Subsidiary of such Person
after the date of the Indenture to the book value of the assets of such entity),
(y) all investments as of such date in unconsolidated Subsidiaries and in
Persons that are not Subsidiaries (except, in each case, Permitted Investments),
and (z) all unamortized debt discount and expense and unamortized deferred
charges as of such date, all of the foregoing determined in accordance with
GAAP.
"CREDIT FACILITY" means a credit facility that may be entered into among the
Company and the lenders parties thereto (which shall initially be a credit
facility among the Company, NationsBank of Texas, N.A. or one of its affiliates,
as agent, and the other lenders parties thereto), including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, extended,
refunded, replaced, restated or refinanced from time to time.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DESIGNATED GUARANTOR SENIOR INDEBTEDNESS" means (i) so long as the Senior
Bank Indebtedness is outstanding, any Subsidiary Guarantor's Indebtedness in
respect of the Senior Bank Indebtedness and (ii) thereafter, any other Guarantor
Senior Indebtedness permitted under the Indenture the principal amount of which
is $15.0 million or more and that has been designated by the Company as
"Designated Guarantor Senior Indebtedness."
"DESIGNATED SENIOR INDEBTEDNESS" means (i) so long as the Senior Bank
Indebtedness is outstanding, the Senior Bank Indebtedness and (ii) thereafter,
any other Senior Indebtedness permitted under the Indenture the principal amount
of which is $15.0 million or more and that has been designated by the Company as
"Designated Senior Indebtedness"; provided that for purposes of clause (i) of
the first sentence of the third paragraph under the caption "Subordination,"
"Designated Senior Indebtedness" shall also mean any other Senior Indebtedness
permitted under the Indenture the principal amount of which is $15.0 million or
more.
"DISQUALIFIED STOCK" means (a) with respect to any Person, Capital Stock of
such Person that, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any event
(unless any redemption or repurchase of such Capital Stock upon the occurrence
of such event is required by any such terms, but only to the extent that a
payment in respect thereof would be permitted under the covenant set forth under
the caption "Restricted Payments"), matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or is redeemable at the
option of the Holder thereof, in whole or in part, on or prior to the date which
is one year after the date on which the Notes mature and (b) with respect to any
Subsidiary of such Person (including with respect to any Subsidiary of the
Company), any Capital Stock other than any common stock with no preference,
privileges, or redemption or repayment provisions.
"DOLLAR-DENOMINATED PRODUCTION PAYMENTS" mean dollar denominated payment
obligations of the Company or any of its Subsidiaries that are or, upon the
occurrence of a contingent event, would be recorded as liabilities in accordance
with GAAP, together with all undertakings and obligations of the Company or any
of its Subsidiaries in connection therewith, which obligations will be deemed to
constitute Indebtedness for borrowed money for purposes of the Indenture.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock), whether outstanding prior
to, on or after the date of the Indenture.
"EQUITY OFFERING" means an offer and sale of Qualified Stock of the Company
to a Person other than an Affiliate of the Company.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXEMPT AFFILIATE TRANSACTIONS" means (a) transactions between or among the
Company and/or its Wholly Owned Subsidiaries, (b) advances not to exceed
$1,000,000 at any time outstanding to
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officers of the Company or any Subsidiary of the Company in the ordinary course
of business to provide for the payment of reasonable expenses incurred by such
persons in the performance of their responsibilities to the Company or such
Subsidiary or in connection with any relocation, (c) fees and compensation paid
to and indemnity provided on behalf of directors, officers or employees of the
Company or any Subsidiary of the Company in the ordinary course of business, (d)
any employment agreement that is in effect on the date of the Indenture in the
ordinary course of business and any such agreement entered into by the Company
or a Subsidiary after the date of the Indenture in the ordinary course of
business of the Company or such Subsidiary and (e) payments and transactions
under the Indebtedness of A&P Meter Service and Supply, Inc. ("A&P") to the
Company outstanding on the date of the Indenture and the performance of and
payment for services provided by A&P to the Company and its Subsidiaries in the
ordinary course of business consistent with past practice. See "Certain
Transactions."
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"GUARANTOR SENIOR INDEBTEDNESS" means (i) all Guarantees or other
Indebtedness of a Subsidiary Guarantor in respect of the Senior Bank
Indebtedness and (ii) any other indebtedness permitted to be incurred by a
Subsidiary Guarantor under the terms of this Indenture, unless the instrument
under which such Indebtedness is incurred expressly provides that it is
subordinated in right of payment to any Indebtedness for money borrowed.
Notwithstanding anything to the contrary in the foregoing, Guarantor Senior
Indebtedness will not include (w) any liability for federal, state, local or
other taxes owed or owing by a Subsidiary Guarantor, (x) any Indebtedness of a
Subsidiary Guarantor to any of the Company's Subsidiaries, Unrestricted
Subsidiaries or other Affiliates, (y) any trade payables or (z) any Indebtedness
that is incurred in violation of this Indenture.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in (a)
interest rates, (b) the value of foreign currencies and (c) Oil and Gas Purchase
and Sales Contracts.
"INDEBTEDNESS" means, with respect to any Person, without duplication, (a)
all liabilities of such Person for borrowed money or for the deferred purchase
price of property or services (excluding any trade accounts payable and other
accrued current liabilities incurred in the ordinary course of business), and
all liabilities of such Person incurred in connection with any letters of
credit, bankers' acceptances or other similar credit transactions or any
agreement to purchase, redeem, exchange, convert or otherwise acquire for value
any Capital Stock of such Person, or any warrants, rights or options to acquire
such Capital Stock outstanding on the date of the Indenture or thereafter, if,
and to the extent, any of the foregoing would appear as a liability upon a
balance sheet of such Person prepared in accordance with GAAP, (b) all
obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, if, and to the extent, any of the foregoing would appear as
a liability upon a balance sheet of such Person prepared in accordance with
GAAP, (c) all Indebtedness of such Person created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even if the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession or sale
of such property), but excluding trade accounts payable arising in the ordinary
course of business, (d) all Capitalized Lease Obligations of such Person, (e)
all Indebtedness referred to in the preceding clauses of other Persons
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and all dividends of other Persons, the payment of which is secured by (or for
which the holder of such Indebtedness has an existing right to be secured by)
any Lien upon property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or become
liable for the payment of such Indebtedness (the amount of such obligation being
deemed to be the lesser of the value of such property or asset or the amount of
the obligation so secured) (f) all Production Payments of such Person, (g) all
guarantees by such Person of Indebtedness referred to in this definition, (h)
all Disqualified Stock of such Person valued at the greater of its voluntary or
involuntary maximum fixed repurchase price plus accrued dividends and (i) all
obligations of such Person under or in respect to currency exchange contracts,
oil or natural gas price hedging arrangements and Hedging Obligations. For
purposes hereof, the "maximum fixed repurchase price" of Disqualified Stock
which does not have a fixed repurchase price shall be calculated in accordance
with the terms of such Disqualified Stock as if Disqualified Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by, the
fair market value of such Disqualified Stock, such fair market value shall be
determined in good faith by the board of directors of the issuer of such
Disqualified Stock; provided, however, that if such Disqualified Stock is not at
the date of determination permitted or required to be repurchase, the "maximum
fixed repurchase price" shall be the book value of such Disqualified Stock.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of direct or indirect
loans (including guarantees of Indebtedness or other obligations), advances or
capital contributions (excluding advances to officers and employees of the type
specified in clause (b) of the definition of Exempt Affiliate Transactions),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP
and the acquisition, by purchase or otherwise, of all or substantially all of
the business or assets of any other Person.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"MATERIAL CHANGE" means an increase or decrease (excluding changes that
result solely from changes in prices) of more than 10% during a fiscal quarter
in the discounted future net cash flows from proved oil and gas reserves of the
Company and its Subsidiaries calculated in accordance with clause (a)(i) of the
definition of Adjusted Consolidated Net Tangible Assets; PROVIDED, however, that
the following will be excluded from the calculation of Material Change: (i) any
acquisition during the quarter of oil and gas reserves that have been estimated
by independent petroleum engineers and on which a report or reports exists and
(ii) any disposition of properties existing at the beginning of such quarter
that have been disposed of pursuant to the provisions of the Indenture described
under the caption "Redemption of the Option of the Holders."
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss, except as provided in (b) below), together with any related provision for
taxes on such gain (but not loss), realized in connection with (a) any Asset
Sale (including, without limitation, dispositions pursuant to Sale and Leaseback
transactions) or (b) the disposition of any securities by such Person or any of
its Subsidiary or the extinguishment of any Indebtedness of such Person or any
of its Subsidiary, other than any loss arising out of the extinguishment of
Indebtedness refinanced with the proceeds of the Notes and other securities
issued contemporaneously with the Notes, (ii) any extraordinary or nonrecurring
gain (but not loss, except as provided
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in (i) above), together with any related provision for taxes on such
extraordinary or nonrecurring gain (but not loss), and (iii) any gain (but not
loss) from currency exchange transactions not in the ordinary course of business
consistent with past practice.
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any noncash
consideration received in any Asset Sale), net of the direct costs relating to
such Asset Sale (including, without limitation, legal, accounting and investment
banking fees, and sales commissions) and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof, and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
"NON-RECOURSE INDEBTEDNESS" means Indebtedness (i) as to which neither the
Company nor any of its Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OIL AND GAS BUSINESS" means the business of the exploration for, and
development, acquisition, and production of hydrocarbons, together with
activities ancillary thereto (including with limitation, the gathering,
processing, treatment, marketing and transportation of such production) and
other related energy and natural resources businesses.
"OIL AND GAS PURCHASE AND SALE CONTRACT" means with respect to any Person,
any oil and gas agreements and other agreements or arrangements or any
combination thereof entered into by such Person in the ordinary course of
business and that is designed to provide protection against oil and natural gas
price fluctuations.
"PERMITTED INVESTMENTS" means (a) any Investments by the Subsidiaries of the
Company in the Company; (b) any Investments in Cash Equivalents; (c) Investments
made as a result of the receipt of noncash consideration from an Asset Sale that
was made pursuant to and in compliance with the covenant described above under
the caption "Repurchase at the Option of Holders -- Asset Sales"; (d)
Investments outstanding as of the date of the Indenture; (e) Investments in
Wholly Owned Subsidiaries engaged in the Oil and Gas Business and Investments in
any Person that, as a result of such Investment (or a series of substantially
contemporaneous Investments made pursuant to a single plan) (x) such other
Person becomes a Wholly Owned Subsidiary engaged in the Oil and Gas Business or
(y) such other Person that is engaged in the Oil and Gas Business is merged or
consolidated with or into, or transfers or conveys all or substantially all of
its assets to the Company or a Wholly Owned Subsidiary in a transaction
permitted under the Indenture; (f) entry into operating agreements, joint
ventures, partnership agreements, working interests, royalty interests, mineral
leases, processing agreements, farm-out agreements, contracts for the sale,
transportation or exchange of oil and natural gas, unitization agreements,
pooling arrangements, area of mutual interest agreements or other similar or
customary agreements, transactions, properties, interests or arrangements, and
Investments and expenditures in connection therewith or pursuant thereto, in
each case made or entered into in the ordinary course of the Oil and Gas
Business, excluding, however, Investments in corporations; (g) entry into any
hedging arrangements in the ordinary course of business for the purpose of
protecting the Company's or any Subsidiaries's production against fluctuations
in oil or natural gas prices; (h) shares of money mutual or similar funds having
assets in excess of $500,000,000, and (i) Investments in an aggregate amount not
to exceed $5,000,000 at any one time outstanding.
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"PERMITTED LIENS" means (a) liens for taxes, assessments and governmental
charges not then due or the validity of which is being contested in good faith
by appropriate proceedings, promptly instituted and diligently conducted, and
for which adequate reserves have been established to the extent required by
GAAP; (b) mechanics', workmen's, materialman's, operator's or similar liens
arising in the ordinary course of business; (c) easements, rights of way,
restrictions and other similar encumbrances incurred in the ordinary course of
business or minor imperfections in title that do not impair the value of
property for its intended use; (d) liens on, or related to, properties to secure
all or part of the costs incurred in the ordinary course of business of
exploration, drilling, development or operation thereof; (e) judgment and
attachment liens not giving rise to an Event of Default or liens created by or
existing from any litigation or legal proceeding that are currently being
contested in good faith by appropriate proceedings, promptly instituted and
diligently conducted, and for which adequate reserves have been made to the
extent required by GAAP; (f) liens on deposits made in the ordinary course of
business; (g) liens in favor of collecting or payor banks having a right of
selloff, revocation, refund or chargeback with respect to money or instruments
of the Company or any Subsidiary on deposit with or in possession of such bank;
(h) liens on pipeline or pipeline facilities which arise out of operation of
law; (i) liens on deposits to secure public or statutory obligations or in lieu
of surety or appeal bonds entered into in the ordinary course of business; (j)
liens reserved in oil and gas leases for bonus or rental payments and for
compliance with the terms of such leases; and (k) liens arising under
partnership agreements, oil and gas leases, farmout agreements, division orders,
contracts for the sale, purchase, exchange, transportation or processing of oil,
gas or other hydrocarbons, unitization and pooling declarations and agreements,
development agreements, operating agreements, area of mutual interest agreements
and other agreements that are customary in the Oil and Gas Business.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries; PROVIDED that: (i) the
principal amount of such Permitted Refinancing Indebtedness does not exceed the
principal or accrued amount of the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded; (ii) such Permitted Refinancing
Indebtedness has a Weighted Average Life to Maturity and a final maturity date
equal to or greater than the Weighted Average Life to Maturity and final
maturity date, respectively, of the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; (iii) if the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded is subordinated in
right of payment to the Notes or any Subsidiary Guarantees, such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and is subordinated in right of payment to the Notes and any Subsidiary
Guarantees on terms at least as favorable to the Holders of the Note as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness
is incurred either by the Company or by the Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"PRINCIPAL PROPERTIES" means the oil and gas properties and other tangible
assets and properties owned by Company on the date of the Indenture
(collectively, the "Original Principal Properties") and assets and properties of
the Company obtained in exchange for any of the Original Principal Properties.
"PRODUCTION PAYMENTS" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
"QUALIFIED STOCK" means, for any Person, any and all Capital Stock of such
Person, other than Disqualified Stock.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"SENIOR BANK INDEBTEDNESS" means the Indebtedness outstanding under the
Credit Facility.
"SENIOR INDEBTEDNESS" means (i) the Senior Bank Indebtedness and (ii) any
other Indebtedness permitted to be incurred by the Company under the terms of
the Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is subordinated in right of
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payment to any Indebtedness for money borrowed. Notwithstanding anything to the
contrary in the foregoing, Senior Indebtedness will not include (w) any
liability for federal, state, local or other taxes owed or owing by the Company,
(x) any Indebtedness of the Company to any of its Subsidiaries, Unrestricted
Subsidiaries or other Affiliates, (y) any trade payables, or (z) any
Indebtedness that is incurred in violation of the Indenture.
"SENIOR REVOLVING INDEBTEDNESS" means revolving credit borrowings and
letters of credit under the Credit Facility and/or any successor facility or
facilities.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof). Notwithstanding the
foregoing, an Unrestricted Subsidiary shall not be a Subsidiary of the Company
for any purposes of the Indenture.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary, if designated by the Board
of Directors of the Company as an Unrestricted Subsidiary pursuant to a Board
Resolution and permitted to be so designated pursuant to the terms of the
Indenture.
"VOLUMETRIC PRODUCTION PAYMENTS" means volumetric production payment
obligations of the Company or any of its Subsidiaries that are or, upon the
occurrence of a contingent event, would be recorded as deferred revenue in
accordance with GAAP, together with all undertakings and obligations of the
Company or any of its Subsidiaries in connection therewith, which will be deemed
to constitute debt for borrowed money for purpose of the Indenture.
"VOTING STOCK" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the product
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal, including
payments at final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment, by (ii) the then outstanding principal amount of
such Indebtedness.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such Person
(i) all of the outstanding Capital Stock or other ownership interests of which
(other than directors qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or (ii)
organized in a foreign jurisdiction and is required by the applicable laws and
regulations of such foreign jurisdiction to be partially owned by the government
of such foreign jurisdiction or individual or corporate citizens of such foreign
jurisdiction in order for such Subsidiary to transact business in such foreign
jurisdiction, provided that such Person or one or more Wholly Owned Subsidiaries
of such Person, owns the remaining Capital Stock or ownership interest in such
Subsidiary and, by contract or otherwise, controls the management and business
of such Subsidiary and derives the economic benefits of ownership of such
Subsidiary to substantially the same extent as if such Subsidiary were a wholly
owned Subsidiary. Unrestricted Subsidiaries shall not be included in the
definition of Wholly Owned Subsidiary for any purposes of the Indenture.
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DESCRIPTION OF OTHER INDEBTEDNESS
EXISTING DEBT FACILITY
In June 1996, the Company entered into a credit agreement (the "Existing
Debt Facility") provided by NationsBridge, L.L.C. and NationsBank, N.A. and
consisting of a $95.0 million revolving credit loan (the "Existing Revolver")
and a $30.0 million term loan (the "Existing Term Loan"). The Existing Debt
Facility provided funds to consummate the 1996 Acquisition and to refinance the
Company's prior senior bank facility. Prudential Securities Group Inc. ("PGI")
has purchased an interest in the Existing Debt Facility.
The Existing Revolver and the Existing Term Loan each matures June 10, 1999.
No periodic principal reductions are required with respect to the Existing Term
Loan; however, quarterly principal reductions in the amount of $3.0 million are
required with respect to the Existing Revolver, commencing January 1, 1997. In
addition, the Existing Debt Facility requires that the net proceeds from the
Notes Offering be applied to reduce the amounts outstanding under the Existing
Revolver and the Existing Term Loan, and 100% of the net proceeds from the
Common Stock Offering are required to be utilized to reduce the amounts
outstanding under the Existing Term Loan and Existing Revolver.
Interest accrues on the Existing Term Loan initially at 14.0% per annum,
increasing by 0.5% per annum at the end of each successive three month period
(commencing September 13, 1996) up to a maximum of 16.5% per annum. Interest may
be paid in cash or "in kind" by delivery of additional notes having the same
terms as the notes issued pursuant to the Existing Term Loan. Interest under the
Existing Revolver accrues, at the option of the Company, at a margin in excess
of either NationsBank, N.A. "LIBOR" rate, up to a maximum of 5.0% per annum, or
NationsBank, N.A. fluctuating "prime rate" up to a maximum of 2.75% per annum.
The Existing Debt Facility is secured by a pledge of substantially all of
the Company's assets, guaranties by the Company's subsidiaries and limited
guaranties by Messrs. Liedtke, Grella and Musselman proportionate to their
membership interests in the LLC.
CREDIT FACILITY
The Credit Facility will provide the Company with a revolving facility based
on the borrowing base of its oil and gas assets which will initially be set at
$50.0 million, none of which is expected to be outstanding at its inception. The
Credit Facility is expected to be secured by a pledge of substantially all of
the Company's assets. See "Mangement's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" for a
further description of the Credit Facility.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, par value $0.10 per share ("Common Stock") and 3,000,000 shares of
preferred stock, par value $0.10 per share ("Preferred Stock"). Upon the
completion of the Offerings and the Corporate Reorganization, the issued and
outstanding capital stock of the Company will consist of 10,000,000 shares of
Common Stock (or 10,600,000 shares if the underwriters' over-allotment option is
exercised in full).
The following description of certain matters relating to the capital stock
of the Company is summary in nature and is qualified in its entirety by the
provisions of the Company's Certificate of Incorporation and Bylaws, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders of the Company. In addition, such
holders are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
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available therefor, subject to the payment of preferential dividends with
respect to any Preferred Stock that from time to time may be outstanding. In the
event of the dissolution, liquidation or winding-up of the Company, the holders
of Common Stock are entitled to share ratably in all assets remaining after
payment of all liabilities of the Company and subject to the prior distribution
rights of the holders of any Preferred Stock that may be outstanding at that
time. The holders of Common Stock do not have cumulative voting rights or
preemptive rights. All shares of Common Stock outstanding and to be outstanding
after the Common Stock Offering will be fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue 3,000,000 shares of
Preferred Stock, in one or more series, and to fix the rights, preferences,
qualifications, privileges, limitations or restrictions of each such series
without any further vote or action by the stockholders, including the dividend
rights, dividend rate, conversion rights, voting rights, terms of redemption
(including sinking fund provisions), redemption price or prices, liquidation
preferences and the number of shares constituting any series or the designations
of such series. No shares of Preferred Stock have ever been issued, and the
Company has no present plans to issue any Preferred Stock. In certain instances
the Indenture limits the ability of the Company to issue Preferred Stock. See
"Description of Notes -- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock."
83
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions of the Underwriting Agreement
(the "Underwriting Agreement") among the Company, NationsBanc Capital Markets,
Inc. and Prudential Securities Incorporated (the "Underwriters"), the
Underwriters severally have agreed to purchase from the Company and the Company
has agreed to sell to the Underwriters severally the principal amount of Notes
set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
- ------------------------------------------------------------------------------------------------ ----------------
<S> <C>
NationsBanc Capital Markets, Inc................................................................ $
Prudential Securities Incorporated..............................................................
----------------
Total....................................................................................... $ 100,000,000
----------------
----------------
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed, subject
to certain conditions, to purchase all of the Notes, if any are purchased. The
Underwriting Agreement provides that, in the event of a default by an
Underwriter, in certain circumstances, the purchase commitments of
non-defaulting Underwriters may be increased or the Underwriting Agreement may
be terminated.
The Company has been advised by the Underwriters that they propose to offer
the Notes to the public initially at the price set forth on the cover page of
this Prospectus, to certain securities dealers (who may include Underwriters) at
such price less a concession not in excess of % of the amount per Note and
that the Underwriters and such dealers may reallow a discount not in excess of
% of the amount per Note to other dealers, including the Underwriters. After
the closing of the public offering, the public offering price, the concession
and the discount to other dealers may be changed by the Underwriters.
There is no currently existing trading market for the Notes, and although
the Underwriters have advised the Company that they currently intend to make a
market in the Notes, they are not obligated to do so and any such market making
may be discontinued at any time, without notice, in the sole discretion of the
Underwriters. Accordingly, there can be no assurance as to the development or
liquidity of any market that may develop for the Notes.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"), or to contribute to payments the Underwriters may be
required to make in respect thereof.
The Underwriters have informed the Company that they do not expect to
confirm sales of Notes offered hereby to any accounts over which they exercise
discretionary authority.
NationsBanc Capital Markets, Inc. is an affiliate of NationsBank, N.A., NBCC
and NationsBridge, L.L.C. NationsBridge, L.L.C. and NationsBank, N.A. are
lenders under the Existing Credit Facility. PGI, an affiliate of Prudential
Securities Incorporated, is also a lender under the Existing Credit Facility.
See "Description of Other Indebtedness." NationsBridge, L.L.C., NationsBank,
N.A. and PGI will receive their respective proportionate shares of the repayment
by the Company of borrowings under the Existing Debt Facility from the net
proceeds of the Offerings. Prudential Securities Incorporated is also acting as
an underwriter in the Company's concurrent Common Stock Offering for which it
will receive customary underwriting discounts and commissions. In addition, the
Underwriters and their respective affiliates provide or have provided banking,
advisory and other financial services for the Company in the ordinary course of
business for which they have received customary compensation.
NBCC is a stockholder of the Company and will receive approximately $16.3
million of the proceeds of the Offerings in redemption of a portion of the
membership interests owned by it and in a distribution to it in the Corporate
Reorganization. See "Use of Proceeds," "The Company -- Corporate Reorganization"
and "Security Ownership of Certain Beneficial Owners and Management." As a
result of such ownership, The National Association of Securities Dealers, Inc.
("NASD") may view
84
<PAGE>
this offering as a participation by NationsBanc Capital Markets, Inc. in the
distribution in a public offering of the securities of an affiliate and this
Notes Offering is being made pursuant to the provisions of Rule 2720 of the
NASD's Conduct Rules. In accordance with Rule 2720, Prudential Securities
Incorporated is acting as a qualified independent underwriter in the Notes
Offering and is assuming the responsibilities of acting as such in pricing the
Notes Offering and conducting due diligence.
LEGAL MATTERS
Certain legal matters related to the Notes offered hereby are being passed
upon for the Company by Cotton, Bledsoe, Tighe & Dawson, a Professional
Corporation, Midland, Texas. Certain matters will be passed upon for the
Underwriters by Baker & Botts, L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of Costilla Energy, L.L.C. and
subsidiaries as of December 31, 1995 and for the year then ended, the statements
of revenues and direct operating expenses of the 1996 Acquisition for the years
ended December 31, 1993, 1994 and 1995, and the statements of revenues and
direct operating expenses of the 1995 Acquisition for the years ended December
31, 1993 and 1994, and the period ended June 12, 1995, have been included herein
and in the registration statement in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Costilla Energy, L.L.C. and
subsidiaries as of December 31, 1994, and for the years ended December 31, 1993
and 1994, have been included herein and in the registration statement in
reliance upon the report of Elms, Faris & Co., P.C., independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
In September 1995, the Company changed its principal accountants from Elms,
Faris & Co., P.C. to KPMG Peat Marwick LLP. The reports of Elms, Faris & Co.,
P.C. on the Company's financial statements for the year ended December 31, 1994
did not contain an adverse opinion or a disclaimer of opinion, nor was it
qualified or modified in any way as to uncertainty, audit scope or accounting
principles. Moreover, there were no disagreements with Elms, Faris & Co., P.C.
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure. The members of the LLC made the
decision to change the LLC's principal accountants.
Certain information appearing in this Prospectus regarding estimated
quantities of oil and gas reserves and the discounted present value of future
pre-tax cash flows therefrom attributable to the Company's properties and to the
properties included in the 1996 Acquisition is based upon estimates of such
reserves and present values prepared by Williamson Petroleum Consultants, Inc.
All of such information has been so included herein in reliance upon the
authority of such firm as experts in such matters. Set forth as Appendix A is
Williamson's Summary Reserve Report dated July 23, 1996 with respect to the oil
and gas interests of the Company and with respect to properties acquired in the
1996 Acquisition.
AVAILABLE INFORMATION
Upon completion of the Offerings, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information filed
by the Company with the Commission can be inspected at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and the Regional Offices of the Commission at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
85
<PAGE>
60661-2511, and 7 World Trade Center, New York, New York 10048. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Commission maintains a World Wide Web site
on the Internet at HTTP:\\WWW.SEC.GOV that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Notes offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
items of which are contained in exhibits to the Registration Statement as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Notes offered hereby, reference
is made to the Registration Statement, including the exhibits thereto, which may
be inspected without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional
Offices of the Commission, and copies of which may be obtained from the
Commission at prescribed rates. Statements made in this Prospectus concerning
the contents of any document referred to herein are not necessarily complete.
With respect to each such document filed with the Commission as an exhibit to
the Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement made herein shall be
deemed qualified by such reference.
86
<PAGE>
GLOSSARY
The terms defined in this section are used throughout this Prospectus.
ADJUSTED EBITDA. Calculated by adding interest, income taxes, depreciation,
depletion and amortization, exploration and abandonment costs and extraordinary
loss resulting from extinguishment of debt to net income (loss).
ALL-IN FINDING COSTS. The amount of total capital expenditures, including
acquisition costs, and exploration and abandonment costs for oil and gas
activities divided by the amount of proved reserves (expressed in BOE) added
during the specified period (including the effect on proved reserves of reserve
revisions).
BBL. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
BCF. One billion cubic feet.
BOE. Equivalent barrels of oil. In reference to natural gas, natural gas
equivalents are determined using the ratio of six Mcf of natural gas to one Bbl
of crude oil, condensate or natural gas liquids.
BTU. One British thermal unit. The quantity of heat required to raise the
temperature of one pound of water one degree Fahrenheit.
DEVELOPED ACREAGE. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
DEVELOPMENT WELL. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
DRY WELL. A well found to be incapable of producing either oil or gas in
sufficient quantifies to justify completion of an oil or gas well.
EXPLORATORY WELL. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.
GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may be,
in which a working interest is owned.
MBBL. One thousand barrels of crude oil or other liquid hydrocarbons.
MBOE. One thousand barrels of oil equivalent.
MMBOE. One million barrels of oil equivalent.
MMBBLS. One million barrels of crude oil or other liquid hydrocarbons.
MMBTU. One million Btu's.
MCF. One thousand cubic feet.
MMCF. One million cubic feet.
NET ACRES OR NET WELLS. The sum of the fractional working interests owned
in gross acres or gross wells.
PRESENT VALUE OF ESTIMATED FUTURE NET REVENUES OR PV-10 VALUE. The present
value of estimated future net revenues is an estimate of future net revenues
from a property at its acquisition date, at a specified date, after deducting
production and ad valorem taxes, future capital costs and operating expenses,
but before deducting federal income taxes. The future net revenues have been
discounted at an annual rate of 10% to determine their "present value." The
present value is shown to indicate the
87
<PAGE>
effect of time on the value of the revenue stream and should not construed as
being the fair market value of the properties. Estimates have been made using
constant oil and natural gas prices and operating costs at the specified date.
PRODUCTIVE WELL. A well that is producing oil or gas that is capable of
production.
PROVED DEVELOPED RESERVES. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
PROVED RESERVES. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
PROVED UNDEVELOPED RESERVES. Reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion.
ROYALTY INTEREST. An interest in an oil and gas property entitling the
owner to a share of oil and gas production free of costs of production.
3-D SEISMIC. Advanced technology method of detecting accumulations of
hydrocarbons identified by the collection and measurement of the intensity and
timing of sound waves transmitted into the earth as they reflect back to the
surface.
UNDEVELOPED ACREAGE. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves.
WORKING INTEREST. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
88
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Financial Statements of Costilla Energy, L.L.C.:
Independent Auditors' Reports...................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995, and June 30, 1996
(unaudited)....................................................................... F-4
Consolidated Statements of Operations for the years ended December 31, 1993, 1994,
and 1995, and the six months ended June 30, 1995 and 1996 (unaudited)............. F-5
Consolidated Statements of Members' Capital for the years ended December 31, 1993,
1994, and 1995, and the six months ended June 30, 1995 (unaudited)................ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994,
and 1995, and the six months ended June 30, 1995 and 1996 (unaudited)............. F-7
Notes to Consolidated Financial Statements......................................... F-8
Financial Statements of the 1995 Acquisition:
Independent Auditors' Report....................................................... F-22
Statements of Revenues and Direct Operating Expenses for the years ended December
31, 1993 and 1994 and the period ended June 12, 1995.............................. F-23
Notes to the Statements of Revenues and Direct Operating Expenses.................. F-24
Financial Statements of the 1996 Acquisition:
Independent Auditors' Report....................................................... F-27
Statements of Revenues and Direct Operating Expenses for the years ended December
31, 1993, 1994 and 1995, and the periods ended June 14, 1995 and 1996
(unaudited)....................................................................... F-28
Notes to the Statements of Revenues and Direct Operating Expenses.................. F-29
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members
Costilla Energy, L.L.C. (a Texas limited liability company):
We have audited the accompanying consolidated balance sheet of Costilla
Energy, L.L.C. (a Texas limited liability company) and subsidiaries as of
December 31, 1995, and the related consolidated statement of operations,
members' capital, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Costilla
Energy, L.L.C. and subsidiaries as of December 31, 1995, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Midland, Texas
April 16, 1996 (except with respect to matters discussed in the last paragraph
of Note 7 and Note 12, as to which the date is June 14, 1996.)
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members
Costilla Energy, L.L.C.:
We have audited the accompanying consolidated balance sheet of Costilla
Energy, L.L.C. (a Texas limited liability company) and subsidiaries (the
combination of CSL Partners, Costilla Petroleum Corporation and Statewide
Minerals, L.C.) as of December 31, 1994, and the related consolidated statements
of operations, members' capital, and cash flows for the years ended December 31,
1993 and 1994. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Costilla Energy, L.L.C. and subsidiaries as of December 31, 1994, and the
results of their operations and their cash flows for the years ended December
31, 1993 and 1994, in conformity with generally accepted accounting principles.
ELMS, FARIS & CO., P.C.
Midland, Texas
March 31, 1995
F-3
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 137 $ 2,866 $ 1,164
Accounts receivable:
Trade, net............................................................................ 1,042 3,154 2,521
Affiliates............................................................................ -- 507 927
Oil and gas sales..................................................................... 1,715 3,915 5,337
Prepaid and other current assets........................................................ 223 439 2,629
------- ------- -----------
Total current assets.............................................................. 3,117 10,881 12,578
------- ------- -----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of accounting:
Proved properties..................................................................... 22,794 79,897 126,809
Unproved properties................................................................... 2,060 2,903 4,615
Accumulated depletion, depreciation and amortization.................................... (3,562) (9,413) (13,933)
------- ------- -----------
21,292 73,387 117,491
------- ------- -----------
Other property and equipment, net......................................................... 76 679 1,640
Deferred charges (Note 2)................................................................. 29 1,736 2,654
Note receivable -- affiliate.............................................................. 390 684 684
------- ------- -----------
$24,904 $87,367 $135,047
------- ------- -----------
------- ------- -----------
<CAPTION>
LIABILITIES, REDEEMABLE MEMBERS' CAPITAL AND MEMBERS' CAPITAL
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt.................................................... $ 22 $ -- $ 98
Trade accounts payable.................................................................. 1,712 5,467 4,587
Undistributed revenue................................................................... 110 1,227 1,524
Other current liabilities............................................................... 192 1,691 2,103
------- ------- -----------
Total current liabilities......................................................... 2,036 8,385 8,312
------- ------- -----------
Long-term debt, less current maturities (Note 7).......................................... 23,591 71,494 122,267
Deferred income (Note 2).................................................................. 24 3,319 2,623
Other noncurrent liabilities.............................................................. -- 38 --
------- ------- -----------
Total liabilities................................................................. 25,651 83,236 133,202
------- ------- -----------
Redeemable members' capital (Note 10)..................................................... -- 12,278 13,557
------- ------- -----------
Members' capital (Note 10)................................................................ (747) (8,147) (11,712)
Commitments and contingencies (Note 8).................................................... -- -- --
------- ------- -----------
$24,904 $87,367 $135,047
------- ------- -----------
------- ------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales........................................ $ 4,231 $ 7,637 $ 21,693 $ 5,568 $ 19,445
Interest and other....................................... 56 87 123 5 40
Gain on sale of assets................................... 110 112 -- -- 40
--------- --------- --------- --------- ---------
4,397 7,836 21,816 5,573 19,525
--------- --------- --------- --------- ---------
Expenses:
Oil and gas production................................... 1,688 2,349 10,024 2,268 8,093
Oil and gas production -- affiliates..................... -- 2 331 145 185
General and administrative............................... 639 634 2,910 678 2,439
General and administrative -- affiliates................. 313 550 661 330 370
Exploration and abandonments............................. 218 793 1,650 1,007 308
Depreciation, depletion and amortization................. 884 1,847 5,958 1,367 4,620
Interest................................................. 605 1,458 4,591 1,046 4,156
Other.................................................... -- -- 2 -- --
--------- --------- --------- --------- ---------
4,347 7,633 26,127 6,841 20,171
--------- --------- --------- --------- ---------
Income (loss) before federal income taxes and
extraordinary item.................................... $ 50 $ 203 $ (4,311) $ (1,268) (646)
Provision for federal income taxes
Current.................................................. (25) 8 3 -- --
Deferred................................................. 2 32 -- -- --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item................ $ 73 $ 163 $ (4,314) $ (1,268) $ (646)
Extraordinary loss resulting from extinguishment of
debt (Note 7)......................................... -- -- -- -- (1,640)
--------- --------- --------- --------- ---------
Net income (loss)...................................... $ 73 $ 163 $ (4,314) $ (1,268) $ (2,286)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
MEMBERS'
CAPITAL
----------
<S> <C>
Balance at January 1, 1993............................................................................ $ 433
Net income.......................................................................................... 73
Contributions....................................................................................... 1
Withdrawals......................................................................................... (456)
----------
Balance at December 31, 1993.......................................................................... 51
Net income.......................................................................................... 163
Withdrawals......................................................................................... (961)
----------
Balance at December 31, 1994.......................................................................... (747)
Issuance costs (Note 10)............................................................................ (753)
Net loss............................................................................................ (4,314)
Withdrawals......................................................................................... (55)
Preferred return and accretion of redeemable members' capital....................................... (2,278)
----------
Balance at December 31, 1995.......................................................................... (8,147)
Net loss (unaudited)................................................................................ (2,286)
Preferred return and accretion of redeemable members' capital (unaudited)........................... (1,279)
----------
Balance at June 30, 1996 (unaudited).................................................................. $ (11,712)
----------
----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- ------------------
1993 1994 1995 1995 1996
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................. $ 73 $ 163 $ (4,314) $ (1,268) $ (2,286)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation, depletion and amortization.................................... 884 1,847 5,958 1,367 4,620
Amortization of deferred charges............................................ -- -- 137 -- 169
Other noncash............................................................... (21) 35 (75) (28) 79
Gain on sale of oil and gas properties...................................... (110) (112) -- -- (40)
Extraordinary loss resulting from extinguishment of debt.................... -- -- -- -- 1,640
Change in operating assets and liabilities:
Increase in accounts receivable........................................... (837) (1,535) (4,818) (3,568) (1,209)
Decrease (increase) in other assets....................................... 20 301 (216) (107) (2,190)
Increase in accounts payable.............................................. 262 723 4,863 2,188 (880)
Increase in other liabilities............................................. 59 102 1,537 (1,624) 671
Increase (decrease) in deferred income.................................... (8) 3 3,294 -- (696)
------- -------- -------- -------- --------
Total adjustments....................................................... 249 1,364 10,680 (1,772) 2,164
------- -------- -------- -------- --------
Net cash provided by (used in) operating activities..................... 322 1,527 6,366 (3,040) (122)
------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures for oil and gas properties............................... (6,634) (11,819) (61,500) (57,261) (47,727)
Proceeds from sale of oil and gas properties.................................. 131 112 -- -- --
Additions to other property and equipment..................................... (228) (49) (720) (512) (1,996)
Advances on affiliate notes receivable........................................ -- (390) (247) -- --
------- -------- -------- -------- --------
Net cash used in investing activities................................... (6,731) (12,146) (62,467) (57,773) (49,723)
------- -------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt............................................... 6,770 11,579 62,704 62,680 125,390
Payments of long-term debt.................................................... -- -- (11,232) (7,902) (74,519)
Deferred loan and financing costs............................................. -- -- (2,587) (2,587) (2,728)
Proceeds from redeemable members' capital..................................... -- -- 10,000 10,000 --
Contributions................................................................. 1 -- -- -- --
Withdrawals................................................................... (456) (961) (55) (97) --
------- -------- -------- -------- --------
Net cash provided by financing activities............................... 6,315 10,618 58,830 62,094 48,143
------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents............................ (94) (1) 2,729 1,281 (1,702)
Cash and cash equivalents, beginning of period.................................. 232 138 137 137 2,866
------- -------- -------- -------- --------
Cash and cash equivalents, end of period........................................ $ 138 $ 137 $ 2,866 $ 1,418 $ 1,164
------- -------- -------- -------- --------
------- -------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(1) ORGANIZATION AND NATURE OF OPERATIONS
Costilla Energy, L.L.C. (the "Company"), a Texas limited liability company,
was formed on February 14, 1995, as the successor to CSL Partners, a Texas
general partnership, which was organized on January 11, 1989. The Company is an
unincorporated association of several individuals and a corporation and will
cease to exist thirty (30) years from the date of formation. Its members have
limited personal liability for the Company's obligations and debts. The Company
is classified as a partnership for federal income tax purposes.
The Company is an oil and gas exploration and production concern with
properties located principally in West Texas, South Texas, and the Rocky
Mountain regions of the United States.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
As of December 31, 1995, the consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. The Company
proportionately consolidates less-than-100%-owned oil and gas partnerships and
joint ventures in accordance with industry practice. All significant accounts
and transactions between the Company and its subsidiaries have been eliminated.
At December 31, 1993 and 1994, the financial statements of the Company and its
affiliates were combined. Prior to February 14, 1995, the combining companies
were owned by individuals who own 70% of the Company, in approximately the same
proportion relative to one another as is their current ownership. Significant
intercompany transactions were eliminated.
USE OF ESTIMATES
Preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, cash and cash equivalents
include cash on hand and depository accounts held by banks.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of unsecured accounts receivable from
unaffiliated working interest owners and crude oil and natural gas purchasers.
TRADE RECEIVABLES
Trade receivables generally consist of amounts due from outside working
interest owners for their proportionate share of drilling and operating costs
incurred by the Company, as operator of the related properties.
HEDGING
Premiums paid for commodity option contracts and interest rate swap
agreements are amortized to oil and gas sales and interest expense,
respectively, over the terms of the agreements. Unamortized premiums are
included in other assets in the consolidated balance sheet. Amounts receivable
under the commodity option contracts and interest rate swap agreements are
accrued as an increase in oil and gas sales and a reduction of interest expense,
respectively, for the applicable periods.
F-8
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OIL AND GAS PROPERTIES
The Company uses the successful efforts method of accounting for oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, and
to drill and equip development wells are capitalized. Costs to drill exploratory
wells that do not find proved reserves, geological and geophysical costs, and
costs of carrying and retaining unproved properties are expensed.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Other unproved
properties are amortized based on the Company's experience of successful
drilling and average holding period. Capitalized costs of producing oil and gas
properties, after considering estimated dismantlement and abandonment costs and
estimated salvage values, are depreciated and depleted by the unit-of-production
method. Support equipment and other property and equipment are depreciated on a
straight-line basis over the estimated useful lives of the assets, which range
from 5 to 7 years.
Prior to the adoption of FAS 121 on January 1, 1995, the Company's aggregate
oil and gas properties were carried at cost, not in excess of total estimated
undiscounted future net revenues, on a worldwide basis.
On sale or retirement of a complete unit of a proved property, the cost and
related accumulated depreciation, depletion, and amortization are eliminated
from the property accounts, and the resultant gain or loss is recognized. On
retirement or sale of a partial unit of proved property, the cost is charged to
accumulated depreciation, depletion, and amortization with a resulting gain or
loss recognized in income.
On sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment if the property had been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.
IMPAIRMENT OF LONG-LIVED ASSETS
As of January 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121 -- ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF ("FAS 121").
Consequently, the Company reviews its long-lived assets to be held and used,
including oil and gas properties accounted for under the successful efforts
method of accounting, whenever events or circumstances indicate that the
carrying value of those assets may not be recoverable. An impairment loss is
indicated if the sum of the expected future cash flows is less than the carrying
amount of the assets. In this circumstance, the Company recognizes an impairment
loss for the amount by which the carrying amount of the asset exceeds the fair
value of the asset.
DEFERRED CHARGES
The Company capitalized certain costs incurred in connection with obtaining
the Credit Agreement and the related revolver and term notes (see Note 7 for
definitions and descriptions of each). These costs are being amortized over the
lives of the notes.
DEFERRED INCOME
In November 1995, the Company entered into gas sales agreements whereby it
committed to delivery of a total of 2,379,000 Mmbtu, from December 1, 1995
through December 1, 1996, for a total fixed price of $3,429,610. Income from the
agreements is recognized in the period of delivery.
F-9
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company uses the sales method of accounting for crude oil revenues.
Under this method, revenues are recognized based on actual volumes of oil sold
to purchasers.
The Company uses the entitlements method of accounting for natural gas
revenues. Under this method, revenues are recognized based on actual production
of natural gas. Natural gas revenues would not have been significantly altered
in any period had the sales method of recognizing natural gas revenues been
utilized.
ENVIRONMENTAL
The Company is subject to extensive Federal, state and local environmental
laws and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and
that have no future economic benefits are expensed. Liabilities for expenditures
of a noncapital nature are recorded when environmental assessment and/ or
remediation is probable, and the costs can be reasonably estimated.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1993 and 1994 financial
statements to conform to the 1995 presentation.
INTERIM FINANCIAL STATEMENTS
The interim financial information as of June 30, 1996, and for the six
months ended June 30, 1995 and 1996, is unaudited. However, in the opinion of
management, these interim financial statements include all the necessary
adjustments to fairly present the results of the interim periods, and all such
adjustments are of a normal recurring nature. The interim financial statements
should be read in conjunction with the audited financial statements for the
years ended December 31, 1993, 1994 and 1995.
(3) ACQUISITION OF OIL AND GAS PROPERTIES
On June 12, 1995, the Company completed the acquisition of certain oil and
gas properties and related assets from Parker & Parsley Development L.P. and
Parker & Parsley Producing L.P. for $46,621,371. The transaction was accounted
for using the purchase method. The results of operations of the acquired
properties are included in the Consolidated Statements of Operations beginning
June 12, 1995. The Company funded the acquisition under the Credit Agreement
described in Note (7). Certain of the acquired properties, which were located
outside of the Company's areas of strategic focus, were sold in 1995. No gain or
loss was recorded on these sales.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The following table reflects the pro forma results of operations as though
the acquisition, net of the related properties sold, had occurred on January 1,
1994. The pro forma amounts are not necessarily indicative of the results that
may be reported in the future.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Revenues................................................................. 35,460 32,746
Net income (loss)........................................................ 1,563 (3,999)
</TABLE>
F-10
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(4) IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted FAS 121 effective as of January 1, 1995. FAS 121
requires that long-lived assets held and used by an entity, including oil and
gas properties accounted for under the successful efforts method of accounting,
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Long-lived assets
to be disposed of are to be accounted for at the lower of carrying amount or
fair value less cost to sell when management has committed to a plan to dispose
of the assets. All companies, including successful efforts oil and gas
companies, are required to adopt FAS 121 for fiscal years beginning after
December 15, 1995.
In order to determine whether an impairment had occurred, the Company
estimated the expected future cash flows of its oil and gas properties and
compared such future cash flows to the carrying amount of the oil and gas
properties to determine if the carrying amount was recoverable. Based on this
process, no writedown in the carrying amount of the Company's proved properties
was necessary at December 31, 1995.
(5) DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to manage well-defined
interest rate and commodity price risks. The Company is exposed to credit losses
in the event of nonperformance by the counterparties to its interest rate swap
agreements and its commodity hedges. The Company anticipates, however, that such
counterparties will be able to fully satisfy their obligations under the
contracts. The Company does not obtain collateral or other security to support
financial instruments subject to credit risk but monitors the credit standing of
the counterparties.
COMMODITY HEDGES. The Company utilizes option contracts to hedge the effect
of price changes on future oil and gas production. If market prices of oil and
gas exceed the strike price of put options, the options will expire unexercised,
therefore reducing the effective price received for oil and gas sales by the
cost of the related option. The following table sets forth the future volumes
hedged by year and the weighted-average strike price of the option contracts at
December 31, 1995:
<TABLE>
<CAPTION>
OIL GAS
VOLUME VOLUME STRIKE PRICE
(BBLS) (MMBTU) PER BBL/MMBTU
----------- ----------- ---------------------
<S> <C> <C> <C>
Oil:
1996............................................... 1,830,000 -- $16.00 - $20.38(a)
1997............................................... 912,500 -- $16.00 - $20.65(a)
Gas:
1996............................................... -- 1,500,000 $1.65(b)
1997............................................... -- 1,350,000 $1.65(b)
</TABLE>
- ------------------------
(a) Represents the weighted-average price of collars established with the
purchase of put option contracts and the sale of call option contracts.
(b) Represents the strike price on purchased put option contracts.
INTEREST RATE SWAP AGREEMENTS. The Company utilizes interest rate swap
agreements to reduce the potential impact of increases in interest rates on
floating-rate, long-term debt. If market rates of interest experienced during
the applicable swap term are below the rates of interest effectively fixed by
the swap agreement, the rate of interest experienced by the Company will exceed
the rate that would have been experienced under the Credit Agreement. At
December 31, 1995, the Company was a
F-11
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(5) DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
party to two interest rate swap agreements, providing the Company with a fixed
interest rate for the terms of the agreements. The following table sets forth
the terms, fixed rates, and notional amounts of the agreements in place as of
December 31, 1995:
<TABLE>
<CAPTION>
NOTIONAL
PRINCIPAL FIXED
TERM AMOUNT INTEREST RATE
- ------------------------------------ ------------- -------------------------------
<S> <C> <C>
Jan. 25, 1996 to Jan. 25, 1999 $24 million ranging from 7.5% to 8.5%
May 24, 1995 to May 27, 1997 $60 million 5.99%
</TABLE>
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1994 and 1995. FASB
Statement No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
1994 1995
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Financial assets:
Cash, cash equivalents and restricted cash....................... $ 137 $ 137 $ 2,866 $ 2,866
Receivables (trade).............................................. 1,042 1,042 3,154 3,154
Receivables (oil and gas sales).................................. 1,715 1,715 3,915 3,915
Commodity option contracts....................................... -- -- 165 555
Interest rate swap and option agreements......................... 203 -- 146 (2,970)
Notes receivable -- affiliate.................................... 390 390 684 684
Financial liabilities:
Payables (trade)................................................. 1,712 1,712 5,467 5,467
Deferred income.................................................. -- -- 3,319 2,950
Long-term debt................................................... 23,613 23,613 71,494 71,494
</TABLE>
The carrying amounts shown in the table are included in the statement of
financial position under the indicated captions.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH, TRADE RECEIVABLES, AND TRADE PAYABLES: The carrying amounts
approximate fair value because of the short maturity of those instruments.
OTHER CURRENT ASSETS: The amounts reported relate to the commodity option
contracts and interest rate swap agreements described in Note 5. The carrying
amount comprises the unamortized premiums paid for the contracts. The fair value
is estimated using option pricing models and essentially values the potential
for the contracts and agreements to become in-the-money through changes in
commodity prices and interest rates during the remaining terms.
NOTES RECEIVABLE-AFFILIATE: The amounts reported relate to notes receivable
from an affiliated company. The carrying amount approximates fair value because
the rate given to the affiliate company is not materially different from the
affiliate company's bank debt.
F-12
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
DEFERRED INCOME: The amounts reported relate to the gas purchase agreements
described in Note 2. The carrying amount represents the payments received under
the agreements for which subsequent delivery is required. The fair value is
estimated based upon the commodity price at December 31, 1995, for a similar
agreement.
LONG-TERM DEBT: The fair value of the Company's long-term debt is estimated
by discounting expected cash flows at the rates currently offered to the Company
for debt of the same remaining maturities, as advised by the Company's bankers.
(7) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Revolver note.......................................................... $ -- $ 59,824
Term notes............................................................. -- 11,670
Note payable to bank................................................... 23,591 --
Note payable to member................................................. 22 --
--------- ---------
23,613 71,494
Less current maturities............................................ 22 --
--------- ---------
$ 23,591 $ 71,494
--------- ---------
--------- ---------
</TABLE>
At December 31, 1995, the Company and certain of its subsidiaries are
parties to a Credit Agreement with a syndicate of banks (the "Banks"). The
Credit Agreement provides for an aggregate $185 million senior secured revolving
line of credit ("Revolver Notes") and an aggregate of $15 million in senior
secured term notes ("Term Notes"). All notes are secured with the assets of the
Company and are guaranteed by the Company's subsidiaries and, to a limited
extent, its individual members.
The Revolver Notes and Term Notes are subject to an aggregate borrowing
base, as determined by the Banks or their agents in their sole discretion and is
redetermined at least bi-annually as of January 15 and July 15, utilizing oil
and gas reserve information as of the immediately preceding period end. As of
January 15, 1996, the borrowing base was $71,670,000.
All outstanding balances under the Credit Agreement may be designated, at
the Company's option, as either "Base Rate Portions" or "Fixed Rate Portions"
(both as defined in the Credit Agreement), provided that no more than five
Eurodollar Tranches may be outstanding at any time. The Base Rate Portions of
the Revolver Notes bear interest at the fluctuating Base Rate, plus a Revolver
Base Rate Spread ranging from 0.25% to 0.75%, depending upon the outstanding
principal balances of the Term Notes. The Base Rate Portions of the Term Notes
bear interest at the fluctuating Base Rate plus 0.75%. The Fixed Rate Portions
of the Revolver Notes bear interest at the Eurodollar Rate for a fixed period of
time elected by the Company, plus a Revolver Fixed Rate Spread ranging from
2.25% to 3.00%, depending on the outstanding principal balances of the Term
Notes. The Fixed Rate Portions of the Term Notes bear interest at the Eurodollar
Rate for a fixed period of time elected by the Company, plus a Fixed Rate Spread
of 3.00%. As of December 31, 1995, the Company had elected a fixed rate of 8.82%
for the Revolver Notes and had elected fixed rates ranging from 8.82% to 8.94%
for $14,000,000 of the outstanding Term Notes at December 31, 1995. The
remaining balances of the Term Notes bear interest at the Base Rate of
NationsBank Prime plus 1.50% at December 31, 1995.
F-13
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(7) LONG-TERM DEBT (CONTINUED)
The outstanding principal balance of the Revolver Notes is due and payable
in sixty (60) monthly installments beginning August 1, 1996, and continuing
regularly thereafter until July 1, 2001. The outstanding principal balance of
the Term Notes is due and payable in two (2) installments, each of which shall
be equal to one-half of the unpaid principal balance of each note, on July 1,
1996, and January 1, 1997.
The Credit Agreement requires the Company to hedge not less than 60% of the
Company's total sales volume, through December 31, 1997, from its proved
developed producing oil and gas reserves, with a floor price of not less than
$16 per Bbl of oil or $1.50 per Mcf of gas.
Additionally, the Credit Agreement contains various restrictive covenants
and compliance requirements, which include: (a) restrictions on dividends and
the incurrence of additional indebtedness; (b) restrictions as to merger, sale
or transfer of assets; (c) limiting total lease payments and total aggregate
executive compensation to $750,000 and $500,000, respectively, in any fiscal
year; and (d) compliance with certain financial ratios.
The Company was in violation of certain covenants and compliance
requirements as of December 31, 1995. Subsequent to December 31, 1995, such
violations were waived by the Banks.
Maturities of long-term debt at December 31, 1995, are as follows (in
thousands):
<TABLE>
<S> <C>
1996...................................................... $ 10,820
1997...................................................... 17,800
1998...................................................... 11,965
1999...................................................... 11,965
2000...................................................... 11,965
Thereafter................................................ 6,979
</TABLE>
The Company paid interest on long-term debt of $546,147, $1,356,604 and
$4,453,684 in 1993, 1994 and 1995, respectively.
As described in Note 12, on June 10, 1996, the Company demonstrated its
intent and ability to refinance the current maturities under the Credit
Agreement by entering into a new loan agreement, proceeds of which were used to
repay the existing notes. Concurrently, the deferred charges associated with the
Credit Agreement were expensed as an extraordinary loss.
(8) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases equipment and office facilities under operating leases on
which rental expense for the years ended December 31, 1993, 1994 and 1995, was
$110,023, $197,533 and $311,221, respectively. Future minimum lease commitments
under noncancellable operating leases at December 31, 1995, are as follows (in
thousands):
<TABLE>
<S> <C>
1996....................................................... $ 257
1997....................................................... 272
1998....................................................... 268
1999....................................................... 195
2000....................................................... 188
Thereafter................................................. 1,190
</TABLE>
SEVERANCE AGREEMENTS
On February 17, 1995, the Company entered into employment agreements with
each of the officers which are effective from the above date through February
17, 2000, or until terminated by the
F-14
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
officer or the Company. In addition to providing a base salary and nominal
yearly increases for each officer, the employment agreements provide for
severance payments upon termination of any such officer's employment or a
significant reduction in that officer's duties or responsibilities.
In the event of such a termination, the Company is obligated to pay the
officer an amount equal to the present value (discounted at 10%) of the
officer's salary which would have been paid through February 17, 2000. The
current annual base salaries for the officers covered under such employment
agreements total approximately $500,000.
EXPLORATION AND DEVELOPMENT
In July 1995, the Republic of Moldova (located in Eastern Europe between
Romania and the Ukraine) granted a Concession Agreement to Resource Development
Company Limited, L.L.C. ("Redeco"), an entity not affiliated with the Company.
The Company has paid Redeco $90,000 and agreed to bear the first $2.0 million of
Concession expenses ($214,178 of which had been expended through December 31,
1995) in return for a 50.0% interest in Redeco. After the initial $2.0 million
expenditure, Redeco and the Company are responsible for bearing 50.0% each of
future expenses. The Concession Agreement covers the entire country with respect
to oil and gas and other minerals and continues for various time periods
depending on the nature of the activity conducted. In connection with two
previously producing but now abandoned fields, Redeco's exclusive rights
continue for 20 years. Redeco's exclusive period to explore throughout the
remainder of Moldova expires in 2005, but Redeco will maintain exclusive
development rights with respect to fields discovered for a period of 20 years
from the date of first production from such field. The Company has no material
fixed financial commitments with respect to the Concession.
LETTERS OF CREDIT
As a result of certain bonding and trade creditor requirements, the Company
has caused irrevocable letters of credit to be issued by a bank totaling
$106,000. As of December 31, 1995, no amounts had been drawn on these letters of
credit.
(9) 401(K) PLAN
The Company has established a qualified cash or deferred arrangement under
IRS code section 401(k) covering substantially all employees. Under the plan,
the employees have an option to make elective contributions of a portion of
their eligible compensation, not to exceed specified annual limitations, to the
plan and the Company has an option to match a percentage of the employee's
contribution. The Company has made matching contributions to the plan totaling
$16,950, $8,921 and $22,531 in 1993, 1994 and 1995, respectively.
(10) REDEEMABLE MEMBERS' CAPITAL AND MEMBERS' CAPITAL
During 1995, NationsBanc Capital Corporation ("NBCC") contributed $10
million in exchange for a 30% ownership interest in the Company including the
preferential return described below. The Company incurred $751,737 in legal fees
and broker's commissions in connection with this transaction and recorded these
costs as direct charges to members' capital in 1995.
Redeemable members' capital includes $10,000,000 that is subject to a
preferential return of 15% per annum and is redeemable at any time at the
Company's option, subject to a redemption premium as described below, or at
NBCC's option on February 17, 2003 or at an earlier date upon occurrence of
certain events including a change in control, certain changes in management, a
change in the Company's status as a limited liability company for tax purposes,
or violation of any of various other restrictive provisions contained in the
Regulations of Costilla Energy, L.L.C. (the "Regulations"). The
F-15
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(10) REDEEMABLE MEMBERS' CAPITAL AND MEMBERS' CAPITAL (CONTINUED)
15% preferred return is treated as a reduction of members' capital. The
redemption price to be paid by the Company shall be equal to the initial amount
received for the preferred units plus a premium, determined in the year the
units are purchased, as follows:
<TABLE>
<CAPTION>
YEAR AFTER PREMIUM
FEBRUARY 17, 1995 PERCENTAGE
- ----------------------- -------------
<S> <C>
1 10%
2 10%
3 8%
4 6%
5 4%
6 2%
7 0%
8 0%
</TABLE>
In addition, a portion of NBCC's interest not subject to preferential return
is classified as redeemable members' capital as the Company may be required to
repurchase such interest upon the occurrence of certain events similar to those
events requiring redemption of the redeemable members' capital described above
and, in any event, on or after February 17, 2000. Such interest may, at the
Company's option, be repurchased to the extent the Company has exercised its
right to redeem all or a portion of the redeemable members' interest subject to
the preferential return. The redemption price the Company would pay in either
instance is determined by the year in which the members' capital is repurchased,
as follows:
<TABLE>
<CAPTION>
AGGREGATE
BEFORE FEBRUARY 17 REDEMPTION PRICE
- ------------------------------------------------------------------ ----------------
<S> <C>
1996.............................................................. $ 1
1997.............................................................. 1,500,000
1998.............................................................. 3,000,000
1999.............................................................. 4,500,000
2000.............................................................. 5,500,000
</TABLE>
The ultimate redemption price of $5,500,000 is being accrued ratably over
the period from February 17, 1995 through February 17, 2000 and is treated as a
reduction of members' capital.
NBCC would retain an 18% interest in the Company after the redemptions
described above occur. Such interest is not subject to redemption.
At December 31, 1995, the Company was in violation of various restrictive
provisions of the Regulations. Subsequent to December 31, 1995, NBCC waived such
violations.
(11) RELATED PARTY TRANSACTIONS
Certain members and officers of the Company own interests in and hold
positions with A&P Meter Service and Supply, Inc. ("A&P"), CSL Management
Corporation ("CSL"), 511 Tex L.C. ("511 Tex") and Valley Gathering Company
("Valley").
Advances from the Company to A&P have been consolidated into two promissory
notes. The first note, which was originally executed December 31, 1994, totals
$390,000, including accrued interest of $20,000 at December 31, 1995. The note
bears interest at a floating rate equal to the "prime rate" plus 1.0%. No
principal or interest payments are due until the maturity of the note at
December 31, 2004. The note is secured by a second lien on A&P's accounts
receivable, inventory and equipment. The
F-16
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(11) RELATED PARTY TRANSACTIONS (CONTINUED)
second note is in the amount of $294,000, including accrued interest of $47,000,
and is dated May 22, 1996. The note bears interest at 6.0% per annum, is
unsecured and is payable upon demand. During 1995, the Company paid $612,139 to
A&P for goods and services provided.
During 1993, 1994 and 1995, the Company paid $312,623, $549,620 and
$592,920, respectively, to CSL for management fees and lease payments on
equipment.
During 1995, the Company paid $67,896 to 511 Tex for office rent.
During 1994 and 1995, the Company paid $2,458 and $440,884, respectively, to
Valley for gas compression and salt water disposal charges. During 1995, Valley
paid the Company $109,399 for operating costs of its salt water disposal wells
and gas compressors.
(12) SUBSEQUENT EVENTS
On March 8, 1996, the Company executed a Purchase and Sale Agreement with
Parker and Parsley Petroleum Company to acquire certain oil and gas properties
for an estimated adjusted purchase price of approximately $42.5 million. The
properties are located primarily in south and west Texas. The transaction was
accounted for using the purchase method. The results of operations of the
acquired properties are included in the Consolidated Statements of Operations as
of the closing date, June 14, 1996.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The following table reflects the pro forma results of operations for the
six-months ended June 30, 1995 and 1996, as though both acquisitions, which
closed on June 12, 1995 and June 14, 1996, had occurred as of January 1, 1995.
The pro forma amounts are not necessarily indicative of the results that may be
reported in the future.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Revenues............................................................... $ 25,706 $ 28,748
Net loss............................................................... (2,875) (910)
</TABLE>
In connection with the foregoing, the Company entered into a new loan
agreement with NationsBridge L.L.C., an affiliate of the Company's current
lender, to provide financing of up to $125 million in advances (the "Loans"),
subject to certain terms and conditions. Proceeds of the Loans were used to fund
the Acquisition, to refinance substantially all of the Company's outstanding
indebtedness, and for other general corporate purposes.
Advances under the Loans were to be made in two portions, Tranche A was up
to $95,000,000 and Tranche B was $30,000,000. Tranche A initially bears
interest, at the Company's option, at the applicable prime rate ("Prime") plus
0.75% or LIBOR plus 3.0%. Each margin above Prime and LIBOR increases by 0.50%
at the end of each successive three-month period, up to a maximum of 2.75% and
5.0% for Prime and LIBOR, respectively. Tranche B initially bears interest at
14.00% per annum, increasing 0.50% at the end of each successive three-month
period, up to a maximum of 16.5%.
Tranche A loans are subject to a borrowing base determination. The initial
borrowing base is $95,000,000 which is automatically reduced by $3,000,000 per
quarter beginning January 1, 1997.
F-17
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(12) SUBSEQUENT EVENTS (CONTINUED)
The borrowing base is also subject to periodic redetermination by NationsBridge
L.L.C. based on its determination of the collateral value of the Company's oil
and gas properties. Final maturity of loans made under Tranches A and B is June
10, 1999.
The Loans are secured by first priority liens, assignments and security
interests in all oil and gas properties, pipelines and gathering systems of the
Company and stock of the Company's subsidiaries. Additionally, the Loans are
subject to various restrictive covenants and compliance requirements, including
but not limited to (a) restrictions on dividends and the incurrence of
additional indebtedness, (b) minimum limitations on the Company's current ratio
and tangible net worth, (c) limitations on payments for leases and executive
compensation, (d) maximum limitations on general and administrative expenses,
capital expenditures and the Company's ratio of debt to adjusted cash flow, and
(e) a requirement to pay to the lender all net oil and gas revenues (as defined
and as adjusted for capital expenditures) on a quarterly basis.
The Company paid the lender's fees and expenses in connection with obtaining
the Loans. The fees were approximately $2,625,000 and will increase by an
additional $625,000 if the Tranche B Loans remain outstanding for more than 90
days. In addition, if the Tranche B amounts are not repaid within one year, an
additional amount of $4,800,000 will accrue. If such additional fees are
incurred, they will be amortized over the remaining period that the Loans are
expected to be outstanding.
(13) OIL AND GAS EXPENDITURES
The following table reflects costs incurred in oil and gas property
acquisition, exploration and development activities:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS
------------------------------- ENDED MARCH 31,
1993 1994 1995 1996
--------- --------- --------- ---------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
Property acquisition costs:
Proved........................................................ $ 4,665 $ 9,649 $ 52,470 $ 2,246
Unproved...................................................... 829 1,232 1,742 677
Exploration..................................................... 2,017 2,167 5,627 1,822
Development..................................................... -- -- 158 232
--------- --------- --------- -------
$ 7,511 $ 13,048 $ 59,997 $ 4,977
--------- --------- --------- -------
--------- --------- --------- -------
</TABLE>
(14) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
The estimates of proved oil and gas reserves, which are located principally
in the United States, were prepared by the Company as of December 31, 1993, 1994
and 1995, and Williamson Petroleum Consultants as of March 31, 1996. Reserves
were estimated in accordance with guidelines established by the SEC and FASB
which require that reserve estimates be prepared under existing economic and
operating conditions with no provision for price and cost escalations, except by
contractual arrangements. The Company has presented the reserve estimates
utilizing an oil price of $17.79 per Bbl and a gas price of $2.03 per Mcf as of
December 31, 1995, and an oil price of $20.71 per Bbl and a gas price of $2.00
per Mcf as of March 31, 1996.
F-18
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(14) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) (CONTINUED)
OIL AND GAS PRODUCING ACTIVITIES
Oil and gas reserve quantity estimates are subject to numerous uncertainties
inherent in the estimation of quantities of proved reserves and in the
projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these estimates are expected to
change as additional information becomes available in the future.
<TABLE>
<CAPTION>
OIL AND CONDENSATE GAS
(MBBLS) (MMCF)
------------------- -----------
<S> <C> <C>
Total Proved Reserves:
Balance, January 1, 1993....................................................... 1,985 16,418
Revisions of previous estimates.............................................. 57 1,160
Extensions and discoveries................................................... 380 591
Production................................................................... (158) (865)
Purchases of minerals-in-place............................................... 101 4,315
------- -----------
Balance, December 31, 1993..................................................... 2,365 21,619
Revisions of previous estimates.............................................. (460) (5,424)
Extensions and discoveries................................................... 761 1,520
Production................................................................... (330) (1,600)
Purchases of minerals-in-place............................................... 1,673 11,397
------- -----------
Balance, December 31, 1994..................................................... 4,009 27,512
Revisions of previous estimates.............................................. (570) 425
Extensions and discoveries................................................... 605 8,922
Production................................................................... (950) (4,806)
Purchases of minerals-in-place............................................... 7,694 46,099
------- -----------
Balance, December 31, 1995..................................................... 10,788 78,152
Revisions of previous estimates.............................................. 437 2,615
Extensions and discoveries................................................... 592 296
Production................................................................... (338) (1,643)
Purchases of minerals-in-place............................................... -- --
------- -----------
Balance, March 31, 1996........................................................ 11,479 79,420
------- -----------
------- -----------
Proved Developed Reserves:
January 1, 1993.............................................................. 1,488 10,055
December 31, 1993............................................................ 1,785 13,268
December 31, 1994............................................................ 2,632 16,340
December 31, 1995............................................................ 8,566 57,393
March 31, 1996............................................................... 9,037 55,408
</TABLE>
F-19
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(14) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
OIL AND GAS RESERVES
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses (based on year-end statutory
tax rates, with consideration of future tax rates already legislated) to be
incurred on pretax net cash flows, less tax basis of the properties and
available credits, and assuming continuation of existing economic conditions.
The estimated future net cash flows are then discounted using a rate of 10% per
year to reflect the estimated timing of the future cash flows.
Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider probable reserves, anticipated
future oil and gas prices, interest rates, changes in development and production
costs and risks associated with future production. Because of these and other
considerations, any estimate of fair value is necessarily subjective and
imprecise.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- ---------------
1993 1994 1995 1996
---------- ----------- ------------ ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Future cash flows........................................ $ 83,510 $ 122,098 $ 350,653 $ 396,919
Future costs:
Production............................................. (31,811) (46,345) (145,510) (162,146)
Development............................................ (4,486) (7,157) (16,806) (17,975)
---------- ----------- ------------ ---------------
Future net cash flows.................................... 47,213 68,596 188,337 216,798
10% annual discount for estimated timing of cash flows... (20,836) (31,817) (75,041) (87,707)
---------- ----------- ------------ ---------------
Standardized measure of discounted net cash flows........ $ 26,377 $ 36,779 $ 113,296 $ 129,091
---------- ----------- ------------ ---------------
---------- ----------- ------------ ---------------
</TABLE>
F-20
<PAGE>
COSTILLA ENERGY, L.L.C.
(A TEXAS LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED.)
(14) SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) (CONTINUED)
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM
PROVED RESERVES
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- ---------------
1993 1994 1995 1996
--------- --------- ----------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Increase (decrease):
Purchase of minerals-in-place............................. $ 3,732 $ 15,231 $ 77,343 $ --
Extensions and discoveries and improved recovery, net of
future production and development costs.................. 2,707 4,072 9,799 6,002
Accretion of discount..................................... 2,056 2,638 3,678 2,832
Net change in sales prices, net of production costs....... (209) 503 (3,422) 9,229
Changes in estimated future development costs............. (16) 940 (2,419) (235)
Revisions of quantity estimates........................... 1,203 (7,248) (2,855) 4,839
Sales, net of production costs............................ (2,543) (5,286) (11,338) (5,174)
Changes of production rates (timing) and other............ (1,114) (448) 5,731 (1,698)
--------- --------- ----------- ---------------
Net increase............................................ 5,816 10,402 76,517 15,795
Standardized measure of discounted future net cash flows:
Beginning of period..................................... 20,561 26,377 36,779 113,296
--------- --------- ----------- ---------------
End of period........................................... $ 26,377 $ 36,779 $ 113,296 $ 129,091
--------- --------- ----------- ---------------
--------- --------- ----------- ---------------
</TABLE>
The 1995 future cash flows shown above include amounts attributable to
proved undeveloped reserves requiring approximately $15.0 million of future
development costs. If these reserves are not developed, the standardized measure
of discounted future net cash flows for 1995 shown above would be reduced by
approximately $22.4 million.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members
Costilla Energy, L.L.C.:
We have audited the accompanying statements of revenues and direct operating
expenses of the 1995 Acquisition (see Note 1) for the years ended December 31,
1993 and 1994, and the period ended June 12, 1995. These statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of revenues and direct
operating expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying statements of revenues and direct operating expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in Forms S-1 of Costilla
Energy, Inc. as described in Note 1) and are not intended to be a complete
presentation of the 1995 Acquisition interests' revenue and expenses.
In our opinion, the statements of revenues and direct operating expenses
referred to above present fairly, in all material respects, the revenues and
direct operating expenses of the 1995 Acquisition for the years ended December
31, 1993 and 1994, and the period ended June 12, 1995, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Midland, Texas
July 4, 1996
F-22
<PAGE>
COSTILLA ENERGY, L.L.C.
1995 ACQUISITION
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------- PERIOD ENDED
1993 1994 JUNE 12, 1995
--------- --------- --------------
<S> <C> <C> <C>
Revenues:
Oil and condensate...................................................... $ 18,542 $ 16,217 $ 7,572
Natural gas............................................................. 13,780 11,407 3,358
--------- --------- --------------
32,322 27,624 10,930
Direct operating expenses:
Lease operating......................................................... 13,376 11,220 4,550
Workovers and dry hole costs............................................ 462 470 109
Production taxes........................................................ 2,070 2,023 923
--------- --------- --------------
15,908 13,713 5,582
--------- --------- --------------
Revenues in excess of direct operating expenses........................... $ 16,414 $ 13,911 $ 5,348
--------- --------- --------------
--------- --------- --------------
</TABLE>
See the accompanying notes to these statements.
F-23
<PAGE>
COSTILLA ENERGY, L.L.C.
1995 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(1) BASIS OF PRESENTATION
On June 12, 1995, Costilla Energy, L.L.C. and Costilla Petroleum Corporation
(collectively, the "Company") acquired from Parker & Parsley Development L.P.
and Parker & Parsley Producing L.P. (collectively, "Parker & Parsley") certain
oil and gas properties (the "1995 Acquisition") for $46,621,371. The
accompanying statements of revenues and direct operating expenses for the 1995
Acquisition do not include general and administrative expenses, interest income
or expense, a provision for depreciation, depletion and amortization, or any
provision for income taxes since historical expenses of this nature incurred by
Parker & Parsley are not necessarily indicative of the costs to be incurred by
the Company.
Historical financial information reflecting financial position, results of
operations, and cash flows of the 1995 Acquisition, are not presented because
the purchase price was assigned to the oil and gas property interests acquired.
Other assets acquired and liabilities assumed were not material. Accordingly,
the historical statements of revenues and direct operating expenses of the 1995
Acquisition are presented in lieu of the financial statements required under
Rule 3-05 of Securities and Exchange Commission Regulation S-X.
Revenues in the accompanying statements of revenues and direct operating
expenses are recognized on the sales method. Under this method, revenues are
recognized based on actual volumes of oil and gas sold to purchasers. Direct
operating expenses are recognized on the accrual method.
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
Reserve information presented below for the 1995 Acquisition is based on
Company prepared reserve estimates, using prices and costs in effect at December
31, 1993 and 1994, and the period ended June 12, 1995. Changes in reserve
estimates were derived by adjusting the period-end quantities and values for
actual production using historical prices and costs.
Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those which are expected to
be recovered through existing wells with existing equipment and operating
methods. Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these reserve estimates are
expected to change as additional information becomes available in the future.
F-24
<PAGE>
COSTILLA ENERGY, L.L.C.
1995 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES (CONTINUED)
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
(CONTINUED)
Below are the net estimated quantities of proved reserves and proved
developed reserves for the 1995 Acquisition.
<TABLE>
<CAPTION>
OIL (MBBLS) GAS (MMCF)
----------- -----------
<S> <C> <C>
Proved reserves at December 31, 1992............................... 9,880 60,199
Production......................................................... (1,204) (6,914)
----------- -----------
Proved reserves at December 31, 1993............................... 8,676 53,285
Production......................................................... (1,142) (6,778)
----------- -----------
Proved reserves at December 31, 1994............................... 7,534 46,507
Production......................................................... (479) (2,405)
----------- -----------
Proved reserves at June 12, 1995................................... 7,055 44,102
----------- -----------
----------- -----------
Proved developed reserves at June 12, 1995......................... 6,707 38,151
----------- -----------
----------- -----------
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS OF PROVED OIL AND
GAS RESERVES
The Company has estimated the standardized measure of discounted future net
cash flows and changes therein relating to proved oil and gas reserves in
accordance with the standards established by the Financial Accounting Standards
Board through its Statement No. 69. The estimates of future cash flows and
future production and development costs are based on period-end sales prices for
oil and gas, estimated future production of proved reserves, and estimated
future production and development costs of proved reserves, based on current
costs and economic conditions. The estimated future net cash flows are then
discounted at a rate of 10%.
Discounted future net cash flow estimates like those shown below are not
intended to represent estimates of the fair market value of oil and gas
properties. Estimates of fair market value should also consider probable
reserves, anticipated future oil and gas prices, interest rates, changes in
development and production costs and risks associated with future production.
Because of these and other considerations, any estimate of fair market value is
necessarily subjective and imprecise.
The following are the Company's estimated standardized measure of discounted
future net cash flows from proved reserves attributable to the 1995 Acquisition:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1994 JUNE 12, 1995
----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Future:
Cash inflows................................................. $ 222,698 $ 188,828 $ 191,758
Production costs............................................. (111,619) (97,988) (93,268)
Development costs............................................ (4,797) (4,797) (4,797)
----------- ----------- -------------
Net cash flows before income taxes......................... 106,282 86,043 93,693
10% annual discount for estimated timing of cash flows......... (37,518) (30,373) (33,074)
----------- ----------- -------------
Standardized measure of discounted future net cash flows before
income taxes.................................................. $ 68,764 $ 55,670 $ 60,619
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
F-25
<PAGE>
COSTILLA ENERGY, L.L.C.
1995 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES (CONTINUED)
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
(CONTINUED)
The following are the sources of changes in the standardized measure of
discounted net cash flows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------- PERIOD ENDED
1993 1994 JUNE 12, 1995
---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure, beginning of period.................... $ 96,022 $ 68,764 $ 55,670
Sales, net of production costs............................... (16,414) (13,911) (5,348)
Net change in prices......................................... (15,892) (3,910) 8,032
Accretion of discount........................................ 9,602 6,876 2,517
Other........................................................ (4,554) (2,149) (252)
---------- ---------- -------------
Standardized measure, end of period.......................... $ 68,764 $ 55,670 $ 60,619
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members
Costilla Energy, L.L.C.:
We have audited the accompanying statements of revenues and direct operating
expenses of the 1996 Acquisition (see Note 1) for the years ended December 31,
1993, 1994 and 1995. These statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of revenues and direct
operating expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying statements of revenues and direct operating expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in Forms S-1 of Costilla
Energy, Inc. as described in Note 1) and are not intended to be a complete
presentation of the 1996 Acquisition interests' revenues and expenses.
In our opinion, the statements of revenues and direct operating expenses
referred to above present fairly, in all material respects, the revenues and
direct operating expenses of the 1996 Acquisition for the years ended December
31, 1993, 1994 and 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Midland, Texas
July 4, 1996
F-27
<PAGE>
COSTILLA ENERGY, L.L.C.
1996 ACQUISITION
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED PERIODS
DECEMBER 31, ENDED JUNE 14,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
Oil and condensate...................................... $ 11,467 $ 10,170 $ 10,564 $ 5,140 $ 5,205
Natural gas............................................. 11,294 10,105 8,645 3,763 3,434
Gas plant............................................... 57 57 126 47 42
Transportation.......................................... 39 379 556 253 542
--------- --------- --------- --------- ---------
22,857 20,711 19,891 9,203 9,223
Direct operating expenses:
Lease operating......................................... 10,977 9,053 9,232 3,965 4,020
Workovers and dry hole costs............................ 675 869 1,002 256 450
Production taxes........................................ 1,166 1,089 992 458 453
Gas plant............................................... 131 350 598 393 269
Transportation.......................................... 10 394 587 268 222
--------- --------- --------- --------- ---------
12,959 11,755 12,411 5,340 5,414
--------- --------- --------- --------- ---------
Revenues in excess of direct operating expenses........... $ 9,898 $ 8,956 $ 7,480 $ 3,863 $ 3,809
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See the accompanying notes to these statements.
F-28
<PAGE>
COSTILLA ENERGY, L.L.C.
1996 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(1) BASIS OF PRESENTATION
On June 14, 1996, Costilla Energy, L.L.C. and Costilla Petroleum Corporation
(collectively, the "Company") acquired from Parker & Parsley Development L.P.,
Parker & Parsley Producing L.P. and Parker & Parsley Gas Processing Co.
(collectively, "Parker & Parsley") certain oil and gas properties (the "1996
Acquisition") for approximately $42.5 million. The accompanying statements of
revenues and direct operating expenses for the 1996 Acquisition do not include
general and administrative expenses, interest income or expense, a provision for
depreciation, depletion and amortization, or any provision for income taxes
since historical expenses of this nature incurred by Parker & Parsley are not
necessarily indicative of the costs to be incurred by the Company.
Historical financial information reflecting financial position, results of
operations, and cash flows of the 1996 Acquisition, are not presented because
the purchase price was assigned to the oil and gas property interests acquired.
Other assets acquired and liabilities assumed were not material. Accordingly,
the historical statements of revenues and direct operating expenses of the 1996
Acquisition are presented in lieu of the financial statements required under
Rule 3-05 of Securities and Exchange Commission Regulation S-X.
Revenues in the accompanying statements of revenues and direct operating
expenses are recognized on the sales method. Under this method, revenues are
recognized based on actual volumes of oil and gas sold to purchasers. Direct
operating expenses are recognized on the accrual method.
INTERIM STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
The interim financial information for the periods ended June 14, 1995 and
1996, is unaudited. However, in the opinion of management, the interim
statements of revenues and direct operating expenses include all the necessary
adjustments to fairly present the results of the interim periods and all such
adjustments are of a normal recurring nature. The interim statements of revenues
and direct operating expenses should be read in conjunction with the audited
statements of revenues and direct operating expenses for the years ended
December 31, 1993, 1994 and 1995.
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
Reserve information presented below for the 1996 Acquisition, as of March
31, 1996, is based on reserve estimates prepared by Williamson Petroleum
Consultants, using prices and costs in effect at that date. Changes in reserve
estimates were derived by adjusting such quantities and values for actual
production using historical prices and costs.
Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those which are expected to
be recovered through existing wells with existing equipment and operating
methods. Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves and in
the projection of future rates of production and the timing of development
expenditures. The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Results of subsequent drilling, testing and production may cause either upward
or downward revision of previous estimates. Further, the volumes considered to
be commercially recoverable fluctuate with changes in prices and operating
costs. The Company emphasizes that reserve estimates are inherently imprecise
and that
F-29
<PAGE>
COSTILLA ENERGY, L.L.C.
1996 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES (CONTINUED)
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED)
estimates of new discoveries are more imprecise than those of currently
producing oil and gas properties. Accordingly, these reserve estimates are
expected to change as additional information becomes available in the future.
Below are the net estimated quantities of proved reserves and proved
developed reserves for the 1996 Acquisition.
<TABLE>
<CAPTION>
OIL (MBBLS) GAS (MMCF)
----------- -----------
<S> <C> <C>
Proved reserves at December 31, 1992.................................................... 7,211 49,963
Production.............................................................................. (718) (5,481)
----- -----------
Proved reserves at December 31, 1993.................................................... 6,493 44,482
Production.............................................................................. (685) (5,217)
----- -----------
Proved reserves at December 31, 1994.................................................... 5,808 39,265
Production.............................................................................. (656) (4,773)
----- -----------
Proved reserves at December 31, 1995.................................................... 5,152 34,492
Production.............................................................................. (154) (991)
----- -----------
Proved reserves at March 31, 1996....................................................... 4,998 33,501
----- -----------
----- -----------
Proved developed reserves at March 31, 1996............................................. 4,515 28,961
----- -----------
----- -----------
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS OF PROVED OIL AND GAS
RESERVES
The Company has estimated the standardized measure of discounted future net
cash flows and changes therein relating to proved oil and gas reserves in
accordance with the standards established by the Financial Accounting Standards
Board through its Statement No. 69. The estimates of future cash flows and
future production and development costs are based on year-end sales prices for
oil and gas, estimated future production of proved reserves, and estimated
future production and development costs of proved reserves, based on current
costs and economic conditions. The estimated future net cash flows are then
discounted at a rate of 10%.
Discounted future net cash flow estimates like those shown below are not
intended to represent estimates of the fair market value of oil and gas
properties. Estimates of fair market value should also consider probable
reserves, anticipated future oil and gas prices, interest rates, changes in
development and production costs and risks associated with future production.
Because of these and other considerations, any estimate of fair market value is
necessarily subjective and imprecise.
F-30
<PAGE>
COSTILLA ENERGY, L.L.C.
1996 ACQUISITION
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES (CONTINUED)
(2) SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED)
The following are the Company's estimated standardized measure of discounted
future net cash flows from proved reserves attributable to the 1996 Acquisition:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------- MARCH 31,
1993 1994 1995 1996
------------ ------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Future:
Cash inflows.............................................. $ 181,010 $ 156,222 $ 165,862 $ 175,507
Production costs.......................................... (116,115) (105,104) (93,878) (91,202)
Development costs......................................... (4,101) (4,101) (4,101) (4,101)
------------ ------------ ----------- -----------
Net cash flows before income taxes...................... 60,794 47,017 67,883 80,204
10% annual discount for estimated timing of cash flows...... (22,564) (17,451) (25,195) (29,768)
------------ ------------ ----------- -----------
Standardized measure of discounted future net cash flows
before income taxes........................................ $ 38,230 $ 29,566 $ 42,688 $ 50,436
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
The following are the sources of changes in the standardized measure of
discounted net cash flows:
<TABLE>
<CAPTION>
THREE MONTH
YEARS ENDED DECEMBER 31, PERIOD ENDED
------------------------------- MARCH 31,
1993 1994 1995 1996
--------- --------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Standardized measure, beginning of period....................... $ 56,372 $ 38,230 $ 29,566 $ 42,688
Sales, net of production costs.................................. (9,943) (9,264) (7,983) (2,090)
Net change in prices............................................ (11,890) (2,838) 18,141 9,277
Accretion of discount........................................... 5,637 3,823 2,957 1,067
Other........................................................... (1,946) (385) 7 (506)
--------- --------- --------- ------------
Standardized measure, end of period............................. $ 38,230 $ 29,566 $ 42,688 $ 50,436
--------- --------- --------- ------------
--------- --------- --------- ------------
</TABLE>
F-31
<PAGE>
APPENDIX A
July 23, 1996
Costilla Energy, Inc.
400 West Illinois, Suite 1000
Midland, Texas 79701
Attention Mr. Michael J. Grella
Gentlemen:
Subject: Summary Letter (for Inclusion in a Prospectus Included in a
Registration Statement for Costilla Energy, Inc. on Form S-1)
Combining Specific Data from Two Williamson Petroleum
Consultants, Inc. Evaluations (1) to the Interests of Costilla
Petroleum Corporation in Various Properties and (2) to the
Interests of Parker & Parsley Petroleum USA, Inc. in Various
Properties Included in Their First Quarter 1996 Sales Package
Effective April 1, 1996
Williamson Project 6.8393
In accordance with your request, Williamson Petroleum Consultants, Inc.
(Williamson) has prepared a summary letter for inclusion in a prospectus for
Costilla Energy, Inc. (Costilla). The filing of this Prospectus gives effect to
the conversion of Costilla Energy, L.L.C. to Costilla Energy, Inc. This summary
letter includes specific data from two evaluations the subjects of which are
described in Item I. All values and discussion of proved reserves and net
revenues, data utilized, assumptions, and qualifications are taken from and
include by reference data from these two evaluations.
Interests in this summary letter represent the April 1, 1996 effective date
consolidation of the ownership interests of Costilla and the ownership interests
of Parker & Parsley in various properties included in their first quarter 1996
sales package which Costilla acquired on June 14, 1996 but which was made
effective as of January 1, 1996. The Costilla interests include all the
interests of Costilla Energy, L.L.C. and all its wholly-owned subsidiaries
including Costilla Petroleum Corporation.
I. THE TWO SUBJECT EVALUATIONS
This summary letter combines certain proved oil and gas reserves and
revenues from the following two Williamson evaluations:
(1) Evaluation of Oil and Gas Reserves to the Interests of Costilla
Petroleum Corporation in Various Properties, Effective April 1, 1996,
Utilizing Nonescalated Economics, for Disclosure to the Securities and
Exchange Commission, Williamson Project 6.8393, transmitted July 18, 1996
(the Costilla report)
(2) Evaluation of Oil and Gas Reserves to the Interests of Parker & Parsley
Petroleum USA, Inc. in Various Properties Included in Their First Quarter
1996 Sales Package, Effective April 1, 1996, Utilizing Nonescalated
Economics, for Disclosure to the Securities and Exchange Commission,
Williamson Project 6.8393, transmitted July 18, 1996 (the Acquisition
report)
II. ESTIMATED SEC RESERVES AND FUTURE NET REVENUES
Projections of the reserves that are attributable to the consolidated
interests in this summary letter were based on economic parameters and operating
conditions considered applicable as of April 1, 1996 and are pursuant to the
requirements of the Securities and Exchange Commission (SEC).
In accordance with instructions from Costilla, Williamson utilized lease
operating expenses for the Costilla-operated properties in the Costilla report
that excluded COPAS overhead and internal
A-1
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 2
indirect overhead which are billed to outside working interest owners. The
exclusion of these costs for the operated properties results in the calculation
of a lower economic limit and causes the economic lifetime to be extended.
Williamson has not quantified the incremental reserves resulting from this
procedure. COPAS overhead was excluded from the lease operating expenses for the
Parker & Parsley-operated properties in the Acquisition report.
The present values of the estimated future net revenues from proved reserves
were calculated using a discount rate of 10.00 percent per year and were
computed in accordance with the financial reporting requirements of the SEC.
Following is a summary of the results of the two evaluations effective April 1,
1996:
<TABLE>
<CAPTION>
PROVED PROVED
DEVELOPED DEVELOPED PROVED TOTAL
PRODUCING NONPRODUCING UNDEVELOPED PROVED
-------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net Reserves to the Evaluated Interests:
Oil/Condensate, BBL...................... 13,122,088 429,450 2,924,589 16,476,127
Gas, MCF................................. 76,439,217 7,929,591 28,551,497 112,920,305
Future Net Revenue, $:
Undiscounted............................. 212,071,507 18,097,949 66,832,632 297,002,088
Discounted Per Annum at 10.00 Percent.... 135,185,097 9,530,285 34,811,523 179,526,905
</TABLE>
- ------------------------
Note: The values presented in this table are taken from evaluations described in
Item I and include by reference all data, qualifications, and assumptions
from these evaluations. Realization of these values is contingent on
achieving successful results from the various schedules and assumptions in
these evaluations. The available engineering data and the completeness
and/or quality of data utilized in evaluating the properties are detailed
in the specific evaluation. Review of any additionally available data may
necessitate revision to these interpretations and assumptions and impact
these values.
III. DEFINITIONS OF SEC RESERVES (1)
The estimated reserves presented in this summary letter are net proved
reserves, including proved developed producing, proved developed nonproducing,
and proved undeveloped reserves, and were computed in accordance with the
financial reporting requirements of the SEC. In preparing these evaluations, no
attempt has been made to quantify the element of uncertainty associated with any
category. Reserves were assigned to each category as warranted. The definitions
of oil and gas reserves pursuant to the requirements of the Securities Exchange
Act are:
PROVED RESERVES (2)
Proved reserves are the estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under the economic criteria employed and existing operating
- ------------------------
(1) For evaluations prepared for disclosure to the Securities and Exchange
Commission, see SEC ACCOUNTING RULES. Commerce Clearing House, Inc. October
1981, Paragraph 290, Regulation 210.4-10, p. 329.
(2) Any variations to these definitions will be clearly stated in the report.
A-2
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 3
conditions, i.e., prices and costs as of the date the estimate is made. Prices
and costs include consideration of changes provided only by contractual
arrangements but not on escalations based upon an estimate of future conditions.
A. Reservoirs are considered proved if economic producibility is supported by
either actual production or conclusive formation test. The area of a
reservoir considered proved includes:
1. that portion delineated by drilling and defined by gas-oil and/or
oil-water contacts, if any; and
2. the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
B. Reserves which can be produced economically through application of improved
recovery techniques (such as fluid injection) are included in the "proved"
classification when successful testing by a pilot project, or the operation
of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
C. Estimates of proved reserves do not include the following:
1. oil that may become available from known reservoirs but is classified
separately as "indicated additional reserves;"
2. crude oil, natural gas, and natural gas liquids, the recovery of which
is subject to reasonable doubt because of uncertainty as to geology,
reservoir characteristics, or economic factors;
3. crude oil, natural gas, and natural gas liquids, that may occur in
undrilled prospects; and
4. crude oil, natural gas, and natural gas liquids, that may be recovered
from oil shales, coal (3), gilsonite and other such sources.
PROVED DEVELOPED RESERVES (4)
Proved developed reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. Additional
oil and gas expected to be obtained through the application of fluid injection
or other improved recovery techniques for supplementing the natural forces and
mechanisms of primary recovery should be included as "proved developed reserves"
only after testing by a pilot project or after the operation of an installed
program has confirmed through production response that increased recovery will
be achieved.
PROVED UNDEVELOPED RESERVES
Proved undeveloped reserves are reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion. Reserves on undrilled acreage
shall be limited to those drilling units offsetting productive
- ------------------------
(3) According to Staff Accounting Bulletin 85, excluding certain coalbed methane
gas.
(4) Williamson Petroleum Consultants, Inc. separates proved developed reserves
into proved developed producing and proved developed nonproducing reserves.
This is to identify proved developed producing reserves as those to be
recovered from actively producing wells; proved developed nonproducing
reserves as those to be recovered from wells or intervals within wells,
which are completed but shut in waiting on equipment or pipeline
connections, or wells where a relatively minor expenditure is required for
recompletion to another zone.
A-3
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 4
units that are reasonably certain of production when drilled. Proved reserves
for other undrilled units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation. Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the area and in the
same reservoir.
IV. DISCUSSION OF SEC RESERVES
A. THE COSTILLA REPORT
A total of 1,014 properties in 294 fields were evaluated in the Costilla
report. Nineteen individual properties had values greater than 1.0 percent
of the total future net revenue discounted at 10.00 percent per annum (DFNR)
and in aggregate represent 34.5 percent of the DFNR in the Costilla report.
The most valued property, the T.B. Pruett Gas Unit No. 3, Soda Lake field,
Ward County, Texas, had a value equal to 4.5 percent of the total DFNR in
the Costilla report. The top eight major-value fields are Talbot (Canyon),
Howard County, Texas; Spraberry (Trend Area), Various Counties, Texas; Soda
Lake (Fusselman), Ward County, Texas; South Buffalo Ridge, Crane County,
Texas; Wattenberg, Weld County, Colorado; East Goldsmith, Ector County,
Texas; Raymond, Sheridan County, Montana; and South West Speaks, Lavaca
County, Texas. These fields contain ten of the 19 top value properties and
represent, in aggregate, 41.0 percent of the total DFNR in the Costilla
report. The remaining 286 fields represent 59.0 percent with no field having
more than 2.9 percent of the DFNR in the Costilla report. A more detailed
property review is included in the Costilla report.
Area oil prices were provided by Costilla to be used at the effective date
with the written assurance that the use of these area prices is reasonable
on an aggregate basis and would not materially affect the income from any
major-value property. These area prices were calculated by adjusting the
West Texas Intermediate oil April 1, 1996 posted price of $20.75 per barrel.
The oil price adjustments for each area are the calculated differences
between the actual price received during 1995 and the posted price for West
Texas Intermediate oil during that same period. After the effective date,
prices were held constant for the life of the properties. No attempt has
been made to account for oil price fluctuations which have occurred in the
market subsequent to the effective date of this report.
Gas prices were provided by Costilla to be used at the effective date. These
prices were based on the April 1996 spot price of $1.75 per million British
thermal units (MMBTU) at the Waha, Texas receipt point. This price was
adjusted with an area price adjustment which was calculated as the
difference between the actual price received during 1995 and the stop price.
The resultant price was further adjusted for the BTU content of the gas for
each well. If the BTU content was unknown, it was assumed to be one MMBTU
per MCF of gas. After the effective date, prices were held constant for the
life of the properties unless Costilla indicated that changes were provided
for by contract. All gas prices were applied to projected wellhead volumes.
It should be emphasized that with the current economic uncertainties,
fluctuation in market conditions could significantly change the economics of
the properties included in this report.
Operating expenses were provided by Costilla and represented, when possible,
the latest available 12-month average of all recurring expenses excluding
COPAS and internal indirect overhead costs which are billable to the working
interest owners. These expenses included, but were not limited to, all
direct operating expenses, field overhead costs, and any ad valorem taxes
not
A-4
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 5
deducted separately. Expenses for workovers, well stimulations, and other
maintenance were not included in the operating expenses unless such work was
expected on a recurring basis. Judgments for the exclusion of the
nonrecurring expenses were made by Costilla. In accordance with instructions
from Costilla, Williamson has excluded COPAS overhead and internal indirect
overhead which are billed to the outside working interest owners from the
operating expenses for Costilla-operated properties. The exclusion of these
costs for operated properties results in the calculation of a lower economic
limit and causes the economic lifetime to be extended. Williamson has not
calculated the reserves that have been added as a result of this procedure.
For new and developing properties where data were unavailable, operating
expenses were estimated by Costilla. Operating costs were held constant for
the life of the properties.
State production taxes have been deducted at the published rates as
appropriate. For operated properties, average county ad valorem taxes
provided by Costilla were deducted for those properties located in states
for which the data were available. Any ad valorem taxes for nonoperated
properties or for properties in other states were assumed to be included in
the operating expenses.
All capital costs for drilling and completion of wells and nonrecurring
workover or operating costs have been deducted as applicable. These costs
were provided by Costilla. No adjustments were made to account for the
potential effect of inflation on these costs.
Neither salvage values nor abandonment costs were provided by Costilla to be
included in this evaluation.
B. THE ACQUISITION REPORT
A total of 1,091 properties in 135 fields were evaluated in the Acquisition
report. Eighteen individual properties had values greater than 1.0 percent
of the total DFNR and in aggregate represent 35.5 percent of the DFNR in the
Acquisition report. The most valued property, the H.W. Glasscock Unit,
Howard-Glasscock field, Glasscock County, Texas, has a projected value of
5.7 percent of the total DFNR in the Acquisition report. The top eight
major-value fields are World, Crockett County, Texas; Dimmitt, Loving
County, Texas; Panna Maria, Karnes County, Texas; Giddings, Various
Counties, Texas; Caldwell, Burleson County, Texas; Coletto Creek, Victoria
County, Texas; Sawyer, Sutton County, Texas; and Jameson, Coke County,
Texas. These fields contain 11 of the 18 top value properties and represent,
in aggregate, 51.9 percent of the total DFNR in the Acquisition report. The
remaining fields represent 48.1 percent with no field having more than 2.9
percent of the DFNR in the Acquisition report. A more detailed property
review is included in the Acquisition report.
Area oil prices were provided by Costilla and Parker & Parsley to be used at
the effective date with the written assurance that the use of these area
prices is reasonable on an aggregate basis and would not materially affect
the income from any major-value property. These area prices were calculated
by adjusting the West Texas Intermediate oil April 1, 1996 posted price of
$20.75 per barrel. The oil price adjustments as calculated by Parker &
Parsley for each area are the calculated differences between the actual
price received during 1995 and the posted price for West Texas Intermediate
oil during that same period. After the effective date, prices were held
constant for the life of the properties. No attempt has been made to account
for oil price fluctuations which have occurred in the market subsequent to
the effective date of this report.
Gas prices were provided by Costilla and Parker & Parsley to be used at the
effective date. These prices were based on the April 1996 spot price of
$1.75 per million British thermal units
A-5
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 6
(MMBTU) at the Waha, Texas receipt point. This price was adjusted with an
area price adjustment which was calculated as the difference between the
actual price received during 1995 and the stop price. The resultant price
was further adjusted for the BTU content of the gas for each well. If the
BTU content was unknown, it was assumed to be one MMBTU per MCF of gas.
After the effective date, prices were held constant for the life of the
properties unless Costilla indicated that changes were provided for by
contract. All gas prices were applied to projected wellhead volumes.
It should be emphasized that with the current economic uncertainties,
fluctuation in market conditions could significantly change the economics of
the properties included in this report.
Operating expenses were provided by Costilla and Parker & Parsley and
represented, when possible, the latest available 12-month average of all
recurring expenses excluding COPAS and internal indirect overhead costs
which are billable to the working interest owners. These expenses included,
but were not limited to, all direct operating expenses, field overhead
costs, and any ad valorem taxes not deducted separately. Expenses for
workovers, well stimulations, and other maintenance were not included in the
operating expenses unless such work was expected on a recurring basis.
Judgments for the exclusion of the nonrecurring expenses were made by
Costilla or Parker & Parsley. In accordance with instructions from Costilla,
Williamson has excluded COPAS overhead which is billed to the outside
working interest owners from the operating expenses for Parker &
Parsley-operated properties. The exclusion of these costs for operated
properties results in the calculation of a lower economic limit and causes
the economic lifetime to be extended. Williamson has not calculated the
reserves that have been added as a result of this procedure. For new and
developing properties where data were unavailable, operating expenses were
estimated by Costilla or Parker & Parsley. Operating costs were held
constant for the life of the properties.
State production taxes have been deducted at the published rates as
appropriate. For operated properties, average county ad valorem taxes
provided by Costilla were deducted for those properties located in states
for which the data were available. Any ad valorem taxes for nonoperated
properties or for properties in other states were assumed to be included in
the operating expenses.
All capital costs for drilling and completion of wells and nonrecurring
workover or operating costs have been deducted as applicable. These costs
were provided by Costilla or Parker & Parsley. No adjustments were made to
account for the potential effect of inflation on these costs.
Neither salvage values nor abandonment costs were provided by Costilla to be
included in this evaluation.
V. GENERAL EVALUATION CONSIDERATIONS PERTAINING TO THE COSTILLA AND ACQUISITION
REPORTS
The individual projections prepared to produce this summary letter include
data that describe the production forecasts and associated evaluation parameters
such as interests, taxes, product prices, operating costs, investments, salvage
values, abandonment costs, and net profit interests, as applicable.
Net income to the evaluated interests is the future net revenue payable to
others, taxes, operating expenses, investments, salvage values, abandonment
costs, and net profit interests, as applicable. The future net revenue is before
federal income tax and excludes consideration of any encumbrances against the
properties if such exist.
A-6
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 7
No opinion is expressed by Williamson as to the fair market value of the
evaluated properties.
The future net revenues presented in this summary letter were based on
projections of oil and gas production. It was assumed there would be no
significant delay between the date of oil and gas production and the receipt of
the associated revenue for this production.
This summary letter includes only those costs and revenues which are
considered by Costilla to be directly attributable to individual leases and
areas. There could exist other revenues, overhead costs, or other costs
associated with Costilla which are not included in this summary letter. Such
additional costs and revenues are outside the scope of this summary letter. This
summary letter is not a financial statement for Costilla and should not be used
as the sole basis for any transaction concerning Costilla, Parker & Parsley, or
the evaluated properties.
The reserves projections in this summary letter are based on the use of the
available data and accepted industry engineering methods. Future changes in any
operational or economic parameters or production characteristics of the
evaluated properties could increase or decrease their reserves. Unforeseen
changes in market demand or allowables set by various regulatory agencies could
also cause actual production rates to vary from those projected. The dates of
first production for nonproducing properties were based on estimates by Costilla
or Williamson and the actual dates may vary from those estimated. Williamson
reserves the right to alter any of the reserves projections and the associated
economics included in this summary letter in any future evaluation based on
additional data that may be acquired.
All data utilized in the preparation of this summary letter with respect to
interests, reversionary status, oil and gas prices, gas categories, gas contract
terms, operating expenses, investments, salvage values, abandonment costs, net
profit interests, well information and current operating conditions, as
applicable, were provided by Costilla, Parker & Parsley, and the operators. Data
obtained after the effective date of the report but prior to the completion of
the report were used only if such data were applied consistently. If such data
were used, the reserves category assignments reflect the status of the wells as
of the effective date. In the Costilla report, daily production data after April
1, 1996 were utilized for new wells in the South Buffalo Ridge, Concho Bluff
(Queen), East Goldsmith (Queen), King Mountain (Penn), and Talbot (Canyon)
fields to assist in determining initial producing and decline rates. Daily
production since the effective date was also used for the Pyote Gas Unit 5 No.
1A, Block 16 (Devonian) field, Ward County, Texas to establish the producing
rate after the well was affected by gas plant problems and for the State 16-05
well in the Raymond field, Sheridan County, Montana to establish the initial
rate of production subsequent to the installation of a downhole pump. Production
data generally through December 1995 or January 1996 provided by Costilla for
the properties in the Costilla report and through November or December 1995
provided by Parker & Parsley for the properties in the Acquisition report were
utilized. All data have been reviewed for reasonableness and, unless obvious
errors were detected, have been accepted as correct. It should be emphasized
that revisions to the projections of reserves and economics included in this
summary letter may be required if the provided data are revised for any reason.
No inspection of the properties was made as this was not considered within the
scope of these projects. No investigation was made of any environmental
liabilities that might apply to the evaluated properties, and no costs are
included for any possible related expenses.
Unless specifically identified and documented by Costilla or Parker &
Parsley as having curtailment problems, gas production trends have been assumed
to be a function of well productivity and not of market conditions. The effect
of "take or pay" clauses in gas contracts was not considered.
A-7
<PAGE>
Costilla Energy, Inc.
Mr. Michael J. Grella
July 23, 1996
Page 8
Oil reserves are expressed in United States (U.S.) barrels of 42 U.S.
gallons. Gas volumes are expressed in thousands of cubic feet (MCF) at 60
degrees Fahrenheit and at the legal pressure base that prevails in the state in
which the reserves are located. No adjustment of the individual gas volumes to a
common pressure base has been made.
Costilla represented to Williamson that it has, or can generate, the
financial and operational capabilities to accomplish those projects evaluated by
Williamson which require capital expenditures.
The estimates of reserves contained in this summary letter were determined
by accepted industry methods and in accordance with the definitions of oil and
gas reserves set forth above. Methods utilized in this summary letter include
extrapolation of historical production trends, material balance determinations,
analogy to similar properties, and volumetric calculations.
Where sufficient production history and other data were available, reserves
for producing properties were determined by extrapolation of historical
production trends or through the use of material balance determinations. Analogy
to similar properties or volumetric calculations were used for nonproducing
properties and those producing properties which lacked sufficient production
history and other data to yield a definitive estimate of reserves. Reserves
projections based on analogy are subject to change due to subsequent changes in
the analogous properties or subsequent production from the evaluated properties.
Volumetric calculations are often based upon limited log and/or core analysis
data and incomplete reservoir fluid and formation rock data. Since these limited
data must frequently be extrapolated over an assumed drainage area, subsequent
production performance trends or material balance calculations may cause the
need for significant revisions to the estimates of reserves.
It should be emphasized that with the current economic uncertainties,
fluctuation in market conditions could significantly change the economics in
this summary letter.
VII. DECLARATION OF INDEPENDENT STATUS AND CONSENT
We understand that our estimates are to be included in a Registration
Statement on Form S-1 (the Registration Statement) to be filed with the SEC and
in the Prospectus as included in such Registration Statement which will be
registered under the Securities Act of 1933, as amended.
Williamson is an independent consulting firm and does not own any interests
in the oil and gas properties covered by this summary letter. Roy C. Williamson,
Jr., Chief Executive Officer, owns a 2.5 percent working interest in six wells
in the Outlook field, Sheridan County, Montana, which have a total value of
$138,912 to the interests of Costilla. No employee, officer or director of
Williamson is an employee, officer or director of Costilla or Parker & Parsley.
Neither the employment of nor the compensation received by Williamson is
contingent upon the values assigned to the oil and gas properties covered by
this summary letter.
We consent to the inclusion of this summary letter in the Registration
Statement, the inclusion in the Registration Statement of data extracted from
this summary letter and to all references to our firm in the Prospectus,
including any references to our firm as Experts.
Yours very truly,
WILLIAMSON PETROLEUM CONSULTANTS, INC.
A-8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THE
SECURITIES IN ANY JURISDICTION WHERE, OR ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN A CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 10
The Company.................................... 16
Common Stock Offering.......................... 16
Use of Proceeds................................ 17
Capitalization................................. 18
Pro Forma Condensed Financial Statements....... 19
Selected Financial Information................. 27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 28
Business and Properties........................ 34
Management..................................... 46
Security Ownership of Certain Beneficial Owners
and Management................................ 49
Executive Compensation and Other Information... 50
Certain Transactions........................... 53
Description of Notes........................... 55
Description of Other Indebtedness.............. 82
Description of Capital Stock................... 82
Underwriting................................... 84
Legal Matters.................................. 85
Experts........................................ 85
Available Information.......................... 85
Glossary....................................... 87
Index to Financial Statements.................. F-1
Summary Reserve Report......................... A-1
</TABLE>
[LOGO]
COSTILLA ENERGY, INC.
$100,000,000 % SENIOR
SUBORDINATED NOTES DUE 2006
---------------------
PROSPECTUS
---------------------
NATIONSBANC CAPITAL MARKETS, INC.
PRUDENTIAL SECURITIES INCORPORATED
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 34,483
NASD filing fee.................................................. 10,500
Blue Sky fees and expenses....................................... 10,000
Accounting fees and expenses..................................... 109,375
Engineering fees and expenses.................................... 113,750
Trustee fees and expenses........................................ 7,500
Legal fees and expenses.......................................... 156,250
Printing and mailing expenses.................................... 122,000
Miscellaneous.................................................... 36,142
---------
TOTAL...................................................... 600,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation to indemnify certain persons, including officers and directors and
former officers and directors, and to purchase insurance with respect to
liability arising out of their capacity or status as officers and directors.
Such law provides further that the indemnification permitted thereunder shall
not be deemed exclusive of any other rights to which officers and directors may
be entitled under the corporation's bylaws, any agreement or otherwise. Article
IX of the Company's Certificate of Incorporation, included in Exhibit 3.1
hereto, and Article VI of the Company's Bylaws, included in Exhibit 3.2 hereto,
provide, in general, that the Company shall indemnify its directors and officers
under the circumstances defined in Section 145 of the General Corporation Law of
the State of Delaware and gives authority to the Company to purchase insurance
with respect to such indemnification. The Company may in the future seek to
obtain insurance providing for indemnification of officers and directors of the
Company and certain other persons against liabilities and expenses incurred by
any of them in certain stated proceedings and under certain stated conditions.
In addition, Section 102(b)(7) of the General Corporation Law of the State
of Delaware permits a corporation to limit the liability of its directors
subject to certain exceptions. In accordance with Section 102(b)(7), Article VI
of the Company's Certificate of Incorporation, included in Exhibit 3.1 hereto,
provides, in general, that no director of the Company shall be personally liable
for (i) any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the General Corporation Law of the State of Delaware or (iv) any
transaction from which the director derived an improper personal benefit.
The Underwriting Agreement provides for indemnification by the Underwriter
of the Registrant, its directors and officers, and by the Registrant of the
Underwriter, for certain liabilities, including liabilities arising under the
Securities Act of 1933 (the "Securities Act").
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Prior to the consummation of the Notes Offering, the Company issued an
aggregate of 3 shares of Common Stock to Messrs. Liedtke, Grella and Musselman
in its initial capitalization, which shares were cancelled in connection with
the Corporate Reorganization, and an aggregate of 6,000,000 shares of Common
Stock to the four members of the LLC in the merger of the LLC with and into the
Company. Such shares were not registered under the Securities Act in reliance
upon the exemption from registration provided by Section 4(2) thereof.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------
<C> <S>
**1.1 Form of Underwriting Agreement
*3.1 Certificate of Incorporation of the Company
*3.2 Bylaws of the Company
*4.1 Form of Notes or Global Certificate (included as Exhibit A to the form of Indenture filed as
Exhibit No. 4.2 to this Registration Statement)
**4.2 Form of Indenture
**5.1 Opinion of Cotton, Bledsoe, Tighe & Dawson, a Professional Corporation
**10.1 Commitment Letter dated August 23, 1996 by NationsBank of Texas, N.A. to the Company
*10.2 Lease Agreement dated January 12, 1996 between Independence Plaza, Ltd. and Costilla Energy,
L.L.C
*10.3 Concession Agreement dated July 6, 1996 between the Government of the Republic of Moldova and
the Resource Development Company, Limited
*10.4 Purchase and Joint Exploration Agreement dated February 21, 1996 between the Company and
Resources Development Limited, L.L.C. (DE)
**10.5 Form of Consolidation Agreement to be effective contemporaneously with closing of the
Offerings to consummate the Corporate Reorganization
**10.6 Form of 1996 Stock Option Plan
**10.7 Form of Outside Directors Stock Option Plan
*10.8 Employment Agreement between the Company and Bobby W. Page effective June 30, 1996
**10.9 Employment Agreement between the Company and Cadell S. Liedtke to be effective
contemporaneously with the closing of the Offerings
**10.10 Employment Agreement between the Company and Michael J. Grella to be effective
contemporaneously with the closing of the Offerings
**10.11 Employment Agreement between the Company and Henry G. Musselman to be effective
contemporaneously with the closing of the Offerings
*10.12 Exchange Agreement dated January 5, 1995 between Costilla Petroleum Corporation and Koch Oil
Company
*10.13 Agreement dated January 2, 1996 between Costilla Petroleum Corporation and Frontier Oil and
Refining Company
**10.14 Purchase and Sale Agreement dated April 3, 1995 by and between Parker & Parsley Development
L.P. and Parker & Parsley Producing L.P. and Parker & Parsley Gas Processing Co. as Seller
and Costilla Petroleum Corporation and Costilla Energy, L.L.C. as Purchaser
**10.15 Purchase and Sale Agreement dated March 8, 1996 by and between Parker & Parsley Development
L.P. and Parker & Parsley Producing L.P. and Parker & Parsley Gas Processing Co. as Seller
and Costilla Petroleum Corporation and Costilla Energy, L.L.C. as Purchaser
**10.16 Supplemental Agreement to Purchase and Joint Exploration Agreement dated August 7, 1996 among
the Company, Costilla Redeco Energy, L.L.C. and Resource Development Company Limited, L.L.C.
(DE)
**10.17 Form of Bonus Incentive Plan
*12.1 Computation of Ratio of Adjusted EBITDA to Interest Expense
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------
<C> <S>
*12.2 Computation of Ratio of Earnings to Fixed Charges
*12.3 Pro Forma Computation of Ratio of ACNTA to Total Debt
**16.1 Letter Regarding Change of Accountants
*21.1 Subsidiaries of the Registrant
**23.1 Consent of KPMG Peat Marwick LLP
*23.2 Consent of Williamson Petroleum Consultants, Inc.
**23.3 Consent of Elms, Faris & Co., P.C.
**23.4 Consent of Cotton, Bledsoe, Tighe & Dawson, a Professional Corporation (such consent is
included in the opinion filed as Exhibit 5.1 to this Registration Statement)
*24.1 Power of Attorney
*24.2 Certified copy of resolution of Board of Directors of Costilla Energy, Inc. authorizing
signature pursuant to Power of Attorney
*25.1 Statement of Eligibility and Qualification of Trustee under 1939 Act on Form T-1
*27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed
** Filed herewith
(b) Financial Statement Schedules.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer of
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such directors, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, (i) the information omitted
from the Prospectus filed as part of this Registration Statement in reliance
upon Rule 430A under the Securities Act and contained in a form of Prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registrant Statement as of the
time it was declared effective and (ii) each post-effective amendment that
contains a form of prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Midland, State of Texas,
on August 30, 1996.
COSTILLA ENERGY, INC.
(Registrant)
By: *
--------------------------------------
Michael J. Grella
PRESIDENT AND CHIEF OPERATING
OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------- ----------------
<C> <S> <C>
* Chairman of the Board,
------------------------------------------- Chief Executive Officer August 30, 1996
Cadell S. Liedtke and Director
* President, Chief
------------------------------------------- Operating Officer and August 30, 1996
Michael J. Grella Director
*
------------------------------------------- Executive Vice President August 30, 1996
Henry G. Musselman and Director
/s/ BOBBY W. PAGE Senior Vice Present,
------------------------------------------- Treasurer and Chief August 30, 1996
Bobby W. Page Financial Officer
*
------------------------------------------- Director August 30, 1996
Jerry J. Langdon
*
------------------------------------------- Director August 30, 1996
W.D. Kennedy
*By: /s/ BOBBY W. PAGE
-------------------------------------------
Bobby W. Page
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------
<C> <S>
**1.1 Form of Underwriting Agreement
*3.1 Certificate of Incorporation of the Company
*3.2 Bylaws of the Company
*4.1 Form of Notes or Global Certificate (included as Exhibit A to the form of Indenture filed as
Exhibit No. 4.2 to this Registration Statement)
**4.2 Form of Indenture
**5.1 Opinion of Cotton, Bledsoe, Tighe & Dawson, a Professional Corporation
**10.1 Commitment Letter dated August 29, 1996 by NationsBank of Texas, N.A. to the Company
*10.2 Lease Agreement dated January 12, 1996 between Independence Plaza, Ltd. and Costilla Energy,
L.L.C
*10.3 Concession Agreement dated July 6, 1996 between the Government of the Republic of Moldova and
the Resource Development Company, Limited
*10.4 Purchase and Joint Exploration Agreement dated February 21, 1996 between the Company and
Resources Development Limited, L.L.C. (DE)
**10.5 Form of Consolidation Agreement to be effective contemporaneously with closing of the
Offerings to consummate the Corporate Reorganization
**10.6 Form of 1996 Stock Option Plan
**10.7 Form of Outside Directors Stock Option Plan
*10.8 Employment Agreement between the Company and Bobby W. Page effective June 30, 1996
**10.9 Employment Agreement between the Company and Cadell S. Liedtke to be effective
contemporaneously with the closing of the Offerings
**10.10 Employment Agreement between the Company and Michael J. Grella to be effective
contemporaneously with the closing of the Offerings
**10.11 Employment Agreement between the Company and Henry G. Musselman to be effective
contemporaneously with the closing of the Offerings
*10.12 Exchange Agreement dated January 5, 1995 between Costilla Petroleum Corporation and Koch Oil
Company
*10.13 Agreement dated January 2, 1996 between Costilla Petroleum Corporation and Frontier Oil and
Refining Company
**10.14 Purchase and Sale Agreement dated April 3, 1995 by and between Parker & Parsley Development
L.P. and Parker & Parsley Producing L.P. and Parker & Parsley Gas Processing Co. as Seller
and Costilla Petroleum Corporation and Costilla Energy, L.L.C. as Purchaser
**10.15 Purchase and Sale Agreement dated March 8, 1996 by and between Parker & Parsley Development
L.P. and Parker & Parsley Producing L.P. and Parker & Parsley Gas Processing Co. as Seller
and Costilla Petroleum Corporation and Costilla Energy, L.L.C. as Purchaser
**10.16 Supplemental Agreement to Purchase and Joint Exploration Agreement dated August 7, 1996 among
the Company, Costilla Redeco Energy, L.L.C. and Resource Development Company Limited, L.L.C.
(DE)
**10.17 Form of Bonus Incentive Plan
*12.1 Computation of Ratio of Adjusted EBITDA to Interest Expense
*12.2 Computation of Ratio of Earnings to Fixed Charges
*12.3 Pro Forma Computation of Ratio of ACNTA to Total Debt
**16.1 Letter Regarding Change of Accountants
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------------------
<C> <S>
*21.1 Subsidiaries of the Registrant
**23.1 Consent of KPMG Peat Marwick LLP
*23.2 Consent of Williamson Petroleum Consultants, Inc.
**23.3 Consent of Elms, Faris & Co., P.C.
**23.4 Consent of Cotton, Bledsoe, Tighe & Dawson, a Professional Corporation (such consent is
included in the opinion filed as Exhibit 5.1 to this Registration Statement)
*24.1 Power of Attorney
*24.2 Certified copy of resolution of Board of Directors of Costilla Energy, Inc. authorizing
signature pursuant to Power of Attorney
*25.1 Statement of Eligibility and Qualification of Trustee under 1939 Act on Form T-1
*27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed
** Filed herewith
<PAGE>
[DRAFT of August 28, 1996]
$100,000,000
COSTILLA ENERGY, INC.
____% NOTES DUE 2006
UNDERWRITING AGREEMENT
___________ ___, 1996
NationsBanc Capital Markets, Inc.
Prudential Securities Incorporated
c/o NationsBanc Capital Markets, Inc.
NationsBank Corporate Center
100 North Tryon Street
Charlotte, North Carolina 28255
Dear Sirs:
SECTION 1. INTRODUCTORY. Costilla Energy, Inc., a Delaware corporation
(the "Company"), confirms its agreement with the several Underwriters named
in Schedule I hereto (the "Underwriters"), to issue and sell $100,000,000
principal amount of its ____% Notes due 2006 (the "Notes"). The Notes are to
be issued pursuant to the provisions of an indenture dated as of
_____________, 1996 (the "Indenture") between the Company and
___________________, as trustee (the "Trustee"). It is understood and
agreed to by all parties hereof that, prior to the Closing Date (as
hereinafter defined), the Company will issue in a public offering __________
shares of its common stock (the "Stock Offering"). The Company hereby agrees
with the Underwriters as follows:
SECTION 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY.
The Company represents and warrants to, and agrees with, the several
Underwriters that:
(a) A registration statement on Form S-1 (File No.
333-________) with respect to the Notes (i) has been prepared by the
Company in conformity with the requirements of the Securities Act of
1933, as amended (the "Act"), and the rules and regulations (the "Rules
<PAGE>
and Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder, (ii) has been filed with the Commission under
the Act and (iii) either has become effective under the Act and is not
proposed to be amended or is proposed to be amended by amendment or
post-effective amendment. If the Company does not propose to amend such
registration statement and if any post-effective amendment to such
registration statement has been filed with the Commission prior to the
execution and delivery of this Agreement, the most recent such amendment
has been declared effective by the Commission. Copies of such
registration statement as amended to date have been delivered by the
Company to you. For purposes of this Agreement, "Effective Time" means
the date and the time as of which such registration statement, or the
most recent post-effective amendment thereto, if any, was declared
effective by the Commission; "Effective Date" means the date of the
Effective Time; "Preliminary Prospectus" means each prospectus included
in such registration statement, or amendments thereof, before it became
effective under the Act and any prospectus filed with the Commission by
the Company with the consent of the Underwriters pursuant to Rule 424(a)
of the Rules and Regulations prior to the filing of the Prospectus;
"Registration Statement" means such registration statement, as amended
at the Effective Time, including any documents incorporated by reference
therein and, if the Effective Date is on or before the date of this
Agreement, all information contained in the final prospectus filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations
("Rule 424(b)") in accordance with Section 5(a) hereof and deemed to be
a part thereof as of the Effective Time pursuant to the Rules and
Regulations; "Prospectus" means the form of prospectus relating to the
Notes, as first used to confirm sales of the Notes; and "described in
the Prospectus" or "disclosed in the Prospectus" means described or
disclosed, as applicable, in the Prospectus. The Commission has not
issued any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus.
(b) At the Effective Time and at all times subsequent thereto up
to the Closing Date hereinafter mentioned, the Registration Statement
and the Prospectus, and any amendments or supplements thereto, conform
in all material respects with the requirements of the Act and the Rules
and Regulations, and at the Effective Time the Registration Statement
did not include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, and the Prospectus, as amended or
supplemented at the Closing Date, if applicable, did not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements contained therein, in the light of the
circumstances under which they were made, not misleading; except that
the foregoing does not apply to (i) that part of the Registration
Statement that constitutes the Statement of Eligibility and
Qualification (Form T-1) under the Trust Indenture Act of 1939, as
amended (the "1939 Act"), of the Trustee, and (ii) statements or
omissions in the Registration Statement or the Prospectus, as amended or
supplemented if applicable, based upon written information furnished to
the Company by any Underwriter through you specifically for use therein.
(c) The consolidated financial statements included in the
Registration Statement and Prospectus present fairly the consolidated
financial position of the Company and its consolidated subsidiaries as
at the dates indicated and the results of their operations and the
-2-
<PAGE>
changes in their consolidated financial position for the periods
specified; said financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent
basis during the periods involved, except as indicated therein; and the
supporting schedules included in the Registration Statement present
fairly the information required to be stated therein. The pro forma
financial statements set forth in the Registration Statement and the
Prospectus (the "pro forma financial statements") have been prepared in
accordance with the applicable accounting requirements of Rule 11-02 of
Regulation S-X; the pro forma adjustments reflected in the pro forma
financial statements have been properly applied to the historical
amounts in the compilation of such statements; and the assumptions used
in the preparation of the pro forma financial statements are, in the
opinion of the Company, reasonable.
(d) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as otherwise
stated therein, (i) there has been no material adverse change in the
condition, financial or otherwise, earnings, affairs or business
prospects of the Company and its subsidiaries considered as a whole,
whether or not arising in the ordinary course of business and (ii) there
have been no material transactions entered into by the Company or any of
its subsidiaries other than those in the ordinary course of business.
(e) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
Delaware with corporate power and authority to own, lease and operate
its properties and conduct its business as described in the Registration
Statement; and the Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
it owns or leases properties or in which the conduct of its business
requires such qualification, except to the extent that the failure to be
so qualified or be in good standing would not have a material adverse
effect on the Company and its subsidiaries considered as a whole.
(f) Each of the subsidiaries of the Company has been duly
incorporated or organized and is validly existing as a corporation or
limited liability company in good standing under the laws of the
jurisdiction of its formation, has corporate power and authority to own,
lease and operate its properties and conduct its business as described
in the Registration Statement and is duly qualified as a foreign
corporation or limited liability company to transact business and is in
good standing in each jurisdiction in which it owns or leases properties
or in which the conduct of its business requires such qualification,
except to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the Company and its
subsidiaries considered as a whole; all of the issued and outstanding
capital stock or other equity interest of each subsidiary has been duly
authorized and validly issued and is fully paid and nonassessable, and
all such capital stock or other equity interest of each subsidiary is
owned by the Company, directly or through subsidiaries, free and clear
of any mortgage, pledge, lien, encumbrance, claim or equity.
(g) Neither the Company nor any of its subsidiaries is (i)
in violation of its or any of their charters or by-laws or other
organizational documents or (ii) in default in the
-3-
<PAGE>
performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which it or any of them is
a party or by which it or any of them or their properties may be bound
except to the extent that such default would not have a material adverse
effect on the Company and its subsidiaries considered as a whole; no
consent, approval, authorization or order of any court or governmental
authority or agency is required for the consummation by the Company of
the transactions contemplated by this Agreement, except such as may be
required under the Act, the 1939 Act, the Rules and Regulations or state
securities or Blue Sky laws; and the execution and delivery of this
Agreement, the Indenture and the Notes and the consummation of the
transactions contemplated herein and therein will not conflict with or
constitute a breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of its subsidiaries pursuant to, any
material contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which the Company or any of its subsidiaries is a
party or by which it or any of them may be bound or to which any of the
property or assets of the Company or any of its subsidiaries is subject,
nor will such action result in any violation of or conflict with the
provisions of the charter or by-laws of the Company or any law,
administrative regulation or administrative or court decree.
(h) The Company and its subsidiaries possess adequate
certificates, authorities, licenses or permits issued by the appropriate
state, federal or foreign regulatory agencies or bodies necessary to
conduct the business now operated by them, and neither the Company nor
any of its subsidiaries has received any notice of proceedings relating
to the revocation or modification of any such certificate, authority,
license or permit which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would materially adversely
affect the condition, financial or otherwise, earnings, affairs or
business prospects of the Company and its subsidiaries considered as a
whole.
(i) Except as set forth in the Prospectus, there is no action,
suit or proceeding before or by any court or governmental agency or
body, domestic or foreign, now pending or, to the knowledge of the
Company, threatened against or affecting the Company or any of its
subsidiaries, which might result in any material adverse change in the
condition, financial or otherwise, earnings, affairs or business
prospects of the Company and its subsidiaries considered as a whole, or
might materially and adversely affect the properties or assets thereof
or might materially and adversely affect the offering of the Notes; and
there are no material contracts or other documents which are required to
be filed as exhibits to the Registration Statement by the Act or by the
Rules and Regulations which have not been so filed.
(j) The Company and each of its subsidiaries has good and
defensible title to all property and assets owned by it and necessary in
the conduct of the business of the Company or such subsidiary in each
case free and clear of all liens, encumbrances and defects except (i)
such as are referred to in the Prospectus or (ii) such as do not
materially adversely affect the value of such property to the Company or
such subsidiary, and do not interfere with the use made and proposed to
be made of such property by the Company or such subsidiary to
-4-
<PAGE>
an extent that such interference would have a material adverse effect on
the Company or such subsidiary.
(k) This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement of the
Company (subject, as to the enforcement of remedies, to applicable
bankruptcy, reorganization, insolvency, moratorium or other laws
affecting creditors' rights generally from time to time in effect and to
general equitable principles), except as rights to indemnity hereunder
may be limited by applicable law.
(l) The Indenture has been duly authorized, executed and delivered
by the Company and duly qualified under the 1939 Act, and constitutes a
legal, valid and binding instrument enforceable against the Company in
accordance with its terms (subject, as to the enforcement of remedies,
to applicable bankruptcy, reorganization, insolvency, moratorium or
other laws affecting creditors' rights generally from time to time in
effect and to general equitable principles).
(m) The Notes have been duly and validly authorized by the Company
for issuance and sale to the Underwriters pursuant to this Agreement
and, when executed by the Company and authenticated by the Trustee in
accordance with the Indenture and delivered to the Underwriters against
payment therefor in accordance with the terms hereof, will have been
validly issued and delivered, free of any preemptive or similar rights,
and will constitute valid and binding obligations of the Company
entitled to the benefits of the Indenture and enforceable against the
Company in accordance with their terms (subject, as to the enforcement
of remedies, to applicable bankruptcy, reorganization, insolvency,
moratorium or other laws affecting creditors' rights generally from time
to time in effect and to general equitable principles). The Notes
conform, or will conform, to the description thereof in the Registration
Statement and the Prospectus. Neither the filing of the Registration
Statement nor the offering or sale of the Notes as contemplated by this
Agreement gives rise to any rights, other than those which have been
duly waived or satisfied, for or relating to the registration of any
securities of the Company. The capitalization of the Company as of the
date of the most recent balance sheet included in the Prospectus is as
set forth in the Prospectus. The Company has all requisite corporate
power and authority to issue, sell, and deliver the Notes in accordance
with and upon the terms and conditions set forth in this Agreement and
in the Registration Statement and Prospectus. All corporate action
required to be taken by the Company for the authorization, issuance,
sale and delivery of the Notes to be sold by the Company hereunder has
been validly and sufficiently taken.
(n) The Subsidiary Guarantees (as defined in the Indenture) when
executed and endorsed upon the Notes and delivered in accordance with
the terms of the Indenture, such Subsidiary Guarantees will be valid and
binding obligations of the Subsidiary Guarantors (as defined in the
Indenture), enforceable against the Subsidiary Guarantors in accordance
with their terms (subject, as to the enforcement of remedies, to
applicable bankruptcy, reorganization, insolvency, moratorium or other
laws affecting
-5-
<PAGE>
creditors' rights generally from time to time in effect and to general
equitable principles); the form of notation to be set forth on each Note
to evidence the Subsidiary Guarantees will be in the form contemplated
by the Indenture; and the Subsidiary Guarantees conform in all material
respects to the description thereof contained in the Registration
Statement and the Prospectus.
(o) KPMG Peat Marwick, LLP and Elms Faris & Company, who have
certified certain financial statements of the Company and its
subsidiaries, are independent public accountants within the meaning of
the Securities Act and the rules and regulations thereunder.
(p) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances
that (i) transactions are executed in accordance with management's
general or specific authorizations; (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain asset
accountability; (iii) access to assets is permitted only in accordance
with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to
any differences.
(q) Neither the Company nor any of its subsidiaries is now or,
after giving effect to the issuance of the Notes and the Subsidiary
Guarantees, will be (i) insolvent, (ii) left with unreasonably small
capital, on a pro forma basis, with which to engage in its anticipated
businesses or (iii) incurring debts beyond its ability to pay such debts
as they become due.
(r) The Company and its subsidiaries own or otherwise possess the
right to use all patents, trademarks, service marks, trade names and
copyrights, all applications and registrations for each of the
foregoing, and all other proprietary rights and confidential information
used in the conduct of their respective businesses as currently
conducted; and neither the Company nor any of its subsidiaries has
received any notice or is otherwise aware, of any infringement of or
conflict with the rights of any third party with respect to any of the
foregoing which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material
adverse effect on the Company.
(s) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses
in which they are engaged; neither the Company nor
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any of its subsidiaries have been refused any insurance coverage sought
or applied for; and neither the Company nor any of its subsidiaries have
any reason to believe that they will not be able to renew their existing
insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not have a material adverse effect on
the Company.
(t) The Company has complied and will comply with all the
provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws of
Florida) and all regulations promulgated thereunder relating to issuers
doing business in Cuba.
(u) There are no contracts or other documents which are required
to be described in the Prospectus or filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which
have not been described in the Prospectus or filed as exhibits to the
Registration Statement or incorporated therein by reference as permitted
by the Rules and Regulations.
(v) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes,
medical wastes, hazardous wastes or hazardous substances by the Company
or any of its subsidiaries (or, to the knowledge of the Company, any of
their predecessors in interest) at, upon or from any of the property now
or previously owned or leased by the Company or its subsidiaries in
violation of any applicable law, ordinance, rule, regulation, order,
judgment, decree or permit, or which would require remedial action under
any applicable law, ordinance, rule, regulation, order, judgment, decree
or permit, except for any violation or remedial action which would not
have, or could not be reasonably likely to have, singularly or in the
aggregate with all such violations and remedial actions, a material
adverse effect on the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries; there has been no material spill, discharge, leak,
emission, injection, escape, dumping or release of any kind onto such
property or into the environment surrounding such property of any toxic
wastes, medical wastes, solid wastes, hazardous wastes or hazardous
substances due to or caused by the Company or any of its subsidiaries or
with respect to which the Company or any of its subsidiaries have
knowledge, except for any such spill, discharge, leak, emission,
injection, escape, dumping or release which would not have or would not
be reasonably likely to have, singularly or in the aggregate with all
such spills, discharges, leaks, emissions, injections, escapes, dumpings
and releases, a material adverse effect on the general affairs,
management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries; and the terms "hazardous
wastes," "toxic wastes," "hazardous substances" and "medical wastes"
shall have the meanings specified in any applicable local, state,
federal and foreign laws or regulations with respect to environmental
protection.
SECTION 3. PURCHASE, SALE AND DELIVERY OF NOTES. Subject to the terms
and conditions and in reliance upon the representations and warranties herein
set forth, the Company agrees to sell to each Underwriter, and each
Underwriter agrees, severally and not jointly, to
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purchase from the Company at a purchase price of _______% of the principal
amount per Note (the "purchase price per Note"), plus accrued interest, if
any, from _________, 1996 to the date of payment and delivery, the respective
principal amount of Notes set forth opposite such Underwriter's name in
Schedule I hereto.
Delivery of and payment for the Notes shall be made at __________ a.m.
New York City time, on __________, 1996, or such later date (not later than
__________, 1996) as you shall designate, which date and time may be
postponed by agreement between you and the Company or as provided in Section
11 hereof (such date and time of delivery and payment for the Notes being
herein called the "Closing Date"). Delivery of the Notes shall be made to
you for the respective accounts of the Underwriters against payment by the
Underwriters through you of the purchase price thereof to or upon the order
of the Company by certified or official bank check or checks payable in
immediately available funds; PROVIDED, that the amount of such payment shall
be reduced by one days' interest on the amount of gross proceeds at the
Underwriters' cost of borrowing such funds plus any other expenses associated
with such payment of immediately available funds. Delivery of the Notes shall
be made at such location as you shall reasonably designate at least one
business day in advance of the Closing Date and payment for the Notes shall
be made at the office of Baker & Botts, L.L.P. ("Counsel for the
Underwriters"), One Shell Plaza, 910 Louisiana, Houston, Texas 77002.
The Company, Prudential Securities Incorporated (the "Independent
Underwriter") and the other Underwriter agree to comply in all material
respects with all of the requirements of Rule 2720 of the Conduct Rules of
the National Association of Securities Dealers, Inc. ("Rule 2720") applicable
to them in connection with the offering and sale of the Notes. The Company
agrees to cooperate with Underwriters, to enable the Underwriters to comply
with Rule 2720 and the Independent Underwriter to perform the services
contemplated by this Agreement.
The Independent Underwriter hereby consents to the references to it as
set forth under the caption "Underwriting" in the Prospectus.
SECTION 4. OFFERING BY UNDERWRITERS. The several Underwriters will
offer the Notes for sale to the public on the terms as set forth in the
Prospectus.
SECTION 5. COVENANTS OF THE COMPANY. The Company covenants and agrees
with the each Underwriter that:
(a) The Company will advise you promptly of any proposal to amend
or supplement the registration statement as filed, or the related
prospectus, prior to the effectiveness of the Registration Statement,
and will not effect such amendment or supplement without your consent,
which will not be unreasonably withheld; the Company will also advise
you promptly of the filing or effectiveness of any amendment or
supplement to the Registration Statement or the Prospectus, the receipt
of any comments from the Commission with respect to the Registration
Statement or the Prospectus or any amendment or supplement thereto, and
of receipt of notification of the institution by the Commission or any
state of any stop order proceedings in respect of the Registration
Statement or the initiation or threatening of any proceeding for such
purpose, and will use every reasonable
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effort to prevent the issuance of any such stop order and to obtain as
soon as possible its lifting, if issued. The Company will also notify
you promptly of any request by the Commission for any amendment of or
supplement to the Registration Statement or the Prospectus or for
additional information; the Company will prepare and file with the
Commission, promptly upon your request, any amendments or supplements to
the Registration Statement or the Prospectus which, in your opinion, may
be necessary or advisable in connection with the distribution of the
Notes; and the Company will not file any amendment or supplement to the
Registration Statement or the Prospectus or file any document under the
Exchange Act before the termination of the offering of the Notes by the
Underwriters if such document would be deemed to be incorporated by
reference into the Prospectus, which filing is not consented to by the
Underwriters after reasonable notice thereof, such consent not to be
unreasonably withheld or delayed.
(b) If, during such period of time after the first date of the
public offering of the Notes as in the opinion of counsel for the
Underwriters a prospectus relating to the Notes is required by law to be
delivered in connection with sales by an Underwriter or dealer, any
event occurs as a result of which the Prospectus as then amended or
supplemented would, in the judgment of the Underwriters and their
counsel, include an untrue statement of a material fact, or omit to
state a material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading, or if
it is necessary at any time to amend the Prospectus to comply with the
Act or any other law, subject to the requirements of paragraph (a) of
this Section 5, the Company promptly will prepare and file with the
Commission an amendment or supplement which will correct such statement
or omission or an amendment which will effect such compliance and will
notify you of such filing, and will prepare and provide to the
Underwriters pursuant to paragraph (c) of this Section 5, an amended
Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance.
(c) The Company will make generally available to the Company's
security holders as soon as practicable an earning statement covering
the twelve month period ending September 30, 1997, that satisfies the
provisions of Section 11(a) of the Act and the Rules and Regulations
including, without limitation, Rule 158.
(d) The Company will deliver to you, free of charge, (i) as many
signed and conformed copies of the Registration Statement (as originally
filed) and of each amendment thereto (including exhibits filed therewith
or incorporated by reference therein) and of the Prospectus as you may
reasonably request and (ii) a conformed copy of the Registration
Statement and each amendment thereto for each of the Underwriters and
will also deliver to each Underwriter, free of charge, during the period
referred to in paragraph (b) of this Section 5, as many copies of the
Prospectus and any amendments and supplements thereto as such
Underwriter may reasonably request.
(e) The Company will arrange to qualify the Notes for offering and
sale under the applicable securities laws of such states and other
jurisdictions of the United States as the Underwriters may designate,
and will maintain such qualifications in effect for as long as
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may be required for the distribution of the Notes. The Company will
file such statements and reports as may be required by the laws of each
jurisdiction in which the Notes have been qualified as above provided.
(f) During the period of five years hereafter, the Company will
furnish to you and upon request, to each of the other Underwriters, as
soon as practicable after the end of each fiscal year, a copy of its
annual report to stockholders for such year, and the Company will
furnish to you (i) as soon as available, a copy of each report or
definitive proxy statement of the Company filed with the Commission
under the Exchange Act or mailed to stockholders, and (ii) from time to
time, such other information concerning the Company as you may
reasonably request.
(g) Until the termination of the offering of the Notes, the
Company shall timely file all documents and amendments to previously
filed documents required to be filed by it pursuant to Section 12, 13,
14 or 15(d) of the Exchange Act.
(h) The Company shall apply the net proceeds from the sale of the
Notes as set forth in the Prospectus.
(i) The Company will cooperate with you and use its best efforts
to permit the Notes to be eligible for clearance and settlement through
The Depository Trust Company.
(j) The Company will not, until [_____] days following the Closing
Date, without your prior written consent, offer, sell or contract to
sell in a public offering, or otherwise dispose of in a public offering,
directly or indirectly, or announce the public offering of, any debt
securities issued or guaranteed by the Company (other than the Notes).
SECTION 6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Notes on
the Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein as of the date hereof and as of
the Closing Date with the same force and effect as if made as of that date,
to the accuracy of the statements of the Company made in any certificates
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective (or if
a post-effective amendment is required to be filed under the Act, such
post-effective amendment shall have become effective) not later than
5:00 p.m., New York time, on the date of this Agreement, or such later
time or date as shall have been consented to by you; and prior to the
Closing Date no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for
that purpose shall have been instituted, or to the knowledge of the
Company or you, shall be contemplated by the Commission.
(b) You shall not have advised the Company that the Registration
Statement or Prospectus, or any amendment or supplement thereto,
contains an untrue statement of fact
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or omits to state a fact which, you have concluded, is material and
in the case of an omission is required to be stated therein or is
necessary to make the statements therein not misleading.
(c) You shall have received a favorable opinion of Cotton,
Bledsoe, Tighe & Dawson, a Professional Corporation ("Counsel for the
Company"), dated the Closing Date to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of
Delaware with full corporate power and authority to own, lease
and operate its properties and conduct its business as described
in the Registration Statement; and the Company is duly qualified
as a foreign corporation to transact business and, to the best of
such counsel's knowledge and information, is in good standing in
each jurisdiction which requires such qualification wherein it
owns or leases material properties or conducts material business
except where the failure to so qualify would not have a material
adverse effect on the properties, prospects, condition (financial
or otherwise) or results of operations of the Company and its
subsidiaries taken as a whole.
(ii) Each of the subsidiaries of the Company has been duly
incorporated or organized and is validly existing as a corporation
or limited liability company in good standing under the laws of
the jurisdiction of its formation, has corporate power and
authority to own, lease and operate its properties and conduct its
business as described in the Registration Statement, and, to the
best of such counsel's knowledge and information, is duly
qualified as a foreign corporation or limited liability company to
transact business and is in good standing in each jurisdiction
which requires such qualification wherein it owns or leases
material properties or conducts material business except where the
failure to so qualify would not have a material adverse effect on
the properties, prospects, condition (financial or otherwise) or
results of operations of the Company and its subsidiaries taken as
a whole; all of the issued and outstanding capital stock or other
equity interest of each subsidiary has been duly authorized and
validly issued and is fully paid and non-assessable, and, except
as otherwise set forth in the Registration Statement, all of such
capital stock or other equity interest, to the best of such
counsel's knowledge and information, is owned by the Company,
directly or indirectly, free and clear of any mortgage, pledge,
lien, encumbrance, claim or equity.
(iii) All of the outstanding shares of capital stock of the
Company have been duly authorized and are validly issued, fully
paid and nonassessable. To the best of such counsel's knowledge,
neither the filing of the Registration Statement nor the offering
or sale of the Notes as contemplated by this Agreement gives rise
to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any securities
of the Company or any of its subsidiaries, and, to the best of
such counsel's knowledge, no person or entity (other than the
Underwriters) has the right, contractual or otherwise, to cause
the Company to sell or otherwise issue to such person or entity,
or permit such person or entity to underwrite the sale
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of, any of the Notes. The authorized equity capitalization of the
Company as of the date of the most recent balance sheet included
or incorporated by reference in the Prospectus is as set forth in
the Prospectus, and the Notes conform as to legal matters to the
description thereof contained in the Prospectus. The Company has
all requisite corporate power and authority to issue, sell and
deliver the Notes in accordance with and upon the terms and
conditions set forth in this Agreement and in the Registration
Statement and Prospectus.
(iv) This Agreement has been duly authorized, executed and
delivered by the Company.
(v) The Indenture has been duly authorized, executed and
delivered by the Company and duly qualified under the 1939 Act,
and constitutes a legal, valid and binding instrument
enforceable against the Company in accordance with its terms
(subject, as to the enforcement of remedies, to applicable
bankruptcy, reorganization, insolvency, moratorium or other
laws affecting creditors' rights generally from time to time in
effect and to general equitable principles).
(vi) The Notes have been duly and validly authorized and,
when executed and authenticated in accordance with the provisions
of the Indenture and delivered to and paid for by the Underwriters
pursuant to this Agreement, will constitute legal, valid and
binding obligations of the Company entitled to the benefits of the
Indenture (subject, as to the enforcement of remedies, to
applicable bankruptcy, reorganization, insolvency, moratorium or
other laws affecting creditors' rights generally from time to time
in effect and to general equitable principles); and the statements
set forth under the heading "Description of Notes" in the
Prospectus, insofar as such statements purport to summarize
certain provisions of the Notes and the Indenture, provide a fair
summary of such provisions.
(vii) The Subsidiary Guarantees, when delivered in
accordance with the terms of the Indenture, will have been
validly issued and delivered and will constitute valid and
binding obligations of the Subsidiary Guarantors, enforceable
against the Subsidiary Guarantors in accordance with their
terms (subject, as to the enforcement of remedies, to
applicable bankruptcy, reorganization, insolvency,
moratorium or other laws affecting creditors' rights generally
from time to time in effect and to general equitable
principles).
(viii) The Registration Statement is effective under the
Act and, to the best of such counsel's knowledge and information,
no stop order suspending the effectiveness of the Registration
Statement has been issued under the Act or proceedings therefor
initiated or threatened by the Commission. All required filings
by the Company under Rule 424(b) of the Rules and Regulations have
been timely made.
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<PAGE>
(ix) Statements set forth in the Prospectus under the
headings "Business and Properties--Regulation" and "Description
of Notes," in the Registration Statement, insofar as such
statements constitute a summary of the legal matters, documents or
proceedings referred to therein fairly present the information
called for with respect to such legal matters, documents and
proceedings.
(x) No consent, approval, authorization or order of any
court or governmental authority or agency is required in
connection with the transactions contemplated by this Agreement,
except such as may be required under the Act, the 1939 Act, the
Rules and Regulations or state securities or Blue Sky laws and
such other approvals (specified in such opinion) as have been
obtained; and, to the best of such counsel's knowledge and
information, the execution and delivery of this Agreement, the
Notes and the Indenture and the consummation of the transactions
contemplated herein will not conflict with or constitute a breach
of, or default under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the
Company or any of its subsidiaries pursuant to, any contract,
indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company or any of its subsidiaries is a
party or by which it or any of them may be bound or to which any
of the property or assets of the Company or any of its
subsidiaries is subject; nor will such action result in any
violation of the provisions of the charter or by-laws of the
Company, or any law, administrative regulation or administrative
or court decree.
(xi) After due inquiry, such counsel does not know of any
legal or governmental proceeding pending or threatened to which
the Company or any of its subsidiaries is a party or to which
any of the properties of the Company is subject that is required
to be described in the Registration Statement or the Prospectus
and is not so described or of any contract or other document that
is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration
Statement that is not so described or filed as required.
(xii) The Registration Statement and the Prospectus and
any further amendments or supplements thereto made by the Company
at the time the Registration Statement and each amendment thereto
became effective (except that no opinion need be expressed as to
the financial statements or notes thereto and other financial and
statistical data contained therein) and the Form T-1 complied as
to form in all material respects with the applicable requirements
of the Act and the Rules and Regulations and the 1939 Act and the
rules and regulations thereunder.
Such opinion shall also contain a statement that such counsel
has no reason to believe that (i) the Registration Statement, as of the
Effective Time, or any amendment thereto (other than the engineering
data, financial statements and notes thereto and the other engineering,
financial and statistical data contained therein, as to which such counsel
need not comment), at the time it became effective, contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary in order to make the
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statements therein not misleading, or (ii) the Prospectus or any supplement
or amendment thereto (other than the engineering data, financial statements
and notes thereto and the other engineering, financial and statistical data
contained therein, as to which such counsel need not comment), on such
Closing Date or at the time such Prospectus or supplement or amendment
thereto was issued contains or contained any untrue statement of a material
fact or omits or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(d) You shall have received from Counsel for the Underwriters such
opinion or opinions, dated the Closing Date, with respect to the issuance
and sale of the Notes, the Registration Statement and Prospectus (as
amended or supplemented at the Closing Date) and other related matters as
the Underwriters may reasonably require, and the Company shall have
furnished to such counsel such documents as they request for the purpose
of enabling them to pass upon such matters.
(e) At the Closing Date there shall not have been, since the date
of this Agreement or since the respective dates as of which information is
given in the Registration Statement, any material adverse change in the
condition, financial or otherwise, earnings, business affairs or business
prospects of the Company and its subsidiaries considered as a whole,
whether or not arising in the ordinary course of business, except as set
forth in or contemplated by the Prospectus (exclusive of any amendment or
supplement thereto), and you shall have received a certificate of the
Company, signed by the Chairman of the Board or the President and the
principal financial or accounting officer of the Company, dated the Closing
Date, to the foregoing effect, to the effect that the signers of such
certificate have carefully examined the Prospectus, any amendment or
supplement to the Prospectus and this Agreement, and to the further effect
that (i) the representations and warranties of the Company contained in
this Agreement are true and correct on and as of the Closing Date with the
same force and effect as though expressly made on and as of the Closing
Date, (ii) the Company has performed or complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or
prior to the Closing Date and (iii) no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been initiated or threatened by the
Commission or any state.
(f) You shall have received from KPMG Peat Marwick, LLP, independent
public accountants, two letters, the first delivered concurrently with the
execution of, and dated the date of, this Agreement and the other dated the
Closing Date, addressed to the Underwriters (with conformed copies for each
of the Underwriters), in form and substance satisfactory to you, to the
effect that:
(i) They are independent public accountants with respect to the
Company and its subsidiaries within the meaning of the Act and the
Rules and Regulations.
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(ii) In their opinion, the consolidated financial statements and
supporting schedules of the Company and its subsidiaries and of the
properties acquired by the Company in certain material transactions in
1995 and 1996 examined by them and included or incorporated by
reference in the Registration Statement comply as to form in all
material respects with the applicable accounting requirements of the
Act and the Rules and Regulations with respect to registration
statements on Form S-1 and the Exchange Act and the rules and
regulations promulgated thereunder (the "Exchange Act Regulations").
(iii) They have performed specified procedures, not constituting
an audit, including a reading of the latest available interim
financial statements of the Company and its indicated subsidiaries, a
reading of the minute books of the Company and such subsidiaries since
the end of the most recent fiscal year with respect to which an audit
report has been issued, inquiries of and discussions with certain
officials of the Company and such subsidiaries responsible for
financial and accounting matters with respect to the unaudited
consolidated financial statements included in the Registration
Statement and Prospectus and the latest available interim unaudited
financial statements of the Company and its subsidiaries in accordance
with Statement of Financial Accounting Standards No. 71, and such other
inquiries and procedures as may be specified in such letters, and on
the basis of such inquiries and procedures nothing came to their
attention that caused them to believe that: (A) the unaudited
consolidated financial statements of the Company and its subsidiaries
included in the Registration Statement and Prospectus do not comply as
to form in all material respects with the applicable accounting
requirements of the Exchange Act and the Exchange Act Regulations or
were not fairly presented in conformity with generally accepted
accounting principles in the United States applied on a basis
substantially consistent with that of the audited financial statements
included or incorporated by reference therein, or (B) at a specified
date not more than five days prior to the date of such letters, there
was any change in the consolidated capital stock or any increase in
consolidated long-term debt of the Company and its subsidiaries or any
decrease in the consolidated net current assets or members' capital of
the Company and its subsidiaries or any increases or decreases in any
other items specified by the Underwriters, in each case as compared
with the amounts shown on the most recent balance sheet of the Company
and its subsidiaries included or incorporated by reference in the
Registration Statement and Prospectus or, during the period from the
date of such balance sheet to a specified date not more than five days
prior to the date of such letters, there were any decreases, as
compared with the corresponding period in the preceding year, in
consolidated net revenues or the total or per share amounts of
consolidated net income of the Company and its subsidiaries or any
increases or decreases in any other items specified by the
Underwriters, except in each such case as set forth in or contemplated
by the Registration Statement and Prospectus or except for such
exceptions enumerated in such letters as shall have been agreed to by
the Underwriters and the Company.
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(iv) In addition to the examination referred to in their report
included or incorporated by reference in the Registration Statement
and the Prospectus, and the specified procedures referred to in clause
(iii) above, they have carried out certain other specified procedures,
not constituting an audit, with respect to certain amounts, percentages
and financial information which are included in the Registration
Statement and Prospectus and which are specified by the Underwriters,
and have found such amounts, percentages and financial information to
be in agreement with the relevant accounting and financial records of
the Company and its subsidiaries identified in such letters.
(v) On the basis of a reading of the unaudited pro forma
financial statements included in the Registration Statement and
Prospectus; carrying out certain specified procedures; inquiries of
certain officials of the Company and Parker & Parsley Development L.P.
and its affiliates who have responsibility for financial and accounting
matters; and proving the arithmetic accuracy of the application of the
pro forma adjustments to the historical amounts in the pro forma
financial statements, nothing came to their attention which caused them
to believe that the pro forma financial statements do not comply in
form in all material respects with the applicable accounting
requirements of Rule 11-02 of Regulation S-X or that the pro forma
adjustments have not been properly applied to the historical amounts in
the compilation of such statements.
(g) At the Closing Date, counsel for the Underwriters shall have
been furnished with such other documents and opinions as they may
reasonably require.
(h) At the time of the Closing, the Notes shall have a rating of at
least _____ by Moody's Investors Service, Inc. and _____ by Standard &
Poor's Rating Service, and the Company shall have delivered to the
Underwriters a letter, dated the Closing Date, from each such rating agency
or other evidence satisfactory to the Underwriters, confirming such
ratings. Since the Effective Date, there shall not have occurred any
downgrading with respect to any debt securities of the Company or any of
its Subsidiaries by any "nationally recognized statistical rating
organization" as that term is defined by the Commission for purposes of
Rule 436(g)(2) under the Act or any public announcement that any such
organization has under surveillance or review its rating of any such debt
securities (other than an announcement with positive implications of a
possible upgrading, and no implication of a possible downgrading of such
rating).
(i) On or prior to the Closing Date, the closing contemplated
pursuant to the Stock Offering shall have occurred.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory in form
and substance to you and to counsel for the Underwriters. The Company shall
furnish to you conformed copies of such opinions, certificates, letters and
other documents in such number as you shall reasonably request. If any of
the conditions specified in this Section 6 shall not have been fulfilled when
and as required by this Agreement, this
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Agreement and all obligations of the Underwriters hereunder may be canceled
at, or at any time prior to, the Closing Date, by you. Any such cancellation
shall be without liability of the Underwriters to the Company. Notice of
such cancellation shall be given to the Company in writing, or by telegraph
or telephone and confirmed in writing.
SECTION 7. PAYMENT OF EXPENSES. The Company will pay all costs,
expenses, fees and taxes incident to (i) the preparation by the Company,
printing, filing and distribution under the Act of the Registration Statement
(including financial statements and exhibits), the Prospectus, each
preliminary prospectus and all amendments and supplements to any of them
prior to or during the period specified in Section 5(b) (including, without
limitation, the deliveries thereof pursuant to Section 5(d)), (ii) the
preparation, printing (including word processing and duplication costs) and
delivery of this Agreement, the Indenture, the Statement of Eligibility and
Qualification of the Trustee on Form T-1, Preliminary and Supplemental Blue
Sky Memoranda, the Notes and all other agreements, memoranda, correspondence
and other documents printed and delivered in connection with the offering of
the Notes, (iii) the registration with the Commission and the issuance by the
Company of the Notes (iv) the registration or qualification of the Notes for
offer and sale under the securities or Blue Sky laws of the several states as
described in Section 5(e) (including the reasonable fees and disbursements of
your counsel relating to such registration or qualification), (v) any fees or
expenses relating to the use of book-entry notes, (vi) the fees, costs and
charges of the Trustee, including the fees and disbursements of counsel for
the Trustee, (vii) the fees and expenses of rating agencies, and (viii) all
other costs and expenses incident to the performance by the Company of its
other obligations under this Agreement.
If the sale of the Notes provided for herein is not consummated because
any condition to the obligations of the Underwriters set forth in Section 6
hereof is not satisfied, because of any termination pursuant to Section 10
hereof or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof
other than by reason of default by any of the Underwriters in payment for the
Notes on the Closing Date, the Company will reimburse the Underwriters
severally upon demand for all out-of-pocket expenses (including reasonable
fees and disbursements of counsel) that shall have been incurred by them in
connection with the proposed purchase and sale of the Notes.
SECTION 8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees
to indemnify and hold harmless each Underwriter, the directors, officers,
employees and agents of each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, from and against any and all losses,
claims, damages, liabilities or judgments (including without limiting the
foregoing the reasonable legal and other expenses incurred in connection
with investigating or defending any action, suit or proceeding or any claim
asserted) arising out of or based upon any untrue statement or alleged
untrue statement in Section 2 hereof or any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
or the Prospectus or any preliminary prospectus or in any amendment or
supplement thereto, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses,
-17-
<PAGE>
claims, damages, liabilities or expenses are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information furnished in writing to the Company by any Underwriter through
you expressly for use therein; and shall reimburse each Underwriter
promptly after receipt of invoices from such Underwriter for any legal or
other expenses as reasonably incurred by such Underwriter in connection
with investigating, preparing to defend or defending against or appearing
as a third-party witness in connection with any such loss, claim, damage,
liability or action, notwithstanding the possibility that payments for such
expenses might later be held to be improper, in which case such payments
shall be promptly refunded. This indemnity agreement will be in addition
to any liability which the Company may otherwise have to the persons
referred to above in this Section 8(a).
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, the directors of the Company, the
officers of the Company who sign the Registration Statement and each
person, if any, who controls the Company within the meaning of either
Section 15 of the Act or Section 20 of the Exchange Act, to the same extent
as the foregoing indemnity from the Company to each Underwriter, but only
with reference to written information relating to such Underwriter
furnished to the Company by or on behalf of such Underwriter through you
specifically for inclusion in the Registration Statement, the Prospectus,
any amendment or supplement thereto, or any preliminary prospectus.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party
(i) will not relieve it from liability under paragraph (a) or (b) above
unless and to the extent it did not otherwise learn of such action and such
failure results in the forfeiture by the indemnifying party of substantial
rights and defenses and (ii) will not, in any event, relieve the
indemnifying party from any obligations to any indemnified party other than
the indemnification obligation provided in paragraph (a) or (b) above. The
indemnifying party shall be entitled to appoint counsel of the indemnifying
party's choice at the indemnifying party's expense to represent the
indemnified party in any action for which indemnification is sought (in
which case the indemnifying party shall not thereafter be responsible for
the fees and expense or any separate counsel retained by the indemnified
party or parties except as set forth below); PROVIDED, HOWEVER, that such
counsel shall be satisfactory to the indemnified party. Notwithstanding
the indemnifying party's election to appoint counsel to represent the
indemnified party in an action, the indemnified party shall have the right
to employ separate counsel (including local counsel), and the indemnifying
party shall bear the reasonable fees, costs and expenses of such separate
counsel if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a conflict
of interest, (ii) the actual or potential defendants in, or targets of, any
such action include both the indemnified party and the indemnifying party
and the indemnified party shall have reasonably concluded that there may be
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party,
(iii) the indemnifying party shall not have employed counsel satisfactory
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<PAGE>
to the indemnified party to represent the indemnified party within a
reasonable time after notice of the institution of such action or (iv) the
indemnifying party shall authorize the indemnified party to employ separate
counsel at the expense of the indemnifying party. An indemnifying party
will not, without the prior written consent of the indemnified parties,
settle or compromise or consent to the entry of any judgment with respect
to any pending or threatened claim, action, suit or proceeding in respect
of which indemnification or contribution may be sought hereunder (whether
or not the indemnified parties are actual or potential parties to such
claim or action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising
out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or
(b) of this Section 8 is unavailable to or insufficient to hold harmless
an indemnified party for any reason, the Company and the Underwriters
agree to contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably incurred in
connection with investigating or defending same) (collectively "Losses")
to which the Company on the one hand and one or more of the Underwriters
on the other hand may be subject in such proportion as is appropriate to
reflect the relative benefits received by the Company and by the
Underwriters from the offering of the Notes; PROVIDED, HOWEVER, that in
no case shall any Underwriter (except as may be provided in any
agreement among the Underwriters relating to the offering of the Notes)
be responsible for any amount in excess of the purchase discount or
commission applicable to the Notes purchased by such Underwriter
hereunder. If the allocation provided by the immediately preceding
sentence is unavailable for any reason, the Company on the one hand and
the Underwriters on the other hand shall contribute in such proportion
as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company and of the Underwriters in connection
with the statements or omissions which resulted in such Losses as well
as any other relevant equitable considerations. Benefits received by
the Company shall be deemed to be equal to the total net proceeds from
the offering (before deducting expenses), and benefits received by the
Underwriters shall be deemed to be equal to the total purchase discounts
and commissions received by the Underwriters from the Company in
connection with the purchase of the Notes hereunder. Relative fault
shall be determined by reference to whether any alleged untrue statement
or omission relates to information provided by the Company or the
Underwriters. The Company and the Underwriters agree that it would not
be just and equitable if contribution were determined by pro rata
allocation or any other method of allocation which does not take into
account of the equitable considerations referred to above.
Notwithstanding the provisions of this paragraph (d), no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this
Section 8, each person who controls an Underwriter within the meaning of
either the Act or the Exchange Act and each director, officer, employee
and agent of an Underwriter shall have the same rights to contribution
as such Underwriter, and each person who controls the Company within the
meaning of either the Act or Exchange Act and each officer and director
of the
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<PAGE>
Company shall have the same rights to contribution as the Company, subject
in each case to the applicable terms and conditions of this paragraph (d).
(e) The Company also agrees to indemnify and hold harmless Prudential
Securities Incorporated and each person, if any, who controls Prudential
Securities Incorporated within the meaning of either Section 15 of the Act or
Section 20 of the Exchange Act, from and against any and all losses, claims,
damages, liabilities and judgments incurred as a result of Prudential Securities
Incorporated's participation as a "qualified independent underwriter" within the
meaning of Section b(15) of Rule 2720 in connection with the offering of the
Notes, except for any losses, claims, damages, liabilities and judgments
resulting from Prudential Securities Incorporated's, or such controlling
person's, willful misconduct or gross negligence.
SECTION 9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. The respective agreements, representations, warranties,
indemnities and other statements of the Company or its officers and of the
Underwriters set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation made by or on behalf
of the Underwriters or the Company or any of the officers, directors or
controlling persons referred to in Section 8 hereof, and will survive
delivery of and payment for the Securities. The provisions of Sections 7 and
8 hereof shall survive the termination or cancellation of this Agreement.
SECTION 10. EFFECTIVENESS OF AGREEMENT AND TERMINATION. This Agreement
shall become effective upon later of (x) execution and delivery hereof by the
parties hereto and (y) release of notification of the effectiveness of the
Registration Statement by the Commission.
This Agreement may be terminated for any reason at any time prior to
the Closing Date by NationsBanc Capital Markets, Inc., in its absolute
discretion, upon the giving of written notice of such termination to the
Company, if at or prior to the Closing Date (i) the Company shall have
failed, refused or been unable to perform any agreement on its part to be
performed hereunder, (ii) any other condition of the Underwriters' obligation
hereunder is not fulfilled, (iii) there has been, since the respective dates
as of which information is given in the Registration Statement, any material
adverse change in the condition, financial or otherwise, earnings, business
affairs or business prospects of the Company and its subsidiaries considered
as a whole, whether or not arising in the ordinary course of business, (iv)
there has occurred any outbreak or escalation of hostilities or other
calamity or crisis or material change in existing financial, political,
economic or securities market conditions, the effect of which is such as to
make it, in the judgment of NationsBanc Capital Markets, Inc., impracticable
or inadvisable to market the Notes in the manner contemplated in the
Prospectus or enforce contracts for the sale of the Notes, (v) reporting of
bid and asked prices has been suspended by the Commission or by the National
Association of Securities Dealers, Inc. or trading generally on either the
American Stock Exchange or the New York Stock Exchange has been suspended, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices for securities have been required, by either of said exchanges or by
order of the Commission or any other governmental authority, or if a banking
moratorium has been declared by Federal, New York or Delaware authorities or
(vi) if there shall have come to the attention of the Underwriters any facts
that would cause the Underwriters to believe that the Prospectus, at the time
it was required to
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<PAGE>
be delivered to a purchaser of Notes, included an untrue statement of a
material fact or omitted to state a material fact necessary in order to make
the statements therein, in light of the circumstances existing at the time of
such delivery, not misleading. In the event of any such termination, the
provisions of Section 7, the indemnity agreement and contribution provisions
set forth in Section 8, and the provisions of Sections 9 and 14 shall remain
in effect.
SECTION 11. DEFAULT. If, on the Closing Date, any one or more
Underwriters shall fail to purchase and pay for any of the Notes agreed to be
purchased by such Underwriter or Underwriters hereunder and such failure to
purchase shall constitute a default in the performance of its or their
obligations under this Agreement, the remaining Underwriters shall be
obligated severally to take up and pay for (in the respective proportions
which the principal amount of Notes set forth opposite their names in
Schedule I hereto bears to the aggregate principal amount of Notes set forth
opposite the names of all the remaining Underwriters) the Notes which the
defaulting Underwriter or Underwriters agreed but failed to purchase;
PROVIDED, HOWEVER, that in the event that the aggregate principal amount of
Notes which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate principal amount of Notes set
forth in Schedule I hereto, the remaining Underwriters shall have the right
to purchase all, but shall not be under any obligation to purchase any, of
the Notes, and if such non-defaulting Underwriters do not purchase all the
Notes, this Agreement will terminate without liability to any non-defaulting
Underwriter or the Company. In the event of a default by any Underwriter as
set forth in this Section 11, the Closing Date shall be postponed for such
period, not exceeding seven days, as you shall determine in order that the
required changes in the Registration Statement and in the Prospectus or in
any other documents or arrangements may be effected. Nothing contained in
this Agreement shall relieve any defaulting Underwriter of its liability, if
any, to the Company or any non-defaulting Underwriter for damages occasioned
by its default hereunder.
SECTION 12. NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to
the Underwriters shall be directed to you c/o NationsBanc Capital Markets,
Inc., 100 North Tryon Street, Charlotte, North Carolina 28255; Attention:
Syndicate; notices to the Company shall be directed to it at Costilla Energy,
Inc., 400 West Illinois, Suite 1000, Midland, Texas 79701, to the attention
of the Secretary with copy to the President.
SECTION 13. PARTIES. This Agreement shall inure to the benefit of
and be binding upon the Company, Costilla Energy, L.L.C. (the "LLC"), the
Underwriters, any controlling persons referred to herein and their respective
successors and assigns. The LLC is a party to this Agreement to confirm its
agreement with the Underwriters that it shall be jointly and severally
responsible for all obligations of the Company hereunder as an original
obligor. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any other person, firm or corporation any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and all conditions and provisions
hereof are intended to be for the sole and exclusive benefit of the parties
hereto and respective successors and said controlling persons and officers
and directors and their heirs and legal representatives, and for the benefit
of no other person, firm or corporation. No purchaser of Notes from any
Underwriter shall be deemed to be a successor by reason merely of such
purchase.
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<PAGE>
SECTION 14. APPLICABLE LAW. This Agreement will be governed by and
construed in accordance with the laws of the State of New York.
SECTION 15. BUSINESS DAY. For purposes of this Agreement,
"business day" means each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in The City of New York, New
York are authorized or obligated by law, executive order or regulation to
close.
SECTION 16. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which will be deemed to be an original, but all
such counterparts will together constitute one and the same instrument.
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<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign this Agreement and return a counterpart hereof to us,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the Underwriters and the Company in accordance with its
terms.
Very truly yours,
COSTILLA ENERGY, INC.
By:
--------------------------------------
Name:
Title:
COSTILLA ENERGY, L.L.C.
By:
--------------------------------------
Name:
Title:
Confirmed and Accepted, as of
the date first above written:
NATIONSBANC CAPITAL MARKETS, INC.
PRUDENTIAL SECURITIES INCORPORATED
Acting severally on behalf of
themselves and the several
Underwriters named herein.
By: NATIONSBANC CAPITAL MARKETS, INC.
By:
--------------------------------------
Name:
Title:
[For themselves and the other
Underwriters named in Schedule I
to the foregoing Agreement]
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<PAGE>
SCHEDULE I
PRINCIPAL AMOUNT
OF NOTES
UNDERWRITER TO BE PURCHASED
- ----------- ----------------
NationsBanc Capital Markets, Inc.. . . . . . . . . . . . . . . $
Prudential Securities Incorporated . . . . . . . . . . . . . .
---------
Total. . . . . . . . . . . . . . . . . . . . $
---------
---------
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<PAGE>
COSTILLA ENERGY, INC.,
as Issuer,
Subsidiary Guarantors parties hereto
$100,000,000
___% SENIOR SUBORDINATED NOTES DUE 2006
____________________________
INDENTURE
Dated as of ___________, 1996
STATE STREET BANK AND TRUST COMPANY,
Trustee
<PAGE>
CROSS-REFERENCE TABLE
Reconciliation and tie between the Trust Indenture Act of 1939
as amended, and the Indenture, dated as of ________________, 1996
TRUST
INDENTURE
ACT INDENTURE
SECTION SECTION
- -------------------------------------------------------------------------------
Section 310(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . .7.10
(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.10
(a)(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(a)(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(a)(5). . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.10
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . .7.08; 7.10
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
Section 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.11
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.11
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
Section 312(a) . . . . . . . . . . . . . . . . . . . . . . .7.06(a); 7.06(b)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06(c)
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06(d)
Section 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06(e)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(c) . . . . . . . . . . . . . . . . . . . . . . . .7.06(e); 7.06(f)
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.06
Section 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . .4.17; 4.19
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(c)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.03
(c)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.03
(c)(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.04
(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4.19
Section 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01(b)
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.05(a)
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01(a)
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01(c)
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.10
Section 316(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.08
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . .6.05
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . .6.04
(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.07
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9.05
Section 317(a)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . .N.A.
(a)(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . .6.08
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.04
Section 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.01
Note: This reconciliation and tie shall not, for any purpose, be deemed to be
part of the Indenture.
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<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION. . . . . . . . . . . .1
SECTION 1.01. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.02. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. . . 20
SECTION 1.03. RULES OF CONSTRUCTION. . . . . . . . . . . . . . . . . 21
SECTION 1.04. FORM OF DOCUMENTS DELIVERED TO TRUSTEE . . . . . . . . 21
SECTION 1.05. ACTS OF HOLDERS. . . . . . . . . . . . . . . . . . . . 22
SECTION 1.06. SATISFACTION AND DISCHARGE . . . . . . . . . . . . . . 22
ARTICLE II
THE NOTES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.01. FORM AND DATING. . . . . . . . . . . . . . . . . . . . 23
SECTION 2.02. EXECUTION AND AUTHENTICATION . . . . . . . . . . . . . 24
SECTION 2.03. REGISTRAR AND PAYING AGENT . . . . . . . . . . . . . . 25
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. . . . . . . . . . 26
SECTION 2.05. GLOBAL NOTES . . . . . . . . . . . . . . . . . . . . . 26
SECTION 2.06. TRANSFER AND EXCHANGE. . . . . . . . . . . . . . . . . 27
SECTION 2.07. REPLACEMENT NOTES. . . . . . . . . . . . . . . . . . . 28
SECTION 2.08. OUTSTANDING NOTES. . . . . . . . . . . . . . . . . . . 29
SECTION 2.09. TEMPORARY NOTES. . . . . . . . . . . . . . . . . . . . 30
SECTION 2.10. CANCELLATION . . . . . . . . . . . . . . . . . . . . . 30
SECTION 2.11. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED . . . . 30
SECTION 2.12. AUTHORIZED DENOMINATIONS . . . . . . . . . . . . . . . 31
SECTION 2.13. COMPUTATION OF INTEREST. . . . . . . . . . . . . . . . 31
SECTION 2.14. PERSONS DEEMED OWNERS. . . . . . . . . . . . . . . . . 31
SECTION 2.15. CUSIP NUMBERS. . . . . . . . . . . . . . . . . . . . . 31
ARTICLE III
REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 3.01. NOTICE TO TRUSTEE. . . . . . . . . . . . . . . . . . . 32
SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED. . . . . . . . . . . 32
SECTION 3.03. NOTICE OF REDEMPTION . . . . . . . . . . . . . . . . . 32
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION . . . . . . . . . . . . 33
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. . . . . . . . . . . . . . 33
SECTION 3.06. NOTES REDEEMED IN PART . . . . . . . . . . . . . . . . 34
ARTICLE IV
COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 4.01. PAYMENT OF NOTES . . . . . . . . . . . . . . . . . . . 34
SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. . . . . . . . . . . . 34
SECTION 4.03. MONEY FOR THE NOTE PAYMENTS TO BE HELD IN TRUST. . . . 35
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<PAGE>
SECTION 4.04. CORPORATE EXISTENCE. . . . . . . . . . . . . . . . . . 35
SECTION 4.05. MAINTENANCE OF PROPERTY. . . . . . . . . . . . . . . . 35
SECTION 4.06. PAYMENT OF TAXES AND OTHER CLAIMS. . . . . . . . . . . 36
SECTION 4.07. REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF
CONTROL. . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 4.08. LIMITATION ON ASSET SALES. . . . . . . . . . . . . . . 38
SECTION 4.09. OWNERSHIP OF AND LIENS ON CAPITAL STOCK. . . . . . . . 41
SECTION 4.10. UNRESTRICTED SUBSIDIARIES. . . . . . . . . . . . . . . 42
SECTION 4.11. RESTRICTED PAYMENTS. . . . . . . . . . . . . . . . . . 43
SECTION 4.12. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED
STOCK. . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 4.13. LIENS. . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 4.14. DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . 46
SECTION 4.15. LIMITATION ON LAYERING DEBT. . . . . . . . . . . . . . 47
SECTION 4.16. TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . 47
SECTION 4.17. REPORTS. . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 4.18. WAIVER OF STAY, EXTENSION OR USURY LAWS. . . . . . . . 48
SECTION 4.19. COMPLIANCE CERTIFICATE; NOTICE OF DEFAULT OR EVENT OF
DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 4.20. INVESTMENT COMPANY ACT . . . . . . . . . . . . . . . . 48
SECTION 4.21. SALE AND LEASEBACK . . . . . . . . . . . . . . . . . . 49
SECTION 4.22. FURTHER INSTRUMENTS AND ACTS . . . . . . . . . . . . . 49
ARTICLE V
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER . . . . . . . . . . . . 49
SECTION 5.01. MERGER, CONSOLIDATION OR SALE OF ASSETS. . . . . . . . 49
SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED. . . . . . . . . . . 50
ARTICLE VI
DEFAULTS AND REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 6.01. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . 50
SECTION 6.02. ACCELERATION . . . . . . . . . . . . . . . . . . . . . 52
SECTION 6.03. OTHER REMEDIES . . . . . . . . . . . . . . . . . . . . 53
SECTION 6.04. WAIVER OF PAST DEFAULTS. . . . . . . . . . . . . . . . 53
SECTION 6.05. CONTROL BY MAJORITY. . . . . . . . . . . . . . . . . . 53
SECTION 6.06. LIMITATION ON SUITS. . . . . . . . . . . . . . . . . . 54
SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT . . . . . . . . . 54
SECTION 6.08. TRUSTEE MAY FILE PROOFS OF CLAIM . . . . . . . . . . . 55
SECTION 6.09. PRIORITIES . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 6.10. UNDERTAKING FOR COSTS. . . . . . . . . . . . . . . . . 56
SECTION 6.11. WAIVER OF STAY OR EXTENSION LAWS . . . . . . . . . . . 56
SECTION 6.12. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF THE
NOTES. . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 6.13. RESTORATION OF RIGHTS AND REMEDIES . . . . . . . . . . 56
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SECTION 6.14. RIGHTS AND REMEDIES CUMULATIVE . . . . . . . . . . . . 57
SECTION 6.15. DELAY OR OMISSION NOT WAIVER . . . . . . . . . . . . . 57
ARTICLE VII
TRUSTEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 7.01. DUTIES OF TRUSTEE. . . . . . . . . . . . . . . . . . . 57
SECTION 7.02. RIGHTS OF TRUSTEE. . . . . . . . . . . . . . . . . . . 58
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE . . . . . . . . . . . . . 59
SECTION 7.04. TRUSTEE'S DISCLAIMER . . . . . . . . . . . . . . . . . 59
SECTION 7.05. NOTICE OF DEFAULTS . . . . . . . . . . . . . . . . . . 59
SECTION 7.06. PRESERVATION OF INFORMATION; REPORTS BY TRUSTEE TO
HOLDERS. . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 7.07. COMPENSATION AND INDEMNITY . . . . . . . . . . . . . . 60
SECTION 7.08. REPLACEMENT OF TRUSTEE . . . . . . . . . . . . . . . . 61
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER. . . . . . . . . . . . . . 63
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. . . . . . . . . . . . . 63
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. . . 64
ARTICLE VIII
DEFEASANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 8.01. COMPANY'S OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT
DEFEASANCE . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE . . . . . . . . . . . . 64
SECTION 8.03. COVENANT DEFEASANCE. . . . . . . . . . . . . . . . . . 65
SECTION 8.04. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE. . . . 66
SECTION 8.05. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE
HELD IN TRUST; MISCELLANEOUS PROVISIONS. . . . . . . . 67
SECTION 8.06. REINSTATEMENT. . . . . . . . . . . . . . . . . . . . . 68
ARTICLE IX
AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 9.01. WITHOUT CONSENT OF HOLDERS . . . . . . . . . . . . . . 68
SECTION 9.02. WITH CONSENT OF HOLDERS. . . . . . . . . . . . . . . . 69
SECTION 9.03. EFFECT OF SUPPLEMENTAL INDENTURES. . . . . . . . . . . 70
SECTION 9.04. COMPLIANCE WITH TRUST INDENTURE ACT. . . . . . . . . . 70
SECTION 9.05. REVOCATION AND EFFECT OF CONSENTS AND WAIVERS. . . . . 70
SECTION 9.06. NOTATION ON OR EXCHANGE OF NOTES . . . . . . . . . . . 71
SECTION 9.07. TRUSTEE TO EXECUTE SUPPLEMENTAL INDENTURES . . . . . . 71
SECTION 9.08. EFFECT ON SENIOR INDEBTEDNESS. . . . . . . . . . . . . 72
ARTICLE X
SUBORDINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 10.01. AGREEMENT TO SUBORDINATE . . . . . . . . . . . . . . . 72
SECTION 10.02. LIQUIDATION; DISSOLUTION; BANKRUPTCY . . . . . . . . . 72
SECTION 10.03. DEFAULT ON DESIGNATED SENIOR INDEBTEDNESS. . . . . . . 73
SECTION 10.04. ACCELERATION OF NOTES. . . . . . . . . . . . . . . . . 74
SECTION 10.05. WHEN DISTRIBUTION MUST BE PAID OVER. . . . . . . . . . 74
SECTION 10.06. NOTICE BY COMPANY. . . . . . . . . . . . . . . . . . . 74
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SECTION 10.07. SUBROGATION. . . . . . . . . . . . . . . . . . . . . . 74
SECTION 10.08. RELATIVE RIGHTS. . . . . . . . . . . . . . . . . . . . 75
SECTION 10.09. SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY . . . . . 75
SECTION 10.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE . . . . . . . 75
SECTION 10.11. RIGHTS OF TRUSTEE AND PAYING AGENT . . . . . . . . . . 76
SECTION 10.12. AUTHORIZATION TO EFFECT SUBORDINATION. . . . . . . . . 76
SECTION 10.13. AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . 76
ARTICLE XI
SUBSIDIARY GUARANTEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
SECTION 11.01. ADDITION OF SUBSIDIARY GUARANTORS. . . . . . . . . . . 78
SECTION 11.02. RELEASE OF A SUBSIDIARY GUARANTOR. . . . . . . . . . . 79
SECTION 11.03. SUBSIDIARY GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN
TERMS. . . . . . . . . . . . . . . . . . . . . . . . . 77
SECTION 11.04. SUBORDINATION OF SUBSIDIARY GUARANTEES . . . . . . . . 80
ARTICLE XII
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
SECTION 12.01. TRUST INDENTURE ACT CONTROLS . . . . . . . . . . . . . 85
SECTION 12.02. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . 85
SECTION 12.03. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT . . 85
SECTION 12.04. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. . . . . 86
SECTION 12.05. RULES BY TRUSTEE, PAYING AGENT AND REGISTRAR . . . . . 86
SECTION 12.06. PAYMENTS ON BUSINESS DAYS. . . . . . . . . . . . . . . 86
SECTION 12.07. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . 86
SECTION 12.08. NO RECOURSE AGAINST OTHERS . . . . . . . . . . . . . . 86
SECTION 12.09. SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . 86
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SECTION 12.10. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . 87
SECTION 12.11. TABLE OF CONTENTS; HEADINGS. . . . . . . . . . . . . . 87
SECTION 12.12. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . 87
SECTION 12.13. FURTHER INSTRUMENTS AND ACTS . . . . . . . . . . . . . 87
EXHIBIT A FORM OF GLOBAL NOTE
EXHIBIT B FORM OF CERTIFICATED NOTE
EXHIBIT C FORM OF SUBSIDIARY GUARANTEE
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INDENTURE, dated as of _______________, 1996, between COSTILLA ENERGY,
INC., a Delaware corporation (the "Company"), having its principal office at
400 West Illinois, Suite 1000, Midland, Texas 79701, and STATE STREET BANK
AND TRUST COMPANY, a Massachusetts trust company, as trustee hereunder (the
"Trustee"), having its Corporate Trust Office at Two International Place,
Corporate Trust Department, 4th Floor, Boston, Massachusetts 02110.
RECITALS OF THE COMPANY
The Company has duly authorized the creation and issue of its ____%
Senior Subordinated Notes Due 2006 (the "Notes") of substantially the tenor
and amount hereinafter set forth, and to provide therefor, the Company has
duly authorized the execution and delivery of this Indenture.
All things necessary to make the Notes, when executed by the Company and
authenticated by the Trustee and delivered hereunder and duly issued by the
Company, the valid obligations of the Company and to make this Indenture a
valid instrument of the Company, in accordance with their respective terms,
have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH, that, for and in
consideration of the premises and the purchase of the Notes by the Holders
thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders of the Notes, as follows:
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 1.01. DEFINITIONS. For all purposes of this Indenture, except
as otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned
to them in this Article, and include the plural as well as the singular;
and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP.
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"ACQUIRED INDEBTEDNESS" means, with respect to any specified Person, (i)
any Indebtedness of any other Person existing at the time such other Person
is merged with or into or becomes a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or
in contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"ACT" when used with respect to any Holder, has the meaning set forth in
Section 1.05 hereof.
"ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS" means, as of the date of
determination, without duplication, (a) the sum of (i) discounted future net
revenue from proved oil and gas reserves of the Company and its Subsidiaries
calculated in accordance with Commission guidelines before any state or
federal income taxes, as estimated in a reserve report prepared as of the end
of the Company's most recently completed fiscal year, which reserve report is
prepared or audited by independent petroleum engineers, as increased by, as
of the date of determination, the discounted future net revenue of (A)
estimated proved oil and gas reserves of the Company and its Subsidiaries
attributable to any acquisition consummated since the date of such year-end
reserve report, and (B) estimated oil and gas reserves of the Company and its
Subsidiary attributable to extensions, discoveries and other additions and
upward revisions of estimates of proved oil and gas reserves due to
exploration, development, exploitation, production or other activities
conducted or otherwise occurring since the date of such year-end reserve
report which would, in the case of determinations made pursuant to clauses
(A) and (B), in accordance with standard industry practice, result in such
additions or revisions, in each case calculated in accordance with Commission
guidelines (utilizing the prices utilized in such year-end reserve report),
and decreased by, as of the date of determination, the discounted future net
revenue of (C) estimated proved oil and gas reserves of the Company and its
Subsidiaries produced or disposed of since the date of such year-end reserve
report and (D) reductions in the estimated oil and gas reserves of the
Company and its Subsidiaries since the date of such year-end reserve report
attributable to downward revisions of estimates of proved oil and gas
reserves due to exploration, development, exploitation, production or other
activities conducted or otherwise occurring since the date of such year-end
reserve report which would, in the case of determinations made pursuant to
clauses (C) and (D), in accordance with standard industry practice, result in
such revisions, in each case calculated in accordance with Commission
guidelines (utilizing the prices utilized in such year-end reserve report);
provided that, in the case of each of the determinations made pursuant to
clauses (A) through (D), such increases and decreases shall be as estimated
by the Company's engineers, except that if as a result of such acquisitions,
dispositions, discoveries, extensions or revisions, there is a Material
Change that is an increase, then such increases and decreases in the
discounted future net revenue shall be confirmed in writing by independent
petroleum engineers, (ii) the capitalized costs that are attributable to oil
and gas properties of the Company and its Subsidiaries to which no proved oil
and gas reserves are attributed, based on the Company's books and records as
of a date no earlier than the date of the Company's latest annual or
quarterly financial statements, (iii) the net working capital (which shall be
calculated as all current assets of the Company and its Subsidiaries minus
all current liabilities of the Company and its Subsidiaries, except current
liabilities included in Indebtedness on a date no earlier than the date of
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the Company's latest annual or quarterly financial statements) and (iv) the
greater of (I) the net book value of the other tangible assets of the Company
and its Subsidiaries on a date no earlier than the date of the Company's
latest annual or quarterly financial statements and (II) the appraised value,
as estimated by independent appraisers, of other tangible assets of the
Company and its Subsidiaries as of a date no earlier than the date of the
Company's latest audited financial statements, minus (b) the sum of (i)
minority interests of third parties to the extent included in the calculation
of the immediately preceding clause (a), (ii) the positive remainder, if any,
obtained by subtracting (I) gas balancing underpayments of the Company and
its Subsidiaries reflected in the Company's latest audited financial
statements and not otherwise included in the calculation of the immediately
preceding clause (a) from (II) any gas balancing liabilities of the Company
and its Subsidiaries reflected in the Company's latest audited financial
statements and not otherwise included in the calculation of the immediately
preceding clause (a), and (iii) the discounted future net revenue,
calculated in accordance with Commission guidelines (utilizing the same
prices utilized in the Company's year-end reserve report), attributable to
oil and gas reserves of the Company and its Subsidiaries subject to
participation interests, overriding royalty interests or other interests of
third parties, pursuant to participation, partnership, vendor financing or
other agreements then in effect other than pursuant to Production Payments,
or that otherwise are required to be delivered to third parties other than
pursuant to Production Payments.
"ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS TO CONSOLIDATED INDEBTEDNESS
RATIO" means, at any time, the ratio of Adjusted Consolidated Net Tangible
Assets at such time, to Consolidated Indebtedness at such time.
"ADJUSTED NET ASSETS" of a Subsidiary Guarantor at any date shall mean
the amount by which the fair value of the property of such Subsidiary
Guarantor exceeds the total amount of liabilities of such Subsidiary
Guarantor, including, without limitation, contingent liabilities (after
giving effect to all other fixed and contingent liabilities incurred or
assumed on such date), but excluding liabilities under such Subsidiary
Guarantor's Subsidiary Guarantee at such date.
"AFFILIATE" of any specified Person means (i) any other Person directly
or indirectly controlling or controlled by or under direct or indirect common
control with such specified Person or (ii) any other Person who is a director
or executive officer of (a) such specified Person or (b) any Person described
in the preceding clause (i). For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of any class, or any series
of any class, of equity securities of a Person, whether or not voting, shall
be deemed to be control.
"AFFILIATE TRANSACTION" has the meaning set forth in Section 4.16 hereof.
"AGENT MEMBER" has the meaning set forth in Section 2.05(a) hereof.
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"APPROVED STOCKHOLDERS" means Cadell S. Liedtke, Michael J. Grella and
Henry G. Musselman and their respective Beneficiaries.
"ASSET SALE" means with respect to any Person, the sale, lease,
conveyance or other disposition, that does not constitute a Restricted
Payment or an Investment, by such Person of any of its assets (including,
without limitation, by way of a Sale and Leaseback Transaction and including
the issuance, sale or other transfer of any Equity Interests in any
Subsidiary or the sale or other transfer of any Equity Interests in any
Unrestricted Subsidiary of such Person) other than to the Company (including
the receipt of proceeds of insurance paid on account of the loss of or damage
to any asset and awards of compensation for any asset taken by condemnation,
eminent domain or similar proceeding, and including the receipt of proceeds
of business interruption insurance), in each case, in one or a series of
related transactions; PROVIDED that, notwithstanding the foregoing, the term
"Asset Sale" shall not include: (a) the sale, lease, conveyance, disposition
or other transfer of all or substantially all of the assets of the Company,
as permitted pursuant to Article V, (b) the sale or lease of hydrocarbons or
other mineral interests in the ordinary course of business and customary in
the Oil and Gas Business, (c) any Production Payment, (d) a transfer of
assets by the Company to a Wholly Owned Subsidiary of the Company (other than
any Principal Properties) or by a Wholly Owned Subsidiary of the Company to
the Company or to another Wholly Owned Subsidiary of the Company, (e) an
issuance of Equity Interests by a Wholly Owned Subsidiary of the Company to
the Company or to another Wholly Owned Subsidiary of the Company, (f) sale or
other disposition of cash or Cash Equivalents or (g) any lease, abandonment,
disposition, relinquishment or farm out of any oil and gas property that are
customary in nature and scope in the Oil and Gas Business and are entered into
in the ordinary course of the Oil and Gas Business of the Company and its
Subsidiaries.
"ASSET SALE OFFER" has the meaning set forth in Section 4.08(d) hereof.
"ASSET SALE PAYMENT DATE" has the meaning set forth in Section
4.08(e)(ii) hereof.
"ASSET SALE PURCHASE PRICE" has the meaning set forth in Section 4.08(d)
hereof
"BENEFICIARY" when used with respect to any individual, means the
spouse, lineal descendants, parents and siblings of any such individual, the
estates and the legal representatives of any such individual and any of the
foregoing and the trustee of any bona fide trust of which any such individual
and any of the foregoing are the sole beneficiaries or grantors.
"BOARD OF DIRECTORS" means, with respect to any Person, the Board of
Directors of such Person or any committee thereof duty authorized to act on
behalf of such Board.
"BOARD RESOLUTION" means, with respect to any Person, a duly adopted
resolution of the Board of Directors in full force and effect at the time of
determination and certified as such by the Secretary or an Assistant
Secretary of such Person.
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"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a day on which banking institutions in The City of New
York are authorized or obligated by law, executive order or regulation to
close.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease
which would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, capital stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of capital stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation
that confers on a Person the right to receive a share of the profits and
losses of, or distributions of assets of, the issuing Person.
"CASH EQUIVALENT" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the
United States is pledged in support thereof) having maturities not more than
twelve months from the date of acquisition, (b) U.S. dollar denominated (or
foreign currency fully hedged) time deposits, certificates of deposit,
Eurodollar time deposits or Eurodollar certificates of deposit of (i) any
domestic commercial bank of recognized standing having capital and surplus in
excess of $500 million or (ii) any bank whose short-term commercial paper
rating from S&P is at least A-1 or the equivalent thereof or from Moody's is
at least P-1 or the equivalent thereof (any such bank being an "Approved
Lender"), in each case with maturities of not more than twelve months from
the date of acquisition, and (c) commercial paper issued by any Approved
Lender (or by the parent company thereof) or any variable rate notes issued
by, or guaranteed by, any domestic corporation rated A-1 (or the equivalent
thereof) or better by S&P or P-1 (or the equivalent thereof) or better by
Moody's and maturing within twelve months of the date of acquisition.
"CERTIFICATED NOTES" means Notes issued in definitive, fully registered
form to beneficial owners of interests in the Global Note pursuant to Section
2.06(a) hereof.
"CHANGE OF CONTROL" means
(i) any "person" or "group" (as such terms are used in Sections
13(d) and 14(d) of the Exchange Act) other than the Approved
Stockholders, is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of more than 50%
of the total Voting Stock of the Company; or
(ii) the Company is merged with or into or consolidated with
another Person and, immediately after giving effect to the merger or
consolidation, (A) less than 50% of the total voting power of the
outstanding Voting Stock of the surviving or resulting Person is then
"beneficially owned" (within the meaning of Rule 13d-3 under the
Exchange Act) in the aggregate by the stockholders of the Company
immediately prior to such merger or consolidation, and (B)
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any "person" or "group" (as defined in Section 13(d)(3) or 14(d)(2) of
the Exchange Act) other than the Approved Stockholders, has become the
direct or indirect "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act) of more than 50% of the total voting power of the
Voting Stock of the surviving or resulting Person; or
(iii) the Company, either individually or in conjunction with one
or more Subsidiaries, sells, assigns, conveys, transfers, leases or
otherwise disposes of, or the Subsidiaries sell, assign, convey,
transfer, lease or otherwise dispose of, all or substantially of the
properties of the Company and the Subsidiaries, taken as a whole (either
in one transaction or a series of related transactions) including
Capital Stock of the Subsidiaries, to any Person (other than the Company
or a Wholly Owned Subsidiary); or
(iv) during any consecutive two-year period, individuals who at
the beginning of such period constituted the Board of Directors of the
Company (together with any new directors whose election by such Board of
Directors or whose nomination for election by the stockholders of the
Company was approved by a vote of a majority of the directors then still
in office who were either directors at the beginning of such period or
whose election or nomination for election was previously so approved)
cease for any reason to constitute a majority of the Board of Directors
of the Company then in office; or
(v) the liquidation or dissolution of the Company.
"CHANGE OF CONTROL OFFER" has the meaning set forth in Section 4.07(a)
hereof.
"CHANGE OF CONTROL PAYMENT DATE" has the meaning set forth in Section
4.07(a) hereof.
"CHANGE OF CONTROL PURCHASE PRICE" has the meaning set forth in Section
4.07(a) hereof.
"CLEARING AGENCY" has the meaning set forth in Section 3(a)(23) of the
Exchange Act.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMISSION" means the United States Securities and Exchange Commission,
as from time to time constituted, created under the Exchange Act, or, if at
any time after the execution of this Indenture such commission is not
existing and performing the duties now assigned to it under the Trust
Indenture Act, the body performing such duties at such time.
"COMPANY" means the party named as such in the preamble to this
Indenture until a successor replaces it pursuant to the applicable provisions
hereof and, thereafter, means such successor.
"COMPANY ORDER" means a written order signed in the name of the Company
by (i) its Chairman of the Board, President, a Vice Chairman or a Vice
President, and (ii) its Treasurer, an Assistant Treasurer, its Secretary or
an Assistant Secretary.
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CONSOLIDATED EBITDA means, with respect to any Person for any period,
the sum of, without duplication, (i) the Consolidated Net Income of such
Person and its Subsidiaries for such period, plus (ii) to the extent deducted
in the computation of such Consolidated Net Income, the Consolidated Interest
Expense for such period, plus (iii) to the extent deducted in the computation
of such Consolidated Net Income, amortization of deferred financing charges
for such period, plus (iv) provision for taxes based on income or profits for
such period (to the extent such income or profits were included in computing
Consolidated Net Income for such period), plus (v) to the extent deducted in
the computation of such Consolidated Net Income, consolidated depreciation,
depletion, amortization and other noncash charges of such Person and its
Subsidiaries required to be reflected as expenses on the books and records of
such Person, plus (vi) to the extent deducted in the computation of such
Consolidated Net Income, consolidated exploration and abandonment expenses of
such Person and its Subsidiaries for such periods, minus (vii) cash payments
with respect to any nonrecurring, noncash charges previously added back
pursuant to clause (v), and excluding (viii) the impact of foreign currency
translations. Notwithstanding the foregoing, the provision for taxes based
on the income or profits of, and the depreciation, depletion and amortization
and other noncash charges of, and the exploration and abandonment expenses
of, a Subsidiary of a Person shall be added to Consolidated Net Income to
compute Consolidated EBITDA only to the extent (and in the same proportion)
that the Net Income of such Subsidiary was included in calculating the
Consolidated Net Income of such Person and only if a corresponding amount
would be permitted at the date of determination to be dividended to such
Person by such Subsidiary without prior approval (unless such approval has
been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its stockholders.
"CONSOLIDATED INDEBTEDNESS" means, with respect to any Person for any
time, the Indebtedness of such Person and its Subsidiaries at such time as
determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED INTEREST COVERAGE RATIO" means with respect to any Person
for any period, the ratio of (i) Consolidated EBITDA of such Person and its
Subsidiaries for such period to (ii) Consolidated Interest Expense of such
Person and its Subsidiaries for such period. In the event that the Company
or any of its Subsidiaries incurs, assumes, Guarantees or repays or redeems
any Indebtedness (other than revolving credit borrowings) or issues or
redeems preferred stock subsequent to the commencement of the four-quarter
reference period for which the Consolidated Interest Coverage Ratio is being
calculated but on or prior to the date on which the event for which the
calculation of the Consolidated Interest Coverage Ratio is made (the
"Calculation Date"), then the Consolidated Interest Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, Guarantee,
repayment or redemption of Indebtedness, or such issuance or redemption of
preferred stock, as if the same had occurred at the beginning of the
applicable four-quarter reference period. For purposes of making the
computation referred to above, (i) acquisitions that have been made by the
Company or any of its Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on
or prior to the Calculation Date shall be deemed
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to have occurred on the first day of the four-quarter reference period, and
(ii) the Consolidated EBITDA attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, and (iii) the Consolidated
Interest Expense attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the
obligations giving rise to such Consolidated Interest Expense will not be
obligations of the referent Person or any of its Subsidiaries following the
Calculation Date.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for
any period, the sum, without duplication, of (i) the consolidated interest
expense of such Person and its Subsidiaries for such period including,
without limitation, amortization of original issue discount, noncash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments (if any)
pursuant to Hedging Obligations, but excluding amortization or write-off of
deferred financing charges for such period, and (ii) the consolidated interest
expense of such Person and its Subsidiaries that was capitalized during such
period, and (iii) any interest expense on Indebtedness of another Person that
is Guaranteed by such Person or one of its Subsidiaries or secured by a Lien
on assets of such Person or one of its Subsidiaries (whether or not such
Guarantee or Lien is called upon), and (iv) the product of (a) all cash
dividend payments (and noncash dividend payments in the case of a Person that
is a Subsidiary) on any series of preferred stock of such Person payable to a
party other than the Company or a Wholly Owned Subsidiary, times (b) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate
of such Person, expressed as a decimal, on a consolidated basis and in
accordance with GAAP.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED that (i) the Net Income (but not loss) of any Person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall
be included only to the extent of the amount of dividends or distributions
paid in cash to the referent Person or a Wholly Owned Subsidiary thereof,
(ii) the Net Income of any Subsidiary shall be excluded to the extent that
the declaration or payment of dividends or similar distributions by that
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (unless such approval has been
obtained) or, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Subsidiary or its stockholders,
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded, (iv) the cumulative effect of a change in accounting principles
shall be excluded, and (v) the Net Income of, or any dividends or other
distributions from, any Unrestricted Subsidiary, to the extent otherwise
included, shall be excluded, unless distributed to the Company or one of its
Subsidiaries.
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"CONSOLIDATED NET WORTH" means, with respect to any Person as of any
date, the consolidated stockholders' equity of such Person and its
consolidated Subsidiaries as of such date less (w) the amount of such
stockholders' equity attributable to Disqualified Stock, (x) all write-ups
subsequent to the date of this Indenture in the book value of any asset owned
by such Person or a consolidated Subsidiary of such Person (other than
purchase accounting adjustments made, in connection with any acquisition of
any entity that becomes a consolidated Subsidiary of such Person after the
date of this Indenture to the book value of the assets of such entity), (y)
all investments as of such date in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, Permitted Investments), and
(z) all unamortized debt discount and expense and unamortized deferred charges
as of such date, all of the foregoing determined in accordance with GAAP.
"CORPORATE TRUST OFFICE" means the principal office of the Trustee at
which at any particular time its corporate trust business shall be principally
administered, which office is, at the date of execution of this Indenture,
located at Two International Place, Corporate Trust Department, 4th Floor,
Boston, Massachusetts 02110.
"COVENANT DEFEASANCE" has the meaning set forth in Section 8.03 hereof.
"CREDIT FACILITY" means a credit facility that may be entered into among
the Company and the lenders parties thereto (which shall initially be a
credit facility among the Company, Nations-Bank of Texas, N.A. or one of its
affiliates, as agent, and the other lenders parties thereto), including any
related notes, guarantees, collateral documents, instruments and agreements
executed in connection therewith, and in each case as amended, modified,
renewed, extended, refunded, replaced, restated or refinanced from time to
time.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"DEFAULTED INTEREST" has the meaning set forth in Section 2.11 hereof.
"DEPOSITARY" means The Depository Trust Company, its nominees, and their
respective successors.
"DESIGNATED GUARANTOR SENIOR INDEBTEDNESS" means (i) so long as the Senior
Bank Indebtedness is outstanding, any Subsidiary Guarantor's Indebtedness in
respect of the Senior Bank Indebtedness and (ii) thereafter, any other Guarantor
Senior Indebtedness permitted under this Indenture the principal amount of which
is $15.0 million or more and that has been designated by the Company as
"Designated Guarantor Senior Indebtedness"; PROVIDED that for purposes of
Section 11.10(a) hereof, "Designated Guarantor Senior Indebtedness" shall also
mean any other Guarantor Senior Indebtedness permitted under this Indenture the
principal amount of which is $15.0 million or more.
"DESIGNATED SENIOR INDEBTEDNESS" means (i) so long as the Senior Bank
Indebtedness is outstanding, the Senior Bank Indebtedness and (ii) thereafter,
any other Senior Indebtedness
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permitted under this Indenture the principal amount of which is $15.0 million
or more and that has been designated by the Company as "Designated Senior
Indebtedness"; PROVIDED that for purposes of Section 10.03(a) hereof,
"Designated Senior Indebtedness" shall also mean any other Senior
Indebtedness permitted under this Indenture the principal amount of which is
$15.0 million or more.
"DISQUALIFIED STOCK" means (a) with respect to any Person, Capital Stock
of such Person that, by its terms (or by the terms of any security into which
it is convertible or for which it is exchangeable), or upon the happening of
any event (unless any redemption or repurchase of such Capital Stock upon the
occurrence of such event is required by any such terms, but only to the extent
that a payment in respect thereof would be permitted under Section 4.11 hereof),
matures or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or is redeemable at the option of the Holder thereof, in whole or
in part, on or prior to the date which is one year after the date on which the
Notes mature and (b) with respect to any Subsidiary of such Person (including
with respect to any Subsidiary of the Company), any Capital Stock other than
any common stock with no preference, privileges, or redemption or repayment
provisions.
"DOLLAR-DENOMINATED PRODUCTION PAYMENTS" means dollar denominated
payment obligations of the Company or any of its Subsidiaries that are or,
upon the occurrence of a contingent event, would be recorded as liabilities
in accordance with GAAP, together with all undertakings and obligations of
the Company or any of its Subsidiaries in connection therewith, which
obligations will be deemed to constitute Indebtedness for borrowed money for
purposes of this Indenture.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock), whether outstanding
prior to, on or after the date of this Indenture.
"EQUITY OFFERING" means an offer and sale of Qualified Stock of the Company
to a Person other than an Affiliate of the Company.
"EVENT OF DEFAULT" has the meaning set forth in Section 6.01 hereof.
"EXCESS PROCEEDS" has the meaning set forth in Section 4.08(c) hereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"EXEMPT AFFILIATE TRANSACTIONS" means (a) transactions between or among
the Company and/or its Wholly Owned Subsidiaries, (b) advances not to exceed
$1,000,000 at any time outstanding to officers of the Company or any Subsidiary
of the Company in the ordinary course of business to provide for the payment
of reasonable expenses incurred by such persons in the performance of their
responsibilities to the Company or such Subsidiary or in connection with any
relocation, (c) fees and compensation paid to and indemnity provided on behalf
of directors, officers or employees of the Company or any Subsidiary of the
Company in the ordinary course of business, (d) any employment
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agreement that is in effect on the date of the Indenture in the ordinary
course of business and any such agreement entered into by the Company or a
Subsidiary after the date of this Indenture in the ordinary course of
business of the Company or such Subsidiary and (e) payments and transactions
under Indebtedness of A&P Meter Service and Supply, Inc. ("A&P")
outstanding on the date of this Indenture and performance of and payment for
services provided by A&P to the Company and its Subsidiaries in the ordinary
course of business consistent with past practices.
"FUNDING GUARANTOR" has the meaning specified in Section 3 of the
Subsidiary Guarantees.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of American
Institute of Certified Public Accountants and statements and pronouncements
of the Financial Accounting Standards Board or in such other statements by
such other entity as have been approved by a significant segment of the
accounting profession, which are in effect on the date of this Indenture.
"GLOBAL NOTES" has the meaning set forth in Section 2.01(c) hereof.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"GUARANTOR SENIOR INDEBTEDNESS" means (i) all Guarantees or other
Indebtedness of a Subsidiary Guarantor in respect of the Senior Bank
Indebtedness and (ii) any other indebtedness permitted to be incurred by a
Subsidiary Guarantor under the terms of this Indenture, unless the instrument
under which such Indebtedness is incurred expressly provides that it is
subordinated in right of payment to any Indebtedness for money borrowed.
Notwithstanding anything to the contrary in the foregoing, Guarantor Senior
Indebtedness will not include (w) any liability for federal, state, local or
other taxes owed or owing by a Subsidiary Guarantor, (x) any Indebtedness of
a Subsidiary Guarantor to any of the Company's Subsidiaries, Unrestricted
Subsidiaries or other Affiliates, (y) any trade payables or (z) any
Indebtedness that is incurred in violation of this Indenture.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations
of such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in (a)
interest rates, (b) the value of foreign currencies and (c) Oil and Gas
Purchase and Sales Contracts.
"HOLDER" means (i) in the case of any Certificated Note, the Person in
whose name such Certificated Note is registered in the Security Register and
(ii) in the case of any Global Note, the Depositary.
"INDEBTEDNESS" means, with respect to any Person, without duplication,
(a) all liabilities of such Person for borrowed money or for the deferred
purchase price of property or services (excluding
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any trade accounts payable and other accrued current liabilities incurred in
the ordinary course of business), and all liabilities of such Person incurred
in connection with any letters of credit, bankers' acceptances or other
similar credit transactions or any agreement to purchase, redeem, exchange,
convert or otherwise acquire for value any Capital Stock of such Person, or
any warrants, rights or options to acquire such Capital Stock outstanding on
the date of this Indenture or thereafter, if, and to the extent, any of the
foregoing would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, (b) all obligations of such Person
evidenced by bonds, notes, debentures or other similar instruments, if, and
to the extent, any of the foregoing would appear as a liability upon a
balance sheet of such Person prepared in accordance with GAAP, (c) all
Indebtedness of such Person created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such
Person (even if the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), but excluding trade accounts payable arising in the ordinary
course of business, (d) all Capitalized Lease Obligations of such Person, (e)
all Indebtedness referred to in the preceding clauses of other Persons and
all dividends of other Persons, the payment of which is secured by (or for
which the holder of such Indebtedness has an existing right to be secured by)
any Lien upon property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or
become liable for the payment of such Indebtedness (the amount of such
obligation being deemed to be the lesser of the value of such property or
asset or the amount of the obligation so secured) (f) all Production Payments
of such Person, (g) all guarantees by such Person of Indebtedness referred to
in this definition, (h) all Disqualified Stock of such Person valued at the
greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued dividends and (i) all obligations of such Person under or in respect
to currency exchange contracts, oil or natural gas price hedging arrangements
and Hedging Obligations. For purposes hereof, the "maximum fixed repurchase
price" of Disqualified Stock which does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Stock
as if Disqualified Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to this Indenture, and if such
price is based upon, or measured by, the fair market value of such
Disqualified Stock, such fair market value shall be determined in good faith
by the board of directors of the issuer of such Disqualified Stock; provided,
however, that if such Disqualified Stock is not at the date of determination
permitted or required to be repurchased, the "maximum fixed repurchase price"
shall be the book value of such Disqualified Stock.
"INDENTURE" means this instrument as originally executed or as it may from
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof, including,
for all purposes of this instrument and any such supplemental indenture, the
provisions of the Trust Indenture Act that are deemed to be a part of and govern
this instrument, and any such supplemental indenture, respectively.
"INTEREST PAYMENT DATE" means the Stated Maturity of an installment of
interest on the Notes.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of direct or
indirect loans (including guarantees of
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Indebtedness or other obligations), advances or capital contributions (excluding
advances to officers and employees of the type specified in clause (b) of the
definition of Exempt Affiliate Transactions), purchases or other acquisitions
for consideration of Indebtedness, Equity Interests or other securities and all
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP or the acquisition, by purchase or
otherwise, of all or substantially all of the business or assets of any other
Person.
"ISSUE DATE" means the date on which the Notes are first authorized and
delivered under this Indenture.
"LEGAL DEFEASANCE" has the meaning set forth in Section 8.02 hereof.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"MATERIAL CHANGE" means an increase or decrease (excluding changes that
result solely from changes in prices) of more than 10% during a fiscal
quarter in the discounted future net cash flows from proved oil and gas
reserves of the Company and its Subsidiaries calculated in accordance with
clause (a)(i) of the definition of Adjusted Consolidated Net Tangible Assets;
provided, however, that the following will be excluded from the calculation
of Material Change: (i) any acquisition during the quarter of oil and gas
reserves that have been estimated by independent petroleum engineers and on
which a report or reports exists and (ii) any disposition of properties
existing at the beginning of such quarter that have been disposed of pursuant
to the provisions of this Indenture described below under Section 4.08.
"MATURITY" means, when used with respect to a Note, the date on which
the principal of such Note becomes due and payable as provided therein or in
this Indenture, whether on the date specified in such Note as the fixed date
on which the principal of such Note is due and payable, on the Change of
Control Payment Date or the Asset Sale Payment Date, or by declaration of
acceleration, call for redemption or otherwise.
"MOODY'S" means Moody's Investors Service, Inc., or, if Moody's
Investors Service, Inc. shall cease rating the specified debt securities and
such ratings business with respect thereto shall have been transferred to a
successor Person, such successor Person; PROVIDED that if Moody's Investors
Service, Inc. ceases rating the specified debt securities and its ratings
business with respect thereto shall not have been transferred to any
successor Person or such successor Person is S&P, then "Moody's" shall mean
any other nationally recognized rating agency (other than S&P) that rates the
specified debt securities and that shall have been designated by the Company
in an Officers' Certificate.
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<PAGE>
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss, except as provided in (b) below), together with any related
provision for taxes on such gain (but not loss), realized in connection with
(a) any Asset Sale (including, without limitation, dispositions pursuant to
Sale and Leaseback Transactions) or (b) the disposition of any securities by
such Person or any of its Subsidiaries or the extinguishment of any
Indebtedness of such Person or any of its Subsidiaries, other than such
losses arising out of the extinguishment of Indebtedness refinanced from the
proceeds of the Notes and other securities issued contemporaneously with the
Notes, (ii) any extraordinary or nonrecurring gain (but not loss, except as
provided in (i) above), together with any related provision for taxes on such
extraordinary or nonrecurring gain (but not loss), and (iii) any gain (but
not loss) from currency exchange transactions not in the ordinary course of
business consistent with past practice.
"NET PROCEEDS" means the aggregate cash proceeds received by the Company
or any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any
noncash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation
expenses incurred as a result thereof, taxes paid or payable as a result
thereof, and any reserve for adjustment in respect of the sale price of such
asset or assets established in accordance with GAAP.
"NON-RECOURSE INDEBTEDNESS" means Indebtedness (i) as to which neither
the Company nor any of its Subsidiaries (a) provides credit support of any
kind (including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a Subsidiary Guarantor
or otherwise), or (c) constitutes the lender; and (ii) no default with respect
to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior
to its Stated Maturity.
"NOTES" has the meaning set forth in the Recitals of the Company and more
particularly means any of the Notes authenticated and delivered under this
Indenture.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFICER" means the Chairman of the Board of Directors, a Vice Chairman
of the Board of Directors, the President, a Vice President, the Chief Financial
Officer, the Chief Accounting Officer, the Treasurer, an Assistant Treasurer,
the Secretary or an Assistant Secretary of the Company or any Subsidiary
Guarantor.
"OFFICERS' CERTIFICATE" means a certificate signed by (i) the Chairman
of the Board of Directors, a Vice Chairman of the Board of Directors, the
President, the Chief Executive Officer or a Vice President of the Company or
any Subsidiary Guarantor, and (ii) the Chief Financial Officer, the Chief
Accounting Officer, the Treasurer, an Assistant Treasurer, the Secretary or
an Assistant Secretary
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of the Company or any Subsidiary Guarantor, and delivered to the Trustee,
which certificate shall comply with the provisions of Section 11.02 hereof;
PROVIDED that any Officers' Certificate delivered pursuant to the first
paragraph of Section 4.19 hereof shall be signed by the Chief Executive
Officer, the Chief Financial Officer or the Chief Accounting Officer.
"OIL AND GAS BUSINESS" means the business of the exploration for, and
development, acquisition, and production of hydrocarbons, together with
activities ancillary thereto (including with limitation, the gathering,
processing, treatment, marketing and transportation of such production) and
other related energy and natural resources businesses.
"OIL AND GAS PURCHASE AND SALE CONTRACT" means with respect to any
Person, any oil and gas agreements and other agreements or arrangements or
any combination thereof entered into by such Person in the ordinary course of
business and that is designed to provide protection against oil and natural
gas price fluctuations.
"OPINION OF COUNSEL" means a written opinion from legal counsel (who may
be counsel to the Company, any Subsidiary Guarantor or the Trustee) who is
acceptable to the Trustee, which opinion shall comply with the provisions of
Section 11.02 hereof; provided that any Opinion of Counsel delivered pursuant
to Section 8.04 hereof shall not be rendered by an employee of the Company or
any of its Subsidiaries.
"PARI PASSU INDEBTEDNESS" means Indebtedness of (a) the Company that is
PARI PASSU with or subordinated to the Notes (other than the Notes) or (b)
any Subsidiary Guarantor that is PARI PASSU with or subordinated to such
Subsidiary Guarantor's Subsidiary Guarantee (other than such Subsidiary
Guarantee or Indebtedness secured by such Subsidiary Guarantee).
"PAYING AGENT" means any Person authorized by the Company to make payments
of principal, premium or interest with respect to the Notes on behalf of the
Company.
"PERMITTED INVESTMENTS" means (a) any Investments by the Subsidiaries of
the Company in the Company; (b) any Investments in Cash Equivalents; (c)
Investments made as a result of the receipt of noncash consideration from an
Asset Sale that was made pursuant to and in compliance with Section
4.08(b)(ii); (d) Investments outstanding as of the date of this Indenture;
(e) Investments in Wholly Owned Subsidiaries that are engaged in the Oil and
Gas Business and Investments in any Person that, as a result of such
Investment (or a series of substantially contemporaneous Investments pursuant
to a single plan) (x) such other Person becomes a Wholly Owned Subsidiary
engaged in the Oil and Gas Business or (y) such other Person that is engaged
in the Oil and Gas Business is merged or consolidated with or into, or
transfers or conveys all or substantially all of its assets to the Company or
a Wholly Owned Subsidiary in a transaction permitted under the Indenture; (f)
entry into operating agreements, joint ventures, partnership agreements,
working interests, royalty interests, mineral leases, processing agreements,
farm-out agreements, contracts for the sale, transportation or exchange of
oil and natural gas, unitization agreements, pooling arrangements, area of
mutual interest agreements or other similar or customary agreements,
transactions, properties, interests or arrangements, and Investments and
expenditures in connection therewith or pursuant thereto, in each case made
or entered into in the ordinary course of the Oil and Gas Business,
excluding, however, Investments in corporations; (g) entry into any hedging
arrangements in the ordinary course of business for the purpose of protecting
the Company's or any Subsidiary's production against fluctuations in oil or
natural gas prices; (h) shares of money mutual or similar funds having assets
in excess of $500,000,000, and (i) Investments in an aggregate amount not to
exceed $5,000,000 at any one time outstanding.
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"PERMITTED LIENS" means (a) liens for taxes, assessments and
governmental charges not then due or the validity of which is being contested
in good faith by appropriate proceedings, promptly instituted and diligently
conducted, and for which adequate reserves have been established to the
extent required by GAAP; (b) mechanics', workmen's, materialman's, operator's
or similar liens arising in the ordinary course of business; (c) easements,
rights of way, restrictions and other similar encumbrances incurred in the
ordinary course of business or minor imperfections in title that do not
impair the value of property for its intended use; (d) liens on, or related
to, properties to secure all or part of the costs incurred in the ordinary
course of business of exploration, drilling, development or operation
thereof; (e) judgment and attachment liens not giving rise to an Event of
Default or liens created by or existing from any litigation or legal
proceeding that are currently being contested in good faith by appropriate
proceedings, promptly instituted and diligently conducted, and for which
adequate reserves have been made to the extent required by GAAP; (f) liens on
deposits made in the ordinary course of business; (g) liens in favor of
collecting or payor banks having a right of selloff, revocation, refund or
chargeback with respect to money or instruments of the Company or any
Subsidiary on deposit with or in possession of such bank (h) liens on
pipeline or pipeline facilities which arise out of operation of law; (i)
liens on deposits to secure public or statutory obligations or in lieu of
surety or appeal bonds entered into in the ordinary course of business; (j)
liens reserved in oil and gas leases for bonus or rental payments and for
compliance with the terms of such leases; and (k) liens arising under
partnership agreements, oil and gas leases, farmout agreements, division
orders, contracts for the sale, purchase, exchange, transportation or
processing of oil, gas or other hydrocarbons, unitization and pooling
declarations and agreements, development agreements, operating agreements,
area of mutual interest agreements and other agreements that are customary in
the Oil and Gas Business.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the
Company or any of its Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund, other Indebtedness of the Company or any of its Subsidiaries;
provided that: (i) the principal amount of such Permitted Refinancing
Indebtedness does not exceed the principal or accrued amount of the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection therewith);
(ii) such Permitted Refinancing Indebtedness has a Weighted Average Life to
Maturity and a final maturity date equal to or greater than the Weighted
Average Life to Maturity and a final maturity date, respectively, of the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Notes, such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and is subordinated in right of
payment to, the Notes on terms at least as favorable to the Holders of Notes
as those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness is incurred either by the Company or by the Subsidiary who is
the obligor on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.
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"PERSON" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"PRINCIPAL PROPERTIES" means the oil and gas properties and other
tangible assets and properties owned by Company on the date of this Indenture
(collectively, the "Original Principal Properties") and assets and properties
of the Company obtained in exchange for any of the Original Principal
Properties.
"PRODUCTION PAYMENTS" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
"PRO FORMA" means, with respect to any calculation made or required to
be made pursuant to the terms hereof, a calculation in accordance with
Article 11 of Regulation S-X promulgated under the Securities Act (to the
extent applicable), as interpreted in good faith by the Board of Directors of
the Company, or otherwise, a calculation made in good faith by the Board of
Directors of the Company, as the case may be.
"PROPERTY" means, with respect to any Person, any interest of such
Person in any kind of property or asset, whether real, personal or mixed,
tangible or intangible, excluding Capital Stock in any other Person.
"PURCHASE MONEY OBLIGATIONS" of any Person means any obligations of such
Person to any seller or any other Person incurred or assumed to finance the
construction and/or acquisition of real or personal property to be used in
the business of such Person or any of its Subsidiaries in an amount that is
not more than 100% of the cost of such property, and incurred within 180 days
after the date of such construction or acquisition (excluding accounts
payable to trade creditors incurred in the ordinary course of business).
"QUALIFIED STOCK" means, for any Person, any and all Capital Stock of
such Person, other than Disqualified Stock.
"RECORD DATE" means, for the interest payable on any Interest Payment
Date, the date specified in Section 2.11 hereof.
"REDEMPTION DATE" means, when used with respect to any Note or part
thereof to be redeemed hereunder, the date fixed for redemption of such Notes
pursuant to the terms of the Notes and this Indenture.
"REDEMPTION PRICE" means when used with respect to any Note or part
thereof to be redeemed hereunder, the price fixed for redemption of such Note
pursuant to the terms of the Notes and this Indenture, plus accrued and
unpaid interest, if any, to the Redemption Date.
"REGISTRAR" has the meaning set forth in Section 2.03 hereof.
"REPRESENTATIVE" means the indenture trustee or other trustee, agent or
representative for any Senior Indebtedness or Guarantor Senior Indebtedness.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
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"RESTRICTED PAYMENT" has the meaning set forth in Section 4.11 hereof.
"S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill
Corporation, or, if Standard & Poor's Ratings Group shall cease rating the
specified debt securities and such ratings business with respect thereto
shall have been transferred to a successor Person, such successor Person;
PROVIDED that if Standard & Poor's Ratings Group ceases rating the specified
debt securities and its ratings business with respect thereto shall not have
been transferred to any successor Person or such successor Person is Moody's,
then "S&P" shall mean any other nationally recognized rating agency (other
than Moody's) that rates the specified debt securities and that shall have
been designated by the Company in an Officers' Certificate.
"SALE AND LEASEBACK TRANSACTION" means, with respect to the Company or
any of its Subsidiaries, any arrangement with any Person providing for the
leasing by the Company or any of its Subsidiaries as lessee of any principal
property, acquired or placed into service more than 180 days prior to such
arrangement (except leases of two years of less), whereby such property has
been or is to be sold or transferred by the Company or any of its
Subsidiaries to such Person or its Affiliates.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"SECURITY REGISTER" has the meaning set forth in Section 2.03 hereof.
"SENIOR BANK INDEBTEDNESS" means the Indebtedness outstanding under the
Credit Facility.
"SENIOR INDEBTEDNESS" means (i) the Senior Bank Indebtedness and (ii)
any other Indebtedness permitted to be incurred by the Company under the
terms of this Indenture, unless the instrument under which such Indebtedness
is incurred expressly provides that it is subordinated in right of payment to
any Indebtedness for money borrowed. Notwithstanding anything to the
contrary in the foregoing, Senior Indebtedness will not include (w) any
liability for federal, state, local or other taxes owed or owing by the
Company, (x) any Indebtedness of the Company to any of its Subsidiaries,
Unrestricted Subsidiaries or other Affiliates, (y) any trade payables or (z)
any Indebtedness that is incurred in violation of this Indenture.
"SENIOR REVOLVING INDEBTEDNESS" means revolving credit borrowings and
letters of credit under the Credit Facility and/or any successor facility or
facilities.
"SPECIAL RECORD DATE" means a date fixed by the Trustee pursuant to
Section 2.11 for the payment of Defaulted Interest.
"STATED MATURITY" means, with respect to any security, the date
specified in such security as the fixed date on which the payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred), and, when
used with respect to any installment of interest on such security, the fixed
date on which such installment of interest is due and payable.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
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or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof). Notwithstanding the foregoing, an Unrestricted Subsidiary shall
not be a Subsidiary of the Company for any purposes of this Indenture.
"SUBSIDIARY GUARANTEE" means the guarantee of the Notes by a Subsidiary
Guarantor pursuant to Exhibit C and Article XI under which such Subsidiary
Guarantor guarantees the Notes.
"SUBSIDIARY GUARANTOR" means each of the Subsidiaries that agrees to
guarantee the Notes.
"TEMPORARY NOTES" has the meaning set forth in Section 2.09 hereof.
"TRUST INDENTURE ACT" means the Trust Indenture Act of 1939 (15 U.S.C.
SECTION Section 77aaa-77bbbb) as in effect on the date of this Indenture
except as required by Section 9.04 hereof; provided that in the event the
Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act"
means, to the extent required by any such amendment, the Trust Indenture Act
of 1939, as so amended.
"TRUST OFFICER" means any officer or assistant officer of the Trustee
assigned by the Trustee to administer this Indenture.
"TRUSTEE" means the party named as such in this Indenture until a
successor replaces it in accordance with the provisions of this Indenture
and, thereafter, means such successor.
"U.S. GOVERNMENT OBLIGATIONS" means (i) securities that are (a) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (b)
obligations of a Person controlled or supervised by and acting as an agency
or instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the
United States of America, which, in either case, are not callable or
redeemable at the option of the issuer thereof; and (ii) depository receipts
issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as
custodian with respect to any U.S. Government Obligation which is specified
in clause (i) above and held by such bank for the account of the holder of
such depository receipt, or with respect to any specific payment of principal
or interest on any U.S. Government Obligation which is so specified and held;
provided that (except as required by law) such custodian is not authorized to
make any deduction from the amount payable to the holder of such depository
receipt from any amount received by the custodian in respect of the U.S.
Government Obligation or the specific payment of principal or interest of the
U.S. Government Obligation evidenced by such depository receipt. Investments
in U.S. Government Obligations may be made through or with the Trustee.
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"UNRESTRICTED SUBSIDIARY" means each entity, if designated by the Board
of Directors of the Company as Unrestricted Subsidiaries pursuant to a Board
Resolution pursuant to Section 4.10 hereof.
"VOLUMETRIC PRODUCTION PAYMENTS" means volumetric production payment
obligations of the Company or any of its Subsidiaries that are or, upon the
occurrence of a contingent event, would be recorded as deferred revenue in
accordance with GAAP, together with all undertakings and obligations of the
Company or any of its Subsidiaries in connection therewith, which will be
deemed to constitute debt for borrowed money for purpose of this Indenture.
"VOTING STOCK" of a corporation means all classes of Capital Stock of
such corporation then outstanding and normally entitled to vote in the
election of directors.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the
sum of the product obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required
payments of principal, including payments at final maturity, in respect
thereof, by (b) the number of years (calculated to the nearest one-twelfth)
that will elapse between such date and the making of such payment, by (ii)
the then outstanding principal amount of such Indebtedness.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Subsidiary of such
Person (i) all of the outstanding Capital Stock or other ownership interests
of which (other than directors' qualifying shares) shall at the time be owned
by such Person or by one or more Wholly Owned Subsidiaries of such Person or
(ii) organized in a foreign jurisdiction and is required by the applicable
laws and regulations of such foreign jurisdiction to be partially owned by
the goernment of such foreign jurisdiction or individual or corporate
citizens of such foreign jurisdiction in order for such Subsidiary to
transact business in such foreign jurisdiction, provided that such Person or
one or more Wholly Owned Subsidiaries of such Person, owns the remaining
Capital Stock or ownership interest in such Subsidiary and, by contract or
otherwise, controls the management and business of such Subsidiary and
derives the economic benefits of ownership of such Subsidiary to
substantially the same extent as if such Subsidiary were a wholly owned
Subsidiary. Unrestricted Subsidiaries shall not be included in the definition
of Wholly Owned Subsidiary for any purposes of this Indenture.
SECTION 1.02. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. (a)
This Indenture is expressly made subject to the Trust Indenture Act as if
this Indenture were, on the date of this Indenture, subject to the Trust
Indenture Act under the provisions of such statute and such provisions are
incorporated by reference in this Indenture.
(b) Whenever this Indenture refers to a provision of the Trust
Indenture Act, the provision is incorporated by reference in and made a part
of this Indenture. The following Trust Indenture Act terms incorporated by
reference in this Indenture have the following meanings:
"indenture securities" means the Notes.
"indenture security holder" means a Holder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
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"obligor" on the indenture securities means the Company or other
obligor on the Notes, if any.
All other Trust Indenture Act terms used or incorporated by reference in
this Indenture that are defined by the Trust Indenture Act, defined by Trust
Indenture Act reference to another statute or defined by Commission rule have
the meanings assigned to them therein.
SECTION 1.03. RULES OF CONSTRUCTION. Unless the context otherwise
requires:
(a) the words "herein," "hereof" and "hereunder," and other words of
similar import, refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision;
(b) "or" is not exclusive;
(c) "including" means including without limitation;
(d) the principal amount of any noninterest bearing or other discount
security, at any date shall be the principal amount thereof that would be
shown on a balance sheet of the issuer dated such date prepared in
accordance with GAAP; and
(e) when used with respect to the Notes, the term "principal amount"
shall mean the principal amount thereof at the Stated Maturity of such
principal amount.
SECTION 1.04. FORM OF DOCUMENTS DELIVERED TO TRUSTEE. In any case where
several matters are required to be certified by, or covered by an opinion of,
any specified Person, it is not necessary that all such matters be certified
by, or covered by the opinion of, only one such Person, or that they be so
certified or covered by only one document, but one such Person may certify or
give an opinion with respect to some matters and one or more other such
Persons as to other matters, and any such Person may certify or give an
opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company or a Subsidiary
Guarantor may be based, insofar as it relates to legal matters, upon a
certificate or opinion of, or representations by, counsel, unless such
officer knows, or in the exercise of reasonable care should know, that the
certificate or opinion or representations with respect to the matters upon
which his certificate or opinion is based are erroneous. Any such certificate
or Opinion of Counsel may be based, insofar as it relates to factual matters,
upon a certificate or opinion of, or representations by, an officer or
officers of the Company or a Subsidiary Guarantor stating that the
information with respect to such factual matters is in the possession of the
Company or such Subsidiary Guarantor, unless such counsel knows, or in the
exercise of reasonable care should know, that the certificate or opinion or
representations with respect to such matters are erroneous.
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Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 1.05. ACTS OF HOLDERS. (a) Any request, demand, authorization,
direction, notice, consent, waiver or other action provided by this Indenture
to be given or taken by Holders may be embodied in and evidenced by one or
more instruments of substantially similar tenor signed by such Holders in
person or by an agent duly appointed in writing; and, except as herein
otherwise expressly provided, such action shall become effective when such
instrument or instruments are delivered to the Trustee and, where it is
hereby expressly required, to the Company and the Subsidiary Guarantors.
Such instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or
of a writing appointing any such agent shall be sufficient for any purpose of
this Indenture and (subject to Section 7.01) conclusive in favor of the
Trustee and the Company and the Subsidiary Guarantors, if made in the manner
provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by an acknowledgment of a notary public or other officer
authorized by law to take acknowledgments of deeds, certifying that the
individual signing such instrument or writing acknowledged to him the
execution thereof. Where such execution is by a signer acting in a capacity
other than such signer's individual capacity, such certificate or affidavit
shall also constitute sufficient proof of the signer's authority. The fact
and date of the execution of any such instrument or writing, or the authority
of the person executing the same, may also be proved in any other manner
which the Trustee deems sufficient.
SECTION 1.06. SATISFACTION AND DISCHARGE. This Indenture shall cease
to be of further effect and the Trustee, on receipt of a Company Order
requesting such action, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture, when (a) either (i) all
outstanding Notes have been delivered to the Trustee for cancellation or (ii)
all such Notes not theretofore delivered to the Trustee for cancellation have
become due and payable and the Company or the Subsidiary Guarantors have
irrevocably deposited or caused to be deposited with the Trustee as trust
funds in trust for the purpose (x) money in an amount, (y) U.S. Government
Obligations or (z) a combination thereof, sufficient, in the case of deposits
pursuant to the foregoing clauses (y) or (z), as established in the opinion
of a nationally recognized firm of independent public accountants expressed
in a written certification thereof delivered to the Trustee, to pay and
discharge the entire indebtedness on such Notes, for principal (and premium,
if any) and interest, if any, to the date of such deposit together with
irrevocable instructions from the Company in form and substance satisfactory
to the Trustee directing the Trustee to apply such funds to the payment
thereof; (b) the Company or the Subsidiary Guarantors have paid or caused to
be paid all other sums payable hereunder by the Company; and (c) the Company
or the Subsidiary Guarantors have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge of
this Indenture have been complied with. Notwithstanding the satisfaction and
discharge of this Indenture pursuant to this Section 1.06, the obligations of
the Company and the Subsidiary Guarantors to the Trustee under Section 7.07
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hereof, and, if money shall have been deposited with the Trustee in trust for
the Holders pursuant to this Section 1.06, the obligations of the Trustee
under this Section 1.06 hereof shall survive.
All money deposited with the Trustee pursuant to this Section 1.06 shall
be held in trust and applied by it, in accordance with the provisions of the
Notes and this Indenture, to the payment, either directly or through any
Paying Agent, to the Persons entitled thereto, of the principal (and premium,
if any) and interest, if any, for the payment of which such money has been
deposited with the Trustee. If the Trustee or Paying Agent is unable to
apply any money [or U.S. Government Obligations] in accordance with this
Section 1.06 by reason of any legal proceeding or by reason of any order or
judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Company's and the Subsidiary
Guarantors' obligations under this Indenture and the Notes shall be revived
and reinstated as though no deposit had occurred pursuant to this Section
1.06 until such time as the Trustee or Paying Agent is permitted to apply all
such money or U.S. Government Obligations in accordance with this Section
1.06; PROVIDED, that if the Company or the Subsidiary Guarantors have made
any payment on any Notes because of the reinstatement of its obligations, the
Company and the Subsidiary Guarantors shall be subrogated to the rights of
the Holders of such Notes to receive such payment from the cash or U.S.
Government Obligations held by the Trustee or Paying Agent.
The Company and the Subsidiary Guarantors shall pay and indemnify the
Trustee against any tax, fee or other charges imposed on or assessed against
the U.S. Government Obligations deposited pursuant to this Section 1.06 or the
principal and interest received in respect thereof other than any such tax, fee
or other charge which by law is for the account of the Holders of outstanding
Notes.
ARTICLE II
THE NOTES
SECTION 2.01. FORM AND DATING. (a) The Notes and the certificate of
authentication of the Trustee thereon shall be substantially in the form of
Exhibit A or Exhibit B hereto, as applicable, which are hereby incorporated
in and expressly made a part of this Indenture.
(b) The Notes may have such letters, numbers or other marks of
identification and such legends and endorsements, stamped, printed,
lithographed or engraved thereon, (i) as the Company may deem appropriate and
as are not inconsistent with the provisions of this Indenture, (ii) such as
may be required to comply with this Indenture, any law or any rule of any
securities exchange on which the Notes may be listed and (iii) such as may be
necessary to conform to customary usage. Each Note shall be dated the date
of its authentication by the Trustee.
(c) The Notes shall be issued initially in the form of a permanent,
global note in definitive, fully registered form, without coupons,
substantially in the form of Exhibit A hereto (the "Global Note"). Upon
issuance, such Global Note shall be duly executed by the Company and
authenticated by the Trustee as hereinafter provided and deposited with the
Trustee as custodian for the Depositary.
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Any Certificated Note that may be issued pursuant to Section 2.06(a) hereof,
shall be issued in the form of a note in definitive, fully registered form,
without coupons, substantially in the form set forth in Exhibit B hereto.
Upon issuance, any such Certificated Note shall be duly executed by the
Company and authenticated by the Trustee as hereinafter provided.
(d) Each Global Note shall bear the following legend on the face thereof:
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY TO COSTILLA ENERGY, INC. OR THE REGISTRAR FOR
REGISTRATION OF TRANSFER OR EXCHANGE AND ANY NOTE ISSUED IS REGISTERED
IN THE NAME OF CEDE & CO. OR SUCH OTHER ENTITY AS HAS BEEN REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY
PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS HAS BEEN
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFER OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, AND
NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A
SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF INTERESTS
IN THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE
WITH THE RESTRICTIONS SET FORTH IN SECTION 2.06 OF THE INDENTURE, DATED
AS OF ________________, 1996, BETWEEN COSTILLA ENERGY, INC. AND THE
TRUSTEE NAMED THEREIN, PURSUANT TO WHICH THIS NOTE WAS ISSUED.
(e) Definitive Notes shall be typed, printed, lithographed or engraved
or produced by any combination of such methods or produced in any other
manner permitted by the rules of any securities exchange on which such Notes
may be listed, all as determined by the officers of the Company executing
such Notes, as evidenced by their execution of such Notes.
SECTION 2.02. EXECUTION AND AUTHENTICATION. The aggregate principal
amount of Notes outstanding at any time shall not exceed $100,000,000. The
Notes shall be executed on behalf of the Company by its Chief Executive
Officer, its President, any Executive Vice President or any Senior Vice
President, under its corporate seal reproduced or imprinted on the Notes by
facsimile or otherwise, and shall be attested by the Company's Secretary or
one of its Assistant Secretaries, in each case by manual or facsimile
signature.
The Notes shall be authenticated by manual signature of an authorized
signatory of the Trustee and shall not be valid for any purpose unless so
authenticated.
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In case any officer of the Company whose signature shall have been
placed upon any of the Notes shall cease to be such officer of the Company
before authentication of such Notes by the Trustee and the issuance and
delivery thereof, such Notes may, nevertheless, be authenticated by the
Trustee and issued and delivered with the same force and effect as though
such Person had not ceased to be such officer of the Company.
Upon compliance by the Company with the provisions of the previous
paragraph, the Trustee shall, upon receipt of a Company Order requesting such
action, authenticate Notes for original issuance in an aggregate principal
amount not to exceed $100,000,000 in the form of the Global Note. Such
Company Order shall specify the amount of Notes to be authenticated and the
date on which the Notes are to be authenticated and shall further provide
instructions concerning registration, amounts for each Holder and delivery.
Upon the occurrence of any event specified in Section 2.06(a) hereof and
compliance by the Company with the provisions of the paragraph preceding the
immediately preceding paragraph, the Company shall execute and the Trustee
shall authenticate and make available for delivery to each beneficial owner
identified by the Depositary, in exchange for such beneficial owner's
interest in the Global Note or Certificated Notes, as the case may be,
representing Notes theretofore represented by the Global Note.
A Note shall not be valid or entitled to any benefit under this
Indenture or obligatory for any purpose unless executed by the Company and
authenticated by the manual signature of the Trustee as provided herein. The
signature of an authorized signatory of the Trustee shall be conclusive
evidence, and the only evidence, that such Note has been authenticated and
delivered under this Indenture.
The Trustee may appoint an authenticating agent reasonably acceptable to
the Company to authenticate the Notes. Unless limited by the terms of such
appointment, an authenticating agent may authenticate Notes whenever the
Trustee may do so. Each reference in this Indenture to authentication by the
Trustee includes authentication by such agent. Any authenticating agent of
the Trustee shall have the same rights hereunder as any Registrar or Paying
Agent.
SECTION 2.03. REGISTRAR AND PAYING AGENT. The Company shall maintain,
pursuant to Section 4.02 hereof, an office or agency where the Notes may be
presented for registration of transfer or for exchange. The Company shall
cause to be kept at such office a register (the register maintained in such
office being herein sometimes referred to as the "Security Register") in
which, subject to such reasonable regulations as it may prescribe, the
Company shall provide for the registration of Notes and of transfers of Notes
entitled to be registered or transferred as provided herein. The Trustee, at
its Corporate Trust Office, is initially appointed "Registrar" for the
purpose of registering Notes and transfers of Notes as herein provided. The
Company may, upon written notice to the Trustee, change the designation of
the Trustee as Registrar and appoint another Person to act as Registrar for
purposes of this Indenture. If any Person other than the Trustee acts as
Registrar, the Trustee shall have the right at any time, upon reasonable
notice, to inspect or examine the Security Register and
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to make such inquiries of the Registrar as the Trustee shall in its
discretion deem necessary or desirable in performing its duties hereunder.
The Company shall enter into an appropriate agency agreement with any
Person designated by the Company as Registrar or Paying Agent that is not a
party to this Indenture, which agreement shall incorporate the provisions of
the Trust Indenture Act and shall implement the provisions of this Indenture
that relate to such Registrar or Paying Agent. Prior to the designation of
any such Person, the Company shall, by written notice (which notice shall
include the name and address of such Person), inform the Trustee of such
designation. If the Company fails to maintain a Registrar or Paying Agent,
the Trustee shall act as such.
Subject to Section 2.06, upon surrender for registration of transfer of
any Note at an office or agency of the Company designated for such purpose,
the Company shall execute, and the Trustee shall authenticate and make
available for delivery, in the name of the designated transferee or
transferees, one or more new Notes of any authorized denomination or
denominations, of like tenor and aggregate principal amount, all as requested
by the transferor.
Every Note presented or surrendered for registration of transfer or for
exchange shall (if so required by the Company, the Trustee or the Registrar)
be duly endorsed, or be accompanied by a duly executed instrument of transfer
in form satisfactory to the Company, the Trustee and the Registrar, by the
Holder thereof or such Holder's attorney duly authorized in writing.
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. On or prior to each
due date of the principal, premium, or any payment of interest, if any, with
respect to any Note, the Company shall deposit with the Paying Agent a sum
sufficient to pay such principal, premium or interest when so becoming due.
The Company shall require each Paying Agent (other than the Trustee) to
agree in writing that such Paying Agent, shall hold in trust for the benefit
of Holders or the Trustee all money held by such Paying Agent for the payment
of principal, premium or interest with respect to the Notes, shall notify the
Trustee of any default by the Company in making any such payment and at any
time during the continuance of any such default, upon the written request of
the Trustee, shall forthwith pay to the Trustee all sums held in trust by
such Paying Agent.
The Company at any time may require a Paying Agent to pay all money held
by it to the Trustee and to account for any funds disbursed by such Paying
Agent. Upon complying with this Section 2.04, the Paying Agent shall have no
further liability for the money delivered to the Trustee.
SECTION 2.05. GLOBAL NOTES. (a) So long as a Global Note is registered
in the name of the Depositary or its nominee, members of, or participants in,
the Depositary ("Agent Members") shall have no rights under this Indenture
with respect to the Global Note held on their behalf by the Depositary or the
Trustee as its custodian, and the Depositary may be treated by the Company,
the Trustee and any agent of the Company or the Trustee as the absolute owner
of such Global Note for
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all purposes. Notwithstanding the foregoing, nothing herein shall (i)
prevent the Company, the Trustee or any agent of the Company or the Trustee,
from giving effect to any written certification, proxy or other authorization
furnished by the Depositary or (ii) impair, as between the Depositary and its
Agent Members, the operation of customary practices governing the exercise of
the rights of a Holder of Notes.
(b) The Holder of a Global Note may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests in such Global Note through Agent Members, to take any action which
a Holder of Notes is entitled to take under this Indenture or the Notes.
(c) Whenever, as a result of an optional redemption of Notes by the
Company, a Change of Control Offer, an Asset Sale Offer or an exchange
pursuant to the second sentence of Section 2.06(a) hereof, a Global Note is
redeemed, repurchased or exchanged in part, such Global Note shall be
surrendered by the Holder thereof to the Trustee who shall cause an
adjustment to be made to Schedule A thereof so that the principal amount of
such Global Note will be equal to the portion of such Global Note not
redeemed, repurchased or exchanged and shall thereafter return such Global
Note to such Holder, provided that any such Global Note shall be in a
principal amount of $1,000 or an integral multiple thereof.
SECTION 2.06. TRANSFER AND EXCHANGE.
(a) The Global Note shall be exchanged by the Company for one or more
Certificated Notes if (a) the Depositary (i) has notified the Company that it
is unwilling or unable to continue as, or ceases to be, a clearing agency
registered under Section 17A of the Exchange Act and (ii) a successor to the
Depositary registered as a clearing agency under Section 17A of the Exchange
Act is not able to be appointed by the Company within 90 calendar days or (b)
the Depositary is at any time unwilling or unable to continue as Depositary
and a successor to the Depositary is not able to be appointed by the Company
within 90 calendar days. If an Event of Default occurs and is continuing,
the Company shall, at the request of the Holder thereof, exchange all or part
of the Global Note for one or more Certificated Notes; PROVIDED that the
principal amount of each of such Certificated Notes and such Global Note,
after such exchange, shall be $1,000 or an integral multiple thereof. In
addition, the Holder of a beneficial interest in the Global Note may at any
time exchange such interest for a Certificated Note in a principal amount of
$1,000 or an integral multiple thereof. Whenever a Global Note is exchanged
as a whole for one or more Certificated Notes, such Global Note shall be
surrendered by the Holder thereof to the Trustee for cancellation. Whenever
a Global Note is exchanged in part for one or more Certificated Notes
pursuant to this Section 2.06(a), it shall be surrendered by the Holder
thereof to the Trustee and the Trustee shall make the appropriate notations
thereon pursuant to Section 2.05(c) hereof. All Certificated Notes issued in
exchange for a Global Note or any portion thereof shall be registered in such
names, and delivered, as the Depositary shall instruct the Trustee.
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(b) A Holder may transfer a Note only upon the surrender of such Note
for registration of transfer. No such transfer shall be effected until, and
the transferee shall succeed to the rights of a Holder only upon, final
acceptance and registration of the transfer in the Security Register by the
Registrar. When Notes are presented to the Registrar with a request to register
the transfer of, or to exchange, such Notes, the Registrar shall register the
transfer or make such exchange as requested if its requirements for such
transactions and any applicable requirements hereunder are satisfied. To permit
registrations of transfers and exchanges, the Company shall execute and the
Trustee shall authenticate Certificated Notes at the Registrar's request.
(c) The Company shall not be required to make and the Registrar need
not register transfers or exchanges of Certificated Notes (i) selected for
redemption (except, in the case of Certificated Notes to be redeemed in part,
the portion thereof not to be redeemed) and (ii) for a period of 15 calendar
days before a selection of Notes to be redeemed.
(d) No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment by Holders of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in connection with any registration of transfer of Notes.
(e) All Notes issued upon any registration of transfer or exchange
pursuant to the terms of this Indenture will evidence the same debt and will
be entitled to the same benefits under this Indenture as the Notes
surrendered for such registration of transfer or exchange.
(f) Any Holder of a Global Note shall, by acceptance of such Global
Note, agree that transfers of beneficial interests in such Global Note may be
effected only through a book entry system maintained by such Holder (or its
agent), and that ownership of a beneficial interest in the Notes represented
thereby shall be required to be reflected in book entry form. Transfers of a
Global Note shall be limited to transfers in whole and not in part, to the
Depositary, its successors, and their respective nominees. Interests of
beneficial owners in a Global Note shall be transferred in accordance with
the rules and procedures of the Depositary (or its successors).
SECTION 2.07. REPLACEMENT NOTES. If any mutilated Note is surrendered
to the Trustee, the Company shall execute and upon its written request the
Trustee shall authenticate and make available for delivery, in exchange for
any such mutilated Note, a new Note containing identical provisions and of
like principal amount, bearing a number not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i) evidence
to their satisfaction of the destruction, loss or theft of any Note and (ii)
such security or indemnity as may be required by them to save either of them
and any agent of each of them harmless, then, in the absence of notice to the
Company or the Trustee that such Note has been acquired by a bona fide
purchaser, the Company shall execute and upon its request the Trustee shall
authenticate and make available for delivery, in lieu of any such destroyed,
lost or stolen Note, a new Note containing identical provisions and of like
principal amount, bearing a number not contemporaneously outstanding.
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In case any such mutilated, destroyed, lost or stolen Note has become or
is about to become due and payable, the Company in its discretion may,
instead of issuing a new Note, pay such Note.
Upon the issuance of any new Note under this Section 2.07, the Company
may require the payment by the Holder of a sum sufficient to cover any tax or
other governmental charge that may be imposed in relation thereto and any
other expenses (including the fees and expenses of the Trustee) connected
therewith.
Every new Note issued pursuant to this Section 2.07 in lieu of any
destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Note shall be at any time enforceable by anyone, and shall be entitled
to all the benefits of this Indenture equally and proportionately with any
and all other Notes duly issued hereunder.
The provisions of this Section 2.07 are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Notes.
SECTION 2.08. OUTSTANDING NOTES. Notes outstanding at any time are all
Notes authenticated by the Trustee except for those canceled by it, those
delivered to it for cancellation, those paid pursuant to Section 2.07 and
those described in this Section 2.08 as not outstanding. A Note does not
cease to be outstanding because the Company or an Affiliate of the Company
holds such Note.
If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be
outstanding unless the Trustee and the Company receive proof satisfactory to
them that such replaced Note is held by a bona fide purchaser.
If the Paying Agent segregates and holds in trust, in accordance with
this Indenture, on a redemption date or Maturity date money sufficient to pay
all principal, premium, if any, and interest payable on that date with
respect to the Notes (or portions thereof) to be redeemed or maturing, as the
case may be, then on and after that date such Notes (or such portions
thereof) shall cease to be outstanding and interest on them shall cease to
accrue.
In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, waiver or consent or any amendment,
modification or other change to this Indenture, Notes held or beneficially
owned by the Company or a Subsidiary or Unrestricted Subsidiary of the
Company or by an Affiliate of the Company or of a Subsidiary or Unrestricted
Subsidiary of the Company or by agents of any of the foregoing shall be
disregarded, except that for the purposes of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent or any
amendment, modification or other change to this Indenture, only Notes which a
Trust Officer actually knows are so owned shall be so disregarded. Notes so
owned which have been pledged in good faith shall not be disregarded if the
pledgee establishes to the satisfaction of the Trustee such
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pledgee's right so to act with respect to the Notes and that the pledgee is
not the Company or an Affiliate of the Company or any of their agents.
SECTION 2.09. TEMPORARY NOTES. Pending the preparation of definitive
Notes, the Company may execute, and the Trustee shall authenticate, temporary
notes ("Temporary Notes") which are printed, lithographed, or otherwise
produced, substantially of the tenor of the definitive Notes in lieu of which
they are issued and with such appropriate insertions, omissions,
substitutions and other variations.
If Temporary Notes are issued, the Company shall cause definitive Notes
to be prepared without unreasonable delay. After the preparation of
definitive Notes, the Temporary Notes shall be exchangeable for definitive
Notes upon surrender of the Temporary Notes to the Trustee, without charge to
the Holder. Until so exchanged, Temporary Notes will evidence the same debt
and will be entitled to the same benefits under this Indenture as the
definitive Notes in lieu of which they have been issued.
SECTION 2.10. CANCELLATION. The Company at any time may deliver Notes
to the Trustee for cancellation. The Registrar and the Paying Agent shall
forward to the Trustee any Notes surrendered to them for registration of
transfer, exchange, purchase or payment. The Trustee shall cancel all Notes
surrendered for registration of transfer, exchange, purchase, payment or
cancellation and shall return such canceled Notes to the Company. The Company
may not issue new Notes to replace Notes it has redeemed or paid or that have
been delivered to the Trustee for cancellation.
SECTION 2.11. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED. Interest
on any Note which is payable, and is punctually paid or duly provided for, on
any Interest Payment Date shall be paid to the Person in whose name such Note
is registered at the close of business on the Record Date for such interest
payment, which shall be the ____________ __, or ____________ __ (whether or not
a Business Day) immediately preceding such Interest Payment Date.
Any interest on any Note which is payable, but is not punctually paid or
duly provided for, on any Interest Payment Date (herein called "Defaulted
Interest") shall forthwith cease to be payable to the registered Holder on
the relevant Record Date, and, except as hereinafter provided, such Defaulted
Interest, and any interest payable on such Defaulted Interest, may be paid by
the Company, at its election, as provided in clause (a) or (b) below:
(a) The Company may elect to make payment of any Defaulted Interest,
and any interest payable on such Defaulted Interest, to the Persons in
whose names the Notes are registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest, which shall be
fixed in the following manner. The Company shall notify the Trustee in
writing of the amount of Defaulted Interest proposed to be paid on the
Notes and the date of the proposed payment, and at the same time the
Company shall deposit with the Trustee an amount of money equal to the
aggregate amount proposed to be paid in respect of such Defaulted Interest
or shall make arrangements satisfactory to the Trustee for such deposit
prior to the date of the proposed
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payment, such money when deposited to be held in trust for the benefit of
the Persons entitled to such Defaulted Interest as provided in this Clause.
Thereupon the Trustee shall fix a Special Record Date for the payment of
such Defaulted Interest which shall be not more than 15 calendar days and
not less than 10 calendar days prior to the date of the proposed payment
and not less than 10 calendar days after the receipt by the Trustee of the
notice of the proposed payment. The Trustee shall promptly notify the
Company of such Special Record Date and, in the name and at the expense of
the Company, shall cause notice of the proposed payment of such Defaulted
Interest and the Special Record Date therefor to be sent, first class mail,
postage prepaid, to each Holder at such Holder's address as it appears in
the Security Register, not less than 10 calendar days prior to such Special
Record Date. Notice of the proposed payment of such Defaulted Interest and
the Special Record Date therefor having been mailed as aforesaid, such
Defaulted Interest shall be paid to the Persons in whose names the Notes
are registered at the close of business on such Special Record Date and
shall no longer be payable pursuant to the following clause (b).
(b) The Company may make payment of any Defaulted Interest, and any
interest payable on such Defaulted Interest, on the Notes in any other
lawful manner not inconsistent with the requirements of any securities
exchange on which the Notes may be listed, and upon such notice as may be
required by such exchange, if, after notice given by the Company to the
Trustee of the proposed payment pursuant to this clause, such manner of
payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section 2.11, each Note
delivered under this Indenture upon registration of transfer of, or in exchange
for, or in lieu of, any other Note, shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Note.
SECTION 2.12. AUTHORIZED DENOMINATIONS. The Notes shall be issuable in
denominations of $1,000 and any integral multiple thereof.
SECTION 2.13. COMPUTATION OF INTEREST. Interest on the Notes shall be
computed on the basis of a 360-day year of twelve 30-day months.
SECTION 2.14. PERSONS DEEMED OWNERS. Prior to the due presentation for
registration of transfer of any Note, the Company, the Trustee, the Paying
Agent, the Registrar or any co-registrar may deem and treat the person in
whose name such Note is registered as the absolute owner of such Note for the
purpose of receiving payment of principal of, premium, if any, and interest
on such Note and for all other purposes whatsoever, whether or not such Note
is overdue, and none of the Company, the Trustee, the Paying Agent, the
Registrar or any co-Registrar shall be affected by notice to the contrary.
SECTION 2.15. CUSIP NUMBERS. The Company, in issuing the Notes, may
use a "CUSIP" number for each series of Notes and, if so, the Trustee shall
use the relevant CUSIP number in any notices to Holders as a convenience to
such Holders; provided that any such notice may state that no
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representation is made as to the correctness or accuracy of the CUSIP number
printed in the notice or on the Notes and that reliance may be placed only on
the other identification numbers printed on the Notes. The Company shall
promptly notify the Trustee of any change in any CUSIP number used.
ARTICLE III
REDEMPTION
SECTION 3.01. NOTICE TO TRUSTEE. If the Company elects to redeem Notes
pursuant to paragraph five of the Notes, it shall notify the Trustee in
writing of the Redemption Date and the principal amount of Notes to be
redeemed. The Company shall give each such notice to the Trustee at least 30
calendar days prior to the Redemption Date unless the Trustee consents to a
shorter period. Such notice shall be accompanied by an Officers' Certificate
and an Opinion of Counsel from the Company to the effect that such redemption
will comply with any conditions to such redemption set forth herein and in
the Notes.
SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED. If less than all the
Notes are to be redeemed at any time, the Trustee shall select the Notes to
be redeemed on a pro rata basis, provided that the Trustee may select for
redemption in part only Notes in denominations larger than $1,000. In
selecting Notes to be redeemed pursuant to this Section 3.02, the Trustee
shall make such adjustments, reallocations and eliminations as it shall deem
proper so that the principal amount of each Note to be redeemed shall be
$1,000 or an integral multiple thereof, by increasing, decreasing or
eliminating any amount less than $1,000 which would be allocable to any
Holder. If the Notes to be redeemed are Certificated Notes, the Certificated
Notes to be redeemed shall be selected by the Trustee by prorating, as nearly
as may be, the principal amount of Certificated Notes to be redeemed among
the Holders of Certificated Notes registered in their respective names.
Provisions of this Indenture that apply to Notes called for redemption also
apply to portions of Notes called for redemption. The Trustee shall notify
the Company promptly of the Notes or portions of Notes to be redeemed.
SECTION 3.03. NOTICE OF REDEMPTION. At least 30 calendar days but not
more than 60 calendar days before a Redemption Date, the Company shall send a
notice of redemption, first class mail, postage prepaid, to Holders of Notes
to be redeemed at the addresses of such Holders as they appear in the Security
Register.
The notice shall identify the Notes to be redeemed (including CUSIP number)
and shall state:
(a) the Redemption Date;
(b) the Redemption Price (and shall specify the portion of such
Redemption Price that constitutes the amount of accrued and unpaid interest
to be paid, if any);
(c) the name and address of the Paying Agent;
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(d) that the Notes called for redemption must be surrendered to the
Paying Agent to collect the Redemption Price;
(e) if any Global Note is being redeemed in part, the portion of the
principal amount of such Note to be redeemed and that, after the Redemption
Date, the Global Note, with a notation on Schedule A thereof adjusting the
principal amount thereof to be equal to the unredeemed portion, will be
returned to the Holder thereof;
(f) if any Certificated Note is being redeemed in part, the portion
of the principal amount of such Note to be redeemed and that, after the
Redemption Date, a new Certificated Note or Certificated Notes in principal
amount equal to the unredeemed portion will be issued;
(g) if fewer than all the outstanding Notes are to be redeemed, the
identification and principal amounts of the particular Notes to be
redeemed;
(h) that, unless the Company defaults in making the redemption
payment, interest on the Notes (or portions thereof) called for redemption
shall cease and such Notes (or portions thereof) shall cease to accrue
interest on and after the Redemption Date;
(i) the paragraph of the Notes pursuant to which the Notes are being
called for redemption; and
(j) any other information necessary to enable Holders to comply with
the notice of redemption.
At the Company's request, the Trustee shall give the notice of redemption
in the Company's name and at the Company's expense. In such event, the Company
shall provide the Trustee with the information required by this Section 3.03
in a timely manner.
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption
is mailed, Notes called for redemption shall become due and payable on the
Redemption Date and at the Redemption Price stated in such notice. Upon
surrender to the Paying Agent, such Notes shall be paid at the Redemption
Price stated in such notice. Failure to give notice or any defect in the notice
to any Holder shall not affect the validity of the notice to any other Holder.
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. On or prior to 10:00 a.m.,
New York City time, on each Redemption Date, the Company shall deposit with the
Paying Agent (or, if the Company, one of its Subsidiaries or any of their
Affiliates is the Paying Agent, the Paying Agent shall segregate and hold in
trust for the benefit of the Holders) money, in federal or other immediately
available funds, sufficient to pay the Redemption Price on all Notes to be
redeemed on that date other than Notes or portions of Notes called for
redemption on such date which have been delivered by the Company to the
Trustee for cancellation.
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So long as the Company complies with the preceding paragraph and the
other provisions of this Article III, interest on the Notes or portions
thereof to be redeemed on the applicable Redemption Date shall cease to
accrue from and after such date and such Notes or portions thereof shall be
deemed not to be entitled to any benefit under this Indenture except to
receive payment of the Redemption Price on the Redemption Date. If any Note
called for redemption shall not be so paid upon surrender for redemption,
then, from the Redemption Date until such Redemption Price is paid, interest
shall be paid on the unpaid principal and premium and, to the extent permitted
by law, on any accrued but unpaid interest thereon, in each case at the rate
prescribed therefor by such Notes.
SECTION 3.06. NOTES REDEEMED IN PART. Upon surrender and cancellation
of a Certificated Note that is redeemed in part, the Company shall issue and
the Trustee shall authenticate and make available for delivery to the
surrendering Holder (at the Company's expense) a new Certificated Note equal
in principal amount to the unredeemed portion of the Certificated Note
surrendered and canceled, PROVIDED that each such Certificated Note shall be
in a principal amount of $1,000 or an integral multiple thereof.
Upon surrender of a Global Note that is redeemed in part, the Paying
Agent shall forward such Global Note to the Trustee who shall make a notation
on Schedule A thereof to reduce the principal amount of such Global Note to
an amount equal to the unredeemed portion of such Global Note, as provided in
Section 2.05(c) hereof.
ARTICLE IV
COVENANTS
SECTION 4.01. PAYMENT OF NOTES. The Company shall promptly pay the
principal of, premium, if any, and interest on, the Notes on the dates and in
the manner provided in the Notes and in this Indenture. Principal, premium
and interest shall be considered paid on the date due if, on such date, the
Trustee or the Paying Agent holds in accordance with this Indenture money
sufficient to pay all principal, premium and interest then due.
To the extent lawful, the Company shall pay interest on overdue
principal, overdue premium, and Defaulted Interest (without regard to any
applicable grace period), at the interest rate borne on the Notes. The
Company's obligation pursuant to the previous sentence shall apply whether
such overdue amount is due at its Stated Maturity, as a result of the Company's
obligations pursuant to Section 3.05, Section 4.07 or Section 4.08 hereof, or
otherwise.
SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. The Company shall
maintain in the Borough of Manhattan, The City of New York, an office or
agency where Notes may be presented or surrendered for payment, where Notes
may be surrendered for registration of transfer or exchange and where notices
and demands to or upon the Company in respect of the Notes and this Indenture
may be served, which office shall be initially the office of State Street
Bank and Trust Company, National Association, 61 Broadway, New York, New York
10006, Concourse Level, Corporate
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Trust Window. The Company shall give prompt written notice to the Trustee of
any change in the location of such office or agency. If at any time the
Company shall fail to maintain any such required office or agency or shall
fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee, and the Company hereby appoints the Trustee its agent
to receive all presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other
offices or agencies (in or outside of The City of New York) where the Notes
may be presented or surrendered for any or all of such purposes, and may from
time to time rescind such designations; provided that no such designation or
rescission shall in any manner relieve the Company of its obligation to
maintain an office or agency in The City of New York, for such purposes. The
Company shall give prompt written notice to the Trustee of any such
designation and any change in the location of any such other office or agency.
SECTION 4.03. MONEY FOR THE NOTE PAYMENTS TO BE HELD IN TRUST. If the
Company, any Subsidiary of the Company or any of their respective Affiliates
shall at any time act as Paying Agent with respect to the Notes, such Paying
Agent shall, on or before each due date of the principal of (and premium, if
any) or interest on any of the Notes, segregate and hold in trust for the
benefit of the Persons entitled thereto money sufficient to pay the principal
(and premium, if any) or interest so becoming due until such money shall be
paid to such Persons or otherwise disposed of as herein provided, and shall
promptly notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents with respect
to the Notes, it shall, prior to or on each due date of the principal of (and
premium, if any) or interest on any of the Notes, deposit with a Paying Agent
a sum sufficient to pay the principal (and premium, if any) or interest so
becoming due, such sum to be held in trust for the benefit of the Persons
entitled to such principal, premium or interest and (unless such Paying Agent
is the Trustee) the Paying Agent shall promptly notify the Trustee of the
Company's action or failure so to act.
SECTION 4.04. CORPORATE EXISTENCE. Subject to the provisions of
Article V hereof, the Company shall do or cause to be done all things
necessary to preserve and keep in full force and effect the corporate
existence, rights (charter and statutory) and franchises of the Company and
each of its Subsidiaries; PROVIDED that the Company and any such Subsidiary
shall not be required to preserve the corporate existence of any such
Subsidiary or any such right or franchise if the Board of Directors of the
Company shall determine that the preservation thereof is no longer desirable
in the conduct of the business of the Company and that the loss thereof is
not disadvantageous in any material respect to the Holders of Notes.
SECTION 4.05. MAINTENANCE OF PROPERTY. The Company shall cause all
Property used or useful in the conduct of its business or the business of any
of its Subsidiaries to be maintained and kept in good condition, repair and
working order and supplied with all necessary equipment and shall cause to be
made all necessary repairs, renewals, replacements, betterments and improvements
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thereof, all as, in the judgment of the Company, may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times; provided that nothing in this Section 4.05 shall prevent
the Company from discontinuing the operation or maintenance of any of such
Property if such discontinuance is, in the judgment of the Company, desirable in
the conduct of its business or the business of any of its Subsidiaries and not
disadvantageous in any material respect to the Holders of Notes.
SECTION 4.06. PAYMENT OF TAXES AND OTHER CLAIMS. The Company shall pay
or discharge or cause to be paid or discharged, before the same shall become
delinquent, (a) all taxes, assessments and governmental charges levied or
imposed upon the Company or any of its Subsidiaries or upon the income,
profits or Property of the Company or any of its Subsidiaries and (b) all
lawful claims for labor, materials and supplies which, if unpaid, might by
law become a Lien upon the Property of the Company or any of its Subsidiaries;
PROVIDED that the Company shall not be required to pay or discharge or cause to
be paid or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings upon stay of execution or the enforcement thereof and for which
adequate reserves in accordance with GAAP or other appropriate provision has
been made.
SECTION 4.07. REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF
CONTROL. (a) Upon the occurrence of a Change of Control, each Holder of
Notes shall have the right to require the Company to purchase such Holder's
Notes, in whole or in part, in a principal amount that is an integral multiple
of $1,000, pursuant to the offer described in Section 4.07(b) hereof (the
"Change of Control Offer") at a purchase price (the "Change of Control Purchase
Price") in cash equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest thereon to the date of purchase (the "Change of
Control Payment Date").
(b) Within 30 calendar days after the date of any Change of Control, the
Company, or the Trustee at the request and expense of the Company, shall send
to each Holder by first class mail, postage prepaid, a notice prepared by the
Company describing the transaction or transactions that constitute the Change
of Control and stating:
(i) that a Change of Control has occurred and a Change of Control
Offer is being made pursuant to this Section 4.07, and that all Notes that
are timely tendered will be accepted for payment;
(ii) the Change of Control Purchase Price, and the Change of Control
Payment Date, which date shall be a Business Day no earlier than 30
calendar days nor later than 60 calendar days subsequent to the date such
notice is mailed;
(iii) that any Notes or portions thereof not tendered or accepted for
payment will continue to accrue interest;
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(iv) that, unless the Company defaults in the payment of the Change
of Control Purchase Price with respect thereto, all Notes or portions
thereof accepted for payment pursuant to the Change of Control Offer shall
cease to accrue interest from and after the Change of Control Payment Date;
(v) that any Holder electing to have any Notes or portions thereof
purchased pursuant to a Change of Control Offer will be required to
surrender such Notes, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of such Notes completed, to the Paying Agent at
the address specified in the notice, prior to the close of business on the
third Business Day preceding the Change of Control Payment Date;
(vi) that any Holder shall be entitled to withdraw such election if
the Paying Agent receives, not later than the close of business on the
second Business Day preceding the Change of Control Payment Date, a
facsimile transmission or letter, setting forth the name of the Holder,
the principal amount of Notes delivered for purchase, and a statement that
such Holder is withdrawing such Holder's election to have such Notes or
portions thereof purchased pursuant to the Change of Control Offer;
(vii) that any Holder electing to have Notes purchased pursuant to the
Change of Control Offer must specify the principal amount that is being
tendered for purchase, which principal amount must be $1,000 or an integral
multiple thereof;
(viii) if Certificated Notes have been issued pursuant to Section
2.06, that any Holder of Certificated Notes whose Certificated Notes are
being purchased only in part will be issued new Certificated Notes equal
in principal amount to the unpurchased portion of the Certificated Note or
Notes surrendered, which unpurchased portion will be equal in principal
amount to $1,000 or an integral multiple thereof;
(ix) that the Trustee will return to the Holder of a Global Note
that is being purchased in part, such Global Note with a notation on
Schedule A thereof adjusting the principal amount thereof to be equal
to the unpurchased portion of such Global Note; and
(x) any other information necessary to enable any Holder to tender
Notes and to have such Notes purchased pursuant to this Section 4.07.
(c) On the Change of Control Payment Date, the Company shall (1)
accept for payment all Notes or portions thereof properly tendered pursuant
to the Change of Control Offer, (2) irrevocably deposit with the Paying
Agent, by 10:00 a.m., New York City time, on such date, in immediately
available funds, an amount equal to the Change of Control Purchase Price in
respect of all Notes or portions thereof so accepted and (3) deliver or cause
to be delivered to the Trustee the Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of Notes or
portions thereof being purchased by the Company. The Paying Agent shall
promptly send by first class mail, postage prepaid, to each Holder of Notes
or portions thereof so accepted for
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payment the Change of Control Purchase Price for such Notes or portions
thereof. The Company shall publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control
Payment Date. For purposes of this Section 4.07, the Trustee shall act as
the Paying Agent.
(d) Upon surrender and cancellation of a Certificated Note that is
purchased in part pursuant to the Change of Control Offer, the Company shall
promptly issue and the Trustee shall authenticate and deliver to the
surrendering Holder of such Certificated Note a new Certificated Note equal
in principal amount to the unpurchased portion of such surrendered
Certificated Note; provided that each such new Certificated Note shall be in
a principal amount of $1,000 or an integral multiple thereof.
Upon surrender of a Global Note that is purchased in part pursuant to a
Change of Control Offer, the Paying Agent shall forward such Global Note to
the Trustee who shall make a notation on Schedule A thereof to reduce the
principal amount of such Global Note to an amount equal to the unpurchased
portion of such Global Note, as provided in Section 2.05(c) hereof.
(e) The Company shall comply with the requirements of Section 14(e)
under the Exchange Act and any other securities laws or regulations, to the
extent such laws and regulations are applicable, in connection with the
purchase of Notes pursuant to a Change of Control Offer.
(f) Prior to complying with the provisions of this Section 4.07, but in
any event within 30 days following a Change of Control, the Company shall
either repay all outstanding Senior Indebtedness or obtain the requisite
consents, if any, under all agreements governing outstanding Senior
Indebtedness to permit the repurchase of Notes required by this Section 4.07.
SECTION 4.08. LIMITATION ON ASSET SALES. (a) The Company shall not
directly or indirectly engage in an Asset Sale of any Principal Properties to
any Subsidiary other than a Subsidiary Guarantor.
(b) The Company shall not, and shall not permit any of its Subsidiaries,
directly or indirectly, to, engage in an Asset Sale unless:
(i) the Company (or such Subsidiary) receives consideration at the
time of such Asset Sale at least equal to the fair market value, and in the
case of a lease of assets under which the Company or any of its
Subsidiaries is the lessor, a lease providing for rent and other conditions
which are no less favorable to the Company (or such Subsidiary) in any
material respect than the then prevailing market conditions (evidenced in
each case by a resolution of the Board of Directors of such Person set
forth in an Officers' Certificate of such Person delivered to the Trustee)
of the assets sold or otherwise disposed of, and
(ii) at least 85% (100% in the case of such lease payments) of the
consideration therefor received by the Company or such Subsidiary is in the
form of cash or Cash Equivalents or properties used in the Oil and Gas
Business of the Company and its Subsidiaries.
(c) The Company may apply Net Proceeds of an Asset Sale, at its option,
(i) to permanently reduce Senior Indebtedness other than Senior Revolving
Indebtedness, (ii) to permanently reduce Senior Revolving Indebtedness (and to
correspondingly reduce commitments
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with respect thereto), or (iii) to invest in properties and assets that will be
used in the Oil and Gas Business of the Company and its Subsidiaries. Pending
the final application of any such Net Proceeds, the Company may temporarily
reduce Senior Revolving Indebtedness or otherwise invest such Net Proceeds in
any manner that is not prohibited by this Indenture.
Any Net Proceeds from Asset Sales that are not applied within 270 days
after the consummation of an Asset Sale as provided in the preceding paragraph
will be deemed to constitute "Excess Proceeds."
(d) When the aggregate amount of Excess Proceeds exceeds $5.0 million,
the Company will be required to make an offer to all Holders of Notes, as
described in Section 4.08(e) hereof (an "Asset Sale Offer"), to purchase from
all Holders, on a pro rata basis, Notes in an aggregate principal amount equal
to the maximum principal amount of Notes that may be purchased out of the
then existing Excess Proceeds, at a purchase price (the "Asset Sale Purchase
Price") in cash in an amount equal to 100% of the principal amount thereof
plus accrued and unpaid interest thereon to the date of purchase.
(e) Within 30 calendar days after the date the amount of Excess Proceeds
exceeds $5.0 million, the Company, or the Trustee at the request and expense of
the Company, shall send to each Holder by first class mail, postage prepaid, a
notice prepared by the Company stating:
(i) that an Asset Sale Offer is being made pursuant to this Section
4.08, and that are Notes that are timely tendered will be accepted for
payment, subject to proration in the event the amount of Excess Proceeds is
less than the aggregate Asset Sale Purchase Price of all Notes timely
tendered pursuant to the Asset Sale Offer;
(ii) the Asset Sale Purchase Price, the amount of Excess Proceeds
that are available to be applied to purchase tendered Notes, and the date
Notes are to be purchased pursuant to the Asset Sale Offer (the "Asset
Sale Payment Date"), which date shall be a Business Day no earlier than
30 calendar days nor later than 60 calendar days subsequent to the date
such notice is mailed;
(iii) that any Notes or portions thereof not tendered or accepted
for payment will continue to accrue interest;
(iv) that, unless the Company defaults in the payment of the Asset
Sale Purchase Price with respect thereto, all Notes or portions thereof
accepted for payment pursuant to the Asset Sale Offer shall cease to
accrue interest from and after the Asset Sale Payment Date;
(v) that any Holder electing to have any Notes or portions thereof
purchased pursuant to the Asset Sale Offer will be required to surrender
such Notes, with the form entitled "Option of Holder to Elect Purchase" on
the reverse of such Notes completed, to the Paying
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Agent at the address specified in the notice, prior to the close of
business on the third Business Day preceding the Asset Sale Payment
Date;
(vi) that any Holder shall be entitled to withdraw such election if
the Paying Agent receives, not later than the close of business on the
second Business Day preceding the Asset Sale Payment Date, a facsimile
transmission or letter, setting forth the name of the Holder, the principal
amount of Notes delivered for purchase, and a statement that such Holder is
withdrawing such Holder's election to have such Notes or portions thereof
purchased pursuant to the Asset Sale Offer;
(vii) that any Holder electing to have Notes purchased pursuant to the
Asset Sale Offer must specify the principal amount that is being tendered
for purchase, which principal amount must be $1,000 or an integral multiple
thereof;
(viii) if Certificated Notes have been issued pursuant to Section
2.06, that any Holder of Certificated Notes whose Certificated Notes are
being purchased only in part will be issued new Certificated Notes equal
in principal amount to the unpurchased portion of the Certificated Note or
Notes surrendered, which unpurchased portion will be equal in principal
amount to $1,000 or an integral multiple thereof;
(ix) that the Trustee will return to the Holder of a Global Note
that is being purchased in part, such Global Note with a notation on
Schedule A thereof adjusting the principal amount thereof to be equal to
the unpurchased portion of such Global Note; and
(x) any other information necessary to enable any Holder to tender
Notes and to have such Notes purchased pursuant to this Section 4.08.
(f) If the aggregate principal amount of the Notes surrendered by
Holders exceeds the amount of Excess Proceeds as indicated in the notice
required by Section 4.08(e) hereof, the Trustee shall select the Notes to be
purchased on a PRO RATA basis based on the principal amount of the Notes
tendered, with such adjustments as may be deemed appropriate by the Trustee,
so that only Notes in denominations of $1,000 or integral multiples thereof
shall be purchased.
(g) On the Asset Sale Payment Date, the Company shall (i) accept for
payment any Notes or portions thereof properly tendered and selected for
purchase pursuant to the Asset Sale Offer and Section 4.08(f) hereof; (ii)
irrevocably deposit with the Paying Agent, by 10:00 a.m., New York City time,
on such date, in immediately available funds, an amount equal to the Asset
Sale Purchase Price in respect of all Notes or portions thereof so accepted;
and (iii) deliver, or cause to be delivered, to the Trustee the Notes so
accepted together with an Officers' Certificate listing the Notes or portions
thereof tendered to the Company and accepted for payment. The Paying Agent
shall promptly send by first class mail, postage prepaid, to each Holder of
Notes or portions thereof so accepted for payment the Asset Sale Purchase
Price for such Notes or portions thereof. The Company shall
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publicly announce the results of the Asset Sale Offer on or as soon as
practicable after the Asset Sale Payment Date. For purposes of this Section
4.08, the Trustee shall act as the Paying Agent.
(h) Upon surrender and cancellation of a Certificated Note that is
purchased in part, the Company shall promptly issue and the Trustee shall
authenticate and deliver to the surrendering Holder of such Certificated Note
a new Certificated Note equal in principal amount to the unpurchased portion
of such surrendered Certificated Note; PROVIDED that each such new
Certificated Note shall be in a principal amount of $1,000 or an integral
multiple thereof.
Upon surrender of a Global Note that is purchased in part pursuant to an
Asset Sale Offer, the Paying Agent shall forward such Global Note to the
Trustee who shall make a notation on Schedule A thereof to reduce the
principal amount of such Global Note to an amount equal to the unpurchased
portion of such Global Note, as provided in Section 2.05(c) hereof.
(i) Upon completion of an Asset Sale Offer (including payment of the
Asset Sale Purchase Price for accepted Notes), any surplus Excess Proceeds
that were the subject of such offer shall cease to be Excess Proceeds, and
the Company may then use such amounts for general corporate purposes.
(j) The Company shall comply with the requirements of Section 14(e)
under the Exchange Act and any other securities laws or regulations, to the
extent such laws and regulations are applicable, in connection with the
purchase of Notes pursuant to an Asset Sale Offer.
SECTION 4.09. OWNERSHIP OF CAPITAL STOCK. The Company shall not
permit any Person (other than the Company or any Wholly Owned Subsidiary of
the Company) to own any Capital Stock of any Subsidiary of the Company, and
shall not permit any Subsidiary of the Company to issue Capital Stock (except
to the Company or to a Wholly Owned Subsidiary of the Company), in each
case except (a) directors' qualifying shares, (b) Capital Stock issued
prior to the time such Person becomes a Subsidiary of the Company, (c) if
such Subsidiary merges with and into another Subsidiary, (d) if another
Subsidiary merges with and into such Subsidiary, (e) if such Subsidiary
ceases to be a Subsidiary (as a result of the sale of 100% of the shares of
such Subsidiary, the Net Proceeds from which are applied in accordance with
Section 4.08 hereof), or (f) Capital Stock of a Subsidiary organized in a
foreign jurisdiction required to be issued to, or owned by, the government of
such foreign jurisdiction or individual or corporate citizens of such foreign
jurisdiction in order for such Subsidiary to transact business in such
foreign jurisdiction.
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SECTION 4.10. UNRESTRICTED SUBSIDIARIES. The Board of Directors of the
Company may designate any of its Subsidiaries as Unrestricted Subsidiaries.
A Subsidiary may only be so designated if (i) immediately after giving effect
to such designation no Default or Event of Default exists, (ii) the Company
would, at the time of such designation and after giving pro forma effect
thereto as if such designation had occurred at the beginning of the
applicable four-quarter period, have been permitted to incur at least $1.00
of additional Indebtedness pursuant to the Consolidated Interest Coverage
Ratio and the Adjusted Consolidated Net Tangible Assets to Consolidated
Indebtedness Ratio tests set forth in Section 4.12(a) hereof, and (iii) after
the date of this Indenture and prior to such designation, no assets of the
Company or of any Subsidiary of the Company (including, without limitation,
Capital Stock of any such Subsidiary) shall have been transferred, directly
or indirectly, to any Unrestricted Subsidiary or any of its Subsidiaries,
other than assets transferred in the ordinary course of business and on terms
that are no less favorable to the Company or the relevant Subsidiary than
those that would have been obtained in a comparable transaction by the
Company or such Subsidiary with an unrelated Person. Any such designation by
the Board of Directors of the Company shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution of the
Company giving effect to such designation and an Officers' Certificate of the
Company certifying that such designation complied with the foregoing
conditions.
Any subsidiary of the Company shall continue to be an Unrestricted
Subsidiary only if it (a) has no Indebtedness other than Non-Recourse
Indebtedness; (b) is a Person with respect to which neither the Company nor
any of its Subsidiaries has any direct or indirect obligation (x) to
subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; and (c) has not guaranteed or otherwise directly
or indirectly provided credit support for any Indebtedness of the Company or
any of its Subsidiaries. If, at any time, any Unrestricted Subsidiary fails
to meet the foregoing requirements, such Unrestricted Subsidiary shall
thereafter cease to be an Unrestricted Subsidiary for purposes of this
Indenture, such Unrestricted Subsidiary shall execute and deliver a
supplemental indenture pursuant to which such Person guarantees the payment
of the Notes on the same terms and conditions as the Subsidiary Guarantees by
the Subsidiary Guarantors and any Indebtedness of such Unrestricted
Subsidiary shall be deemed to be incurred by a Subsidiary of the Company as
of such date.
The Board of Directors of the Company may at any time designate any
Subsidiary, if previously designated as Unrestricted Subsidiaries, to be a
Subsidiary; provided that such designation shall be deemed to be an
incurrence of Indebtedness by a Subsidiary of the Company of any outstanding
Indebtedness of such Subsidiary and such designation shall only be permitted
if (i) such Indebtedness is permitted under the covenant described under
Section 4.12 hereof, (ii) no Default or Event of Default would be in
existence following such designation and (iii) such Subsidiary shall execute
and deliver a supplemental indenture pursuant to which such Person guarantees
the payment of the Notes on the same terms and conditions as the Subsidiary
Guarantees by the Subsidiary Guarantors.
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SECTION 4.11. RESTRICTED PAYMENTS. The Company shall not, and shall
not permit any of its Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any distribution on account of the Company's or any
of its Subsidiaries' Equity Interests, other than dividends or distributions
payable in Equity Interests (other than Disqualified Stock) of the Company or
dividends or distributions payable to the Company or any Wholly Owned
Subsidiary of the Company; (ii) purchase, redeem or otherwise acquire or
retire for value any Equity Interests of the Company or any Subsidiary or
Unrestricted Subsidiary or other Affiliate of the Company (other than Equity
Interests of the Company, any Subsidiary or Unrestricted Subsidiary owned by
any Wholly Owned Subsidiary of the Company); (iii) make any principal payment
on, or purchase, redeem, defease or otherwise acquire or retire for value any
PARI PASSU Indebtedness prior to a scheduled mandatory sinking fund payment
date or maturity date, or (iv) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at the time of
and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have
been permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Consolidated Interest Coverage Ratio and the Adjusted
Consolidated Net Tangible Assets to Consolidated Indebtedness Ratio
tests set forth under Section 4.12(a); and
(c) such Restricted Payment, together with the aggregate of all
other Restricted Payments made by the Company and its Subsidiaries on or
after the date of this Indenture (excluding Restricted Payments
permitted by clauses (ii), (iii), (iv) and (v) of the next succeeding
paragraph), is less than the sum of (i) 50% of the Consolidated Net
Income of the Company and its Subsidiaries for the period (taken as one
accounting period) from the beginning of the first day of the fiscal
month during which this Indenture was executed and delivered to the end of
the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted Payment
(or, if such Consolidated Net Income for such period is a deficit, less
100% of such deficit), plus (ii) 100% of the aggregate net cash proceeds
received by the Company as capital contributions to the Company or from
the issue or sale after the date of this Indenture of Equity Interests
of the Company or of debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
convertible debt securities) sold to a Subsidiary or an Unrestricted
Subsidiary of the Company and other than Disqualified Stock or
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debt securities that have been converted into Disqualified Stock),
except for Capital Stock of the Company issued contemporaneously with
the issuance of the Notes.
The foregoing clauses (b) and (c), however, will not prohibit (i) the
payment of any dividend within 60 days after the date of declaration thereof,
if at said date of declaration such payment would have complied with the
provisions of this Indenture; (ii) the payment of any dividend on Equity
Interests of the Company (other than Disqualified Stock) payable solely in
shares of Equity Interests of the Company (other than Disqualified Stock);
(iii) any dividend or other distribution payable from a Subsidiary of the
Company to the Company or any Wholly Owned Subsidiary; (iv) the making of any
Restricted Investment in exchange for, or out of the proceeds of, the
substantially concurrent sale, issuance or exchange (other than to a
Subsidiary or any Unrestricted Subsidiary of the Company) of Equity Interests
of the Company (other than Disqualified Stock); PROVIDED, that any net cash
proceeds that are utilized for any such Restricted Investment shall be
excluded from clause (c) of the preceding paragraph; (v) the redemption,
repurchase, retirement or other acquisition of any Equity Interests of the
Company in exchange for, or out of the proceeds of, the substantially
concurrent sale, issuance or exchange (other than to a Subsidiary or any
Unrestricted Subsidiary of the Company) of other Equity Interests of the
Company (other than any Disqualified Stock); PROVIDED that any net cash
proceeds that are utilized for any such redemption, repurchase, retirement or
other acquisition shall be excluded from clause (c) of the preceding
paragraph; and (vi) the defeasance, redemption or repurchase of any PARI
PASSU Indebtedness prior to a scheduled mandatory sinking fund payment date
or maturity date thereof with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness or the substantially concurrent sale
(other than to a Subsidiary or any Unrestricted Subsidiary of the Company) of
Equity Interests of the Company (other than Disqualified Stock) or the
purchase, redemption or acquisition by the Company of any PARI PASSU
Indebtedness prior to a scheduled mandatory sinking fund payment date or
maturity date thereof through the issuance in exchange thereof of Equity
Interests of the Company (other than Disqualified Stock); PROVIDED, that any
net cash proceeds that are utilized for any such defeasance, redemption or
repurchase, purchase or acquisition shall be excluded from clause (c) of the
preceding paragraph.
The amount of all Restricted Payments (other than cash) shall be the
fair market value (evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Trustee) on the date of
the Restricted Payment of the asset(s) proposed to be transferred by the
Company or such Subsidiary, as the case may be, pursuant to the Restricted
Payment. Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an Officers' Certificate of the Company
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by this Section 4.11 were computed,
which calculations may be based upon the Company's latest available financial
statements.
SECTION 4.12. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED
STOCK. (a) The Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness
(including Acquired Indebtedness) and the Company shall not issue any
Disqualified Stock and shall not permit any of its Subsidiaries to issue any
shares of preferred stock; PROVIDED, HOWEVER, that the Company may incur
Indebtedness (including Acquired Indebtedness) and the Company may issue
shares of Disqualified Stock if: (i) the Consolidated Interest Coverage
Ratio for the Company's most recently ended four full fiscal quarters for
which internal financial statements are available immediately preceding the
date on which
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such additional Indebtedness is incurred or such Disqualified Stock is issued
would have been at least, during the period from the date of this Indenture
until the first anniversary thereof, 2.25 to 1, and thereafter, 2.50 to 1,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or
the Disqualified Stock had been issued, as the case may be, at the beginning
of such four-quarter period; (ii) the Adjusted Consolidated Net Tangible
Assets would have been at least 150% of Consolidated Indebtedness, determined
on a pro forma basis (including a pro forma application of the net proceeds
therefrom) and (iii) no Default or Event of Default shall have occurred and
be continuing or would occur as a consequence thereof; PROVIDED, that no
Guarantee may be incurred pursuant to this paragraph, unless the guaranteed
Indebtedness is incurred by the Company pursuant to this paragraph.
(b) The foregoing provisions will not apply to:
(i) the incurrence by the Company of Indebtedness under the Credit
Facility (and the incurrence by Subsidiaries of Guarantees thereof) in
an aggregate principal amount at any time outstanding (with letters of
credit being deemed to have a principal amount equal to the maximum
potential liability of the Company and its Subsidiaries thereunder) not
to exceed $50 million, less the aggregate amount of all Net Proceeds of
Asset Sales applied to permanently reduce the outstanding amount or the
commitments with respect to such Indebtedness pursuant to Section 4.08
hereof;
(ii) the incurrence by the Company of Indebtedness represented by
the Notes and of its Subsidiaries of Indebtedness represented by the
Subsidiary Guarantees;
(iii) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or
refund, any Indebtedness described in Section 4.12(b)(ii) hereof;
(iv) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Wholly Owned Subsidiaries or between or among any Wholly Owned
Subsidiaries; PROVIDED that, in the case of Indebtedness of the Company,
such obligations shall be unsecured and subordinated in case of an event
of default in all respects to the Company's obligations pursuant to the
Notes; and PROVIDED, HOWEVER, that (i) any subsequent issuance or
transfer of Equity Interests that results in any such Indebtedness being
held by a Person other than a Wholly Owned Subsidiary of the Company and
(ii) any sale or other transfer of any such Indebtedness to a Person
that is not either the Company or a Wholly Owned Subsidiary of the
Company shall be deemed, in each case, to constitute an incurrence of
such Indebtedness by the Company or such Subsidiary, as the case may be;
(v) the incurrence by the Company or Hedging Obligations that are
incurred for the purpose of fixing or hedging interest rate risk with
respect to any floating rate Indebtedness that is permitted by this
Indenture to be incurred; PROVIDED that the notional amount
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of such Hedging Obligations does not exceed the principal amount of the
Indebtedness to which such Hedging Obligations relate;
(vi) the incurrence by the Company of Hedging Obligations under
commodity hedging and currency exchange agreements; PROVIDED that such
agreements were entered into in the ordinary course of business for the
purpose of limiting risks that arise in the ordinary course of business;
(vii) the incurrence by the Subsidiaries of Indebtedness in
existence on the date of this Indenture listed on Schedule 4.12(b)(viii)
attached to this Indenture; and
(viii) the incurrence by the Company and its Subsidiaries of
Indebtedness (in addition to Indebtedness permitted by any other clause
of this Section 4.12) in an aggregate principal amount at any time
outstanding not to exceed $10 million;
PROVIDED that no Subsidiary may incur any Indebtedness other than Indebtedness
described in Section 4.12(b)(iv) or (vii) unless such Subsidiary shall have
executed and delivered a Subsidiary Guarantee and such Subsidiary Guarantee
shall be in full force and effect (except to the extent Section 11.02 hereof
would result in the release thereof) so long as such Indebtedness remains
outstanding.
SECTION 4.13. LIENS. The Company shall not, and shall not permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien (other than Permitted Liens but only to the extent
securing obligations not constituting Indebtedness) on any of its assets, now
owned or hereafter acquired, securing any Indebtedness other than Senior
Indebtedness, unless the Notes are secured equally and ratably with such
other Indebtedness; PROVIDED that, if such Indebtedness is by its terms
expressly subordinate to the Notes, the Lien securing such subordinate or
junior Indebtedness shall be subordinate and junior to the Lien securing the
Notes with the same relative priority as such subordinated or junior
Indebtedness shall have with respect to the Notes.
SECTION 4.14. DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer
to exist or become effective any encumbrance or restriction on the ability of
any Subsidiary to (i)(a) pay dividends or make any other distributions to the
Company or any of its Subsidiaries on its Capital Stock or with respect to
any other interest or participation in, or measured by, its profits, or (b)
pay any indebtedness owed to the Company or any of its Subsidiaries, (ii)
make loans or advances to the Company or any of its Subsidiaries, (iii)
transfer any of its properties or assets to the Company or any of its
Subsidiaries, (iv) transfer any of its property or assets to the Company or
any of its Subsidiaries, (v) grant liens or security interests on the assets
in favor of the Holders of Notes, or (vi) guarantee the Notes or any renewals
or refinancings thereof, except for such encumbrances or restrictions
existing under or by reason of (A) the Credit Facility, this Indenture and
the Note, (B) applicable law, (C) any instrument governing Acquired
Indebtedness or Capital Stock of a Person acquired by the Company or any of
its Subsidiaries as in effect at the time of such acquisition (except to the
extent such Acquired Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other
than the Person, or the property or assets of the Person, so acquired,
PROVIDED that the Consolidated EBITDA of such Person is not taken into
account in determining whether such acquisition was permitted by the terms of
this Indenture, or (D) Permitted Refinancing Indebtedness, PROVIDED that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced.
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SECTION 4.15. LIMITATION ON LAYERING DEBT. The Company shall not
incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to any Senior
Indebtedness and senior in any respect in right of payment of the Notes.
SECTION 4.16. TRANSACTIONS WITH AFFILIATES. The Company shall not, and
shall not permit any of its Subsidiaries to, after the date of this
Indenture, sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or make any payment to, or purchase any property or
assets from, or enter into or suffer to exist any transaction or series of
transactions, or make any agreement, loan, advance or guarantee with, or for
the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), other than Exempt Affiliate Transactions, unless (i) such
Affiliate Transaction is on terms that are no less favorable to the Company
or the relevant Subsidiary (as reasonably determined by the Company) than
those that would have been obtained in a comparable transaction by the
Company or such Subsidiary with an unrelated Person and (ii) the Company
delivers to the Trustee (a) with respect to any Affiliate Transaction entered
into after the date of this Indenture involving aggregate consideration in
excess of $1.0 million, a resolution of the Board of Directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies
with clause (i) above and that such Affiliate Transaction has been approved
by a majority of the disinterested members of the Board of Directors and (b)
with respect to any Affiliate Transaction involving aggregate consideration
in excess of $5.0 million, an opinion as to the fairness to the Company or
such Subsidiary of such Affiliate Transaction from a financial point of view
issued by an investment banking firm of national standing.
SECTION 4.17. REPORTS. Whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company shall furnish to the Holders of Notes, and file with the Trustee,
within 15 days after it is, or would have been, required to file such with
the Commission (i) all quarterly and annual financial information that is or
would be required to be contained in a filing with the Commission on Forms
10-Q and 10-K if the Company is or were required to file such Forms,
including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii)
all current reports that are or would be required to be filed with the
Commission on Form 8-K if the Company is or were required to file such
reports. In addition, whether or not required by the rules and regulations
of the Commission, the Company shall file a copy of all such information and
reports with the Commission for public availability (unless the Commission
will not accept such a filing) and make such information available to
securities analysts and prospective investors upon written request.
Delivery of such reports, information and documents to the Trustee is
for informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
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SECTION 4.18. WAIVER OF STAY, EXTENSION OR USURY LAWS. Each of the
Company and the Subsidiary Guarantors covenants (to the extent that it may
lawfully do so) that it will not at any time insist upon, or plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay or
extension law or any usury law or other law that would prohibit or forgive
the Company or such Subsidiary Guarantor from paying all or any portion of
the principal of or premium, if any, or interest on the Notes as contemplated
herein, wherever enacted, now or at any time hereafter in force, or that may
affect the covenants or the performance of this Indenture; and (to the extent
that it may lawfully do so) the Company or such Subsidiary Guarantor hereby
expressly waives all benefit or advantage of any such law and covenants that
it will not hinder, delay or impede the execution of any power herein granted
to the Trustee, but will suffer and permit the execution of every such power
as though no such law had been enacted.
SECTION 4.19. COMPLIANCE CERTIFICATE; NOTICE OF DEFAULT OR EVENT OF
DEFAULT. (a) The Company shall deliver to the Trustee within 120 calendar
days after the end of each fiscal year of the Company ending after the date
hereof, an Officers' Certificate stating whether or not, to the best
knowledge of such officer, the Company has complied with all conditions and
covenants under this Indenture, and, if the Company shall be in Default,
specifying all such Defaults and the nature thereof of which such officer may
have knowledge.
For the purposes of this Section 4.19(a), compliance shall be determined
without regard to any period of grace or requirement of notice under this
Indenture.
(b) The Company shall deliver written notice to the Trustee immediately
upon any executive officer of the Company becoming aware of the occurrence of
any event which constitutes, or with the giving of notice or the lapse of
time or both would constitute, a Default or Event of Default, describing such
Default or Event of Default, its status and what action the Company is taking
or proposes to take with respect thereto.
(c) So long as not contrary to the then-current recommendations of the
American Instituted of Certified Public Accountants, the year-end financial
statements delivered pursuant to Section 4.17 hereof shall be accompanied by
a written statement of the Company's independent public accountants (who
shall be a firm of established national reputation) that in making the
examination necessary for certification of such financial statements, nothing
has come to their attention that would lead them to believe that the Company
has violated any provisions of Article IV or Article V hereof or, if any such
violation has occurred, specifying the nature and period of existence
thereof, it being understood that such accountants shall not be liable
directly or indirectly to any Person for any failure to obtain knowledge of
any such violation.
SECTION 4.20. INVESTMENT COMPANY ACT. None of the Company or the
Subsidiaries or Unrestricted Subsidiaries of the Company shall become an
investment company subject to registration under the Investment Company Act
of 1940, as amended.
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SECTION 4.21. SALE AND LEASEBACK. The Company will not, and will not
permit any of its Subsidiaries to, enter into any Sale and Leaseback
Transaction unless (a) the Company or its Subsidiaries entering into such
Sale and Leaseback Transaction could have incurred the Indebtedness relating
to such Sale and Leaseback Transaction pursuant to Sections 4.12 and 4.13 and
(b) the Net Proceeds of such Sale and Leaseback Transaction are at least
equal to the fair market value of such property as determined by the Board of
Directors of the Company.
SECTION 4.22. FURTHER INSTRUMENTS AND ACTS. Upon request of the
Trustee, the Company shall execute and deliver such further instruments and
do such further acts as may be reasonably necessary or proper to carry out
more effectively the purpose of this Indenture.
ARTICLE V
CONSOLIDATION, MERGER,
CONVEYANCE, LEASE OR TRANSFER
SECTION 5.01. MERGER, CONSOLIDATION OR SALE OF ASSETS. The Company
shall not, and shall not permit any Subsidiary to, in a single transaction or
series of related transactions consolidate or merge with or into (other than
the consolidation or merger of a Wholly Owned Subsidiary of the Company with
another Wholly Owned Subsidiary of the Company or into the Company) (whether
or not the Company or such Subsidiary is the surviving corporation), or
directly and/or indirectly through its Subsidiaries sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its
properties or assets (determined on a consolidated basis for the Company and
its Subsidiaries taken as a whole) in one or more related transactions to,
another corporation, Person or entity unless (i) either (a) the Company, in
the case of a transaction involving the Company, or such Subsidiary, in the
case of a transaction involving a Subsidiary, is the surviving corporation or
(b) in the case of a transaction involving the Company, the entity or the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made is a corporation organized or
existing under the laws of the United States, any state thereof or the
District of Columbia and assumes all the obligations of the Company under the
Notes and this Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee; (ii) immediately after such
transaction no Default or Event of Default exists; and (iii) the Company or,
if other than the Company, the entity or Person formed by or surviving any
such consolidation or merger, or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made (A) will have
Consolidated Net Worth immediately after the transaction equal to or greater
than the Consolidated Net Worth of the Company immediately preceding the
transaction and (B) will, at the time of such transaction and after giving
pro forma effect thereto as if such transaction had occurred at the beginning
of the applicable four-quarter period, be permitted to incur at least $1.00
of additional Indebtedness pursuant to the Consolidated Interest Coverage
Ratio and the Adjusted Consolidated Net Tangible Assets to Consolidated
Indebtedness Ratio tests set forth in Section 4.12(a) hereof.
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In connection with any consolidation, merger, conveyance, lease or other
disposition contemplated by this Section 5.01, the Company shall deliver, or
cause to be delivered, to the Trustee, in form reasonably satisfactory to the
Trustee, an Officers' Certificate of the Company and an Opinion of Counsel of
the Company, each stating that such consolidation, merger, conveyance, lease
or disposition and any supplemental indenture in respect thereto comply with
this Section 5.01 and that all conditions precedent herein provided for
relating to such transaction have been complied with.
SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED. Upon any consolidation
with, or merger by the Company with and into, any other corporation, or any
sale, assignment, transfer, lease, conveyance or other disposition of all or
substantially all of the Property of the Company and its Subsidiaries taken
as a whole in accordance with Section 5.01 hereof, the successor corporation
formed by such consolidation or into which the Company is merged, or the
Person to which such sale, conveyance, assignment, transfer, lease,
conveyance or other disposition is made, shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under this
Indenture with the same effect as if such successor Person has been named as
the Company herein; and thereafter the predecessor corporation shall be
relieved of all obligations and covenants under this Indenture and the Notes,
EXCEPT for the obligation to pay the principal of (and premium, if any) and
interest on the Notes.
ARTICLE VI
DEFAULTS AND REMEDIES
SECTION 6.01. EVENTS OF DEFAULT. "Event of Default," wherever used
herein with respect to the Notes, means any one of the following events
(whatever the reason for such event, and whether it shall be voluntary or
involuntary, or be effected by operation of law, pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) The Company or any Subsidiary Guarantor fails to make any
payment of interest on any Note when the same becomes due and payable
and such failure continues for a period of 30 calendar days, whether or
not such payment is prohibited by the provisions of Articles X or XI
hereof; or
(b) The Company or any Subsidiary Guarantor fails to make any
payment of the principal or of premium, if any, on any Note when the
same becomes due and payable whether upon maturity, redemption, required
repurchase or otherwise, whether or not such payment is prohibited by
the provisions of Articles X or XI hereof; or
(c) the Company or any Subsidiary fails to observe or perform any
covenant, condition or agreement on the part of the Company to be
observed or performed pursuant to Section 4.07, 4.08, 4.09, 4.11 or 4.12
hereof or Article V hereof; or
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(d) the Company or any Subsidiary fails to comply with any of its
other agreements or covenants in, or provisions of, the Notes or this
Indenture and such failure continues for the period and after the notice
specified below; or
(e) a default occurs under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any of
its Subsidiaries (or the payment of which is Guaranteed by the Company
or any of its Subsidiaries), whether such Indebtedness or Guarantee now
exists or shall be created after the date of this Indenture, which
default (i) is caused by a failure to pay principal of such Indebtedness
at final maturity thereof (a "Payment Default) or (ii) results in the
acceleration of such Indebtedness prior to its express maturity and, in
each case, the principal amount of such Indebtedness, together with the
principal amount of any other Indebtedness as to which there has been a
Payment Default or the maturity of which has been so accelerated,
aggregates $10.0 million or more; or
(f) a final judgment or final judgments for the payment of money
not fully covered by insurance are entered by a court or courts of
competent jurisdiction against the Company or any of its Subsidiaries
and such judgment or judgments remain undischarged for a period (during
which execution shall not be effectively stayed) of 60 days, PROVIDED
that the aggregate of all such undischarged judgments exceeds $1.0
million; or
(g) the entry by a court having jurisdiction in the premises of
(i) a decree or order for relief in respect of the Company or any
Subsidiary of the Company in an involuntary case or proceeding under
United States bankruptcy laws, as now or hereafter constituted, or any
other applicable Federal, state, or foreign bankruptcy, insolvency, or
other similar law or (ii) a decree or order adjudging the Company or any
Subsidiary of the Company a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement,
adjustment or composition of, or in respect of, the Company or any
Subsidiary of the Company under United States bankruptcy laws, as now or
hereafter constituted, or any other applicable Federal, state or foreign
bankruptcy, insolvency, or similar law, or appointing a custodian,
receiver, liquidator, assignee, trustee, sequestrator or other similar
official of the Company or any Subsidiary of the Company or of any
substantial part of the Property of the Company or any Subsidiary of the
Company, or ordering the winding-up or liquidation of the affairs of the
Company or any Subsidiary of the Company, and the continuance of any
such decree or order for relief or any such other decree or order
unstayed and in effect for a period of 60 consecutive calendar days; or
(h) (i) the commencement by the Company or any Subsidiary of the
Company of a voluntary case or proceeding under United States bankruptcy
laws, as now or hereafter constituted, or any other applicable Federal,
state, or foreign bankruptcy, insolvency or other similar law or of any
other case or proceeding to be adjudicated a bankrupt or insolvent; or
(ii) the consent by the Company or any Subsidiary of the Company to the
entry of a decree or order for relief in respect of the Company or any
Subsidiary or Unrestricted Subsidiary of the Company
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in an involuntary case or proceeding under United States bankruptcy
laws, as now or hereafter constituted, or any other applicable Federal,
state, or foreign bankruptcy, insolvency, or other similar law or to the
commencement of any bankruptcy or insolvency case or proceeding against
the Company or any Subsidiary of the Company; or (iii) the filing by the
Company or any Subsidiary of the Company of a petition or answer or
consent seeking reorganization or relief under United States bankruptcy
laws, as now or hereafter constituted, or any other applicable Federal,
state or foreign bankruptcy, insolvency or other similar law; or (iv)
the consent by the Company or any Subsidiary of the Company to the
filing of such petition or to the appointment of or taking possession by
a custodian, receiver, liquidator, assignee, trustee, sequestrator or
similar official of the Company or any Subsidiary of the Company or of
any substantial part of the Property of the Company or any Subsidiary of
the Company, or the making by the Company or any Subsidiary of the
Company of an assignment for the benefit of creditors; or (v) the
admission by the Company or any Subsidiary of the Company in writing of
its inability to pay its debts generally as they become due; or (vi) the
taking of corporate action by the Company or any Subsidiary of the
Company in furtherance of any such action; or
(i) any Subsidiary Guarantee or any provision thereof shall at any
time cease to be the legal, valid and binding obligation of the
Subsidiary Guarantor party thereto as represented in the Subsidiary
Guarantee (other than pursuant to Section 11.02 hereof or Section 2 of the
Subsidiary Guarantees), such that the Holders of the Notes could not
reasonably be expected to realize the material benefits intended to be
provided by such Subsidiary Guarantor under the Subsidiary Guarantee or
any Subsidiary Guarantor shall assert that the Subsidiary Guarantee is not
a legal, valid and binding obligation or shall purport to revoke its
obligations thereunder.
A Default under clause (d) is not an Event of Default until the Trustee
notifies the Company, or the Holders of at least 25% in principal amount of
the then outstanding Notes notify the Company and the Trustee, of the Default
and the Company does not cure the Default within 60 calendar days after
receipt of the notice. The notice must specify the Default, demand that it be
remedied and state that the notice is a "Notice of Default".
SECTION 6.02. ACCELERATION. If an Event of Default (other than an Event
of Default specified in Section 6.01(g) or Section 6.01(h)) occurs and is
continuing, then and in every such case the Trustee by notice to the Company,
or the Holders of at least 25% in principal amount of the then outstanding
Notes by written notice to the Company and the Trustee may declare the unpaid
principal of and any accrued interest on all the Notes then outstanding to be
immediately due and payable. Upon such declaration the principal and
interest shall be due and payable immediately (together with any premium, if
applicable). If an Event of Default specified in Section 6.01(g) or Section
6.01(h) occurs, such an amount shall IPSO FACTO become and be immediately due
and payable without any declaration or other act on the part of the Trustee
or any Holder.
The Holders of a majority in principal amount of the then outstanding
Notes by written notice to the Trustee may rescind an acceleration and its
consequences if the rescission would not conflict with any judgment or decree
and if all existing Events of Default (except nonpayment of principal,
interest or premium that have become due solely because of the acceleration)
have been cured or
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waived. No such recession shall affect any subsequent Default or impair any
right consequent thereon.
SECTION 6.03. OTHER REMEDIES. The Company covenants that if an Event of
Default specified in Section 6.01(a) or Section 6.01(b) occurs the Company
shall, upon demand of the Trustee, pay to the Trustee, for the benefit of the
Holders, the whole amount then due and payable on the Notes for principal
(and premium, if any) and interest and, to the extent that payment of such
interest shall be legally enforceable, interest upon the overdue principal
(and premium, if any) and upon Defaulted Interest at the rate or rates
prescribed therefor in such Notes; and, in addition thereto, such further
amount as shall be sufficient to cover the costs and expenses of collection,
including the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel and all other amounts due to the
Trustee pursuant to Section 7.07 hereof.
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, and may
prosecute such proceeding to judgment or final decree, and may enforce the
same against the Company or any other obligor upon such Notes and collect the
moneys adjudged or decreed to be payable in the manner provided by law out of
the Property of the Company or any other obligor upon such Notes, wherever
situated.
If an Event of Default with respect to the Notes occurs and is
continuing, the Trustee may in its discretion proceed to protect and enforce
its rights and the rights of the Holders by such appropriate judicial
proceedings as the Trustee shall deem most effectual to protect and enforce
any such rights, whether for the specific enforcement of any covenant or
agreement in this Indenture or in aid of the exercise of any power granted
herein, or to enforce any other proper remedy.
SECTION 6.04. WAIVER OF PAST DEFAULTS. The Holders of not less than a
majority in principal amount of the outstanding Notes may, on behalf of the
Holders of all the Notes, waive any past Default and its consequences under
this Article VI, except Default (a) in the payment of the principal of (or
premium, if any) or interest on, any Note (except a payment default resulting
from an acceleration that has been rescinded), or (b) in respect of a
covenant or provision hereof which under Section 9.02 hereof cannot be
modified or amended without the consent of the Holder of each outstanding
Note affected. Any such waiver may (but need not) be given in connection
with a tender offer or exchange offer for the Notes.
SECTION 6.05. CONTROL BY MAJORITY. The Holders of not less than a
majority in principal amount of the outstanding Notes shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee; PROVIDED that:
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(a) such direction shall not be in conflict with any rule of law
or with this Indenture or unduly prejudicial to the rights of other
Holders and would not subject the Trustee to personal liability, and
(b) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
SECTION 6.06. LIMITATION ON SUITS. No Holder of Notes shall have any
right to institute any proceeding, judicial or otherwise, with respect to
this Indenture, or for the appointment of a receiver or trustee, or for any
other remedy hereunder, unless
(a) such Holder has previously given written notice to the Trustee
of a continuing Event of Default with respect to the Notes;
(b) the Holders of not less than 25 percent in principal amount of
the outstanding Notes shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own
name as Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee security or
indemnity satisfactory to the Trustee in its reasonable discretion
against the costs, expenses and liabilities to be incurred in compliance
with such request;
(d) the Trustee for 30 calendar days after its receipt of such
notice, request and offer of indemnity has failed to institute any such
proceeding; and
(e) no direction inconsistent with such written request has been
given to the Trustee during such 30-day period by the Holders of a
majority in principal amount of the outstanding Notes;
in any event, it being understood and intended that no one or more Holders of
Notes shall have any right in any manner whatever by virtue of, or by
availing of, any provision of this Indenture to affect, disturb or prejudice
the rights of any other Holders of Notes, or to obtain or to seek to obtain
priority or preference over any other of such Holders or to enforce any right
under this Indenture, except in the manner herein provided and for the equal
and ratable benefit of all Holders of Notes.
SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any
other provision of this Indenture, the right of any Holder to receive payment
of principal of (premium, if any) and interest on the Notes held by such
Holder, on or after the respective due dates expressed in the Notes or the
redemption dates or purchase dates provided for therein, or to bring suit for
the enforcement of any such payment on or after such respective dates, shall
be absolute and unconditional and shall not be impaired or affected without
the consent of such Holder.
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SECTION 6.08. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the pendency
of any receivership, insolvency, liquidation, bankruptcy, reorganization,
arrangement, adjustment, composition or other judicial proceedings, or any
voluntary or involuntary case under United States bankruptcy laws, as now or
hereafter constituted, relative to the Company, any Subsidiary Guarantor or
any other obligor upon the Notes or the Property of the Company, any
Subsidiary Guarantor or of such other obligor or their creditors, the Trustee
(irrespective of whether the principal of such Notes shall then be due and
payable as therein expressed or by declaration or otherwise and irrespective
of whether the Trustee shall have made any demand on the Company or any
Subsidiary Guarantor for the payment of overdue principal or interest) shall
be entitled and empowered, by intervention in such proceeding or otherwise,
(i) to file and prove a claim for the whole amount of principal (and premium,
if any) and interest owing and unpaid in respect of the Notes, to file such
other papers or documents and to take such other actions, including
participating as a member or otherwise in any official committee of creditors
appointed in the matter, as may be necessary or advisable in order to have
the claims of the Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel and all other amounts due to the Trustee pursuant to Section 7.07
hereof) and of the Holders allowed in such judicial proceeding, and (ii) to
collect and receive any moneys or other Property payable or deliverable on
any such claims and to distribute the same; and any receiver, assignee,
trustee, custodian, liquidator, sequestrator (or other similar official) in
any such proceeding is hereby authorized by each Holder to make such payments
to the Trustee, and in the event that the Trustee shall consent to the making
of such payments directly to the Holders, to pay to the Trustee any amount
due it for the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel, and any other amounts due the Trustee
under Section 7.07 hereof. Nothing contained herein shall be deemed to
authorize the Trustee to authorize or consent to or accept or adopt on behalf
of any Holder any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Holder in any
such proceeding.
SECTION 6.09. PRIORITIES. Any money collected by the Trustee pursuant
to this Article VI shall be applied in the following order, at the date or
dates fixed by the Trustee and, in case of the distribution of such money on
account of principal (premium, if any) or interest upon presentation of the
Notes and the notation thereon of the payment if only partially paid and upon
surrender thereof if fully paid:
(a) FIRST: To the payment of all amounts due the Trustee under
Section 7.07 hereof;
(b) SECOND: To the payment of the amounts then due and unpaid for
principal of (and premium, if any) and interest on the Notes, ratably,
without preference or priority of any kind, according to the amounts due
and payable on such Notes for principal (and premium, if any) and
interest, respectively; and
(c) THIRD: To the Company.
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The Trustee may fix a record date and payment date for any payment to
Holders pursuant to this Section 6.09. At least 15 calendar days before such
record date, the Company shall mail to each Holder and the Trustee a notice
that states such record date, the payment date and amount to be paid. The
Trustee may mail such notice in the name and at the expense of the Company.
SECTION 6.10. UNDERTAKING FOR COSTS. All parties to this Indenture
agree, and each Holder of any Note by such Holder's acceptance thereof shall
be deemed to have agreed, that any court may in its discretion require, in
any suit for the enforcement of any right or remedy under this Indenture, or
in any suit against the Trustee for any action taken, suffered or omitted by
it as Trustee, the filing by any party litigant in such suit of an
undertaking to pay the costs of such suit and that such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees and
expenses, against any party litigant in such suit, having due regard to the
merits and good faith of the claims or defenses made by such party litigant;
but the provisions of this Section shall not apply to any suit instituted by
the Trustee, to any suit instituted by any Holder, or group of Holders,
holding in the aggregate more than 10 percent in principal amount of the
outstanding Notes, or to any suit instituted by any Holder for the
enforcement of the payment of the principal of (or premium, if any) or
interest on any Note on or after its Stated Maturity.
SECTION 6.11. WAIVER OF STAY OR EXTENSION LAWS. The Company and the
Subsidiary Guarantors (to the extent it or they may lawfully do so) shall not
at any time insist upon, or plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay or extension law wherever enacted, now
or at any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Company and the Subsidiary Guarantors
(to the extent that it or they may lawfully do so) hereby expressly waives
all benefit or advantage of any such law, and shall not hinder, delay or
impede the execution of any power herein granted to the Trustee, but shall
suffer and permit the execution of every such power as though no such law had
been enacted.
SECTION 6.12. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF THE
NOTES. All rights of action and claims under this Indenture or the Notes may
be prosecuted and enforced by the Trustee without the possession of any of
the Notes or the production thereof in any proceeding relating thereto, and
any such proceeding instituted by the Trustee shall be brought in its own
name, as trustee of an express trust, and any recovery of judgment shall,
after provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the Holders of the Notes.
SECTION 6.13. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or
any Holder of Notes has instituted any proceeding to enforce any right or
remedy under this Indenture and such proceeding has been discontinued or
abandoned for any reason, or has been determined adversely to the Trustee or
to such Holder, then and in every such case the Company, the Subsidiary
Guarantors, the Trustee and the Holders shall, subject to any determination
in such proceeding, be restored severally and respectively to their former
positions hereunder, and thereafter all rights and remedies of the Trustee
and the Holders shall continue as though no such proceeding had been
instituted.
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SECTION 6.14. RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise
provided in Section 2.07 hereof, no right or remedy herein conferred upon or
reserved to the Trustee or to the Holders is intended to be exclusive of any
other right or remedy, and every right and remedy shall, to the extent
permitted by law, be cumulative and in addition to every other right and
remedy given hereunder or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or employment of any
other appropriate right or remedy.
SECTION 6.15. DELAY OR OMISSION NOT WAIVER. No delay or omission of
the Trustee or of any Holder of any Note to exercise any right or remedy
accruing upon any Event of Default shall impair any such right or remedy or
constitute a waiver of any such Event of Default or an acquiescence therein.
Every right and remedy given by this Article VI or by law to the Trustee or
to the Holders may be exercised from time to time, and as often as may be
deemed expedient, by the Trustee or by the Holders, as the case may be.
ARTICLE VII
TRUSTEE
SECTION 7.01. DUTIES OF TRUSTEE. (a) If an Event of Default has
occurred and is continuing, the Trustee shall exercise the rights and powers
vested in it by this Indenture and shall use the same degree of care and
skill in their exercise as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs.
(b) Except during the continuance of an Event of Default: (i) the
Trustee undertakes to perform such duties and only such duties as are
specifically set forth in this Indenture and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and (ii)
in the absence of bad faith on its part, the Trustee may conclusively rely,
as to the truth of the statements and the correctness of the opinions
expressed therein, upon certificates or opinions furnished to the Trustee and
conforming to the requirements of this Indenture; PROVIDED that in the case
of any such certificates or opinions that by any provision of this Indenture
are specifically required to be furnished to the Trustee, the Trustee shall
examine such certificates and opinions to determine whether or not they
conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own willful
misconduct, PROVIDED that: (i) this paragraph (c) shall not limit the effect
of paragraph (b) of this Section 7.01; (ii) the Trustee shall not be liable
for any error of judgment made in good faith by a Trust Officer unless it is
proved that the Trustee was negligent in ascertaining the pertinent facts;
and (iii) the Trustee shall not be liable with respect to any action it takes
or omits to take in good faith in accordance with a direction received by it
pursuant to Section 6.05 hereof.
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(d) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree in writing with the Company.
(e) Money held in trust by the Trustee need not be segregated from
other funds except to the extent required by law.
(f) No provision of this Indenture shall require the Trustee to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk of liability
is not reasonably assured to it.
(g) Every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Article VII and to the provisions of the
Trust Indenture Act.
SECTION 7.02. RIGHTS OF TRUSTEE. (a) The Trustee may rely on any
document believed by it to be genuine and to have been signed or presented by
the proper Person. Except as provided in Section 7.01(b) hereof, the Trustee
need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel. The Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on
any Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be responsible for
the misconduct or negligence of any such agent; PROVIDED that such agent was
appointed with due care by the Trustee.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers; PROVIDED that the Trustee's conduct does not constitute willful
misconduct or gross negligence.
(e) The Trustee shall not be charged with knowledge of any Default or
Event of Default under Sections 6.01(c), 6.01(d), 6.01(e) or 6.01(f) hereof,
of the identity of any Subsidiary or of the existence of any Change of
Control or Asset Sale unless either (i) a Trust Officer shall have actual
knowledge thereof, or (ii) the Trustee shall have received notice thereof in
accordance with Section 12.02 hereof from the Company or any Holder of Notes.
(f) The Trustee may consult with counsel of its selection and the
advice of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon.
(g) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction,
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consent, order, bond, debenture or other paper or document, but the Trustee,
in its discretion may make such further inquiry or investigation into such
facts or matters as it may see fit, and, if the Trustee shall determine to
make such further inquiry or investigation, it shall be entitled to examine
the books, records and premises of the Company, personally or by agent or
attorney.
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee, any Paying
Agent or Registrar, in its individual or any other capacity, may become the
owner or pledgee of Notes and may otherwise deal with the Company or its
Affiliates with the same rights it would have if it were not Trustee, Paying
Agent or Registrar hereunder, as the case may be; PROVIDED that the Trustee
must in any event comply with Section 7.10 and Section 7.11 hereof.
SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Notes, it shall not be accountable for the Company's
use of the proceeds from the Notes, and it shall not be responsible for any
statement of the Company in this Indenture, including the recitals contained
herein, or in any document issued in connection with the sale of the Notes or
in the Notes other than the Trustee's certificate of authentication.
SECTION 7.05. NOTICE OF DEFAULTS. Within 90 calendar days after the
occurrence of any Default hereunder with respect to the Notes, the Trustee
shall transmit by mail to all Holders, as their names and addresses appear in
the Security Register, notice of such Default hereunder known to the Trustee,
unless such Default shall have been cured or waived, PROVIDED that, except in
the case of a Default in the payment of the principal of (or premium, if any)
or interest on any Note, the Trustee shall be protected in withholding such
notice if and so long as the board of directors, the executive committee or a
trust committee of directors and/or Trust Officers of the Trustee in good
faith determine that the withholding of such notice is in the interest of the
Holders.
SECTION 7.06. PRESERVATION OF INFORMATION; REPORTS BY TRUSTEE TO
HOLDERS. (a) The Company shall furnish or cause to be furnished to the
Trustee:
(i) semiannually, not less than 10 calendar days prior to each
Interest Payment Date, a list, in such form as the Trustee may
reasonably require, of the names and addresses of the Holders as of the
Record Date immediately preceding such Interest Payment Date, and
(ii) at such other times as the Trustee may request in writing,
within 30 calendar days after the receipt by the Company of any such
request, a list of similar form and content as of a date not more than
15 calendar days prior to the time such list is furnished;
PROVIDED, HOWEVER, that if and so long as the Trustee shall be the Registrar
for the Notes, no such list need be furnished with respect to the Notes.
(b) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in
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Section 7.06(a) hereof and the names and addresses of Holders received by the
Trustee in its capacity as Registrar, if so acting. The Trustee may destroy
any list furnished to it as provided in Section 7.06(a) hereof upon receipt
of a new list so furnished.
(c) Holders may communicate as provided in Section 312(b) of the Trust
Indenture Act with other Holders with respect to their rights under this
Indenture or under the Notes.
(d) Each Holder of Notes, by receiving and holding the same, agrees
with the Company and the Trustee that neither the Company nor the Trustee
shall be held accountable by reason of the disclosure of any such information
as to the names and addresses of the Holders in accordance with this Section
7.06, regardless of the source from which such information was derived, and
that the Trustee shall not be held accountable by reason of mailing any
material pursuant to a request made under this Section 7.06.
(e) Within 60 calendar days after May 15 of each year commencing
with the year 1997, the Trustee shall transmit by mail to all Holders of
Notes, a brief report dated as of such May 15 if and to the extent
required under Section 313(a) of the Trust Indenture Act.
(f) The Trustee shall comply with Sections 313(b) and 313(c) of the
Trust Indenture Act.
(g) A copy of each report described in Section 7.06(e) hereof shall, at
the time of its transmission to Holders, be filed by the Trustee with each
stock exchange, if any, upon which the Notes are then listed, with the
Commission and also with the Company. The Company shall promptly notify the
Trustee of any stock exchange upon which the Notes are listed.
SECTION 7.07. COMPENSATION AND INDEMNITY. The Company shall pay to the
Trustee from time to time such compensation for its services as the Company
and the Trustee shall from time to time agree. The Company shall reimburse
the Trustee upon request for all reasonable out-of-pocket expenses incurred
or made by it, including costs of collection, in addition to the compensation
for its services. Such expenses shall include the reasonable compensation
and expenses, disbursements and advances of the Trustee's agents and counsel.
The Trustee's compensation shall not be limited by any law on compensation
of a trustee of an express trust.
The Company shall indemnify the Trustee for, and hold it harmless
against, any and all loss, liability, damage, claim or expense (including
reasonable attorneys' fees and expenses) arising out of or incurred by it in
connection with the acceptance or administration of the trust created by this
Indenture and the performance of its duties hereunder, except as set forth in
the next paragraph. The Trustee shall notify the Company promptly of any
claim for which it may seek indemnity. Failure by the Trustee to so notify
the Company shall not relieve the Company of its obligations hereunder. The
Company shall defend any such claim and the Trustee shall cooperate in the
defense of such claim. The Trustee may have separate counsel and the Company
shall pay the reasonable fees and expenses of such counsel. The Company need
not pay for any settlement made without its consent, which consent shall not
be unreasonably withheld.
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The Company need not reimburse any expense or indemnify against any
loss, liability or expense incurred by the Trustee through the Trustee's own
willful misconduct, gross negligence or bad faith.
To secure the Company's payment obligations in this Section 7.07,
the Trustee shall have a Lien prior to the Notes on all money or property
held or collected by the Trustee other than money or property held in trust
to pay principal of, premium, if any, and interest on, particular Notes.
The Company's payment obligations pursuant to this Section 7.07
shall survive the resignation or removal of the Trustee and discharge of this
Indenture. Subject to any other rights available to the Trustee under
applicable bankruptcy law, when the Trustee incurs expenses after the
occurrence of a Default specified in Section 6.01(g) or Section 6.01(h)
hereof, the expenses are intended to constitute expenses of administration
under bankruptcy law.
SECTION 7.08. REPLACEMENT OF TRUSTEE. (a) No resignation or
removal of the Trustee and no appointment of a successor Trustee pursuant to
this Article VII shall become effective until the acceptance of appointment
by the successor Trustee under this Section 7.08.
(b) The Trustee may resign at any time by giving written notice
thereof to the Company. If an instrument of acceptance by a successor
Trustee shall not have been delivered to the Trustee within 30 calendar days
after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a
successor Trustee.
(c) The Trustee may be removed at any time by Act of the Holders
of a majority in principal amount of the outstanding Notes, delivered to the
Trustee and to the Company. If an instrument of acceptance by a successor
Trustee shall not have been delivered to the Trustee within 30 calendar days
after the giving of notice of removal, the Trustee being removed may petition
any court of competent jurisdiction for the appointment of a successor
Trustee.
(d) If at any time:
(i) the Trustee shall fail to comply with Section 310(b)
of the Trust Indenture Act after written request therefor by the Company
or by any Holder who has been a bona fide Holder of a Note for at least
six months, unless the Trustee's duty to resign is stayed in accordance
with the provisions of Section 310(b) of the Trust Indenture Act; or
(ii) the Trustee shall cease to be eligible under Section
7.10 hereof and shall fail to resign after written request therefor by
the Company or by any such Holder; or
(iii) the Trustee shall become incapable of acting or a
decree or order for relief by a court having jurisdiction in the
premises shall have been entered in respect of the Trustee in an
involuntary case under the United States bankruptcy laws, as now or
hereafter constituted, or any other applicable Federal or state
bankruptcy, insolvency or similar law; or a decree or order
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by a court having jurisdiction in the premises shall have been entered
for the appointment of a receiver, custodian, liquidator, assignee,
trustee, sequestrator (or other similar official) of the Trustee or of
its Property or affairs, or any public officer shall take charge or
control of the Trustee or of its Property or affairs for the purpose of
rehabilitation, conservation, winding up or liquidation; or
(iv) the Trustee shall commence a voluntary case under the
United States bankruptcy laws, as now or hereafter constituted, or any
other applicable Federal or state bankruptcy, insolvency or similar law
or shall consent to the appointment of or taking possession by a
receiver, custodian, liquidator, assignee, trustee, sequestrator (or
other similar official) of the Trustee or its Property or affairs, or
shall make an assignment for the benefit of creditors, or shall admit in
writing its inability to pay its debts generally as they become due, or
shall take corporate action in furtherance of any such action,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee with respect to the Notes, or (ii) subject to Section 6.10 hereof,
any Holder who has been a bona fide Holder of a Note for at least six months
may, on behalf of such Holder and all others similarly situated, petition any
court of competent jurisdiction for the removal of the Trustee and the
appointment of a successor Trustee for the Notes. If an instrument of
acceptance by a successor Trustee shall not have been delivered to the
Trustee within 30 calendar days after the giving of notice of removal, the
Trustee being removed may petition any court of competent jurisdiction for
the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable
of acting, or if a vacancy shall occur in the office of Trustee for any
cause, the Company, by or pursuant to a Board Resolution, shall promptly
appoint a successor Trustee. If, within one year after such resignation,
removal or incapability, or the occurrence of such vacancy, a successor
Trustee shall be appointed by the Holders of a majority in principal amount
of the outstanding Notes delivered to the Company and the retiring Trustee,
the successor Trustee so appointed shall, forthwith upon its acceptance of
such appointment in accordance with this Section 7.08, become the successor
Trustee and to that extent replace any successor Trustee appointed by the
Company. If no successor Trustee shall have been so appointed by the Company
or the Holders and shall have accepted appointment in the manner hereinafter
provided, any Holder that has been a bona fide Holder of a Note for at least
six months may, subject to Section 6.10 hereof, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for
the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee by mailing
written notice of such resignation, removal and appointment by first class
mail, postage prepaid, to the Holders as their names and addresses appear in
the Security Register. Each notice shall include the name of the successor
Trustee with respect to the Notes and the address of its Corporate Trust
Office.
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(g) In the event of an appointment hereunder of a successor
Trustee, each such successor Trustee so appointed shall execute, acknowledge
and deliver to the Company and to the retiring Trustee an instrument
accepting such appointment, and thereupon the resignation or removal of the
retiring Trustee shall become effective and such successor Trustee, without
any further act, deed or conveyance, shall become vested with all the rights,
powers, trusts and duties of the retiring Trustee but, on request of the
Company or the successor Trustee, such retiring Trustee shall, upon payment
of its charges, execute and deliver an instrument transferring to such
successor Trustee all the rights, powers and trusts of the retiring Trustee,
and shall duly assign, transfer and deliver to such successor Trustee all
Property and money held by such former Trustee hereunder, subject to its
Lien, if any, provided for in Section 7.07 hereof.
(h) Upon request of any such successor Trustee, the Company
shall execute any and all instruments for more fully and certainly vesting in
and confirming to such successor Trustee all such rights, powers and trusts
referred to in Section 7.08(g) hereof.
(i) No successor Trustee shall accept its appointment unless at
the time of such acceptance such successor Trustee shall be qualified and
eligible under this Article VII and under the Trust Indenture Act.
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER. Any corporation into
which the Trustee may be merged or converted or with which it may be
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Trustee shall be a party, or any corporation
succeeding to all or substantially all of the corporate trust business of the
Trustee, shall be the successor of the Trustee hereunder; PROVIDED that such
corporation shall be otherwise qualified and eligible under this Article VII
and under the Trust Indenture Act, without the execution or filing of any
paper or any further act on the part of any of the parties hereto. In case
any Notes shall have been authenticated, but not delivered, by the Trustee
then in office, any successor by merger, conversion or consolidation to such
authenticating Trustee may adopt such authentication and deliver the Notes so
authenticated with the same effect as if such successor Trustee had itself
authenticated such Notes. In the event that any Notes shall not have been
authenticated by such predecessor Trustee, any such successor Trustee may
authenticate and deliver such Notes, in either its own name or that of its
predecessor Trustee, with the full force and effect which this Indenture
provides for the certificate of authentication of the Trustee.
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. There shall at all
times be a Trustee hereunder which shall be
(i) a corporation organized and doing business under
the laws of the United States of America, any State or Territory thereof
or the District of Columbia, authorized under such laws to exercise
corporate trust powers, and subject to supervision or examination by
Federal, State, Territorial or District of Columbia authority, or
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(ii) a corporation or other Person organized and doing
business under the laws of a foreign government that is permitted to act
as Trustee pursuant to a rule, regulation or order of the Commission,
authorized under such laws to exercise corporate trust powers, and
subject to supervision or examination by authority of such foreign
government or a political subdivision thereof substantially equivalent
to supervision or examination applicable to United States institutional
trustees,
in either case having a combined capital and surplus of at least $50,000,000.
If such Person publishes reports of condition at least annually,
pursuant to law or to the requirements of the aforesaid supervising or
examining authority, then for the purposes of this Section 7.10, the combined
capital and surplus of such corporation shall be deemed to be its combined
capital and surplus as set forth in its most recent report of condition so
published. Neither the Company nor any Affiliate of the Company shall serve
as Trustee hereunder. If at any time the Trustee shall cease to be eligible
to serve as Trustee hereunder pursuant to the provisions of this Section
7.10, it shall resign immediately in the manner and with the effect specified
in this Article VII.
If the Trustee has or shall acquire any "conflicting interest"
within the meaning of Section 310(b) of the Trust Indenture Act, the Trustee
and the Company shall in all respects comply with the provisions of Section
310(b) of the Trust Indenture Act. Nothing herein shall prevent the Trustee
from filing with the Commission the application referred to in the
penultimate paragraph of Section 310(b) of the Trust Indenture Act.
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
The Trustee shall comply with Section 311(a) of the Trust Indenture Act,
excluding any creditor relationship listed in Section 311(b) of the Trust
Indenture Act. A Trustee who has resigned or been removed shall be subject
to Section 311(a) of the Trust Indenture Act to the extent indicated therein.
ARTICLE VIII
DEFEASANCE
SECTION 8.01. COMPANY'S OPTION TO EFFECT LEGAL DEFEASANCE OR
COVENANT DEFEASANCE. The Company may elect, at its option, at any time, to
have Section 8.02 or Section 8.03 hereof applied to the outstanding Notes (in
whole and not in part) upon compliance with the conditions set forth below in
this Article VIII. Such election shall be evidenced by a Board Resolution
delivered to the Trustee and shall specify whether the Notes are being
defeased to Stated Maturity or to a specified Redemption Date determined in
accordance with the terms of this Indenture and the Notes.
SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE. Upon the Company's
exercise under Section 8.01 hereof, of its option to have this Section 8.02
applied to the outstanding Notes (in whole and not in part), the Company
shall be deemed to have been discharged from its obligations with respect to
such Notes as provided in this Section 8.02 on and after the date the
conditions set forth
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in Section 8.04 hereof are satisfied (hereinafter called "Legal Defeasance").
For this purpose, such Legal Defeasance means that the Company and the
Subsidiary Guarantors shall be deemed to have paid and discharged the entire
indebtedness represented by such Notes, which shall thereafter be deemed to
be "outstanding" only for the purposes of Section 8.05 hereof and the other
Sections of this Indenture referred to in (a) and (b) below, and to have
satisfied all its other obligations under such Notes and this Indenture
insofar as such Notes are concerned (and the Trustee, on demand of and at the
expense of the Company, shall execute proper instruments acknowledging the
same), subject to the following which shall survive until otherwise
terminated or discharged hereunder:
(a) the rights of Holders of such Notes to receive, solely from the
trust fund described in Section 8.04 hereof and as more fully set forth
in such Section 8.04 payments in respect of the principal of and any
premium and interest on such Notes when payments are due,
(b) the Company's and the Subsidiary Guarantors' obligations with
respect to such Notes under Sections 2.06, 2.07, 2.09, 4.02, 4.03 and
4.04 hereof and the Subsidiary Guarantees,
(c) the rights, powers, trusts, duties and immunities of the
Trustee under this Indenture and the Company's obligations in connection
therewith,
(d) Article III hereof, and
(e) this Article VIII.
Subject to compliance with this Article VIII, the Company may
exercise its option to have this Section 8.02 applied to the outstanding
Notes (in whole and not in part) notwithstanding the prior exercise of its
option to have Section 8.03 hereof applied to such Notes.
SECTION 8.03. COVENANT DEFEASANCE. Upon the Company's exercise
under Section 8.01 hereof of its option to have this Section 8.03 applied to
the outstanding Notes (in whole and not in part), (i) the Company and the
Subsidiary Guarantors shall be released from their obligations under Section
5.01(iii), Sections 4.05 through 4.17, inclusive, and any covenant added to
this Indenture subsequent to the date of this Indenture pursuant to Section
9.01 hereof, (ii) the occurrence of any event specified in Section 6.01(c) or
Section 6.01(d) hereof, with respect to any of Section 5.01(iii), Sections
4.05 through 4.17, inclusive, and any covenant added to this Indenture
subsequent to the date of this Indenture pursuant to Section 9.01 hereof,
shall be deemed not to be or result in an Event of Default, in each case with
respect to such Notes as provided in this Section 8.03 on and after the date
the conditions set forth in Section 8.04 hereof are satisfied (hereinafter
called "Covenant Defeasance") and the Notes shall thereafter be deemed not
"outstanding" for the purposes of any direction, waiver consent or
declaration or act of Holders (and the consequences of any thereof) in
connection with such covenants, but shall continue to be deemed "outstanding"
for all other purposes hereunder (it being understood that such Notes shall
not be deemed outstanding for accounting purposes). For this purpose, such
Covenant Defeasance means that, with respect to such Notes, the Company and
the Subsidiary Guarantors may omit to comply with and shall have no liability
in
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respect of any term, condition or limitation set forth in any such specified
Section (to the extent so specified in the case of Sections 6.01(c) and
6.01(d) hereof), whether directly or indirectly, by reason of any reference
elsewhere herein to any such Section or by reason of any reference in any
such Section to any other provision herein or in any other document; but the
remainder of this Indenture and such Notes shall be unaffected thereby. In
addition, upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.03 hereof, subject to the satisfaction of the
conditions set forth in Section 8.04 hereof, Sections 6.01 (e) and 6.01(f)
hereof shall thereafter not constitute Events of Default.
SECTION 8.04. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE. The
following shall be the conditions to the application of Section 8.02 or
Section 8.03 hereof to the outstanding Notes:
(a) The Company or any Subsidiary Guarantor shall irrevocably have
deposited or caused to be deposited with the Trustee as trust funds in
trust for the purpose of making the following payments, specifically
pledged as security for, and dedicated solely to the benefits of the
Holders of such Notes, (i) money in an amount, or (ii) U.S. Government
Obligations which through the scheduled payment of principal and
interest in respect thereof in accordance with their terms will provide,
not later than one day before the due date of any payment, money in an
amount, or (iii) a combination thereof, in each case sufficient, in the
opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to
the Trustee, to pay and discharge, and which shall be applied by the
Trustee (or any such other qualifying trustee) to pay and discharge, the
principal of, premium, if any, and any installment of interest on such
Notes on the Stated Maturity thereof or applicable Redemption Date, as
the case may be, in accordance with the terms of this Indenture and such
Notes.
(b) In the event of an election to have Section 8.02 hereof apply
to the outstanding Notes, the Company shall have delivered to the
Trustee an Opinion of Counsel stating that (i) the Company has received
from, or there has been published by, the Internal Revenue Service a
ruling or (ii) since the date of this Indenture, there has been a change
in the applicable Federal income tax law, in either case (i) or (ii) to
the effect that, and based thereon such opinion shall confirm that, the
Holders of such Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of the deposit, Legal Defeasance
and discharge to be effected with respect to such Notes and will be
subject to Federal income tax on the same amount, in the same manner and
at the same times as would be the case if such deposit, Legal Defeasance
and discharge were not to occur.
(c) In the event of an election to have Section 8.03 hereof apply
to the outstanding Notes, the Company shall have delivered to the
Trustee an Opinion of Counsel to the effect that the Holders of such
Notes will not recognize income, gain or loss for Federal income tax
purposes as a result of the deposit and Covenant Defeasance to be
effected with respect to such Notes and will be subject to Federal
income tax on the same amount, in the same manner and at the same times
as would be the case if such deposit and Covenant Defeasance were not to
occur.
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(d) No Default or Event of Default with respect to the outstanding
Notes shall have occurred and be continuing at the time of such deposit
(other than a Default or Event of Default resulting from the borrowing
of funds to be applied to such deposit) after giving effect thereto or,
with respect to a Default or Event of Default specified in Section
6.01(g) or Section 6.01(h), any time on or prior to the 123rd calendar
day after the date of such deposit (it being understood that this
condition shall not be deemed satisfied until after such 123rd calendar
day).
(e) Such Legal Defeasance or Covenant Defeasance shall not cause
the Trustee to have a conflicting interest within the meaning of the
Trust Indenture Act (assuming for the purpose of this clause (e) that
all Notes are in default within the meaning of such Act).
(f) Such Legal Defeasance or Covenant Defeasance shall not result
in a breach or violation of, or constitute a default under, any material
agreement or instrument (other than this Indenture) to which the Company
or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is bound.
(g) The Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders over any other creditors of the
Company or with the intent of defeating, hindering, delaying or
defrauding any other creditors of the Company.
(h) Such Legal Defeasance or Covenant Defeasance shall not result
in the trust arising from such deposit constituting an investment
company within the meaning of the Investment Company Act of 1940, as
amended, unless such trust shall be registered under such Act or exempt
from registration thereunder.
(i) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent with respect to such Legal Defeasance or Covenant Defeasance
have been complied with.
SECTION 8.05. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE
HELD IN TRUST; MISCELLANEOUS PROVISIONS. All money and U.S. Government
Obligations (including the proceeds thereof) deposited with the Trustee
pursuant to Section 8.04 hereof in respect of the outstanding Notes shall be
held in trust and applied by the Trustee, in accordance with the provisions
of such Notes and this Indenture, to the payment, either directly or through
any such Paying Agent as the Trustee may determine, to the Holders of such
Notes, of all sums due and to become due thereon in respect of principal and
any premium and interest, but money so held in trust need not be segregated
from other funds except to the extent required by law. The Company shall pay
and indemnify the Trustee against any tax, fee or other charge imposed on or
assessed against the U.S. Government Obligations deposited pursuant to
Section 8.04 hereof or the principal and interest received in respect thereof
other than any such tax, fee or other charge which by law is for the account
of the Holders of outstanding Notes.
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Anything in this Article VIII to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Order any money or U.S. Government Obligations held by it as provided in
Section 8.04 hereof which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, are in excess of the amount thereof that would then
be required to be deposited to effect the Legal Defeasance or Covenant
Defeasance, as the case may be, with respect to the outstanding Notes.
SECTION 8.06. REINSTATEMENT. If the Trustee or Paying Agent is
unable to apply any money in accordance with this Article VIII with respect
to any Notes by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application
then the obligations under this Indenture and such Notes from which the
Company has been discharged or released pursuant to Section 8.02 or 8.03
hereof shall be revived and reinstated as though no deposit had occurred
pursuant to this Article VIII with respect to such Notes, until such time as
the Trustee or Paying Agent is permitted to apply all money held in trust
pursuant to Section 8.05 hereof with respect to such Notes in accordance with
this Article VIII; provided that if the Company or any Subsidiary Guarantor
makes any payment of principal of or any premium or interest on any such Note
following such reinstatement of its obligations, the Company or such
Subsidiary Guarantor, as the case may be, shall be subrogated to the rights
(if any) of the Holders of such Notes to receive such payment from the money
so held in trust.
ARTICLE IX
AMENDMENTS
SECTION 9.01. WITHOUT CONSENT OF HOLDERS. The Company, the
Subsidiary Guarantors and the Trustee may, at any time, and from time to
time, without notice to or consent of any Holder of Notes, enter into one or
more indentures supplemental hereto or execute and deliver any Subsidiary
Guarantee or amendment or supplement thereto, in form satisfactory to the
Trustee, for any of the following purposes:
(a) to evidence the succession of another Person to the Company
and the assumption by such successor of the covenants of the Company
herein and contained in the Notes; or
(b) to add to the covenants of the Company or its Subsidiaries,
for the benefit of the Holders of all of the Notes, or to surrender any
right or power herein conferred upon the Company or its Subsidiaries;
or
(c) to add any additional Events of Default; or
(d) to provide for uncertificated Notes in addition to or in place
of Certificated Notes; or
(e) to evidence and provide for the acceptance of appointment
hereunder of a successor Trustee; or
(f) to secure the Notes or the Subsidiary Guarantees; or
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(g) to cure any ambiguity herein, or to correct or supplement
any provision hereof or the Subsidiary Guarantees which may be
inconsistent with any other provision hereof or to add any other
provisions with respect to matters or questions arising under this
Indenture; provided that such actions shall not adversely affect the
interests of the Holders of Notes in any material respect; or
(h) to comply with the requirements of the Commission in order to
effect or maintain the qualification of this Indenture under the Trust
Indenture Act; or
(i) to provide for assumption of a Subsidiary Guarantor's
obligations under its Subsidiary Guarantee upon a merger, consolidation,
sale, assignment, transfer, lease, conveyance or other disposition of
all or substantially all of the assets, of such Subsidiary Guarantor, in
compliance with Section 11.02; or
(j) to add or release a Subsidiary Guarantor in compliance with the
provisions of Article XI.
SECTION 9.02. WITH CONSENT OF HOLDERS. With the consent of the
Holders of not less than a majority in principal amount of the outstanding
Notes (which consent may, but need not, be given in connection with any
tender offer or exchange offer for the Notes), by Act of said Holders
delivered to the Company, each of the Subsidiary Guarantors and the Trustee,
the Company, each of the Subsidiary Guarantors and the Trustee may enter into
one or more indentures supplemental hereto or amendments or supplements to
the Subsidiary Guarantees for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Indenture
or the Subsidiary Guarantees or of modifying in any manner the rights of the
Holders (including Section 4.07 and Section 4.08 hereof); provided that no
such supplement or amendment shall, without the consent of the Holder of each
outstanding Note,
(a) reduce the principal amount of Notes whose Holders must consent
to an amendment, supplement or waiver;
(b) reduce the principal of or change the Stated Maturity of any
Note or alter or waive any of the provisions with respect to the
redemption of the Notes, except as provided above with respect to
Sections 4.07 and 4.08 hereof;
(c) reduce the rate of or change the time for payment of interest,
including Defaulted Interest, on any Note;
(d) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in
aggregate principal amount of the then outstanding Notes and a waiver of
the payment default that resulted from such acceleration);
(e) make any Note payable in money other than that stated in the
Notes;
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(f) make any change in the provisions of this Indenture relating
to waivers of past Defaults or the rights of Holders of Notes to receive
payments of principal of or interest on the Notes;
(g) waive a redemption payment with respect to any Note (other than
a payment required by Section 4.07 or Section 4.08 hereof);
(h) make any change in Section 6.04 or 6.07 hereof or in the
foregoing amendment and waiver provisions; or
(i) modify any provisions of this Indenture or the Subsidiary
Guarantees relating to the relative ranking of the Notes or the
Subsidiary Guarantees in a manner adverse to the Holders thereof.
It shall not be necessary for any Act of Holders under this Section
9.02 to approve the particular form of any proposed supplement or amendment,
but it shall be sufficient if such Act shall approve the substance thereof.
After an amendment or supplement under this Section or a waiver
under Section 6.04 becomes effective, the Company shall mail to the Holders
of Notes affected thereby a notice briefly describing the amendment,
supplement or waiver. Any failure of the Company to mail such notice, or any
defect therein, shall not, however, in any way impair or affect the validity
of any such amended or supplemental Indenture or waiver.
SECTION 9.03. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the
execution of any supplemental indenture or other amendment under this Article
IX, this Indenture or the Subsidiary Guarantees, as the case may be, shall be
modified in accordance therewith, and such supplemental indenture or other
amendment shall form a part of this Indenture or the Subsidiary Guarantees,
as the case may be, for all purposes; and every Holder of Notes theretofore
or thereafter authenticated and delivered hereunder shall be bound thereby.
SECTION 9.04. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment
or supplement to this Indenture, the Subsidiary Guarantees or the Notes shall
comply with the Trust Indenture Act as then in effect.
SECTION 9.05. REVOCATION AND EFFECT OF CONSENTS AND WAIVERS. A
consent to an amendment, supplement or a waiver by a Holder of a Note shall
bind the Holder and every subsequent Holder of such Note or portion of such
Note that evidences the same debt as the consenting Holder's Note, even if
notation of the consent or waiver is not made on such Note; provided that any
such Holder or subsequent Holder may revoke the consent or waiver as to such
Holder's Note or portion of such Note if the Trustee receives the notice of
revocation before the date the amendment, supplement or waiver becomes
effective. After an amendment, supplement or waiver becomes effective
pursuant to this Article IX, it shall bind every Holder.
The Company may, but shall not be obligated to, fix a record date
for the purpose of determining the Holders entitled to give their consent or
take any other action described above or
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required or permitted to be taken pursuant to this Indenture. If a record
date is fixed, then notwithstanding the immediately preceding paragraph,
those Persons who were Holders at such record date (or their duly designated
proxies), and only those Persons, shall be entitled to give such consent or
to revoke any consent previously given or to take any such action, whether or
not such Persons continue to be Holders after such record date. No such
consent shall be valid or effective for more than 120 calendar days after
such record date.
SECTION 9.06. NOTATION ON OR EXCHANGE OF NOTES. If a supplemental
indenture changes the terms of a Note, the Trustee may require the Holder
thereof to deliver such Note to the Trustee. The Trustee may place an
appropriate notation on such Note regarding the changed terms and return it
to the Holder. Alternatively, if the Company or the Trustee so determines,
the Company in exchange for such Note shall issue and the Trustee shall
authenticate a new Note that reflects the changed terms. Failure to make the
appropriate notation or to issue a new Note shall not affect the validity of
such amendment or supplement.
SECTION 9.07. TRUSTEE TO EXECUTE SUPPLEMENTAL INDENTURES. The
Trustee shall execute any supplemental indenture or other amendment
authorized pursuant to this Article IX if such supplemental indenture does
not adversely affect the rights, duties, liabilities or immunities of the
Trustee. If it does, the Trustee may, but shall not be required to, execute
such supplemental indenture or other amendment. In executing any
supplemental indenture or other amendment, the Trustee shall be entitled to
receive indemnity reasonably satisfactory to it and to receive, and (subject
to Section 7.01 hereof) shall be fully protected in relying upon, an
Officers' Certificate (which need only cover the matters set forth in clause
(a) below) and an Opinion of Counsel provided by the Company stating that:
(a) such supplemental indenture or other amendment is authorized
or permitted by this Indenture and that all conditions precedent to the
execution, delivery and performance of such supplemental indenture have
been satisfied;
(b) the Company or any Subsidiary Guarantor, as the case may be,
has all necessary corporate power and authority to execute and deliver
the supplemental indenture or other amendment and that the execution,
delivery and performance of such supplemental indenture or other
amendment has been duly authorized by all necessary corporate action of
the Company or such Subsidiary Guarantor;
(c) the execution, delivery and performance of the supplemental
indenture or other amendment do not conflict with, or result in the breach
of or constitute a default under any of the terms, conditions or provisions
of (i) this Indenture, (ii) the charter documents and by-laws of the
Company or such Subsidiary Guarantor, or (iii) any material agreement or
instrument to which the Company or such Subsidiary Guarantor is subject;
(d) to the best knowledge and belief of legal counsel writing such
Opinion of Counsel, the execution, delivery and performance of the
supplemental indenture or other amendment do not conflict with, or result
in the breach of any of the terms, conditions or provisions of (i) any law
or regulation applicable to the Company or such Subsidiary Guarantor, or
(ii) any material order, writ, injunction or decree of any court or
governmental instrumentality applicable to the Company or such Subsidiary
Guarantor;
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(e) such supplemental indenture or other agreement has been duly
and validly executed and delivered by the Company or such Subsidiary
Guarantor, and this Indenture or Subsidiary Guarantee, as the case may be,
together with such supplemental indenture or other agreement constitutes
a legal, valid and binding obligation of the Company or such Subsidiary
Guarantor enforceable against such Person in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency or similar laws affecting the enforcement of creditors' rights
generally and general equitable principles; and
(f) this Indenture or Subsidiary Guarantee, as the case may be,
together with such amendment or supplement complies with the Trust
Indenture Act.
SECTION 9.08. EFFECT ON SENIOR INDEBTEDNESS. No supplemental
indenture or amendment to the Subsidiary Guarantee shall adversely affect
the rights of holders of Senior Indebtedness under Article X hereof or the
holders of Guarantor Senior Indebtedness under Sections 4, 5, 6, 7, 8, 9, 10,
11, 12 or 15 of the Subsidiary Guarantees unless expressly consented to in
writing by or on behalf of such holders (or by any specified percentage
of holders of a class of Senior Indebtedness or Guarantor Senior
Indebtedness, as the case may be, required to consent thereto pursuant to the
terms of the agreement or instrument creating, evidencing or governing such
Senior Indebtedness or Guarantor Senior Indebtedness, as the case may be), in
which event such supplemental indenture or amendment shall be binding on all
successors and assigns of such holders and on all persons who become holders
of such Senior Indebtedness or Guarantor Senior Indebtedness issued after the
date of such amendment or modification.
ARTICLE X
SUBORDINATION
SECTION 10.01. AGREEMENT TO SUBORDINATE. The Company agrees, and
each Holder by accepting a Note agrees, that the Indebtedness evidenced by
the Note and the payment of the principal of (and premium, if any, on) and
interest on, the Note or the purchase by the Company pursuant to Sections
4.07 and 4.08 hereof of any of the foregoing is expressly made subordinate
and subject in right of payment, to the extent and in the manner provided in
this Article X, to the prior payment in full of all Senior Indebtedness
(whether outstanding on the date hereof or hereafter created, incurred,
assumed or guaranteed), and that the subordination is for the benefit of the
holders of Senior Indebtedness. This Article X shall constitute a continuing
offer to all Persons who become holders of, or continue to hold, Senior
Indebtedness, and such provisions are made for the benefit of the holders of
Senior Indebtedness.
SECTION 10.02. LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any
distribution to creditors of the Company in a liquidation or dissolution of
the Company or in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to the Company or its property, in an assignment
for the benefit of creditors or any marshaling of the Company's assets and
liabilities:
(a) holders of Senior Indebtedness shall be entitled to receive
payment in full in cash of all Obligations due in respect of such Senior
Indebtedness (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Indebtedness)
before Holders shall be entitled to receive any payment with respect to
principal of (or premium, if any, on) or interest on the Notes or on
account of the purchase, redemption or other acquisition of the Notes
(including pursuant to an Asset Sale Offer or Change of Control Offer)
(except that Holders may receive (i) securities that are subordinated to
at least the same extent as the Notes are subordinated
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to (A) Senior Indebtedness and (B) any securities issued in exchange for
Senior Indebtedness and (ii) payments and other distributions made from
any defeasance trust created pursuant to Section 8.01 hereof); and
(b) until all Obligations with respect to Senior Indebtedness (as
provided in subsection (a) above) are paid in full in cash, any
distribution to which Holders would be entitled but for this Article
shall be made to holders of Senior Indebtedness (except that Holders may
receive (i) securities that are subordinated to at least the same extent
as the Notes to (A) Senior Indebtedness and (B) any securities issued in
exchange for Senior Indebtedness and (ii) payments and other
distributions made from any defeasance trust created pursuant to Section
8.01 hereof), as their interests may appear.
SECTION 10.03. DEFAULT ON DESIGNATED SENIOR INDEBTEDNESS. The
Company may not make any payment or distribution to the Trustee or any Holder
in respect of Obligations with respect to the Notes and may not acquire from
the Trustee or any Holder any Notes for cash or property (other than (i)
securities that are subordinated to at least the same extent as the Notes to
(A) Senior Indebtedness and (B) any securities issued in exchange for Senior
Indebtedness and (ii) payments and other distributions made from any
defeasance trust created pursuant to Section 8.01 hereof) until all principal
and other Obligations with respect to the Senior Indebtedness have been paid
in full if:
(a) a default in the payment of any principal, premium, if any, or
interest with respect to Designated Senior Indebtedness occurs and is
continuing beyond any applicable grace period in the agreement,
indenture or other document governing such Designated Senior
Indebtedness; or
(b) a default, other than such payment default, on Designated
Senior Indebtedness occurs and is continuing that then permits holders
of such Designated Senior Indebtedness to accelerate its maturity and
the Trustee receives a notice of such default (a "Payment Blockage
Notice") from a Person who may give it pursuant to Section 10.11 hereof.
If the Trustee receives any such Payment Blockage Notice, no subsequent
Payment Blockage Notice shall be effective for purposes of this Section
10.03 unless and until at least 360 days shall have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice. No
default specified in this clause (b) that existed or was continuing on
the date of delivery of any Payment Blockage Notice to the Trustee shall
be, or be made, the basis for a subsequent Payment Blockage Notice.
The Company may and shall resume payments on and distributions in
respect of the Notes and may acquire them upon the earlier of:
(i) in the case of a default referred to in Section 10.03(a),
the date upon which such default is cured or waived, or
(ii) in the case of a default referred to in Section 10.03(b)
hereof, the earlier of the date on which such default is cured or waived
or 179 days after the date on which the applicable
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Payment Blockage Notice is received, unless the maturity of such
Designated Senior Indebtedness has been accelerated,
if, and only if, this Article X otherwise permits the payment, distribution
or acquisition at the time of such payment or acquisition.
SECTION 10.04. ACCELERATION OF NOTES. If payment of the Notes is
accelerated because of an Event of Default, the Company shall promptly notify
the Representatives of holders of Designated Senior Indebtedness and
Designated Guarantor Senior Indebtedness of the acceleration.
SECTION 10.05. WHEN DISTRIBUTION MUST BE PAID OVER. In the event
that the Trustee or any Holder receives any payment of any Obligations with
respect to the Notes at a time when the Trustee or such Holder, as
applicable, has actual knowledge that such payment is prohibited by Section
10.03 hereof, such payment shall be held by the Trustee or such Holder, in
trust for the benefit of, and shall be paid forthwith over and delivered,
upon written request, to, the holders of Senior Indebtedness as their
interests may appear or their Representative under the indenture or other
agreement (if any) pursuant to which Senior Indebtedness may have been
issued, for application to the payment of all Obligations with respect to
Senior Indebtedness remaining unpaid to the extent necessary to pay such
Obligations in full in accordance with their terms, after giving effect to
any concurrent payment or distribution to or for the holders of Senior
Indebtedness.
With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform only such obligations on the part of the Trustee as are
specifically set forth in this Article X, and no implied covenants or
obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to
owe any fiduciary duty to the holders of Senior Indebtedness, and shall not
be liable to any such holders if the Trustee shall pay over or distribute to
or on behalf of Holders or the Company or any other Person money or assets to
which any holders of Senior Indebtedness shall be entitled by virtue of this
Article X, except if such payment is made as a result of the willful
misconduct or gross negligence of the Trustee.
SECTION 10.06. NOTICE BY COMPANY. The Company shall promptly notify
the Trustee and the Paying Agent of any facts known to the Company that would
cause a payment of any Obligations with respect to the Notes to violate this
Article X, but failure to give such notice shall not affect the subordination
of the Notes to the Senior Indebtedness as provided in this Article X.
SECTION 10.07. SUBROGATION. After all Senior Indebtedness is paid
in full and until the Notes are paid in full, Holders shall be subrogated
(equally and ratably with all other Indebtedness PARI PASSU with the Notes)
to the rights of holders of Senior Indebtedness to receive distributions
applicable to Senior Indebtedness to the extent that distributions otherwise
payable to the Holders have been applied to the payment of Senior
Indebtedness. A distribution made under this Article X to holders of Senior
Indebtedness that otherwise would have been made to Holders is not, as
between the Company and Holders, a payment by the Company on the Notes.
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SECTION 10.08. RELATIVE RIGHTS. This Article X defines the relative
rights of Holders and holders of Senior Indebtedness. Nothing in this
Indenture shall:
(i) impair, as between the Company and Holders, the obligation of
the Company, which is absolute and unconditional, to pay principal of,
premium, if any, on and interest on the Notes in accordance with their
terms;
(ii) affect the relative rights of Holders and creditors of the
Company other than their rights in relation to holders of Senior
Indebtedness; or
(iii) prevent the Trustee or any Holder from exercising its available
remedies upon a Default or Event of Default, subject to the rights of
holders and owners of Senior Indebtedness to receive distributions and
payments otherwise payable to Holders.
If the Company fails because of this Article X to pay principal of,
premium, if any, on or interest on a Note on the due date, the failure is still
a Default or Event of Default.
SECTION 10.09. NO WAIVER OF SUBORDINATION. (a) No right of any holder
of Senior Indebtedness to enforce the subordination of the Indebtedness
evidenced by the Notes shall be impaired by any act or failure to act by the
Company or any Holder or by the failure of the Company or any Holder to
comply with this Indenture.
(b) Without in any way limiting the generality of paragraph (a) of this
Section, the holders of any Senior Indebtedness, in accordance with the terms
of the instrument or agreement evidencing their Senior Indebtedness, may, at
any time and from time to time, without the consent of or notice to the
Trustee or the Holders, without incurring responsibility to the Holders and
without impairing or releasing the subordination or other benefits provided in
this Article X, or the obligations hereunder of the Holders to the holders of
Senior Indebtedness, do any one or more of the following: (i) change the
manner, place or terms of payment or extend the time of payment of, or renew,
exchange, amend, increase or alter, Senior Indebtedness or the terms of any
instrument evidencing the same or any agreement under which Senior
Indebtedness is outstanding or any liability of any obligor thereon (unless
such change, extension, amendment, increase or other alteration results in
such Indebtedness no longer being Senior Indebtedness as defined in this
Indenture); (ii) sell, exchange, release or otherwise deal with any Property
pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) settle or
compromise any Senior Indebtedness or any liability of any obligor thereon or
release any Person liable in any manner for the collection of Senior
Indebtedness; and (iv) exercise or refrain from exercising any rights against
the Company and any other Person.
SECTION 10.10. DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a
distribution is to be made or a notice given to holders of Senior Indebtedness,
the distribution may be made and the notice given to their Representative.
Upon any payment or distribution of assets of the Company referred to in
this Article X, the Trustee and the Holders shall be entitled to rely upon any
order or decree made by any court of competent jurisdiction or upon any
certificate of such Representative or of the liquidating trustee or agent or
other Person making any distribution to the Trustee or to the Holders for the
purpose of ascertaining the Persons entitled to participate in such
distribution, the holders of the Senior Indebtedness and other Indebtedness
of the Company, the amount thereof or payable thereon, the amount or amounts
paid or distributed thereon and all other facts pertinent thereto or to this
Article X.
The Trustee shall be entitled to rely on the delivery to it of a written
notice by a Person representing himself to be a holder of Senior Indebtedness
(or a trustee or agent on behalf of such holder) to establish that such notice
has been given by a holder of Senior Indebtedness (or a trustee or agent on
behalf of any such holder). In the event that the Trustee determines in good
faith that further evidence is required with respect to the right of any Person
as a holder of Senior Indebtedness to participate in any payment or
distribution pursuant to this Article X, the Trustee may request such Person
to furnish evidence to the reasonable satisfaction of the Trustee as to the
amount of Senior Indebtedness held by such Person, the extent to which such
Person is entitled to participate in such
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payment or distribution and any other facts pertinent to the rights of such
Person under this Article X, and if such evidence is not furnished, the
Trustee may defer any payment which it may be required to make for the benefit
of such Person pursuant to the terms of this Indenture pending judicial
determination as to the rights of such Person to receive such payment.
SECTION 10.11. RIGHTS OF TRUSTEE AND PAYING AGENT. Notwithstanding the
provisions of this Article X or any other provision of this Indenture, the
Trustee shall not be charged with knowledge of the existence of any facts
that would prohibit the making of any payment or distribution by the Trustee,
and the Trustee and the Paying Agent may continue to make payments on the
Notes, unless the Trustee shall have received at its Corporate Trust Office
at least two Business Days prior to the date of such payment written notice
of facts that would cause the payment of any Obligations with respect to the
Notes to violate Article X or XI. Only the holders of Designated Senior
Indebtedness or a Representative thereof may give the notice. Nothing in
Article X or XI shall impair the claims of, or payments to, the Trustee under
or pursuant to Section 7.07 hereof.
The Trustee in its individual or any other capacity may hold Senior
Indebtedness with the same rights it would have if it were not Trustee. Any
Paying Agent may do the same with like rights.
SECTION 10.12. AUTHORIZATION TO EFFECT SUBORDINATION. Each Holder of a
Note by the Holder's acceptance thereof authorizes and directs the Trustee on
the Holder's behalf to take such action as may be necessary or appropriate to
effectuate the subordination as provided in this Article X, and appoints the
Trustee to act as the Holder's attorney-in-fact for any and all such purposes.
If the Trustee does not file a proper proof of claim or proof of debt in the
form required in any judicial proceeding relative to the Company (or any other
obligor upon the Notes), its creditors or its property at least 30 days before
the expiration of the time to file such claim, any Representative is hereby
authorized to file an appropriate claim for and on behalf of the Holders of
the Notes.
SECTION 10.13. AMENDMENTS. The provisions of this Article X shall not
be amended or modified in a manner materially adverse to the Holders of Senior
Indebtedness without the written consent of the holders of all Designated
Senior Indebtedness.
ARTICLE XI
SUBSIDIARY GUARANTEES
SECTION 11.01. ADDITION OF SUBSIDIARY GUARANTORS.
(a) The Company agrees to cause each Subsidiary to execute and
deliver a Subsidiary Guarantee in the form of Exhibit C attached
hereto pursuant to which such Person guarantees the payment of the
Notes at or before such Person incurs any Indebtedness other than
Indebtedness described in Section 4.12(b)(iv) or (vii).
(b) Any Person that was not a Subsidiary Guarantor on the date of
this Indenture may become a Subsidiary Guarantor by executing and
delivering to the Trustee (i) a Subsidiary Guarantee in the form of
Exhibit C attached hereto and (ii) an Opinion of Counsel and Officers'
Certificate to the effect that such supplemental indenture has been duly
authorized and executed by such Person and constitutes the legal, valid,
binding and enforceable obligation of such Person (subject to such
customary exceptions concerning creditors' rights and equitable principles
as may
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be acceptable to the Trustee in its discretion and provided that no
opinion need be rendered concerning the enforceability of the Subsidiary
Guarantee).
SECTION 11.02. RELEASE OF A SUBSIDIARY GUARANTOR.
(a) Upon the sale or other disposition (by merger or otherwise) of
a Subsidiary Guarantor (or all or substantially all of its assets) to a
Person other than the Company or another Subsidiary Guarantor and pursuant
to a transaction that is otherwise in compliance with this Indenture
(including as described in Section 11.03 or Article V), such Subsidiary
Guarantor shall be deemed released from all of its Subsidiary Guarantees
and related obligations in this Indenture; PROVIDED, HOWEVER, that any such
termination shall occur only to the extent that all obligations of such
Subsidiary Guarantor under all of its guarantees of, and under all of its
pledges of assets or other security interests which secure, other
Indebtedness of the Company or any Subsidiary shall also terminate or be
released upon such sale or other disposition.
(b) Each Subsidiary Guarantor that is designated as an Unrestricted
Subsidiary by the Company in accordance with the provisions of this
Indenture shall be deemed released from all of its Subsidiary Guarantees
and related obligations in this Indenture for so long as it remains an
Unrestricted Subsidiary.
(c) The Trustee shall deliver an appropriate instrument evidencing
such release upon receipt of a request by the Company accompanied by an
Officers' Certificate and an Opinion of Counsel certifying that such sale
or other disposition was made by the Company or the Subsidiary Guarantor,
as the case may be, in accordance with the provisions of this Indenture.
Any Subsidiary Guarantor not so released remains liable for the full amount
of principal of and interest on the Notes as provided in this Article XI.
(d) Any Subsidiary Guarantor not released in accordance with this
Section 11.02 shall remain liable for the full amount of principal of (and
premium, if any, on) and interest on the Securities as provided in this
Article XI and the Subsidiary Guarantees.
SECTION 11.03. SUBSIDIARY GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN
TERMS.
(a) Except as set forth in Articles IV and V, nothing contained in
this Indenture or in any of the Notes shall prevent any consolidation or
merger of a Subsidiary Guarantor, with or into the Company or another
Subsidiary Guarantor or shall prevent any sale, assignment, transfer,
lease, conveyance or other disposition of the property of a Subsidiary
Guarantor as an entirety or substantially as an entirety, to the Company
or another Subsidiary Guarantor.
(b) Except as set forth in Articles IV and V hereof, nothing
contained in this Indenture or in any of the Notes shall prevent any
consolidation or merger of a Subsidiary Guarantor with or into a Person
other than the Company or a Subsidiary Guarantor (whether or not affiliated
with the Subsidiary Guarantor), or successive consolidations or mergers in
which a Subsidiary Guarantor or its successor or successors shall be a
party or parties, or shall prevent any sale, assignment, transfer, lease,
conveyance or other disposition of all or substantially all of the property
of a Subsidiary Guarantor, to a Person other than the Company or another
Subsidiary Guarantor (whether or not affiliated with the Subsidiary
Guarantor); PROVIDED, that (i) if the surviving Person is not the Company
or a Subsidiary Guarantor, the surviving corporation agrees to assume such
Subsidiary Guarantor's Subsidiary Guarantee and all its obligations
pursuant to this Indenture (except to the extent that Section 11.02 would
result in the release of such Subsidiary Guarantee), (ii) immediately
after giving effect to such transaction no Default or Event of Default
would exist or be continuing, and (iii) each Subsidiary Guarantor hereby
covenants and agrees that, upon any such consolidation, merger, sale,
conveyance or other disposition, such Subsidiary Guarantor's Subsidiary
Guarantee, and the due and punctual performance and observance of all of
the covenants and conditions of this Indenture to be performed by such
Subsidiary Guarantor, shall be expressly assumed (in the event that the
Subsidiary Guarantor is not the surviving corporation in a merger), by
supplemental indenture, Subsidiary Guarantee or other instrument
reasonably satisfactory in form to the Trustee, executed and delivered
to the Trustee, by such Person formed by such consolidation, or into
which the Subsidiary Guarantor shall have merged, or by the Person that
shall have acquired such Property (except to the extent Section 11.02
would result in the release of such Subsidiary Guarantee, in which case
such surviving Person or transferee of such Property shall not have to
execute any such supplemental indenture, Subsidiary Guarantee or other
instrument and shall not have to assume such Subsidiary Guarantor's
Subsidiary Guarantee). In the case of any such consolidation, merger,
sale, conveyance or other disposition and upon the assumption by
the successor Person, by supplemental indenture executed and delivered to
the Trustee and reasonably satisfactory in form to the Trustee of the due
and punctual performance of all of the covenants and conditions of this
Indenture to be performed by the Subsidiary Guarantor, such successor
Person shall succeed to and be substituted for the Subsidiary Guarantor
with the same effect as if it had been named herein as the initial
Subsidiary Guarantor.
SECTION 11.04. SUBORDINATION OF SUBSIDIARY GUARANTEES.
The obligations of the Subsidiary Guarantors in respect of the payment
of the Notes are subordinated to the payment of Guarantor Senior Indebtedness
in the manner and to the extent set forth in the Subsidiary Guarantees.
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<PAGE>
ARTICLE XII
MISCELLANEOUS
SECTION 12.01. TRUST INDENTURE ACT CONTROLS. If and to the extent that
any provision of this Indenture limits, qualifies or conflicts with the
duties imposed by, or with another provision (an "incorporated provision")
included in this Indenture by operation of, Sections 310 to 318, inclusive,
of the Trust Indenture Act, such imposed duties or incorporated provision
shall control.
SECTION 12.02. NOTICES. Any notice or communication shall be in writing
and delivered in person or mailed by first class mail, postage prepaid,
addressed as follows: if to the Company or any Subsidiary Guarantor: 400
West Illinois, 10th Floor, Midland, Texas 79701, Attention: Chief Financial
Officer; if to the Trustee: State Street Bank and Trust Company, Two
International Place, 4th Floor, Boston, Massachusetts 02110, Attention:
Corporate Trust Department.
The Company, the Subsidiary Guarantors or the Trustee, by notice to the
other, may designate additional or different addresses for subsequent notices
or communications. Any notice or communication mailed to a Holder shall be
sent to the Holder by first class mail, postage prepaid, at the Holder's
address as it appears in the Security Register and shall be duly given if so
sent within the time prescribed. Failure to mail a notice or communication to
a Holder or any defect in it shall not affect its sufficiency with respect to
other Holders. If a notice or communication is mailed to the Company, the
Trustee or a Holder in the manner provided above, it is duly given, whether
or not the addressee receives it. In case by reason of the suspension of
regular mail service or by reason of any other cause it shall be
impracticable to give notice by mail to Holders, then such notification as
shall be made with the approval of the Trustee shall constitute a sufficient
notification for every purpose hereunder.
SECTION 12.03. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon
any request or application by the Company or any Subsidiary Guarantor to the
Trustee to take or refrain from taking any action under this Indenture, the
Company or such Subsidiary Guarantor shall furnish to the Trustee: (a) an
Officers' Certificate stating that, in the opinion of the signers, all
conditions precedent, if any, provided for in this Indenture relating to the
proposed action have been complied with; and
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<PAGE>
(b) an Opinion of Counsel stating that, in the opinion of such counsel, all
such conditions precedent have been complied with.
SECTION 12.04. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each
certificate or opinion with respect to compliance with a covenant or
condition provided for in this Indenture (other than pursuant to Section 4.19
hereof) shall include: (a) a statement that the individual making such
certificate or opinion has read such covenant or condition; (b) a brief
statement as to the nature and scope of the examination or investigation upon
which the statements or opinions contained in such certificate or opinion are
based; (c) a statement that, in the opinion of such individual, such person
has made such examination or investigation as is necessary to enable such
person to express an informed opinion as to whether or not such covenant or
condition has been complied with; and (d) a statement as to whether or not,
in the opinion of such individual, such covenant or condition has been
complied with.
SECTION 12.05. RULES BY TRUSTEE, PAYING AGENT AND REGISTRAR. The
Trustee may make reasonable rules for action by or a meeting of Holders, and
any Registrar and Paying Agent may make reasonable rules for their functions;
provided that no such rule shall conflict with terms of this Indenture or the
Trust Indenture Act.
SECTION 12.06. PAYMENTS ON BUSINESS DAYS. If a payment hereunder is
scheduled to be made on a date that is not a Business Day, payment shall be
made on the next succeeding day that is a Business Day, and no interest shall
accrue with respect to that payment during the intervening period. If a
regular record date is a date that is not a Business Day, such record date
shall not be affected.
SECTION 12.07. GOVERNING LAW. THIS INDENTURE AND THE NOTES SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE.
SECTION 12.08. NO RECOURSE AGAINST OTHERS. No director, officer,
employee, incorporator or stockholder of the Company or any Subsidiary
Guarantor, as such, shall have any liability for any obligations of the
Company or any Subsidiary Guarantor under the Notes, the Subsidiary
Guarantees or this Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation, solely by reason of its status
as a director, officer, employee, incorporator or stockholder of the Company
or any Subsidiary Guarantor. By accepting a Note, each Holder waives and
releases all such liability (but only such liability) as part of the
consideration for issuance of such Note to such Holder.
SECTION 12.09. SUCCESSORS. All agreements of the Company and the
Subsidiary Guarantors in this Indenture and the Notes shall bind its
successors and assigns whether so expressed or not. All agreements of the
Trustee in this Indenture shall bind its successors and assigns whether so
expressed or not.
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<PAGE>
SECTION 12.10. COUNTERPARTS. This Indenture may be executed in any
number of counterparts and by the parties thereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
SECTION 12.11. TABLE OF CONTENTS; HEADINGS. The table of contents,
cross-reference table and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not
intended to be considered a part hereof and shall not modify or restrict any
of the terms or provisions hereof.
SECTION 12.12. SEVERABILITY. In case any provision in this Indenture
or in the Notes shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way
be affected or impaired thereby.
SECTION 12.13. FURTHER INSTRUMENTS AND ACTS. Upon request of the
Trustee, the Company and the Subsidiary Guarantors will execute and deliver
such further instruments and do such further acts as may be reasonably
necessary or proper to carry out more effectively the purposes of this
Indenture.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed as of the day and year first above written.
COSTILLA ENERGY, INC.
By
-----------------------------------
Name:
Title:
STATE STREET BANK AND TRUST COMPANY,
as Trustee
By
-----------------------------------
Name:
Title:
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<PAGE>
STATE OF TEXAS )
) SS.:
COUNTY OF HARRIS )
On the __ day of ______________, 1996, before me personally came
_______________________, to me known, who, being by me duly sworn, did depose
and say that he is ______________________ of Costilla Energy, Inc., one of
the corporations described in and which executed the foregoing instrument,
and that he signed his name thereto by authority of the Board of Directors of
said corporation.
--------------------------------------
Notary Public
State of Texas
My commission expires
-----
[Seal]
STATE OF TEXAS )
) SS.:
COUNTY OF HARRIS )
On the ____ day of __________________, 1996, before me personally came
________________________, to me known, who, being by me duly sworn, did
depose and say that ______ is ______________________ of State Street Bank and
Trust Company, one of the corporations described in and which executed the
foregoing instrument, and that he signed his name thereto by authority of the
Board of Directors of said corporation.
--------------------------------------
Notary Public
State of Texas
My commission expires
----------------
[Seal]
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<PAGE>
EXHIBIT A
FORM OF FACE OF GLOBAL NOTE
COSTILLA ENERGY, INC.
No. ______ CUSIP No. ___________
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO.
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY TO COSTILLA ENERGY, INC. OR THE REGISTRAR FOR
REGISTRATION OF TRANSFER OR EXCHANGE AND ANY NOTE ISSUED IS REGISTERED
IN THE NAME OF CEDE & CO. OR SUCH OTHER ENTITY AS HAS BEEN REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY
PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS HAS BEEN
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY),
ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO
ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS
AN INTEREST HEREIN.
TRANSFER OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, AND
NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A SUCCESSOR
THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF INTERESTS IN THIS
GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
RESTRICTIONS SET FORTH IN SECTION 2.06 OF THE INDENTURE, DATED AS OF
___________________, 1996, BETWEEN COSTILLA ENERGY, INC., AND THE TRUSTEE
NAMED THEREIN, PURSUANT TO WHICH THIS NOTE WAS ISSUED.
<PAGE>
GLOBAL NOTE
REPRESENTING ____% SENIOR SUBORDINATED NOTES DUE 2006
Costilla Energy, Inc., a Delaware corporation, for value received,
hereby promises to pay to CEDE & CO., or its registered assigns, the
principal sum indicated on Schedule A hereof, on __________________, 2006.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof by manual signature, this
Note shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purposes.
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed
under its corporate seal.
COSTILLA ENERGY, INC.
By:
---------------------------------
Name:
Title:
[Corporate Seal]
Attest:
By:
---------------------------------
Name:
Title:
Dated:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
STATE STREET BANK AND TRUST COMPANY,
as Trustee, certifies that this is one of
the Notes referred to in the Indenture.
By:
----------------------------------
Authorized Signatory
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<PAGE>
FORM OF REVERSE SIDE OF GLOBAL NOTE
COSTILLA ENERGY, INC.
GLOBAL NOTE
REPRESENTING ___% SENIOR SUBORDINATED NOTES DUE 2006
1. INDENTURE.
This Note is one of a duly authorized issue of debt securities of
the Company (as defined below) designated as its "____% Senior Subordinated
Notes due 2006" (herein called the "Notes") limited in aggregate principal
amount to $100,000,000, issued under an indenture dated as of _______________,
1996 (as amended or supplemented from time to time, the "Indenture") between
the Company and State Street Bank and Trust Company, as trustee (the
"Trustee," which term includes any successor Trustee under the Indenture), to
which Indenture reference is hereby made for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the
Company, the subsidiaries of the Company that have guaranteed the payment of
the Notes (the "Subsidiary Guarantors"), the Trustee and each Holder of Notes
and of the terms upon which the Notes are, and are to be, authenticated and
delivered. The summary of the terms of this Note contained herein does not
purport to be complete and is qualified by reference to the Indenture. All
terms used in this Note which are not defined herein shall have the meanings
assigned to them in the Indenture.
The Indenture restricts, among other things, the Company's and its
Subsidiaries' ability to incur additional indebtedness and issue preferred
stock, incur liens to secure PARI PASSU or subordinated indebtedness, pay
dividends or make certain other restricted payments, apply net proceeds from
certain asset sales, enter into certain transactions with affiliates, incur
indebtedness that is subordinate in right of payment to any Senior
Indebtedness and senior in right of payment to the Notes, merge or
consolidate with any other person, sell stock of Subsidiaries or sell,
assign, transfer, lease, convey or otherwise dispose of substantially all of
the assets of the Company. The Indenture permits, under certain
circumstances, Subsidiaries of the Company to be deemed Unrestricted
Subsidiaries and thus not subject to the restrictions of the Indenture.
2. PRINCIPAL AND INTEREST.
Costilla Energy, Inc., a Delaware corporation (such corporation, and
its successors and assigns under the Indenture hereinafter referred to, being
herein called the "Company"), promises to pay the principal amount set forth
on Schedule A of this Note to the Holder hereof on ___________, 2006.
The Company shall pay interest on this Note at a rate of ____%, per
annum semiannually in arrears on ________________ __, and ________________
__, of each year, commencing on ____________ __, 1997, to the Holder hereof
until the principal amount hereof is paid or duly provided for. Interest
shall accrue from __________________, 1996 or from the most
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<PAGE>
recent Interest Payment Date thereafter to which interest has been paid or
duly provided for. The interest so payable, and punctually paid or duly
provided for, on any Interest Payment Date will, subject to certain
exceptions provided in the Indenture, be paid to the Person in whose name
this Note (or the Note in exchange or substitution for which this Note was
issued) is registered at the close of business on the Record Date for
interest payable on such Interest Payment Date. The Record Date for any
interest payment is the close of business on ______________ __, or
______________ __, as the case may be, whether or not a Business Day,
immediately preceding the Interest Payment Date on which such interest is
payable. Any such interest not so punctually paid or duly provided for
("Defaulted Interest") shall forthwith cease to be payable to the Holder on
such Record Date and shall be paid as provided in Section 2.11 of the
Indenture. Interest will be computed on the basis of a 360-day year of
twelve 30-day months.
Each payment of interest in respect of an Interest Payment Date will
include interest accrued through the day before such Interest Payment Date.
If an Interest Payment Date falls on a day that is not a Business Day, the
interest payment to be made on such Interest Payment Date will be made on the
next succeeding Business Day with the same force and effect as if made on
such Interest Payment Date, and no additional interest will accrue as a
result of such delayed payment.
To the extent lawful, the Company shall pay interest on overdue
principal, overdue premium, and Defaulted Interest (without regard to any
applicable grace period), at the interest rate borne on the Notes. The
Company's obligation pursuant to the previous sentence shall apply whether
such overdue amount is due at its Stated Maturity, as a result of the
Company's obligations pursuant to Section 3.05, Section 4.07 or Section 4.08
of the Indenture, or otherwise.
3. METHOD OF PAYMENT.
The Company, through the Paying Agent, shall pay interest on this
Note to the registered Holder of this Note, as provided above. The Holder
must surrender this Note to a Paying Agent to collect principal payments.
The Company will pay principal, premium, if any, and interest in money of the
United States of America that at the time of payment is legal tender for
payment of all debts public and private. Principal, premium, if any, and
interest will be payable at the office of the Paying Agent but, at the option
of the Company, interest may be paid by check mailed to the registered
Holders at their registered addresses; PROVIDED that all payments with
respect to Notes the Holders of which have given wire transfer instructions
to the Company will be required to be made by wire transfer of immediately
available funds to the accounts specified by the Holders thereof.
4. PAYING AGENT AND REGISTRAR.
Initially, the Trustee will act as Paying Agent and Registrar under
the Indenture. The Company may, upon written notice to the Trustee, appoint
and change any Paying Agent or Registrar. The Company or any of its
subsidiaries may act as Paying Agent or Registrar.
A-4
<PAGE>
5. OPTIONAL REDEMPTION.
The Notes may not be redeemed at the Company's option prior to
_____, 2001. Thereafter, the Notes will be subject to redemption at the
option of the Company, in whole or in part, upon not less than 30 calendar
days' nor more than 60 calendar days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued
and unpaid interest thereon (if any) to the applicable Redemption Date, if
redeemed during the twelve-month period beginning on _________ of the years
indicated below:
YEAR PERCENTAGE
---- ----------
2001 _______%
2002 _______%
2003 _______%
2004 and thereafter 100.000%
Notwithstanding the foregoing, at any time on or before
_____________, 1999, the Company may (but shall not have the obligation to)
redeem up to 30% of the original aggregate principal amount of the Notes at a
redemption price of _______% of the principal amount thereof, plus accrued
and unpaid interest thereon to the Redemption Date, with the net proceeds of
an Equity Offering made by the Company; PROVIDED that at least 70% of the
aggregate principal amount of Notes originally issued remain outstanding
immediately after the occurrence of such redemption; and PROVIDED, FURTHER,
that such redemption shall occur within 75 days of the date of the closing of
such Equity Offering.
The Notes are not subject to any sinking fund.
6. NOTICE OF REDEMPTION.
At least 30 calendar days but not more than 60 calendar days before
a Redemption Date, the Company will send a notice of redemption, first-class
mail, postage prepaid, to Holders of Notes to be redeemed at the addresses of
such Holders as they appear in the Security Register.
If less than all of the Notes are to be redeemed at any time, the
Notes to be redeemed will be chosen by the Trustee in accordance with the
Indenture. If any Note is redeemed subsequent to a Record Date with respect
to any Interest Payment Date specified above and on or prior to such Interest
Payment Date, then any accrued interest will be paid on such Interest Payment
Date to the Holder of the Note at the close of business on such Record Date.
If money in an amount sufficient to pay the Redemption Price of all Notes (or
portions thereof) to be redeemed on the Redemption Date is deposited with the
Paying Agent on or before the applicable Redemption Date and certain other
conditions are satisfied, interest on the Notes or portions thereof to be
redeemed on the applicable Redemption Date will cease to accrue.
A-5
<PAGE>
7. REPURCHASE AT THE OPTION OF HOLDERS UPON CHANGE OF CONTROL.
Upon the occurrence of a Change of Control, each Holder of Notes
shall have the right to require the Company to purchase such Holder's Notes,
in whole or in part, in a principal amount that is an integral multiple of
$1,000, pursuant to a Change of Control Offer, at a purchase price in cash
equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest thereon to the Change of Control Payment Date.
Within 30 calendar days following any Change of Control, the Company
shall send, or cause to be sent, by first-class mail, postage prepaid, a
notice regarding the Change of Control Offer to each Holder of Notes. The
Holder of this Note may elect to have this Note or a portion hereof in an
authorized denomination purchased by completing the form entitled "Option of
Holder to Elect Purchase" appearing below and tendering this Note pursuant to
the Change of Control Offer. Unless the Company defaults in the payment of
the Change of Control Purchase Price with respect thereto, all Notes or
portions thereof accepted for payment pursuant to the Change of Control Offer
will cease to accrue interest from and after the Change of Control Payment
Date.
8. REPURCHASE AT THE OPTION OF HOLDERS UPON ASSET SALE.
If at any time the Company or any Subsidiary engages in any Asset
Sale, the Company shall, within 30 calendar days of the date the amount of
Excess Proceeds exceeds $5.0 million, use the then-existing Excess Proceeds
to make an offer to purchase from all Holders, on a pro rata basis, Notes in
an aggregate principal amount equal to the maximum principal amount that may
be purchased out of the then-existing Excess Proceeds, at a purchase price in
cash in an amount equal to 100% of the principal amount thereof plus accrued
and unpaid interest thereon, if any, to the Asset Sale Payment Date. Upon
completion of an Asset Sale Offer (including payment of the Asset Sale
Purchase Price for accepted Notes), any surplus Excess Proceeds that were the
subject of such offer shall cease to be Excess Proceeds, and the Company may
then use such amounts for general corporate purposes.
Within 30 calendar days of the date the amount of Excess Proceeds
exceeds $5.0 million, the Company shall send, or cause to be sent, by
first-class mail, postage prepaid, a notice regarding the Asset Sale Offer to
each Holder of Notes. The Holder of this Note may elect to have this Note or
a portion hereof in an authorized denomination purchased by completing the
form entitled "Option of Holder to Elect Purchase" appearing below and
tendering this Note pursuant to the Asset Sale Offer. Unless the Company
defaults in the payment of the Asset Sale Purchase Price with respect
thereto, all Notes or portions thereof selected for payment pursuant to the
Asset Sale Offer will cease to accrue interest from and after the Asset Sale
Payment Date.
9. THE GLOBAL NOTE.
So long as this Global Note is registered in the name of the
Depositary or its nominee, members of, or participants in, the Depositary
("Agent Members") shall have no rights under the
A-6
<PAGE>
Indenture with respect to this Global Note held on their behalf by the
Depositary or the Trustee as its custodian, and the Depositary may be treated
by the Company, the Trustee and any agent of the Company or the Trustee as
the absolute owner of this Global Note for all purposes. Notwithstanding the
foregoing, nothing herein shall (i) prevent the Company, the Trustee or any
agent of the Company or the Trustee, from giving effect to any written
certification, proxy or other authorization furnished by the Depositary or
(ii) impair, as between the Depositary and its Agent Members, the operation
of customary practices governing the exercise of the rights of a Holder of
Notes.
The Holder of this Global Note may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests in this Global Note through Agent Members, to take any action which
a Holder of Notes is entitled to take under the Indenture or the Notes.
Whenever, as a result of optional redemption by the Company, a
Change of Control Offer, an Asset Sale Offer or an exchange for Certificated
Notes, this Global Note is redeemed, repurchased or exchanged in part, this
Global Note shall be surrendered by the Holder thereof to the Trustee who
shall cause an adjustment to be made to Schedule A hereof so that the
principal amount of this Global Note will be equal to the portion not
redeemed, repurchased or exchanged and shall thereafter return this Global
Note to such Holder; PROVIDED that this Global Note shall be in a principal
amount of $1,000 or an integral multiple of $1,000.
10. TRANSFER AND EXCHANGE.
The Holder of this Global Note shall, by acceptance of this Global
Note, agree that transfers of beneficial interests in this Global Note may be
effected only through a book entry system maintained by such Holder (or its
agent), and that ownership of a beneficial interest in the Notes represented
thereby shall be required to be reflected in book entry form.
Transfers of this Global Note shall be limited to transfers in whole
and not in part, to the Depositary, its successors, and their respective
nominees. Interests of beneficial owners in this Global Note shall be
transferred in accordance with the rules and procedures of the Depositary (or
its successors).
This Global Note shall be exchanged by the Company for one or more
Certificated Notes if (a) the Depositary (i) has notified the Company that it
is unwilling or unable to continue as, or ceases to be, a clearing agency
registered under Section 17A of the Exchange Act and (ii) a successor to the
Depositary registered as a clearing agency under Section 17A of the Exchange
Act is not able to be appointed by the Company within 90 calendar days or (b)
the Depositary is at any time unwilling or unable to continue as Depositary
and a successor to the Depositary is not able to be appointed by the Company
within 90 calendar days. If an Event of Default occurs and is continuing,
the Company shall, at the request of the Holder hereof, exchange all or part
of this Global Note for one or more Certificated Notes; PROVIDED that the
principal amount of each of such Certificated Notes and this Global Note,
after such exchange, shall be $1,000 or an integral multiple
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<PAGE>
thereof. Whenever this Global Note is exchanged as a whole for one or more
Certificated Notes, it shall be surrendered by the Holder to the Trustee for
cancellation. Whenever this Global Note is exchanged in part for one or more
Certificated Notes, it shall be surrendered by the Holder to the Trustee and
the Trustee shall make the appropriate notations hereon pursuant to Section
2.05(c) of the Indenture. All Certificated Notes issued in exchange for this
Global Note or any portion hereof shall be registered in such names, and
delivered, as the Depositary shall instruct the Trustee.
The Holder of this Note shall have the right to obtain from the
Company the information specified in Section 4.17 of the Indenture.
11. DENOMINATIONS.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and integral multiples thereof of principal amount.
12. UNCLAIMED MONEY.
If money for the payment of principal, premium, if any, or interest
remains unclaimed for two years, the Trustee or Paying Agent shall pay the
money back to the Company at its request unless an abandoned property law
designates another Person. After any such payment, Holders entitled to the
money must look only to the Company and not to the Trustee for payment unless
such abandoned property law designates another Person.
13. DISCHARGE AND DEFEASANCE.
Subject to certain conditions, the Company at any time may terminate
some or all of its obligations under the Notes and the Indenture if the
Company irrevocably deposits with the Trustee money or U.S. Government
Obligations for the payment of principal, premium, if any, and interest on
the Notes to redemption or maturity, as the case may be.
14. AMENDMENT, WAIVER.
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture, the Subsidiary Guarantees or the Notes may be amended with the
written consent of the Holders of at least a majority in principal amount of
the outstanding Notes and (ii) any past Default and its consequences may be
waived with the written consent of the Holders of at least a majority in
principal amount of the outstanding Notes. Subject to certain exceptions set
forth in the Indenture and the Subsidiary Guarantees, without the consent of
any Holder of Notes, the Company, the Subsidiary Guarantors and the Trustee
may amend the Indenture, the Subsidiary Guarantees or the Notes (i) to
evidence the succession of another Person to (A) the Company and the
assumption by such successor of the covenants of the Company under the
Indenture and contained in the Notes or (B) a Subsidiary Guarantor and the
assumption by such successor of the covenants of such Subsidiary Guarantor
contained in its Subsidiary Guarantee; (ii) to add additional covenants or to
surrender rights and powers conferred on the Company or any Subsidiary; (iii)
to add any
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<PAGE>
additional Events of Default; (iv) to provide for uncertificated Notes in
addition to or in place of Certificated Notes; (v) to evidence and provide
for the acceptance of appointment under the Indenture of a successor Trustee;
(vi) to secure the Notes; (vii) to cure any ambiguity in the Indenture or the
Subsidiary Guarantees, to correct or supplement any provision in the
Indenture or the Subsidiary Guarantees which may be inconsistent with any
other provision therein or to add any other provisions with respect to
matters or questions arising under the Indenture, PROVIDED that such actions
shall not adversely affect the interests of the Holders in any material
respect; (viii) to comply with the requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust
Indenture Act; or (ix) to release any Subsidiary Guarantor pursuant to the
Indenture.
15. DEFAULTS AND REMEDIES.
If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the Notes, subject to certain
limitations, may declare all the Notes to be immediately due and payable.
Certain events of bankruptcy or insolvency are Events of Default and shall
result in the Notes being-immediately due and payable upon the occurrence of
such Events of Default without any further act of the Trustee or any Holder.
Holders of Notes may not enforce the Indenture or the Notes except
as provided in the Indenture. The Trustee may refuse to enforce the
Indenture or the Notes unless it receives reasonable indemnity or security.
Subject to certain limitations, Holders of a majority in principal amount of
the Notes may direct the Trustee in its exercise of any trust or power under
the Indenture. The Holders of a majority in principal amount of the then
outstanding Notes, by written notice to the Trustee, may rescind any
declaration of acceleration and its consequences if the rescission would not
conflict with any judgment or decree, and if all Events of Default have been
cured or waived except nonpayment of principal, interest or premium that has
become due solely because of the acceleration.
16. SUBORDINATION.
The payment of principal of, premium, if any, and interest on the
Notes will be subordinated in right of payment to the prior payment in full
of Senior Indebtedness as set forth in Article X of the Indenture. The
obligations of the Subsidiary Guarantors to the Holders or the Trustee
pursuant to the Subsidiary Guarantees and the Indenture will be subordinated
in right of payment to the prior payment in full of Guarantor Senior
Indebtedness as set forth in Article XI of the Indenture and the Subsidiary
Guarantees.
17. SUBSIDIARY GUARANTEE.
Subject to the limitations set forth in the Indenture and the
Subsidiary Guarantees, the payment of principal of, premium, if any, and
interest on the Notes will be guaranteed by each Subsidiary Guarantor.
A-9
<PAGE>
18. INDIVIDUAL RIGHTS OF TRUSTEE.
Subject to certain limitations imposed by the Trust Indenture Act,
the Trustee or any Paying Agent or Registrar, in its individual or any other
capacity, may become the owner or pledgee of Notes and may otherwise deal
with the Company or its Affiliates with the same rights it would have if it
were not Trustee, Paying Agent or Registrar, as the case may be, under the
Indenture.
19. NO RECOURSE AGAINST CERTAIN OTHERS.
No director, officer, employee, incorporator or stockholder of the
Company or any Subsidiary Guarantor, as such, shall have any liability for
any obligations of the Company or such Subsidiary Guarantor under the Notes,
the Subsidiary Guarantees or the Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation, solely by
reason of its status as a director, officer, employee, incorporator or
stockholder of the Company or any Subsidiary Guarantor. By accepting a Note,
each Holder waives and releases all such liability (but only such liability)
as part of the consideration for issuance of such Note to such Holder.
20. GOVERNING LAW.
THE INDENTURE AND THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS
MADE AND TO BE PERFORMED IN SAID STATE.
The Company will furnish to any Holder of Notes upon written request
and without charge to the Holder a copy of the Indenture which has in it the
text of this Note. Requests may be made to:
Costilla Energy, Inc.
400 West Illinois, 10th Floor
Midland, Texas 79701
Attention: Chief Financial Officer
A-10
<PAGE>
SCHEDULE A
SCHEDULE OF PRINCIPAL AMOUNT
The initial principal amount at maturity of this Note shall be $100,000,000.
The following decreases/increase in the principal amount at maturity of this
Note have been made:
TOTAL PRINCIPAL
AMOUNT AT
DECREASE IN INCREASE IN MATURITY
DATE OF PRINCIPAL PRINCIPAL FOLLOWING SUCH NOTATION MADE
DECREASE/ AMOUNT AT AMOUNT AT DECREASE/ BY OR ON BEHALF
INCREASE MATURITY MATURITY INCREASE OF TRUSTEE
- --------- ----------- ----------- --------------- ---------------
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
_____________ ___________ ___________ _______________ _______________
A-11
<PAGE>
ASSIGNMENT
(To be executed by the registered Holder
if such Holder desires to transfer this Note)
FOR VALUE RECEIVED __________________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAX IDENTIFYING NUMBER OF TRANSFEREE
_______________________________
_____________________________________________________________________________
(Please print name and address of transferee)
this Note, together with all right, title and interest herein, and does
hereby irrevocably constitute and appoint ______________________________
Attorney to transfer this Note on the Security Register, with full power of
substitution.
Dated:________________________
_______________________________ ______________________________________
Signature of Holder Signature Guaranteed by an
institution member of the
Signature Guaranty Medallion
Program
NOTICE: The signature to the foregoing Assignment must correspond to the
Name as written upon the face of this Note in every particular, without
alteration or any change whatsoever.
A-12
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
(check as appropriate)
/ / In connection with the Change of Control Offer made pursuant to Section
4.07 of the Indenture, the undersigned hereby elects to have
/ / the entire principal amount
/ / $_________________ ($1,000 in principal amount or an integral multiple
thereof) of this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or ____________________ an amount
in cash equal to 101% of the principal amount indicated in the
preceding sentence, plus accrued and unpaid interest thereon, if any,
to the Change of Control Payment Date.
/ / In connection with the Asset Sale Offer made pursuant to Section 4.08 of
the Indenture, the undersigned hereby elects to have
/ / the entire principal amount
/ / $_________________ ($1,000 in principal amount or an integral multiple
thereof) of this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or ____________________ an amount
in cash equal to 100% of the principal amount indicated in the
preceding sentence, plus accrued and unpaid interest thereon, if any,
to the Asset Sale Payment Date.
Dated:________________________
_______________________________ ______________________________________
Signature of Holder Signature Guaranteed by an institution
member of the Signature Guaranty
Medallion Program
NOTICE: The signature to the foregoing must correspond to the Name as
written upon the face of this Note in every particular, without alteration or
any change whatsoever.
A-13
<PAGE>
EXHIBIT B
FORM OF FACE OF CERTIFICATED NOTE
COSTILLA ENERGY, INC.
No._________ CUSIP No. ___________
___% SENIOR SUBORDINATED NOTE DUE 2006
Costilla Energy, Inc., a Delaware corporation, for value received, hereby
promises to pay to _________________ or its registered assigns, the principal
amount of _____________ on ____________, 2006.
Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof by manual signature, this
Note shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purposes.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed
under its corporate seal.
COSTILLA ENERGY, INC.
By:
----------------------------------
Name:
Title:
[Corporate Seal]
Attest:
By:
---------------------------
Name:
Title:
Dated:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
STATE STREET BANK AND TRUST COMPANY,
as Trustee, certifies that this is one of
the Notes referred to in the Indenture.
By:
---------------------------
Authorized Signatory
B-2
<PAGE>
FORM OF REVERSE SIDE OF CERTIFICATED NOTE
COSTILLA ENERGY, INC.
____% SENIOR SUBORDINATED NOTE DUE 2006
1. INDENTURE.
This Note is one of a duly authorized issue of debt securities of
the Company (as defined below) designated as its "____% Senior Subordinated
Notes due 2006" (herein called the "Notes") limited in aggregate principal
amount to $100,000,000, issued under an indenture dated as of
________________, 1996 (as amended or supplemented from time to time, the
"Indenture") between the Company and State Street Bank and Trust Company, as
trustee (the "Trustee," which term includes any successor Trustee under the
Indenture), to which Indenture reference is hereby made for a statement of
the respective rights, limitations of rights, duties and immunities
thereunder of the Company, the subsidiaries of the Company that have
guaranteed the payment of the Notes (the "Subsidiary Guarantors"), the
Trustee and each Holder of Notes and of the terms upon which the Notes are,
and are to be, authenticated and delivered. The summary of the terms of this
Note contained herein does not purport to be complete and is qualified by
reference to the Indenture. All terms used in this Note which are not
defined herein shall have the meanings assigned to them in the Indenture.
The Indenture restricts, among other things, the Company's and its
Subsidiaries' ability to incur additional indebtedness and issue preferred
stock, incur liens to secure PARI PASSU or subordinated indebtedness, pay
dividends or make certain other restricted payments, apply net proceeds from
certain asset sales, enter into certain transactions with affiliates, incur
indebtedness that is subordinate in right of payment to any Senior Indebtedness
and senior in right of payment to the Notes, merge or consolidate with any
other person, sell stock of Subsidiaries or sell, assign, transfer, lease,
convey or otherwise dispose of substantially all of the assets of the Company.
The Indenture permits, under certain circumstances, Subsidiaries of the Company
to be deemed Unrestricted Subsidiaries and thus not subject to the restrictions
of the Indenture.
2. PRINCIPAL AND INTEREST.
Costilla Energy, Inc., a Delaware corporation (such corporation, and
its successors and assigns under the Indenture hereinafter referred to, being
herein called the "Company"), promises to pay the principal amount set forth on
the face hereof to the Holder hereof on __________________, 2006.
The Company shall pay interest on this Note at a rate of ____%, per
annum semiannually in arrears on _______________ __, and _____________ __ of
each year, commencing on ____________ __, 1997, to the Holder hereof until
the principal amount hereof is paid or duly provided for. Interest shall
accrue from _________________, 1996 or from the most recent Interest Payment
Date thereafter to which interest has been paid or duly provided for. The
interest so
B-3
<PAGE>
payable, and punctually paid or duly provided for, on any Interest Payment
Date will, subject to certain exceptions provided in the Indenture, be paid
to the Person in whose name this Note (or the Note in exchange or substitution
for which this Note was issued) is registered at the close of business on the
Record Date for interest payable on such Interest Payment Date. The Record
Date for any interest payment is the close of business on _________ __, or
__________ __, as the case may be, whether or not a Business Day, immediately
preceding the Interest Payment Date on which such interest is payable. Any
such interest not so punctually paid or duly provided for ("Defaulted Interest")
shall forthwith cease to be payable to the Holder on such Record Date and shall
be paid as provided in Section 2.11 of the Indenture. Interest will be computed
on the basis of a 360-day year of twelve 30-day months.
Each payment of interest in respect of an Interest Payment Date
will include interest accrued through the day before such Interest Payment
Date. If an Interest Payment Date falls on a day that is not a Business Day,
the interest payment to be made on such Interest Payment Date will be made on
the next succeeding Business Day with the same force and effect as if made on
such Interest Payment Date, and no additional interest will accrue as a
result of such delayed payment.
To the extent lawful, the Company shall pay interest on overdue
principal, overdue premium, and Defaulted Interest (without regard to any
applicable grace period), at the interest rate borne on the Notes. The
Company's obligation pursuant to the previous sentence shall apply whether
such -overdue amount is due at its Stated Maturity, as a result of the
Company's obligations pursuant to Section 3.05, Section 4.07 or Section 4.08
of the Indenture, or otherwise.
3. METHOD OF PAYMENT.
The Company, through the Paying Agent, shall pay interest on this
Note to the registered Holder of this Note, as provided above. The Holder
must surrender this Note to a Paying Agent to collect principal payments. The
Company will pay principal, premium, if any, and interest in money of the United
States of America that at the time of payment is legal tender for payment of all
debts public and private. Principal, premium, if any, and interest will be
payable at the office of the Paying Agent but, at the option of the Company,
interest may be paid by check mailed to the registered Holders at their
registered addresses; provided that all payments with respect to Notes the
Holders of which have given wire transfer instructions to the Company will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof.
4. PAYING AGENT AND REGISTRAR.
Initially, the Trustee will act as Paying Agent and Registrar under
the Indenture. The Company may, upon written notice to the Trustee, appoint and
change any Paying Agent or Registrar. The Company or any of its subsidiaries
may act as Paying Agent or Registrar.
B-4
<PAGE>
5. OPTIONAL REDEMPTION.
The Notes may not be redeemed at the Company's option prior to
2001. Thereafter, the Notes will be subject to redemption at the option of
the Company, in whole or in part, upon not less than 30 calendar days' nor
more than 60 calendar days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon (if any) to the applicable Redemption Date, if redeemed
during the twelve-month period beginning on ______________ of the years
indicated below:
Year Percentage
2001 _______%
2002 _______%
2003 _______%
2004 and thereafter 100.000%
Notwithstanding the foregoing, at any time on or before _____________,
1999, the Company may (but shall not have the obligation to) redeem up to 30%
of the original aggregate principal amount of the Notes at a redemption price
of _____% of the principal amount thereof, plus accrued and unpaid interest
thereon to the Redemption Date, with the net proceeds of an Equity Offering
made by the Company; provided that at least 70% of the aggregate principal
amount of Notes originally issued remain outstanding immediately after the
occurrence of such redemption; and provided, further, that such redemption
shall occur within 75 days of the date of the closing of such Equity Offering.
The Notes are not subject to any sinking fund.
6. NOTICE OF REDEMPTION.
At least 30 calendar days but not more than 60 calendar days before
a Redemption Date, the Company will send a notice of redemption, first-class
mail, postage prepaid, to Holders of Notes to be redeemed at the addresses of
such Holders as they appear in the Security Register.
If less than all of the Notes are to be redeemed at any time, the
Notes to be redeemed will be chosen by the Trustee in accordance with the
Indenture. If any Note is redeemed subsequent to a Record Date with respect
to any Interest Payment Date specified above and on or prior to such Interest
Payment Date, then any accrued interest will be paid on such Interest Payment
Date to the Holder of the Note at the close of business on such Record Date.
If money in an amount sufficient to pay the Redemption Price of all Notes (or
portions thereof) to be redeemed on the Redemption Date is deposited with the
Paying Agent on or before the applicable Redemption Date and certain other
conditions are satisfied, interest on the Notes or portions thereof to be
redeemed on the applicable Redemption Date will cease to accrue.
B-5
<PAGE>
7. REPURCHASE AT THE OPTION OF HOLDERS UPON CHANGE OF CONTROL.
Upon the occurrence of a Change of Control, each Holder of Notes
shall have the right to require the Company to purchase such Holder's Notes,
in whole or in part, in a principal amount that is an integral multiple of
$1,000, pursuant to a Change of Control Offer, at a purchase price in cash
equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest thereon to the Change of Control Payment Date.
Within 30 calendar days following any Change of Control, the
Company shall send, or cause to be sent, by first-class mail, postage
prepaid, a notice regarding the Change of Control Offer to each Holder of
Notes. The Holder of this Note may elect to have this Note or a portion
hereof in an authorized denomination purchased by completing the form
entitled "Option of Holder to Elect Purchase" appearing below and tendering
this Note pursuant to the Change of Control Offer. Unless the Company
defaults in the payment of the Change of Control Purchase Price with respect
thereto, all Notes or portions thereof accepted for payment pursuant to the
Change of Control Offer will cease to accrue interest from and after the
Change of Control Payment Date.
8. REPURCHASE AT THE OPTION OF HOLDERS UPON ASSET SALE.
If at any time the Company or any Subsidiary engages in any Asset
Sale, the Company shall, within 30 calendar days of the date the amount of
Excess Proceeds exceeds $5.0 million, use the then-existing Excess Proceeds
to make an offer to purchase from all Holders, on a pro rata basis, Notes in
an aggregate principal amount equal to the maximum principal amount that may
be purchased out of the then-existing Excess Proceeds, at a purchase price in
cash in an amount equal to 100% of the principal amount thereof plus accrued
and unpaid interest thereon, if any, to the Asset Sale Payment Date. Upon
completion of an Asset Sale Offer (including payment of the Asset Sale
Purchase Price for accepted Notes), any surplus Excess Proceeds that were the
subject of such offer shall cease to be Excess Proceeds, and the Company may
then use such amounts for general corporate purposes.
Within 30 calendar days of the date the amount of Excess Proceeds
exceeds $5.0 million, the Company shall send, or cause to be sent, by
first-class mail, postage prepaid, a notice regarding the Asset Sale Offer to
each Holder of Notes. The Holder of this Note may elect to have this Note or
a portion hereof in an authorized denomination purchased by completing the
form entitled "Option of Holder to Elect Purchase" appearing below and
tendering this Note pursuant to the Asset Sale Offer. Unless the Company
defaults in the payment of the Asset Sale Purchase Price with respect
thereto, all Notes or portions thereof selected for payment pursuant to the
Asset Sale Offer will cease to accrue interest from and after the Asset Sale
Payment Date.
9. TRANSFER AND EXCHANGE.
A Holder may transfer a Note only upon the surrender of such Note
for registration of transfer. No such transfer shall be effected until, and
such transferee shall succeed to the rights
B-6
<PAGE>
of a Holder only upon, final acceptance and registration of the transfer in
the Security Register by the Registrar. When Notes are presented to the
Registrar with a request to register the transfer of, or to exchange, such
Notes, the Registrar shall register the transfer or make such exchange as
requested if its requirements for such transactions and any applicable
requirements hereunder are satisfied.
No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer of Notes.
The Holder of this Note shall have the right to obtain from the
Company the information specified in Section 4.17 of the Indenture.
10. DENOMINATIONS.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and integral multiples thereof of principal amount.
11. UNCLAIMED MONEY.
If money for the payment of principal, premium, if any, or interest
remains unclaimed for two years, the Trustee or Paying Agent shall pay the
money back to the Company at its request unless an abandoned property law
designates another Person. After any such payment, Holders entitled to the
money must look only to the Company and not to the Trustee for payment unless
such abandoned property law designates another Person.
12. DISCHARGE AND DEFEASANCE.
Subject to certain conditions, the Company at any time may
terminate some or all of its obligations under the Notes and the Indenture if
the Company irrevocably deposits with the Trustee money or U.S. Government
Obligations for the payment of principal, premium, if any, and interest on
the Notes to redemption or maturity, as the case may be.
13. AMENDMENT, WAIVER.
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture, the Subsidiary Guarantees or the Notes may be amended with the
written consent of the Holders of at least a majority in principal amount of
the outstanding Notes and (ii) any past Default and its consequences may be
waived with the written consent of the Holders of at least a majority in
principal amount of the outstanding Notes. Subject to certain exceptions set
forth in the Indenture and the Subsidiary Guarantees, without the consent of
any Holder of Notes, the Company, the Subsidiary Guarantors and the Trustee
may amend the Indenture, the Subsidiary Guarantees or the Notes (i) to
evidence the succession of another Person to (A) the Company and the
assumption by such successor of the covenants of the Company under the
Indenture and contained in the Notes or (B) a Subsidiary Guarantor and the
assumption by such successor of the covenants of such Subsidiary Guarantor
under
B-7
<PAGE>
contained in its Subsidiary Guarantee; (ii) to add additional covenants or to
surrender rights and powers conferred on the Company or any Subsidiary; (iii)
to add any additional Events of Default; (iv) to provide for uncertificated
Notes in addition to or in place of Certificated Notes; (v) to evidence and
provide for the acceptance of appointment under the Indenture of a successor
Trustee; (vi) to secure the Notes; (vii) to cure any ambiguity in the
Indenture or the Subsidiary Guarantees, to correct or supplement any
provision in the Indenture or the Subsidiary Guarantees which may be
inconsistent with any other provision therein or to add any other provisions
with respect to matters or questions arising under the Indenture, PROVIDED
that such actions shall not adversely affect the interests of the Holders in
any material respect; (viii) to comply with the requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act; or (ix) to release any Subsidiary Guarantor
pursuant to the Indenture.
14. DEFAULTS AND REMEDIES.
If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the Notes, subject to certain
limitations, may declare all the Notes to be immediately due and payable.
Certain events of bankruptcy or insolvency are Events of Default and shall
result in the Notes being immediately due and payable upon the occurrence of
such Events of Default without any further act of the Trustee or any Holder.
Holders of Notes may not enforce the Indenture or the Notes except
as provided in the Indenture. The Trustee may refuse to enforce the
Indenture or the Notes unless it receives reasonable indemnity or security.
Subject to certain limitations, Holders of a majority in principal amount of
the Notes may direct the Trustee in its exercise of any trust or power under
the Indenture. The Holders of a majority in principal amount of the then
outstanding Notes, by written notice to the Trustee, may rescind any
declaration of acceleration and its consequences if the rescission would not
conflict with any judgment or decree, and if all Events of Default have been
cured or waived except nonpayment of principal, interest or premium that has
become due solely because of the acceleration.
15. SUBORDINATION.
The payment of principal of, premium, if any, and interest on the
Notes will be subordinated in right of payment to the prior payment in full
of Senior Indebtedness as set forth in Article X of the Indenture. The
obligations of the Subsidiary Guarantors to the Holders or the Trustee
pursuant to the Subsidiary Guarantees and the Indenture will be subordinated
in right of payment to the prior payment in full of Guarantor Senior
Indebtedness as set forth in Article XI of the Indenture and the Subsidiary
Guarantees.
16. SUBSIDIARY GUARANTEE.
Subject to the limitations set forth in the Indenture and the
Subsidiary Guarantees, the payment of principal of, premium, if any, and
interest on the Notes will be guaranteed by each Subsidiary Guarantor and all
additional Subsidiary Guarantors.
B-8
<PAGE>
17. INDIVIDUAL RIGHTS OF TRUSTEE.
Subject to certain limitations imposed by the Trust Indenture Act,
the Trustee or any Paying Agent or Registrar, in its individual or any other
capacity, may become the owner or pledgee of Notes and may otherwise deal
with the Company or its Affiliates with the same rights it would have if it
were not Trustee, Paying Agent or Registrar, as the case may be, under the
Indenture.
18. NO RECOURSE AGAINST CERTAIN OTHERS.
No director, officer, employee, incorporator or stockholder of the
Company or any Subsidiary Guarantor, as such, shall have any liability for
any obligations of the Company or such Subsidiary Guarantor under the Notes,
the Subsidiary Guarantees or the Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation, solely by
reason of its status as a director, officer, employee, incorporator or
stockholder of the Company or any Subsidiary Guarantor. By accepting a Note,
each Holder waives and releases all such liability (but only such liability)
as part of the consideration for issuance of such Note to such Holder.
19. GOVERNING LAW.
THE INDENTURE AND THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS
MADE AND TO BE PERFORMED IN SAID STATE.
The Company will furnish to any Holder of Notes upon written request
and without charge to the Holder a copy of the Indenture which has in it the
text of this Note. Requests may be made to:
Costilla Energy, Inc.
400 West Illinois, 10th Floor
Midland, Texas 79701
Attention: Chief Financial Officer
B-9
<PAGE>
ASSIGNMENT
(To be executed by the registered Holder
if such Holder desires to transfer this Note)
FOR VALUE RECEIVED __________________________ hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAX IDENTIFYING NUMBER OF TRANSFEREE
- -------------------------
|
- -----------------------------------------------------------------------------
(Please print name and address of transferee)
- -----------------------------------------------------------------------------
this Note, together with all right, title and interest herein, and does hereby
irrevocably constitute and appoint ______________________________ Attorney to
transfer this Note on the Security Register, with full power of substitution.
Dated:
------------------------
- --------------------------------- ----------------------------------------
Signature of Holder Signature Guaranteed by an institution
member of the Signature Guaranty
Medallion Program
NOTICE: The signature to the foregoing Assignment must correspond to the Name
as written upon the face of this Note in every particular, without alteration
or any change whatsoever.
B-10
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
(check as appropriate)
/ / In connection with the Change of Control Offer made pursuant to
Section 4.07 of the Indenture, the undersigned hereby elects to have
/ / the entire principal amount
/ / $_________________ ($1,000 in principal amount or an integral
multiple thereof) of this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or ____________________ an amount
in cash equal to 101% of the principal amount indicated in the
preceding sentence, plus accrued and unpaid interest thereon, if any,
to the Change of Control Payment Date.
/ / In connection with the Asset Sale Offer made pursuant to Section 4.08
of the Indenture, the undersigned hereby elects to have
/ / the entire principal amount
/ / $_________________ ($1,000 in principal amount or an integral
multiple thereof) of this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or ____________________ an amount
in cash equal to 100% of the principal amount indicated in the
preceding sentence, plus accrued and unpaid interest thereon, if any,
to the Asset Sale Payment Date.
Dated:
-------------------
- -------------------------------- ---------------------------------------
Signature of Holder Signature Guaranteed by an institution
member of the Signature Guaranty
Medallion Program
NOTICE: The signature to the foregoing must correspond to the Name as written
upon the face of this Note in every particular, without alteration or any change
whatsoever.
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<PAGE>
EXHIBIT C
SUBSIDIARY GUARANTEE
This Subsidiary Guarantee, dated as of ___________________, (this
"Subsidiary Guarantee" and together with all such guarantees delivered from
time to time under Article XI of the Indenture referred to below being
referred to herein as the "Subsidiary Guarantees") is made by ____ and _____
(each a "Subsidiary Guarantor" and collectively, the "Subsidiary Guarantors")
in favor of STATE STREET BANK AND TRUST COMPANY as Trustee (together with its
successors and assigns in such capacity, the "Trustee") under the Indenture
(as amended or modified from time to time, the "Indenture") dated as of _____,
1996 made by Costilla Energy, Inc., a Delaware corporation (the "Company"),
pursuant to which the Company issued its __% Senior Subordinated Notes due
2006 (the "Notes"). Unless otherwise defined herein, capitalized terms used
herein have the meanings assigned to such terms in the Indenture.
WHEREAS, pursuant to Section 4.12(b) of the Indenture, each Subsidiary
Guarantor is prohibited from incurring certain Indebtedness without executing
and delivering a Subsidiary Guarantee; and
WHEREAS, the Subsidiary Guarantor wishes to incur such Indebtedness;
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Subsidiary Guarantor agrees as follows:
SECTION 1. UNCONDITIONAL GUARANTEE.
Each Subsidiary Guarantor hereby, jointly and severally, unconditionally
guarantees to each Holder and to the Trustee the due and punctual payment of
the principal of, premium, if any, and interest on the Notes and all other
amounts due and payable under the Indenture and the Notes by the Company,
whether at maturity, by acceleration, redemption, repurchase or otherwise,
including, without limitation, interest on the
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<PAGE>
overdue principal of, premium, if any, and interest on the Notes, to the extent
lawful, all in accordance with the terms hereof and thereof; subject, however,
to the limitations set forth in Section 2.
Failing payment when due of any amount so guaranteed for whatever
reason, the Subsidiary Guarantors will be jointly and severally obligated to
pay the same immediately. Each Subsidiary Guarantor hereby agrees that its
obligations hereunder shall be unconditional irrespective of the validity,
regularity or enforceability of the Notes or the Indenture, the absence of
any action to enforce the same, any waiver or consent by any Holder of the
Notes with respect to any provisions hereof or thereof, the recovery of any
judgment against the Company, any action to enforce the same or any other
circumstance which might otherwise constitute a legal or equitable discharge
or defense of any Subsidiary Guarantor. Each Subsidiary Guarantor hereby
waives diligence, presentment, demand of payment, filing of claims with a
court in the event of insolvency or bankruptcy of the Company, any right to
require a proceeding first against the Company, protest, notice and all
demands whatsoever and covenants that this Subsidiary Guarantee will not be
discharged except by complete performance of the obligations contained in the
Notes, this Indenture and in this Subsidiary Guarantee. If any Holder or the
Trustee is required by any court or otherwise to return to the Company, any
Subsidiary Guarantor, or any custodian, trustee, liquidator or other similar
official acting in relation to the Company or any Subsidiary Guarantor, any
amount paid by the Company or any Subsidiary Guarantor to the Trustee or such
Holder, this Subsidiary Guarantee, to the extent theretofore discharged,
shall be in full force and effect. Each Subsidiary Guarantor agrees it shall
not be entitled to any right of subrogation in relation to the Holders in
respect of any obligations guaranteed hereby until payment in full of all
obligations guaranteed hereby. Each Subsidiary Guarantor further agrees
that, as between each Subsidiary Guarantor, on the one hand, and the Holders
and the Trustee, on the other hand, (x) the maturity of the obligations
guaranteed hereby may be accelerated as provided in Article VI of the
Indenture for the purposes of this Subsidiary Guarantee, notwithstanding any
stay, injunction or other prohibition preventing such acceleration in respect
of the obligations guaranteed hereby, and (y) in the event of any
acceleration of such obligations as provided in Article VI of the Indenture
and subject to the rescission thereof as provided therein, such obligations
(whether or not due and payable) shall forthwith become due and payable by
each Subsidiary Guarantor for the purpose of this Subsidiary Guarantee.
SECTION 2. LIMITATION OF SUBSIDIARY GUARANTOR'S LIABILITY.
Each Subsidiary Guarantor and by its acceptance of its Note each Holder
hereby confirms that it is the intention of all such parties that the
guarantee by such Subsidiary Guarantor pursuant to its Subsidiary Guarantee
not constitute a fraudulent transfer or conveyance for purposes of the
Federal Bankruptcy Code, the Uniform Fraudulent Conveyance Act, the Uniform
Fraudulent Transfer Act or any similar federal, state or foreign law. To
effectuate the foregoing intention, the Holders and each Subsidiary Guarantor
irrevocably agree that the obligations of each Subsidiary Guarantor under the
Subsidiary Guarantees shall be limited to the maximum amount as will, after
giving effect to all other contingent and fixed liabilities of such
Subsidiary Guarantors and after giving effect to any collections from or
payments made by or on behalf of any other Subsidiary Guarantor in respect of
the obligations of such other Subsidiary Guarantor under its Subsidiary
Guarantees or pursuant to
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Section 3, result in the obligations of such Subsidiary Guarantor under
its Subsidiary Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under federal, state or foreign law. This Section 2
is for the benefit of the creditors of each Subsidiary Guarantor, and, for
purposes of the Federal Bankruptcy Code, the Uniform Fraudulent Conveyance
Act, the Uniform Fraudulent Transfer Act and each other similar federal,
state or foreign law, any Indebtedness of a Subsidiary Guarantor incurred
from time to time pursuant to the Credit Facility shall be deemed to have
been incurred prior to the incurrence by such Subsidiary Guarantor of
liability under its Subsidiary Guarantee.
SECTION 3. CONTRIBUTION. In order to provide for just and equitable
contribution among the Subsidiary Guarantors, the Subsidiary Guarantors
agree, INTER SE, that in the event any payment or distribution is made by any
Subsidiary Guarantor (a "Funding Guarantor") under the Subsidiary Guarantees,
such Funding Guarantor shall be entitled to a contribution from each other
Subsidiary Guarantor in a pro rata amount based on the Adjusted Net Assets of
each Subsidiary Guarantor (including the Funding Guarantor) for all payments,
damages and expenses incurred by the Funding Guarantor in discharging the
Company's obligations with respect to the Notes or, subject to this Section 3,
any other Subsidiary Guarantor's obligations with respect to the Subsidiary
Guarantees.
SECTION 4. SUBSIDIARY GUARANTEES SUBORDINATED TO GUARANTOR SENIOR
INDEBTEDNESS. Each Subsidiary Guarantor agrees, and each Holder by accepting
a Note agrees, that the Indebtedness evidenced by its Subsidiary Guarantee is
subordinate and subject in right of payment, to the extent and in the manner
provided in this Subsidiary Guarantee, to the prior payment in full of all
Guarantor Senior Indebtedness (whether outstanding on the date hereof or
hereafter created, incurred, assumed or guaranteed), and that the
subordination is for the benefit of the holders of Guarantor Senior
Indebtedness, PROVIDED, HOWEVER, that the Subsidiary Guarantee of such
Subsidiary Guarantor, the Indebtedness represented thereby and the payment of
the principal of (and premium, if any, on) and the interest on the Notes
pursuant to such Subsidiary Guarantee in all respects shall rank PARI PASSU
with, or prior to, all existing and future unsecured indebtedness (including,
without limitation, Indebtedness) of such Subsidiary Guarantor that is
subordinated to its Guarantor Senior Indebtedness. This Subsidiary Guarantee
shall constitute a continuing offer to all Persons who become holders of, or
continue to hold, Guarantor Senior Indebtedness, and such provisions are made
for the benefit of the holders of Guarantor Senior Indebtedness.
SECTION 5. LIQUIDATION; DISSOLUTION; BANKRUPTCY. Upon any
distribution to creditors of any Subsidiary Guarantor in a liquidation or
dissolution of such Subsidiary Guarantor or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to any Subsidiary
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Guarantor or its property, in an assignment for the benefit of creditors or
any marshaling of any Subsidiary Guarantor's assets and liabilities:
(a) holders of such Subsidiary Guarantor's Guarantor Senior
Indebtedness shall be entitled to receive payment in full in cash of all
Obligations due in respect of such Guarantor Senior Indebtedness (including
interest after the commencement of any such proceeding at the rate specified
in the applicable Guarantor Senior Indebtedness) before Holders shall be
entitled to receive any payment with respect to such Subsidiary Guarantor's
Subsidiary Guarantee (except that Holders may receive (i) securities that are
subordinated to at least the same extent as such Subsidiary Guarantor's
Subsidiary Guarantee to (A) Guarantor Senior Indebtedness and (B) any
securities issued in exchange for Guarantor Senior Indebtedness and (ii)
payments and other distributions made from any defeasance trust created
pursuant to Section 8.01 of the Indenture); and
(b) until all Obligations with respect to such Subsidiary Guarantor's
Guarantor Senior Indebtedness (as provided in subsection (a) above) are paid
in full in cash, any distribution to which Holders would be entitled but for
this Article shall be made to holders of Guarantor Senior Indebtedness
(except that Holders may receive (i) securities that are subordinated to at
least the same extent as such Subsidiary Guarantor's Subsidiary Guarantee to
(A) Guarantor Senior Indebtedness and (B) any securities issued in exchange
for Guarantor Senior Indebtedness and (ii) payments and other distributions
made from any defeasance trust created pursuant to Section 8.01 of the
Indenture), as their interests may appear.
SECTION 6. DEFAULT ON DESIGNATED GUARANTOR SENIOR INDEBTEDNESS. No
Subsidiary Guarantor may make any payment or distribution to the Trustee or
any Holder in respect of Obligations with respect to such Subsidiary
Guarantor's Subsidiary Guarantee and may not acquire from the Trustee or any
Holder any Notes for cash or property (other than (i) securities that are
subordinated to at least the same extent as such Subsidiary Guarantor's
Subsidiary Guarantee to (A) Guarantor Senior Indebtedness and (B) any
securities issued in exchange for Guarantor Senior Indebtedness and (ii)
payments and other distributions made from any defeasance trust created
pursuant to Section 8.01 of the Indenture) until all principal and other
Obligations with respect to the Guarantor Senior Indebtedness have been paid
in full if:
(a) a default in the payment of any principal, premium, if any, or
interest with respect to Guarantor Designated Senior Indebtedness occurs and
is continuing beyond any applicable grace period in the agreement, indenture
or other document governing such Designated Guarantor Senior Indebtedness; or
(b) a default, other than such payment default, on Designated Guarantor
Senior Indebtedness occurs and is continuing that then permits holders of such
Designated Guarantor Senior Indebtedness to accelerate its maturity and the
Trustee receives a notice of such default (a "Subsidiary Guarantor Payment
Blockage Notice") from a Person who may give it pursuant to Section 13
hereof. If the Trustee receives any such Subsidiary Guarantor Payment
Blockage Notice, no subsequent Subsidiary Guarantor Payment Blockage Notice
shall be effective for purposes of this
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Section 6 unless and until at least 360 days shall have elapsed since the
effectiveness of the immediately prior Subsidiary Guarantor Payment Blockage
Notice. No default specified in this clause (b) that existed or was continuing
on the date of delivery of any Subsidiary Guarantor Payment Blockage Notice to
the Trustee shall be, or be made, the basis for a subsequent Subsidiary
Guarantor Payment Blockage Notice.
Such Subsidiary Guarantor may and shall resume payments on and
distributions in respect of its Subsidiary Guarantee and may acquire them
upon the earlier of:
(i) in the case of a default referred to in Section 6(a), the
date upon which such default is cured or waived, or
(ii) in the case of a default referred to in Section 6(b) hereof,
the earlier of the date on which such default is cured or waived or 179
days after the date on which the applicable Subsidiary Guarantor Payment
Blockage Notice is received, unless the maturity of such Designated
Guarantor Senior Indebtedness has been accelerated,
if, and only if, this Subsidiary Guarantee otherwise permits the payment,
distribution or acquisition at the time of such payment or acquisition.
SECTION 7. WHEN DISTRIBUTION MUST BE PAID OVER. In the event that the
Trustee or any Holder receives any payment of any Obligations with respect to
any Subsidiary Guarantee at a time when the Trustee or such Holder, as
applicable, has actual knowledge that such payment is prohibited by Section 5
or 6 hereof, such payment shall be held by the Trustee or such Holder, in
trust for the benefit of, and shall be paid forthwith over and delivered,
upon written request, to, the holders of Guarantor Senior Indebtedness of the
applicable Subsidiary Guarantor as their interests may appear or their
Representative under the indenture or other agreement (if any) pursuant to
such Guarantor Senior Indebtedness may have been issued, for application to
the payment of all Obligations with respect to such Subsidiary Guarantor's
Guarantor Senior Indebtedness remaining unpaid to the extent necessary to pay
such Obligations in full in accordance with their terms, after giving effect
to any concurrent payment or distribution to or for the holders of such
Subsidiary Guarantor's Guarantor Senior Indebtedness.
With respect to the holders of any Guarantor Senior Indebtedness, the
Trustee undertakes to perform only such obligations on the part of the
Trustee as are specifically set forth in this Subsidiary Guarantee, and no
implied covenants or obligations with respect to the holders of any Guarantor
Senior Indebtedness shall be read into this Subsidiary Guarantee against the
Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Guarantor Senior Indebtedness, and shall not be liable to any such
holders if the Trustee shall pay over or distribute to or on behalf of
Holders or the Company or any other Person money or assets to which any
holders of Guarantor Senior Indebtedness shall be entitled by virtue of this
Subsidiary Guarantee, except if such payment is made as a result of the
willful misconduct or gross negligence of the Trustee.
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SECTION 8. NOTICE BY SUBSIDIARY GUARANTOR. Each Subsidiary Guarantor
shall promptly notify the Trustee and the Paying Agent of any facts known to
such Subsidiary Guarantor that would cause a payment of any Obligations with
respect to such Subsidiary Guarantor's Subsidiary Guarantee to violate this
Subsidiary Guarantee, but failure to give such notice shall not affect the
subordination of such Subsidiary Guarantor's Subsidiary Guarantee to such
Subsidiary Guarantor's Guarantor Senior Indebtedness as provided in this
Subsidiary Guarantee.
SECTION 9. SUBROGATION. After all Guarantor Senior Indebtedness of a
Subsidiary Guarantor is paid in full and until the Notes are paid in full,
Holders shall be subrogated (equally and ratably with all other Indebtedness
of such Subsidiary Guarantor PARI PASSU the Notes) to the rights of holders
of such Guarantor Senior Indebtedness to receive distributions applicable to
such Guarantor Senior Indebtedness to the extent that distributions otherwise
payable to the Holders have been applied to the payment of such Guarantor
Senior Indebtedness. A distribution made under this Subsidiary Guarantee to
holders of such Guarantor Senior Indebtedness that otherwise would have been
made to Holders is not, as between such Subsidiary Guarantor and Holders, a
payment by such Subsidiary Guarantor on its Subsidiary Guarantee.
SECTION 10. RELATIVE RIGHTS. This Subsidiary Guarantee defines the
relative rights of Holders and holders of Guarantor Senior Indebtedness.
Nothing in this Subsidiary Guarantee shall:
(i) impair, as between the Subsidiary Guarantors and Holders, the
obligation of the Subsidiary Guarantors, which is absolute and
unconditional, to pay principal of, premium, if any, on and interest on
the Subsidiary Guarantees in accordance with their terms;
(ii) affect the relative rights of Holders and creditors of the
Subsidiary Guarantors other than their rights in relation to holders of
Guarantor Senior Indebtedness; or
(iii) prevent the Trustee or any Holder from exercising its
available remedies upon a Default or Event of Default, subject to the
rights of holders and owners of Guarantor Senior Indebtedness to receive
distributions and payments otherwise payable to Holders.
If the Subsidiary Guarantors fail because of this Subsidiary Guarantee
to pay principal of, premium, if any, on or interest on a Note on the due
date, the failure is still a Default or Event of Default.
SECTION 11. NO IMPAIRMENT OF SUBORDINATION BY SUBSIDIARY GUARANTORS
OR HOLDERS. (a) No right of any holder of Guarantor Senior Indebtedness to
enforce the subordination of the Indebtedness evidenced by any Subsidiary
Guarantor's Subsidiary Guarantee shall be impaired by any act or failure to
act by such Subsidiary Guarantor or any Holder or by the failure of
Subsidiary Guarantors or any Holder to comply with this Indenture.
(b) Without in any way limiting the generality of paragraph (a) of this
Section, the holders of any Guarantor Senior Indebtedness, may, at any time
and from time to time, without the consent of or notice to the Trustee or the
Holders, without incurring responsibility to the Holders and without
impairing or releasing the subordination or other benefits provided in this
Subsidiary Guarantee, or the obligations hereunder of the Holders to the
holders of Guarantor Senior Indebtedness, do any one or more of the
following: (i) change the manner, place or terms of payment or extend the
time of payment of, or renew, exchange, amend, increase or alter, Guarantor
Senior Indebtedness or the terms of any instrument evidencing the same or any
agreement under which Guarantor Senior Indebtedness is outstanding or any
liability of any obligor thereon (unless such change, extension, amendment,
increase or other alteration results in such Indebtedness no longer being
Guarantor Senior Indebtedness as defined in the Indenture and this Subsidiary
Guaranty); (ii) sell, exchange, release or otherwise deal with any Property
pledged, mortgaged or otherwise securing Guarantor Senior Indebtedness;
(iii) settle or compromise any Guarantor Senior Indebtedness or any liability
of any obligor thereon or release any Person liable in any manner for the
collection of Guarantor Senior Indebtedness; and (iv) exercise or refrain
from exercising any rights against the Company and any other Person.
SECTION 12. DISTRIBUTION OR NOTICE TO REPRESENTATIVE. Whenever a
distribution is to be made or a notice given to holders of Guarantor Senior
Indebtedness, the distribution may be made and the notice given to their
Representative.
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Upon any payment or distribution of assets of any Subsidiary Guarantor
referred to in this Subsidiary Guarantee, the Trustee and the Holders shall
be entitled to rely upon any order or decree made by any court of competent
jurisdiction or upon any certificate of such Representative or of the
liquidating trustee or agent or other Person making any distribution to the
Trustee or to the Holders for the purpose of ascertaining the Persons
entitled to participate in such distribution, the holders of such Guarantor
Senior Indebtedness and other Indebtedness of such Subsidiary Guarantor, the
amount thereof or payable thereon, the amount or amounts paid or distributed
thereon and all other facts pertinent thereto or to this Subsidiary Guarantee.
The Trustee shall be entitled to rely on the delivery to it of a written
notice by a Person representing himself to be a holder of Guarantor Senior
Indebtedness (or a trustee or agent on behalf of such holder) to establish
that such notice has been given by a holder of such Guarantor Senior
Indebtedness (or a trustee or agent on behalf of any such holder). In the
event that the Trustee determines in good faith that further evidence is
required with respect to the right of any Person as a holder of such
Guarantor Senior Indebtedness to participate in any payment or distribution
pursuant to this Subsidiary Guarantee, the Trustee may request such Person to
furnish evidence to the reasonable satisfaction of the Trustee as to the
amount of such Guarantor Senior Indebtedness held by such Person, the extent
to which such Person is entitled to participate in such payment or
distribution and any other facts pertinent to the rights of such Person under
this Subsidiary Guarantee, and if such evidence is not furnished, the Trustee
may defer any payment which it may be required to make for the benefit of
such Person pursuant to the terms of this Indenture pending judicial
determination as to the rights of such Person to receive such payment.
SECTION 13. RIGHTS OF TRUSTEE AND PAYING AGENT. Notwithstanding the
provisions of any Subsidiary Guarantee or any other provision of the
Indenture, the Trustee shall not be charged with knowledge of the existence
of any facts that would prohibit the making of any payment or distribution by
the Trustee, and the Trustee and the Paying Agent may continue to make
payments on the Notes, unless the Trustee shall have received at its
Corporate Trust Office at least two Business Days prior to the date of such
payment written notice of facts that would cause the payment of any
Obligations with respect to any Subsidiary Guarantee to violate this
Subsidiary Guarantee. Only the holders of Designated Guarantor Senior
Indebtedness or a Representative thereof may give the notice. Nothing in
this Subsidiary Guarantee shall impair the claims of, or payments to, the
Trustee under or pursuant to Section 7.07 of the Indenture.
The Trustee in its individual or any other capacity may hold Guarantor
Senior Indebtedness with the same rights it would have if it were not
Trustee. Any Paying Agent may do the same with like rights.
SECTION 14. AUTHORIZATION TO EFFECT SUBORDINATION. Each Holder of a
Note by the Holder's acceptance thereof authorizes and directs the Trustee on
the Holder's behalf to take such action as may be necessary or appropriate to
effectuate the subordination as provided in this Subsidiary Guarantee, and
appoints the Trustee to act as the Holder's attorney-in-fact for any and all
such purposes. If the Trustee does not file a proper proof of claim or proof
of debt in the form required in any
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judicial proceeding relative to any Subsidiary Guarantor (or any other
obligor upon the Notes), its creditors or its property at least 30 days
before the expiration of the time to file such claim, any Representative is
hereby authorized to file an appropriate claim for and on behalf of the
Holders of the Notes.
SECTION 15. AMENDMENTS. The provisions of this Subsidiary Guarantee
shall not be amended or modified except in accordance with Article IX of the
Indenture.
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SECTION 16. REPRESENTATIONS AND WARRANTIES. Each Subsidiary Guarantor
hereby represents and warrants as follows:
(a) Such Subsidiary Guarantor is (i) a duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation, (ii) has all requisite power and authority to own or lease
and operate its properties and to carry on its business as now conducted and
as proposed to be conducted; and (iii) is duly qualified or licensed to do
business as a foreign corporation and is in good standing in all
jurisdictions in which it owns or leases assets and property or in which the
conduct of its business requires it to so qualify or be licensed except where
the failure to so qualify or be licensed would not have a material adverse
effect on the operations, business, prospects, assets, properties or
condition (financial or other) of the Company and its Subsidiaries, including
such Guarantor, considered as one enterprise.
(b) The execution, delivery and performance by such Subsidiary Guarantor
of this Subsidiary Guarantee, have been duly authorized by all necessary
corporate action on the part of such Subsidiary Guarantor and do not and will
not violate any provision of the articles or certificate of incorporation or
by-laws or other charter documents of such Subsidiary Guarantor and do not and
will not
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violate, or be in conflict with, or constitute a default under, or permit the
termination of, or result in the creation of any Lien (other than a Permitted
Lien) upon any property of such Subsidiary Guarantor under (x) any statute or
law or any judgment, decree, order, regulation or rule of any court or
governmental authority to which such Subsidiary Guarantor or any of its
properties may be subject, or (y) any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument to which such
Subsidiary Guarantor is a party or by which it may be bound, or to which any
of its properties may be subject, which conflict, default, termination or
Lien would have a material adverse effect upon the operations, business,
prospects, assets, properties or condition (financial or other) of the
Company and its Subsidiaries, including such Subsidiary Guarantor, considered
as one enterprise, or except as set forth in the Disclosure Statement. This
Subsidiary Guarantee is the legal, valid and binding obligation of such
Subsidiary Guarantor, enforceable against such Subsidiary Guarantor in
accordance with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency, reorganization or other similar laws affecting
enforcement of creditors rights generally and except as enforcement thereof
is subject to general principles of equity (regardless of whether enforcement
is considered in a proceeding in equity or at law).
(c) No authorization, consent, approval or other action by, and no
notice to or filing with, any court, governmental, administrative or judicial
authority or regulatory body (domestic or foreign) is required for the due
execution, delivery or performance by such Subsidiary Guarantor of this
Subsidiary Guarantee.
SECTION 17. ADDRESSES FOR NOTICES. All notices, requests, demands and
other communications provided for or permitted hereunder shall be in writing
(including
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telegraphic communication) and, if to any Subsidiary Guarantor, mailed or
telegraphed or delivered to it, adressed to it at the address of the Company
specified in the Indenture, if to Trustee, addressed to it at the address
specified in the Indenture, or as to each party at such other address as
shall be designated by such party in a written notice to each other party
complying as to delivery with the terms of this Section 18.
SECTION 18. NO WAIVER; REMEDIES. No failure on the part of the Trustee
or any Holder, to exercise, and no delay in exercising, an right hereunder
shall operate as a waiver thereof; nor shall any single or partial exercise
of any right hereunder preclude any other or further exercise thereof or the
exercise of any other right. The remedies herein provided are cumulative and
not exclusive of any remedies provided by law or any other agreement.
SECTION 19. CONTINUING GUARANTY; TRANSFER OF NOTES; TERMINATION OF
GUARANTY. (a) This Subsidiary Guarantee is a continuing guaranty and, subject
to the provisions of subsection (b) below, shall (i) remain in full force and
effect until payment in full of the Obligations and all other amounts payable
under this Subsidiary Guarantee, (ii) be binding upon each Subsidiary
Guarantor, its successors and assigns, and (iii) inure to the benefit of and
be enforceable by the Trustee and its successors, transferees and assigns.
(b) All obligations of a particular Subsidiary Guarantor hereunder shall
automatically terminate as set forth in Section 11.02 of the Indenture.
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enforceable in such jurisdiction and such illegal, invalid or unenforceable
provision shall be legal, valid and enforceable in all other jurisdictions.
SECTION 20. GOVERNING LAW. This Subsidiary Guarantee shall be governed
by, and construed in accordance with, the law of the State of New York,
United States.
SECTION 21. SEVERABILITY. In case any provision of this Subsidiary
Guarantee shall be invalid, illegal or unenforceable, that portion of such
provision that is not invalid, illegal or unenforceable shall remain in
effect, and the validity, legality, and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
IN WITNESS WHEREOF, each Subsidiary Guarantor has caused this Subsidiary
Guarantee to be duly executed and delivered by its officer thereunto duly
authorized as of the date first above written.
[LIST OF SUBSIDIARY GUARANTORS]
By: _________________
Name and Title:
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EXHIBIT 5.1
COTTON, BLEDSOE, TIGHE & DAWSON
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
SUITE 300
500 WEST ILLINOIS
MIDLAND, TEXAS 79701-4337
P.O. BOX 2776 ZIP 79702-2776
TELEPHONE (915) 684-5782
FAX (915) 682-3672
August 30, 1996
Costilla Energy, Inc.
400 West Illinois, Suite 1000
Midland, Texas 79701
Re: Registration Statement on Form S-1
(Registration No. 333-08909)
Gentlemen:
We have acted as counsel for Costilla Energy, Inc., a Delaware corporation
(the "Company") in connection with the registration under the Securities Act
of 1933, as amended (the "Act"), of $100,000,000 of ____% Senior Subordinated
Notes due 2006 (the "Notes") of the Company to be sold to the several
Underwriters to be named in Schedule 1 (collectively, the "Underwriters")
attached to the Underwriting Agreement (the "Underwriting Agreement") to be
entered into by and between the Underwriters, for whom NationsBanc Capital
Markets, Inc. and Prudential Securities Incorporated are acting as
representatives, the Company, and Costilla Energy, L.L.C. A Registration
Statement on Form S-1 (Registration No. 333-08909) covering the sale of the
Notes was filed under the Act with the Securities and Exchange Commission (the
"Commission") on July 26, 1996, as amended by Amendment No. 1 to be filed
with the Commission on August 30, 1996 (the "Registration Statement").
In reaching the conclusions expressed in this opinion, we have examined
signed copies of the Registration Statement and all exhibits thereto. We
have also examined and relied upon originals, or copies certified to our
satisfaction, of (i) the Certificate of Incorporation
<PAGE>
Costilla Energy, Inc.
August 30, 1996
Page 2
and Bylaws of the Company, (ii) minutes and records of the corporate
proceedings of the Company with respect to the issuance of the Notes and
related matters, (iii) the form of Underwriting Agreement, and (iv) such other
agreements and instruments relating to the Company as we have deemed necessary
or appropriate for the purposes of the opinions hereinafter expressed. In
rendering such opinions, we have relied, to the extent we deemed reasonable,
on certificates and certain other information provided to us by officers of the
Company and public officials as to matters of fact of which the maker of such
certificates or the person providing such information had knowledge, without
investigation into or verification of such information. Furthermore, in
rendering such opinions we have assumed that the signatures on all documents
examined by us are genuine, that all documents and corporate record books
submitted to us as originals are authentic, accurate and complete, and that all
documents submitted to use as copies are true, correct and complete copies of
the originals thereof. We have also assumed that the Underwriting Agreement
will be executed in substantially the same form as presented to us.
Based solely upon the foregoing, subject to the assumptions, limitations
and qualifications set forth herein, and specifically limited in all respects
to the laws of the State of Texas, of the United States of America and the
General Corporation Law of the State of Delaware, we are of the opinion that
the Notes registered pursuant to the Registration Statement have been duly
and validly authorized by the Company and, when paid for, issued or sold and
delivered in accordance with the terms of the Underwriting Agreement and the
Registration Statement, will be binding obligations of the Company, subject
to applicable bankruptcy, insolvency, reorganization, fraudulent transfer,
moratorium or similar laws affecting creditors' rights severally and to
general principles of equity and the availability of equitable remedies.
Please note in this regard that we are not licensed to practice law in the
State of Delaware, but have reviewed Delaware law in connection with the
opinions expressed herein.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to this Firm under the caption
"Legal Matters" in the Prospectus forming a part of the Registration
Statement. In giving this consent we do not thereby admit that we come
within the category of persons whose consent is required under the Act or the
rules and regulations of the Commission promulgated thereunder.
This opinion is rendered only to the Company and solely for the benefit of
the Company and the Commission in connection with the registration and the
issuance of the Notes pursuant to the Registration Statement. This opinion
may not be otherwise used,
<PAGE>
Costilla Energy, Inc.
August 30, 1996
Page 3
circulated, quoted, relied upon, or referred to by you or the Commission for
any other purpose or by any other person, firm or corporation for any
purpose, without our prior written consent.
Yours very truly,
COTTON, BLEDSOE, TIGHE & DAWSON
By: /s/ Richard T. McMillan
------------------------------
Richard T. McMillan
<PAGE>
EXHIBIT 10.1
August 23, 1996
Costilla Energy, Inc.
400 West Illinois Avenue, 10th Floor
Midland, Texas 79701
Attn: Michael J. Grella
Dear Mike:
We are pleased to advise you that NationsBank of Texas, N.A. ("NATIONSBANK")
hereby commits (the "COMMITMENT"), subject to the terms and conditions
outlined in this letter and in the Summary of Terms and Conditions attached
hereto, incorporated herein and made a part hereof (collectively, this
"COMMITMENT LETTER") that it will make available to you a credit facility in
an amount up to $50,000,000 (the "CREDIT FACILITY"). Proceeds of the Credit
Facility will be used as provided in the Summary of Terms and Conditions.
The Commitment is conditioned upon the preparation, execution and delivery of
such documents in form and substance satisfactory to us and our counsel (the
"DEFINITIVE DOCUMENTS"), upon the resolution to our satisfaction of any legal
or structural issues in connection with the Credit Facility, and upon the
absence of a material adverse change in Costilla's financial condition,
operations, prospects or properties from that reflected in the information
delivered to NationsBank or any of its affiliates in connection with the
transaction contemplated by this Commitment Letter. The Commitment is also
subject to (i) the completion of such legal and financial review as we
determine to be necessary, (ii) the absence of any factors which we determine
from such review to adversely affect our ability to offer the Credit Facility
as set forth in the attached Summary of Terms and Conditions, and (iii) the
satisfaction of all conditions set forth in this Commitment Letter.
Neither this Commitment Letter nor the Commitment is assignable by you.
Nothing in this Commitment Letter, express or implied, shall give any person,
other than the parties hereto, any benefit or any legal or equitable right,
remedy or claim under this Commitment Letter. Furthermore, this Commitment
Letter is confidential and may not be disclosed to any person or entity
except Costilla's officers, directors, employees and professional advisors.
<PAGE>
Mr. Michael J. Grella
August 23, 1996
Page 2
Costilla agrees to pay NationsBank the fees and expenses as set forth in the
attached Summary of Terms and Conditions. In addition, Costilla agrees to
indemnify and hold NationsBank and its affiliates harmless from and against
any and all liabilities, claims, losses, damages, penalties, costs, or
expenses (including without limitation, reasonable fees and expenses of
counsel) of any kind or nature whatsoever which in any way or to any extent
may be imposed on, incurred by, or asserted against us in connection with
this Commitment Letter, the Definitive Documents, or any of the negotiations,
transactions and events at any time associated therewith or contemplated
therein except for any of the foregoing arising from the gross negligence or
willful misconduct of NationsBank or its affiliates, and upon demand from
time to time, to reimburse NationsBank and its affiliates for all reasonable
out-of-pocket costs, expenses and other payments, including but not limited
to, reasonable legal fees and disbursements incurred or made in connection
with the Commitment and the preparation, execution and delivery of the
Definitive Documents, regardless of whether or not the Definitive Documents
are executed.
Additionally, Costilla agrees to allow NationsBank or any of its affiliates
to reference this Commitment for the benefit of promoting NationsBank or such
affiliate.
This Commitment Letter (including the attached Summary of Terms and
Conditions) sets forth the entire understanding of the parties as to the
scope of the Commitment and the obligation of NationsBank with respect
thereto. The Commitment will expire at 5:00 PM Midland, Texas time on August
26, 1996 unless accepted prior to such time. The Commitment will also expire
on October 4, 1996 if by such date you have not executed and delivered
Definitive Documents acceptable to us as contemplated in the attached Summary
of Terms and Conditions.
This Commitment Letter shall be governed by, and construed in accordance
with, the laws of the State of Texas as applied to contracts made and
performed within such state, without giving effect to the principles of
conflicts of laws thereof. To the fullest extent permitted by applicable
law, each of NationsBank and Costilla hereby irrevocably submit to the
jurisdiction of any Texas court or Federal court sitting in Texas, in respect
of any suit, action or proceeding arising out of or relating to the
Commitment, this Commitment Letter or the Definitive Documents and agree that
any such suit, action or proceeding may be heard and determined in any such
court. Each of NationsBank and Costilla waive, to the fullest extent
permitted by applicable law, any objection which it may now or hereafter have
to the laying of the venue of any such suit, action or proceedings brought in
any such court, and any claim that any such suit, action or proceeding
brought in any such court has been brought in an inconvenient forum.
Please indicate your acceptance of the Commitment and your agreement to the
matters contained in this Commitment Letter by executing this document and
returning it to us at
<PAGE>
Mr. Michael J. Grella
August 23, 1996
Page 3
or before 5:00 PM August 28, 1996, together with one-fifth of the
underwriting fee ($50,000) due upon your execution of this Commitment Letter
with the remainder payable at closing.
Sincerely,
NATIONSBANK OF TEXAS, N.A.
By: /s/ Frank K. Stowers
--------------------------------
Name: Frank K. Stowers
Title: Vice President
ACCEPTED AND AGREED TO
as of the date first written above
COSTILLA ENERGY, INC.
By: /s/ Michael J. Grella
--------------------------------
Name: Michael J. Grella
Title: President
<PAGE>
SUMMARY OF TERMS AND CONDITIONS
AUGUST 23, 1996
BORROWER: Costilla Energy, Inc., a Delaware corporation.
AGENT: NationsBank of Texas, N.A. ("NATIONSBANK").
ARRANGER: NationsBanc Capital Markets, Inc. ("NCMI").
LENDERS: NationsBank and other financial institutions acceptable
to Agent, NCMI and Borrower.
ISSUING LENDER: NationsBank.
AMOUNT AND TYPE Revolving Line of Credit in an amount equal to the
OF CREDIT FACILITY: Borrowing Base; the initial Borrowing Base will be
$50,000,000. Prior to the second anniversary date of
the Credit Facility, the Borrowing Base will be
redetermined periodically and increased or decreased in
the manner described below, but in no event will the
Borrowing Base ever exceed $125,000,000.
Beginning on the second anniversary of the date of
the Credit Facility, the Borrowing Base will be
redetermined periodically and may be decreased, but
will not be increased above the amount of the Borrowing
Base in effect immediately prior to such
redetermination. In addition, the Borrowing Base will
be further reduced each quarter by an amount equal to
one-twelfth of the Borrowing Base in effect on such
second anniversary date.
PURPOSE: Borrower will use all proceeds of the Credit Facility
for (i) working capital in its existing lines of
business (which include the exploration, operation and
development of oil and gas properties), (ii)
acquisition of oil and gas reserves, and (iii) issuance
of letters of credit (sub-limit on letter of credit
issuance of $1,000,000).
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Costilla Energy, Inc. Page 1 NationsBank
<PAGE>
INTEREST RATE: Agent's fluctuating "Base Rate" (defined as the higher
of Agent's Prime Rate and the Federal Funds Rate plus
1/2%) plus the Applicable Base Rate Margin, based on a
360-day year, payable monthly.
Agent's reserve adjusted eurodollar rate for periods of
1, 2, 3, or 6 months, plus the Applicable Eurodollar
Rate Margin, based on a 360 day year, payable quarterly
and at the end of each interest period.
Interest on past due principal and interest shall be
payable at the highest lawful rate.
The Applicable Margins shall be based upon the
outstanding balances of the Credit Facility, including
Letter of Credit Obligations, divided by the Borrowing
Base then in effect (expressed in basis points):
<TABLE>
LESS THAN GREATER THAN 50% GREATER THAN
50% /LESS THAN 75% 75%
--------- ---------------- ------------
<S> <C> <C> <C>
Base Rate Margin 0 0 25
Eurodollar Rate Margin 100 137.5 162.5
</TABLE>
FEES: A commitment fee payable quarterly in arrears on the
unutilized portion of the Borrowing Base, and
calculated based on a 360-day year (expressed in basis
points).
<TABLE>
LESS THAN GREATER THAN 50% GREATER THAN
50% /LESS THAN 75% 75%
--------- ---------------- ------------
<S> <C> <C> <C>
Commitment Fee 27.5 32.5 37.5
</TABLE>
Underwriting fee of 50 bp; 20% due upon acceptance of
the commitment and 80% due at closing of the Credit
Facility.
- -------------------------------------------------------------------------------
Costilla Energy, Inc. Page 2 NationsBank
<PAGE>
A fee of 1/4% on any increase in the Borrowing Base.
Letter of Credit Fees: (i) issuance fee for the account
of the Issuing Lender in the amount of 0.125% of the
face amount of each letter of credit issued, and (ii)
letter of credit fee for the pro rata accounts of the
Lenders equal to the greater of (a) the Applicable
Eurodollar Rate Margin per annum of the face amount of
each letter of credit and (b) $500, payable at the time
of issuance.
Agent's fee of $50,000 per year.
AMORTIZATION/ Beginning on the second anniversary of the date of the
MATURITY: Credit Facility, quarterly payments of principal in the
amount necessary to cause the outstanding balance of
the Credit Facility to equal the reduced Borrowing
Base. Due in full on the fifth anniversary of the
Credit Facility.
OPTIONAL Permitted at any time without penalty, so long as no
PREPAYMENTS: principal bearing interest at a eurodollar rate is paid
before the end of the applicable interest period.
BORROWING BASE Prior to the second anniversary date of the Credit
REDUCTIONS: Facility, Borrower may reduce the Borrowing Base within
fifteen days after the date on which the Borrowing Base
is redetermined.
REQUIRED See requirements under Borrowing Base.
PREPAYMENTS:
SECURITY AND SUPPORTING First priority liens and assignments of production
AGREEMENTS: covering 70% of Borrower's oil and gas properties and
all related contracts.
First priority security interest in and pledge of
Borrower's stock in Subsidiaries.
Negative Pledge on all other (i) oil and gas properties
of Borrower and Subsidiaries and (ii)
- -------------------------------------------------------------------------------
Costilla Energy, Inc. Page 3 NationsBank
<PAGE>
stock of Subsidiaries now or hereafter owned by
Borrower, and Agreement to Pledge such properties or
stock upon request.
All security documentation will be prepared by Agent's
counsel and must be satisfactory to Agent and Lenders
in form and substance.
TITLE ASSURANCES: Legal opinions or other title assurances satisfactory
to Agent covering certain oil and gas properties to be
mortgaged and assurances from Borrower that title
matters have not materially changed since the title
review which occurred in connection with the
NationsBridge facility.
ENVIRONMENTAL REVIEW: An environmental report on the oil and gas properties
owned by Borrower, in form and substance and authorship
satisfactory to Agent and assurances from Borrower that
environmental matters have not materially changed since
the environmental due diligence which occurred in
connection with the NationsBridge facility.
BORROWING BASE: The aggregate outstanding principal balance under the
Credit Facility (including any letters of credit) may
at no time exceed the Borrowing Base, which will be set
semi-annually by Agent and Lenders in their sole
discretion (Agent and Borrower shall each have the
right to request additional Borrowing Base
redeterminations but not more than once during any six
month period). All Borrowing Base redeterminations
will be set by Majority Lenders provided that agreement
of 100% of the Lenders will be required to increase the
Borrowing Base. Increases in the BB will not occur
after the second anniversary date.
To assist Agent and Lenders in setting the Borrowing
Base, Borrower will furnish by February 28 of each year
an annual engineering report on proved oil and gas
properties of Borrower and Subsidiaries, dated as of
January 1 of such year, and prepared by Williamson
Petroleum
- -------------------------------------------------------------------------------
Costilla Energy, Inc. Page 4 NationsBank
<PAGE>
Consultants, Inc. or other independent petroleum
engineers acceptable to Agent, and Borrower will
furnish by July 31 of each year a supplemental in-house
engineering report effective as of July 1.
Borrower will furnish to Agent and Lenders with these
engineering reports a report of production and
associated operating statements for the oil and gas
properties of Borrower. Borrower will also furnish to
Agent and Lenders a quarterly report of production and
associated operating statements for the oil and gas
properties of Borrower.
If the Borrowing Base ever falls below the outstanding
balance of the Credit Facility (the amount by which the
outstanding balance exceeds the Borrowing Base is
herein called the "BORROWING BASE DEFICIENCY"),
Borrower must either (i) prepay the Credit Facility in
the amount of the deficit within 10 days after notice
thereof by Agent, or elect within such period to repay
the Borrowing Base Deficiency in 6 equal consecutive
monthly installments which shall be in addition to
other principal payments due under the Credit Facility
or (ii) mortgage to Agent additional oil and gas
properties sufficient to cause an increase in the
Borrowing Base by the amount of such Borrowing Base
Deficiency.
CONDITIONS OF LENDING: 1. Borrower shall have successfully completed (i) the
merger of Costilla Energy, L.L.C. into Costilla Energy,
Inc. (the "MERGER"), (ii) the public issuance of 10
year subordinated debt in the net amount of at least
$100,000,000 and (iii) equity in the gross amount of at
least $60,000,000 upon terms and conditions outlined in
the Form S-1 Registration Statements filed with
Securities and Exchange Commission on July 26, 1996.
2. All documents governing the Credit Facility
(including without limitation a Credit Agreement,
Promissory Note, and documents establishing the
security rights listed above) must be executed and
- -------------------------------------------------------------------------------
Costilla Energy, Inc. Page 4 NationsBank
<PAGE>
delivered in forms acceptable to Agent and Lenders.
3. The Credit Facility and the loan documents must
comply with all applicable laws, contracts, instruments
and governmental policies.
4. There must be no default at closing or any funding,
and all representations and warranties must then be
true.
5. Receipt by Agent of:
(a) Closing certificates of senior officers of
Borrower, confirming that all representations and
warranties are true, that all closing conditions have
been satisfied, and such other matters as Agent may
specify.
(b) Certificates of public officials as to
Borrower's and Subsidiaries' existence and good
standing.
(c) Such legal opinions of counsel for Borrower
and Subsidiaries, and satisfaction or resolution of
such other legal requirements or risks, as Agent and
its counsel may specify including but not limited to
opinions regarding the Merger and the associated
transfer of assets and the continuation of liens on
those assets.
(d) Title assurances as described above.
(e) Environmental review as described above.
6. There must be no material adverse change in the
financial condition, operations, prospects or
properties of Borrower or Subsidiaries from that
presented to Agent in connection herewith, and no
pending or threatened challenge thereto by governmental
officials or third parties.
REPRESENTATIONS AND The Credit Agreement and other loan documents
- -------------------------------------------------------------------------------
Costilla Energy, Inc. Page 6 NationsBank
<PAGE>
WARRANTIES: shall contain such representations and warranties that
Agent deems appropriate for this transaction, including
without limitation confirmation of various factors
which Agent and Lenders have considered in making their
decision to enter into the Credit Facility.
AFFIRMATIVE COVENANTS: The Credit Agreement and other loan documents shall
contain such affirmative covenants of Borrower and
Subsidiaries as are usual and customary for
transactions of this kind, including without limitation
the following affirmative covenants:
1. Borrower will deliver the following financial
statements and reports:
(a) Annual audited consolidated financial
statements of Borrower and Subsidiaries (with
accountants' certificate of no default and officer's
certificate of no default) within 105 days after each
fiscal year.
(b) Quarterly unaudited consolidated (and
consolidating upon the request of Agent) financial
statements of Borrower and Subsidiaries (with officer's
certificate of no default) within 60 days after each
fiscal quarter.
(c) Reports outlined under "BORROWING BASE"
above.
2. Agent and Lenders will have general access to
information about Borrower and Subsidiaries.
3. Borrower will pay Agent's and Arranger's expenses,
including legal fees, in negotiating, syndicating,
administering, enforcing, and defending the various
loan documents and rights of Agent and Lenders
thereunder, together with interest on amounts not
timely paid to the extent permitted by law. Borrower
will pay Lenders' expenses, including legal fees, in
enforcing and
- -------------------------------------------------------------------------------
Costilla Energy, Inc. Page 7 NationsBank
<PAGE>
defending the various loan documents and Lenders'
rights thereunder, together with interest on amounts
not timely paid to the extent permitted by law.
4. Borrower and Subsidiaries will maintain insurance
as is customary in industry and satisfactory to Agent.
5. All transactions among Borrower, Subsidiaries,
Executives and their affiliates shall be on terms no
more favorable than could be obtained from third
parties in an arm's length transaction.
NEGATIVE COVENANTS: The Credit Agreement and other loan documents shall
contain such negative covenants of Borrower and
Subsidiaries as are usual and customary for
transactions of this type, including without limitation
the following negative covenants:
1. Debt (other than trade debt, taxes and other
current liabilities according to GAAP, but including
guaranties) of Borrower and Subsidiaries will be
limited to the Credit Facility, public subordinated
debt contemplated hereby, and other debt of Borrower
not to exceed $750,000. Any intercompany debt will be
limited to customary intercompany accounts in an amount
to be determined.
2. Liens by Borrower and Subsidiaries will be limited
to those securing the Credit Facility, and to customary
statutory and inchoate liens.
3. Mergers by Borrower and Subsidiaries will be
prohibited unless Borrower is the surviving entity and
no Default or Event of Default exists or occurs as a
result of such merger.
4. Sales of interests in Borrower's Subsidiaries will
be prohibited. Sales of property by Borrower and its
Subsidiaries will be generally prohibited,
- -------------------------------------------------------------------------------
Costilla Energy, Inc. Page 8 NationsBank
<PAGE>
EXCEPT THAT assets having an aggregate value of
$750,000 may be sold during the six-month period
following each redetermination of the Borrowing Base
without consent of Lenders. Borrower shall notify
Agent of each such sale and Agent shall release such
property at Borrower's expense. All other sales of
property must be approved by Agent and Majority Lenders
and the Borrowing Base will be reduced by the value
assigned by Lenders to such property.
5. Dividends and other payments to equity owners by
Borrower are not permitted.
6. Investments (or acquisitions) by Borrower and
Subsidiaries will be limited to (i) high-grade cash
equivalents, (ii) investments in the Moldovan operation
in amount not to exceed $2,500,000 per year, (iii) oil
and gas reserves to which proved reserves are
attributable, (iv) Republic Gas Partners, L.L.C., in an
amount not to exceed $1,000,000, (v) existing
Promissory Notes from A & P Meter Service and Supply,
Inc., and (vi) oil and gas leases to which no proved
reserves are attributable in an amount not to exceed
$2,500,000 per year. Investments by Borrower in its
subsidiaries (and loans by Borrower to its
subsidiaries) will generally be prohibited unless the
subsidiary has unconditionally guaranteed the Credit
Facility and granted to Agent first perfected liens and
security interests in all of its properties to secure
the Credit Facility. Should a Borrowing Base
Deficiency or an Event of Default occur, the Agent
shall have the right to require that each Subsidiary
unconditionally guaranty the Credit Facility and grant
to Agent first perfected liens and security interests
in all of its assets to secure the Credit Facility. In
the ordinary course of business, cash transfers to and
from Borrower's subsidiaries for customary
intercompany accounts will be allowed in an amount to
be determined. Loans and new lines of business will be
generally prohibited.
- -------------------------------------------------------------------------------
Costilla Energy, Inc. Page 9 NationsBank
<PAGE>
7. Borrower's consolidated current ratio will not be
less than 1.0 to 1.0. Current maturities of long term
debt will be excluded as current liabilities and up to
$10,000,000 of borrowing availability can be included
as a current asset.
8. After the transactions contemplated hereby,
Borrower's consolidated tangible net worth will not be
less than the sum of (i) $30,000,000 plus (ii) 50% of
Borrower's consolidated net income earned after June
30, 1996, plus (iii) 75% of net proceeds from the sale
of equity interests in Borrower after the closing of
the Credit Facility.
9. Payments due under leases (other than oil and gas
leases) by Borrower and Subsidiaries shall not exceed
$1,000,000 in any fiscal year.
10. Commodity hedging shall be limited in any month
to: (i) 100% of proved production for puts and (ii)
75% of proved production for all other derivative
products.
11. Beginning September 30, 1996, Borrower's ratio of
EBITDA to interest expense shall never be less than
2.0 to 1. The calculation of EBITDA and interest
expense will be based upon: (i) for the period ending
September 30, 1996 upon the immediately preceding
fiscal quarter annualized, (ii) for the period ending
December 31, 1996 the immediately preceding two fiscal
quarters annualized, (iii) for the period ending March
31, 1997 the immediately preceding three fiscal
quarters annualized, and (iv) for the period ending
June 30, 1997 and for each fiscal quarter thereafter,
the last four fiscal quarters.
12. Neither Borrower nor any of its Subsidiaries
will, directly or indirectly, enter into, create, or
otherwise allow to exist any contract or other
consensual restriction on the ability of any subsidiary
of Borrower: (i) to pay dividends or make other
distributions to Borrower, (ii) to redeem
- -------------------------------------------------------------------------------
Costilla Energy, Inc. Page 10 NationsBank
<PAGE>
equity interests held in it by Borrower, (iii) to repay
loans and other indebtedness owing by it to Borrower,
or (iv) to transfer any of its assets to Borrower.
EVENTS OF DEFAULT: The Credit Agreement and other loan documents will
contain such events of default as are usual and
customary for transactions of this kind, including
without limitation defaults in payment or performance
under the Credit Facility, misrepresentations,
cross-defaults to other debt instruments or material
obligations, events of default related to ERISA and
insolvency, change of ownership, change in management
and any material adverse change affecting Borrower or
any Subsidiary.
INDEMNIFICATION: Borrower will generally indemnify Agent, NCMI, their
affiliates and all Lenders under the Credit Facility
against losses in connection with the Credit Facility
and the rights provided to Agent and Lenders in
connection therewith, including without limitation
indemnification against costs and taxes related to the
making, commitment to make, failure to take down or
prepayment of loans thereunder or the reservation of
capital in connection therewith.
GENERAL: 1. The loan documents will generally be governed by
Texas law.
2. The loan documents as ultimately executed will
constitute the complete agreement of the parties
thereto, without modification by this summary of terms
and conditions or any discussions among representatives
of Borrower, Agent, Lenders, or any other parties.
3. The loan documents will provide that the parties
thereto will waive, to the maximum extent not
prohibited by law, any right to a trial by jury or to
claim or recover special, exemplary, punitive or
consequential damages, under or in connection
- -------------------------------------------------------------------------------
Costilla Energy, Inc. Page 11 NationsBank
<PAGE>
with the loan documents as ultimately executed, or any
negotiations, transactions or events associated
herewith or therewith or contemplated hereby or
thereby.
4. Each Lender will have the right to assign all or
part of its interest in the Credit Facility at its
discretion, subject to Borrower's consent which shall
not be unreasonably withheld or required if an Event of
Default exists, provided that the amount of each such
assignment is not less than $10,000,000. A processing
fee in the amount of $2,500 shall be due and payable to
Agent upon any assignment of all or part of any
Lender's interest in the Credit Facility. In addition,
each Lender shall have the right to sell participations
in its interest in the Credit Facility, provided that
the amount thereof shall be at least $1,000,000 and
that no participant shall have the right to (i)
participate in setting the Borrowing Base or (ii)
approve any amendment to or waiver of the loan
documents except for material changes in the amount and
term of the Credit Facility.
5. Agent and Lenders shall have the right to disclose
any and all information they have concerning Borrower,
Subsidiaries, their properties and the Credit Facility
to NCMI and any financial institution that may
participate in the syndication of the Credit Facility.
- -------------------------------------------------------------------------------
Costilla Energy, Inc. Page 12 NationsBank
<PAGE>
CONSOLIDATION AGREEMENT
This Agreement dated this _______ day of September, 1996, by and between:
Costilla Energy, Inc. (the "Company") - a Delaware
corporation;
Costilla Energy, L.L.C. (the "LLC") - a Texas limited
liability company;
CSL Management Corporation ("CSL") - a Texas corporation;
Valley Gathering Company ("Valley") - a Texas corporation;
Cadell S. Liedtke ("Liedtke") - an individual of Midland
County, Texas;
Michael J. Grella ("Grella") - an individual of Midland
County, Texas;
Henry G. Musselman ("Musselman") - an individual of Midland
County Texas; and
NationsBanc Capital Corporation ("NBCC") - a Texas
corporation.
R E C I T A L S
WHEREAS, the Company has been formed to acquire and consolidate (the
"Consolidation") the following assets or entities:
(1) the outstanding common stock of Valley through a cash purchase;
(2) the assets of CSL through a cash purchase;
(3) the LLC (following the redemption by the LLC of NBCC's redeemable
interests in the LLC (the "Redeemable Interest") owned by NBCC), including: (a)
the stock of the three corporate subsidiaries of the LLC, being Statewide
Minerals, Inc. ("Statewide"); Costilla Petroleum Corporation ("CPC"); and
Costilla Pipeline Corporation ("Pipeline"), all Texas corporations, and (b) the
membership interests of the LLC in two Texas limited liability companies,
Costilla Redeco Energy, L.L.C. ("Energy") and Costilla Redeco Operating, L.L.C.
("Operating") through a merger (the "Merger") of the LLC into the Company
pursuant to Part Ten of Art. 1528n V.A.T.S., and Section 264 of the Delaware
General Corporation Laws.
<PAGE>
WHEREAS, immediately prior to the Merger, the LLC will distribute
$4,218,215 in cash to the Members of the LLC in the amounts set forth herein;
WHEREAS, concurrently with the Consolidation, the Company will close
offerings (collectively, the "Offerings") of $100,000,000 ____% senior
subordinated notes due 2006, and 4,000,000 shares of its common stock par value
$.10 per share (the "Company Common Stock") pursuant to the Securities Act of
1933, as amended (the "Securities Act"), as described in those certain
Registration Statements on Form S-1, Registration Nos. 333-08909 and 333-08913,
respectively, (as amended at the time each becomes effective, the "Registration
Statements") of the Company, each filed with the Securities and Exchange
Commission on July 26, 1996; and
WHEREAS, the parties hereto desire to set forth the terms and conditions of
the Consolidation and provide for certain relationships and obligations among
the parties hereto following the Effective Date (as defined herein).
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants set forth herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound hereby, the aforesaid parties hereby agree as follows:
I. REDEMPTION, DISTRIBUTIONS AND ACQUISITIONS
A. REDEMPTION OF REDEEMABLE INTERESTS OF NBCC
1. Immediately prior to the Merger, NBCC shall convey, transfer,
assign and sell to the LLC its Redeemable Interest for $15,486,914 (the
"Redemption") payable in cash. The source of the cash payment required by this
Section I.A.1. shall be an advance to the LLC by the Company from the net
proceeds from the Offerings.
2. The Redemption shall be accomplished pursuant to an Assignment of
NBCC's Redeemable Interest substantially in the form attached hereto as Exhibit
"A" (the "Assignment").
2
<PAGE>
3. NBCC represents that
(a) the Redeemable Interest is free and clear of all
encumbrances, security interests and liens and are subject only to those
obligations arising from its membership in the LLC, as defined in the LLC's
Regulations.
(b) NBCC will, upon execution of the Assignment, convey good and
indefeasible title to the Redeemable Interests as well as all rights to profits
and capital in respect thereof.
(c) NBCC further represents that it has taken all required
corporate action to convey the Redeemable Interests and has acquired all
necessary consents and approvals to consummate the Assignment. No notice to or
approval by any other person, firm, entity (including governmental authorities),
is required by NBCC to execute and deliver the Assignment.
B. CASH DISTRIBUTION TO MEMBERS
Immediately prior to the Merger, the LLC shall make a cash
distribution to each of its Members as follows:
NBCC $ 759,279
Liedtke $1,936,669
Grella $1,051,244
Musselman $ 471,023
The source of the cash payment required by this Section I.B. shall be an
advance to the LLC by the Company from the net proceeds from the Offerings.
C. PURCHASE OF VALLEY STOCK
1. At the Closing and concurrently with the consummation of the
other transactions contemplated by the Consolidation, the Company shall purchase
all of the issued and outstanding shares of common stock of Valley from each of
Liedtke, Grella and Musselman (collectively, the "Selling Shareholders") for the
cash consideration of $660 per share ($660,000, in the aggregate) as follows:
Selling Shareholder No. of Shares Cash Payment Price
------------------- ------------- ------------------
Liedtke 540 $356,400
Grella 317 $204,220
Musselman 143 $ 94,380
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2. Valley and the Selling Shareholders represent, jointly and
severally, that:
a. Valley is a corporation duly organized, validly existing and
in good standing under the laws of the State of Texas. Valley has all requisite
power and authority to own, operate and carry on its business as now being
conducted. Valley's capitalization consists of 1,000,000 shares of common
stock, par value $1.00 per share (the "Valley Common Stock"), of which 1,000
shares are issued and outstanding. There are no other classes of stock
authorized or outstanding. The issued and outstanding shares of Valley Common
Stock have been validly issued, and are fully paid and non-assessable. There
are no outstanding options, warrants or similar rights to purchase or convert
any obligation into Valley Common Stock or other securities of Valley.
b. Valley has good and marketable title to all of its assets
and properties, tangible and intangible, that are material to Valley's business
and future prospects. All of Valley's assets are free and clear of all
mortgages, liens, pledges, security interests, encumbrances, equities, claims,
easements, covenants, conditions and restrictions, except as set forth in the
financial statements previously delivered to the Company.
c. The Valley Common Stock is owned by each of the Selling
Shareholders free and clear of all liens, security interests or encumbrances.
Each of the Selling Shareholders has all requisite authority to sell, convey and
assign such shares of Valley Common Stock without the consent of any other
person, firm, agency or other entity, other than such consents as have been
obtained.
d. The financial statements of Valley previously delivered to
the Company (i) present fairly the financial position of Valley as at the date
indicated and the results of its operations for the periods specified and (ii)
have been prepared in conformity with generally accepted accounting principles
applied on a consistent basis during the periods involved, except as indicated
therein, for the absence of footnotes and for closing adjustments which would
not be material in amount. Since the date of such financial statements there
has been no material adverse change in Valley.
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3. The sale and assignment of the Valley Common Stock shall be
effectuated by the delivery, at Closing, by each of the Selling Shareholders to
the Company, of the original common stock certificates endorsed in blank.
D. PURCHASE OF CSL ASSETS
1. At the Closing and concurrently with the consummation of the
other transactions contemplated by the Consolidation, the Company shall purchase
all of the assets of CSL for $40,000 payable in cash to CSL. The source of the
cash payment required by this Section I.D.1. shall be net proceeds from the
Offerings.
2. CSL and the Selling Shareholders represent, jointly and severally
that:
a. CSL is a corporation duly organized, validly existing and in
good standing under the laws of the State of Texas. CSL has all requisite power
and authority to own, operate and carry on its business as now being conducted.
b. CSL is the sole owner of the assets conveyed hereunder and
has full power and authority to dispose of its assets. CSL has good and
marketable title to all of its assets and properties, tangible and intangible,
that are material to CSL's business and future prospects. All of CSL's assets
are free and clear of all mortgages, liens, pledges, security interests,
encumbrances, equities, claims, easements, covenants, conditions and
restrictions, except as set forth in the financial statements previously
delivered to the Company.
c. The financial statements of CSL previously delivered to the
Company (i) present fairly the financial position of CSL as at the date
indicated and the results of its operations for the periods specified and (ii)
have been prepared in conformity with generally accepted accounting principles
applied on a consistent basis during the periods involved, except as indicated
therein, for the absence of footnotes and for closing adjustments which would
not be material in amount. Since the date of such financial statements there
has been no material adverse change in CSL.
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<PAGE>
3. This conveyance shall be accomplished by the execution, by a duly
authorized officer of CSL, of a bill of sale and assignment substantially in the
form attached hereto as Exhibit "B" with a complete description of the assets
conveyed attached thereto, including the assets identified on the attachment to
Exhibit "B". CSL shall also deliver a certified copy of Directors' and
Shareholders' Resolutions authorizing the sale of all its assets.
II. THE SECTION 351 TRANSACTIONS
At the Closing and concurrently with the other transactions contemplated by
the Consolidation, there shall be consummated two transactions pursuant to
Section 351 of the Internal Revenue Code of 1986, as amended (the "Code") as
follows:
A. THE MERGER OF LLC INTO THE COMPANY
1. ACTIONS TO BE TAKEN. As a part of the Consolidation, the
following actions shall be taken by the LLC and the Company:
a. Simultaneous with the execution of this Agreement, the
Company and the LLC shall adopt and enter into a Plan and Agreement of Merger
(the "Merger Agreement"), a copy of which is attached hereto as Exhibit "C",
providing for the Merger of the LLC with and into the Company effective on the
Effective Date. For the purposes of this Agreement, the "Effective Date" shall
be the date appropriate certificates of merger are filed with the secretaries of
the States of Texas and Delaware, which date shall be the same date as the date
of Closing, and the "Effective Time" shall be the time the later of such filings
is made on the Effective Date. For tax purposes, the Merger will be treated as
a contribution of the LLC's assets and liabilities to the Company solely in
exchange for Company Common Stock pursuant to Section 351 of the Code, and a
distribution of the Company Common Stock from the Company to the former Members
of the LLC.
b. At the Effective Time the LLC shall be merged with and into
the Company in accordance with the terms and conditions of the Merger Agreement
and Section 351 of the Code; and the separate existence of the LLC shall cease
and the Company shall continue as the surviving entity. The
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Company and the LLC will cause the Merger to be consummated by filing a
Certificate of Merger (the "Merger Certificate") with the secretary of the
States of Texas and Delaware as required by the Delaware General Corporation
Laws and the Texas Limited Liability Company Act.
c. At the Effective Time, by virtue of the Merger and without
any action on the part of any person, the membership interests in the LLC, all
of which are owned by Liedtke, Grella, Musselman and NBCC, shall be converted
into and shall become the number of shares of Common Stock of the Company
determined pursuant to the Merger Agreement and Section II.A.1.e. below. From
and after the Effective Time, the Company shall possess all of the rights,
privileges and powers of the LLC; all property, rights, privileges, powers and
other interests of the LLC shall be thereafter as effectively the property of
the Company as they were of the LLC; the title to any and all real or personal
property or other interest vested by deed or otherwise in LLC shall vest in the
Company and shall not revert or be in any way impaired by reason of the Merger;
and all rights of creditors and all liens upon any property of the LLC shall be
preserved unimpaired, and all debts, liabilities and duties of the LLC shall
thereafter attach to the Company, and may be enforced against it to the same
extent as if such debts, liabilities and duties had been contracted by it.
d. On and after the Effective Time by virtue of the Merger and
without any further action, the Company shall become the owner of all issued and
outstanding shares of Statewide, CPC and Pipeline, and shall become a member in
Energy and Operating.
e. Pursuant to the Merger, at the Closing, the Company shall
issue an aggregate of 6,000,000 shares of Company Common Stock to the holders of
the membership interests in the LLC (the "LLC Members") as follows and all
previously issued shares of the Company's Common Stock, if any, in connection
with its organization shall be cancelled:
LLC Member No. of Shares of Common Stock to be Issued
---------- ------------------------------------------
Liedtke 2,656,796
Grella 1,558,161
Musselman 705,035
NBCC 1,080,008
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Upon the issuance of such shares of Common Stock, they shall be
validly issued, fully paid and nonassessable. Such number of shares may be
adjusted prior to the Effective Time by an agreement executed by all of the
members, subject to consent of the representatives of the underwriters in the
Offerings.
2. Representations and Warranties of the LLC and the LLC Members.
The LLC and the LLC Members, jointly and severally, represent that:
a. The LLC is a limited liability company, duly organized,
validly existing and in good standing under the laws of the State of Texas. The
LLC has all requisite power and authority (including all licenses, franchises,
permits and other governmental authorizations as are legally required) to carry
on its business as now being conducted, to own, lease and operate its properties
and assets, and to enter into and carry out its obligations under this
Agreement. The LLC is qualified to do business in all states other than the
State of Texas wherein such qualification is required, except when the failure
to be so qualified does not have a material adverse effect on the financial
condition or results of operation of the LLC. The LLC has taken all action
necessary to authorize the execution, delivery and performance of this Agreement
and the other agreements and documents contemplated hereby to which it is a
party.
b. This Agreement has been, and the other agreements and
documents contemplated hereby have been or at Closing will be, duly executed by
the LLC and each constitutes the legal, valid and binding obligation of the LLC,
enforceable in accordance with its respective terms and conditions, except as
enforceability may be limited by bankruptcy, conservatorship, insolvency,
moratorium, reorganization, receivership or similar laws and judicial decisions
affecting the rights of creditors generally and by general principals of equity.
The LLC has full power and authority to execute, deliver and perform this
Agreement which will not violate any requirement of law or its articles of
association, regulations or other organizational documents, nor will it violate
any applicable law, regulation or order of any governmental authority nor any
agreement, indenture, mortgage, deed of trust, voting
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<PAGE>
agreement, loan agreement, note agreement or other evidence of indebtedness,
lease, contract or other instrument to which it is a party or by which its
property is bound.
c. The LLC has good and defensible title to its assets to be
vested in the Company pursuant to the Merger except for:
i. undeveloped oil and gas leases;
ii. personal property and equipment located on property
subject to oil and gas leases and used in connection with the operation and
development of oil and gas leases; and
iii. defects which collectively would not have a material
adverse effect on the business, properties, business prospects, condition
(financial or otherwise) or results of operation of the Company.
For purposes of this Agreement, good and defensible title shall mean
title that is free from defects as would cause a reasonable doubt in the mind of
a reasonable and prudent purchaser in the area where the property interest is
situated and cause him, if he were purchasing such interest, to refuse to accept
the same at its full agreed value. The title to certain assets may be subject
to drilling obligations in leases, farmout agreements, operating agreements, gas
purchase contracts, covenants, restrictions, rights, easements, liens and
encumbrances which are valid and in full force and effect as to such properties,
and minor irregularities in title which, collectively, do not interfere with the
operation, use and enjoyment of any such asset in the normal course of business
as presently conducted by the LLC or materially impair the value thereof for
such business.
d. The LLC's assets (except for undeveloped oil and gas leases
and personal property and equipment located on property subject to oil and gas
leases and used in connection with the operation and development of oil and gas
leases) are held by the LLC free and clear of any security interests, mortgages,
pledges, liens, encumbrances, charges, defects or restrictions of any kind or
character other than (i) those described in the preceding paragraph c and; (ii)
those granted to NationsBridge, L.L.C. and its affiliates pursuant to security
agreements, mortgages, assignments and other instruments to secure
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<PAGE>
the obligation of the LLC under various loan arrangements. The oil and gas
interests of the LLC were acquired in a manner customary in the oil and gas
industry using reasonable diligence used by prudent purchasers in the area,
and the developed portion of the oil and gas leases are valid, subsisting and
enforceable against each of the parties thereof and are in full force and
effect in accordance with their respective terms (except for such leases that
have partially terminated as to certain nonproducing lands and/or depths
pursuant to the terms thereto) and where the failure of such leases to be
enforceable or to be in full force and effect would not, in either instance,
have a material adverse effect on the LLC or its business, properties,
business prospects, conditions (financial or otherwise) or results of
operations, taken as a whole.
e. There are no actions, suits or proceedings pending or
threatened against or affecting the LLC, or its officers, directors or members
in their capacities as such, before any federal, state or local body or
authority, domestic or foreign, wherein an unfavorable ruling, decision or
finding would have a material adverse effect on its business, properties,
business prospects, conditions (financial or otherwise) or results of
operations.
B. THE PUBLIC OFFERING
Concurrently with the other transactions contemplated by the Consolidation,
and as a condition precedent thereto, the Company shall have closed an initial
public offering (the "Common Stock Offering") of shares of the Company Common
Stock pursuant to the Securities Act, as described in that certain Registration
Statement on Form S-1, Registration No. 333-08913 filed with the Securities and
Exchange Commission. Proceeds from the Common Stock Offering shall constitute
"property" contributed to the Company solely in exchange for common stock as
defined in Code Section 351 and shall be the result of an "underwriting" as
described in the Regulations to the Code at Section 1.351-1(a)(3).
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<PAGE>
III. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In connection with transactions contemplated under Article I and II hereof,
the Company represents to each of the LLC, Valley, CSL, Liedtke, Grella,
Musselman and NBCC that the following representations and warranties are true
and correct as of the closing:
A. The Company is a corporation duly organized and validly existing, in
good standing, under the laws of the State of Delaware, with all requisite
corporate power and authority to own and to lease its property and to carry on
its business as now conducted, and is duly qualified and authorized to do
business as a foreign corporation and is in good standing in each jurisdiction
wherein the failure to be so qualified and authorized would have a material
adverse effect on the financial condition or results of operations of the
Company.
B. It has full requisite corporate and other power and authority to enter
into this Agreement and to perform its obligations hereunder. The execution and
delivery of this Agreement by the Company and the consummation by the Company of
the transactions contemplated hereby have been duly authorized by the Board of
Directors of the Company and no other corporate proceeding on the part of the
Company is necessary for the execution and delivery of this Agreement by it.
This Agreement has been duly executed and delivered by the Company and
constitutes a legal, valid and binding obligation of the Company, enforceable
against it in accordance with its terms.
IV. REGISTRATION RIGHTS
A. INCIDENTAL REGISTRATION.
1. REQUEST FOR REGISTRATION. If at any time the Company proposes to
file a registration statement under the Securities Act (other than a
registration statement on Form S-4 or Form S-8 or other similar forms providing
for the registration of employee benefits plans) with respect to an offering of
shares of Company Common Stock (the "Shares") for its own account or for the
account of any of Liedtke, Grella, Musselman or NBCC (collectively, the
"Affiliated Holders") (including, without limitation, a "Demand Registration"
pursuant to Section IV.B.), then the Company shall give written notice of such
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<PAGE>
proposed filing and its distribution plan to each Affiliated Holder owning more
than five percent (5%) of the total outstanding Company Common Stock (each, an
"Eligible Holder") as soon as practicable (but in no event less than twenty (20)
days before the anticipated filing date of such registration statement). Such
notice shall offer each Eligible Holder the opportunity to have all or any part
of the Shares owned by such Eligible Holder included in the registration
statement proposed to be filed by the Company, and thereby be registered under
the Securities Act (and any related qualification under any applicable state
securities or "blue sky" laws or other compliance) or, at the Company's option,
in a separate registration statement to be filed concurrently with such
registration statement (in either case, "Incidental Registration"). Within
fifteen (15) days after receiving such notice, each Eligible Holder may make a
written request to the Company that any or all of the Eligible Holder's Shares
be included in the Incidental Registration, which notice shall specify the
precise portion of such Eligible Holder's Shares to be so included. Subject to
the provisions of Section IV.A.2., the Company shall include in the Incidental
Registration all Shares in the Company with respect to which the Company has
received such a written request by an Eligible Holder. Any Eligible Holder
shall be permitted to withdraw all or part of his Shares in the Company from an
Incidental Registration at any time prior to the effective date of the
registration statement filed with respect to such Incidental Registration.
2. PRIORITY ON INCIDENTAL REGISTRATION. The Company shall use its
best efforts to cause the managing underwriter or underwriters of a proposed
underwritten offering by the Company, in connection with which Incidental
Registration is requested, to permit the inclusion of all Shares in the Company
requested by the Eligible Holders (the "Selling Incidental Holders") to be
included in the Incidental Registration on the same terms and conditions as
similar securities of the Company included therein to the extent appropriate.
Notwithstanding the foregoing, if the managing underwriter or underwriters of
such offering deliver a written opinion to the Company that, because of the size
of the offering which the Selling Incidental Holders, the Company and any other
security holders of the Company intend to make, the success of the offering
would be materially and adversely affected by inclusion of more than a specific
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<PAGE>
number of the Shares requested to be so included, then such registration shall
be comprised of the following Shares:
a. PRIMARY REGISTRATION. If such Incidental
Registration is incident to a primary registration on behalf
of the Company, then the Shares to be included in such
primary registration shall be as follows:
(i) first, the Shares intended to be offered by the
Company;
(ii) second, the Shares owned and requested to be
registered by NBCC; and
(iii) third, the Shares owned, and requested to be
registered, by the other Selling Incidental
Holders in proportion to the ratio that the
number of Shares owned by each such remaining
Selling Incidental Holder (excluding any
Shares to be registered pursuant to
subparagraph IV.A.2(a)(ii)) bears to the
total number of Shares owned by all such
Selling Incidental Members (excluding any
Shares to be registered pursuant to
subparagraph IV.A.2.(a)(ii)) (or as otherwise
agreed); and
b. SECONDARY REGISTRATIONS. If such Incidental
Registration is incident to a secondary registration on behalf of
Affiliated Holders owning Shares (including, a Demand
Registration under Section IV.B.), then the total number of
Shares to be included in such secondary registration (the
"Available Shares") shall be allocated as follows: (i) up to 50%
to Shares owned, and requested to be registered by, NBCC; and
(ii) the remainder (to the extent not requested to be registered
by NBCC) to all other Selling Incidental Holders requesting the
Company to have their Shares included in such registration, with
such remaining
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<PAGE>
Available Shares being allocated among such other Selling
Incidental Holders in proportion to the total number of Shares
owned by each such other Selling Incidental Holder bears to
the total number of Shares owned by all such other Selling
Incidental Holders.
3. ASSIGNMENTS, ETC.. All rights under this Section IV.A.
shall be freely assignable and such rights are not intended to create
rights in any person not a party to this Agreement or its assigns.
B. DEMAND REGISTRATION.
1. REQUEST FOR REGISTRATION. NBCC may make written requests for
registration under the Securities Act ("Demand Registration") of all or part of
NBCC's Shares, subject to the conditions of this Article IV. Each such request
shall specify the precise number of Shares proposed to be sold and shall also
specify the intended method of disposition thereof. Upon receiving a request for
a Demand Registration, the Company shall give written notice of such request to
all other Eligible Holders at least twenty (20) days before the anticipated
filing date of such registration statement, and each such Eligible Holder shall
be entitled to participate in such Demand Registration as a Selling Incidental
Holder pursuant to the terms, conditions and limitations set forth in Section
IV.A. As soon as practicable after receipt of a request for a Demand
Registration, the Company shall file a registration statement on an appropriate
form under the Securities Act for the number of Shares requested by NBCC and any
Selling Incidental Holders, subject to the conditions of this Article IV.
2. LIMITATION ON DEMAND REGISTRATION. No Demand Registration may be
requested by NBCC at any time during which a registration statement filed by the
Company in which NBCC was entitled to participate is effective under the
Securities Act (or would have been entitled but for the delivery by the managing
underwriter or underwriters of the opinion set forth in the second sentence of
Section IV.A.2.) or within ninety (90) days after the closing of any offering
effected pursuant to any such registration statement. Notwithstanding anything
to the contrary in this Article IV, the Company shall not
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<PAGE>
be obligated to effect more than two Demand Registrations for NBCC. A
registration shall not count as a Demand Registration: (a) unless a
registration statement with respect thereto has become effective; (b) if,
after such registration statement has become effective, such registration is
interfered with by any stop order, injunction or other order or requirement
of the Securities and Exchange Commission ("SEC") or other governmental
agency or court for any reason not attributable to NBCC, and such
registration statement has not thereafter again become effective; or (c) if
the conditions to closing specified in the underwriting agreement, if any,
entered into in connection with such registration are not satisfied or
waived, other than by reason of a failure on the part of NBCC.
3. EFFECTIVE REGISTRATION AND EXPENSES. The Company shall use its
reasonable best efforts to cause each registration statement filed pursuant to a
Demand Registration to become effective under the Securities Act and thereafter
to keep it effective under the Securities Act for a period of ninety (90) days
(subject to extension pursuant to the last paragraph of Section IV.D. hereof).
The Company shall pay all Registration Expenses (as defined in Section IV.E.17)
in connection with any Demand Registration, whether or not it becomes effective,
except (a) as provided in Section IV.E. or (b) if such Demand Registration is
expected to become effective within the price range estimated by the underwriter
but is withdrawn due to the decision of NBCC.
4. SELECTION OF UNDERWRITERS. If NBCC so elects, the offering
pursuant to such Demand Registration shall be in the form of an underwritten
offering. If any Demand Registration is in the form of an underwritten offering,
the Company shall select and obtain the investment banker or investment bankers
and manager or managers that will administer the offering, subject to the
approval of NBCC (which approval shall not be unreasonably withheld).
D. HOLDBACK AGREEMENTS.
1. RESTRICTIONS ON PUBLIC SALE BY ELIGIBLE HOLDERS. Upon the offer
by the Company to include any Affiliated Holders' Shares ("Selling Holders") in
a registration statement filed pursuant to an Incidental Registration or a
Demand Registration (or in case the Company files a registration statement
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<PAGE>
for Common Stock and the managing underwriters deliver the opinion set forth
in the second sentence of Section IV.A.2.), each Eligible Holder agrees not
to effect any public sale or distribution of the same type of securities
being registered or a similar security of the Company or any securities
convertible into or exchangeable or exercisable for such securities, including
a sale pursuant to Rule 144 under the Securities Act, during the fourteen (14)
days prior to, and during a 90-day period beginning on, the effective date of
such registration statement (except as part of such registration), if and to
the extent requested by the Company in the case of a non-underwritten public
offering or if and to the extent requested by the managing underwriter or
underwriters in the case of an underwritten public offering.
2. RESTRICTIONS ON PUBLIC SALE BY THE COMPANY. The Company agrees
that during the fourteen (14) days prior to, and during a 180-day period
beginning on, the effective date of any registration statement filed pursuant to
a Demand Registration, it shall not effect any public or private sale or
distribution of the same type of securities being registered or a similar
security of the Company, or any securities convertible into or exchangeable or
exercisable for securities of the nature of such securities (except as part of
such registration or pursuant to a registration statement on Form S-4 or S-8 or
other similar forms providing for the registration of employee benefits plans).
E. REGISTRATION PROCEDURES. Subject to the other provisions and
limitations contained in this Article IV, whenever any Eligible Holder has
requested that any of its Shares be registered pursuant to an Incidental
Registration or whenever NBCC has requested that any of its Shares be registered
pursuant to a Demand Registration, the Company shall use its best efforts to
effect the registration and the sale of such Shares in accordance with the
intended method of disposition thereof, as soon as practicable, and in
connection with any such request, the Company shall as expeditiously as
possible:
1. REGISTRATION STATEMENT. Prepare and file with the SEC a
registration statement on any form for which the Company then qualifies or which
counsel for the Company shall deem appropriate and which form shall be available
for the sale of the Selling Holders' Shares to be registered thereunder in
accordance with the intended method of distribution thereof, and use its best
efforts to cause such filed
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<PAGE>
registration statement to become effective under the Securities Act; provided
that: (a) in the case of an Incidental Registration, at least five (5) days
before filing a registration statement or prospectus, or as promptly as
practicable prior to filing any amendments or supplements thereto, the
Company shall furnish to one (1) counsel, selected by the Selling Holders,
copies of all such documents proposed to be filed, which documents shall be
subject to the review of the Selling Holders and such counsel; (b) in the
case of a Demand Registration, NBCC and one (1) counsel selected by it shall
have the right to participate in the preparation of such documents; and (c)
after the filing of the registration statement, the Company shall promptly
notify each such Selling Holder and such counsel of comments received from,
or any stop order issued or threatened by, the SEC and take all reasonable
actions required to respond to such comments or, as the case may be, prevent
the entry of such stop order or to remove it, if it has been entered;
2. AMENDMENTS AND SUPPLEMENTS TO REGISTRATION STATEMENT. Prepare
and file with the SEC such amendments and supplements to such registration
statement and the prospectus used in connection therewith as may be necessary to
keep such registration statement effective for the applicable period required by
the terms hereof, which period shall terminate when all Shares covered by such
registration statement have been sold or, in the case of an Incidental
Registration, for such time period as the Company shall determine in its sole
discretion (but not before the expiration of the 90-day period referred to in
Section 4(3) of the Securities Act and Rule 174 thereunder, if applicable) and
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement during such period in
accordance with the intended methods of disposition as set forth in such
registration statement;
3. PROPOSED REGISTRATION DOCUMENTS. Furnish to each Selling Holder,
prior to filing the registration statement, if requested, copies of such
registration statement as proposed to be filed, and thereafter furnish to each
Selling Holder such number of copies of such registration statement, each
amendment and supplement thereto (in each case including all exhibits thereto
and documents incorporated or deemed to be incorporated therein by reference),
the prospectus included in such registration statement
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<PAGE>
(including each preliminary prospectus), and such other documents as each
Selling Holder may reasonably request in order to facilitate the disposition
of the Shares owned by each Selling Holder;
4. BLUE SKY QUALIFICATION. Use its best efforts to register or
qualify such Shares under such other securities or blue sky laws of such
jurisdictions as each Selling Holder reasonably (in light of each Selling
Holder's intended plan of distribution) requests and do any and all other acts
and things which may be reasonably necessary to enable each Selling Holder to
consummate the disposition in such jurisdictions of the Shares owned by each
Selling Holder and keep each such registration or qualification (or exemption
therefrom) effective during the period such registration statement is effective;
provided that the Company shall not be required to: (a) qualify generally to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this subsection; (b) subject itself to taxation in any such
jurisdiction; or (c) consent to general service of process in any such
jurisdiction;
5. APPROVAL BY OTHER GOVERNMENTAL AUTHORITIES. Use its best efforts
to cause such Shares to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Company to enable each Selling Holder to
consummate the disposition of such Shares, provided that the Company shall not
be required to: (a) qualify generally to do business in any jurisdiction where
it would not otherwise be required to qualify, but for this subsection; (b)
subject itself to taxation in any such jurisdiction; or (c) consent to general
service of process in any such jurisdiction;
6. NOTICE; AMENDMENT OF PROSPECTUS. At any time when a prospectus
relating to Shares is required to be delivered under the Securities Act: (a)
notify each Selling Holder of the occurrence of an event requiring the
preparation of a supplement or amendment to such prospectus; (b) prepare and
file such supplement, amendment or any other required document, so that as
thereafter delivered to the purchasers of such Shares, such prospectus shall not
contain an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not
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<PAGE>
misleading; and (c) promptly make available to each Selling Holder any such
supplement, amendment or other document;
7. EXECUTION OF CUSTOMARY AGREEMENTS; FURTHER ACTION. Enter into
and perform customary agreements (including an underwriting agreement in
customary form with the managing underwriter or underwriters, if any), use its
best efforts to obtain any necessary consents in connection with any proposed
registration and sale of Shares, and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of such Shares;
8. INSPECTION AND AVAILABILITY OF RECORDS. Make available for
inspection by each Selling Holder, any underwriter participating in any
disposition pursuant to such registration statement, and any attorney,
accountant, or other professional retained by any Selling Holder or such
underwriter (collectively, the "Inspectors"), all financial and other records,
pertinent corporate documents, and properties of the Company (collectively, the
"Records") as shall be reasonably necessary to enable them to exercise their due
diligence responsibility, and cause the Company's Officers and employees to
supply all information reasonably requested by any such Inspectors in connection
with such registration statement; provided, however, records which the Company
determines, in good faith, to be confidential and which it notifies the
Inspectors are confidential shall not be disclosed by the Inspectors unless: (a)
in the reasonable judgment of counsel to the Company, the disclosure of such
Records is necessary to avoid or correct a misstatement or omission in such
registration statement or (b) the release of such Records is ordered pursuant to
a subpoena or other order from a court of competent jurisdiction; with each
Selling Holder hereby agreeing that information obtained by him, or on his
behalf, as a result of such inspections shall be deemed confidential and shall
not be used by him as the basis for any market transactions in the securities of
the Company unless and until such is made generally available to the public; and
each Selling Holder hereby further agrees that he shall, upon learning that
disclosure by such Selling Holder of such Records is sought in a court of
competent jurisdiction, give prompt notice to the Company and allow the
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<PAGE>
Company, at the Company's expense, to undertake appropriate action to prevent
disclosure of the Records deemed confidential;
9. COMFORT LETTER. If such sale is pursuant to an underwritten
offering, use its best efforts to obtain a comfort letter or comfort letters
from the Company's independent public accountants in customary form and covering
such matters of the type customarily covered by comfort letters as any Selling
Holder or the managing underwriter or underwriters reasonably request;
10. OTHER COMPLIANCE; EARNINGS STATEMENT. Otherwise use its best
efforts to comply with all applicable rules and regulations of the SEC, and make
available to its security holders as soon as reasonably practicable, an earnings
statement covering a period of twelve (12) months, beginning within three (3)
months after the effective date of the registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities Act;
11. PROSPECTUS SUPPLEMENT; POST-EFFECTIVE AMENDMENT. If requested by
the managing underwriter or underwriters, if any, or any Selling Holder in
connection with an underwritten offering pursuant to an Incidental Registration
or a Demand Registration: (i) promptly incorporate in a prospectus supplement or
post-effective amendment such information as the managing underwriter or
underwriters, if any, and/or any Selling Holder reasonably requests to be
included therein, as may be required by applicable laws; and (ii) make all
required filings of such prospectus supplement or such post-effective amendment
as soon as practicable after the Company has received notification of the
matters to be incorporated in such prospectus supplement or post-effective
amendment; provided, however, that the Company shall not be required to take any
action pursuant to this Section IV.E.11. that is not, in the reasonable opinion
of counsel for the Company, in compliance with applicable law;
12. REMOVAL OF SUSPENSIONS. Use its reasonable efforts to obtain the
withdrawal of any order suspending the effectiveness of a registration statement
filed in connection herewith, or the lifting of any suspension of the
qualification (or exemption from qualification) of any of the Shares for sale in
any jurisdiction, at the earliest possible moment;
20
<PAGE>
13. SHARE CERTIFICATES. Cooperate with each Selling Holder and the
managing underwriters, if any, to facilitate the timely preparation and delivery
of certificates, if any, representing Shares to be sold, which certificates or
notes shall not bear any restrictive legends and shall be in a form eligible for
deposit with The Depository Trust Company or other appropriate depository; and
enable such certificates representing Shares to be in such denominations and
registered in such names as the managing underwriters, if any, or holders may
request at least two (2) Business Days prior to any sale of Shares;
14. SECURITIES EXCHANGE LISTING. Cause all such Shares to be listed
on any securities exchange (or on The Nasdaq Stock Market's National Market) on
which similar securities issued by the Company are then listed or traded;
provided, that the applicable listing requirements are satisfied in the opinion
of the Company and its counsel;
15. LEGAL OPINION. Furnish, at the request of any Selling Holder on
the date such securities are delivered to the underwriters for sale pursuant to
such registration or, if such securities are not being sold through
underwriters, on the date the registration statement with respect to such
securities becomes effective, an opinion, dated such date, of counsel
representing the Company for the purposes of such registration, addressed to the
underwriters, if any, and to the Selling Holder making such request, covering
such legal matters with respect to the registration in respect of which such
opinion is being given as such Selling Holder or underwriters may reasonably
request and as are customarily included in such opinions; and
16. FURTHER ACTION. Take such other actions as are reasonably
required in order to expedite or facilitate the disposition of such Shares.
Notwithstanding the provisions of this Section IV, the Company shall
be entitled to postpone, for a reasonable period of time, the filing of any
registration statement under an Incidental Registration if the Company
determines, in the good faith exercise of its reasonable business judgment, that
such registration and offering could materially interfere with any bona fide
financing, acquisition, or other material business plans of the Company
(including a proposed primary offering by the Company of its own
21
<PAGE>
securities) or would require disclosure of non-public information, the
premature disclosure of which could materially adversely affect the business,
properties, operations or financial results of the Company; provided,
however, that the Company shall not be required to disclose to the Selling
Incidental Holders any such transaction, plan or non-public information. If
the Company postpones the filing of a registration statement pursuant hereto,
it shall promptly notify in writing the Selling Incidental Holders when the
events or circumstances permitting such postponement have ended and at such
time shall proceed with the filing of the registration statement as
requested. If the Company shall postpone the filing of a registration
statement pursuant hereto, then the Selling Incidental Holders shall have the
right to withdraw their request for registration by giving written notice to
the Company at any time within five (5) days after the date the Company
notifies such Selling Incidental Holders of its willingness to proceed with
the filing of the registration statement. The Company may require each
Selling Holder to furnish promptly in writing to the Company such information
regarding the distribution of the Shares as the Company may from time to time
reasonably request and such other information as may be legally required in
connection with such registration.
Each Selling Holder shall cooperate with the Company and, if
applicable, the underwriter or underwriters in providing such information and
executing and delivering such documents as the Company or the underwriter or
underwriters reasonably shall request in connection with any such registration,
and the Company shall not be obligated to include in any such registration any
Shares of any Eligible Holder who does not comply with this paragraph.
Each Selling Holder agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section IV.E.6.,
such Selling Holder shall forthwith discontinue disposition of Shares pursuant
to the registration statement covering such Shares, until such Selling Holder's
receipt of the copies of the supplemented or amended prospectus contemplated by
Section IV.E.6. and, if so directed by the Company, such Selling Holder shall
deliver to the Company all copies, other than permanent file copies then in such
Selling Holder's possession, of the most recent prospectus
22
<PAGE>
covering such Shares at the time of receipt of such notice. If the Company
shall give such notice, the Company shall extend the period during which such
registration statement shall be maintained effective (including the period
referred to in Section IV.E.2.) by the number of days during the period from
and including the date of the giving of notice pursuant to Section IV.E.6.
hereof to the date when the Company shall make available to such Selling
Holder a prospectus supplemented or amended to conform with the requirements
or Section IV.E.6.
17. REGISTRATION EXPENSES. In connection with any registration
statement required to be filed under this Article IV, the Company shall pay the
following registration expenses (the "Registration Expenses"): (a) all
registration and filing fees; (b) fees and expenses relating to compliance with
securities or blue sky laws (including reasonable fees and disbursements of
counsel in connection with blue sky qualifications of the Shares requested to be
registered); (c) printing expenses (including expenses of printing certificates,
if any, for Shares requested to be registered); (d) internal expenses
(including, without limitation, all salaries and expenses of its Officers and
employees performing legal or accounting duties); (e) any fees and expenses
incurred in connection with the listing of the Shares requested to be registered
on any national securities exchange or automated quotation system on which the
Company's Shares are listed; (f) reasonable fees and disbursements of counsel
for the Company and customary fees and expenses for independent certified public
accountants retained by the Company (including the costs associated with the
delivery by independent certified public accountants of a comfort letter or
comfort letters requested pursuant to Section IV.E.9. hereof); (g) the
reasonable fees and expenses of any special experts or other Persons retained by
the Company in connection with such registration; (h) reasonable fees and
expenses of one counsel (who shall be reasonably acceptable to the Company) for
the Selling Holders incurred in connection with any Incidental Registration
hereunder and reasonable fees and expenses of one counsel (who shall be
reasonably acceptable to the Company) for NBCC incurred in connection with any
Demand Registration hereunder; and (i) messenger, courier, delivery and
telephone expenses related to any registration contemplated hereunder. The
Company shall not have any obligation to pay any underwriting
23
<PAGE>
fee discounts or commissions attributable to the sale of Shares pursuant to
any Incidental Registration or Demand Registration, or any out-of-pocket
expenses of any Selling Holder (or the agents who manage his accounts)
incurred in connection therewith, which amounts shall be the responsibility
of the Selling Holder or Selling Holders.
F. SPECIAL PROVISIONS RELATING TO REGISTRATION RIGHTS.
1. ASSIGNMENT. Rights relating to Incidental Registration and Demand
Registration rights granted pursuant to this Article IV are transferable to
transferees of Shares permitted under this Agreement who execute and deliver to
the Company an Addendum to this Agreement in which such transferee agrees to be
bound by this Agreement and to observe and comply with this Agreement and with
all obligations and restrictions imposed hereby.
2. LIMITED DEMAND REGISTRATION RIGHTS. Except as set forth in this
Agreement, the Company has not granted to any Person the right to require the
Company to register the Shares in the Company or any other securities of the
Company.
G. INDEMNIFICATION; CONTRIBUTION.
1. INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify
and hold harmless each Selling Holder and, if applicable, its directors and
officers and each Person who controls such Selling Holder within the meaning of
either Section 15 of the Securities Act or Section 20 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), from and against any and all
losses, claims, damages, liabilities and expenses (including reasonable legal
and other costs of investigation and defense) (collectively, "Losses") arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact contained in any such registration statement or prospectus
relating to Shares or in any amendment or supplement thereto or in any
preliminary prospectus, or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages, liabilities, or expenses arise out of, or are based
upon, any such untrue statement or omission or allegation
24
<PAGE>
thereof based upon information furnished in writing to the Company by such
Selling Holder or on such Selling Holder's behalf for use therein. The
Company also agrees to indemnify any underwriters of the Shares, their
officers and directors, and each Person who controls such underwriters within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act on substantially the same basis as the indemnification of
Selling Holders provided in this Section IV.G.
2. INDEMNIFICATION BY SELLING HOLDERS. Each Selling Holder agrees to
indemnify and hold harmless the Company, the Affiliated Holders, its Officers,
Directors and each Person, if any, who controls the Company within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act
(other than the Selling Holder) to the fullest extent lawful, from and against
all Losses arising out of or based upon any untrue or alleged untrue statement
of a material fact contained in any registration statement or prospectus
relating to the Shares of the Company or in any amendment or supplement thereto
or in any preliminary prospectus, or arising out of or based upon any omission
or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading, to the extent, but only
to the extent, that such information was furnished in writing by such Selling
Holder or on such Selling Holder's behalf, in such Selling Holder's capacity as
a Selling Holder and not in his capacity as an Officer, expressly for use in any
registration statement or form of prospectus relating to the Shares or any
amendment or supplement thereto, provided, however, that (a) with respect to any
untrue statement or omission or alleged untrue statement or omission made in any
preliminary or final prospectus, the indemnity agreement contained in this
subsection shall not apply to the extent that any such Losses result from the
fact that a current copy of the prospectus was not sent or given to the Person
asserting any such Losses at or prior to the written confirmation of the sale of
the Shares concerned to such Person, if it is determined that it was the
responsibility of the Company or any other Person or entity (other than the
Selling Holder) to provide such Person with a current copy of the prospectus and
such current copy of the prospectus would have cured the defect giving rise to
such Losses and (b) no Selling Holder shall be liable for indemnity in an amount
in excess of the gross proceeds received by such Selling Holder
25
<PAGE>
in any Incidental Registration or Demand Registration. Each Selling Holder
also agrees to indemnify and hold harmless underwriters of the Shares, their
officers and directors, and each Person who controls such underwriters on
substantially the same basis as the indemnification of the Company provided
in this Section IV.G.
3. CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any action or
proceeding (including any governmental investigation) shall be brought or
asserted against any Person entitled to indemnification under Section IV.G.1. or
Section IV.G.2. above ("Indemnified Party") with respect to which indemnity may
be sought from any party who has agreed to provide such indemnification
("Indemnifying Party"), the Indemnified Party shall promptly notify the
Indemnifying Party in writing, and the Indemnifying Party shall assume the
defense thereof, including the employment of counsel reasonably satisfactory to
such Indemnified Party, and shall assume the payment of all expenses relating to
such defense, including without limitation reasonable attorneys' fees. The
Indemnified Party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall be at the expense of such Indemnified Party unless: (a) the
Indemnifying Party has agreed to pay such fees and expenses; (b) the
Indemnifying Party shall have failed to promptly assume the defense of such
action or proceeding and to employ counsel reasonably satisfactory to the
indemnified Party; or (c)(i) the named parties to any such action or proceeding
(including any impleaded parties) include both such Indemnified Party and the
Indemnifying Party, and such Indemnified Party shall have been advised by
counsel that there is a conflict of interest on the part of counsel employed by
the Indemnifying Party to represent such Indemnified Party, or (ii) the
Indemnified Party's counsel shall have advised the Indemnified Party that there
may be defenses available to the Indemnified Party that are different from or in
addition to those available to the Indemnifying Party and that the Indemnifying
Party is not able to assert on behalf of or in the name of the Indemnified Party
(in which case of either of (i) or (ii), if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party), the Indemnifying Party shall not have the
right to assume the defense of such action
26
<PAGE>
or proceeding on behalf of such Indemnified Party; it being understood,
however, that the Indemnifying Party shall not, in connection with any one
such action or proceeding or separate but substantially similar or related
actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (together with appropriate local
counsel) at any time for all such Indemnified Parties, which firm shall be
designated in writing by one or more Indemnified Parties that hold a majority
of the Shares held by all of the Indemnified Parties. The Indemnifying Party
shall not be liable for any settlement of any such action or proceeding
effected without its written consent, which consent shall not be unreasonably
withheld, but if settled with its written consent, or if there be a final
judgment for the plaintiff in any such action or proceeding, the Indemnifying
Party shall indemnify and hold harmless such Indemnified Parties from and
against any loss or liability (to the extent stated above) by reason of such
settlement or judgment.
4. CONTRIBUTION. If the indemnification provided for in this
Section IV.G. is unavailable to the Indemnified Parties in respect of any Losses
(other than by reason of exceptions provided in Section IV.G.1. or Section
IV.G.2.), then each Indemnifying Party, in lieu of indemnifying such Indemnified
Party, shall contribute to the amount paid or payable by such Indemnified Party
as a result of such Losses: (a) in such proportion as is appropriate to reflect
the relative fault of the Indemnifying Party, on the one hand, and the
Indemnified Party, on the other hand, with respect to the statements or
omissions which resulted in such Losses, or action in respect thereof, as well
as any other relevant equitable considerations; or (b) if the allocation
provided by clause (a) above is not permitted by applicable law, in such
proportion as shall be appropriate to reflect the relative benefits received by
the Indemnifying Party, on the one hand, and the Indemnified Party, on the other
hand, from the offering of the securities covered by such registration
statement; provided, however, that under no circumstances shall the allocation
set forth in this clause (b) be applicable to any Losses arising out of a Demand
Registration effected at the request of NBCC. The relative fault of the
Indemnifying Party, on the one hand, and of the Indemnified Party, on the other
hand, shall be determined by reference to, among other things, whether the
untrue or alleged
27
<PAGE>
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by such party, and such
party's relative intent, knowledge, access to information, and opportunity to
correct or prevent such statement or omission. The relative benefits received
by the Indemnifying Party, on the one hand, and the Indemnified Party, on the
other hand, shall be deemed to be in the same proportion as the total
proceeds from the offering (net of underwriting discounts and commissions,
but before deducting expenses) received by the Indemnifying Party bears to
the total proceeds (net of underwriting discounts and commissions, but before
deducting expenses) received by the Indemnified Party.
The Company and each Selling Holder agree that it would not be just
and equitable if contribution pursuant to this Section IV.G.4. were determined
by pro rata allocation (even if the underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take into
account the equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section IV.G.4., no Selling
Holder shall be required to contribute any amount in excess of the amount by
which the total price at which the Shares of such Selling Holder were offered to
the public exceeds the amount of any damages which such Selling Holder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Subsection 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
5. SURVIVAL. The indemnity and contribution agreements contained in
this Section IV.G. shall remain operative and in full force and effect
regardless of: (a) any amendment, restatement or termination of this Agreement
or any underwriting agreement; (b) any investigation made by or on behalf of any
Indemnified Party or by or on behalf of the Company; and (c) the consummation of
the sale or successive resale of the Shares, until the expiration of all periods
during which any suit or proceeding of the type for which indemnity may be
claimed under this Section IV.G. ("Indemnifiable Claims") have
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<PAGE>
elapsed, and thereafter until the final and non-appealable resolution of any
and all Indemnifiable Claims commenced during such periods and the final
resolution between the Company and any Selling Holder of any and all claims
made by either party under this Section IV.G. hereof with respect to those
Indemnifiable Claims.
G. Participation in Underwritten Registrations. No Selling Holder may
participate in any underwritten registration hereunder unless such Selling
Holder: (a) agrees to sell his Shares on the basis provided in any underwriting
arrangements approved by the Persons or entities entitled hereunder to approve
such arrangements; and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements, and other documents reasonably
required under the terms of such underwriting arrangements and this Agreement.
H. RULE 144. The Company covenants that it shall file any reports
required to be filed by it under the Securities Act and the Securities Exchange
Act of 1934 and the rules and regulations thereunder, and it shall take such
further action, that any Affiliated Holder may reasonably request to enable such
Affiliated Holder to sell Shares, from time to time, without registration under
the Securities Act but within the limitation of the exemptions provided by (1)
Rule 144 under the Securities Act, as such Rule may be amended from time to
time, or (2) any similar rule or regulation hereafter adopted by the SEC. Upon
the request of any Affiliated Holder, the Company shall deliver to such
Affiliated Holder a written statement as to whether it has complied with such
requirements.
V. CLOSING.
A. TIME AND LOCATION. The closing of the transactions contemplated by
this Agreement (the "Closing") shall be subject to the accuracy in all material
respects of the representations and warranties of the parties hereto as though
made on an as of the date of Closing and shall take place contemporaneously with
the closing of the Offerings, at such time and place as the parties hereto may
mutually agree.
B. OBLIGATIONS AT THE CLOSING. Subject to the conditions set forth in
this Agreement, at the Closing:
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<PAGE>
1. the LLC shall have redeemed NBCC's Redeemable Interest as
contemplated by Section I.A. hereof, and made the distribution contemplated by
Section I.B. hereof;
2. the sale of the Valley Common Stock shall be consummated in
accordance with Section I.C. hereof;
3. the sale of CSL assets shall be consummated in accordance with
Section I.D. hereof;
4. the Company shall issue and deliver the shares of Company Common
Stock to the LLC Members and the Merger shall be consummated in accordance with
Section II.A. hereof;
5. Valley, CSL, the LLC and the Affiliated Holders shall perform,
satisfy and comply in all material respects all other covenants and conditions
required by this Agreement to be performed, satisfied or complied with on or
before the Effective Date; and
6. the Company shall perform, satisfy and comply in all material
respects all other covenants and conditions required by this Agreement to be
performed, satisfied or complied with on or before the Effective Date.
VI. REMEDIES.
A. Each of the parties to this Agreement shall be entitled to enforce its
rights under this Agreement specifically, to recover damages by reason of any
breach of any provision of this Agreement and to exercise all of the rights
existing in its favor. The parties hereto agree and acknowledge that money
damages may not be an adequate remedy for any such breach or threatened breach
of the provisions of this Agreement and that any party may in its sole
discretion, in addition to any other available remedies, apply to any court of
law or equity of competent jurisdiction for and be entitled to receive or be
entitled to, specific performance and injunctive relief in order to enforce or
prevent any violations of the provisions of this Agreement, without the
necessity of demonstrating that it has been irreparably harmed. The
representations and warranties in this Agreement shall survive the Closing.
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<PAGE>
B. In the event a party brings an action under this Agreement, the
prevailing party in such dispute shall be entitled to recover from the losing
party any fees, costs and expenses of enforcing any right of such prevailing
party under or with respect to this Agreement, including, without limitation,
the reasonable fees and expenses of its attorneys and accountants and all fees,
costs and expenses of appeals.
VII. MISCELLANEOUS.
A. NOTICES. All notices and other communications required or permitted
to be given hereunder shall be in writing and shall be deemed to have been duly
given if delivered personally, mailed by certified mail (return receipt
requested) or sent by overnight delivery service, facsimile transmission or
telex to the parties at the following addresses or at such other addresses as
shall be specified by the parties by like notice:
If to the LLC, Valley, CSL or the Company:
400 W. Illinois
Suite 1000
Midland, Texas 79701
Attention: Michael J. Grella
If to Liedtke, Grella or Musselman, to each of such persons at the
following address:
400 W. Illinois
Suite 1000
Midland, Texas 79701
If to NBCC:
100 N. Tryon Street
Charlotte, North Carolina 28255
Attention: Travis Hain and Robert H. Sheridan, III
Notice so given shall, in the case of notice so given by mail, be deemed to be
given and received on the third calendar day after posting; in the case of
notice so given by overnight delivery services, on the date of actual delivery
and, in the case of notice so given by facsimile transmission, telex or personal
delivery, on the date of actual transmission or, as the case may be, on the day
of personal delivery.
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<PAGE>
B. TERMINATION OF PRIOR AGREEMENTS. This Agreement fully replaces and
supersedes all prior agreements relating to the common stock of, or the
membership interest or other interest in, the LLC, CSL, Valley or their
respective predecessors, including, but not limited to, (i) the Regulations of
the LLC dated February 17, 1995; (ii) the Membership Subscription Agreement
dated February 17, 1995 among the LLC, NBCC and each other holder of the within-
mentioned purchase interest; (iii) the Buy-Sell Agreement dated February 17,
1995 (the "LLC Buy-Sell Agreement") by and between the LLC and Liedtke, Grella
and Musselman and their respective spouses, being Marion Liedtke, Katherine
Riggs Grella and Melinda Musselman (collectively, "Spouses"); and (iv) the Buy-
Sell Agreement dated February 17, 1995 by and between Liedtke, Grella and
Musselman and their respective Spouses, CSL Management Corporation, Valley
Gathering Company and 511 TEX L.C. (collectively, the "Prior Agreements"). As a
result of the execution of this Agreement, the parties hereto declare the Prior
Agreements to be of no further force and effect and any notices required
thereunder shall be superseded hereby; provided, however, that if the closing
does not incur on or before October 9, 1996, the Prior Agreements shall be
revived in their entirety.
C. SEVERABILITY AND REFORMATION. The parties hereto intend all of the
provisions of this Agreement to be enforced to the fullest extent permitted by
law. If, however, any provision of this Agreement is held to be illegal,
invalid or unenforceable under present or future law, then such illegality,
invalidity or unenforceability shall not invalidate the entire Agreement. Such
provision shall be deemed modified to the extent necessary to render it legal,
valid and enforceable, and if no such modification shall render it legal, valid,
and enforceable, then this Agreement shall be construed and enforced as if such
illegal, invalid, or unenforceable provision were never a part thereof, and the
remaining provisions shall remain in full force and effect and shall not be
affected by the illegal, invalid, or unenforceable provision or by its
severance.
D. ENTIRE AGREEMENT; AMENDMENT. This Agreement, together with the
Exhibits attached hereby and those documents expressly referred to herein,
contains the entire understanding and agreement
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among the parties to this Agreement, and supersedes any other agreement among
such parties, whether oral or in writing, with respect to the subject matter
hereof. This Agreement may not be altered, amended, rescinded or revoked,
nor may any of its provisions be waived, except by an instrument in writing
signed by all of the parties hereto or, in the case of an asserted waiver, by
the party or parties against whom the waiver is sought to be enforced.
E. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, with the
same effect as if all parties had signed the same document. All such
counterparts shall be deemed an original, shall be construed together and shall
constitute one and the same instrument.
F. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure
to the benefit of, and be enforceable by and against, each of the parties hereto
and their respective successors and assigns.
G. GOVERNING LAW AND VENUE. ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY AND INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE
OF TEXAS. THIS AGREEMENT IS PERFORMABLE IN MIDLAND COUNTY, TEXAS, AND VENUE OF
ANY ACTION RELATED OR PERTAINING TO THIS AGREEMENT SHALL LIKE IN MIDLAND COUNTY,
TEXAS.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written, to be effective, however, at the Closing.
COSTILLA ENERGY, INC.
By:
--------------------------------------------
Name: Cadell S. Liedtke
Title: Chairman of the Board
COSTILLA ENERGY, L.L.C.
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<PAGE>
By:
--------------------------------------------
Name: Michael J. Grella
Title: President
-----------------------------------------------
Cadell S. Liedtke, Individually
-----------------------------------------------
Michael J. Grella, Individually
-----------------------------------------------
Henry G. Musselman, Individually
NATIONSBANC CAPITAL CORPORATION
By:
--------------------------------------------
Name:
Title:
CSL MANAGEMENT CORPORATION
By:
--------------------------------------------
Name:
Title:
VALLEY GATHERING COMPANY
By:
--------------------------------------------
Name:
Title:
34
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EXHIBIT 10.6
==================================================================
* * * * *
1996 STOCK OPTION PLAN
OF
COSTILLA ENERGY, INC.
(A DELAWARE CORPORATION)
* * * * *
==================================================================
<PAGE>
TABLE OF CONTENTS
* * *
1996 STOCK OPTION PLAN
OF
COSTILLA ENERGY, INC.
==================================================================
SECTION SUBJECT PAGE
1. PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. CERTAIN DEFINITIONS . . . . . . . . . . . . . . . . . . . 1
3. INCENTIVE STOCK OPTIONS AND NONSTATUTORY STOCK OPTIONS. . 5
4. ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . 6
4.1 GENERAL . . . . . . . . . . . . . . . . . . . . 6
4.2 ACTIONS OF BOARD. . . . . . . . . . . . . . . . 7
4.3 CONDITIONAL GRANTS. . . . . . . . . . . . . . . 7
5. ELIGIBILITY AND PARTICIPATION . . . . . . . . . . . . . . 7
5.1 ELIGIBLE EMPLOYEES. . . . . . . . . . . . . . . 7
5.2 OPTION PRICE. . . . . . . . . . . . . . . . . . 8
5.3 OPTION AGREEMENT. . . . . . . . . . . . . . . . 8
6. SHARES OF COMMON STOCK SUBJECT TO THE PLAN. . . . . . . . 8
6.1 MAXIMUM NUMBER. . . . . . . . . . . . . . . . . 8
6.2 CAPITAL CHANGES . . . . . . . . . . . . . . . . 9
7. EXERCISE OF STOCK OPTIONS . . . . . . . . . . . . . . . . 9
7.1 TIME OF EXERCISE. . . . . . . . . . . . . . . . 9
7.2 SURRENDER OF SHARES IN PAYMENT OF EXERCISE
PRICE. . . . . . . . . . . . . . . . . . . . . 10
7.3 USE OF PROMISSORY NOTE; EXERCISE LOANS. . . . . 10
7.4 STOCK RESTRICTION AGREEMENT . . . . . . . . . . 11
7.5 TERMINATION OF EMPLOYMENT BEFORE EXERCISE . . . 11
7.6 GRANT OF SUPPLEMENTAL BONUSES . . . . . . . . . 12
7.7 OPTION VESTING UPON CHANGE OF CONTROL OF THE
COMPANY. . . . . . . . . . . . . . . . . . . . 13
<PAGE>
7.8 STAND-ALONE, ADDITIONAL, TANDEM, AND
SUBSTITUTE AWARDS. . . . . . . . . . . . . . . 13
8. LIMITED RIGHTS. . . . . . . . . . . . . . . . . . . . . . 14
8.1 GRANT OF LIMITED RIGHTS . . . . . . . . . . . . 14
8.2 EXERCISE OF LIMITED RIGHTS. . . . . . . . . . . 15
8.3 FORM OF PAYMENT . . . . . . . . . . . . . . . . 16
8.4 TERMINATION . . . . . . . . . . . . . . . . . . 16
9. NO CONTRACT OF EMPLOYMENT . . . . . . . . . . . . . . . . 16
10. NO RIGHTS AS A STOCKHOLDER. . . . . . . . . . . . . . . . 16
11. NON-TRANSFERABILITY . . . . . . . . . . . . . . . . . . . 17
12. COMPLIANCE WITH RULE 16b-3. . . . . . . . . . . . . . . . 17
13. AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . 18
14. REGISTRATION OF OPTIONED SHARES . . . . . . . . . . . . . 18
15. WITHHOLDING TAXES . . . . . . . . . . . . . . . . . . . . 18
16. FINANCING ARRANGEMENTS. . . . . . . . . . . . . . . . . . 19
17. NONEXCLUSIVITY OF THE PLAN. . . . . . . . . . . . . . . . 19
<PAGE>
1996 STOCK OPTION PLAN
OF
COSTILLA ENERGY, INC.
1. PURPOSE.
The purpose of this 1996 Stock Option Plan (the "Plan") is to enable
Costilla Energy, Inc. (the "Company"), and such of its subsidiary
corporations (as defined in Section 424(f) of the Internal Revenue Code of
1986 (the "Code")) as the Board of Directors of the Company (the "Board")
shall from time to time designate ("Participating Subsidiaries"), to attract
and retain qualified employees, and to provide such persons with additional
motivation to advance the interests of the Company and its Participating
Subsidiaries. The Plan provides for the grant of Stock Options, both
Incentive Stock Options (under Code Section 422) and nonqualified stock
options (under Code Section 83), Limited Rights, and Supplemental Bonuses to
employees of the Company.
2. CERTAIN DEFINITIONS.
2.1 "CHANGE OF CONTROL." The term "Change of Control" shall mean any
of the following events:
(A) any "Person," as such term is used in Sections 13(d) and 14(d)
of the Exchange Act (other than the Company, any trustee or other fiduciary
holding securities under an employee benefit plan of the Company, or any
company owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the
Company) becomes the "Beneficial Owner" as defined in Rule 13d-3 under the
Exchange Act
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after (but not as a direct result of) the completion of the Company's initial
public offering, directly or indirectly, of 25% or more of the combined
voting power of the Company's outstanding securities.
(B) individuals who constitute the Board on the effective date of
the Plan (the "Incumbent Board") cease for any reason to constitute at least
a majority thereof, provided that any person becoming a director subsequent
to such effective date whose election, or nomination for election, by the
Company's stockholders, was approved by a vote of at least a majority of the
directors comprising the Incumbent Board (either by a specific vote or by
approval of the proxy statement of the Company in which such person is named
as a nominee for director, without objection to such nomination) shall be,
for purposes of this clause (B), considered as though such person were a
member of the Incumbent Board;
(C) the stockholders of the Company shall approve a merger,
consolidation, recapitalization, or reorganization of the Company, a reverse
stock split of outstanding voting securities, or consummation of any such
transaction if stockholder approval is not obtained, other than (1) any such
transaction which would result in at least 50% of the total voting power
represented by the voting securities of the surviving entity outstanding
immediately after such transaction being "Beneficially Owned" (as defined
above) by 75% or more of the holders of outstanding voting securities of the
Company immediately prior to the transaction, with the voting power of each
such continuing holder relative to other such continuing holders not
substantially altered in the transaction, or (2) a merger or consolidation
effected to implement a recapitalization of the Company (or similar
transaction) in which no "Person" (as defined above) acquires more than 25%
of the combined voting power of the Company's then outstanding securities; or
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(D) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
Notwithstanding anything in the foregoing to the contrary, no Change of
Control shall be deemed to have occurred with respect to any particular
Employee by virtue of any transaction which results in such Employee, or a
group of Persons which includes such Employee, acquiring, directly or
indirectly, 25% or more of the combined voting power of the Company's
outstanding securities.
2.2 "COMMON STOCK." Common Stock means Common Stock, par value $0.10
per share, of the Company.
2.3 "EMPLOYEE." An Employee is an employee of the Company or any
Participating Subsidiary.
2.4 "EXCHANGE ACT." Exchange Act means the Securities Exchange Act of
1934, as amended from time to time.
2.5 "FAIR MARKET VALUE." The Fair Market Value of a share of Common
Stock on any date shall be the closing price of the Common Stock as reported
in the Wall Street Journal for securities listed on The Nasdaq Stock Market's
National Market (the "Nasdaq National Market"), or other exchange on which
the Common Stock is traded, for the date in question, or if no closing price
is available, the closing price on the next preceding date for which a
closing price was so reported, unless otherwise specified by the Board. If
the Common Stock is not listed on The Nasdaq National Market or traded on
another exchange, the Fair Market Value shall be such amount as determined by
the Board.
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2.6 "LIMITED RIGHT." A Limited Right is the right to receive payment,
in cash, following a Change of Control, of an amount equal to the product
computed by multiplying (i) the excess of (A) the higher of (x) the Minimum
Price Per Share, if the Change of Control occurs as a result of a
Transaction, tender offer or exchange offer, or (y) the highest Fair Market
Value per share during the period commencing thirty days prior to the Change
of Control and ending immediately prior to the date the Limited Right is
exercised, over (B) the option price per share under the Stock Option to
which such Limited Right relates, by (ii) the number of shares of Common
Stock as to which such Limited Right is being exercised provided that, in the
case of any ISO (as defined herein), the amount computed under part (A) of
the foregoing formula shall be equal to the Fair Market Value of Common Stock
on the date the Limited Right is, in fact, exercised.
2.7 "MINIMUM PRICE PER SHARE." Minimum Price Per Share means the
highest gross price (before brokerage commissions and soliciting dealer's
fees) paid or to be paid for a share of Common Stock (whether by way of
exchange, conversion, distribution or upon liquidation or otherwise) in any
Transaction, tender offer or exchange offer occurring prior to the date on
which such Limited Right is exercised. If the consideration paid or to be
paid in any such Transaction, tender offer or exchange offer shall consist,
in whole or in part, of consideration other than cash, the Board shall take
such action, as in its judgment it deems appropriate, to establish the cash
value of such consideration, but such valuation shall not be less than the
value, if any, attributed to such consideration in writing by any party to
such Transaction, tender offer or exchange offer other than the Company.
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2.8 "PARTICIPANT." A Participant is an Employee to whom a Stock
Option, Limited Right or Supplemental Bonus is granted.
2.9 "OPTION PRICE." The purchase price per share of Common Stock
subject to a Stock Option is set pursuant to Section 5.2.
2.10 "STOCK OPTION." A Stock Option is the right granted under the
Plan to an Employee to purchase, at such time or times and at such Option
Price or prices as are determined by the Board, the number of shares of
Common Stock determined by the Board.
2.11 "SUPPLEMENTAL BONUS." A Supplemental Bonus is the right to
receive payment, in shares of Common Stock, cash or a combination of shares
of Common Stock and cash, of an amount specified by the Board pursuant to
Section 7.6.
2.12 "TRANSACTION." A Transaction is (A) any consolidation or merger
of the Company in which the Company is not the surviving corporation other
than a merger solely to effect a reincorporation or a merger of the Company
as to which stockholder approval is not required pursuant to Section 251(f)
or 253 of the Delaware General Corporation Law, or (B) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of 50% or more of the assets or earning power of the Company,
or (C) the adoption of any plan or proposal for the liquidation or
dissolution of the Company.
For purposes of this Plan, the Board may, by resolution, clarify the
date as of which a Change of Control shall be deemed to have occurred.
3. INCENTIVE STOCK OPTIONS AND NONSTATUTORY STOCK OPTIONS.
The Stock Options granted under the Plan may be either:
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<PAGE>
(a) Incentive Stock Options ("ISOs") which are intended to be
"incentive stock options" as that term is defined in Section 422(b) of the
Code; or
(b) Nonstatutory Stock Options ("NSOs") which are intended to be
options that do not qualify as "incentive stock options" under Section 422 of
the Code.
The individual Option Agreement(s) (as defined in Section 5.3) shall
clearly designate whether the Stock Options granted are ISOs or NSOs.
Subject to other provisions of the Plan, a Participant may receive ISOs or
NSOs. Subject to other provisions of the Plan, a Participant may receive
ISOs and NSOs at the same time, provided that the ISOs and NSOs are clearly
designated as such.
Except as otherwise expressly provided herein, all of the provisions and
requirements of the Plan relating to Stock Options shall apply to both ISOs
and NSOs.
4. ADMINISTRATION.
4.1 GENERAL. The Plan shall be administered by the Board. Subject to
the provisions of the Plan, the Board shall have full authority to administer
the Plan, including authority to grant awards under the Plan and determine
the terms thereof, to interpret and construe any provision of the Plan and
any Stock Option, Limited Right or Supplemental Bonus granted thereunder, to
adopt such rules and regulations for administering the Plan, including those
it may deem necessary in order to comply with the requirements of the Code or
in order that Stock Options that are intended to be ISOs will be classified
as incentive stock options under the Code, or in order to conform to any
regulation or to any change in any law or regulation applicable thereto, and
to make all other decisions and determinations under the Plan.
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<PAGE>
4.2 ACTIONS OF BOARD. All actions taken and all interpretations and
determinations made by the Board in good faith (including determinations of
Fair Market Value) shall be final and binding upon all Participants (their
heirs, personal representative, administrators and assigns), the Company and
all other interested persons. No member of the Board shall be personally
liable for any action, determination or interpretation made in good faith
with respect to the Plan, and all members of the Board shall, in addition to
their rights as directors, be fully protected by the Company with respect to
any such action, determination or interpretation.
4.3 CONDITIONAL GRANTS. All Stock Options, Limited Rights and
Supplemental Bonuses granted prior to the date the Company's Registration on
Form S-1 with respect to the Common Stock is declared effective by the
Securities and Exchange Commission are expressly conditioned upon such
effectiveness. If such effectiveness is not obtained within one (1) year of
the Effective Date, such conditionally granted Stock Options, Limited Rights
and Supplemental Bonuses shall automatically terminate and be of no effect or
value. In addition to any other limitations provided herein, no Stock Option
or Limited Right may be exercised until such Registration Statement is
declared effective by the Securities and Exchange Commission.
5. ELIGIBILITY AND PARTICIPATION.
5.1 ELIGIBLE EMPLOYEES. Grants of Stock Options, Limited Rights and
Supplemental Bonuses may be made to Employees. Any director of the Company
or of a Participating Subsidiary who is also an Employee shall also be
eligible, but directors who are not Employees shall not be eligible, to
receive Stock Options, Limited Rights or Supplemental Bonuses under the Plan.
The Board shall from time to time determine the Employees to whom Stock
Options shall be granted, whether the option is an ISO, an NSO or combination
of both, the number of shares
7
<PAGE>
of Common Stock subject to each Stock Option to be granted to each such
Employee, the Option Price of such Stock Options and the terms and conditions
of such Stock Options, including the terms of exercise of the Stock Options,
subject to the provisions of this Plan.
5.2 OPTION PRICE. Except as otherwise provided in Section 7.8, the
Option Price of any ISO or NSO shall not be less than the Fair Market Value
of a share of Common Stock on the date on which the Stock Option is granted
and shall not be less than par value of Common Stock. If an ISO is granted
to any Employee who, at the time of the grant, owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company or any parent or subsidiary corporation of the Company, the Option
Price of such ISO shall be at least 110% of the Fair Market Value of the
Common Stock subject to the ISO on the date such ISO is granted, and such ISO
shall not be exercisable after five years after the date on which it was
granted.
5.3 OPTION AGREEMENT. Each Stock Option shall be evidenced by a
written agreement ("Option Agreement") containing such terms and provisions
of the grant as the Board may determine including without limitation those
terms set by the Board pursuant to Section 5.1 and 7.1 subject to the
provisions of this Plan, which may be incorporated into the Option Agreement
by reference.
6. SHARES OF COMMON STOCK SUBJECT TO THE PLAN.
6.1 MAXIMUM NUMBER. The maximum aggregate number of shares of Common
Stock that may be issued under the Plan shall be 850,000 shares, subject to
adjustment as provided in Section 6.2. Such shares may be authorized and
unissued shares or may be treasury shares. The aggregate Fair Market Value
(determined as of the time an ISO is granted) of the Common Stock as to which
all ISOs granted to an individual may first become exercisable in a
particular calendar
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year may not exceed $100,000; provided that to the extent that Stock Options
intended to be ISOs (together with all incentive stock options granted under
other Company plans to such individual) become exercisable in a given year in
excess of $100,000, such portion of the Stock Options shall be deemed to be
NSOs and shall be exercisable as such. If any shares of Common Stock subject
to Stock Options are not purchased or otherwise paid for before such Stock
Options expire or otherwise terminate, unless such Stock Options are
surrendered upon exercise of Limited Rights, such shares may again be made
subject to Stock Options or otherwise issued under the Plan.
6.2 CAPITAL CHANGES. In the event any changes are made to the shares
of Common Stock (whether by reason of merger, consolidation, reorganization,
recapitalization, stock dividend in excess of one percent (1%) at any single
time, stock split, combination of shares, exchange of shares, extraordinary
cash dividend, change in corporate structure or otherwise), the Board shall,
in order to prevent dilution or enlargement of Participant's rights, make
appropriate adjustments in: (i) the number and kind of shares theretofore
made subject to Stock Options, and in the Option Price of said shares, and
(ii) the aggregate number and kind of shares which may be issued under the
Plan. If any of the foregoing adjustments shall result in a fractional
share, the fraction shall be disregarded, and the Company shall have no
obligation to make any cash or other payment with respect to such a
fractional share.
7. EXERCISE OF STOCK OPTIONS.
7.1 TIME OF EXERCISE. Subject to the provisions of the Plan, including
without limitation Section 7.7, the Board, in its discretion, shall determine
the time when a Stock Option, or a portion of a Stock Option, shall become
exercisable, and the time when a Stock Option, or a portion of a Stock
Option, shall expire. Such time or times shall be set forth in the Option
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Agreement evidencing such Stock Option. An ISO shall expire, to the extent
not exercised, no later than the tenth anniversary date of the date on which
it was granted, and an NSO shall expire, to the extent not exercised, no
later than 10 years and one day after the date on which it was granted. The
Board may accelerate the vesting of any Participant's Stock Option by giving
written notice to the Participant. Unless otherwise determined by the
Committee, the acceleration of the exercise period of a Stock Option shall
not affect the expiration date of that Stock Option.
7.2 SURRENDER OF SHARES IN PAYMENT OF EXERCISE PRICE. The Board, in
its sole discretion, may permit a Participant to surrender to the Company
shares of Common Stock as part or full payment for the exercise of a Stock
Option. Such surrendered shares shall be valued at their Fair Market Value
on the date of exercise. Unless otherwise determined by the Board, any such
shares surrendered by the Participant shall have been held by him for at
least six months prior to surrender.
7.3 USE OF PROMISSORY NOTE; EXERCISE LOANS. The Board may, in its sole
discretion, impose terms and conditions, including conditions relating to the
manner and timing of payments of the Option Price, on the exercise of Stock
Options. Such terms and conditions may include, but are not limited to,
permitting a Participant to deliver to the Company his promissory note as
payment for the exercise of a Stock Option; provided that, with respect to
any promissory note given as payment or partial payment for the exercise of
an ISO, all terms of such note, including collateral securing the same, shall
be determined at the time the Stock Option is granted and set forth in the
Option Agreement. The Board, in its sole discretion, may authorize the
Company to make a loan to a Participant in connection with the exercise of
Stock Options, or
10
<PAGE>
authorize the Company to make a loan to a Participant in connection with the
exercise of Stock Options, or authorize the Company to arrange or guaranty
loans to a Participant by a third party, including in connection with
broker-assisted cashless exercises. The foregoing notwithstanding, a
Participant shall pay at least the par value of the Common Stock to be
acquired upon exercise of a Stock Option in the form of lawful consideration
under the Delaware General Corporation Law prior to issuance of such shares.
7.4 STOCK RESTRICTION AGREEMENT. The Board may provide that shares of
Common Stock issuable upon the exercise of a Stock Option shall, under
certain conditions, be subject to restrictions whereby the Company has a
right of first refusal with respect to such shares or a right or obligation
to repurchase all or a portion of such shares, which restrictions may survive
a Participant's term of employment with the Company. The acceleration of time
or times at which the Stock Option becomes exercisable may be conditioned
upon the Participant's agreement to such restrictions.
7.5 TERMINATION OF EMPLOYMENT BEFORE EXERCISE. If a Participant's
employment with the Company or a Participating Subsidiary shall terminate for
any reason other than the Participant's disability, any ISO then held by the
Participant, to the extent then exercisable under the applicable Option
Agreement(s), shall remain exercisable after the termination of his
employment for a period of three months from date of termination. If the
Participant's employment is terminated because the Participant is disabled
within the meaning of Section 22(e)(3) of the Code, any ISO then held by the
Participant, to the extent then exercisable under the applicable Option
Agreement(s), shall remain exercisable after the termination of his
employment for a period of one year (but in no event beyond ten years from
the date of grant of the ISO) by the Participant or his legal representative.
If the Stock Option is not exercised during
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the applicable period, it shall be deemed to have been forfeited and of no
further force or effect. The period and extent to which an NSO may be
exercised following termination of employment shall be determined by the
Board and set forth in the Option Agreement. Notwithstanding the foregoing,
a Stock Option, whether an ISO or NSO, held by a Participant at the
Participant's death shall be exercisable by the Participant's personal
representative, estate or heirs until the later of (i) the expiration of the
Stock Option or (ii) one year after death.
7.6 GRANT OF SUPPLEMENTAL BONUSES. The Board, either at the time of
grant or at any time prior to exercise of any NSO or Limited Right, may
provide for a Supplemental Bonus from the Company or Participating Subsidiary
in connection with a specified number of shares of Common Stock then
purchasable, or which may become purchasable, under an NSO, or a specified
number of Limited Rights which may be or become exercisable. A Supplemental
Bonus shall be automatically payable upon the exercise of the NSO or Limited
Right with regard to which such the Supplemental Bonus was granted. A
Supplemental Bonus shall not exceed the amount necessary to reimburse the
Participant for the income tax liability incurred by him upon the exercise of
the NSO or upon the exercise of such Limited Right, calculated using the
maximum combined federal and applicable state income tax rates then in effect
and taking into account the tax liability incurred by him upon the exercise
of the NSO or upon the exercise of such Limited Right, calculated using the
maximum combined federal and applicable state income tax rates than in effect
and taking into account the tax liability arising from the Participant's
receipt of the Supplemental Bonus, all as determined by the Committee. The
Committee may, in its discretion, elect to pay any part or all of the
Supplemental Bonus in: (i) cash; (ii) shares of Common Stock; or (iii) any
combination of cash and shares of Common Stock; provided that
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bonuses payable in respect of Limited Rights shall be payable only in cash.
The Board's determination to grant a Supplemental Bonus shall be made by
giving written notice to the Participant not later than 90 days after the
related exercise, which notice shall specify the portion which the Board
elects to pay in cash, shares of Common Stock or a combination thereof. In
the event any portion is to be paid in shares of Common Stock, the number of
shares to be delivered shall be determined by dividing the amount which the
Board elects to pay in shares of Common Stock by the Fair Market Value of one
share of Common Stock on the date of exercise. Any fractional shares
resulting from any such calculation shall be disregarded. Said shares,
together with any cash payable to the Participant, shall be delivered within
said 90-day period.
7.7 OPTION VESTING UPON CHANGE OF CONTROL OF THE COMPANY. In the event
of a Change of Control of the Company the vesting of Stock Options granted
pursuant to the Plan shall automatically be accelerated, so that all Stock
Options outstanding at the time of such Change of Control will be exercisable
immediately except as otherwise provided in Section 2.1.
7.8 STAND-ALONE, ADDITIONAL, TANDEM, AND SUBSTITUTE AWARDS. Awards
granted under the Plan may, in the discretion of the Board, be granted either
alone or in addition to, in tandem with, or in substitution for, any other
award granted under the Plan or any other plan of the Company or any
Participating Subsidiary or any other right of a Participant to receive
payment from the Company or any Participating Subsidiary. If an award is
granted in substitution for another such award, the Board shall require the
surrender of such other award in consideration for the grant of the new
award. Awards granted in addition to or in tandem with other awards may be
granted either as of the same time as or a different time from the grant of
such other awards. The per share Option Price of any Stock Option:
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(A) Granted in substitution for an outstanding
award shall be not less than the lesser of the Fair
Market Value of a share of Common Stock from the date
such substitute award is granted or such Fair Market
Value at that date reduced to reflect the fair market
value (as determined by the Board) at that date of the
award required to be surrendered by the Participant as
a condition to receipt of the substitute award; or
(B) Retroactively granted in tandem with an
outstanding award shall be not less than the lesser of
the Fair Market Value of a share of Common Stock at the
date of grant of the later award or at the date of
grant of the earlier award.
Except for the Option Price required to be paid upon the exercise of Stock
Options and except as provided in this Section 7.8, only services may be
required as consideration for the grant of any award under the Plan.
8. LIMITED RIGHTS.
8.1 GRANT OF LIMITED RIGHTS. The Board may in its discretion grant
Limited Rights to a Participant concurrently with the grant of each ISO or at
any time with respect to any NSO. Such Limited Rights shall be exercisable
with respect to the number of shares of Common Stock which are, or may
become, purchasable under any such Stock Option. The Board may, in its
discretion, specify the terms and conditions of such rights, including
without limitation the date or dates upon which such rights shall expire and
become void and unexercisable, except that Limited Rights granted with
respect to an ISO shall only be exercisable, and shall expire, at the time or
times the ISO is exercisable and expires, respectively. Each Participant to
whom Limited Rights are granted shall be given written notice advising him of
the grant of such rights and
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specifying the terms and conditions of the rights, which shall be subject to
all the provisions of this Plan.
8.2 EXERCISE OF LIMITED RIGHTS. Subject to the limitations set forth
in Section 8.1, a Limited Right may be exercisable only during the period
beginning on the first day following the occurrence of a Change of Control
and ending on the sixtieth day following such date. Upon the occurrence of a
tender or exchange offer constituting a Change of Control, a Limited Right
may be exercised in such manner regardless of whether the Board supports or
opposes such tender or exchange offer. A Participant shall exercise his
Limited Rights by delivering a written notice to the Board specifying the
number of shares with respect to which he exercises Limited Rights and
agreeing to surrender the right to purchase an equivalent number of shares of
Common Stock subject to his Stock Option. If a Participant exercises Limited
Rights, payment of his Limited Rights shall be made in accordance with
Section 8.3 on or before the thirtieth day after the date of exercise of the
Limited Rights. A Limited Right shall remain exercisable during the exercise
periods specified in accordance with Section 8.1 and this Section in the
event of a termination of employment of the Participant holding the Limited
Right after a Change of Control; provided, however, that the Limited Right
shall expire upon the expiration of the exercise period of the Stock Option
to which it relates. Notwithstanding the above, upon a termination of the
employment of the holder of the Limited Right before the occurrence of any
Change of Control, the Limited Right shall expire immediately upon such
termination.
8.3 FORM OF PAYMENT. If a Participant elects to exercise
Limited Rights as provided in Section 8.2, the Company shall pay to the
Participant in cash the amount set forth in Section 2.7 hereof, calculated
with respect to the shares as to which the Participant has exercised Limited
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Rights, within thirty days after the date of exercise of the Limited Rights.
If such amount is not paid in full within the prescribed period, the Company
shall be liable to such Participant for the costs of collection of such
amount, including attorney's fees.
8.4 TERMINATION. When a Limited Right is exercised, the Stock Option
to which it relates, if any, shall cease to be exercisable to the extent of
the number of shares of Common Stock with respect to which such Limited Right
was exercised. Upon the exercise or termination of a Stock Option, any
Limited Right granted with respect thereto shall terminate to the extent of
the number of shares as to which such Stock Option was exercised or
terminated.
9. NO CONTRACT OF EMPLOYMENT.
Nothing in this Plan shall confer upon the Participant the right to
continue in the employ of the Company, or any Participating Subsidiary, nor
shall it interfere in any way with the right of the Company, or any such
Participating Subsidiary, to discharge the Participant at any time for any
reason whatsoever, with or without cause. Nothing in this Article 9 shall
affect any rights or obligations of the Company or any Participant under any
written contract of employment.
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10. NO RIGHTS AS A STOCKHOLDER.
A Participant shall have no rights as a stockholder with respect to
any shares of Common Stock subject to a Stock Option, until such Stock Option
is exercised and certificates representing the shares are issued. Except as
provided in Section 6.2, no adjustment shall be made in the number of shares
of Common Stock issued to a Participant, or in any other rights of the
Participant upon exercise of a Stock Option by reason of any dividend,
distribution or other right granted to stockholders for which the record date
is prior to the date of issuance of shares upon exercise of the Participant's
Stock Option.
11. NON-TRANSFERABILITY.
No Stock Option, Limited Right or Supplemental Bonus granted under
this Plan, nor any other rights acquired by a Participant under this Plan,
shall be assignable or transferable by a Participant, other than by will or
the laws of descent and distribution, or pursuant to a qualified domestic
relations order as defined under Section 1041 of the Code or Title I of the
Employee Retirement Income Security Act of 1974, and any ISO shall be
exercisable, during the Participant's lifetime, only by him. In the event of
a Participant's death, the Stock Option or any Limited Right or Supplemental
Bonus may be exercised by the personal representative of the Participant's
estate or, if no personal representative has been appointed, by the successor
or successors in interest determined under the Participant's will or under
the applicable laws of descent and distribution.
12. COMPLIANCE WITH RULE 16b-3.
It is the intent of the Company that the Plan comply in all respects
with Rule 16b-3 under the Exchange Acct in connection with any award granted
to a person who is subject to Section 16
17
<PAGE>
of the Exchange Act. Accordingly, if any provision of the Plan or any
agreement hereunder does not comply with the requirements of Rule 16b-3 as
then applicable to any such person, such provision shall be construed or
deemed amended to the extent necessary to conform to such requirements with
respect to such person.
13. AMENDMENT.
The Company by action of the Board may amend, modify or terminate
this Plan at any time or may amend, modify or terminate any outstanding
Option Agreement, except that any such amendment, modification or termination
of the Plan shall be subject to the approval of the Company's stockholders
within one year after such Board action if such stockholder approval is
required by any federal or state law or regulation or the rules of any stock
exchange or automated quotation system on which the Common Stock may be
listed or quoted, or if the Board in its discretion determines that obtaining
such stockholder approval is for any reason advisable. Moreover, no action
may be taken by the Company without the consent of the affected Participant
which will materially impair the rights of such Participant under any award
then outstanding or which will prevent an ISO from continuing to qualify
under Section 422 of the Code.
14. REGISTRATION OF OPTIONED SHARES.
No Stock Option shall be exercisable unless the Company's sale of
such optioned shares is pursuant to an applicable effective registration
statement under the Securities Act of 1933, as amended, or unless, in the
opinion of counsel to the Company, the Company's sale of such
18
<PAGE>
optioned shares would be exempt from the registration requirements of the
Securities Act of 1933, as amended, and unless, in the opinion of such
counsel, such sale would be exempt from the registration or qualification
requirements of applicable state securities laws.
15. WITHHOLDING TAXES.
The Company or a Participating Subsidiary may take such steps as the
Board may deem necessary or appropriate for the withholding of any taxes
which the Company or the Participating Subsidiary is required by any law or
regulation or any governmental authority, whether federal, state or local,
domestic or foreign, to withhold in connection with any Stock Option, Limited
Right or Supplemental Bonus, and to take such other action as the Board may
deem necessary or advisable to enable the Company and Participants to satisfy
obligations for the payment of tax liabilities in excess of such withholding
obligations relating to any such award. This authority shall include
authority to withhold or receive shares or other property and to make cash
payments in respect thereof in satisfaction of Participant's tax obligations.
16. FINANCING ARRANGEMENTS.
The Board, in its discretion, may enter into arrangements with one
or more banks, brokers or other financial institutions to facilitate the
exercise, and the disposition of shares acquired upon exercise, of Stock
Options or Supplemental Bonuses, including, without limitation, arrangements
for the simultaneous exercise of Stock Options (including a related
Supplemental Bonus), and sale of the shares acquired upon such exercise.
17. NONEXCLUSIVITY OF THE PLAN.
Neither the adoption of the Plan by the Board nor the submission of
the Plan to stockholders of the Company for approval shall be construed as
creating any limitations on the
19
<PAGE>
power or authority of the Board to adopt such other or additional incentive
or other compensation arrangements or whatever nature as the Board may deem
necessary or desirable or preclude or limit the continuation of any other
plan, practice or arrangement for payment of compensation or fringe benefits
to employees generally, or to any class or group of employees, which the
Company or any subsidiary now has lawfully put into effect, including,
without limitation, any retirement, pension, savings and stock purchase plan,
insurance, death and disability benefits and executive short-term incentive
plans.
18. EFFECTIVE DATE.
This Plan shall become effective on September 1, 1996 (the "Effective
Date"), subject to the Company's Registration Statement on Form S-1 with respect
to the Common Stock, file number 333-08913, being declared effective by the
Securities and Exchange Commission. If no such effectiveness is obtained on or
before one (1) year of the Effective Date, the Plan shall terminate, and all
Stock Options, Limited Rights and Supplemental Bonuses conditionally granted
hereunder shall be null and void and of no force or effect. No ISO shall be
granted subsequent to ten years after the Effective Date. Unless earlier
terminated by the Board, the Plan shall terminate when no shares of Common Stock
remain reserved and available for issuance and the Company has no further
obligation with respect to any award granted under the Plan.
The foregoing 1996 Stock Option Plan of Costilla Energy, Inc. was
adopted and approved by the Board of Directors and stockholders of the
Company on the 26th day of August, 1996.
20
<PAGE>
COSTILLA ENERGY, INC.
By:
-----------------------------------------
Michael J. Grella
President and Chief Operating Officer
21
<PAGE>
EXHIBIT 10.7
=============================================================================
* * * * *
OUTSIDE DIRECTORS STOCK OPTION PLAN
OF
COSTILLA ENERGY, INC.
(A DELAWARE CORPORATION)
* * * * *
=============================================================================
<PAGE>
TABLE OF CONTENTS
* * *
OUTSIDE DIRECTORS STOCK OPTION PLAN
OF
COSTILLA ENERGY, INC.
==============================================================================
1. PURPOSE OF PLAN. . . . . . . . . . . . . . . . . . . . . . . . 1
2. STOCK SUBJECT TO THE PLAN. . . . . . . . . . . . . . . . . . . 1
3. PERSONS ELIGIBLE UNDER THE PLAN. . . . . . . . . . . . . . . . 2
4. ADMINISTRATION OF THE PLAN . . . . . . . . . . . . . . . . . . 2
(a) GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . 2
(b) GRANT OF OPTIONS . . . . . . . . . . . . . . . . . . . . 2
(c) CONDITIONAL GRANTS . . . . . . . . . . . . . . . . . . . 3
(d) CHANGES IN LAW APPLICABLE. . . . . . . . . . . . . . . . 3
5. TERMS AND CONDITIONS OF OPTIONS. . . . . . . . . . . . . . . . 3
(a) NUMBER OF SHARES . . . . . . . . . . . . . . . . . . . . 3
(b) EXERCISE PRICE . . . . . . . . . . . . . . . . . . . . . 4
(c) VESTING. . . . . . . . . . . . . . . . . . . . . . . . . 4
(d) OPTION PERIOD. . . . . . . . . . . . . . . . . . . . . . 4
(1) GENERAL. . . . . . . . . . . . . . . . . . . . . . 4
(2) TERMINATION OF STATUS AS OUTSIDE DIRECTOR. . . . . 4
(3) DEATH. . . . . . . . . . . . . . . . . . . . . . . 4
(e) EXERCISE OF OPTIONS. . . . . . . . . . . . . . . . . . . 5
(f) NON-TRANSFERABILITY OF OPTIONS . . . . . . . . . . . . . 5
(g) COMPLIANCE WITH SECURITIES LAWS. . . . . . . . . . . . . 5
6. MEDIUM AND TIME OF PAYMENT . . . . . . . . . . . . . . . . . . 6
7. RIGHTS AS A STOCKHOLDER. . . . . . . . . . . . . . . . . . . . 7
8. ADJUSTMENTS ON CHANGES IN CAPITALIZATION OR
REORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . 7
(a) CHANGES IN CAPITALIZATION. . . . . . . . . . . . . . . . 7
(b) REORGANIZATION . . . . . . . . . . . . . . . . . . . . . 8
(c) FRACTIONAL SHARES. . . . . . . . . . . . . . . . . . . . 8
(d) CHANGE IN PAR VALUE. . . . . . . . . . . . . . . . . . . 8
<PAGE>
(e) NOTICE OF ADJUSTMENTS. . . . . . . . . . . . . . . . . . 9
(f) NON-ADJUSTABLE EVENTS. . . . . . . . . . . . . . . . . . 9
(g) RIGHT OF COMPANY TO MAKE ADJUSTMENTS . . . . . . . . . . 9
9. TIME OF GRANTING OPTIONS AND OPTION AGREEMENT. . . . . . . . . 9
10. NO OBLIGATION TO EXERCISE OPTION . . . . . . . . . . . . . . . 10
11. EFFECTIVE DATE OF THE PLAN . . . . . . . . . . . . . . . . . . 10
12. TERMINATION OF THE PLAN. . . . . . . . . . . . . . . . . . . . 10
13. MODIFICATION, EXTENSION, AND RENEWAL OF OPTIONS. . . . . . . . 10
14. AMENDMENT OF THE PLAN. . . . . . . . . . . . . . . . . . . . . 11
ii
<PAGE>
OUTSIDE DIRECTORS STOCK OPTION PLAN
OF
COSTILLA ENERGY, INC.
1. PURPOSE OF PLAN. This Outside Directors Stock Option Plan (the
"Plan") is intended to encourage ownership of the common stock of COSTILLA
ENERGY, INC. (the "Company") by Outside Directors (as hereinafter defined) of
the Company in order to provide additional incentive for such persons to
promote the success of the business of the Company and to encourage each of
them to become and remain an Outside Director of the Company by providing
such persons an opportunity to benefit from any appreciation of the common
stock of the Company through the issuance of stock options to such persons in
accordance with the terms of the Plan. It is further intended that options
granted pursuant to this Plan (the "Options") shall constitute non-qualified
stock options within the meaning of the Internal Revenue Code of 1986 (the
"Code").
2. STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided in
Section 8 hereof, an aggregate of 50,000 shares of the common stock, $.10 par
value, of the Company (the "Common Stock"), will be reserved and authorized
for issuance upon the exercise of Options, which shares in whole or in part
shall be authorized, but unissued, shares of the Common Stock or issued
shares of Common Stock which are reacquired by the Company as determined from
time to time by the Board of Directors. The number of shares of Common Stock
available at any time for the granting of Options under the Plan shall be
equal to the total number of reserved shares of Common Stock less the number
of shares of Common Stock
<PAGE>
underlying outstanding Options or which have been issued upon exercise of
Options. If an Option ceases to be exercisable in whole or in part, the
shares represented by such Option shall continue to be available under the
Plan for purposes of granting Options with respect thereto.
The Company will not be required upon the exercise of any Option
to issue or deliver any shares of stock prior to the completion of such
registration or other qualification of such shares under any State or Federal
law, rule or regulation as the Company shall determine to be necessary or
desirable.
3. PERSONS ELIGIBLE UNDER THE PLAN. Only those persons qualifying
as Outside Directors, as defined herein, are eligible to participate in the
Plan and receive Options hereunder. As used herein, the term "Outside
Directors" means only those directors of the Company who are not executive
officers or regular salaried employees of the Company as of the date an
Option is granted.
4. ADMINISTRATION OF THE PLAN.
(a) GENERAL. The grant of options under the Plan shall be
non-discretionary and based solely upon whether a person is eligible as an
Outside Director. The ministerial tasks associated with the Plan, including
without limitation completing option grant documents, determining the
exercise prices from objective sources and issuing shares of Common Stock
upon exercise of an Option, shall be performed by the officers of the
Company. Such officers shall have no discretion in performing such tasks,
and must do so in compliance with the terms of the Plan and applicable law.
(b) GRANT OF OPTIONS. Each person who qualifies as an Outside
Director shall receive, each year such person so qualifies, an Option for
1,000 shares of Common Stock. Such an Option shall be granted
OUTSIDE DIRECTORS STOCK OPTION PLAN - Page 2
<PAGE>
an Option shall be granted annually to each Outside Director on the day
immediately following the date such Outside Director is elected by the
stockholders of the Company beginning in 1997 and continuing for ten (10)
years thereafter; provided, that if no election of directors occurs within a
thirteen (13) month period after the last such election, such an Option shall
be granted to each Outside Director on the last day of that thirteen (13)
month period.
(c) CONDITIONAL GRANTS. All Options granted prior to the date
the Company's Registration Statement on Form S-1 with respect to the Common
Stock, file number 333-08913 is declared effective by the Securities and
Exchange Commission (the "Commission") are expressly conditioned upon such
effectiveness. If such effectiveness is not obtained within one (1) year from
the Effective Date, such conditionally granted Options shall automatically
terminate and be of no effect or value. In addition to any other limitations
provided herein, no Option may be exercised until such Registration Statement
is declared effective by the Commission.
(d) CHANGES IN LAW APPLICABLE. If the laws relating to
non-qualified stock options are changed, altered or amended during the term
of the Plan, the Board of Directors shall have full authority and power to
alter or amend the Plan to conform to such changes in the law without the
necessity of obtaining stockholder approval, unless such changes require such
approval.
5. TERMS AND CONDITIONS OF OPTIONS. All Options granted pursuant to
this Plan must be granted within ten (10) years from the Effective Date.
(a) NUMBER OF SHARES. Each Option shall represent 1,000 shares
of Common Stock.
OUTSIDE DIRECTORS STOCK OPTION PLAN - Page 3
<PAGE>
(b) EXERCISE PRICE. The purchase price for each share of Common
Stock purchased upon exercise of an Option shall be equal to the fair market
value of a share of Common Stock at the time the Option is granted. The
"fair market value" per share of Common Stock shall be equal to the closing
price of the Common Stock as reported on The Nasdaq Stock Market's National
Market (the "Nasdaq National Market") or other stock exchange on the day the
Option is granted, so long as the Common Stock is quoted thereon. If no sale
is reported on the day the Option is granted, the "fair market value" shall
be equal to the closing price reported on the next preceding day on which a
sale of Common Stock is reported. If the Common Stock is not listed on the
Nasdaq National Market or another stock exchange, the exercise price shall be
set by the Board of Directors.
(c) VESTING. Each Option shall be fully vested and exercisable
on the date such Option is granted, subject to the limitations provided in
Section 4(c) hereof.
(d) OPTION PERIOD.
(1) GENERAL. Each Option shall state the date
upon which it is granted. Each Option shall be exercisable
for a period of ten (10) years from the date of grant.
(2) TERMINATION OF STATUS AS OUTSIDE DIRECTOR.
In the event an optionee's status as an Outside Director is
terminated for any reason other than the death of such
optionee prior to the full exercise of an Option, such
optionee may exercise the Option at any time within six (6)
months after such termination to the extent the optionee
was entitled to exercise such option on the date of such
termination; provided, however, that the Option may not be
exercised after the expiration of the term of the Option.
(3) DEATH. If an optionee dies while an Outside
Director of the Company or during the exercise period
following termination as provided in Section 5(d)(2) above
and held unexercised Options granted pursuant to the Plan
at the time of death, such Options may be exercised in whole or
in part at any time within one (1) year
OUTSIDE DIRECTORS STOCK OPTION PLAN - Page 4
<PAGE>
after the optionee's death by the executors or administrators
of the optionee's estate or by any person or persons who acquire
the Options directly from the optionee by bequest or inheritance;
provided, however, that no Option shall be exercisable after the
expiration of the term of the Option.
(e) EXERCISE OF OPTIONS. To the extent that a holder of an
Option has a current right to exercise the Option, said Option may be
exercised from time to time by written notice to the attention of the
Secretary of the Company at its principal place of business. Such notice
shall state the election to exercise the Option and the number of shares in
respect of which it is being exercised, and shall be signed and dated by the
person or persons so exercising the Option. Such notice shall be accompanied
by payment of the full purchase price of such shares, as provided in Section
6 hereof. The Company will deliver a certificate or certificates
representing such shares as soon as practicable after such notice and payment
are received. The certificate or certificates for the shares as to which the
Option is exercised will be registered on the books of the Company in the
name of the person or persons exercising the Option.
(f) NON-TRANSFERABILITY OF OPTIONS. An Option granted pursuant
to the Plan is exercisable only by the optionee during his or her lifetime
and is not assignable or transferable by him or her other than by will or the
laws of descent and distribution.
(g) COMPLIANCE WITH SECURITIES LAWS. At the time of exercise of
any Option, the Company may require the optionee to execute any documents or
take any action which may be necessary to comply with the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder, or any other applicable federal
or state laws regulating the sale and issuance of securities; and the Company
may, if it deems necessary, include provisions in the option agreements
authorized under the
OUTSIDE DIRECTORS STOCK OPTION PLAN - Page 5
<PAGE>
Plan to assure such compliance. The Company may, from time to time, change
its requirements with respect to enforcing compliance with federal and state
securities laws, including without limitation the request for and enforcement
of agreements of investment intent, such requirements to be determined by the
Company in its judgment as necessary to assure compliance with such laws.
6. MEDIUM AND TIME OF PAYMENT. The purchase price of the shares of
the Common Stock purchased upon the exercise of an Option shall be paid in
full at the time of exercise and shall be payable in cash in United States
dollars (including cashier's or certified check, bank draft or money order);
provided, however, that in lieu of such cash the person exercising the Option
may pay the exercise price in whole or in part by delivering to the Company
shares of the Common Stock having a fair market value on the date of exercise
of the stock option (determined by the closing price of the Common Stock on
the Nasdaq National Market on that day, or if no price is reported on that
day, on the next preceding day on which a closing price is reported) equal to
the purchase price for the shares being purchased; except that (i) any
portion of the purchase price representing a fraction of a share shall in any
event be paid in cash and (ii) no shares of the Common Stock which have been
held for less than six months may be delivered in payment of the purchase
price of a stock option. Delivery of shares may be accomplished through the
effective transfer to the Company of shares of Common Stock held by a broker
or other agent. The Company will also cooperate with any person exercising
an Option who participates in a cashless exercise program of a broker or
other agent under which all or part of the shares received upon exercise of
the Option are sold through the broker or other agent or under which the
broker or other agent makes a loan to such person. Notwithstanding the
foregoing, the exercise of the Option shall not be deemed to occur and no
OUTSIDE DIRECTORS STOCK OPTION PLAN - Page 6
<PAGE>
shares of Common Stock will be issued by the Company upon exercise of the
Option until the Company has received payment of the purchase price in full.
The date of exercise of an Option shall be the date of full payment of the
purchase price. Payment of the purchase price with shares of Common Stock
will not increase the number of shares of Common Stock that may be issued
under the Plan as provided in Section 2.
7. RIGHTS AS A STOCKHOLDER. The holder of an Option shall have no
rights as a stockholder of the Company with respect to the shares covered by
his or her Option until the due exercise of the Option and the date of
issuance of one or more stock certificates to him or her for such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for
which the record date is prior to the date such stock certificate(s) are
issued and delivered, except as provided in Section 8 hereof.
8. ADJUSTMENTS ON CHANGES IN CAPITALIZATION OR REORGANIZATION.
(a) CHANGES IN CAPITALIZATION. Subject to any required action
by the stockholders of the Company, the number of shares of Common Stock
covered by the Plan as provided in Section 2 hereof, the number of shares of
Common Stock covered by each outstanding Option, and the exercise price per
share specified in each such Option, shall be proportionately adjusted for
any increase or decrease in the number of issued shares of Common Stock of
the Company after the date the Option is granted resulting from a subdivision
or consolidation of shares, or the payment of a stock dividend (but only on
the Common Stock), stock split, or any other increase or decrease in the
number of such shares effected without receipt of consideration by the
Company, so that upon exercise of the Option, the optionee shall receive the
same proportionate number of shares he or she would have received had he or
she
OUTSIDE DIRECTORS STOCK OPTION PLAN - Page 7
<PAGE>
been the holder of all shares subject to his or her outstanding Options
immediately before the effective date of such change in the number of issued
shares of the Common Stock of the Company.
(b) REORGANIZATION. Subject to any required action by the
stockholders of the Company, if the outstanding shares of the Common Stock
shall be changed into or exchangeable for a different number or kind of
shares of stock or other securities of the Company or another entity, whether
through reorganization, reclassification, recapitalization, stock split-up,
combination of shares, merger or consolidation, then there shall be
substituted for each share of the Common Stock set forth in Section 2, for
each share of the Common Stock subject to any then outstanding Option and for
each share of the Common Stock which may be issued under the Plan but which
is not then subject to any outstanding Option, the number and kind of shares
of stock or other securities into which each outstanding share of the Common
Stock shall be so changed or for which each such share shall be exchangeable.
(c) FRACTIONAL SHARES. No adjustment or substitution provided
for in this Section 8 shall require the Company to issue or sell a fraction
of a share or other security. Accordingly, all fractional shares or other
securities which result from any such adjustment or substitution shall be
eliminated and not carried forward to any subsequent adjustment or
substitution.
(d) CHANGE IN PAR VALUE. In the event of a change in the Common
Stock of the Company as presently constituted, which change is limited to a
change of all of its authorized shares with par value into the same number of
shares with a different par value or without par value, the shares resulting
from any such change shall be deemed to be the Common Stock within the
meaning of the Plan.
OUTSIDE DIRECTORS STOCK OPTION PLAN - Page 8
<PAGE>
(e) NOTICE OF ADJUSTMENTS. To the extent that the adjustments
set forth in the foregoing paragraphs of this Section 8 relate to stock or
securities of the Company, such adjustments, if any, shall be made by the
Board of Directors, whose actions in that respect shall be final, binding and
conclusive. The Company shall give timely notice of any adjustments made to
each holder of an Option under this Plan and such adjustments shall be
effective and binding on the optionee.
(f) NON-ADJUSTABLE EVENTS. Except as expressly provided herein,
the adjustments provided in this Section 8 shall not be made with respect to
any increase or decrease in the number of issued shares of Common Stock or
other securities of the Company caused by (i) the dissolution, liquidation,
merger, reorganization, consolidation, or spin-off of assets or stock of any
entity other than the Company; or (ii) any issuance by the Company of shares
of Common Stock or any other securities upon the receipt of consideration for
such issuance. Any such change shall not affect the number or price of
shares of Common Stock reserved under the Plan or subject to an Option.
(g) RIGHT OF COMPANY TO MAKE ADJUSTMENTS. The grant of an
Option pursuant to the Plan shall not affect in any way the right or power of
the Company to make adjustments, reclassifications, reorganizations, or
changes of its capital or business structure or to merge or consolidate or to
sell or transfer all or any part of its business or assets.
9. TIME OF GRANTING OPTIONS AND OPTION AGREEMENT. Neither anything
contained in the Plan nor in any resolution adopted or to be adopted by the
Board of Directors or the stockholders of the Company shall constitute the
granting of any Option. The granting of an Option shall be effected only
when a written Option Agreement acceptable in form and substance to the Board
of Directors, in accordance with and subject to the terms and conditions
hereof,
OUTSIDE DIRECTORS STOCK OPTION PLAN - Page 9
<PAGE>
shall have been duly executed by the president or other duly authorized
officer of the Company and by the person to whom such Option shall be granted
and delivered to such person. No person shall have any rights under the Plan
until such time, if any, as a written Option Agreement shall have been duly
executed and delivered as set forth in this Section 9.
10. NO OBLIGATION TO EXERCISE OPTION. The granting of an Option
shall impose no obligation upon the optionee to exercise such Option, or
purchase any shares of Common Stock.
11. EFFECTIVE DATE OF THE PLAN. The Plan shall become effective on
September 1, 1996, (the "Effective Date"), subject to the Company's
Registration Statement on Form S-1 with respect to the Common Stock, file
number 333-08913, being declared effective by the Commission. If no such
effectiveness is obtained on or before one (1) year from the Effective Date,
the Plan shall terminate, and all Options conditionally granted hereunder
shall be null and void and of no force or effect.
12. TERMINATION OF THE PLAN. This Plan shall terminate as of the
expiration of ten (10) years from and after the Effective Date of the Plan or
at such earlier time as may be determined by the Board of Directors in its
sole discretion. Options may be granted under this Plan at any time and from
time to time prior to its termination. Any Option outstanding under the Plan
at the time of its termination shall remain in effect until the Option is
exercised or its term expires, and the terms and conditions of the Plan shall
survive and remain in full force and effect as to such Option.
13. MODIFICATION, EXTENSION, AND RENEWAL OF OPTIONS. Subject to the
terms and conditions and within the limitations of the Plan, the Board of
Directors may modify, extend or renew outstanding Options granted under the
Plan, or accept the surrender of outstanding Options (to the extent not
theretofore exercised). The Board of Directors may, at any time prior
OUTSIDE DIRECTORS STOCK OPTION PLAN - Page 10
<PAGE>
to the exercise of an Option when the fair market value of the Common Stock
falls below the exercise price of the Option, modify any outstanding Option
to specify a lower exercise price or cancel an outstanding Option and grant a
new Option in replacement therefor at a lower exercise price, which lower
price shall be equal to the fair market value of the Common Stock (as
determined by the closing price of the Common Stock on the Nasdaq National
Market) on the date of such modification or replacement. Notwithstanding the
foregoing, however, no modification of an Option shall, without the consent
of the optionee, alter or impair any rights or obligations under any Option
theretofore granted under the Plan.
14. AMENDMENT OF THE PLAN. The Board of Directors may at any time
and from time to time, without obtaining the approval of the stockholders of
the Company, modify or amend the Plan in such respects as it shall deem
advisable to conform to any change in the law or in any other respect. The
termination or any modification or amendment of the Plan shall not, without
the consent of the person to whom any Option was previously granted, affect
his or her rights under an Option theretofore granted to him or her.
15. WITHHOLDING. The Company may, at any time an Option is granted
under the Plan, or at the time any Option is exercised, require the Outside
Director receiving the grant or exercising the Option to pay any amount
necessary to satisfy federal, state, and local withholding requirements with
respect to such grant or exercise, such tax withholding may be satisfied at
the Company's option by the Company withholding of Common Stock to be issued
as a result of the exercise of the Option. If shares of Common Stock are
withheld, the number of shares withheld shall be equal to the dollar amount
to be withheld divided by the closing price per share of the Common Stock on
the Nasdaq National Market.
OUTSIDE DIRECTORS STOCK OPTION PLAN - Page 11
<PAGE>
The foregoing Outside Directors Stock Option Plan of Costilla Energy,
Inc. was adopted and approved by the Board of Directors and stockholders of
the Company on the 26th day of August, 1996.
COSTILLA ENERGY, INC.
By:
-------------------------------------
Michael J. Grella
President and Chief Operating Officer
OUTSIDE DIRECTORS STOCK OPTION PLAN - Page 12
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
AGREEMENT entered into as of the 1st day of September, 1996,
between COSTILLA ENERGY, INC. (the "Company") and CADELL S.
LIEDTKE ("Liedtke"), but effective only as provided in Section 1.
below.
In consideration of the mutual agreements herein contained,
the parties hereto agree as follows:
1. This Agreement shall be effective, if at all, upon the
closing of the transaction contemplated by that certain
registration statement of the Company filed with the Securities
and Exchange Commission on Form S-1 (File No. 333-08913) offering
shares of Company's Common Stock to the public (the "Closing
Date"), and shall continue in effect for a three-year period from
the Closing Date (the "Initial Term"), provided however, this
Agreement will automatically renew for a period of one year, and
successive one-year periods thereafter, unless Liedtke is
notified of its termination in writing by placing such notice in
United States certified mail, return receipt requested, postage
prepaid at the address shown below, at least 90 days prior to the
stated termination date (the "Stated Termination Date) or 90 days
prior to any successive Stated Termination Dated thereafter. If
the Closing Date shall not have occurred on or prior to December
31, 1996, this Agreement shall be of no force and effect. This
Agreement may also be terminated by the Company because of
Liedtke's willful misconduct, negligence, inability to perform
the services required, dishonesty, breach of a fiduciary duty,
willful violation of any law, rule, regulation (other than a law,
rule or regulation relating to a traffic violation or similar
offense), or a material breach of any provision of this
Agreement, which remains uncured after 30 days' written notice to
Liedtke.
1. The Company may terminate Liedtke's employment
hereunder without cause, effective on the date written notice of
such termination is placed in United States certified mail,
return receipt requested, postage prepaid, addressed to Liedtke
at the address shown below. Termination without cause will be
deemed to have occurred if the Company significantly reduces
Liedtke's duties and responsibilities in a manner inconsistent
with his experience, training and background; provided, however,
that upon any such termination, Liedtke shall be paid the greater
of the Base Salary then in effect for the remaining term of the
Agreement or one year's salary at the then Base Salary rate. Any
vested benefits of Liedtke under any plan or agreement shall not
be affected.
2. Liedtke may terminate his employment hereunder upon at
least one month's written notice to the Company placed in United
States certified mail, return receipt requested, postage prepaid
to the address shown below. If Liedtke terminates his employment
during the first two years of this Agreement, the Company's
obligations under this Agreement shall cease immediately except
as provided below upon receipt of such notice of termination by
the Company and Liedtke
<PAGE>
will be paid his Base Salary on a pro rata basis through the last
day worked. If Liedtke terminates his employment subsequent to the
second anniversary of this Agreement, he will be paid his Base
Salary for a one year period following his termination date.
3. Liedtke's title during his term of employment shall be
Chairman of the Board and Chief Executive Officer. During the
term of this Agreement, and subject to the other provisions of
this Agreement, Liedtke shall diligently provide services to the
Company.
4. Liedtke agrees that this contract is one for full time
employment, that he will spend no less than 40 hours per week
(subject to legal holidays and vacations as set forth below) at
this employment.
5. As compensation for the services to be rendered by
Liedtke, the Company shall pay Liedtke a Base Salary at the
annual rate of $300,000 beginning on the Closing Date. Liedtke
shall be considered for periodic salary increases at the
discretion of the Board of Directors. Notwithstanding the
quotation of the Base Salary at an annual rate, Liedtke will only
be paid on a pro rata basis only for the actual days worked if
his employment is terminated.
6. Liedtke shall be entitled to 21 days paid vacation in
each calendar year, earned pro rata each month. Liedtke shall be
entitled to all paid holidays given by the Company to its senior
executive officers.
7. The Company shall reimburse Liedtke for any direct,
reasonable and necessary expenses incurred directly at the
request of the Company in the performance of this Agreement, such
expenses to generally include, but not be limited to, travel,
lodging and meals incurred while away from Midland and any other
directly attributable expenses to carrying out Liedtke's
obligations under this Agreement.
8. If, as a result of Liedtke's inability to perform the
essential functions of the duties set out herein, with or without
accommodation, due to physical or mental illness or injury, and
if Liedtke shall have been absent from his duties hereunder for
more than 180 days within any 365-day period, the Company shall
be entitled to deliver written notice of termination to Liedtke
and if within 30 days after any such written notice of
termination is given, Liedtke shall not have returned to the
performance of his duties in accordance with the terms of this
Agreement, the Company may terminate his employment hereunder
upon written notice placed in United States certified mail,
return receipt requested, postage prepaid to the address shown
below. Upon the death of Liedtke during the term of this
Agreement, the Company shall continue to pay to Liedtke's estate
the Base Salary for one year following Liedtke's death, following
which the obligations of the Company under this Agreement shall
terminate in their entirety. Termination of Liedtke's employment
under this paragraph shall not affect Liedtke's entitlement to
any vested benefits provided herein.
-2-
<PAGE>
9. NONCOMPETITION; NONDISCLOSURE.
(a) Liedtke agrees to not engage in any Competitive
Activity for one (1) year following the date of his termination
of employment with Company, if Liedtke's employment terminates
during the Initial Term; provided, however, that this Section
10(a) shall not apply if the Company terminates Liedtke's
employment without cause. For the purposes of this Section
10(a), "Competitive Activity" shall mean activity, without the
written consent of the Board of Directors of the Company (which
consent shall not be unreasonably withheld), consisting of
Liedtke's participation in the management of, or Liedtke's
acquisition of any interest as a director, officer, shareholder,
partner, owner or agent of, in or for any corporation,
partnership or business in competition with the Company's
Business; provided, however, that nothing in this Section 10 it
shall be construed as prohibiting Liedtke from acquiring up to,
but not more than five percent (5%) of the equity or other
interest in any such corporation, partnership or other entity.
For purposes of this Section 10, the "Company's Business" shall
mean the exploration for, drilling and development of oil and gas
reserves in such areas as the Company is conducting such
activities on thee date of termination.
(b) Liedtke agrees not to disclose, either while in
the Company's employ or at any time thereafter, to any person not
employed on a full-time basis by the Company or its affiliates,
or not engaged to render services to the Company or its
affiliates, except with the prior written consent of any officer
authorized to act in the matter by the Board, any confidential
information obtained by Liedtke while in the employ of the
Company, provided, however, that this provision shall not
preclude Liedtke from the use or disclosure of information know
generally to the public or of information not considered
confidential by persons engaged in the business conducted by the
Company or from disclosure required by law or court order; and
further provided that this provision shall cease to apply if the
Company terminates Liedtke's employment without cause. The
agreement made in this Section 10 shall be in addition to, and
not in limitation or derogation of, any obligations otherwise
imposed by law or by separate agreement upon Liedtke in respect
of confidential information of the Company.
10. If any action at law or equity is necessary to enforce
or interpret the terms of this Agreement, the prevailing party
shall be entitled to reasonable attorney's fees, as may be
awarded by the court, costs and necessary disbursements in
addition to any other relief to which it may be entitled. This
provision shall be binding on the parties without regard to
whether attorney's fees would be due under statute or common law.
11. All notices authorized or required by the parties
hereunder shall be given in writing by United States certified
mail, return receipt requested, postage prepaid, and addressed to
the party to whom the notice is given at the addresses shown on
the signature page. Notices shall be deemed given when deposited
in the United States mail. Each party shall have the right to
change its addresses at any time and from time to time by giving
written notice thereof to the other.
-3-
<PAGE>
12. This Agreement shall be construed under and in
accordance with the laws of the State of Texas.
13. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs,
executors, administrators, legal representatives, successors and
assigns where permitted by this Agreement. However, the services
to be provided by Liedtke are personal and not performable in
satisfaction of this Agreement by any other person.
14. In case any one or more of the provisions contained in
this Agreement shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other
provisions hereof, and this Agreement shall be construed as if
such invalid, illegal or unenforceable provision had never been
contained herein.
15. This Agreement constitutes the sole and only agreement
of the parties hereto and supersedes any prior understandings or
written or oral agreement between the parties respecting the
within subject matter. The parties agree this contract can be
modified only in writing and that Liedtke will not rely on any
oral representations of any sort or character regarding his
employment status, salary, bonuses or benefits.
16. For purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when placed in United
States certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to Liedtke:
Cadell S. Liedtke
900 North F Street
Midland, Texas 79701
If to the Company:
Costilla Energy, Inc.
P. O. Box 10369
Midland, Texas 79702
Attention: Chairman of the Board
or to such other address as either party may have furnished to
the other in writing in accordance herewith, except that notices
of change of address shall be effective only upon receipt.
-4-
<PAGE>
/s/ Cadell S. Liedtke
---------------------------------
CADELL S. LIEDTKE
COSTILLA ENERGY, INC.
By: /s/ Michael J. Grella
----------------------------
Michael J. Grella
President
THE STATE OF TEXAS )
COUNTY OF MIDLAND )
This instrument was acknowledged before me on this the ___
day of _____________, 1996, by CADELL S. LIEDTKE.
---------------------------------------
Notary Public - State of --------------
Print Name: ---------------------------
My Comm. Expires: ---------------------
THE STATE OF TEXAS )
COUNTY OF MIDLAND )
This instrument was acknowledged before me on this ____ day
of ___________ , 1996, by MICHAEL J. GRELLA, as President of
COSTILLA ENERGY, INC., a Delaware corporation, on behalf of said
corporation.
---------------------------------------
Notary Public - State of Texas
Print Name: ---------------------------
My Commission Expires: ----------------
-5-
<PAGE>
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
AGREEMENT entered into as of the 1st day of September, 1996,
between COSTILLA ENERGY, INC. (the "Company") and MICHAEL J. GRELLA
("Grella"), but effective only as provided in Section 1. below.
In consideration of the mutual agreements herein contained,
the parties hereto agree as follows:
1. This Agreement shall be effective, if at all, upon the
closing of the transaction contemplated by that certain
registration statement of the Company filed with the Securities
and Exchange Commission on Form S-1 (File No. 333-08913) offering
shares of Company's Common Stock to the public (the "Closing
Date"), and shall continue in effect for a three-year period from
the Closing Date (the "Initial Term"), provided however, this
Agreement will automatically renew for a period of one year, and
successive one-year periods thereafter, unless Grella is
notified of its termination in writing by placing such notice in
United States certified mail, return receipt requested, postage
prepaid at the address shown below, at least 90 days prior to the
stated termination date (the "Stated Termination Date) or 90 days
prior to any successive Stated Termination Dated thereafter. If
the Closing Date shall not have occurred on or prior to December 31,
1996, this Agreement shall be of no force and effect. This
Agreement may also be terminated by the Company because of
Grella's willful misconduct, negligence, inability to perform
the services required, dishonesty, breach of a fiduciary duty,
willful violation of any law, rule, regulation (other than a law,
rule or regulation relating to a traffic violation or similar
offense), or a material breach of any provision of this
Agreement, which remains uncured after 30 days' written notice to
Grella.
1. The Company may terminate Grella's employment
hereunder without cause, effective on the date written notice of
such termination is placed in United States certified mail,
return receipt requested, postage prepaid, addressed to Grella
at the address shown below. Termination without cause will be
deemed to have occurred if the Company significantly reduces
Grella's duties and responsibilities in a manner inconsistent
with his experience, training and background; provided, however,
that upon any such termination, Grella shall be paid the greater
of the Base Salary then in effect for the remaining term of the
Agreement or one year's salary at the then Base Salary rate. Any
vested benefits of Grella under any plan or agreement shall not
be affected.
2. Grella may terminate his employment hereunder upon at
least one month's written notice to the Company placed in United
States certified mail, return receipt requested, postage prepaid
to the address shown below. If Grella terminates his employment
during the first two years of this Agreement, the Company's
obligations under this Agreement shall cease immediately except
as provided below upon receipt of such notice of termination by
the Company and Grella
<PAGE>
will be paid his Base Salary on a pro rata basis through
the last day worked. If Grella terminates his employment
subsequent to the second anniversary of this Agreement,
he will be paid his Base Salary for a one year period
following his termination date.
3. Grella's title during his term of employment
shall be President and Chief Operating Officer. During
the term of this Agreement, and subject to the other
provisions of this Agreement, Grella shall diligently
provide services to the Company.
4. Grella agrees that this contract is one for
full time employment, that he will spend no less than 40
hours per week (subject to legal holidays and vacations
as set forth below) at this employment.
5. As compensation for the services to be rendered
by Grella, the Company shall pay Grella a Base Salary at
the annual rate of $300,000 beginning on the Closing
Date. Grella shall be considered for periodic salary
increases at the discretion of the Board of Directors.
Notwithstanding the quotation of the Base Salary at an
annual rate, Grella will only be paid on a pro rata basis
only for the actual days worked if his employment is
terminated.
6. Grella shall be entitled to 21 days paid
vacation in each calendar year, earned pro rata each
month. Grella shall be entitled to all paid holidays
given by the Company to its senior executive officers.
7. The Company shall reimburse Grella for any
direct, reasonable and necessary expenses incurred
directly at the request of the Company in the performance
of this Agreement, such expenses to generally include,
but not be limited to, travel, lodging and meals incurred
while away from Midland and any other directly
attributable expenses to carrying out Grella's
obligations under this Agreement.
8. If, as a result of Grella's inability to
perform the essential functions of the duties set out
herein, with or without accommodation, due to physical
or mental illness or injury, and if Grella shall have
been absent from his duties hereunder for more than 180
days within any 365-day period, the Company shall be
entitled to deliver written notice of termination to
Grella and if within 30 days after any such written
notice of termination is given, Grella shall not have
returned to the performance of his duties in accordance
with the terms of this Agreement, the Company may
terminate his employment hereunder upon written notice
placed in United States certified mail, return receipt
requested, postage prepaid to the address shown below.
Upon the death of Grella during the term of this
Agreement, the Company shall continue to pay to Grella's
estate the Base Salary for one year following Grella's
death, following which the obligations of the Company
under this Agreement shall terminate in their entirety.
Termination of Grella's employment under this paragraph
shall not affect Grella's entitlement to any vested
benefits provided herein.
-2-
<PAGE>
9. NONCOMPETITION; NONDISCLOSURE.
(a) Grella agrees to not engage in any Competitive
Activity for one (1) year following the date of his termination
of employment with the Company, if Grella's employment terminates
during the Initial Term; provided, however, that this Section
10(a) shall not apply if the Company terminates Grella's
employment without cause. For the purposes of this Section
10(a), "Competitive Activity" shall mean activity, without the
written consent of the Board of Directors of the Company (which
consent shall not be unreasonably withheld), consisting of
Grella's participation in the management of, or Grella's
acquisition of any interest as a director, officer, shareholder,
partner, owner or agent of, in or for any corporation,
partnership or business in competition with the Company's
Business; provided, however, that nothing in this Section 10 it
shall be construed as prohibiting Grella from acquiring up to,
but not more than five percent (5%) of the equity or other
interest in any such corporation, partnership or other entity.
For purposes of this Section 10, the "Company's Business" shall
mean the exploration for, drilling and development of oil and gas
reserves in such areas as the Company is conducting such
activities on the date of termination.
(b) Grella agrees not to disclose, either while in
the Company's employ or at any time thereafter, to any person not
employed on a full-time basis by the Company or its affiliates,
or not engaged to render services to the Company or its
affiliates, except with the prior written consent of any officer
authorized to act in the matter by the Board, any confidential
information obtained by Grella while in the employ of the
Company, provided, however, that this provision shall not
preclude Grella from the use or disclosure of information know
generally to the public or of information not considered
confidential by persons engaged in the business conducted by the
Company or from disclosure required by law or court order; and
further provided that this provision shall cease to apply if the
Company terminates Grella's employment without cause. The
agreement made in this Section 10 shall be in addition to, and
not in limitation or derogation of, any obligations otherwise
imposed by law or by separate agreement upon Grella in respect
of confidential information of the Company.
10. If any action at law or equity is necessary to enforce
or interpret the terms of this Agreement, the prevailing party
shall be entitled to reasonable attorney's fees, as may be
awarded by the court, costs and necessary disbursements in
addition to any other relief to which it may be entitled. This
provision shall be binding on the parties without regard to
whether attorney's fees would be due under statute or common law.
11. All notices authorized or required by the parties
hereunder shall be given in writing by United States certified
mail, return receipt requested, postage prepaid, and addressed to
the party to whom the notice is given at the addresses shown on
the signature page. Notices shall be deemed given when deposited
in the United States mail. Each party shall have the right to
change its addresses at any time and from time to time by giving
written notice thereof to the other.
-3-
<PAGE>
12. This Agreement shall be construed under and in
accordance with the laws of the State of Texas.
13. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs,
executors, administrators, legal representatives, successors and
assigns where permitted by this Agreement. However, the services
to be provided by Grella are personal and not performable in
satisfaction of this Agreement by any other person.
14. In case any one or more of the provisions contained in
this Agreement shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other
provisions hereof, and this Agreement shall be construed as if
such invalid, illegal or unenforceable provision had never been
contained herein.
15. This Agreement constitutes the sole and only agreement
of the parties hereto and supersedes any prior understandings or
written or oral agreement between the parties respecting the
within subject matter. The parties agree this contract can be
modified only in writing and that Grella will not rely on any
oral representations of any sort or character regarding his
employment status, salary, bonuses or benefits.
16. For purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when placed in United
States certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to Grella:
Michael J. Grella
1 Willow Court
Midland, Texas 79705
If to the Company:
Costilla Energy, Inc.
P. O. Box 10369
Midland, Texas 79702
Attention: Chairman of the Board
or to such other address as either party may have furnished to
the other in writing in accordance herewith, except that notices
of change of address shall be effective only upon receipt.
-4-
<PAGE>
/s/ Michael J. Grella
---------------------------------
MICHAEL J. GRELLA
COSTILLA ENERGY, INC.
By: /s/ Cadell S. Liedtke
-----------------------------
Cadell S. Liedtke
Chairman of the Board
THE STATE OF TEXAS )
COUNTY OF MIDLAND )
This instrument was acknowledged before me on this the ___
day of _____________, 1996, by MICHAEL J. GRELLA.
---------------------------------
Notary Public - State of --------
Print Name: ---------------------
My Comm. Expires: ---------------
THE STATE OF TEXAS )
COUNTY OF MIDLAND )
This instrument was acknowledged before me on this ____ day
of ___________ , 1996, by CADELL S. LIEDTKE, as Chairman of the
Board of COSTILLA ENERGY, INC., a Delaware corporation,
on behalf of said corporation.
---------------------------------
Notary Public - State of Texas
Print Name: ---------------------
My Commission Expires: ----------
-5-
<PAGE>
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
AGREEMENT entered into as of the 1st day of September, 1996, between
COSTILLA ENERGY, INC. (the "Company") and HENRY G. MUSSELMAN ("Musselman"),
but effective only as provided in Section 1. below.
In consideration of the mutual agreements herein contained, the parties
hereto agree as follows:
1. This Agreement shall be effective, if at all, upon the closing of the
transaction contemplated by that certain registration statement of the
Company filed with the Securities and Exchange Commission on Form S-1 (File
No. 333-08913) offering shares of Company's Common Stock to the public (the
"Closing Date"), and shall continue in effect for a three-year period from
the Closing Date (the "Initial Term"), provided however, this Agreement will
automatically renew for a period of one year, and successive one-year periods
thereafter, unless Musselman is notified of its termination in writing by
placing such notice in United States certified mail, return receipt
requested, postage prepaid at the address shown below, at least 90 days prior
to the stated termination date (the "Stated Termination Date) or 90 days
prior to any successive Stated Termination Dated thereafter. If the Closing
Date shall not have occurred on or prior to December 31, 1996, this Agreement
shall be of no force and effect. This Agreement may also be terminated by
the Company because of Musselman's willful misconduct, negligence, inability
to perform the services required, dishonesty, breach of a fiduciary duty,
willful violation of any law, rule, regulation (other than a law, rule or
regulation relating to a traffic violation or similar offense), or a material
breach of any provision of this Agreement, which remains uncured after 30
days' written notice to Musselman.
1. The Company may terminate Musselman's employment hereunder without
cause, effective on the date written notice of such termination is placed in
United States certified mail, return receipt requested, postage prepaid,
addressed to Musselman at the address shown below. Termination without cause
will be deemed to have occurred if the Company significantly reduces
Musselman's duties and responsibilities in a manner inconsistent with his
experience, training and background; provided, however, that upon any such
termination, Musselman shall be paid the greater of the Base Salary then in
effect for the remaining term of the Agreement or one year's salary at the
then Base Salary rate. Any vested benefits of Musselman under any plan or
agreement shall not be affected.
2. Musselman may terminate his employment hereunder upon
at least one month's written notice to the Company placed in
United States certified mail, return receipt requested, postage
prepaid to the address shown below. If Musselman terminates his
employment during the first two years of this Agreement, the
Company's obligations under this Agreement shall cease
immediately except as provided below upon receipt of such notice
of termination by the Company
<PAGE>
and Musselman will be paid his Base Salary on a pro rata basis through the
last day worked. If Musselman terminates his employment subsequent to the
second anniversary of this Agreement, he will be paid his Base Salary for a
one year period following his termination date.
3. Musselman's title during his term of employment shall be Executive
Vice President. During the term of this Agreement, and subject to the other
provisions of this Agreement, Musselman shall diligently provide services to
the Company.
4. Musselman agrees that this contract is one for full time
employment, that he will spend no less than 40 hours per week (subject to
legal holidays and vacations as set forth below) at this employment.
5. As compensation for the services to be rendered by Musselman, the
Company shall pay Musselman a Base Salary at the annual rate of $215,000
beginning on the Closing Date. Musselman shall be considered for periodic
salary increases at the discretion of the Board of Directors.
Notwithstanding the quotation of the Base Salary at an annual rate, Musselman
will only be paid on a pro rata basis only for the actual days worked if his
employment is terminated.
6. Musselman shall be entitled to 21 days paid vacation in each
calendar year, earned pro rata each month. Musselman shall be entitled to
all paid holidays given by the Company to its senior executive officers.
7. The Company shall reimburse Musselman for any direct, reasonable
and necessary expenses incurred directly at the request of the Company in the
performance of this Agreement, such expenses to generally include, but not be
limited to, travel, lodging and meals incurred while away from Midland and
any other directly attributable expenses to carrying out Musselman's
obligations under this Agreement.
8. If, as a result of Musselman's inability to perform the essential
functions of the duties set out herein, with or without accommodation, due
to physical or mental illness or injury, and if Musselman shall have been
absent from his duties hereunder for more than 180 days within any 365-day
period, the Company shall be entitled to deliver written notice of
termination to Musselman and if within 30 days after any such written notice
of termination is given, Musselman shall not have returned to the performance
of his duties in accordance with the terms of this Agreement, the Company may
terminate his employment hereunder upon written notice placed in United
States certified mail, return receipt requested, postage prepaid to the
address shown below. Upon the death of Musselman during the term of this
Agreement, the Company shall continue to pay to Musselman's estate the Base
Salary for a period of one year Musselman's death, following which the
obligations of the Company under this Agreement shall terminate in their
entirety. Termination of Musselman's employment under this paragraph shall
not affect Musselman's entitlement to any vested benefits provided herein.
-2-
<PAGE>
9. NONCOMPETITION; NONDISCLOSURE.
(a) Musselman agrees to not engage in any Competitive Activity for
one (1) year following the date of his termination of employment with
Company, if Musselman's employment terminates during the Initial Term;
provided, however, that this Section 10(a) shall not apply if the Company
terminates Musselman's employment without cause. For the purposes of this
Section 10(a), "Competitive Activity" shall mean activity, without the
written consent of the Board of Directors of the Company (which consent shall
not be unreasonably withheld), consisting of Musselman's participation in the
management of, or Musselman's acquisition of any interest as a director,
officer, shareholder, partner, owner or agent of, in or for any corporation,
partnership or business in competition with the Company's Business; provided,
however, that nothing in this Section 10 it shall be construed as prohibiting
Musselman from acquiring up to, but not more than five percent (5%) of the
equity or other interest in any such corporation, partnership or other
entity. For purposes of this Section 10, the "Company's Business" shall mean
the exploration for, drilling and development of oil and gas reserves in such
areas as the Company is conducting such activities on thee date of
termination.
(b) Musselman agrees not to disclose, either while in the
Company's employ or at any time thereafter, to any person not employed on a
full-time basis by the Company or its affiliates, or not engaged to render
services to the Company or its affiliates, except with the prior written
consent of any officer authorized to act in the matter by the Board, any
confidential information obtained by Musselman while in the employ of the
Company, provided, however, that this provision shall not preclude Musselman
from the use or disclosure of information know generally to the public or of
information not considered confidential by persons engaged in the business
conducted by the Company or from disclosure required by law or court order;
and further provided that this provision shall cease to apply if the Company
terminates Musselman's employment without cause. The agreement made in this
Section 10 shall be in addition to, and not in limitation or derogation of,
any obligations otherwise imposed by law or by separate agreement upon
Musselman in respect of confidential information of the Company.
10. If any action at law or equity is necessary to enforce or interpret
the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorney's fees, as may be awarded by the court, costs and
necessary disbursements in addition to any other relief to which it may be
entitled. This provision shall be binding on the parties without regard to
whether attorney's fees would be due under statute or common law.
11. All notices authorized or required by the parties hereunder shall
be given in writing by United States certified mail, return receipt
requested, postage prepaid, and addressed to the party to whom the notice is
given at the addresses shown on the signature page. Notices shall be deemed
given when deposited in the United States mail. Each party shall have the
right to change its addresses at any time and from time to time by giving
written notice thereof to the other.
-3-
<PAGE>
12. This Agreement shall be construed under and in accordance with the
laws of the State of Texas.
13. This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective heirs, executors, administrators,
legal representatives, successors and assigns where permitted by this
Agreement. However, the services to be provided by Musselman are personal
and not performable in satisfaction of this Agreement by any other person.
14. In case any one or more of the provisions contained in this
Agreement shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions hereof, and this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never
been contained herein.
15. This Agreement constitutes the sole and only agreement of the
parties hereto and supersedes any prior understandings or written or oral
agreement between the parties respecting the within subject matter. The
parties agree this contract can be modified only in writing and that
Musselman will not rely on any oral representations of any sort or character
regarding his employment status, salary, bonuses or benefits.
16. For purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall
be deemed to have been duly given when placed in United States certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to Musselman:
Henry G. Musselman
3 Deerfield Drive
Midland, Texas 79705
If to the Company:
Costilla Energy, Inc.
P. O. Box 10369
Midland, Texas 79702
Attention: Chairman of the Board
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
-4-
<PAGE>
/s/ Henry G. Musselman
---------------------------------------
HENRY G. MUSSELMAN
COSTILLA ENERGY, INC.
By: /s/ Cadell S. Liedtke
---------------------------------------
Cadell S. Liedtke
Chairman of the Board
THE STATE OF TEXAS )
COUNTY OF MIDLAND )
This instrument was acknowledged before me on this the ______ day of
_____________, 1996, by HENRY G. MUSSELMAN.
---------------------------------------
Notary Public - State of --------------
Print Name: ---------------------------
My Comm. Expires: ---------------------
THE STATE OF TEXAS )
COUNTY OF MIDLAND )
This instrument was acknowledged before me on this ____ day of
____________ , 1996, by CADELL S. LIEDTKE, as Chairman of the Board of
COSTILLA ENERGY, INC., a Delaware corporation, on behalf of said corporation.
---------------------------------------
Notary Public - State of Texas
Print Name: ---------------------------
My Commission Expires: ----------------
-5-
<PAGE>
PURCHASE AND SALE AGREEMENT
by and between
PARKER & PARSLEY DEVELOPMENT L.P.
and
PARKER & PARSLEY PRODUCING L.P.
as Seller
and
COSTILLA PETROLEUM CORPORATION
and
COSTILLA ENERGY, L.L.C.
as Purchaser
APRIL 3, 1995
<PAGE>
PURCHASE AND SALE AGREEMENT
This PURCHASE AND SALE AGREEMENT (this "AGREEMENT") is made as of April 3,
1995, by and between PARKER & PARSLEY DEVELOPMENT L.P., a Texas limited
partnership (for itself individually and as the successor by merger with Parker
& Parsley Development Company and P&P Producing, Inc. ("PPDLP"), and PARKER &
PARSLEY PRODUCING L.P., a Delaware limited partnership f/k/a Bridge Oil Company,
L.P. ("PPPLP", and, together with PPDLP, "SELLER"), and COSTILLA PETROLEUM
CORPORATION, a Texas corporation ("CPC") and COSTILLA ENERGY, L.L.C., a Texas
limited liability company ("CELLC", and, together with CPC, "PURCHASER").
RECITALS:
WHEREAS, on or about April 3, 1995, Seller and Purchaser entered into a
Purchase and Sale Agreement whereby Seller agreed to sell and Purchaser agreed
to purchase Seller's interests in certain oil and gas leases, agreements,
contracts, real property, personal property, equipment and related rights (the
"PRIOR AGREEMENT"); and
WHEREAS, Seller and Purchaser now desire to amend and restate the Prior
Agreement as this Agreement.
NOW, THEREFORE, for good and valuable consideration and for the mutual
covenants contained herein, Seller and Purchaser hereby agree as follows:
ARTICLE 1. SALE AND PURCHASE
1.1 EFFECTIVE TIME. The effective time and date of the purchase and sale
contemplated hereby shall be 7:00 a.m., April 1, 1995, at the site of the
respective Subject Properties (the "EFFECTIVE TIME").
1.2 SALE AND PURCHASE. Subject to the terms and conditions herein
contained, at Closing and as of the Effective Time, Seller shall sell, assign,
transfer and convey to Purchaser, and Purchaser shall purchase and receive, the
following described assets, less and except the Excluded Assets (the "ASSETS"):
(a) all interest of Seller as of the Effective Time (the "SALE INTEREST")
in and to (i) the wells, leases and/or units described in Exhibit "A"
attached hereto and incorporated herein, (ii) the oil, gas and mineral
leasehold estates and fee estates appurtenant to wells, leases and/or
units described in Exhibit "A" attached hereto, upon which such wells
are located or with respect to which such wells are associated, and
(iii) all other interests in oil, gas and other minerals of whatever
nature appurtenant to wells, leases and/or units described in Exhibit
"A" attached hereto, including, without limitation, all fee estates,
fee mineral and royalty interests, working interests, farmout rights
and overriding royalty interests (reference being hereby made to
Seller's records and files located at 303 W. Wall, Suite 101, Midland,
Texas, for a more complete description of said leases, leasehold and
fee estates and interests), together with all of Seller's right, title
and interest in respect of and in any pooled, communitized or unitized
acreage of which any such leasehold, fee or other interest is a part
and all of the rights incident thereto (the "SUBJECT PROPERTIES");
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<PAGE>
(b) to the extent attributable or allocable to the Subject Properties, all
interest of Seller (including, without limitation, leasehold) as of
the Effective Time in and to: (i) all wells (including but not limited
to the wells described in Exhibit "A" and all other oil, gas,
injection and water wells), equipment, lease equipment, signage,
gathering pipelines, gas facilities, gathering systems, gathering,
storage, distribution, treating, processing and disposal facilities
and tanks, vehicles, tools, buildings, inventory and all other real or
tangible personal property and fixtures which are located on or
directly and solely related to the Subject Properties, including,
without limitation, items of personal property described in Exhibit
"A-1"; (ii) all oil, gas, mineral and other hydrocarbon substances
produced on or after the Effective Time; (iii) to the extent the same
are assignable or transferable by Seller, all orders, contracts, title
opinions and documents, abstracts of title, leases, deeds, unitization
agreements, pooling agreements, operating agreements, division of
interest statements, participation agreements, and all other
agreements and instruments; (iv) all surface leasehold and fee
estates, easements, rights-of-way, licenses, authorizations, permits
and similar rights and interests, subject to the rights of third
parties; (v) except as expressly provided otherwise herein, all
warranties, covenants, indemnities and representations from third
parties, and all claims, rights and causes of action against third
parties, asserted and unasserted, known and unknown; (vi) to the
extent assignable and subject to the rights of third parties, lease
files, land files, operating files, well files, oil and gas sales
contract files, gas processing files, logs, test data, production
histories, division order files, abstracts, title files and materials,
and all other books, files and records (the "RECORDS"), and all rights
thereto, subject to the rights of third parties; and (vii) all other
rights, privileges, benefits and powers conferred upon the owner and
holder of interests in the Subject Properties; and
(c) to the extent necessary for the ownership, use or development of the
Subject Properties and subject to the rights of third parties, the
right of ingress and egress with respect to the SF Interests (as
defined below).
1.3 EXCLUDED ASSETS. Notwithstanding anything in this Agreement to the
contrary, the Assets do not include and Purchaser agrees and acknowledges that
each Seller respectively has reserved from the Assets and hereby reserves unto
itself any and all rights, titles and interests in and to (a) (1) fee, fee
mineral and royalty interests which were conveyed to PPPLP by all or any of
Santa Fe Energy Resources, Inc. ("SFER"), Santa Fe Energy Operating Partners,
L.P. ("SFEOP") or SFER Properties-A, Inc. ("SFERP-A") or any of their respective
Affiliates, and (2) or arising under that certain Exploration Agreement dated
April 8, 1994, between SFEOP and PPPLP and all property rights, grants, and
interests created, made or evidenced by such Exploration Agreement
(collectively, the "SF INTERESTS"), (b) the right of ingress and egress for the
purpose of mining, drilling, exploring, operating, holding, producing and
developing the SF Interests for oil, gas, minerals and other hydrocarbon
substances, and (c) seismic, geologic and geophysical records and data not
expressly described in Section 1.2(b)(vi) above ((a) through (c), collectively,
the "EXCLUDED ASSETS").
ARTICLE 2. CONSIDERATION
2.1 CONSIDERATION. As consideration for this Agreement and the transfer
of the Assets, at Closing, Purchaser shall pay to Seller $53,578,954 (the
"PURCHASE PRICE"), as may be adjusted pursuant hereto (the "ADJUSTED PURCHASE
PRICE"). The Purchase Price has been allocated by Purchaser as provided on
Exhibit "A".
2
<PAGE>
2.2 MANNER OF PAYMENT. At Closing, except as provided in the following
Section 2.3, Purchaser shall pay Seller or Seller's designee the Adjusted
Purchase Price by wire transfer of immediately available funds as follows:
Account: Parker & Parsley Development L.P.
Account No: 1290288845
NationsBank of Texas, N.A.
ABA Routing No: 111000025
Attention: Frank Stowers
NationsBank of Texas-Midland
(915) 685-2179
2.3 LIKE KIND EXCHANGE OPTION. Seller and Purchaser hereby agree that
Seller, in lieu of the sale of the Assets to Purchaser for the cash
consideration provided herein, shall have the right at any time prior to Closing
to assign all or a portion of its rights under this Agreement to a qualified
intermediary in order to accomplish the transactions contemplated hereby in a
manner that will comply, either in whole or in part, with the requirements of a
like kind exchange pursuant to Section 1031 of the Internal Revenue Code of
1986, as amended ("CODE"). In the event Seller assigns its rights under this
Agreement pursuant to this Section 2.3, Seller agrees to notify Purchaser in
writing of such assignment before Closing. If Seller assigns its rights under
this Agreement, Purchaser agrees to (i) consent to Seller's assignment of its
rights in this Agreement, (ii) deposit the Adjusted Purchase Price with the
qualified escrow or qualified trust account designated by Seller at Closing, and
(iii) take such further actions, at Seller's cost, as are reasonably required to
effectuate the transactions contemplated hereby pursuant to Code Section 1031,
but, in so acting, Purchaser shall have no liability to any party in connection
with such actions. All risks associated with any like kind exchange and
compliance thereof with applicable laws, rules and regulations shall be the sole
responsibility of Seller, and Seller agrees to indemnify and hold Purchaser
harmless from and against all costs, expenses, liabilities and obligations which
arise as a result of Purchaser's agreement contained in this Section 2.3.
2.4 DEPOSIT. Contemporaneously with the execution of this Agreement,
Purchaser will pay to Seller $1,600,000, which shall be wired in accordance with
the instructions contained in Section 2.2 above. If Closing occurs, such amount
and all interest accrued thereon (the "DEPOSIT") shall be applied to reduce the
Adjusted Purchase Price. If Closing does not occur, the Deposit shall be
applied as provided in Section 10.2. Until disposed of in accordance with the
terms of this Agreement, the Deposit shall be held and invested by Seller in
marketable obligations issued or unconditionally guaranteed by the United States
of America or an instrumentality or agency thereof and entitled to the full
faith and credit of the United States of America, or in money market and/or
mutual funds that invest solely in such obligations.
ARTICLE 3. DEFECTS
3.1 DEFINITION OF ACCEPTABLE TITLE. As used herein, the term
"ACCEPTABLE TITLE" shall mean, as to the Subject Properties, such right,
title and interest that (a) entitles Seller to receive not less than the net
revenue interest set forth in Exhibit "A" of all oil, gas and associated
liquid and gaseous hydrocarbons produced, saved and marketed from the
respective Subject Properties, (b) obligates Seller to bear costs and
expenses relating to the maintenance, development, and operation of all wells
located on the respective Subject Properties in an amount not greater than
the working interest set forth in Exhibit "A", unless there is a
corresponding increase in the applicable net revenue interest, and (c) except
for Permitted Encumbrances, is free and clear of all liens, claims and
encumbrances; PROVIDED, however that (i) the presence of a preferential right
to purchase provision shall not be considered to be a Defect (as defined in
Section 3.5 below); and (ii) if Purchaser demonstrates before or after
Closing, subject to Section 13.12 below, that Seller does not have or cannot
convey
3
<PAGE>
Acceptable Title to a well described in Exhibit "A" and, if so demonstrated
after Closing, that Purchaser did not receive at Closing an adjustment to the
Purchase Price or other consideration on account of such matter, and if Seller
owns fee mineral interests or other interests underlying the applicable
proration or spacing unit on which such well is located, Seller shall resolve
such matter by, at Seller's option, either (1) granting a lease (on mutually
acceptable terms) on all or part of such interests, or (2) conveying (which
conveyance may be limited in term, similar to an oil and gas lease) all or part
of such interests to Purchaser and, if so resolved, such matter shall not be
considered a Defect for any purpose hereunder if the interest so conveyed, or
leased, will (after considering, in the case of a lease, the royalty reserved to
Seller under the lease) be sufficient so that, after giving effect thereto, such
matter will no longer exist (a "FURTHER CONVEYANCE"); PROVIDED, however, that
such Further Conveyance shall be limited to depths from the surface of the
ground down to the deepest producing zone from which production is being
obtained (from the subject well) at the Effective Time insofar as such depths
underlie the proration or spacing unit attributable to such well. Purchaser
acknowledges and agrees that any net revenue interests and working interests
reflected on Exhibit "A" are for the convenience of Seller and Purchaser and
included solely for the purpose of determining Acceptable Title prior to
Closing; Seller does not and shall not represent or warrant that the Sale
Interest is equal to any such interests in any respect, but agrees that (i) for
purposes of determining Defects prior to Closing, with respect to those Subject
Properties listed on Exhibit "A" with "0.0000" "APO" interests, the "APO"
interests shall be deemed to be the same as the corresponding "BPO" interests,
and (ii) Purchaser may assert as a Title Defect (as defined in and pursuant to
Section 3.5 below) any matter reasonably expected to reduce the net revenue
interest assigned to such Subject Property or any matter reasonably expected to
increase the working interest assigned to such Subject Property unless there is
a corresponding increase in the applicable net revenue interest.
3.2 DEFINITION OF PERMITTED ENCUMBRANCES. As used herein, the term
"PERMITTED ENCUMBRANCES" shall mean the following items, provided none of the
following items shall operate to increase the working interest of Seller as set
forth in Exhibit "A" for any of the Subject Properties, without a corresponding
increase in the applicable net revenue interest, or decrease the net revenue
interest of Seller set forth in Exhibit "A" for any of the Subject Properties:
(a) lessors' royalties, overriding royalties, production payments,
reversionary interests and similar burdens;
(b) division orders and sales contracts;
(c) preferential rights to purchase not identified in writing to Seller
pursuant to Section 3.7 below, or, if so identified, with respect to
which (i) waivers are obtained from the appropriate parties, (ii) the
appropriate time period for asserting such rights has expired without
an exercise of such rights, or (iii) appropriate parties have
exercised such rights and the Purchase Price has been adjusted where
appropriate with reference to the value allocated in Exhibit "A" to
the affected Asset ("PREFERENTIAL RIGHTS");
(d) rights to consent to assignments required by this Agreement held by
Persons other than governmental entities and not identified in writing
to Seller pursuant to Section 3.7 below, or, if so identified, with
respect to which (i) waivers or consents are obtained from the
appropriate parties, or (ii) the prescribed time period for denying
such consent has expired;
4
<PAGE>
(e) materialman's, mechanic's, repairman's, employee's, contractor's,
operator's, tax, and other similar liens or charges arising in the
ordinary course of business for obligations that are not delinquent
and that will be paid and discharged in the ordinary course of
business;
(f) rights to consent by, required notices to, filings with, or other
actions by governmental entities in connection with the sale or
conveyance of oil and gas leasehold and fee estates or interests
therein, which consents, notices, filings and/or other actions are
customarily obtained after closing;
(g) easements, rights-of-way, servitudes, permits, surface leases and
other rights in respect of surface operations affecting the Assets
which in the aggregate are not such as to interfere materially with
the operation or use of any of the Subject Properties or materially
reduce the value thereof;
(h) rights reserved to or vested in any governmental, statutory or public
authority to control or regulate any of the Assets in any manner, and
all applicable laws, rules and orders of any governmental authority
affecting the Assets which in the aggregate are not such as to
interfere materially with the operation or use of any of the Subject
Properties or materially reduce the value thereof;
(i) operating agreements, unit agreements, unit operating agreements,
pooling agreements and pooling designations affecting the Subject
Properties which are of public record or contained in the Records or
otherwise available to Purchaser and all actions taken or operations
occurring in the normal course of business pursuant to such
instruments;
(j) Title Defects that Purchaser may have expressly waived in writing or
which are deemed to have been waived pursuant to Section 3.6;
(k) all conveyances, reservations and exceptions of public record or
contained in the Records affecting the Assets which in the aggregate
are not such as to interfere materially with the operation or use of
any of the Subject Properties or materially reduce the value thereof;
and
(l) all other liens, charges, encumbrances, contracts, agreements,
instruments, obligations, defects and irregularities affecting the
Assets which in the aggregate are not such as to interfere materially
with the operation or use of the affected Subject Properties or
materially reduce the value thereof.
3.3 ENVIRONMENTAL AND PHYSICAL ASSESSMENT. Purchaser shall have the
right to make an environmental and other physical assessment of the Assets
during the period ("EXAMINATION PERIOD") beginning on the date of execution of
this Agreement and ending on June 1, 1995. During Seller's normal business
hours, Purchaser and its Representatives shall have the right to enter upon the
Assets and all buildings and improvements thereon, inspect the same, conduct
soil and water tests and borings, and generally conduct such tests,
examinations, investigations and studies as may be reasonably necessary or
appropriate for the preparation of appropriate environmental and other reports
relating to the Assets, their condition, and the presence of wastes or
contaminants. Seller shall be provided 48 hours prior notice of such
activities and shall have the right to witness all such tests and
investigations. Purchaser shall keep any data or information acquired by all
such examinations and the results of all analyses of such data and information
strictly confidential and not disclose any of the same to any Person unless
otherwise required by law or regulation and then only after written notice to
Seller of the need for disclosure and the identity of all intended recipients.
Seller hereby grants
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<PAGE>
Purchaser access to the Assets to conduct its environmental and other physical
assessment upon the condition that, in accordance with Section 9.2, Purchaser
hereby indemnifies and holds Seller and its Affiliates and their respective
Representatives harmless from and against any and all claims for or related to
personal injury or property damage arising out of or as a result of the
activities of Purchaser or its Representatives on the Assets in conducting such
environmental and physical assessments. If during the Examination Period,
Purchaser determines in good faith that (i) there is a condition or circumstance
which constitutes a violation of applicable law or regulation, or (ii) there is
a claim, demand, filing, investigation, action, suit or other legal or
administrative proceeding asserted or otherwise initiated by a governmental
authority and arising from or related to the Subject Properties or the ownership
or operation of any thereof ("ENVIRONMENTAL DEFECT"), Purchaser may include
notice of such Defect in any Notice of Defects delivered hereunder, and the
value of such Defect asserted by Purchaser shall not be limited to the value of
the Subject Properties so affected; PROVIDED, that any such matter not included
in a Notice of Defects shall be waived by Purchaser.
3.4 IDENTIFIED CLAIMS. During the Examination Period and in accordance
with Section 4.12, Seller shall make available to Purchaser for examination and
copying (at Purchaser's cost) any of the Records and Seller's accounting records
relating to the Assets as Purchaser may reasonably request. Seller shall also
permit Purchaser's Representatives to consult with Seller's employees and
Seller's independent contractors who have knowledge concerning the Assets during
normal business hours regarding such records; PROVIDED, that such consultation
shall not unreasonably disrupt the performance by such employee or independent
contractor of his or its duties with Seller. If during the Examination Period,
Purchaser determines in good faith that (i) royalties, rentals or other payments
due in respect of the Assets prior to the Effective Time have not been paid
(except for those amounts in suspense), or (ii) there are unsatisfied claims,
demands, liabilities or obligations in respect of the Assets based upon
omissions, events or occurrences prior to the Effective Time (collectively,
"IDENTIFIED CLAIMS"), Purchaser may include notice of such Identified Claims in
any Notice of Defects delivered hereunder; PROVIDED, that any such matter not
included in a Notice of Defects shall be waived by Purchaser.
3.5 NOTICE OF DEFECTS. If any matter is discovered by Purchaser that, in
Purchaser's reasonable, good faith opinion, would (a) cause any of the Sale
Interest not to be Acceptable Title (a "TITLE DEFECT"); (b) constitute a breach
of Seller's representations, warranties and agreements contained herein (a
"CONTRACT DEFECT"); (c) constitute an Environmental Defect; or (d) constitute an
Identified Claim ((a) through (d) individually, a "DEFECT", and collectively,
the "DEFECTS"), then Purchaser may provide written notice (a "NOTICE OF
DEFECTS") thereof actually delivered to Seller not later than noon, June 2,
1995; PROVIDED, however, that any notice concerning a Contract Defect not
discoverable from an examination of the Records, public records, Purchaser's
records, the records of any purchaser of production attributable to the Subject
Properties or a physical inspection of the Assets may be delivered to Seller on
or before noon of the business day immediately before the Closing Date, and
that, if so delivered, Purchaser's sole remedy therefor shall be as provided in
Section 3.6, with the procedure therein provided applicable thereto the same as
if such Contract Defect had been included in any Notice of Defects delivered not
later than noon, June 2, 1995 (i.e., the value of any such Contract Defect shall
be included in the value of any other Defects included in a Notice of Defects,
or, if no Notice of Defects has been provided, then such Contract Defect only
may be included in a Notice of Defects then given to Seller). A Notice of
Defects shall specifically identify the Defect and include (i) the Purchaser's
purported value of each specific Defect, (ii) an identification of each affected
Asset, (iii) Purchaser's basis for determining the existence and value of such
Defect, together with all associated reports, opinions, data, valuations,
assessments, conclusions and supporting calculations, and (iv) Purchaser's
statement of steps necessary to cure each such Defect to its satisfaction, all
of which shall be kept strictly confidential by Seller, except to the extent
required by law, regulation or order of any court or other governmental
authority or as may be necessary to address Defects identified in a Notice of
Defects.
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3.6 REMEDY FOR DEFECTS. In Seller's sole discretion, but without
obligation, it may, at its sole cost, take such steps as are reasonably
necessary to cure Defects identified in a Notice of Defects. In the event
Seller is unable or elects not to cure any or all Defects, Seller and Purchaser
may, at Seller's option, meet and use their best efforts to agree in good faith
on the validity of each Defect claim and the need for and amount of any mutually
acceptable Purchase Price adjustment. Purchaser's asserted Title Defect
adjustments shall be made with reference (as a maximum) to the allocated value
for each affected Asset as set forth in Exhibit "A". If the parties cannot
agree on the need for or the amount of a claimed Purchase Price adjustment,
Purchaser shall accept and purchase the Assets, including any Asset subject to a
Defect, as provided herein; PROVIDED, however, that (i) if the aggregate net
amount of Purchase Price adjustments asserted by Purchaser, PLUS the amount of
any uninsured Casualty Losses and Casualty Losses not fully covered by insurance
(to the extent of such deficiency only), PLUS the value of any of the Subject
Properties (with reference to the allocated value thereof on Exhibit "A" as a
maximum) taken in condemnation or under the right of eminent domain prior to the
end of the Examination Period, or with respect to which proceedings for such
purposes shall be pending or threatened in writing at such time, equals or
exceeds $3,500,000, or (ii) if the aggregate value of Preferential Rights to be
exercised at Closing equals or exceeds 30% of the Purchase Price, then Seller or
Purchaser may, upon written notice to the other, terminate this Agreement,
without liability or further obligation to the other party, subject to Section
10.2. Seller shall have no obligation hereunder to any Person to sell, convey,
deliver or otherwise transfer all or any part of the Assets if Purchaser or
Seller terminates this Agreement pursuant to the foregoing clause (ii).
Purchaser agrees and acknowledges that Seller has no obligation to adjust the
Purchase Price with respect to Defects. If Closing occurs, Purchaser shall be
deemed to have waived or assumed any and all claims, known and unknown, arising
from or related to any and all Defects or title to or other condition of the
Assets, including, without limitation, whether or not identified in a Notice of
Defects, and notwithstanding the fact that Seller may not have cured any such
Defect(s) to Purchaser's satisfaction, and Seller shall have no obligation with
respect thereto. As used in this Agreement, the "AGGREGATE NET AMOUNT" of
Purchase Price adjustments shall be determined by subtracting from the value of
all Defects asserted by Purchaser (i) the value of all interests by which
Seller's actual interests in the Subject Properties exceeds the net revenue
interests set forth on Exhibit "A" hereto, and (ii) the value of Defects
asserted by Purchaser which are cured or otherwise resolved to Purchaser's
reasonable satisfaction. If Purchaser provides Seller with a Notice of Defects,
Purchaser shall provide Seller copies of all pertinent portions of applicable
title opinions, data and curative information available to it to enable the
parties to make such determination.
3.7 PREFERENTIAL PURCHASE RIGHTS AND CONSENTS TO ASSIGN. Upon written
notification to Seller by Purchaser identifying Persons (and their addresses)
holding preferential rights to purchase affecting the Subject Properties or the
right to consent with respect to any assignments required hereby, other than
such consents of governmental authorities which are usually obtained in the
normal course of business after Closing, actually received by Seller not later
than the earlier of (i) fifteen (15) days prior to the Closing Date, or (ii)
five (5) business days prior to the latest date prior to Closing permitted by
the subject agreement for such notice to be provided, Seller shall send notice
of this Agreement to all such Persons (y) offering to sell to each such Person
the Subject Properties for which a preferential right is held on and subject to
the terms hereof and for the same allocated value for such Subject Properties
reflected on Exhibit "A", or (z) requesting, where appropriate, consent to any
assignment required in connection herewith. Purchaser shall be entitled to
review and approve the form of all such notices; PROVIDED, that such approval
shall not be unreasonably withheld or delayed. If, prior to Closing, any of
such Persons asserting a preferential purchase right notifies Seller that it
intends to consummate the purchase of the Subject Properties to which it holds a
preferential
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<PAGE>
purchase right pursuant to the terms and conditions hereof, then, subject to
clause (ii) of Section 3.6 above, such Subject Properties shall be excluded from
the Assets to be conveyed to Purchaser under this Agreement and the Purchase
Price shall be reduced by the allocated value of such Subject Properties
reflected in Exhibit "A"; PROVIDED, however, that if the holder of such
preferential right fails to consummate the purchase of such Subject Properties
on the Closing Date, then Seller shall promptly so notify Purchaser, and Seller
shall sell immediately to Purchaser, and Purchaser shall purchase from Seller,
for a price equal to the allocated value of such Subject Properties and upon the
other terms of this Agreement, the Subject Properties to which the preferential
purchase right was asserted. All Subject Properties for which a preferential
purchase right has not been asserted prior to Closing by the holder of such
right, or with respect to which Closing does not occur on the Closing Date
following the assertion of a preferential purchase right, shall be sold to
Purchaser at Closing pursuant and subject to the provisions of this Agreement.
If one (1) or more of the holders of any preferential purchase rights notifies
Seller subsequent to Closing that it intends to assert its preferential purchase
right, Seller shall give notice thereof to Purchaser, whereupon Purchaser shall
satisfy all such preferential purchase right obligations of Seller to such
holders and shall indemnify and hold Seller harmless from and against any and
all claims, liabilities, losses, costs and expenses (including, without
limitation, court costs and reasonable attorneys' fees) in connection therewith,
and Purchaser shall be entitled to receive (and Seller hereby assigns to
Purchaser all of Seller's rights to) all proceeds received from such holders in
connection with such preferential purchase rights; Purchaser shall indemnify
and hold harmless Seller from and against any and all claims, liabilities,
losses, costs and expenses (including, without limitation, court costs and
reasonable attorneys' fees) asserted or incurred at any time (whether before or
after Closing) with respect to or arising directly or indirectly from the claims
of any Person to a preferential purchase right affecting any of the Assets
transferred to Purchaser hereunder.
ARTICLE 4. SELLER'S REPRESENTATIONS,WARRANTIES AND COVENANTS
Seller represents, warrants to and covenants with Purchaser that (PROVIDED,
that each of PPDLP and PPPLP, respectively, makes such representations,
warranties and covenants solely with respect to itself and not as to the other):
4.1 EXISTENCE. PPDLP and PPPLP are limited partnerships, duly formed,
validly existing and in good standing under the laws of the State of Texas and
the State of Delaware, respectively.
4.2 POWER. Seller has the requisite power and authority to enter into and
perform this Agreement and the transactions contemplated hereby. The execution,
delivery and performance of this Agreement by Seller, and the transactions
contemplated hereby, will not (a) violate any provision of Seller's articles or
agreement of limited partnership or other governing documents, (b) conflict
with, result in a breach of, constitute a default (or an event that with the
lapse of time or notice, or both would constitute a default) under any agreement
or instrument to which Seller is a party or by which Seller is bound, (c) to the
best knowledge and belief of Seller,
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violate any judgment, order, ruling, or decree applicable to Seller and entered
or delivered in a proceeding in which Seller was or is a named party, or (d) to
the best knowledge and belief of Seller, violate any applicable law, rule or
regulation.
4.3 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the transactions contemplated hereby have been duly and validly
authorized by all requisite action on the part of Seller. This Agreement has
been duly executed and delivered on behalf of Seller, and at the Closing all
documents and instruments required hereunder to be executed and delivered by
Seller shall be duly executed and delivered. This Agreement and such documents
and instruments shall constitute legal, valid and binding obligations of Seller
enforceable in accordance with their terms subject, however, to the effect of
bankruptcy, insolvency, reorganization, moratorium and similar laws from time to
time in effect relating to the rights and remedies of creditors, as well as to
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
4.4 BROKERS. Seller has incurred no obligation or liability, contingent
or otherwise, for brokers' or finders' fees in respect of the matters provided
for in this Agreement which will be the responsibility of Purchaser, and any
such obligation or liability that might exist shall be the sole obligation of
Seller.
4.5 FOREIGN PERSON. Seller is not a "FOREIGN PERSON" within the meaning
of the Code.
4.6 NO LIENS. The Assets are not subject to any valid and enforceable
security interests, liens or mortgages.
4.7 VALID AGREEMENTS. Material oil and gas leases and other material
contracts and agreements constituting a part of the Assets are valid and in full
force and effect, and Seller is not, or with the lapse of time or giving of
notice or both will not be, in material breach or material default, with respect
to any of its obligations thereunder and no party has given or threatened to
give Seller notice of any material default thereunder.
4.8 NO RESERVATIONS. There are no reservations which affect the Assets
other than those currently of public record.
4.9 PERMITS. Seller possesses all material licenses, permits,
certificates, orders, approvals and authorizations necessary to own the Assets
and to carry on its business as now being conducted.
4.10 COMPLIANCE WITH LAW. Seller is in material compliance with all laws,
ordinances, rules, regulations and orders applicable to the Assets, including,
without limitation, all environmental laws, ordinances, rules, regulations and
orders, except to the extent of any non-compliance that is not reasonably
expected to result in a material adverse affect on the Assets; however, Seller
has not received any notice of any claimed noncompliance therewith. Seller is
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not aware of any facts, conditions or circumstances in connection with, related
to or associated with the Assets that could reasonably be expected to give rise
to any claim or assertion that Seller, the Assets or the ownership or operation
of any thereof is not in material compliance with any applicable law, rule,
regulation, ordinance, or order of any governmental authority or with any term
or conditions of any applicable permit, license, approval, consent, certificate
or other authorization.
4.11 TAXES. All ad valorem, property, production, severance, excise, and
similar taxes and assessments based on or measured by the ownership of property
or the production of hydrocarbons or the receipt of proceeds therefrom
attributable to the Assets that have become due and payable have been properly
and timely paid, except to the extent of any failure that is not reasonably
expected to result in a material adverse effect on the Assets.
4.12 ACCESS TO RECORDS. Seller will provide Purchaser through Closing
access to the Records during normal business hours at their place of storage,
and, at Purchaser's cost, will assist Purchaser in obtaining access to and the
right to review and copy Records pertaining to the Subject Properties not in
Seller's possession or control. From and after the date of the execution of
this Agreement through the Closing Date, Seller shall not add to or remove from
the Records any contracts, instruments, documents or other materials except for
such additions and removals as are done in the ordinary course of business with
respect to ongoing operations.
4.13 NO CALL. No Person has any option to purchase or similar right under
any agreement with respect to production attributable to the Assets which could
reasonably be expected to materially and adversely affect the value of the
Assets, taken as a whole.
4.14 LITIGATION. No pending litigation or other proceeding in which Seller
(or its direct predecessor in title) is a named party affects any of the Assets,
and no litigation or other proceeding has been threatened in writing with
respect to any of the Assets, except as described in the Disclosure Schedule
attached hereto.
4.15 NO "TAKE-OR-PAY" COMMITMENTS. Seller is not obligated by virtue of a
prepayment arrangement, a "take-or-pay" arrangement, a production payment or any
other arrangement to deliver hydrocarbons from the Subject Properties at some
future time without then or thereafter receiving full payment therefor.
4.16 ROYALTIES. All royalties, rentals and other payments due with respect
to the Assets have been properly and timely paid.
4.17 ACCESS. No condition exists upon any of the Subject Properties which
is reasonably expected to restrict access thereto.
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LIMITATION AND DISCLAIMER OF REPRESENTATIONS AND WARRANTIES
THE EXPRESS REPRESENTATIONS AND WARRANTIES OF SELLER CONTAINED IN THIS AGREEMENT
ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES,
EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE, AND, EXCEPT FOR THE REPRESENTATIONS
AND WARRANTIES CONTAINED IN SECTIONS 4.1 THROUGH 4.5 (WHICH SHALL SURVIVE
CLOSING) THE REPRESENTATIONS AND WARRANTIES CONTAINED HEREIN SHALL TERMINATE IN
ALL RESPECTS UPON CLOSING. ANY ASSIGNMENT AND BILL OF SALE OR OTHER CONVEYANCE
EXECUTED AND DELIVERED PURSUANT HERETO SHALL BE: (a) WITHOUT ANY WARRANTY OR
REPRESENTATION OF TITLE, EITHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE; (b)
WITHOUT ANY EXPRESS, IMPLIED, STATUTORY OR OTHER WARRANTY OR REPRESENTATION AS
TO THE CONDITION, QUANTITY, QUALITY, FITNESS FOR A PARTICULAR PURPOSE,
CONFORMITY TO MODELS OR SAMPLES OF MATERIALS OR MERCHANTABILITY OF ANY OF THE
ASSETS OR THEIR FITNESS FOR ANY PURPOSE; AND (c) WITHOUT ANY OTHER EXPRESS,
IMPLIED, STATUTORY OR OTHER WARRANTY OR REPRESENTATION WHATSOEVER. AT CLOSING,
PURCHASER SHALL HAVE INSPECTED OR WAIVED ITS RIGHT TO INSPECT THE RECORDS AND
THE ASSETS FOR ALL PURPOSES AND SATISFIED ITSELF AS TO THE PHYSICAL AND
ENVIRONMENTAL CONDITION OF THE ASSETS, BOTH SURFACE AND SUBSURFACE, INCLUDING
BUT NOT LIMITED TO CONDITIONS SPECIFICALLY RELATED TO THE PRESENCE, RELEASE OR
DISPOSAL OF HAZARDOUS SUBSTANCES. PURCHASER IS RELYING SOLELY UPON ITS OWN
INSPECTION OF THE ASSETS, AND, PURCHASER SHALL ACCEPT ALL OF THE SAME IN THEIR
"AS IS, WHERE IS" CONDITION. IN ADDITION, SELLER MAKES NO WARRANTY OR
REPRESENTATION, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AS TO THE ACCURACY OR
COMPLETENESS OF ANY DATA, REPORTS, RECORDS, PROJECTIONS, INFORMATION OR
MATERIALS NOW, HERETOFORE OR HEREAFTER FURNISHED OR MADE AVAILABLE TO PURCHASER
IN CONNECTION WITH THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, ANY
DESCRIPTION OF THE ASSETS, PRICING ASSUMPTIONS, OR QUALITY OR QUANTITY OF
HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE ASSETS OR THE ABILITY OR
POTENTIAL OF THE ASSETS TO PRODUCE HYDROCARBONS OR THE ENVIRONMENTAL CONDITION
OF THE ASSETS OR ANY OTHER MATTERS CONTAINED IN CONFIDENTIAL INFORMATION OR ANY
OTHER MATERIALS FURNISHED OR MADE AVAILABLE TO PURCHASER BY SELLER OR BY
SELLER'S AGENTS OR REPRESENTATIVES. ANY AND ALL SUCH DATA, RECORDS, REPORTS,
PROJECTIONS, INFORMATION AND OTHER MATERIALS FURNISHED BY SELLER OR BY SELLER'S
AGENTS OR REPRESENTATIVES OR OTHERWISE MADE AVAILABLE TO PURCHASER ARE PROVIDED
TO PURCHASER AS A CONVENIENCE, AND SHALL NOT CREATE OR GIVE RISE TO ANY
LIABILITY OF OR AGAINST SELLER. ANY RELIANCE ON OR USE OF THE SAME SHALL BE AT
PURCHASER'S SOLE RISK. THE ASSIGNMENTS AND BILLS OF SALE OR OTHER CONVEYANCES
TO BE DELIVERED
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BY SELLER AT CLOSING SHALL EXPRESSLY SET FORTH THE LIMITATIONS AND DISCLAIMERS
OF REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS PARAGRAPH.
Seller covenants and agrees that from and after the execution of this
Agreement and until the Closing Date:
4.18 MAINTENANCE OF ASSETS. Seller will not sell, transfer, assign, convey
or otherwise dispose of any of the Assets subject to Seller's direct control,
other than (a) oil, gas and other hydrocarbons produced, saved and sold in the
ordinary course of business, (b) personal property and equipment which is
replaced with property and equipment of comparable or better value and utility
in the ordinary and routine maintenance and operation of the Subject Properties,
and (c) as required in connection with any exercise of preferential rights or as
otherwise required to satisfy obligations to third parties under contracts
presently existing.
4.19 NO ENCUMBRANCES. Seller will not create any lien, security interest
or encumbrance on the Sale Interest, the oil or gas attributable to the Assets,
or the proceeds thereof, other than Permitted Encumbrances.
4.20 OPERATIONS. With respect to any of the Subject Properties operated by
Seller or a third party, Seller will, subject to the rights of affected parties
under applicable agreements:
(a) cause the Subject Properties to be developed, maintained and
operated in compliance with applicable laws, ordinances, rules,
regulations and orders and in a prudent, good and workmanlike
manner, maintain insurance now in force with respect to the
Subject Properties, and pay or cause to be paid all costs and
expenses in connection therewith;
(b) not participate in the drilling of any new well on the Subject
Properties or fail to participate in operations on the Subject
Properties proposed by other parties, without the advance written
consent of Purchaser, which consent or non-consent must be given
by Purchaser within three (3) days of the notice from Seller;
(c) not take any action or fail to take any action which is
reasonably expected to result in any termination of the leases
forming a part of the Subject Properties;
(d) perform and comply with all of its obligations under agreements
relating to or affecting the Subject Properties;
(e) carry on its business with respect to the Subject Properties in
substantially the same manner as it has heretofore, not
introducing any new method of management, operation or accounting
with respect to the Subject
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Properties except as may be required by applicable statutes, rules or
regulations or by applicable presently existing contractual obligations;
(f) not enter into or assume any contract, agreement or commitment
which is not in the ordinary course of business as heretofore
conducted or which involves payments, receipts or potential
liabilities with respect to the Subject Properties of more than
$25,000, excluding emergency expenditures; and
(g) not resign or otherwise voluntarily relinquish its rights as
operator of any Subject Property for which it serves as operator
on the date hereof.
(h) not grant any preferential right to purchase or similar right or
agree to require the consent of any party to the transfer and
assignment of the Assets to Purchaser, subject to existing
contractual obligations;
(i) not enter into any gas sales contract or crude oil sales or
supply contract with respect to the Subject Properties which is
not terminable without penalty upon notice of thirty (30) days
or less;
(j) not enter into any transaction the effect of which, considered as
a whole, would be to cause Seller's ownership interest in any of
the Subject Properties to be altered from its ownership interest
as of the date hereof;
(k) not enter into any settlement of or relinquish any outstanding
receivables which are a part of the Assets (including, without
limitations, the right to receive any retroactive price
adjustments, take-or-pay monies, FERC mandated refunds,
accounting adjustments, tax adjustments, and Minerals Management
Service refunds);
(l) if any approval or consent by any federal, state or local
governmental authority is required to vest Acceptable Title to
any of the Sale Interest in Purchaser at Closing, exercise its
best efforts, as reasonably requested in writing by Purchaser, to
obtain all such required approvals or consents at Purchaser's
expense;
(m) through Closing, give prompt written notice to Purchaser of any
notice of default (or written threat of default, whether disputed
or denied) received or given by Seller under any instrument or
agreement affecting the Subject Properties to which Seller is a
party or by which it or any of the Subject Properties is bound;
and
(n) to the extent it can do so without violating any third party
agreement and subject to the rights of third parties, exercise
its best efforts to provide (as
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soon as practicable) Purchaser with a copy of each authority for
expenditure and contract affecting the Subject Properties entered
into after the date hereof; PROVIDED, however, that the provision
of such matters to Purchaser is for informational purposes only
and that Purchaser shall have no right to comment upon or object
to any such matter that is otherwise not in violation of this
Agreement.
ARTICLE 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
Purchaser represents and warrants to and covenants with Seller that
(PROVIDED, that each of CPC and CELLC, respectively, makes such representations,
warranties and covenants solely with respect to itself and not as to the other):
5.1 EXISTENCE. CELLC is a limited liability company duly organized,
validly existing and in good standing under the laws of the State of Texas. CPC
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Texas.
5.2 POWER. Purchaser has the requisite power and authority to enter into
and perform this Agreement and the transactions contemplated hereby. The
execution, delivery and performance of this Agreement by Purchaser, and the
transactions contemplated hereby, will not (a) violate any provision of any
Purchaser's certificate or articles of incorporation or organization, as the
case may be, bylaws, regulations or other governing documents; (b) to the best
knowledge and belief of Purchaser, conflict with, result in a breach of,
constitute a default (or an event that with the lapse of time or notice, or both
would constitute a default) under any agreement or instrument to which Purchaser
is a party or by which Purchaser is bound, (c) to the best knowledge and belief
of Purchaser, violate any judgment, order, ruling, or decree applicable to
Purchaser and entered or delivered in a proceeding in which Purchaser was or is
a named party; or (d) to the best knowledge and belief of Purchaser, violate any
applicable law, rule or regulation.
5.3 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the transactions contemplated hereby have been duly and validly
authorized by all requisite action on the part of Purchaser. This Agreement has
been duly executed and delivered on behalf of Purchaser, and at the Closing all
documents and instruments required hereunder to be executed and delivered by
Purchaser shall have been duly executed and delivered. This Agreement and such
documents and instruments shall constitute legal, valid and binding obligations
of Purchaser enforceable in accordance with their terms, subject, however, to
the effect of bankruptcy, insolvency, reorganization, moratorium and similar
laws from time to time in effect relating to the rights and remedies of
creditors, as well as to general principles of equity (regardless of whether
such enforceability is considered in a proceeding in equity or at law).
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5.4 BROKERS. Purchaser has not incurred any obligation or liability,
contingent or otherwise, for brokers' or finders' fees in respect of the matters
provided for in this Agreement which will be the responsibility of Seller, and
any such obligation or liability that might exist shall be the sole obligation
of Purchaser.
5.5 INVESTMENT INTENT. Purchaser is acquiring the Assets for Purchaser's
own account for investment, and not with a view to, or for resale in connection
with, any distribution thereof within the meaning of the Securities Act of 1933,
and shall not resell any or all of the Assets except in compliance with all
applicable securities laws.
5.6 ADDITIONAL INTERESTS. If offered in writing to Purchaser by PPDLP,
Purchaser shall have the option to purchase, upon essentially the same terms and
conditions as contained herein, all additional right, title and interest, if
any, in and to the Assets acquired after the Effective Time by PPDLP, and, if
such option is exercised, the consideration paid therefor shall be the purchase
price paid by PPDLP. Notwithstanding the immediately preceding sentence,
Purchaser shall purchase at Closing all interests in any of the Assets (which
are purchased by Purchaser) and described on Appendix I attached hereto offered
by the Persons identified on Appendix I for the purchase price described on
Appendix I (which amount has been included in the Purchase Price), whether or
not such interests are acquired by PPDLP prior to Closing, unless such interests
are subject to Defects specifically included in any Notice of Defects delivered
hereunder, in which case, at PPDLP's sole option, (i) such affected interest
shall be excluded from the Assets and the Purchase Price shall be reduced by the
Purchase Price allocated thereto on Appendix I, or (ii) the Purchase Price shall
be reduced by the purchase price allocated thereto on Appendix I and such
interest shall be conveyed to Purchaser at Closing as a part of the Assets. All
such interests acquired by Purchaser shall be deemed to be a part of the Sale
Interest for all purposes.
ARTICLE 6. SELLER'S CONDITIONS OF CLOSING
Seller's obligation to consummate the transactions provided for herein is
subject only to the satisfaction or waiver by Seller on or before the Closing
Date of the following conditions:
6.1 REPRESENTATIONS. The representations and warranties of Purchaser
contained in Article 5 shall be true and correct in all material respects on the
Closing Date as though made on and as of that date.
6.2 PERFORMANCE. Purchaser shall have performed in all material respects
the obligations, covenants and agreements hereunder to be performed by it at or
prior to the Closing.
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6.3 OFFICER'S CERTIFICATE. Each Purchaser shall have delivered to Seller
a certificate of an executive officer dated the Closing Date, certifying on
behalf of such Purchaser that the conditions set forth in Sections 6.1 and 6.2
have been fulfilled.
6.4 PENDING MATTERS. No suit, action or other proceeding by a third party
or a governmental authority shall be pending or threatened which seeks
substantial damages from Seller in connection with, or seeks to restrain, enjoin
or otherwise prohibit, the consummation of the transactions contemplated by this
Agreement.
6.5 HSR ACT. The waiting period required by the HSR Act (as defined in
Section 13.20 below) shall have expired or been terminated.
ARTICLE 7. PURCHASER'S CONDITIONS OF CLOSING
Purchaser's obligation to consummate the transactions provided for herein
is subject only to the satisfaction or waiver by Purchaser on or before the
Closing Date of the following conditions:
7.1 REPRESENTATIONS. The representations and warranties of Seller
contained in Article 4 shall be true and correct in all material respects on the
Closing Date as though made on and as of that date.
7.2 PERFORMANCE. Seller shall have performed in all material respects the
obligations, covenants and agreements hereunder to be performed by it at or
prior to the Closing.
7.3 OFFICER'S CERTIFICATE. Seller shall have delivered to Purchaser
certificates of executive officers of Seller's respective general partners,
dated the Closing Date, certifying on behalf of such Seller that the conditions
set forth in Sections 7.1 and 7.2 have been fulfilled.
7.4 PENDING MATTERS. No suit, action or other proceeding by a third party
or a governmental authority shall be pending or threatened which seeks
substantial damages from Purchaser in connection with or, seeks to restrain,
enjoin or otherwise prohibit, the consummation of the transactions contemplated
by this Agreement.
7.5 HSR ACT. The waiting period required by the HSR Act (as defined in
Section 13.20 below) shall have expired or been terminated.
ARTICLE 8. CLOSING
8.1 TIME AND PLACE OF CLOSING. If the conditions to Closing have been
satisfied or expressly waived by the party entitled to the benefits thereof, the
consummation of the transactions contemplated hereby ("CLOSING") shall take
place at Seller's offices in Midland,
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Texas, on June 12, 1995, at 9:00 a.m, or at such other place and time or in
such other manner agreed upon by Seller and Purchaser ("CLOSING DATE");
PROVIDED, that Seller shall have the right to extend Closing for up to thirty
(30) days to respond to any Notice of Defects provided by Purchaser and that any
extension by Seller shall not serve to provide Purchaser rights not otherwise
expressly provided herein, nor to extend any rights of Purchaser contained
herein, including, without limitation, those contained in Section 3.5.
8.2 CLOSING OBLIGATIONS. At the Closing,
(a) Seller shall execute, acknowledge and deliver to Purchaser an
Assignment and Bill of Sale in substantially the form attached hereto
as Exhibit "B", conveying the Assets to Purchaser as provided hereby;
(b) Seller and Purchaser shall execute, acknowledge and deliver transfer
orders or letters in lieu thereof directing all purchasers of
production to make payment to Purchaser of proceeds attributable to
the Sale Interest;
(c) Purchaser shall deliver the Adjusted Purchase Price as provided in
Article 2;
(d) Purchaser and Seller shall execute and deliver a settlement statement
(the "PRELIMINARY SETTLEMENT STATEMENT") prepared by Seller and
setting forth the Purchase Price and all adjustments thereto agreed
upon by the parties, using the best information available, subject to
Section 13.18; and
(e) Purchaser and Seller shall execute such other instruments and take
such other action as may be necessary to carry out their respective
obligations under this Agreement.
ARTICLE 9. POST-CLOSING OBLIGATIONS
9.1 RECEIPTS AND CREDITS; SUSPENSE FUNDS. Subject to the terms hereof,
all monies, refunds, proceeds, receipts, credits and income attributable to the
purchased Assets (a) for all periods of time from and after the Effective Time
shall be the sole property and entitlement of the Purchaser, and, to the extent
received by Seller, Seller shall fully disclose and account therefor to
Purchaser promptly, and (b) for all periods of time prior to the Effective Time
shall be the sole property and entitlement of Seller to the extent received by
Purchaser or Seller prior to the Final Accounting Date or allocated to Seller in
the Final Accounting, and if received by Purchaser, Purchaser shall fully
disclose and account therefore to Seller promptly. Purchaser shall pay Seller
for Seller's share of hydrocarbons attributable to the purchased Assets in
storage above the pipeline connection or in transit on the Effective Time at the
purchaser's then posted field price for hydrocarbons of like grade and gravity
in the relevant field, net of all applicable taxes. Seller and Purchaser
recognize that as of the Effective Time there may be over or under imbalances
with respect to gas production, gathering, transportation or processing
attributable
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to the Subject Properties ("IMBALANCES") and hereby agree that (i) Imbalances
shall not be included in any Identified Claims asserted hereunder, and (ii) the
Subject Properties will be conveyed specifically subject to Imbalances which
exist as of the Effective Time, with Purchaser, as of Closing, bearing and
assuming all obligations with respect to any overproduction account or liability
and receiving the benefit of and being credited with any underproduction account
or credit. At Closing, Seller shall deliver to Purchaser all amounts in
Seller's possession due third party owners of interests in the Subject
Properties, and Purchaser agrees that it shall be solely responsible for the
disposition of such funds, the payment thereof to the rightful owners and the
payment, if any, of royalty thereon (the "SUSPENSE FUNDS").
9.2 COSTS AND LIABILITIES; INDEMNITY.
(a) As used in this Agreement, "CLAIMS" shall include costs,
expenses, obligations, claims, demands, causes of action,
liabilities, damages, fines, penalties and judgments of any kind
or character, whether matured or unmatured, absolute or
contingent, accrued or unaccrued, liquidated or unliquidated,
known or unknown, and all costs and fees (including, without
limitation, interest, attorneys' fees, costs of experts, court
costs and costs of investigation) incurred in connection
therewith, including, but not limited to claims arising from or
directly or indirectly related to royalty, operating, suspense
and capital obligations attributable to the purchased Assets. As
used in this Section 9.2, "ASSETS" shall include the Suspense
Funds.
(b) Notwithstanding anything in this Agreement to the contrary, it is
the express intent and agreement of Seller and Purchaser that, if
Closing occurs, Purchaser shall accept the purchased Assets in
their "AS IS, WHERE IS" condition, subject to any and all
defects, deficiencies, irregularities and claims related or
attributable in any manner thereto, including, without
limitation, Title Defects, Contract Defects, Environmental
Defects, Identified Claims or any other matter affecting in any
respect the title or physical condition of, or the right to own,
use, operate, develop or enjoy, the purchased Assets, whether
known or unknown, liquidated or unliquidated, fixed or
contingent, direct or indirect.
(c) At Closing and without further action or documentation, Purchaser
(i) shall assume, be responsible for and comply with all duties
and obligations, express or implied, arising at any time with
respect to the purchased Assets, including, without limitation
(1) those arising under or by virtue of any lease, contract,
agreement, document, permit, law, statute, rule, regulation or
order of any governmental authority or court (specifically
including, without limitation, any governmental request or other
requirement to plug, re-plug or abandon any well of whatsoever
type, status or classification, or take any clean-up, remedial or
other
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action with respect to the purchased Assets), (2) preferential
rights to purchase and (3) third party consents; (ii) shall
assume, be responsible for and pay all claims affecting or
arising, directly or indirectly, at any time in connection with
the purchased Assets, including, without limitation, claims for
personal or property injury or damage, environmental cleanup,
remediation, or compliance, or for any other relief, arising
directly or indirectly from or incident to, the use, occupation,
operation, maintenance or abandonment of or production from the
purchased Assets, or condition of the purchased Assets, whether
latent or patent, including, without limitation, contamination of
property or premises with Naturally Occurring Radioactive
Materials ("NORM"), and whether or not arising solely from or
contributed to by the negligence in any form, whether active or
passive, or of any kind or nature, of Seller or its predecessors
in title or their respective agents, employees or contractors;
and (iii) shall defend, indemnify and hold Seller harmless from
any and all claims arising, asserted or due at any time in
connection with the foregoing.
(d) From and after Closing, any claim for indemnity hereunder shall
be made by written notice, together with a written description of
any claims asserted stating the nature and basis of such claim
and, if ascertainable, the amount thereof. Purchaser shall have
a period of twenty (20) days after receipt of such notice within
which to respond thereto or, in the case of a claim which
requires a shorter time for response, then within such shorter
period as specified by Seller in such notice (the "NOTICE
PERIOD"). If Purchaser denies liability hereunder or fails to
provide the defense for any claim, Seller may defend or
compromise the claim as it deems appropriate without prejudice to
any of Seller's rights hereunder, with no right of Purchaser to
approve or disapprove any actions taken in connection therewith
by Seller. If Purchaser accepts liability and responsibility for
the defense of any claim, it shall so notify Seller as soon as is
practicable prior to the expiration of the Notice Period and
undertake the defense or compromise of such claim with counsel
selected by Purchaser and reasonably acceptable to Seller. If
Purchaser undertakes the defense or compromise of such claim,
Seller shall be entitled, at its own expense, to participate in
such defense. No compromise or settlement of any claim shall be
made without reasonable notice to Seller, and without the prior
written approval of Seller, which approval shall not be
unreasonably withheld or delayed, unless such compromise or
settlement includes a general and complete release of Seller, its
Affiliates and their respective Representatives in respect of the
matter, with prejudice, and with no express or written admission
of liability on the part of Seller, its Affiliates and their
respective Representatives, and no constraints on the future
conduct of its or their respective businesses.
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(e) Seller shall have the right at all times to participate, at its
sole cost, in the preparation for any hearing or trial related to
the indemnities set forth in this Agreement, as well as the right
to appear on its own behalf or to retain separate counsel to
represent it at any such hearing or trial.
(f) THE INDEMNITIES PROVIDED IN THIS AGREEMENT SHALL EXTEND TO SELLER
AND ITS AFFILIATES AND ANY PERSON WHO AT ANY TIME HAS SERVED OR
IS SERVING AS A DIRECTOR, OFFICER, EMPLOYEE, CONSULTANT, INVITEE
OR AGENT THEREOF (EACH A "REPRESENTATIVE"), AND EACH OF THEIR
RESPECTIVE HEIRS, EXECUTORS, SUCCESSORS AND ASSIGNS, AND SHALL
APPLY TO ALL CLAIMS SUBJECT TO INDEMNITY HEREUNDER, INCLUDING
THOSE BASED ON NEGLIGENCE OF ANY NATURE, INCLUDING SOLE
NEGLIGENCE, SIMPLE NEGLIGENCE, CONCURRENT NEGLIGENCE, ACTIVE
NEGLIGENCE, PASSIVE NEGLIGENCE, STRICT LIABILITY OR FAULT OF
SELLER (OR ANY OTHER INDEMNIFIED PARTY) OR ANY OTHER THEORY OF
LIABILITY OR FAULT, WHETHER OF LAW (WHETHER COMMON OR STATUTORY)
OR IN EQUITY; PROVIDED, HOWEVER, PURCHASER SHALL NOT BE LIABLE
FOR OR INDEMNIFY SELLER FOR ANY CLAIM ASSERTED BY PURCHASER AND
ARISING FROM A BREACH BY SELLER OF THIS AGREEMENT. THE
INDEMNIFICATION PROVISIONS OF THIS SECTION 9.2 SHALL BE IN
ADDITION TO ANY OTHER INDEMNITY PROVISIONS CONTAINED IN THIS
AGREEMENT, AND IT IS EXPRESSLY UNDERSTOOD AND AGREED THAT THE
TERMS OF THIS SECTION 9.2 SHALL CONTROL OVER ANY CONFLICTING OR
CONTRADICTING TERMS OR PROVISIONS CONTAINED IN THIS AGREEMENT,
AND SHALL SURVIVE CLOSING.
9.3 FURTHER ASSURANCES. After Closing, Seller and Purchaser agree to take
such further actions and to execute, acknowledge and deliver all such further
documents that are necessary or useful in carrying out the purposes of this
Agreement or of any document delivered pursuant hereto.
9.4 DELIVERY OF RECORDS. As soon as reasonably possible but no later than
thirty (30) days after the Closing Date, Seller shall deliver originals (or
copies where originals are not available) of the Records to Purchaser; PROVIDED,
that Seller (i) shall exercise its best efforts to provide Purchaser at Closing
or as soon thereafter as is practicable with all Records necessary to assume and
conduct operations of the Assets, and (ii) shall have the right to retain, as
its own, original Records that pertain to the Excluded Assets and copies of all
other Records.
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9.5 ACCOUNTING FOR SUBJECT PROPERTIES. At the request of Purchaser,
Seller shall continue to account for all Subject Properties presently operated
by it through the last day of the month in which Closing occurs, in accordance
with its customary procedures; PROVIDED, however, that such accounting shall be
for Purchaser's sole benefit and at Purchaser's sole risk and that Purchaser
shall indemnify Seller for such activities in accordance with Section 9.2.
9.6 ACCESS TO DATA. Subject to the rights of third parties and to the
extent attributable to the purchased Subject Properties, Seller shall provide
Purchaser reasonable access at their place of storage to all seismic, geologic
and geophysical records and data not obtained from SFER, SFEOP, SFERP-A or any
of their respective Affiliates and in Seller's possession as of the Effective
Time. Subject to the rights of third parties and Seller's proprietary rights,
Seller shall provide Purchaser with reasonable access to Seller's books and
records after Closing as necessary for Purchaser to prepare its financial
statements.
ARTICLE 10. TERMINATION
10.1 RIGHT OF TERMINATION. This Agreement and the transactions
contemplated hereby may be terminated at any time at or prior to the Closing:
(a) By Seller if Closing does not occur on or before July 12, 1995;
(b) By mutual consent of the parties;
(c) By Purchaser or Seller in accordance with Section 3.6;
(d) By Purchaser by notice delivered to Seller on or before Closing
if all conditions described in Article 7 shall not have been met
and such noncompliance shall not have been caused or waived by
the actions or inactions of Purchaser; or
(e) By Seller by notice delivered to Purchaser on or before Closing
if (i) all conditions described in Article 6 shall not have been
met and such noncompliance shall not have been caused or waived
by the actions or inactions of Seller, or (ii) Purchaser has not
made the filings and requests required of it by the first
sentence of Section 13.20 prior to April 17, 1995.
10.2 EFFECT OF TERMINATION. If this Agreement is terminated pursuant to
Section 10.1, this Agreement shall become void and of no further force or effect
(except for the provisions of Sections 4.4, 5.4, 13.1 through 13.11 and 13.14
through 13.17, each of which shall survive such termination and continue in full
force and effect); PROVIDED, however, (i) that if either party is in material
default of its obligations under this Agreement at the time this Agreement is so
terminated, such defaulting party shall continue to be liable to the other party
for damages and
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other remedies available at law or in equity (including, without limitation, for
specific performance) in respect of such default and such liability shall not be
affected by such termination; and (ii) if this Agreement is so terminated by
Purchaser, in the absence of a default hereunder by Purchaser, the Deposit shall
be returned to Purchaser, or if so terminated by Seller, as the result of a
default hereunder by Purchaser, the Seller may, in its sole discretion, elect to
retain the Deposit as liquidated damages (it being agreed by the parties that
damages in said event would be extremely difficult to determine, and that the
Deposit represents a fair and reasonable estimate of such damages under the
circumstances, and does not constitute a penalty). Notwithstanding anything to
the contrary contained in this Agreement, upon any termination of this Agreement
pursuant to Section 10.1 by Seller, in the absence of a material default
hereunder by Seller, Seller shall be free immediately to enjoy all rights of
ownership of the Assets and may sell, transfer, encumber or otherwise dispose of
the Assets to any party without any restriction under this Agreement and without
any impairment of its rights hereunder to recover damages from Purchaser arising
from any default hereunder by Purchaser; PROVIDED, that Seller's right to seek
specific performance of Purchaser's obligations hereunder shall be waived upon
any such disposition of the Assets and that its right to seek or recover any
other damages shall be waived upon its election to retain the Deposit.
ARTICLE 11. TAXES
11.1 APPORTIONMENT OF AD VALOREM AND PROPERTY TAXES. All ad valorem
taxes, real property taxes, personal property taxes, and similar obligations
concerning the Assets with respect to the tax period in which the Effective Time
occurs ("PROPERTY TAXES") shall be apportioned as of the Effective Time between
Seller and Purchaser. Seller shall file or cause to be filed all required
reports and returns incident to the Property Taxes and shall pay or cause to be
paid to the taxing authorities all Property Taxes relating to the tax period in
which the Effective Time occurs. Purchaser shall pay to Seller Purchaser's pro
rata portion of Property Taxes within thirty (30) days after receipt of Seller's
invoice therefor.
11.2 SALES TAXES. The Purchase Price excludes any sales taxes or
other taxes required to be paid in connection with the sale of property pursuant
to this Agreement. Purchaser shall be liable for all sales, use and other
taxes, conveyance, transfer and recording fees and real estate transfer stamps
or taxes that may be imposed on any transfer of property pursuant to this
Agreement. These taxes shall be collected and remitted under applicable law.
Purchaser shall indemnify and hold Seller harmless with respect to the payment
of any of these taxes including any interest or penalties assessed thereon.
11.3 OTHER TAXES. All taxes (other than income taxes) which are
imposed on or with respect to the production of oil, natural gas or other
hydrocarbons or minerals or the receipt of proceeds therefrom (including but
not limited to severance, production, and excise taxes) shall be apportioned
between the parties based upon the respective shares of production taken by
the parties. From and after Closing, Purchaser shall be responsible for
paying or withholding or
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causing to be paid or withheld all such taxes and for filing all statements,
returns, and documents incident thereto.
11.4 COOPERATION. Each party to this Agreement shall provide the
other party with reasonable access to all relevant documents, data and other
information which may be required by the other party for the purpose of
preparing tax returns and responding to any audit by any taxing jurisdiction.
Each party to this Agreement shall cooperate with all reasonable requests of the
other party made in connection with contesting the imposition of taxes.
Notwithstanding anything to the contrary in this Agreement, neither party to
this Agreement shall be required at any time to disclose to the other party any
tax return or other confidential tax information.
ARTICLE 12. PHYSICAL CONDITION OF THE ASSETS
12.1 PRIOR USE OF ASSETS. THE ASSETS HAVE BEEN USED FOR OIL AND GAS
DRILLING AND PRODUCING OPERATIONS AND RELATED OIL FIELD OPERATIONS. PHYSICAL
CHANGES IN THE LAND MAY HAVE OCCURRED AS A RESULT OF SUCH USES. THE ASSETS ALSO
MAY INCLUDE BURIED PIPELINES AND OTHER EQUIPMENT, WHETHER OR NOT OF A SIMILAR
NATURE, THE LOCATIONS OF WHICH MAY NOT NOW BE KNOWN BY SELLER OR READILY
APPARENT BY A PHYSICAL INSPECTION OF THE PROPERTY. PURCHASER UNDERSTANDS THAT
SELLER DOES NOT HAVE THE REQUISITE INFORMATION WITH WHICH TO DETERMINE THE EXACT
NATURE OR CONDITION OF THE ASSETS OR THE AFFECT ANY SUCH USE HAS HAD ON THE
PHYSICAL CONDITION OF THE LANDS BURDENED BY THE ASSETS.
12.2 ASSUMPTION OF ASSETS IN PRESENT CONDITION. PURCHASER
ACKNOWLEDGES THAT (i) THE CONSUMMATION OF THIS AGREEMENT BY PURCHASER SHALL BE
ON THE BASIS OF ITS OWN INVESTIGATION OF THE PHYSICAL CONDITION OF THE ASSETS,
INCLUDING, WITHOUT LIMITATIONS, SUBSURFACE CONDITION; (ii) THE ASSETS HAVE BEEN
USED IN THE MANNER AND FOR THE PURPOSES SET FORTH ABOVE AND THAT PHYSICAL
CHANGES TO THE ASSETS AND THE LANDS BURDENED THEREBY MAY HAVE OCCURRED AS A
RESULT OF SUCH USE; AND (iii) NORM AND MAN-MADE MATERIAL FIBERS ("MMMF") MAY BE
PRESENT AT SOME LOCATIONS. PURCHASER ACKNOWLEDGES THAT NORM IS A NATURAL
PHENOMENON ASSOCIATED WITH MANY OIL FIELDS IN THE UNITED STATES AND THROUGHOUT
THE WORLD. PURCHASER SHALL MAKE ITS OWN DETERMINATION OF THIS PHENOMENON AND
OTHER CONDITIONS. SELLER DISCLAIMS ANY LIABILITY ARISING OUT OF OR IN
CONNECTION WITH ANY PRESENCE OF NORM OR MMMF ON OR AFFECTING THE ASSETS. IN
ACCORDANCE WITH SECTION 9.2 AND AT CLOSING, PURCHASER SHALL ASSUME THE RISK THAT
THE PURCHASED ASSETS MAY CONTAIN WASTES OR CONTAMINANTS AND ADVERSE PHYSICAL
CONDITIONS, INCLUDING THE PRESENCE OF PIPELINES, EQUIPMENT AND OTHER ITEMS OF
PERSONAL PROPERTY, AND WASTES OR CONTAMINANTS WHICH MAY
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NOT HAVE BEEN REVEALED BY PURCHASER'S INVESTIGATION. IN ACCORDANCE WITH SECTION
9.2 AND AT CLOSING, ALL RESPONSIBILITY AND LIABILITY RELATED TO DISPOSALS,
SPILLS, WASTES, OR CONTAMINATION, OR OTHER ADVERSE PHYSICAL CONDITIONS ON,
BELOW, OR RELATED TO OR AFFECTING THE PURCHASED ASSETS SHALL BE ASSUMED BY
PURCHASER AND PURCHASER SHALL, NOTWITHSTANDING WHEN THE BASIS FOR ANY CLAIM,
ACTION, SUIT, JUDGMENT (INCLUDING, WITHOUT LIMITATION, THOSE FOR DEATH, PERSONAL
INJURY OR PROPERTY DAMAGE) SHALL HAVE OCCURRED, INDEMNIFY, DEFEND AND HOLD
SELLER HARMLESS THEREFROM PURSUANT TO SECTION 9.2.
12.3 CASUALTY LOSS. In the event of any material damage by fire or
other casualty to any of the Assets prior to the Closing ("CASUALTY LOSS"), this
Agreement shall remain in full force and effect, and as to each affected Asset,
Seller shall at its election either collect (and when collected pay over to
Purchaser) or assign to Purchaser any and all insurance claims related to such
damage, and Purchaser shall take title to the affected Asset without reduction
in the Purchase Price.
ARTICLE 13. MISCELLANEOUS
13.1 GOVERNING LAW. This Agreement and all instruments executed in
accordance herewith shall be governed by and interpreted in accordance with the
laws of the State of Texas, without regard to conflict of law rules that would
direct application of the laws of another jurisdiction, except to the extent
that it is mandatory that the law of the jurisdiction wherein the Assets are
located shall apply. In the event of any litigation or other proceeding in
connection with this Agreement, the venue for any such proceeding shall be in a
court of competent jurisdiction located in Midland County, Texas, and the
prevailing party shall be entitled to recover its reasonable attorney's fees and
costs incurred therein from the other party, in addition to any damages awarded.
13.2 ENTIRE AGREEMENT. This Agreement, the letter agreement of even
date between the parties, the Assignment and Bill of Sale and the
Confidentiality Agreement dated February 17, 1995, as amended, between CPC,
CELLC and Parker & Parsley Petroleum Company (the "CONFIDENTIALITY AGREEMENT")
constitute the entire agreement between the parties and supersede all prior
agreements, understandings, negotiations and discussions, whether oral or
written, of the parties. No supplement, amendment, alteration, modification,
waiver or termination of this Agreement shall be binding unless executed in
writing by the parties hereto.
13.3 WAIVER. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar), nor shall such waiver constitute a continuing waiver
unless otherwise expressly provided.
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13.4 CAPTIONS. The captions in this Agreement are for convenience
only and shall not be considered a part of or affect the construction or
interpretation of any provision of this Agreement.
13.5 ASSIGNABILITY. Except pursuant to a like kind exchange pursuant
to Section 2.3, neither party hereto shall assign (whether before, at or after
Closing) this Agreement or any of its rights or obligations hereunder without
the prior written consent of the other party, which may be withheld for any or
no reason. Any assignment made without such consent shall be void. Except as
otherwise provided herein, this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective permitted successors and
assigns; PROVIDED, that Seller agrees (i) that Purchaser may submit its written
request received on or before June 2, 1995, that Seller consent to the
conveyance at Closing of certain of the Assets to Valley Gathering Company, a
Texas corporation and an Affiliate of Purchaser, and (ii) that Seller shall not
unreasonably withhold its consent to such request; PROVIDED, that for the
purposes of this Agreement, expressly including, without limitation, Article 9,
all such Assets conveyed to Valley Gathering Company shall be deemed to be
Assets purchased hereunder by Purchaser.
13.6 NOTICES. Any notice provided or permitted to be given under
this Agreement shall be in writing, and may be served by personal delivery or by
registered or certified U.S. mail, addressed to the party to be notified,
postage prepaid, return receipt requested. Notice deposited in the mail in the
manner hereinabove described shall be deemed to have been given and received on
the date of the delivery as shown on the return receipt. Notice served in any
other manner (including by facsimile delivery) shall be deemed to have been
given and received only if and when actually received by the addressee. For
purposes of notice, the addresses of the parties shall be as follows:
SELLER:
Parker & Parsley Development L.P.
Parker & Parsley Producing L.P.
Attn: Tim Leach and W.T. Howard
303 W. Wall, Suite 101
Midland, Texas 79701
Telephone: (915) 683-4768
Fax: (915) 571-5208
with copy to: David W. Copeland
303 W. Wall, Suite 101
Midland, Texas 79701
Telephone: (915) 683-4768
Fax: (915) 571-5815
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PURCHASER:
Costilla Energy, L.L.C.
Attn: Cliff Hair
511 West Texas
Midland, Texas 79701
Telephone: (915) 683-3092
Fax: (915) 685-0841
with copy to: Michael J. Grella
511 West Texas
Midland, Texas 79701
Telephone: (915) 683-3092
Fax: (915) 685-0841
Each party shall have the right, upon giving three (3) days prior notice to the
other in the manner hereinabove provided, to change its address for purposes of
notice to any other appropriate street address.
13.7 DTPA WAIVER. TO THE EXTENT APPLICABLE TO THE ASSETS OR ANY
PORTION THEREOF, EACH PURCHASER HEREBY WAIVES THE PROVISIONS OF THE TEXAS
DECEPTIVE TRADE PRACTICES ACT, CHAPTER 17, SUBCHAPTER E, SECTIONS 17.41 THROUGH
17.63, INCLUSIVE (OTHER THAN SECTION 17.555, WHICH IS NOT WAIVED), TEX. BUS. &
COM. CODE. IN ORDER TO EVIDENCE ITS ABILITY TO GRANT SUCH WAIVER, PURCHASER
HEREBY REPRESENTS AND WARRANTS TO SELLER THAT IT (i) IS IN THE BUSINESS OF
SEEKING OR ACQUIRING, BY PURCHASE OR LEASE, GOODS OR SERVICES FOR COMMERCIAL OR
BUSINESS USE; (ii) HAS ASSETS OF $5,000,000 OR MORE ACCORDING TO ITS MOST RECENT
FINANCIAL STATEMENT PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES; (iii) HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL, BUSINESS AND OIL
AND GAS MATTERS THAT ENABLE IT TO EVALUATE THE MERITS AND RISKS OF THE
TRANSACTIONS CONTEMPLATED HEREBY; (iv) IS NOT IN A SIGNIFICANTLY DISPARATE
BARGAINING POSITION; AND (v) THAT THIS WAIVER IS A MATERIAL AND INTEGRAL PART OF
THIS AGREEMENT AND THE CONSIDERATION THEREOF.
13.8 EXPENSES. Each party shall be solely responsible for all
expenses incurred by it in connection with this transaction (including, without
limitation, fees and expenses of its own legal counsel and accountants).
13.9 SEVERABILITY. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced under any rule of law, all
other conditions and provisions of this Agreement shall nevertheless remain in
full force and effect so long as the economic or legal
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substance of the transactions contemplated hereby is not affected in a
materially adverse manner with respect to either party.
13.10 DAMAGES. The parties waive any rights to punitive and
incidental or consequential damages resulting from a breach of this Agreement.
13.11 NO THIRD PARTY BENEFICIARY. This Agreement is not intended to
create, nor shall it be construed to create, any rights in any third party under
doctrines concerning third party beneficiaries.
13.12 SURVIVAL. The representations and warranties of the parties
under this Agreement shall not survive, but shall terminate upon and be
extinguished by, Closing; PROVIDED, however, that (i) all representations,
waivers, covenants, agreements and indemnities contained entirely within
Sections 1.2, 3.1, 3.6, 4.1 through 4.5 and 5.1 through 5.6, and Articles 9, 11,
12 or 13 of this Agreement shall survive the Closing, and (ii) Seller's
obligation with respect to Further Conveyances (as defined in Section 3.1 above)
shall expire on the first anniversary of the Closing Date with respect to
matters not asserted prior to such anniversary date with the specificity
required of Notice of Defects given hereunder; FURTHER PROVIDED, that,
notwithstanding anything herein to the contrary, Purchaser expressly agrees and
acknowledges that it shall have no remedy or recourse against Seller or its
Affiliates or any of their respective Representatives with respect to the
condition of the Assets or any representation or warranty made in connection
with this Agreement, except as expressly provided by Section 3.6.
13.13 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
13.14 CERTAIN DEFINITIONS. As used in this Agreement, (a) the term
"AFFILIATE" means, as to any Person, each other Person that directly or
indirectly (through one or more intermediaries or otherwise) controls, is
controlled by, or is under common control with, such Person; (b) the term
"PERSON" means an individual, corporation, partnership, association, joint stock
company, trust or trustee thereof, estate or executor thereof, unincorporated
organization or joint venture, court or other governmental unit or any agency or
subdivision thereof, or any other legally recognizable entity; and (c) the terms
"TO [SELLER'S OR PURCHASER'S, AS THE CASE MAY BE] KNOWLEDGE" or "KNOWN TO" and
other terms of similar import shall mean, with respect to the referenced party,
only the then existing actual non-privileged knowledge of any president or vice
president of such party or of such party's general or managing partner or agent,
as the case may be, and are not intended to imply that such party in fact has
actual knowledge of the subject matter to which such terms apply.
13.15 CONSTRUCTION OF AMBIGUITY. In the event of any ambiguity in any
of the terms or conditions of this Agreement, including any exhibits hereto and
whether or not placed of record, such ambiguity shall not be construed for or
against any party hereto on the basis that such party did or did not author the
same.
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13.16 WAIVER OF JURY TRIAL. SELLER AND PURCHASER DO HEREBY IRREVOCABLY
WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO A TRIAL BY
JURY IN ANY ACTION, SUIT OR OTHER LEGAL PROCEEDING BASED UPON, ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
13.17 PUBLICITY. Seller and Purchaser shall consult with each other
with regard to all publicity and other releases and disclosures to be made prior
to, at or after Closing concerning this Agreement and the transactions
contemplated hereby, which are not otherwise expressly permitted by the
Confidentiality Agreement, and, except as required by applicable law or the
applicable rules or regulations of any governmental body or stock exchange,
neither party shall make any disclosure or issue any publicity or other release
without the prior written consent of the other party, which consent shall not be
unreasonably withheld or delayed.
13.18 ACCOUNTING.
A. Seller shall deliver to Purchaser on or before the fourth business day
prior to Closing the Preliminary Settlement Statement setting forth
any adjustments to the Purchase Price provided for in or required by
this Agreement, using estimates where actual amounts are not known at
the Closing. The Preliminary Settlement Statement shall be prepared
in accordance with this Agreement and with standard industry and
accounting practices. In connection with the preparation of the
Preliminary Settlement Statement, the Purchase Price shall be (1)
increased by (a) the costs and expenses that are attributable to the
Subject Properties for the period from the Effective Time to the
Closing Date that are paid by Seller, and (b) other amounts due Seller
and contemplated hereby, and (2) reduced by (a) proceeds received by
Seller for hydrocarbons attributable to the Subject Properties
produced after the Effective Time, and (b) other amounts due Purchaser
and contemplated hereby.
B. As soon as reasonably practicable after the Closing, but not later
than ninety (90) days thereafter Seller shall prepare, in accordance
with this Agreement and with standard industry and accounting
practices, and deliver to Purchaser, a final accounting statement
showing the proration and calculation of credits and payment
obligations of Purchaser and Seller hereunder. As soon as reasonably
practicable thereafter, Purchaser shall deliver to Seller a written
report containing any changes that Purchaser proposes to be made to
such statement. The parties shall use their best efforts to reach
agreement (the "FINAL ACCOUNTING") on the final accounting statement
on or before the 120th day after the Closing Date (such date the
"FINAL ACCOUNTING DATE", whether or not Seller and Purchaser have
agreed on the Final Accounting). Once the Final Accounting has been
agreed to by Purchaser and Seller, there shall be no further
adjustments to the Purchase Price. At Closing, Purchaser shall assume
and acquire all rights, obligations and
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liabilities relating to the purchased Assets whether arising before or
after the Effective Time, as provided in Article 9.
13.19 OPERATORSHIP. Seller does not represent to Purchaser that
Purchaser will automatically succeed to the operatorship of any given Subject
Property as to which Seller is currently the operator. Purchaser recognizes and
agrees that Purchaser will be required to comply with applicable operating
agreements, unit operating agreements or other similar contracts relating to any
elections or other selection procedures in order to succeed Seller as operator.
13.20 HSR ACT. The parties shall exercise their best efforts to file
(or will cause their ultimate parent entities to file) with the United States
Federal Trade Commission and the United States Department of Justice all
notifications and reports required for the transaction contemplated hereby under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR ACT"), and shall
request early termination of the prescribed waiting period. Both parties shall
use their best efforts to promptly supply any supplemental or additional
information which may be requested in connection therewith pursuant to the HSR
Act and shall comply in all material respects with the requirements of the HSR
Act. Closing of the transaction contemplated hereby shall not occur unless and
until all necessary filings and notifications under the HSR Act have been made,
including the provision of any required additional information or documents, and
the waiting period referred to in such Act shall have expired or terminated.
13.21 SELLER'S EMPLOYEES. Purchaser will interview and evaluate in
accordance with its normal employment procedures those Persons employed by
Seller in connection with the Subject Properties and identified by letter of
even date herewith from Seller to Purchaser who desire to be considered for
employment by Purchaser, and will offer in writing employment to those Persons
for whom Purchaser in its sole discretion determines a need. If Purchaser fails
to offer such employment to all of such Persons, Purchaser shall not, as a
result of such failure, otherwise be in default under this Agreement, but shall
be required to reimburse Seller for severance benefits paid by Seller to each
such Person not offered employment by Purchaser; PROVIDED, that such
reimbursement shall not exceed that amount determined by multiplying each such
employee's normal weekly wage by ten (10). Persons offered employment with
Purchaser will be offered employment at their current work location with
compensation and benefits comparable to those provided to Purchaser's current
employees performing similar tasks, or, if none, with compensation and benefits
comparable to those provided by Seller, and Purchaser, with respect to its
policies and procedures, will (i) give all such Persons credit for years of
employment with Seller or its Affiliates, and (ii) waive or cause the waiver of
all waiting periods required before new employees of Purchaser are normally
entitled to Purchaser's employee benefits of any and all nature, or make other
accommodations equivalent to such a waiver. Such offers shall be made prior to
Closing, but shall be contingent upon the occurrence of Closing and such
employment shall not commence until Closing. If any such Person employed by
Purchaser is terminated by Purchaser within six (6) months of Closing, Purchaser
shall pay such Person a severance benefit equal to the amount determined by
multiplying each such employee's normal weekly wage by ten (10). Purchaser
shall have no obligation under this Section 13.21
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with respect to Persons offered employment by Purchaser pursuant to this Section
13.21 who decline such employment.
13.22 OPINIONS OF COUNSEL. Upon execution hereof, Purchaser and Seller
shall deliver to the other the opinion of its counsel, reasonably acceptable to
the receiving party, to the effect that (a) such party is authorized and
empowered to enter into and consummate and perform this Agreement, (b) this
Agreement will be binding upon and enforceable against such party according to
its terms, and (c) no further resolutions or approvals of such party are
necessary to authorize and empower such party to consummate this Agreement and
perform hereunder; such opinion to be in form and substance reasonably
acceptable to the receiving party.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
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EXECUTED as of the date first set forth above.
SELLER:
PARKER & PARSLEY DEVELOPMENT L.P.,
by Parker & Parsley Petroleum USA, Inc.,
General Partner
By: /s/ T.A. Leach
----------------------------------------------
T. A. Leach, Senior Vice President
PARKER & PARSLEY PRODUCING L.P.,
by Parker & Parsley, Inc., General Partner
By: /s/ T.A. Leach
----------------------------------------------
T.A. Leach, Senior Vice President
PURCHASER:
COSTILLA PETROLEUM CORPORATION
By: /s/ Michael J. Grella
----------------------------------------------
Michael J. Grella, President
COSTILLA ENERGY, L.L.C.
By: /s/ Cadell S. Liedtke
----------------------------------------------
Cadell S. Liedtke, Chief Executive Officer
By: /s/ Henry G. Musselman
----------------------------------------------
Henry G. Musselman, Vice President
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PURCHASE AND SALE AGREEMENT
by and between
PARKER & PARSLEY DEVELOPMENT L.P.
and
PARKER & PARSLEY PRODUCING L.P.
AND
PARKER & PARSLEY GAS PROCESSING CO.
as Seller
and
COSTILLA PETROLEUM CORPORATION
and
COSTILLA ENERGY, L.L.C.
as Purchaser
MARCH 8, 1996
<PAGE>
TABLE OF CONTENTS
ARTICLE 1. SALE AND PURCHASE ............................................. 1
1.1 Effective Time ................................................... 1
1.2 Sale and Purchase ................................................ 1
1.3 Excluded Assets .................................................. 2
1.4 Pipeline ......................................................... 2
ARTICLE 2. CONSIDERATION ................................................. 3
2.1 Consideration .................................................... 3
2.2 Manner of Payment ................................................ 3
2.3 Like Kind Exchange Option ........................................ 3
2.4 Deposit .......................................................... 3
ARTICLE 3. DEFECTS ....................................................... 3
3.1 Definition of Acceptable Title ................................... 3
3.2 Definition of Permitted Encumbrances ............................. 4
3.3 Environmental and Physical Assessment ............................ 5
3.4 Identified Claims ................................................ 6
3.5 Notice of Defects ................................................ 6
3.6 Remedy for Defects ............................................... 7
3.7 Preferential Purchase Rights and Consents to Assign .............. 7
ARTICLE 4. SELLER'S REPRESENTATIONS,WARRANTIES AND COVENANTS ............. 8
4.1 Existence ........................................................ 8
4.2 Existence ........................................................ 8
4.3 Power ............................................................ 8
4.4 Authorization .................................................... 9
4.5 Brokers .......................................................... 9
4.6 Foreign Person ................................................... 9
4.7 No Liens ......................................................... 9
4.8 Valid Agreements ................................................. 9
4.9 No Reservations .................................................. 9
4.10 Permits .......................................................... 9
4.11 Compliance with Law .............................................. 9
4.12 Taxes ............................................................ 9
4.13 Access to Records ................................................ 9
4.14 No Call .......................................................... 10
4.15 Litigation ....................................................... 10
4.16 No "Take-or-Pay" Commitments ..................................... 10
4.17 Royalties ........................................................ 10
4.18 Access ........................................................... 10
4.19 NGPA Status ...................................................... 10
4.20 Use of Assets .................................................... 10
4.21 Take or Pay; Discounts ........................................... 10
4.22 FERC ............................................................. 10
LIMITATION AND DISCLAIMER OF REPRESENTATIONS AND WARRANTIES ........... 11
4.23 Maintenance of Assets ............................................ 11
4.24 No Encumbrances .................................................. 12
4.25 Operations ....................................................... 12
<PAGE>
ARTICLE 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER ........ 13
5.1 Existence ........................................................ 13
5.2 Power ............................................................ 13
5.3 Authorization .................................................... 13
5.4 Brokers .......................................................... 14
5.5 Investment Intent ................................................ 14
5.6 Additional Interests ............................................. 14
ARTICLE 6. SELLER'S CONDITIONS OF CLOSING ................................ 14
6.1 Representations .................................................. 14
6.2 Performance ...................................................... 14
6.3 Officer's Certificate ............................................ 14
6.4 Pending Matters .................................................. 14
6.5 HSR Act .......................................................... 14
ARTICLE 7. PURCHASER'S CONDITIONS OF CLOSING ............................. 15
7.1 Representations .................................................. 15
7.2 Performance ...................................................... 15
7.3 Officer's Certificate ............................................ 15
7.4 Pending Matters .................................................. 15
7.5 HSR Act .......................................................... 15
7.6 Pipeline ......................................................... 15
ARTICLE 8. CLOSING ....................................................... 15
8.1 Time and Place of Closing ........................................ 15
8.2 Closing Obligations .............................................. 15
ARTICLE 9. POST-CLOSING OBLIGATIONS ...................................... 16
9.1 Receipts and Credits; Suspense Funds ............................. 16
9.2 Costs and Liabilities; Indemnity ................................. 16
9.3 Further Assurances ............................................... 18
9.4 Delivery of Records .............................................. 18
ARTICLE 10. TERMINATION .................................................. 19
10.1 Right of Termination ............................................. 19
10.2 Effect of Termination ............................................ 19
ARTICLE 11. TAXES ........................................................ 20
11.1 Apportionment of Ad Valorem and Property Taxes ................... 20
11.2 Sales Taxes ...................................................... 20
11.3 Other Taxes ...................................................... 20
11.4 Cooperation ...................................................... 20
ARTICLE 12. PHYSICAL CONDITION OF THE ASSETS ............................. 20
12.1 Prior Use of Assets .............................................. 20
12.2 Assumption of Assets in Present Condition ........................ 20
12.3 Casualty Loss .................................................... 21
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ARTICLE 13. MISCELLANEOUS ............................................... 21
13.1 Governing Law ................................................... 21
13.2 Entire Agreement ................................................ 21
13.3 Waiver .......................................................... 21
13.4 Captions ........................................................ 22
13.5 Assignability ................................................... 22
13.6 Notices ......................................................... 22
13.7 DTPA Waiver ..................................................... 23
13.8 Expenses ........................................................ 23
13.9 Severability .................................................... 23
13.10 Damages ......................................................... 23
13.11 No Third Party Beneficiary ...................................... 23
13.12 Survival ........................................................ 23
13.13 Counterparts .................................................... 24
13.14 Certain Definitions ............................................. 24
13.15 Construction of Ambiguity ....................................... 24
13.16 Waiver of Jury Trial ............................................ 24
13.17 Publicity ....................................................... 24
13.18 Accounting ...................................................... 24
13.19 Operatorship .................................................... 25
13.20 HSR Act ......................................................... 25
13.21 Seller's Employees .............................................. 25
13.22 Opinions of Counsel ............................................. 25
Disclosure Schedule
Schedule I - Excluded Equipment
Exhibit "A" - Subject Properties
Exhibit "A-1" - Leasehold Estates
Exhibit "A-2" - Certain Personal Property
Exhibit "A-3" - Pipeline Map
Appendix I - Additional Interests
<PAGE>
PURCHASE AND SALE AGREEMENT
This PURCHASE AND SALE AGREEMENT (this "AGREEMENT") is made as of March 8,
1996, by and between PARKER & PARSLEY DEVELOPMENT L.P., a Texas limited
partnership ("PPDLP"), PARKER & PARSLEY PRODUCING L.P., a Delaware limited
partnership ("PPPLP"), and PARKER & PARSLEY GAS PROCESSING CO., a Delaware
corporation acting as the Trustee of Three Rivers Pipeline Business Trust, a
Pennsylvania business trust ("PPGP", and, together with PPDLP and PPPLP,
"SELLER"), and COSTILLA PETROLEUM CORPORATION, a Texas corporation ("CPC") and
COSTILLA ENERGY, L.L.C., a Texas limited liability company ("CELLC", and,
together with CPC, "PURCHASER").
RECITALS:
WHEREAS, Seller has agreed to sell and Purchaser has agreed to purchase
Seller's interests in certain oil and gas leases, agreements, contracts, real
property, personal property, equipment and related rights.
NOW, THEREFORE, for good and valuable consideration and for the mutual
covenants contained herein, Seller and Purchaser hereby agree as follows:
ARTICLE 1. SALE AND PURCHASE
1.1 EFFECTIVE TIME. The effective time and date of the purchase and sale
contemplated hereby shall be 7:00 a.m., January 1, 1996, at the site of the
respective Subject Properties (the "EFFECTIVE TIME").
1.2 SALE AND PURCHASE. Subject to the terms and conditions herein
contained, at Closing and as of the Effective Time, Seller shall sell, assign,
transfer and convey to Purchaser, and Purchaser shall purchase and receive, the
following described assets, less and except the Excluded Assets (the "ASSETS"):
(a) all interest of Seller as of the Effective Time (the "SALE INTEREST")
in and to (1) the wells, leases and/or units described in Exhibit "A"
attached hereto and incorporated herein; (2) the oil, gas and mineral
leasehold estates and fee estates appurtenant to wells, leases and/or
units described in Exhibit "A" attached hereto, upon which such wells
are located or with respect to which such wells are associated,
including the leasehold estates described in Exhibit "A-1"; (3) all
other interests in oil, gas and other minerals of whatever nature
appurtenant to wells, leases and/or units described in Exhibit "A"
attached hereto, including, without limitation, all fee estates, fee
mineral and royalty interests, working interests, farmout rights and
overriding royalty interests; (4) any pooled, communitized or unitized
acreage of which any such leasehold, fee or other interest is a part
and all of the rights incident thereto; (5) the gas processing plant
and appurtenant lands located in Karnes County, Texas, known as the
Person Processing Plant; and (6) that certain 8-inch pipeline
extending approximately 119 miles from a point 2.5 miles each of
Mobil Pipe Line Company's terminal near Midland, Pennsylvania to a
point at Mobil Pipe Line Company's terminal near Hollidaysburg,
Pennsylvania and located in Allegheny, Beaver, Blair, Cambria, Indiana
and Westmoreland Counties, Pennsylvania, and that certain 4-inch
lateral line extending from such 8-inch line to McKees Rocks,
Allegheny County, Pennsylvania, known as the Three Rivers Pipeline and
as depicted on Exhibit "A-3" attached hereto (the "PIPELINE"),
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together with all appurtenant easements, rights-of-way, easements,
surface leases, fee estates and other real property rights (reference
being hereby made to Seller's records and files located at 303 W.
Wall, Suite 101, Midland, Texas, and at Seller's Yatesboro Field
office, Yatesboro, Pennsylvania, for a more complete description of
said leases, leasehold and fee estates and interests, plant and
pipeline) (collectively, the "SUBJECT PROPERTIES");
(b) to the extent attributable or allocable to the Subject Properties, all
interest of Seller (including, without limitation, leasehold) as of
the Effective Time in and to: (1) all wells (including but not limited
to the wells described in Exhibit "A" and all other oil, gas,
injection and water wells), equipment, lease equipment, signage,
gathering pipelines, gas facilities, gathering systems, gathering,
storage, distribution, treating, processing and disposal facilities
and tanks, vehicles, tools, buildings, inventory and all other real or
tangible personal property and fixtures which are located on or
directly and solely related to the Subject Properties, including,
without limitation, items of personal property described in Exhibit
"A-2"; (2) all oil, gas, mineral and other hydrocarbon substances
produced on or after the Effective Time; (3) to the extent the same
are assignable or transferable by Seller, all orders, contracts, title
opinions and documents, abstracts of title, leases, deeds, unitization
agreements, pooling agreements, operating agreements, division of
interest statements, participation agreements, gas purchase, sale,
transportation and processing agreements, and all other agreements and
instruments; (4) all surface leasehold and fee estates, easements,
rights-of-way, licenses, authorizations, permits and similar rights
and interests, subject to the rights of third parties; (5) except as
expressly provided otherwise herein, all warranties, covenants,
indemnities and representations from third parties, and all claims,
rights and causes of action against third parties, asserted and
unasserted, known and unknown; (6) to the extent assignable and
subject to the rights of third parties, lease files, land files,
operating files, well files, oil and gas sales contract files, gas
processing files, logs, test data, production histories, division
order files, abstracts, title files and materials, and all other
books, files and records (the "RECORDS"), and all rights thereto,
subject to the rights of third parties; and (7) all other rights,
privileges, benefits and powers conferred upon the owner and holder of
interests in the Subject Properties; and
(c) to the extent necessary for the ownership, use or development of the
Subject Properties and subject to the rights of third parties, the
right of ingress and egress with respect to the SF Interests (as
defined below).
1.3 EXCLUDED ASSETS. Notwithstanding anything in this Agreement to the
contrary, the Assets do not include and Purchaser agrees and acknowledges that
each Seller respectively has reserved from the Assets and hereby reserves unto
itself any and all rights, titles and interests in and to (a) (1) fee, fee
mineral and royalty interests which were conveyed to PPPLP by all or any of
Santa Fe Energy Resources, Inc. ("SFER"), Santa Fe Energy Operating Partners,
L.P. ("SFEOP") or SFER Properties-A, Inc. ("SFERP-A") or any of their respective
Affiliates, and (2) or arising under that certain Exploration Agreement dated
April 8, 1994, between SFEOP and PPPLP and all property rights, grants, and
interests created, made or evidenced by such Exploration Agreement
(collectively, the "SF INTERESTS"), (b) the right of ingress and egress for the
purpose of mining, drilling, exploring, operating, holding, producing and
developing the SF Interests for oil, gas, minerals and other hydrocarbon
substances, (c) seismic, geologic and geophysical records and data not expressly
described in Section 1.2(b)(6) above, and (d) the equipment described on
Schedule I attached hereto ((a) through (d), collectively, the "EXCLUDED
ASSETS").
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1.4 PIPELINE. At Purchaser's option and subject to Seller's written
consent given hereafter, which may be withheld or denied for any or no reason,
Purchaser may elect to acquire Three Rivers Pipeline Business Trust, a
Pennsylvania business trust, for the Agreed Value, as herein defined, but which
for all purposes hereunder shall be deemed to be $3,500,000.
ARTICLE 2. CONSIDERATION
2.1 CONSIDERATION. As consideration for this Agreement and the transfer
of the Assets, at Closing, Purchaser shall pay to Seller $45,098,590 (the
"PURCHASE PRICE"), as may be adjusted pursuant hereto (the "ADJUSTED PURCHASE
PRICE"). On or before April 8, 1996, Purchaser will provide to Seller an
allocation of the Purchase Price among the Subject Properties based upon
Purchaser's engineered value for each such property as of the Effective Date
(the "AGREED VALUE").
2.2 MANNER OF PAYMENT. At Closing, except as provided in the following
Section 2.3, Purchaser shall pay Seller or Seller's designee the Adjusted
Purchase Price by wire transfer of immediately available funds as follows:
Account: Parker & Parsley Development L.P.
Account No: 1290288845
NationsBank of Texas, N.A.
ABA Routing No: 111000025
Attention: Frank Stowers
NationsBank of Texas-Midland
(915) 685-2179
2.3 LIKE KIND EXCHANGE OPTION. Seller and Purchaser hereby agree that
Seller, in lieu of the sale of the Assets to Purchaser for the cash
consideration provided herein, shall have the right at any time prior to Closing
to assign all or a portion of its rights under this Agreement to a qualified
intermediary in order to accomplish the transactions contemplated hereby in a
manner that will comply, either in whole or in part, with the requirements of a
like kind exchange pursuant to Section 1031 of the Internal Revenue Code of
1986, as amended ("CODE"). In the event Seller assigns its rights under this
Agreement pursuant to this Section 2.3, Seller agrees to notify Purchaser in
writing of such assignment before Closing. If Seller assigns its rights under
this Agreement, Purchaser agrees to (i) consent to Seller's assignment of its
rights in this Agreement, (ii) deposit the Adjusted Purchase Price with the
qualified escrow or qualified trust account designated by Seller at Closing, and
(iii) take such further actions, at Seller's cost, as are reasonably required to
effectuate the transactions contemplated hereby pursuant to Code Section 1031,
but, in so acting, Purchaser shall have no liability to any party in connection
with such actions. All risks associated with any like kind exchange and
compliance thereof with applicable laws, rules and regulations shall be the sole
responsibility of Seller, and Seller agrees to indemnify and hold Purchaser
harmless from and against all costs, expenses, liabilities and obligations which
arise as a result of Purchaser's agreement contained in this Section 2.3.
2.4 DEPOSIT. Purchaser will pay to Seller (a) $500,000 contemporaneously
with the execution of this Agreement ("FIRST INSTALLMENT"), and (b) an
additional $1,500,000 on or before 11:00 a.m., March 18, 1996 ("SECOND
INSTALLMENT") as a performance deposit hereunder, each of which shall be wired
in accordance with the instructions contained in Section 2.2 above. If Closing
occurs, such amount and all interest accrued thereon (the "DEPOSIT") shall be
applied to reduce the Adjusted Purchase Price. If Closing does not occur, the
Deposit shall be applied as provided in Section 10.2. Until disposed of in
accordance with the terms of this Agreement, the Deposit shall be held and
invested by Seller in marketable obligations issued or unconditionally
guaranteed by the United States
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of America or an instrumentality or agency thereof and entitled to the full
faith and credit of the United States of America, or in money market and/or
mutual funds that invest solely in such obligations.
ARTICLE 3. DEFECTS
3.1 DEFINITION OF ACCEPTABLE TITLE. As used herein, the term "ACCEPTABLE
TITLE" shall mean, as to the Subject Properties, such right, title and interest
that (a) entitles Seller to receive not less than the net revenue interest set
forth in Exhibit "A" of all oil, gas and associated liquid and gaseous
hydrocarbons produced, saved and marketed from the respective Subject
Properties, (b) obligates Seller to bear costs and expenses relating to the
maintenance, development, and operation of all wells located on the respective
Subject Properties in an amount not greater than the working interest set forth
in Exhibit "A", unless there is a corresponding increase in the applicable net
revenue interest, and (c) except for Permitted Encumbrances, is free and clear
of all liens, claims and encumbrances; PROVIDED, however that (i) the presence
of a preferential right to purchase provision shall not be considered to be a
Defect (as defined in Section 3.5 below); and (ii) if Purchaser demonstrates
before or after Closing, subject to Section 13.12 below, that Seller does not
have or cannot convey Acceptable Title to a well described in Exhibit "A" and,
if so demonstrated after Closing, that Purchaser did not receive at Closing an
adjustment to the Purchase Price or other consideration on account of such
matter, and if Seller owns fee mineral interests or other interests underlying
the applicable proration or spacing unit on which such well is located, Seller
shall resolve such matter by, at Seller's option, either (1) granting a lease
(on mutually acceptable terms) on all or part of such interests, or (2)
conveying (which conveyance may be limited in term, similar to an oil and gas
lease) all or part of such interests to Purchaser and, if so resolved, such
matter shall not be considered a Defect for any purpose hereunder if the
interest so conveyed, or leased, will (after considering, in the case of a
lease, the royalty reserved to Seller under the lease) be sufficient so that,
after giving effect thereto, such matter will no longer exist (a "FURTHER
CONVEYANCE"); PROVIDED, however, that such Further Conveyance shall be limited
to depths from the surface of the ground down to the deepest producing zone from
which production is being obtained (from the subject well) at the Effective Time
insofar as such depths underlie the proration or spacing unit attributable to
such well. Purchaser acknowledges and agrees that any net revenue interests and
working interests reflected on Exhibit "A" are for the convenience of Seller and
Purchaser and included solely for the purpose of determining Acceptable Title
prior to Closing; Seller does not and shall not represent or warrant that the
Sale Interest is equal to any such interests in any respect, but agrees that (i)
for purposes of determining Defects prior to Closing, with respect to those
Subject Properties listed on Exhibit "A" with "0.0000" "APO" interests, the
"APO" interests shall be deemed to be the same as the corresponding "BPO"
interests, and (ii) Purchaser may assert as a Title Defect (as defined in and
pursuant to Section 3.5 below) any matter reasonably expected to reduce the net
revenue interest assigned to such Subject Property or any matter reasonably
expected to increase the working interest assigned to such Subject Property
unless there is a corresponding increase in the applicable net revenue interest.
3.2 DEFINITION OF PERMITTED ENCUMBRANCES. As used herein, the term
"PERMITTED ENCUMBRANCES" shall mean the following items, provided none of the
following items shall operate to increase the working interest of Seller as set
forth in Exhibit "A" for any of the Subject Properties, without a corresponding
increase in the applicable net revenue interest, or decrease the net revenue
interest of Seller set forth in Exhibit "A" for any of the Subject Properties:
(a) lessors' royalties, overriding royalties, production payments,
reversionary interests and similar burdens;
(b) division orders and sales contracts;
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(c) preferential rights to purchase not identified in writing to Seller
pursuant to Section 3.7 below, or, if so identified, with respect to
which (1) waivers are obtained from the appropriate parties, (2) the
appropriate time period for asserting such rights has expired without
an exercise of such rights, or (3) appropriate parties have exercised
such rights and the Purchase Price has been adjusted by the Agreed
Value ("PREFERENTIAL RIGHTS");
(d) rights to consent to assignments required by this Agreement held by
Persons other than governmental entities and not identified in writing
to Seller pursuant to Section 3.7 below, or, if so identified, with
respect to which (1) waivers or consents are obtained from the
appropriate parties, or (2) the prescribed time period for denying
such consent has expired;
(e) materialman's, mechanic's, repairman's, employee's, contractor's,
operator's, tax, and other similar liens or charges arising in the
ordinary course of business for obligations that are not delinquent
and that will be paid and discharged in the ordinary course of
business;
(f) rights to consent by, required notices to, filings with, or other
actions by governmental entities in connection with the sale or
conveyance of oil and gas leasehold and fee estates or interests
therein, which consents, notices, filings and/or other actions are
customarily obtained after closing;
(g) easements, rights-of-way, servitudes, permits, surface leases and
other rights in respect of surface operations affecting the Assets
which in the aggregate are not such as to interfere materially with
the operation or use of any of the Subject Properties or materially
reduce the value thereof;
(h) rights reserved to or vested in any governmental, statutory or public
authority to control or regulate any of the Assets in any manner, and
all applicable laws, rules and orders of any governmental authority
affecting the Assets which in the aggregate are not such as to
interfere materially with the operation or use of any of the Subject
Properties or materially reduce the value thereof;
(i) operating agreements, unit agreements, unit operating agreements,
pooling agreements and pooling designations affecting the Subject
Properties which are of public record or contained in the Records or
otherwise available to Purchaser and all actions taken or operations
occurring in the normal course of business pursuant to such
instruments;
(j) Title Defects that Purchaser may have expressly waived in writing or
which are deemed to have been waived pursuant to Section 3.6;
(k) all conveyances, reservations and exceptions of public record or
contained in the Records affecting the Assets which in the aggregate
are not such as to interfere materially with the operation or use of
any of the Subject Properties or materially reduce the value thereof;
and
(l) all other liens, charges, encumbrances, contracts, agreements,
instruments, obligations, defects and irregularities affecting the
Assets which in the aggregate are not such as to interfere materially
with the operation or use of the affected Subject Properties or
materially reduce the value thereof.
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3.3 ENVIRONMENTAL AND PHYSICAL ASSESSMENT. Purchaser shall have the
right to make an environmental and other physical assessment of the Assets
during the period ("EXAMINATION PERIOD") beginning on the date of execution of
this Agreement and ending at noon on May 20, 1996. During Seller's normal
business hours, Purchaser and its Representatives shall have the right to enter
upon the Assets and all buildings and improvements thereon, inspect the same,
conduct soil and water tests and borings, and generally conduct such tests,
examinations, investigations and studies as may be reasonably necessary or
appropriate for the preparation of appropriate environmental and other reports
relating to the Assets, their condition, and the presence of wastes or
contaminants. Seller shall be provided 48 hours prior notice of such
activities and shall have the right to (i) witness all such tests and
investigations, (ii) receive an equal distribution of all samples taken by
Purchaser and its Representatives, and (iii) prohibit such tests and
investigations which it reasonably believes could materially damage its
properties or business interests; PROVIDED, that Purchaser shall have the right
to exclude the Asset subject to such prohibition from this Agreement by written
notice delivered with any Notice of Defects, in which case the Purchase Price
shall be reduced by the Agreed Value. Purchaser shall keep any data or
information acquired by all such examinations and the results of all analyses of
such data and information strictly confidential and not disclose any of the same
to any Person unless otherwise required by law or regulation and then only after
written notice to Seller of the need for disclosure and the identity of all
intended recipients. Seller hereby grants Purchaser access to the Assets to
conduct its environmental and other physical assessment upon the condition that,
in accordance with Section 9.2, Purchaser hereby indemnifies and holds Seller
and its Affiliates and their respective Representatives harmless from and
against any and all claims for or related to personal injury or property damage
arising out of or as a result of the activities of Purchaser or its
Representatives on the Assets in conducting such environmental and physical
assessments. If during the Examination Period, Purchaser determines in good
faith that (i) there is a condition or circumstance which constitutes a
violation of applicable law or regulation, or (ii) there is a claim, demand,
filing, investigation, action, suit or other legal or administrative proceeding
asserted or otherwise initiated by a governmental authority and arising from or
related to the Subject Properties or the ownership or operation of any thereof
("ENVIRONMENTAL DEFECT"), Purchaser may include notice of such Defect in any
Notice of Defects delivered hereunder, and the value of such Defect asserted by
Purchaser shall not be limited to the value of the Subject Properties so
affected; PROVIDED, that any such matter not included in a Notice of Defects
shall be and hereby is waived by Purchaser.
3.4 IDENTIFIED CLAIMS. During the Examination Period and in accordance
with Section 4.12, Seller shall make available to Purchaser for examination and
copying (at Purchaser's cost) any of the Records and Seller's accounting records
relating to the Assets as Purchaser may reasonably request. Seller shall also
permit Purchaser's Representatives to consult with Seller's employees and
Seller's independent contractors who have knowledge concerning the Assets during
normal business hours regarding such records; PROVIDED, that such consultation
shall not unreasonably disrupt the performance by such employee or independent
contractor of his or its duties with Seller. If during the Examination Period,
Purchaser determines in good faith that (i) royalties, rentals or other payments
due in respect of the Assets prior to the Effective Time have not been paid
(except for those amounts in suspense), or (ii) there are unsatisfied claims,
demands, liabilities or obligations in respect of the Assets based upon
omissions, events or occurrences prior to the Effective Time (collectively,
"IDENTIFIED CLAIMS"), Purchaser may include notice of such Identified Claims in
any Notice of Defects delivered hereunder; PROVIDED, that any such matter not
included in a Notice of Defects shall be and hereby is waived by Purchaser.
3.5 NOTICE OF DEFECTS. If any matter is discovered by Purchaser that, in
Purchaser's reasonable, good faith opinion, would (a) cause any of the Sale
Interest not to be Acceptable Title (a "TITLE DEFECT"); (b) constitute a breach
of Seller's representations, warranties and agreements contained herein (a
"CONTRACT DEFECT"); (c) constitute an Environmental Defect; or (d) constitute an
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Identified Claim ((a) through (d) to the extent that each such matter exceeds an
individual value of $5,000, individually, a "DEFECT", and collectively, the
"DEFECTS"), then Purchaser may provide written notice (a "NOTICE OF DEFECTS")
thereof actually delivered to Seller not later than noon, May 20, 1996;
PROVIDED, however, that any notice concerning a Contract Defect not discoverable
from an examination of the Records, public records, Purchaser's records, the
records of any purchaser of production attributable to the Subject Properties or
a physical inspection of the Assets may be delivered to Seller on or before noon
of the business day immediately before the Closing Date, and that, if so
delivered, Purchaser's sole remedy therefor shall be as provided in Section 3.6,
with the procedure therein provided applicable thereto the same as if such
Contract Defect had been included in any Notice of Defects delivered not later
than noon, May 20, 1996 (i.e., the value of any such Contract Defect shall be
included in the value of any other Defects included in a Notice of Defects, or,
if no Notice of Defects has been provided, then such Contract Defect only may be
included in a Notice of Defects then given to Seller). A Notice of Defects shall
specifically identify the Defect and include (i) the Purchaser's purported value
of each specific Defect, (ii) an identification of each affected Asset, (iii)
Purchaser's basis for determining the existence and value of such Defect,
together with all associated reports, opinions, data, valuations, assessments,
conclusions and supporting calculations, and (iv) Purchaser's statement of steps
necessary to cure each such Defect to its satisfaction, all of which shall be
kept strictly confidential by Seller, except to the extent required by law,
regulation or order of any court or other governmental authority or as may be
necessary to address Defects identified in a Notice of Defects.
3.6 REMEDY FOR DEFECTS. In Seller's sole discretion, but without
obligation, it may, at its sole cost, take such steps as are reasonably
necessary to cure Defects identified in a Notice of Defects. In the event
Seller is unable or elects not to cure any or all Defects, Seller and Purchaser
may, at Seller's option, meet and use their best efforts to agree in good faith
on the validity of each Defect claim and the need for and amount of any mutually
acceptable Purchase Price adjustment. Purchaser's asserted Title Defect
adjustments shall be made with reference (as a maximum) to the Agreed Value for
each affected Asset. If the parties cannot agree on the need for or the amount
of a claimed Purchase Price adjustment, Purchaser shall accept and purchase the
Assets, including any Asset subject to a Defect, as provided herein; PROVIDED,
however, that (i) if the aggregate net amount of Purchase Price adjustments
asserted by Purchaser, PLUS the amount of any uninsured Casualty Losses and
Casualty Losses not fully covered by insurance (to the extent of such deficiency
only), PLUS the value of any of the Subject Properties (with reference to the
Agreed Value thereof as a maximum) taken in condemnation or under the right of
eminent domain prior to the end of the Examination Period, or with respect to
which proceedings for such purposes shall be pending or threatened in writing at
such time, equals or exceeds $3,150,000, or (ii) if the aggregate value of
Preferential Rights to be exercised at Closing equals or exceeds 30% of the
Purchase Price, then Seller or Purchaser may, upon written notice to the other,
terminate this Agreement, without liability or further obligation to the other
party, subject to Section 10.2. Seller shall have no obligation hereunder to any
Person to sell, convey, deliver or otherwise transfer all or any part of the
Assets if Purchaser or Seller terminates this Agreement pursuant to the
foregoing clause (ii). Purchaser agrees and acknowledges that Seller has no
obligation to adjust the Purchase Price with respect to Defects. If Closing
occurs, Purchaser shall be deemed to have waived or assumed any and all claims,
known and unknown, arising from or related to any and all Defects or title to or
other condition of the Assets, including, without limitation, whether or not
identified in a Notice of Defects, and notwithstanding the fact that Seller may
not have cured any such Defect(s) to Purchaser's satisfaction, and Seller shall
have no obligation with respect thereto. As used in this Agreement, the
"AGGREGATE NET AMOUNT" of Purchase Price adjustments shall be determined by
subtracting from the value of all Defects asserted by Purchaser (y) the value of
all interests by which Seller's actual interests in the Subject Properties
exceeds the net revenue interests set forth on Exhibit "A" hereto, and (z) the
value of Defects asserted by Purchaser which are cured or otherwise resolved to
Purchaser's reasonable satisfaction. If Purchaser provides Seller with a Notice
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of Defects, Purchaser shall provide Seller copies of all pertinent portions of
applicable title opinions, data and curative information available to it to
enable the parties to make such determination.
3.7 PREFERENTIAL PURCHASE RIGHTS AND CONSENTS TO ASSIGN. Upon written
notification to Seller by Purchaser identifying Persons (and their addresses)
holding preferential rights to purchase affecting the Subject Properties or the
right to consent with respect to any assignments required hereby, other than
such consents of governmental authorities which are usually obtained in the
normal course of business after Closing, actually received by Seller not later
than the earlier of (i) fifteen (15) days prior to the Closing Date, or (ii)
five (5) business days prior to the latest date prior to Closing permitted by
the subject agreement for such notice to be provided, Seller shall send notice
of this Agreement to all such Persons (y) offering to sell to each such Person
the Subject Properties for which a preferential right is held on and subject to
the terms hereof and for the Agreed Value, or (z) requesting, where appropriate,
consent to any assignment required in connection herewith. Purchaser shall be
entitled to review and approve the form of all such notices; PROVIDED, that such
approval shall not be unreasonably withheld or delayed. If, prior to Closing,
any of such Persons asserting a preferential purchase right notifies Seller that
it intends to consummate the purchase of the Subject Properties to which it
holds a preferential purchase right pursuant to the terms and conditions hereof,
then, subject to clause (ii) of Section 3.6 above, such Subject Properties shall
be excluded from the Assets to be conveyed to Purchaser under this Agreement and
the Purchase Price shall be reduced by the Agreed Value; PROVIDED, however, that
if the holder of such preferential right fails to consummate the purchase of
such Subject Properties on the Closing Date, then Seller shall promptly so
notify Purchaser, and Seller shall sell immediately to Purchaser, and Purchaser
shall purchase from Seller, for the Agreed Value and upon the other terms of
this Agreement, the Subject Properties to which the preferential purchase right
was asserted. All Subject Properties for which a preferential purchase right has
not been asserted prior to Closing by the holder of such right, or with respect
to which Closing does not occur on the Closing Date following the assertion of a
preferential purchase right, shall be sold to Purchaser at Closing pursuant and
subject to the provisions of this Agreement. If one (1) or more of the holders
of any preferential purchase rights notifies Seller subsequent to Closing that
it intends to assert its preferential purchase right, Seller shall give notice
thereof to Purchaser, whereupon Purchaser shall satisfy all such preferential
purchase right obligations of Seller to such holders and shall indemnify and
hold Seller harmless from and against any and all claims, liabilities, losses,
costs and expenses (including, without limitation, court costs and reasonable
attorneys' fees) in connection therewith, and Purchaser shall be entitled to
receive (and Seller hereby assigns to Purchaser all of Seller's rights to) all
proceeds received from such holders in connection with such preferential
purchase rights; Purchaser shall indemnify and hold harmless Seller from and
against any and all claims, liabilities, losses, costs and expenses (including,
without limitation, court costs and reasonable attorneys' fees) asserted or
incurred at any time (whether before or after Closing) with respect to or
arising directly or indirectly from the claims of any Person to a preferential
purchase right affecting any of the Assets transferred to Purchaser hereunder.
ARTICLE 4. SELLER'S REPRESENTATIONS,WARRANTIES AND COVENANTS
Seller represents, warrants to and covenants with Purchaser that (PROVIDED,
that each of PPDLP and PPPLP, respectively, makes such representations,
warranties and covenants solely with respect to itself and not as to the other):
4.1 EXISTENCE. PPDLP and PPPLP are each limited partnerships, duly
formed, validly existing and in good standing under the laws of the State of
Texas and the State of Delaware, respectively.
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4.2 EXISTENCE. PPGP is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware, and is the sole
Trustee of Three Rivers Pipeline Business Trust. Three Rivers Pipeline Business
Trust is a business trust duly formed, legally existing and in good standing
under the laws of the State of Pennsylvania.
4.3 POWER. Seller has the requisite power and authority to enter into and
perform this Agreement and the transactions contemplated hereby. The execution,
delivery and performance of this Agreement by Seller, and the transactions
contemplated hereby, will not (a) violate any provision of Seller's articles or
agreement of limited partnership or other governing documents, (b) conflict
with, result in a breach of, constitute a default (or an event that with the
lapse of time or notice, or both would constitute a default) under any agreement
or instrument to which Seller is a party or by which Seller is bound, (c) to the
best knowledge and belief of Seller, violate any judgment, order, ruling, or
decree applicable to Seller and entered or delivered in a proceeding in which
Seller was or is a named party, or (d) to the best knowledge and belief of
Seller, violate any applicable law, rule or regulation.
4.4 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the transactions contemplated hereby have been duly and validly
authorized by all requisite action on the part of Seller. This Agreement has
been duly executed and delivered on behalf of Seller, and at the Closing all
documents and instruments required hereunder to be executed and delivered by
Seller shall be duly executed and delivered. This Agreement and such documents
and instruments shall constitute legal, valid and binding obligations of Seller
enforceable in accordance with their terms subject, however, to the effect of
bankruptcy, insolvency, reorganization, moratorium and similar laws from time to
time in effect relating to the rights and remedies of creditors, as well as to
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
4.5 BROKERS. Seller has incurred no obligation or liability, contingent
or otherwise, for brokers' or finders' fees in respect of the matters provided
for in this Agreement which will be the responsibility of Purchaser, and any
such obligation or liability that might exist shall be the sole obligation of
Seller.
4.6 FOREIGN PERSON. Seller is not a "FOREIGN PERSON" within the meaning
of the Code.
4.7 NO LIENS. The Assets are not subject to any valid and enforceable
security interests, liens or mortgages.
4.8 VALID AGREEMENTS. Material oil and gas leases and other material
contracts and agreements constituting a part of the Assets are valid and in full
force and effect, and Seller is not, or with the lapse of time or giving of
notice or both will not be, in material breach or material default, with respect
to any of its obligations thereunder and no party has given or threatened to
give Seller notice of any material default thereunder.
4.9 NO RESERVATIONS. There are no reservations which affect the Assets
other than those currently of public record.
4.10 PERMITS. Seller possesses all material licenses, permits,
certificates, orders, approvals and authorizations necessary to own the Assets
and to carry on its business as now being conducted.
4.11 COMPLIANCE WITH LAW. Seller is in material compliance with all laws,
ordinances, rules, regulations and orders applicable to the Assets, including,
without limitation, all environmental laws, ordinances, rules, regulations and
orders, except to the extent of any non-compliance that is not reasonably
expected to result in a material adverse affect on the Assets; however, Seller
has not
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received any notice of any claimed noncompliance therewith. Seller is not aware
of any facts, conditions or circumstances in connection with, related to or
associated with the Assets that could reasonably be expected to give rise to any
claim or assertion that Seller, the Assets or the ownership or operation of any
thereof is not in material compliance with any applicable law, rule, regulation,
ordinance, or order of any governmental authority or with any term or conditions
of any applicable permit, license, approval, consent, certificate or other
authorization.
4.12 TAXES. All ad valorem, property, production, severance, excise, and
similar taxes and assessments based on or measured by the ownership of property
or the production of hydrocarbons or the receipt of proceeds therefrom
attributable to the Assets that have become due and payable have been properly
and timely paid, except to the extent of any failure that is not reasonably
expected to result in a material adverse effect on the Assets.
4.13 ACCESS TO RECORDS. Seller will provide Purchaser through Closing
access to the Records during normal business hours at their place of storage,
and, at Purchaser's cost, will assist Purchaser in obtaining access to and the
right to review and copy Records pertaining to the Subject Properties not in
Seller's possession or control. From and after the date of the execution of
this Agreement through the Closing Date, Seller shall not add to or remove from
the Records any contracts, instruments, documents or other materials except for
such additions and removals as are done in the ordinary course of business with
respect to ongoing operations.
4.14 NO CALL. No Person has any option to purchase or similar right under
any agreement with respect to production attributable to the Assets which could
reasonably be expected to materially and adversely affect the value of the
Assets, taken as a whole.
4.15 LITIGATION. No pending litigation or other proceeding in which Seller
(or its direct predecessor in title) is a named party affects any of the Assets,
and no litigation or other proceeding has been threatened in writing with
respect to any of the Assets, except as described in the Disclosure Schedule to
be attached hereto on or before the fifteenth day hereafter; PROVIDED, that
either Seller or Purchaser may exclude from this Agreement any Assets (other
than the Pipeline with respect to pending proceedings concerning an increase in
existing tariffs) subject to such proceedings and the Purchase Price shall be
reduced by the Agreed Value.
4.16 NO "TAKE-OR-PAY" COMMITMENTS. Seller is not obligated by virtue of a
prepayment arrangement, a "TAKE-OR-PAY" arrangement, a production payment or any
other arrangement to deliver hydrocarbons from the Subject Properties at some
future time without then or thereafter receiving full payment therefor.
4.17 ROYALTIES. All royalties, rentals and other payments due with respect
to the Assets have been properly and timely paid.
4.18 ACCESS. No condition exists upon any of the Subject Properties which
is reasonably expected to restrict access thereto.
4.19 NGPA STATUS. Seller has obtained and maintained for its period of
Seller's ownership all approvals and has filed all reports and other matters
necessary to maintain and operate the entirety of the Pipeline under and
pursuant to Section 311 of the Natural Gas Policy Act of 1978 and all rules,
regulations and orders promulgated thereunder (the "NGPA").
4.20 USE OF ASSETS. The Pipeline has been used by Seller solely for the
transportation and sale of pipeline quality natural gas.
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4.21 TAKE OR PAY; DISCOUNTS. The Pipeline is not subject to any contracts
under which it is required to take or pay for, or take and pay for, or purchase
minimum quantities of natural gas. The Pipeline is not obligated to deliver,
process or transport any gas or products thereof without being entitled to
receive payment at the full agreed upon rate for such delivery, processing or
transportation.
4.22 FERC.
(a) To the extent that the operations of the Pipeline are subject to
a tariff approved by the Federal Energy Regulatory Commission
("FERC"), those operations are in material compliance with such
tariffs;
(b) the Seller has no actual refund obligation imposed in connection
with the Pipeline under an order issued by FERC; and
(c) Seller has not received notice that a customer of the Pipeline
has made a complaint against the Pipeline which is currently
pending before FERC, nor notice that any customer has threatened
to make such a complaint.
LIMITATION AND DISCLAIMER OF REPRESENTATIONS AND WARRANTIES
THE EXPRESS REPRESENTATIONS AND WARRANTIES OF SELLER CONTAINED IN THIS AGREEMENT
ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES,
EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE, AND, EXCEPT FOR THE REPRESENTATIONS
AND WARRANTIES CONTAINED IN SECTIONS 4.1 THROUGH 4.5 (WHICH SHALL SURVIVE
CLOSING) THE REPRESENTATIONS AND WARRANTIES CONTAINED HEREIN SHALL TERMINATE IN
ALL RESPECTS UPON CLOSING. ANY ASSIGNMENT AND BILL OF SALE OR OTHER CONVEYANCE
EXECUTED AND DELIVERED PURSUANT HERETO SHALL BE: (a) WITHOUT ANY WARRANTY OR
REPRESENTATION OF TITLE, EITHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE; (b)
WITHOUT ANY EXPRESS, IMPLIED, STATUTORY OR OTHER WARRANTY OR REPRESENTATION AS
TO THE CONDITION, QUANTITY, QUALITY, FITNESS FOR A PARTICULAR PURPOSE,
CONFORMITY TO MODELS OR SAMPLES OF MATERIALS OR MERCHANTABILITY OF ANY OF THE
ASSETS OR THEIR FITNESS FOR ANY PURPOSE; AND (c) WITHOUT ANY OTHER EXPRESS,
IMPLIED, STATUTORY OR OTHER WARRANTY OR REPRESENTATION WHATSOEVER. AT CLOSING,
PURCHASER SHALL HAVE INSPECTED OR WAIVED ITS RIGHT TO INSPECT THE RECORDS AND
THE ASSETS FOR ALL PURPOSES AND SATISFIED ITSELF AS TO THE PHYSICAL AND
ENVIRONMENTAL CONDITION OF THE ASSETS, BOTH SURFACE AND SUBSURFACE, INCLUDING
BUT NOT LIMITED TO CONDITIONS SPECIFICALLY RELATED TO THE PRESENCE, RELEASE OR
DISPOSAL OF HAZARDOUS SUBSTANCES. PURCHASER IS RELYING SOLELY UPON ITS OWN
INSPECTION OF THE ASSETS, AND, PURCHASER SHALL ACCEPT ALL OF THE SAME IN THEIR
"AS IS, WHERE IS" CONDITION. IN ADDITION, SELLER MAKES NO WARRANTY OR
REPRESENTATION, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AS TO THE ACCURACY OR
COMPLETENESS OF ANY DATA, REPORTS, RECORDS, PROJECTIONS, INFORMATION OR
MATERIALS NOW, HERETOFORE OR HEREAFTER FURNISHED OR MADE AVAILABLE TO PURCHASER
IN CONNECTION WITH THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, ANY
DESCRIPTION OF THE ASSETS, PRICING ASSUMPTIONS, OR QUALITY OR QUANTITY OF
HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE ASSETS OR THE ABILITY OR
POTENTIAL OF THE ASSETS TO PRODUCE HYDROCARBONS OR THE ENVIRONMENTAL CONDITION
OF THE ASSETS OR ANY OTHER MATTERS CONTAINED IN CONFIDENTIAL INFORMATION OR ANY
OTHER MATERIALS FURNISHED OR MADE AVAILABLE TO PURCHASER BY SELLER OR BY
SELLER'S AGENTS OR REPRESENTATIVES. ANY AND ALL SUCH DATA, RECORDS, REPORTS,
PROJECTIONS, INFORMATION AND OTHER MATERIALS FURNISHED BY SELLER OR BY SELLER'S
AGENTS OR REPRESENTATIVES OR OTHERWISE MADE AVAILABLE TO PURCHASER OR
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PURCHASER'S REPRESENTATIVES ARE PROVIDED TO OR FOR THE BENEFIT OF PURCHASER AS A
CONVENIENCE, AND SHALL NOT CREATE OR GIVE RISE TO ANY LIABILITY OF OR AGAINST
SELLER OR SELLER'S AGENTS OR REPRESENTATIVES. ANY RELIANCE ON OR USE OF THE
SAME SHALL BE AT PURCHASER'S SOLE RISK. THE ASSIGNMENTS AND BILLS OF SALE OR
OTHER CONVEYANCES TO BE DELIVERED BY SELLER AT CLOSING SHALL EXPRESSLY SET FORTH
THE LIMITATIONS AND DISCLAIMERS OF REPRESENTATIONS AND WARRANTIES CONTAINED IN
THIS PARAGRAPH.
Seller covenants and agrees that from and after the execution of this
Agreement and until the Closing Date:
4.23 MAINTENANCE OF ASSETS. Seller will not sell, transfer, assign, convey
or otherwise dispose of any of the Assets subject to Seller's direct control,
other than (a) oil, gas and other hydrocarbons produced, saved and sold in the
ordinary course of business, (b) personal property and equipment which is
replaced with property and equipment of comparable or better value and utility
in the ordinary and routine maintenance and operation of the Subject Properties,
and (c) as required in connection with any exercise of preferential rights or as
otherwise required to satisfy obligations to third parties under contracts
presently existing.
4.24 NO ENCUMBRANCES. Seller will not create any lien, security interest
or encumbrance on the Sale Interest, the oil or gas attributable to the Assets,
or the proceeds thereof, other than Permitted Encumbrances.
4.25 OPERATIONS. Seller will, subject to the rights of affected parties
under applicable agreements:
(a) cause the Subject Properties to be developed, maintained and
operated in compliance with applicable laws, ordinances, rules,
regulations and orders and in a prudent, good and workmanlike
manner, maintain all permits, certificates, licenses,
authorizations and insurance now in force with respect to the
Subject Properties, and pay or cause to be paid all costs and
expenses in connection therewith;
(b) not participate in the drilling of any new well on the Subject
Properties or fail to participate in operations on the Subject
Properties proposed by other parties, without the advance written
consent of Purchaser, which consent (which may not be
unreasonably withheld) or non-consent must be given by Purchaser
within three (3) days of the notice from Seller;
(c) not take any action or fail to take any action which is
reasonably expected to result in any termination of the leases
forming a part of the Subject Properties;
(d) perform and comply with all of its obligations under agreements
relating to or affecting the Subject Properties;
(e) carry on its business with respect to the Subject Properties in
substantially the same manner as it has heretofore, not
introducing any new method of management, operation or accounting
with respect to the Subject Properties except as may be required
by applicable statutes, rules or regulations or by applicable
presently existing contractual obligations;
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(f) not enter into or assume any contract, agreement or commitment
which is not in the ordinary course of business as heretofore
conducted or which involves payments, receipts or potential
liabilities with respect to the Subject Properties of more than
$25,000, excluding emergency expenditures; and
(g) not resign or otherwise voluntarily relinquish its rights as
operator of any Subject Property for which it serves as operator
on the date hereof.
(h) not grant any preferential right to purchase or similar right or
agree to require the consent of any party to the transfer and
assignment of the Assets to Purchaser, subject to existing
contractual obligations;
(i) not enter into any gas sales contract or crude oil sales or
supply contract with respect to the Subject Properties which is
not terminable without penalty upon notice of thirty (30) days
or less;
(j) not enter into any transaction the effect of which, considered as
a whole, would be to cause Seller's ownership interest in any of
the Subject Properties to be altered from its ownership interest
as of the date hereof;
(k) not enter into any settlement of or relinquish any outstanding
receivables which are a part of the Assets (including, without
limitations, the right to receive any retroactive price
adjustments, take-or-pay monies, FERC mandated refunds,
accounting adjustments, tax adjustments, and Minerals Management
Service refunds);
(l) if any approval or consent by any federal, state or local
governmental authority is required to vest Acceptable Title to
any of the Sale Interest in Purchaser at Closing, exercise its
best efforts, as reasonably requested in writing by Purchaser, to
obtain all such required approvals or consents at Purchaser's
expense;
(m) through Closing, give prompt written notice to Purchaser of any
notice of default (or written threat of default, whether disputed
or denied) received or given by Seller under any instrument or
agreement affecting the Subject Properties to which Seller is a
party or by which it or any of the Subject Properties is bound;
and
(n) to the extent it can do so without violating any third party
agreement and subject to the rights of third parties, exercise
its best efforts to provide (as soon as practicable) Purchaser
with a copy of each authority for expenditure and contract
affecting the Subject Properties entered into after the date
hereof; PROVIDED, however, that the provision of such matters to
Purchaser is for informational purposes only and that Purchaser
shall have no right to comment upon or object to any such matter
that is otherwise not in violation of this Agreement.
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ARTICLE 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
Purchaser represents and warrants to and covenants with Seller that
(PROVIDED, that each of CPC and CELLC, respectively, makes such representations,
warranties and covenants solely with respect to itself and not as to the other):
5.1 EXISTENCE. CELLC is a limited liability company duly organized,
validly existing and in good standing under the laws of the State of Texas. CPC
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Texas.
5.2 POWER. Purchaser has the requisite power and authority to enter into
and perform this Agreement and the transactions contemplated hereby. The
execution, delivery and performance of this Agreement by Purchaser, and the
transactions contemplated hereby, will not (a) violate any provision of any
Purchaser's certificate or articles of incorporation or organization, as the
case may be, bylaws, regulations or other governing documents; (b) to the best
knowledge and belief of Purchaser, conflict with, result in a breach of,
constitute a default (or an event that with the lapse of time or notice, or both
would constitute a default) under any agreement or instrument to which Purchaser
is a party or by which Purchaser is bound, (c) to the best knowledge and belief
of Purchaser, violate any judgment, order, ruling, or decree applicable to
Purchaser and entered or delivered in a proceeding in which Purchaser was or is
a named party; or (d) to the best knowledge and belief of Purchaser, violate any
applicable law, rule or regulation.
5.3 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the transactions contemplated hereby have been duly and validly
authorized by all requisite action on the part of Purchaser. This Agreement has
been duly executed and delivered on behalf of Purchaser, and at the Closing all
documents and instruments required hereunder to be executed and delivered by
Purchaser shall have been duly executed and delivered. This Agreement and such
documents and instruments shall constitute legal, valid and binding obligations
of Purchaser enforceable in accordance with their terms, subject, however, to
the effect of bankruptcy, insolvency, reorganization, moratorium and similar
laws from time to time in effect relating to the rights and remedies of
creditors, as well as to general principles of equity (regardless of whether
such enforceability is considered in a proceeding in equity or at law).
5.4 BROKERS. Purchaser has not incurred any obligation or liability,
contingent or otherwise, for brokers' or finders' fees in respect of the matters
provided for in this Agreement which will be the responsibility of Seller, and
any such obligation or liability that might exist shall be the sole obligation
of Purchaser.
5.5 INVESTMENT INTENT. Purchaser is acquiring the Assets for Purchaser's
own account for investment, and not with a view to, or for resale in connection
with, any distribution thereof within the meaning of the Securities Act of 1933,
and shall not resell any or all of the Assets except in compliance with all
applicable securities laws.
5.6 ADDITIONAL INTERESTS. If offered in writing to Purchaser by PPDLP,
Purchaser shall have the option to purchase, upon essentially the same terms and
conditions as contained herein, all additional right, title and interest, if
any, in and to the Assets acquired after the Effective Time by PPDLP, and, if
such option is exercised, the consideration paid therefor shall be the purchase
price paid by PPDLP. Notwithstanding the immediately preceding sentence,
Purchaser shall purchase at Closing all interests in any of the Assets (which
are purchased by Purchaser) and described on Appendix I attached hereto offered
by the owners thereof for the purchase price described on Appendix I (which
amount has not been included in the Purchase Price), whether or not such
interests are acquired by
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PPDLP prior to Closing, unless such interests are subject to Defects
specifically included in any Notice of Defects delivered hereunder, in which
case, at Seller's sole option, (i) such affected interest shall be excluded from
the Assets and the Purchase Price shall be reduced by the purchase price
allocated thereto on Appendix I, or (ii) the Purchase Price shall be reduced by
the purchase price allocated thereto on Appendix I and such interest shall be
conveyed to Purchaser at Closing as a part of the Assets. All such interests
acquired by Purchaser shall be deemed to be a part of the Sale Interest for all
purposes.
ARTICLE 6. SELLER'S CONDITIONS OF CLOSING
Seller's obligation to consummate the transactions provided for herein is
subject only to the satisfaction or waiver by Seller on or before the Closing
Date of the following conditions:
6.1 REPRESENTATIONS. The representations and warranties of Purchaser
contained in Article 5 shall be true and correct in all material respects on the
Closing Date as though made on and as of that date.
6.2 PERFORMANCE. Purchaser shall have performed in all material respects
the obligations, covenants and agreements hereunder to be performed by it at or
prior to the Closing.
6.3 OFFICER'S CERTIFICATE. Each Purchaser shall have delivered to Seller
a certificate of an executive officer dated the Closing Date, certifying on
behalf of such Purchaser that the conditions set forth in Sections 6.1 and 6.2
have been fulfilled.
6.4 PENDING MATTERS. No suit, action or other proceeding by a third party
or a governmental authority shall be pending or threatened which seeks
substantial damages from Seller in connection with, or seeks to restrain, enjoin
or otherwise prohibit, the consummation of the transactions contemplated by this
Agreement.
6.5 HSR ACT. The waiting period required by the HSR Act (as defined in
Section 13.20 below) shall have expired or been terminated.
ARTICLE 7. PURCHASER'S CONDITIONS OF CLOSING
Purchaser's obligation to consummate the transactions provided for herein
is subject only to the satisfaction or waiver by Purchaser on or before the
Closing Date of the following conditions:
7.1 REPRESENTATIONS. The representations and warranties of Seller
contained in Article 4 shall be true and correct in all material respects on the
Closing Date as though made on and as of that date.
7.2 PERFORMANCE. Seller shall have performed in all material respects the
obligations, covenants and agreements hereunder to be performed by it at or
prior to the Closing.
7.3 OFFICER'S CERTIFICATE. Seller shall have delivered to Purchaser
certificates of executive officers of Seller's respective general partners,
dated the Closing Date, certifying on behalf of such Seller that the conditions
set forth in Sections 7.1 and 7.2 have been fulfilled.
7.4 PENDING MATTERS. No suit, action or other proceeding by a third party
or a governmental authority shall be pending or threatened which seeks
substantial damages from Purchaser in connection
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with or, seeks to restrain, enjoin or otherwise prohibit, the consummation of
the transactions contemplated by this Agreement.
7.5 HSR ACT. The waiting period required by the HSR Act (as defined in
Section 13.20 below) shall have expired or been terminated.
7.6 PIPELINE. Purchaser's obligation to consummate the transaction
provided for herein with respect to the Pipeline shall be subject to Purchaser
having obtained, prior to or at Closing, every operating right (including
rights-of-way, easements and contracts), license, permit or federal, state or
local governmental approval (including without limitation, those required of any
federal, state or local governmental authority which are not assignable by
Seller or must be issued to Purchaser in its own name) and which is necessary in
order for Purchaser to acquire, own, possess and operate the Pipeline and to
conduct the business of the Pipeline as a gas transportation system, failing in
which (unless waived by Purchaser) the Purchase Price shall be reduced at
Closing by the Agreed Value of the Pipeline, which Seller and Purchaser agree
for all purposes hereunder is $3,500,000.
ARTICLE 8. CLOSING
8.1 TIME AND PLACE OF CLOSING. If the conditions to Closing have been
satisfied or expressly waived by the party entitled to the benefits thereof, the
consummation of the transactions contemplated hereby ("CLOSING") shall take
place at Seller's offices in Midland, Texas, on May 31, 1996, at 9:00 a.m, or at
such other place and time or in such other manner agreed upon by Seller and
Purchaser ("CLOSING DATE"); PROVIDED, that Seller shall have the right to extend
Closing for up to thirty (30) days to respond to any Notice of Defects provided
by Purchaser and that any extension by Seller shall not serve to provide
Purchaser rights not otherwise expressly provided herein, nor to extend any
rights of Purchaser contained herein, including, without limitation, those
contained in Section 3.5.
8.2 CLOSING OBLIGATIONS. At the Closing,
(a) Seller shall execute, acknowledge and deliver to Purchaser (or its
designee pursuant to Section 13.5) conveyance documents in mutually
acceptable form and substance consistent herewith, by which the Assets
shall be conveyed as provided hereby;
(b) Seller and Purchaser shall execute, acknowledge and deliver transfer
orders or letters in lieu thereof directing all purchasers of
production to make payment to Purchaser of proceeds attributable to
the Sale Interest;
(c) Purchaser shall deliver the Adjusted Purchase Price as provided in
Article 2;
(d) Purchaser and Seller shall execute and deliver a settlement statement
(the "PRELIMINARY SETTLEMENT STATEMENT") prepared by Seller and
setting forth the Purchase Price and all adjustments thereto agreed
upon by the parties, using the best information available, subject to
Section 13.18; and
(e) Purchaser and Seller shall execute such other instruments and take
such other action as may be necessary to carry out their respective
obligations under this Agreement.
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ARTICLE 9. POST-CLOSING OBLIGATIONS
9.1 RECEIPTS AND CREDITS; SUSPENSE FUNDS. Subject to the terms hereof,
all monies, refunds, proceeds, receipts, credits, receivables, accounts and
income attributable to the purchased Assets (a) for all periods of time from and
after the Effective Time shall be the sole property and entitlement of the
Purchaser, and, to the extent received by Seller, Seller shall fully disclose
and account therefor to Purchaser promptly, and (b) for all periods of time
prior to the Effective Time shall be the sole property and entitlement of Seller
to the extent received by Purchaser or Seller prior to the Final Accounting Date
or allocated to Seller in the Final Accounting, and if received by Purchaser,
Purchaser shall fully disclose and account therefore to Seller promptly.
Purchaser shall pay Seller for Seller's share of hydrocarbons attributable to
the purchased Assets in storage above the pipeline connection or in transit on
the Effective Time at the purchaser's then posted field price for hydrocarbons
of like grade and gravity in the relevant field, net of all applicable taxes.
Seller and Purchaser recognize that as of the Effective Time there may be over
or under imbalances with respect to gas production, gathering, transportation or
processing attributable to the Subject Properties ("IMBALANCES") and hereby
agree that (i) Imbalances shall not be included in any Identified Claims
asserted hereunder (except as provided in the proviso following the next
clause), and (ii) the Subject Properties will be conveyed specifically subject
to Imbalances which exist as of the Effective Time, with Purchaser, as of
Closing, bearing and assuming all obligations with respect to any overproduction
account or liability and receiving the benefit of and being credited with any
underproduction account or credit; PROVIDED, however, that with respect to
Subject Properties that are subject to gas balancing agreements, Purchaser (x)
may include any net overproduced Imbalance as an Identified Claim hereunder, or
(y) at Closing shall pay Seller an amount determined by multiplying the net
underproduced Imbalance by $1.00/MCF. At Closing, Seller shall deliver to
Purchaser all amounts in Seller's possession due third party owners of interests
in the Subject Properties, and Purchaser agrees that it shall be solely
responsible for the disposition of such funds, the payment thereof to the
rightful owners and the payment, if any, of royalty thereon (the "SUSPENSE
FUNDS").
9.2 COSTS AND LIABILITIES; INDEMNITY.
(a) As used in this Agreement, "CLAIMS" shall include costs,
expenses, obligations, claims, demands, causes of action,
liabilities, damages, fines, penalties and judgments of any kind
or character, whether matured or unmatured, absolute or
contingent, accrued or unaccrued, liquidated or unliquidated,
known or unknown, and all costs and fees (including, without
limitation, interest, attorneys' fees, costs of experts, court
costs and costs of investigation) incurred in connection
therewith, including, but not limited to claims arising from or
directly or indirectly related to royalty, operating, suspense
and capital obligations attributable to the purchased Assets. As
used in this Section 9.2, "ASSETS" shall include the Suspense
Funds.
(b) Notwithstanding anything in this Agreement to the contrary, it is
the express intent and agreement of Seller and Purchaser that, if
Closing occurs, Purchaser shall accept the purchased Assets in
their "AS IS, WHERE IS" condition, subject to any and all
defects, deficiencies, irregularities and claims related or
attributable in any manner thereto, including, without
limitation, Title Defects, Contract Defects, Environmental
Defects, Identified Claims or any other matter affecting in any
respect the title or physical condition of, or the right to own,
use, operate, develop or enjoy, the purchased Assets, whether
known or unknown, liquidated or unliquidated, fixed or
contingent, direct or indirect.
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(c) At Closing and without further action or documentation, Purchaser
(1) shall assume, be responsible for and comply with all duties
and obligations, express or implied, arising at any time with
respect to the purchased Assets, including, without limitation
(i) those arising under or by virtue of any lease, contract,
agreement, document, permit, law, statute, rule, regulation or
order of any governmental authority or court (specifically
including, without limitation, any governmental request or other
requirement to plug, re-plug or abandon any well of whatsoever
type, status or classification, or take any clean-up, remedial or
other action with respect to the purchased Assets), (ii)
preferential rights to purchase and (iii) third party consents;
(2) shall assume, be responsible for and pay all claims affecting
or arising, directly or indirectly, at any time in connection
with the purchased Assets, including, without limitation, claims
for personal or property injury or damage, environmental cleanup,
remediation, or compliance, or for any other relief, arising
directly or indirectly from or incident to, the use, occupation,
operation, maintenance or abandonment of or production from the
purchased Assets, or condition of the purchased Assets, whether
latent or patent, including, without limitation, contamination of
property or premises with Naturally Occurring Radioactive
Materials ("NORM"), and whether or not arising solely from or
contributed to by the negligence in any form, whether active or
passive, or of any kind or nature, of Seller or its predecessors
in title or their respective agents, employees or contractors;
and (3) shall defend, indemnify and hold Seller harmless from any
and all claims arising, asserted or due at any time in connection
with the foregoing.
(d) From and after Closing, any claim for indemnity hereunder shall
be made by written notice, together with a written description of
any claims asserted stating the nature and basis of such claim
and, if ascertainable, the amount thereof. Purchaser shall have
a period of twenty (20) days after receipt of such notice within
which to respond thereto or, in the case of a claim which
requires a shorter time for response, then within such shorter
period as specified by Seller in such notice (the "NOTICE
PERIOD"). If Purchaser denies liability hereunder or fails to
provide the defense for any claim, Seller may defend or
compromise the claim as it deems appropriate without prejudice to
any of Seller's rights hereunder, with no right of Purchaser to
approve or disapprove any actions taken in connection therewith
by Seller. If Purchaser accepts liability and responsibility for
the defense of any claim, it shall so notify Seller as soon as is
practicable prior to the expiration of the Notice Period and
undertake the defense or compromise of such claim with counsel
selected by Purchaser and reasonably acceptable to Seller. If
Purchaser undertakes the defense or compromise of such claim,
Seller shall be entitled, at its own expense, to participate in
such defense. No compromise or settlement of any claim shall be
made without reasonable notice to Seller, and without the prior
written approval of Seller, which approval shall not be
unreasonably withheld or delayed, unless such compromise or
settlement includes a general and complete release of Seller, its
Affiliates and their respective Representatives in respect of the
matter, with prejudice, and with no express or written admission
of liability on the part of Seller, its Affiliates and their
respective Representatives, and no constraints on the future
conduct of its or their respective businesses.
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(e) Seller shall have the right at all times to participate, at its
sole cost, in the preparation for any hearing or trial related to
the indemnities set forth in this Agreement, as well as the right
to appear on its own behalf or to retain separate counsel to
represent it at any such hearing or trial.
(f) THE INDEMNITIES PROVIDED IN THIS AGREEMENT SHALL EXTEND TO SELLER
AND ITS AFFILIATES AND ANY PERSON WHO AT ANY TIME HAS SERVED OR
IS SERVING AS A DIRECTOR, OFFICER, EMPLOYEE, CONSULTANT, INVITEE
OR AGENT THEREOF (EACH A "REPRESENTATIVE"), AND EACH OF THEIR
RESPECTIVE HEIRS, EXECUTORS, SUCCESSORS AND ASSIGNS, AND SHALL
APPLY TO ALL CLAIMS SUBJECT TO INDEMNITY HEREUNDER, INCLUDING
THOSE BASED ON NEGLIGENCE OF ANY NATURE, INCLUDING SOLE
NEGLIGENCE, SIMPLE NEGLIGENCE, CONCURRENT NEGLIGENCE, ACTIVE
NEGLIGENCE, PASSIVE NEGLIGENCE, STRICT LIABILITY OR FAULT OF
SELLER (OR ANY OTHER INDEMNIFIED PARTY) OR ANY OTHER THEORY OF
LIABILITY OR FAULT, WHETHER OF LAW (WHETHER COMMON OR STATUTORY)
OR IN EQUITY; PROVIDED, HOWEVER, PURCHASER SHALL NOT BE LIABLE
FOR OR INDEMNIFY SELLER FOR ANY CLAIM ASSERTED BY PURCHASER AND
ARISING FROM A BREACH BY SELLER OF THIS AGREEMENT. THE
INDEMNIFICATION PROVISIONS OF THIS SECTION 9.2 SHALL BE IN
ADDITION TO ANY OTHER INDEMNITY PROVISIONS CONTAINED IN THIS
AGREEMENT, AND IT IS EXPRESSLY UNDERSTOOD AND AGREED THAT THE
TERMS OF THIS SECTION 9.2 SHALL CONTROL OVER ANY CONFLICTING OR
CONTRADICTING TERMS OR PROVISIONS CONTAINED IN THIS AGREEMENT,
AND SHALL SURVIVE CLOSING.
9.3 FURTHER ASSURANCES. After Closing, Seller and Purchaser agree to take
such further actions and to execute, acknowledge and deliver all such further
documents that are necessary or useful in carrying out the purposes of this
Agreement or of any document delivered pursuant hereto.
9.4 DELIVERY OF RECORDS. As soon as reasonably possible but no later than
thirty (30) days after the Closing Date, Seller shall deliver originals (or
copies where originals are not available) of the Records to Purchaser; PROVIDED,
that Seller (i) shall exercise its best efforts to provide Purchaser at Closing
or as soon thereafter as is practicable with all Records necessary to assume and
conduct operations of the Assets, and (ii) shall have the right to retain, as
its own, original Records that pertain to the Excluded Assets and copies of all
other Records.
9.5 ACCESS TO DATA. Subject to the rights of third parties and to the
extent attributable to the purchased Subject Properties, Seller shall provide
Purchaser reasonable access at their place of storage to all seismic, geologic
and geophysical records and data not obtained from SFER, SFEOP, SFERP-A or any
of their respective Affiliates and in Seller's possession as of the Effective
Time. Subject to the rights of third parties and Seller's proprietary rights,
Seller shall provide Purchaser with reasonable access to Seller's books and
records after Closing as necessary for Purchaser to prepare its financial
statements.
ARTICLE 10. TERMINATION
10.1 RIGHT OF TERMINATION. This Agreement and the transactions
contemplated hereby may be terminated at any time at or prior to the Closing:
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(a) by Seller if Closing does not occur on or before July 1, 1996;
(b) by mutual consent of the parties;
(c) by Purchaser or Seller in accordance with Section 3.6;
(d) by Purchaser by notice delivered to Seller on or before Closing
if all conditions described in Article 7 shall not have been met
and such noncompliance shall not have been caused or waived by
the actions or inactions of Purchaser;
(e) by Seller by notice delivered to Purchaser on or before Closing
if (1) all conditions described in Article 6 shall not have been
met and such noncompliance shall not have been caused or waived
by the actions or inactions of Seller, or (2) Purchaser has not
made the filings and requests required of it by the first
sentence of Section 13.20 prior to April 20, 1996; or
(f) by Seller if the Second Installment is not made in accordance
herewith.
10.2 EFFECT OF TERMINATION. If this Agreement is terminated pursuant to
Section 10.1, this Agreement shall become void and of no further force or effect
(except for the provisions of Sections 4.4, 5.4, 13.1 through 13.11 and 13.14
through 13.17, each of which shall survive such termination and continue in full
force and effect); PROVIDED, however, (i) that if either party is in material
default of its obligations under this Agreement at the time this Agreement is so
terminated, such defaulting party shall continue to be liable to the other party
for damages and other remedies available at law or in equity (including, without
limitation, for specific performance) in respect of such default and such
liability shall not be affected by such termination; and (ii) if this Agreement
is so terminated by Purchaser, in the absence of a default hereunder by
Purchaser, the Deposit shall be returned to Purchaser, or if so terminated by
Seller, as the result of a default hereunder by Purchaser, the Seller may, in
its sole discretion, elect to retain the Deposit as liquidated damages (it being
agreed by the parties that damages in said event would be extremely difficult to
determine, and that the Deposit represents a fair and reasonable estimate of
such damages under the circumstances, and does not constitute a penalty).
Notwithstanding anything to the contrary contained in this Agreement, upon any
termination of this Agreement pursuant to Section 10.1 by Seller, in the absence
of a material default hereunder by Seller, Seller shall be free immediately to
enjoy all rights of ownership of the Assets and may sell, transfer, encumber or
otherwise dispose of the Assets to any party without any restriction under this
Agreement and without any impairment of its rights hereunder to recover damages
from Purchaser arising from any default hereunder by Purchaser; PROVIDED, that
Seller's right to seek specific performance of Purchaser's obligations hereunder
shall be waived upon any such disposition of the Assets and that its right to
seek or recover any other damages shall be waived upon its election to retain
the Deposit, if, and only if the First Installment and Second Installment have
been paid in accordance herewith.
ARTICLE 11. TAXES
11.1 APPORTIONMENT OF AD VALOREM AND PROPERTY TAXES. All ad valorem taxes,
real property taxes, personal property taxes, and similar obligations concerning
the Assets with respect to the tax period in which the Effective Time occurs
("PROPERTY TAXES") shall be apportioned as of the Effective Time between Seller
and Purchaser. Seller shall file or cause to be filed all required reports and
returns incident to the Property Taxes and shall pay or cause to be paid to the
taxing authorities all Property Taxes relating to the tax period in which the
Effective Time occurs. Purchaser shall pay to Seller
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Purchaser's pro rata portion of Property Taxes within thirty (30) days after
receipt of Seller's invoice therefor.
11.2 SALES TAXES. The Purchase Price excludes any sales taxes or other
taxes required to be paid in connection with the sale of property pursuant to
this Agreement. Purchaser shall be liable for all sales, use and other taxes,
conveyance, transfer and recording fees and real estate transfer stamps or taxes
that may be imposed on any transfer of property pursuant to this Agreement.
These taxes shall be collected and remitted under applicable law. Purchaser
shall indemnify and hold Seller harmless with respect to the payment of any of
these taxes including any interest or penalties assessed thereon.
11.3 OTHER TAXES. All taxes (other than income taxes) which are imposed on
or with respect to the production of oil, natural gas or other hydrocarbons or
minerals or the receipt of proceeds therefrom (including but not limited to
severance, production, and excise taxes) shall be apportioned between the
parties based upon the respective shares of production taken by the parties.
From and after Closing, Purchaser shall be responsible for paying or withholding
or causing to be paid or withheld all such taxes and for filing all statements,
returns, and documents incident thereto.
11.4 COOPERATION. Each party to this Agreement shall provide the other
party with reasonable access to all relevant documents, data and other
information which may be required by the other party for the purpose of
preparing tax returns and responding to any audit by any taxing jurisdiction.
Each party to this Agreement shall cooperate with all reasonable requests of the
other party made in connection with contesting the imposition of taxes.
Notwithstanding anything to the contrary in this Agreement, neither party to
this Agreement shall be required at any time to disclose to the other party any
tax return or other confidential tax information.
ARTICLE 12. PHYSICAL CONDITION OF THE ASSETS
12.1 PRIOR USE OF ASSETS. THE ASSETS HAVE BEEN USED FOR OIL AND GAS
DRILLING AND PRODUCING OPERATIONS AND RELATED OIL FIELD OPERATIONS. PHYSICAL
CHANGES IN THE LAND MAY HAVE OCCURRED AS A RESULT OF SUCH USES. THE ASSETS ALSO
MAY INCLUDE BURIED PIPELINES AND OTHER EQUIPMENT, WHETHER OR NOT OF A SIMILAR
NATURE, THE LOCATIONS OF WHICH MAY NOT NOW BE KNOWN BY SELLER OR READILY
APPARENT BY A PHYSICAL INSPECTION OF THE PROPERTY. PURCHASER UNDERSTANDS THAT
SELLER DOES NOT HAVE THE REQUISITE INFORMATION WITH WHICH TO DETERMINE THE EXACT
NATURE OR CONDITION OF THE ASSETS OR THE AFFECT ANY SUCH USE HAS HAD ON THE
PHYSICAL CONDITION OF THE LANDS BURDENED BY THE ASSETS.
12.2 ASSUMPTION OF ASSETS IN PRESENT CONDITION. PURCHASER
ACKNOWLEDGES THAT (i) THE CONSUMMATION OF THIS AGREEMENT BY PURCHASER SHALL BE
ON THE BASIS OF ITS OWN INVESTIGATION OF THE PHYSICAL CONDITION OF THE ASSETS,
INCLUDING, WITHOUT LIMITATIONS, SUBSURFACE CONDITION; (ii) THE ASSETS HAVE BEEN
USED IN THE MANNER AND FOR THE PURPOSES SET FORTH ABOVE AND THAT PHYSICAL
CHANGES TO THE ASSETS AND THE LANDS BURDENED THEREBY MAY HAVE OCCURRED AS A
RESULT OF SUCH USE; AND (iii) NORM AND MAN-MADE MATERIAL FIBERS ("MMMF") MAY BE
PRESENT AT SOME LOCATIONS. PURCHASER ACKNOWLEDGES THAT NORM IS A NATURAL
PHENOMENON ASSOCIATED WITH MANY OIL FIELDS IN THE UNITED STATES AND THROUGHOUT
THE WORLD. PURCHASER SHALL MAKE ITS OWN DETERMINATION OF THIS PHENOMENON AND
OTHER CONDITIONS. SELLER DISCLAIMS ANY LIABILITY ARISING OUT OF OR IN
CONNECTION WITH ANY PRESENCE OF NORM OR MMMF ON OR AFFECTING THE ASSETS. IN
ACCORDANCE WITH SECTION 9.2 AND AT CLOSING, PURCHASER SHALL ASSUME THE RISK THAT
THE PURCHASED ASSETS
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MAY CONTAIN WASTES OR CONTAMINANTS AND ADVERSE PHYSICAL CONDITIONS, INCLUDING
THE PRESENCE OF PIPELINES, EQUIPMENT AND OTHER ITEMS OF PERSONAL PROPERTY, AND
WASTES OR CONTAMINANTS WHICH MAY NOT HAVE BEEN REVEALED BY PURCHASER'S
INVESTIGATION. IN ACCORDANCE WITH SECTION 9.2 AND AT CLOSING, ALL
RESPONSIBILITY AND LIABILITY RELATED TO DISPOSALS, SPILLS, WASTES, OR
CONTAMINATION, OR OTHER ADVERSE PHYSICAL CONDITIONS ON, BELOW, OR RELATED TO OR
AFFECTING THE PURCHASED ASSETS SHALL BE ASSUMED BY PURCHASER AND PURCHASER
SHALL, NOTWITHSTANDING WHEN THE BASIS FOR ANY CLAIM, ACTION, SUIT, JUDGMENT
(INCLUDING, WITHOUT LIMITATION, THOSE FOR DEATH, PERSONAL INJURY OR PROPERTY
DAMAGE) SHALL HAVE OCCURRED, INDEMNIFY, DEFEND AND HOLD SELLER HARMLESS
THEREFROM PURSUANT TO SECTION 9.2.
12.3 CASUALTY LOSS. In the event of any material damage by fire
or other casualty to any of the Assets prior to the Closing ("CASUALTY LOSS"),
this Agreement shall remain in full force and effect, and as to each affected
Asset, Seller shall at its election either collect (and when collected pay over
to Purchaser) or assign to Purchaser any and all insurance claims related to
such damage, and Purchaser shall take title to the affected Asset without
reduction in the Purchase Price.
ARTICLE 13. MISCELLANEOUS
13.1 GOVERNING LAW. This Agreement and all instruments executed
in accordance herewith shall be governed by and interpreted in accordance with
the laws of the State of Texas, without regard to conflict of law rules that
would direct application of the laws of another jurisdiction, except to the
extent that it is mandatory that the law of the jurisdiction wherein the Assets
are located shall apply. In the event of any litigation or other proceeding in
connection with this Agreement, the venue for any such proceeding shall be in a
court of competent jurisdiction located in Midland County, Texas, and the
prevailing party shall be entitled to recover its reasonable attorney's fees and
costs incurred therein from the other party, in addition to any damages awarded.
13.2 ENTIRE AGREEMENT. This Agreement, all agreements and
instruments executed in connection herewith and the Confidentiality Agreement
dated January 22, 1996, between CPC, CELLC and Parker & Parsley Petroleum
Company (the "CONFIDENTIALITY AGREEMENT") constitute the entire agreement
between the parties and supersede all prior agreements, understandings,
negotiations and discussions, whether oral or written, of the parties. No
supplement, amendment, alteration, modification, waiver or termination of this
Agreement shall be binding unless executed in writing by the parties hereto.
13.3 WAIVER. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar), nor shall such waiver constitute a continuing
waiver unless otherwise expressly provided.
13.4 CAPTIONS. The captions in this Agreement are for
convenience only and shall not be considered a part of or affect the
construction or interpretation of any provision of this Agreement.
13.5 ASSIGNABILITY. Except pursuant to a like kind exchange
pursuant to Section 2.3, neither party hereto shall assign (whether before, at
or after Closing) this Agreement or any of its rights or obligations hereunder
without the prior written consent of the other party, which may be withheld for
any or no reason. Any assignment made without such consent shall be void.
Except as otherwise provided herein, this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective permitted
successors and assigns; PROVIDED, that Seller agrees that at Purchaser's written
request received on or before May 1, 1996, Seller will convey at Closing
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the Assets to Purchaser and its Affiliates, including without limitation, to
Valley Gathering Company, a Texas corporation, in the proportions identified in
such written request; further PROVIDED, that for the purposes of this Agreement,
expressly including, without limitation, Article 9, all such Assets conveyed to
Valley Gathering Company or any other Affiliate of Purchaser shall be deemed to
be Assets purchased hereunder by Purchaser for all purposes.
13.6 NOTICES. Any notice provided or permitted to be given
under this Agreement shall be in writing, and may be served by personal delivery
or by registered or certified U.S. mail, addressed to the party to be notified,
postage prepaid, return receipt requested. Notice deposited in the mail in the
manner hereinabove described shall be deemed to have been given and received on
the date of the delivery as shown on the return receipt. Notice served in any
other manner (including by facsimile delivery) shall be deemed to have been
given and received only if and when actually received by the addressee. For
purposes of notice, the addresses of the parties shall be as follows:
SELLER:
Parker & Parsley Development L.P.
Parker & Parsley Producing L.P.
Attn: Tim Leach and W.T. Howard
303 W. Wall, Suite 101
Midland, Texas 79701
Telephone: (915) 683-4768
Fax: (915) 571-5050
with copy to: David W. Copeland
303 W. Wall, Suite 101
Midland, Texas 79701
Telephone: (915) 683-4768
Fax: (915) 571-5815
PURCHASER:
Costilla Energy, L.L.C.
Attn: Cliff Hair
511 West Texas
Midland, Texas 79701
Telephone: (915) 683-3092
Fax: (915) 685-0841
with copy to: Michael J. Grella
511 West Texas
Midland, Texas 79701
Telephone: (915) 683-3092
Fax: (915) 685-0841
Each party shall have the right, upon giving three (3) days prior notice to the
other in the manner hereinabove provided, to change its address for purposes of
notice to any other appropriate street address.
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13.7 DTPA WAIVER. TO THE EXTENT APPLICABLE TO THE ASSETS OR ANY
PORTION THEREOF, EACH PURCHASER HEREBY WAIVES THE PROVISIONS OF THE TEXAS
DECEPTIVE TRADE PRACTICES ACT, CHAPTER 17, SUBCHAPTER E, SECTIONS 17.41 THROUGH
17.63, INCLUSIVE (OTHER THAN SECTION 17.555, WHICH IS NOT WAIVED), TEX. BUS. &
COM. CODE. IN ORDER TO EVIDENCE ITS ABILITY TO GRANT SUCH WAIVER, PURCHASER
HEREBY REPRESENTS AND WARRANTS TO SELLER THAT IT (i) IS IN THE BUSINESS OF
SEEKING OR ACQUIRING, BY PURCHASE OR LEASE, GOODS OR SERVICES FOR COMMERCIAL OR
BUSINESS USE; (ii) HAS ASSETS OF $5,000,000 OR MORE ACCORDING TO ITS MOST RECENT
FINANCIAL STATEMENT PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES; (iii) HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL, BUSINESS AND OIL
AND GAS MATTERS THAT ENABLE IT TO EVALUATE THE MERITS AND RISKS OF THE
TRANSACTIONS CONTEMPLATED HEREBY; (iv) IS NOT IN A SIGNIFICANTLY DISPARATE
BARGAINING POSITION; AND (v) THAT THIS WAIVER IS A MATERIAL AND INTEGRAL PART OF
THIS AGREEMENT AND THE CONSIDERATION THEREOF.
13.8 EXPENSES. Each party shall be solely responsible for all
expenses incurred by it in connection with this transaction (including, without
limitation, fees and expenses of its own legal counsel and accountants).
13.9 SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced under any rule of
law, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in a materially adverse
manner with respect to either party.
13.10 DAMAGES. The parties waive any rights to punitive and
incidental or consequential damages resulting from a breach of this Agreement.
13.11 NO THIRD PARTY BENEFICIARY. This Agreement is not
intended to create, nor shall it be construed to create, any rights in any third
party under doctrines concerning third party beneficiaries.
13.12 SURVIVAL. The representations and warranties of the
parties under this Agreement shall not survive, but shall terminate upon and be
extinguished by, Closing; PROVIDED, however, that (i) all representations,
waivers, covenants, agreements and indemnities contained entirely within
Sections 1.2, 3.1, 3.6, 3.7, 4.1 through 4.5 and 5.1 through 5.6, and Articles
9, 11, 12 or 13 of this Agreement shall survive the Closing, and (ii) Seller's
obligation with respect to Further Conveyances (as defined in Section 3.1 above)
shall expire on the first anniversary of the Closing Date with respect to
matters not asserted prior to such anniversary date with the specificity
required of Notice of Defects given hereunder; FURTHER PROVIDED, that,
notwithstanding anything herein to the contrary, Purchaser expressly agrees and
acknowledges that it shall have no remedy or recourse against Seller or its
Affiliates or any of their respective Representatives with respect to the
condition of the Assets or any representation or warranty made in connection
with this Agreement, except as expressly provided by Section 3.6.
13.13 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
13.14 CERTAIN DEFINITIONS. As used in this Agreement, (a) the
term "AFFILIATE" means, as to any Person, each other Person that directly or
indirectly (through one or more
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intermediaries or otherwise) controls, is controlled by, or is under common
control with, such Person; (b) the term "PERSON" means an individual,
corporation, partnership, association, joint stock company, trust or trustee
thereof, estate or executor thereof, unincorporated organization or joint
venture, court or other governmental unit or any agency or subdivision thereof,
or any other legally recognizable entity; and (c) the terms "TO [SELLER'S OR
PURCHASER'S, AS THE CASE MAY BE] KNOWLEDGE" or "KNOWN TO" and other terms of
similar import shall mean, with respect to the referenced party, only the then
existing actual non-privileged knowledge of any president or vice president of
such party or of such party's general or managing partner or agent, as the case
may be, and are not intended to imply that such party in fact has actual
knowledge of the subject matter to which such terms apply.
13.15 CONSTRUCTION OF AMBIGUITY. In the event of any ambiguity
in any of the terms or conditions of this Agreement, including any exhibits
hereto and whether or not placed of record, such ambiguity shall not be
construed for or against any party hereto on the basis that such party did or
did not author the same.
13.16 WAIVER OF JURY TRIAL. SELLER AND PURCHASER DO HEREBY
IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO
A TRIAL BY JURY IN ANY ACTION, SUIT OR OTHER LEGAL PROCEEDING BASED UPON,
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
13.17 PUBLICITY. Seller and Purchaser shall consult with each
other with regard to all publicity and other releases and disclosures to be made
prior to, at or after Closing concerning this Agreement and the transactions
contemplated hereby, which are not otherwise expressly permitted by the
Confidentiality Agreement, and, except as required by applicable law or the
applicable rules or regulations of any governmental body or stock exchange,
neither party shall make any disclosure or issue any publicity or other release
without the prior written consent of the other party, which consent shall not be
unreasonably withheld or delayed.
13.18 ACCOUNTING.
A. Seller shall deliver to Purchaser on or before the fourth
business day prior to Closing the Preliminary Settlement
Statement setting forth any adjustments to the Purchase
Price provided for in or required by this Agreement, using
estimates where actual amounts are not known at the Closing.
The Preliminary Settlement Statement shall be prepared in
accordance with this Agreement and with standard industry
and accounting practices. In connection with the
preparation of the Preliminary Settlement Statement, the
Purchase Price shall be (1) increased by (a) the costs and
expenses that are attributable to the Subject Properties for
the period from the Effective Time to the Closing Date that
are paid, incurred or assessed by Seller (including,
administrative overhead for wells operated by Seller and
attributable to Seller's interest in such wells), and (b)
other amounts due Seller and contemplated hereby, and (2)
reduced by (a) proceeds received by Seller for hydrocarbons
attributable to the Subject Properties produced after the
Effective Time, and (b) other amounts due Purchaser and
contemplated hereby.
B. As soon as reasonably practicable after the Closing, but not
later than ninety (90) days thereafter Seller shall prepare,
in accordance with this Agreement and with standard industry
and accounting practices, and
25
<PAGE>
deliver to Purchaser, a final accounting statement showing
the proration and calculation of credits and payment
obligations of Purchaser and Seller hereunder. As soon as
reasonably practicable thereafter, Purchaser shall deliver
to Seller a written report containing any changes that
Purchaser proposes to be made to such statement. The
parties shall use their best efforts to reach agreement (the
"FINAL ACCOUNTING") on the final accounting statement on or
before the 120th day after the Closing Date (such date the
"FINAL ACCOUNTING DATE", whether or not Seller and Purchaser
have agreed on the Final Accounting). Once the Final
Accounting has been agreed to by Purchaser and Seller, there
shall be no further adjustments to the Purchase Price.
13.19 OPERATORSHIP. Seller does not represent to Purchaser that
Purchaser will automatically succeed to the operatorship of any given Subject
Property as to which Seller is currently the operator. Purchaser recognizes and
agrees that Purchaser will be required to comply with applicable operating
agreements, unit operating agreements or other similar contracts relating to any
elections or other selection procedures in order to succeed Seller as operator.
13.20 HSR ACT. The parties shall exercise their best efforts to
file (or will cause their ultimate parent entities to file) with the United
States Federal Trade Commission and the United States Department of Justice all
notifications and reports required for the transaction contemplated hereby under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR ACT"), and shall
request early termination of the prescribed waiting period. Both parties shall
use their best efforts to promptly supply any supplemental or additional
information which may be requested in connection therewith pursuant to the HSR
Act and shall comply in all material respects with the requirements of the HSR
Act. Closing of the transaction contemplated hereby shall not occur unless and
until all necessary filings and notifications under the HSR Act have been made,
including the provision of any required additional information or documents, and
the waiting period referred to in such Act shall have expired or terminated.
13.21 SELLER'S EMPLOYEES. Purchaser will interview and evaluate
in accordance with its normal employment procedures those Persons (not to exceed
30) employed by Seller in connection with the Subject Properties and identified
by letter dated on or before fifteen days hereafter from Seller to Purchaser who
desire to be considered for employment by Purchaser, and will offer in writing
employment to those Persons for whom Purchaser in its sole discretion determines
a need. If Purchaser fails to offer such employment to all of such Persons,
Purchaser shall not, as a result of such failure, otherwise be in default under
this Agreement, but shall be required to reimburse Seller for severance benefits
paid by Seller to each such Person not offered employment by Purchaser;
PROVIDED, that such reimbursement shall not exceed that amount determined by
multiplying each such employee's normal weekly wage by ten (10). Persons
offered employment with Purchaser will be offered employment at their current
work location with compensation and benefits comparable to those provided to
Purchaser's current employees performing similar tasks, or, if none, with
compensation and benefits comparable to those provided by Seller. Such offers
shall be made at least fifteen (15) days prior to Closing, but shall be
contingent upon the occurrence of Closing and such employment shall not commence
until Closing. If any such Person employed by Purchaser is terminated by
Purchaser within six (6) months of Closing, Purchaser shall pay such Person a
severance benefit equal to the amount determined by multiplying each such
employee's normal weekly wage by ten (10). Purchaser shall have no obligation
under this Section 13.21 with respect to Persons offered employment by Purchaser
pursuant to this Section 13.21 who decline such employment, except that the
foregoing
26
<PAGE>
provisions shall apply to the extent that such Person accepts employment with
Purchaser or any of its Affiliates within twelve (12) months of Closing.
13.22 OPINIONS OF COUNSEL. Not later than March 18, 1996,
Purchaser and Seller shall deliver to the other the opinion of its counsel,
reasonably acceptable to the receiving party, to the effect that (a) such party
is authorized and empowered to enter into and consummate and perform this
Agreement, (b) this Agreement will be binding upon and enforceable against such
party according to its terms, and (c) no further resolutions or approvals of
such party are necessary to authorize and empower such party to consummate this
Agreement and perform hereunder; such opinion to be in form and substance
reasonably acceptable to the receiving party.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
27
<PAGE>
EXECUTED as of the date first set forth above.
SELLER:
PARKER & PARSLEY DEVELOPMENT L.P.,
by Parker & Parsley Petroleum USA, Inc.,
General Partner
By: /s/ T. A. Leach
-------------------------------------
T. A. Leach, Executive Vice President
PARKER & PARSLEY PRODUCING L.P.,
by Parker & Parsley, Inc., General Partner
By: /s/ T.A. Leach
-------------------------------------
T.A. Leach, Executive Vice President
PARKER & PARSLEY GAS PROCESSING CO.,
Trustee of Three Rivers Pipeline Business
Trust
By: /s/ T.A. Leach
-------------------------------------
T.A. Leach, Vice President
PURCHASER:
COSTILLA PETROLEUM CORPORATION
By: /s/ Michael J. Grella
-------------------------------------
Michael J. Grella, President
COSTILLA ENERGY, L.L.C.
By: /s/ Michael J. Grella
-------------------------------------
Michael J. Grella, President
28
<PAGE>
EXHIBIT 10.16
SUPPLEMENTAL AGREEMENT
TO
PURCHASE AND JOINT
EXPLORATION AGREEMENT
This Supplemental Agreement (the "Supplement") to that certain Purchase and
Joint Exploration Agreement dated February 21, 1996, (the "Agreement")
between and among Costilla Energy, L.L.C., a Texas limited liability company
("Costilla"), Costilla Redeco Energy, L.L.C., a Texas limited liability
company the members of which are Costilla and Costilla Petroleum Corporation
("Costilla-Redeco"), and Resource Development Company Limited, L.L.C. (DE), a
Delaware limited liability company ("REDECO"), is entered into this the 7th
day of August, 1996, between and among Costilla, Costilla-Redeco, and REDECO.
R E C I T A L S
(a) All terms defined in the Agreement shall have the same meaning when
used in this Supplement.
(b) REDECO has heretofore agreed to assign to Costilla 50% of REDECO's
rights and obligations under the Concession in accordance with and pursuant
to the terms of the Agreement for valuable consideration previously received.
(c) By this Agreement, Costilla and REDECO are agreeing to modify
certain provisions of the Agreement as set forth below in satisfaction of
REDECO's obligation to assign an interest in the Concession to Costilla and
Costilla-Redeco.
I.
MEMBERSHIP IN REDECO
1.1 MEMBERSHIP OF COSTILLA-REDECO. Costilla-Redeco shall be admitted as
a member of REDECO effective as of the date hereof with a sharing ratio of
50%. The Operating Agreement of REDECO (the "Operating Agreement") shall be
amended concurrently herewith by adoption of the Resolutions of the Members
of REDECO attached hereto as Exhibit "A" to reflect the addition of
Costilla-Redeco as a member of REDECO.
1.2 MEMBERSHIP OF REDECO INTERNATIONAL. The current members of
REDECO, save and except Costilla-Redeco, will assign their membership interest
in REDECO to REDECO International Ltd., a company organized under
the laws of Guernsey ("Internationally"), such that International will have a
50% membership and ownership interest in REDECO. Costilla-Redeco hereby
consents to the admission of International as a member of REDECO to the
extent of the membership interest in REDECO so transferred by other members
to International.
<PAGE>
Supplemental Agreement
August 7, 1996
Page 2
1.3 FURTHER AGREEMENT. The parties hereto agree to make further
revisions in the Operating Agreement as needed to accomplish the following:
(a) Incorporate the rights and duties of the parties as contained in
the Agreement within the context of the parties doing business as
members in a limited liability company,
(b) Memorialize the limitation on REDECO that it only shall be
permitted to engage in a trade or business outside of the territory
of the United States of America,
(c) Recognize that International shall succeed to certain of the rights
and duties of REDECO under the Agreement since Costilla Redeco is now
a member of REDECO,
(d) Recognize the obligations of the members of REDECO to manage public
announcements in a manner consistent with the securities laws of
Canada and the United States, and
(e) Address such other items as to which all of the parties agree.
II.
RIGHTS OF THE PARTIES
Until such time as the Operating Agreement is revised as described
above, the terms of the Agreement shall take precedence over the terms of the
Operating Agreement as to the rights and obligations of the parties other
than their relationship as members in a limited liability company. Should the
parties fail to agree on the further revisions above referenced within thirty
(30) days hereof, Costilla-Redeco shall after an additional thirty (30) days
assign its membership interest in REDECO to a designee of International and
the parties shall be reinstated to all rights and duties recited in the
Agreement.
III.
ASSIGNMENT ON CONCESSION
Notwithstanding Costilla-Redeco's membership in REDECO, the parties
hereto agree that they shall each make best efforts to obtain approval by
Moldova of assignment of a direct interest in the Concession itself to either
of Costilla-Redeco or International should either such party so request such
an assignment. Should Costilla-Redeco receive such an approval of assignment,
it agrees to remain a member in REDECO at least to the minimum extent
required to preserve the partnership aspects of that limited liability
company unless a new member can be added without material economic
disadvantage to either of REDECO or Costilla.
<PAGE>
Supplemental Agreement
August 7, 1996
Page 3
IV.
COUNTERPART EXECUTION
This Supplement is executed in multiple original counterparts and each
such counterpart shall be deemed an original agreement for all purposes;
provided no party shall be bound to this Supplement unless and until all
parties have executed a counterpart.
V.
WAIVER
No waiver by any party of any one or more defaults by another party in
the performance of this Supplement or the Agreement shall operate or be
construed as a wavier of any future default or defaults by the same party,
whether of a like or of a different character. Except as expressly provided
in this Supplement or the Agreement no party shall be deemed to have waived,
released or modified any of its rights under this Supplement or the Agreement
unless such party has expressly stated, in writing, that it does waive,
release or modify such right.
EXECUTED as of the day, month and year first set forth above.
COSTILLA ENERGY, L.L.C.
By: /s/ Michael J. Grella
------------------------------------
Name: Michael J. Grella
----------------------------------
Title: President and Chief Operating
Officer
---------------------------------
REDECO DEVELOPMENT COMPANY LIMITED,
L.L.C. (DE)
By: /s/ William C. Liedtke
------------------------------------
Name: William C. Liedtke
----------------------------------
Title: Executive Vice President
---------------------------------
COSTILLA REDECO ENERGY, L.L.C.
By: Costilla Energy, L.L.C.
By: /s/ Michael J. Grella
------------------------------------
Name: Michael J. Grella
----------------------------------
Title: President and Chief Operating
Officer
---------------------------------
<PAGE>
EXHIBIT 10.17
- -------------------------------------------------------------------
* * * * *
BONUS INCENTIVE PLAN
OF
COSTILLA ENERGY, INC.
(A DELAWARE CORPORATION)
* * * * *
- -------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
* * *
BONUS INCENTIVE PLAN
OF
COSTILLA ENERGY, INC.
- -----------------------------------------------------------------
SECTION SUBJECT PAGE
- ------- ------- ----
1. PURPOSE OF PLAN . . . . . . . . . . . . . . . . . . . . . 1
2. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 1
3. ADMINISTRATION OF THE PLAN. . . . . . . . . . . . . . . . 2
4. RESERVES FOR INCENTIVE AWARDS . . . . . . . . . . . . . . 3
5. PARTICIPATION IN THE PLAN . . . . . . . . . . . . . . . . 4
6. SELECTION OF PARTICIPANTS FOR INCENTIVE AWARDS. . . . . . 4
7. AWARDS OF INCENTIVE COMPENSATION. . . . . . . . . . . . . 5
8. PAYMENT OR DISTRIBUTION OF AWARDS . . . . . . . . . . . . 6
9. FORFEITURE OF BENEFITS. . . . . . . . . . . . . . . . . . 6
10. COMPLIANCE WITH SECURITIES LAWS . . . . . . . . . . . . . 6
11. INCLUSION OF AWARD AS INCOME. . . . . . . . . . . . . . . 7
12. WITHHOLDING . . . . . . . . . . . . . . . . . . . . . . . 7
13. AMENDMENT OR TERMINATION. . . . . . . . . . . . . . . . . 8
14. NO RIGHT TO EMPLOYMENT; OFFICIAL CAPACITY . . . . . . . . 8
<PAGE>
15. EFFECTIVE DATE AND TERM . . . . . . . . . . . . . . . . . 9
<PAGE>
BONUS INCENTIVE PLAN
OF
COSTILLA ENERGY, INC.
1. PURPOSE OF PLAN. This Bonus Incentive Plan (the
"Plan") is intended to attract and retain individuals of
outstanding competence and to promote the growth and development
of the Company or a Subsidiary (as hereinafter defined) by
providing incentive compensation as a reward for those officers,
directors, employees and advisors of the Company or a Subsidiary
who contribute by their ability, industry, loyalty, ingenuity, or
exceptional service to the management, development achievement of
planned corporate financial and operational goals, and successful
operations of the Company or a Subsidiary.
2. DEFINITIONS. For purposes of the Plan, the
following terms shall have the ascribed meanings unless otherwise
clearly apparent from the context:
"AWARD" - means a distribution in (i) cash, (ii) shares
of the Common Stock of the Company, or (iii) any combination of
cash and shares of Common Stock to be made to a Participant for a
Fiscal Year as determined in accordance with the provisions of
the Plan.
"BENEFICIARY" - means a Participant designated by the
Board of Directors to receive an Award.
"BOARD OF DIRECTORS" - means the Board of Directors of
the Company.
1
<PAGE>
"COMMON STOCK" - means the common stock, $.10 par value
per share, of the Company.
"COMPANY" - means Costilla Energy, Inc.
"EMPLOYEE" - means a person who is in the regular
employment of the Company or a Subsidiary as determined by the
personnel rules and practices of the Company or a Subsidiary, as
applicable.
"FISCAL YEAR" - means the taxable year of the Company
or a Subsidiary ending December 31.
"PARTICIPANT" - means (i) an officer, director or
advisor of the Company or a Subsidiary as of the last day of the
Fiscal Year or (ii) any Employee who (a) has completed a minimum
of 180 days of service with the Company or a Subsidiary, and (b)
is employed by the Company or a Subsidiary as of the last day of
the Fiscal Year; provided, however, that any such person who owns
ten percent (10%) or more of the outstanding shares of Common
Stock at any time during a Fiscal Year shall not qualify as a
Participant and is not eligible for Awards under the Plan for
that Fiscal Year.
"PLAN" - means this Bonus Incentive Plan of the
Company.
"SUBSIDIARY" - means any corporation of which capital
stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of its outstanding capital
stock entitled to vote generally in the election of directors is
owned in the aggregate by the Company directly or indirectly
through one or more Subsidiaries.
2
<PAGE>
3. ADMINISTRATION OF THE PLAN. The Plan shall be
administered by the Board of Directors. Subject to the express
provisions and limitations of the Plan, the Board of Directors
shall have the authority and power to construe the Plan and to
adopt, prescribe, amend and rescind rules and regulations
relating to the Plan, and to make all determinations necessary or
advisable for administering the Plan, including the selection of
Participants to receive Awards. No member of the Board of
Directors shall be liable for any action or determination made in
good faith with respect to the Plan.
All determinations, decisions and directions made or
given by the Board of Directors under the Plan shall be final and
conclusive. The decision of the Board of Directors on any
question concerning or involving the interpretation or
administration of the Plan shall be final and conclusive, and
nothing in the Plan shall be deemed to give any Participant, his
legal representative or assigns, any right to participate in the
Plan except to such extent, if any, as the Board of Directors may
have determined or approved pursuant to the provisions of the
Plan.
4. RESERVES FOR INCENTIVE AWARDS. In order to fund the
payment of Awards of Common Stock granted to Participants in
accordance with the terms of the Plan, the Company shall
authorize and reserve for issuance under the Plan an aggregate of
100,000 shares of the Common Stock, subject to adjustment as
hereinafter provided. In addition, in order to fund payment of
Awards of cash granted to Participants pursuant to the Plan, the
Board of Directors may from time to time either (i) establish a
cash reserve out of the general operating funds of the Company in
such amount as the Board of Directors shall in its discretion
determine to be reasonable or advisable or (ii) elect to fund and
distribute such cash Awards directly out of the general operating
funds of the Company. Subject to any required action by the
stockholders of
3
<PAGE>
the Company, (a) the number of shares of Common Stock covered by
and reserved for issuance under the Plan shall be appropriately
adjusted for any increase or decrease in the number of issued
shares of Common Stock of the Company resulting from a subdivision
or consolidation of the shares of Common Stock of the Company or
the payment of a stock dividend (but only on the Common Stock),
stock split, or any other increase or decrease in the number of
such shares effected without receipt of consideration by the
Company; and (b) if the outstanding shares of Common Stock are
changed or exchangeable for a different number or kind of shares of
stock or other securities of the Company or another entity, then
there shall be substituted for each share of Common Stock covered
by and reserved for issuance under the Plan the number and kind of
shares of stock or other securities into which each outstanding
share of the Common Stock shall be changed or for which each such
share shall be exchangeable.
5. PARTICIPATION IN THE PLAN. During the existence of the
Plan, each individual officer, director, Employee, or advisor of
the Company or a Subsidiary shall be eligible to participate in
the Plan for each Fiscal Year in which such individual qualifies
as a Participant as defined in Section 2 hereof. The Board of
Directors may give due consideration to the recommendations and
comments submitted by officers, managers and department heads of
the Company or a Subsidiary, as applicable, with respect to the
performance of Employees of the Company or a Subsidiary.
6. SELECTION OF PARTICIPANTS FOR INCENTIVE AWARDS. In
determining the Participants who will receive Awards, the Board
of Directors shall consider, among such other factors as it shall
deem relevant, (a) the profitability of the Company or the
Subsidiary, (b) the success of the Company or the Subsidiary in
achieving its projected financial objectives for the Fiscal Year,
(c)
4
<PAGE>
the Participant's tenure with the Company or Subsidiary, (d)
the Participant's duties and responsibilities, level of
performance, salary level, and contributions to the success of
the Company or the Subsidiary, (e) the abilities and success of
the Participant in aiding and supporting the achievement of
operational or production goals or achieving administrative
expense ratios, (f) the cash position of the Company or
Subsidiary, as appropriate, and (g) such other factors as the
Committee deems appropriate and relevant, including, but not
limited to, the recommendations and comments, if any, submitted
by officers, managers and department heads of the Company or
Subsidiary, as applicable, with respect to the respective
Participants of the Plan.
7. AWARDS OF INCENTIVE COMPENSATION. Within sixty (60)
days after the expiration of each Fiscal Year, the Board of
Directors, after considering the factors set forth in Section 6,
shall determine (i) the Beneficiaries who shall be entitled to
receive Awards for such Fiscal Year, (ii) the amount of the Award
to be paid or distributed to each Beneficiary for such Fiscal
Year, and (iii) whether such Award shall be made in cash, shares
of Common Stock or a combination thereof. The amount of the
Award shall be distributed by the Company to each designated
Beneficiary as specified in Section 8 hereof. The Company shall
not be liable for interest on any Award of cash granted under the
Plan. An Award in Common Stock shall not entitle the Beneficiary
to have any shares registered or recorded in the Beneficiary's
name, nor shall such Beneficiary have any rights as a stockholder
with respect to such shares, until such time as a stock
certificate evidencing such shares is delivered to him or her
pursuant to the terms of the Award and this Plan. No Beneficiary
to whom an Award has been made shall have any rights to the Award
other than to receive the Award at the time and in the form
specified by the Board of Directors, which right may not be
assigned or transferred except by will or by the laws of descent
5
<PAGE>
and distribution. Unless a Beneficiary has filed written
instructions with the Company to the contrary, any Award payable
with respect to a deceased Beneficiary shall be paid to the
Beneficiary's surviving spouse, if any; otherwise, such Award
shall be paid to the Beneficiary's estate.
8. PAYMENT OR DISTRIBUTION OF AWARDS. Awards of any
Fiscal Year shall be in cash or in shares of Common Stock or a
combination of cash and shares of Common Stock, as the Board of
Directors shall determine in its sole discretion. Any Award
which becomes payable or distributable pursuant to the Plan shall
be paid or distributed to the designated Beneficiary as soon as
administratively feasible and practicable after the approval
thereof by the Board of Directors.
9. FORFEITURE OF BENEFITS. Any officer, director,
Employee or advisor of the Company or Subsidiary, as applicable,
who fails for any reason to qualify as a Participant of the Plan,
shall not be eligible to participate in the Plan, or having
initially qualified as a Participant, but thereafter for any
reason ceases to so qualify as specified in Section 2 hereof,
shall forfeit his or her participation in the Plan and shall not
be entitled to any Award for such Fiscal Year, unless the Board
of Directors shall specifically determines otherwise.
Notwithstanding the preceding, in the event of such
disqualification by death or permanent disability of a
Participant, the Board of Directors shall determine whether an
Award should be paid or distributed to such Participant. The
determination of the Board of Directors in the exercise of its
sole discretion shall be final and binding upon anyone claiming
by or through such a Participant.
10. COMPLIANCE WITH SECURITIES LAWS. At the time of any
Award of shares of Common Stock under the Plan, the Company may
require the Beneficiary thereof to execute any documents or take
any action which may be then necessary to comply with the
Securities Act of
6
<PAGE>
1933, as amended (the "Securities Act") and the
rules and regulations promulgated thereunder, or any other
applicable federal or state laws regulating the sale and issuance
of securities.
11. INCLUSION OF AWARD AS INCOME. The amount of any Award
granted to a Beneficiary under the Plan shall be subject to
inclusion in the gross income of the Beneficiary in the year such
Award is paid or distributed to the Beneficiary. Any such Award
of Common Stock shall be reported as income in an amount equal to
the fair market value of such Common Stock as of the date such
Common Stock is awarded to the Beneficiary. The fair market
value shall be deemed to be the closing price of the Common Stock
on The Nasdaq Stock Market's National Market on the day the Award
in Common Stock is granted or, if no sale of the Common Stock of
the Company is reported on such market on such day, on the next
preceding day on which a closing price is reported.
12. WITHHOLDING. Whenever a Beneficiary shall recognize
compensation income as a result of an Award of cash granted under
the Plan, the Company shall deduct and withhold the applicable
federal income and employment tax withholding due on such cash
Award and remit such withheld amount to the Internal Revenue
Service in accordance with the applicable provisions of the
Internal Revenue Code (the "Code") and the regulations
promulgated thereunder. Whenever a Beneficiary shall recognize
compensation income as a result of an Award of Common Stock
granted under the Plan, either (i) the Company shall deduct and
withhold the applicable federal income and employment tax
withholding due on such Award of Common Stock from any Award of
cash that may have been granted to the Beneficiary at the same
time as the Award of Common Stock and remit such withheld amount
to the Internal Revenue Service in accordance with the applicable
provisions of the Code and the regulations promulgated
thereunder, or (ii) the
7
<PAGE>
Beneficiary shall remit in cash to the Company the applicable
federal income and employment tax withholding which the Company is
required to remit to the Internal Revenue Service in accordance
with the applicable provisions of the Code and the regulations
promulgated thereunder.
13. AMENDMENT OR TERMINATION. The Board of Directors may,
at any time and from time to time without the necessity of
obtaining approval of the stockholders of the Company, amend,
modify, change, suspend, or terminate, in whole or in part, any
or all of the provisions of the Plan, except that no such
amendment, modification, change, suspension, or termination shall
affect any right of any Participant to receive Awards made prior
to the effective date thereof.
14. NO RIGHT TO EMPLOYMENT; OFFICIAL CAPACITY. No
provision contained in this Plan shall be deemed to grant unto
any Participant or his legal representative or assigns, or any
other person or entity claiming under or through a Participant,
any contract or other right to participate in the benefits of the
Plan other than as expressly set forth herein. Nothing in the
Plan shall be construed as constituting a commitment, guarantee,
arrangement, agreement or understanding of any kind or nature
that the Company or Subsidiary will continue to employ, retain,
elect or designate an individual (whether or not a Participant)
in any capacity; nor shall the Plan affect in any way the right
of the Company or a Subsidiary to terminate the employment,
association, designation or official capacity of any individual
(whether or not a Participant) at any time with or without cause.
15. EFFECTIVE DATE AND TERM. This Plan shall become
effective upon the closing date of the initial public offering of
the Common Stock of the Company pursuant to the Securities Act
and shall remain in effect until termination by the Board of
Directors.
8
<PAGE>
The foregoing Bonus Incentive Plan of Costilla Energy, Inc.
was adopted by the Board of Directors and stockholders of the
Company on the 26th day of August, 1996.
COSTILLA ENERGY, INC.
By:
-------------------------------------
Michael J. Grella
President and Chief Executive Officer
9
<PAGE>
EXHIBIT 16.1
ELMS, FARIS & CO., P.C.
August 27, 1996
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Re: Costilla Energy, Inc.
Gentlemen:
In September 1995, Costilla Energy, Inc. (the
"Company") changed its principal accountants from Elms, Faris &
Co., P.C. to KPMG Peat Marwick, LLP. This change of the
Company's principal accountants requires certain disclosures,
pursuant to Item 304(a) of Regulation S-K, in each of the
Registration Statements on Form S-1 filed by the Company on July
26, 1996, file numbers 333-08913 and 333-08909. Representatives
of Elms, Faris & Co., P.C. have reviewed such disclosure in each
of the Registration Statements, and agree with those statements
made by the Company in response to Item 304(a) of Regulation S-K.
Very truly yours,
ELMS, FARIS & CO., P.C.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Members
Costilla Energy, L.L.C.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
KPMG PEAT MARWICK LLP
Midland, Texas
August 30, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Members
Costilla Energy, L.L.C.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
ELMS, FARIS & CO., P.C.
Midland, Texas
August 30, 1996
