<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______ to _______
COMMISSION FILE NO. 0-21411
--------------------
COSTILLA ENERGY, INC.
(Exact name of registrant as specified in its charter)
--------------------
DELAWARE 75-2658940
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 WEST ILLINOIS, SUITE 1000 MIDLAND, TEXAS 79701
(Address of principal executive offices) (Zip code)
(915) 683-3092
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.10 PAR VALUE 10 1/4% SENIOR NOTES DUE 2006
(Title of Class) (Title of Class)
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES NO X*
------- -------
*The Registrant's Form 8-A was declared effective with the Securities
and Exchange Commission on October 2, 1996.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates, based
upon the last sale price as quoted on the Nasdaq Stock Market's National
Market of $13.00 per share on March 21, 1997, was $79,887,340.
Number of shares of Common Stock outstanding as of March 21, 1997 ... 10,476,500
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Form 10-K will be included in
the registrant's definitive Proxy Statement, which will be filed with the
Commission not later than April 30, 1997 and which is incorporated herein by
reference.
================================================================================
<PAGE>
COSTILLA ENERGY, INC.
TABLE OF CONTENTS
PAGE
----
PART I.
Item 1. Business. 3
Item 2. Properties. 10
Item 3. Legal Proceedings. 18
Item 4. Submission of Matters to a Vote of Security Holders. 18
PART II.
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters. 19
Item 6. Selected Financial Data. 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 21
Item 8. Financial Statements and Supplementary Data. 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 26
PART III.
Item 10. Directors and Executive Officers of the Registrant. 27
Item 11. Executive Compensation. 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management. 27
Item 13. Certain Relationships and Related Transactions. 27
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K. 28
SIGNATURES 30
2
<PAGE>
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K under "Item 1. Business," "Item 3. Legal
Proceedings," "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations," and elsewhere in this Form 10-K
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties,
and other factors which may cause the actual results, performance, or
achievements of Costilla Energy, Inc. ("Costilla" or the "Company") to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors
include, among others, the following: the volatility of oil and gas prices,
the Company's drilling results and ability to replace oil and gas reserves,
the availability of capital resources, the reliance upon estimates of proved
reserves, operating hazards and uninsured risks, competition, government
regulation, and the ability of the Company to implement its business
strategy, and other factors referenced in the Company's recent prospectus for
its initial public offering of common stock.
ITEM 1. BUSINESS.
Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Reform Act.
See "Special Note Regarding Forward-Looking Statements" for additional
factors relating to such statements.
GENERAL
Costilla Energy, Inc. ("Costilla" or the "Company") is an independent energy
company that is engaged in the exploration, exploitation, development, and
acquisition of oil and gas properties. The Company's primary operations are
in the Permian Basin area of Texas and New Mexico, the Gulf Coast (onshore)
and the Rocky Mountain regions. In 1996 the Company 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'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 January 1, 1997, the Company had
total estimated net proved reserves of 17.0 Mmbbls of oil and 120.3 Bcf of
gas, aggregating 37.0 MMBOE, with a PV-10 Value of approximately $311.8
million, all of which has been calculated pursuant to the requirements of the
Securities and Exchange Commission. The Company also has a substantial
undeveloped acreage position consisting of 242,541 gross (147,742 net) acres
at December 31, 1996. The Company has identified in excess of 200 drilling
locations of which 88 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 41wells based on these 3-D surveys, 36 of
which have been productive. The Company has completed two additional 3-D
surveys in 1996 on one of these acreage blocks. The Company currently plans
to drill approximately 48 wells in 1997 based on its 3-D surveys.
Since 1993, Costilla has generated significant growth in reserves and
production. The Company increased its estimated proved reserves from 6.0
MMBOE at January 1, 1994 to 37.0 MMBOE at January 1, 1997 representing a
compound annual growth rate of 83%. This reserve growth has been achieved at
an average All-In Finding Cost of $3.68 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 8,907 BOE for the year ended December 31,
1996, representing a compound annual growth rate of 121%. The Company's
production rate at December 31, 1996 was approximately 12,400 BOEPD.
Oil and gas terms used herein are defined under "-Definition of Certain Oil
and Gas Terms".
3
<PAGE>
CORPORATE REORGANIZATION
Costilla was incorporated in Delaware in June 1996 primarily to consolidate
and continue the activities previously conducted by Costilla Energy, L.L.C.,
a Texas limited liability company (the "LLC"). Costilla was formed for the
purpose of conducting a $60 million initial public offering of common stock
and a $100 million senior notes offering (the "Offerings"), which Offerings
were completed in early October 1996.
The following is a description of sources and uses of proceeds from the
Offerings (in millions):
SOURCES:
Notes Offering . . . . . . . . . . . . . . . . . . . . . . $ 100.0
Common Stock Offering. . . . . . . . . . . . . . . . . . . 65.9 (a)
--------
$ 165.9
--------
--------
USES:
Refinance Existing Debt. . . . . . . . . . . . . . . . . . $ 125.8
Redeem membership interests in the L.L.C. . . . . . . . . 15.5
Distributions to individual members to pay estimated
income tax liability of such members in the L.L.C. . . . 3.4
Pro rata distribution to remaining member in the L.L.C.. . 0.8
Purchase of stock and assets of affiliated companies . . . 0.7
Working capital. . . . . . . . . . . . . . . . . . . . . . 10.7
Estimated fees, commissions, underwriting discounts and
expenses related to the Offerings . . . . . . . . . . . . 9.0
--------
$ 165.9
--------
--------
- -------------------
(a) Includes 475,000 shares of the underwriter's over-allotment exercised
subsequent to the closing of the common stock offering.
The Company's executive offices are located at 400 West Illinois, Suite 1000,
Midland, Texas, 79701 (mailing address P.O. Box 10369, Midland, Texas 79702)
and its telephone number is (915) 683-3092.
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 in known producing
regions. The Company's 1997 capital budget for exploration activities
is $7.2 million, which includes the drilling of 26 exploratory wells.
In addition, Costilla has $5.2 million budgeted for the acquisition
of undeveloped acreage and seismic projects.
4
<PAGE>
- 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 the drilling
of development wells, recompletions, workovers, infill and horizontal
drilling, a secondary recovery project and a carbon dioxide flood.
The Company's 1997 capital budget for such activities is $13.6 million,
which includes the drilling of 36 development wells.
- 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, additional 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 operating costs and marketing of production. At January 1, 1997,
the Company operated wells constituting approximately 74% of its
total PV-10 Value.
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 December 31,
1996, the Company produced 2.8 MMBOE from the acquired properties and sold a
portion of the acquired properties for approximately $3.6 million. At
January 1, 1997, the net proved reserves of the remaining properties were
13.9 MMBOE. The acquired properties also included 103,010 gross (93,787 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
an adjusted purchase price of approximately $38.7 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 42,855 gross (16,646 net) undeveloped acres and a pipeline
located in Pennsylvania, which was sold on December 31, 1996 for $3.3 million.
RECENT DEVELOPMENTS
On December 31, 1996, the Company closed the sale of all of the capital stock
of a wholly owned subsidiary, which owned a 120 mile gas transportation
pipeline in southwestern Pennsylvania, for net proceeds of $3.3 million. The
pipeline was acquired through the 1996 Acquisition, was regarded as a
non-strategic asset to the Company's business and had been held for resale.
On December 31, 1996 the Company also closed the sale of substantially all of
the assets of another wholly owned subsidiary, for net proceeds of
approximately $3.0 million. The remaining assets of the subsidiary are held
by the Company.
5
<PAGE>
In 1996, the Company purchased a 40.5% membership interest in Republic Gas
Partners, L.L.C., a Delaware limited liability company ("Republic"), for
approximately $1,020,000. Republic owns and operates gas pipelines and
associated facilities in Louisiana.In March 1997, the Company sold its
investment in Republic for an amount equal to its original cost, plus
interest from the date of purchase.
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.
The Federal Energy Regulatory Commission ("FERC") regulates interstate
natural gas transportation rates and service conditions. Such regulation
affects the marketing of gas produced by the Company and the revenues
received by the Company for sales of such production. Since the mid-1980s,
FERC Orders have fundamentally restructured interstate pipeline sales and
transportation services, including the unbundling by interstate pipelines of
the sales, transportation, storage and other components of the city-gate
sales services such pipelines previously performed. These regulatory measures
may ultimately enhance the Company's ability to market and transport its gas,
although it may also subject the Company to greater competition, more
restrictive pipeline imbalance tolerances and greater penalties if those
tolerances are violated.
The FERC has recently announced several important transportation-related
policy statements and proposed rule changes, including policy statements on
how interstate natural gas pipelines can recover the cost of new pipeline
facilities and policy statements on alternatives to its traditional
cost-of-service ratemaking methodology (including criteria to be used in
evaluating proposals to charge market-based rates for the transportation of
natural gas). In addition, the FERC is reconsidering its regulations regarding
releases of firm interstate natural gas pipeline capacity. While the Company
cannot predict exactly how FERC actions might impact the Company's natural
gas sales, it
6
<PAGE>
does not believe it will be treated materially differently than other natural
gas producers and marketers with which it completes.
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 form the
Company's operations. Such laws and regulations may substantially increase the
cost of exploring for, developing or producingoil 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 know 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 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 December 31, 1996, the Company had 114 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.
7
<PAGE>
DEFINITION OF CERTAIN OIL AND GAS TERMS
The terms defined in this section are used throughout this Form 10-K.
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 know 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 effect of time on the value of the
revenue stream and
8
<PAGE>
should not be 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 cost bearing operating interest which gives the owner
the right to drill, produce and conduct operating activities on the property
and a share of production.
9
<PAGE>
ITEM 2. PROPERTIES.
PRINCIPAL PROPERTIES
The following table sets forth certain information, as of January 1, 1997,
which relates to the principal oil and gas properties owned by the Company.
PROVED RESERVES
---------------------------------------------------
TOTAL OIL PERCENT OF
GROSS OIL GAS EQUIVALENT TOTAL OIL
WELLS (MBBLS) (MMCF) (MBOE) EQUIVALENT
----- ------ ------- ---------- ----------
REGION
- ------
Permian Basin. . . . . . . 2,001 9,889 59,512 19,808 53.5%
Gulf Coast . . . . . . . . 932 2,189 37,149 8,381 22.6
Rocky Mountain . . . . . . 249 4,124 5,742 5,081 13.7
Other. . . . . . . . . . . 433 798 17,869 3,776 10.2
----- ------ ------- ------ ------
Total. . . . . . . . . . . 3,615 17,000 120,272 37,045 100.00%
----- ------ ------- ------ ------
----- ------ ------- ------ ------
PERMIAN BASIN. At January 1, 1997, 53.5% 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 formations such as the Spraberry, Canyon, Ellenberger and
Devonian. 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 81 drilling locations on the Company's 14,623 gross (7,165 net)
acres in this prospect based on an approximate 80-square mile 3-D seismic
project. Through December 31, 1996, the Company drilled 15 wells on this
prospect, of which 14 were successful resulting in three separate field
discoveries. In addition, these wells have confirmed the Strawn and Wolfcamp
trends which were identified by the seismic project undertaken jointly with
Texaco Exploration and Production Inc. ("Texaco"). The Company plans to
drill 20 wells in this trend in 1997, two of which were in progress at
December 31, 1996. The Company's working interest in this prospect is
approximately 49%.
Costilla and Texaco are also evaluating the development of a Queen Sand field
identified from the Edwards/McElroy Ranch seismic program. The six producing
wells at December 31, 1996 were producing an aggregate of approximately 50
Bbls of oil per day. A pilot waterflood has been commenced and is being
evaluated for additional development. The drilling of one additional Queen
Sand well is anticipated in 1997.
MACGYVER-GREEN ACRES PROSPECT, HOWARD COUNTY, TEXAS. The Company has
identified 53 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 8,600 feet in August 1994. From completion to December 31, 1996, the well
produced 72 MBbls of oil and 287 Mmcf of gas, and averaged 54 Bbls of oil per
day and 625 Mcf of gas per day during December 1996. Of the 24 wells which
have been drilled on this prospect, 20 are productive. The
10
<PAGE>
Company intends to drill 20 additional wells during 1997 on its 10,041 gross
(7,229 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.
In 1996 the Company completed an approximate 17-square mile seismic survey
on the project. 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 purchased a lease covering 3,750 gross acres on this 50,000 acre ranch.
After acquiring the lease, the Company sold a portion of its interest in the
lease to a major oil company, which left the Company with an approximately
53% working interest. The Company believes that there is significant
potential in this area.
DAVAN UNIT 3-D PROJECT, STONEWALL COUNTY, TEXAS. The Company has completed
another 3-D seismic project to further develop the Company-operated Davan
Unit. The project involves a 3-D seismic evaluation of approximately 4,380
gross acres adjacent to a Company-operated waterflood which has produced in
excess of three Mmbbls of oil. The Company plans to drill four wells on this
project during 1997. The Company's working interest in this project is 100%.
An example of the Company's current exploitation efforts in the Permian Basin
is:
WORLD FIELD, CROCKETT COUNTY, TEXAS. This field was acquired in the 1996
Acquisition. It produces from the Grayburg formation at an average depth of
2550 feet. Discovered in 1926, it is one of the oldest and most prolific
shallow fields in the Permian Basin. Costilla owns a 100% working interest in
4,380 acres containing 87 existing wells. At the time of acquisition, the
field was producing approximately 480 Bbls of oil per day and 53,400 Bbls of
water per day. In December, 1996 the Company initiated a polymer treatment
program to reduce water production and increase oil cut. Thirteen treatments
have been completed as of February 1997 resulting in oil production improving
to approximately 650 Bbls of oil per day and water production dropping to
approximately 43,500 Bbls of water per day. Additionally, some submersible
pumps have been replaced by progressing cavity pumps which are expected to be
significantly less costly to operate. A fieldwide study is underway to
identify additional workover candidates as well as additional locations for
development drilling.
GULF COAST. At January 1, 1997, 22.6% of the Company's proved reserves were
concentrated in the Gulf Coast region, on shore. 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 was acquired in the
1995 Acquisition and currently consists of 10,982 gross and net acres. 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 has acquired additional acreage in this prospect and plans to
initiate a 3-D survey in 1997.
SOUTHWEST SPEAKS, LAVACA COUNTY, TEXAS. This project was also acquired in
the 1995 Acquisition and currently consists of 9,062 gross and net acres.
Multiple producing horizons from shallow depths to below 14,000 feet have
produced over 122 Bcf of gas from this highly faulted field. A well has been
completed in the Rainbow Wilcox sand on acreage adjoining Costilla's lease.
A well, in which Costilla holds a 10% interest as a result of a farmout, is
11
<PAGE>
being completed on Costilla's lease. The Company has commenced a 3-D survey
in the Speaks area in the first quarter of 1997. The Company's working
interest in this prospect is 100%.
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 providing opportunity for further
development. The Company's lease in the Borchers field area has produced
over 21 Bcf of gas from two Wilcox sands. Costilla has a 100% working
interest in this field consisting of 1,322 gross and net acres.
Examples of exploitation activities in this region include:
PERSONVILLE, LIMESTONE COUNTY, TEXAS. When this lease was acquired in the
1995 Acquisition, it was producing 70 Mcf per day from one well. In the last
half of 1996, the Company completed two 11,000 foot Cotton Valley wells which
were collectively producing approximately 4.5 Mmcf per day in December 1996.
A third well was completed in January 1997. The Company plans 14 additional
wells in this area. The Company is the operator and owns approximately 29%
working interest in this 1,026 gross acre (298 net acre) lease.
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. By mid-December 1996 the Company had
worked over six wells via refracing and/or opening additional pay zones.
Production has improved from 137 BOE per day to 325 BOE per day on those
wells. Additional increases in production are expected as frac loads are
recovered. Completion of the first two of seven planned horizontal wells in
the Austin Chalk are the Patterson "G" 1-H, producing 326 barrels of oil and
727,000 cubic feet of gas per day, and Mais-Kachtik 1-H, producing 364
barrels of oil and 952,000 cubic feet of gas per day. 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 January 1, 1997, 13.7% 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:
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 of which the
first well has been drilled and completed as a producer. Additional
development is anticipated. Costilla has 5,169 gross (1,292 net) acres in
the Outlook prospect, and its working interest is approximately 25%.
WATTENBERG FIELD, WELD COUNTY, COLORADO. The Company operates 70 wells in
the Wattenberg Field of the DJ Basin in northeast Colorado. During January,
1997 the Company initiated an 11 well development program of which 7 wells
have been completed at March 20, 1997, with initial producing rates averaging
55 BOEPD per well. An estimated 20 additional locations are drillable. The
Company owns an approximate 72% average working interest in 6,255 gross
(4,479 net) acres.
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
12
<PAGE>
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
durations. 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. For the year ended December 31, 1996, one oil
purchaser accounted for 11.2% of the Company's 1996 consolidated revenue.
The Company does not anticipate any difficulty if it should have to replace
any of the purchasers of its crude oil and natural gas.
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. The Company's
current position with regard to its 1997 commodity hedges is as follows:
OIL SALES. As of December 31, 1996, the Company had purchased put options on
6,536 barrels of oil per day for the calendar months June 1997 through
October 1997 providing a floor price of $17.00 per barrel. Additionally, the
Company had purchased put options on 2,500 Bbls of oil per day for 1997 which
provide a floor price of $16.00 per barrel and sold call options on 2,500
barrels of oil per day for 1997 at $20.65 per barrel. These put options
provide downside protection on approximately 70% of the Company's estimated
1997 oil production.
GAS SALES. As of December 31, 1996, the Company had put options which
provide a floor price of $1.65 per Mmbtu (approximately $1.82 per Mcf) for
150,000 Mmbtu's per month of its gas production through October 1997. In
February 1997, the Company purchased put options which establish a floor
price of $1.85 per Mmbtu (approximately $2.04 per Mcf) for 300,000 Mmbtu's
per month of its gas production for the period April 1997 through October
1997. The put options currently in place represent approximately 25% of the
Company's estimated gas production for 1997.
13
<PAGE>
OIL AND GAS RESERVES
The Company's estimated total proved and proved developed reserves of oil and
gas as of January 1, 1997 were as follows:
JANUARY 1, 1997
--------------------------
OIL GAS
(MBBLS) (MMCF) MBOE
------- ------- ------
Proved developed producing . . . . 13,894 82,861 27,704
Proved developed non-
producing. . . . . . . . . . . . 124 7,162 1,318
Proved undeveloped . . . . . . . . 2,982 30,249 8,023
------ ------- ------
Total proved . . . . . . . . . . 17,000 120,272 37,045
------ ------- ------
------ ------- ------
The future net cash flows from the Company's estimated proved reserves as of
January 1, 1997 were as follows:
JANUARY 1, 1997
---------------
(in thousands)
Future net cash flows before
income taxes . . . . . . . . . . . . . . . . . . $538,343
Future net cash flows before
income taxes, discounted
at 10% . . . . . . . . . . . . . . . . . . . . . $311,803
The reserve estimates at January 1, 1997 were prepared by Williamson
Petroleum Consultants, Inc.
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 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 "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.
14
<PAGE>
PRODUCTION VOLUMES, PRICES AND COSTS
The following table sets forth certain information regarding the Company's
production volumes, average sales price and costs for the periods presented:
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
Production:
Oil (MBbls). . . . . . . . . . . . . 1,726 950 330
Gas (Mmcf) . . . . . . . . . . . . . 9,205 4,806 1,600
MBOE . . . . . . . . . . . . . . . . 3,260 1,751 597
Average Sales Price:
Oil (per Bbl). . . . . . . . . . . . $19.87 $15.53 $15.25
Gas (per Mcf). . . . . . . . . . . . 2.13 1.45 1.63
Costs Per BOE:
Production costs, including
severance taxes (1). . . . . . . . $ 6.68 $ 5.91 $ 3.94
Depreciation, depletion and
amortization . . . . . . . . . . . 3.81 3.40 3.09
- ---------------------
(1) Production costs per BOE in 1996 and 1995 were unusually high as a result
of relatively high workover expenses with respect to properties acquired
in the 1995 Acquisition and the 1996 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.
EXPLORATION AND DEVELOPMENT ACTIVITIES
The Company drilled, or participated in the drilling of, the following number
of wells during the periods indicated. At December 31, 1996, the Company was
in the process of drilling 7 gross (4.33 net) wells and was in the process of
completing 8 gross (4.04 net) wells as producers which are not reflected in
the following table.
1996 1995 1994
------------- ------------ ------------
GROSS NET GROSS NET GROSS NET
----- ----- ----- ----- ----- ----
Exploratory:
Productive. . . . . 13 8.88 10 4.58 9 2.27
Dry . . . . . . . . 2 2.00 6 2.57 10 3.73
----- ----- ----- ----- ----- ----
Total . . . . . . 15 10.88 16 7.15 19 6.00
----- ----- ----- ----- ----- ----
----- ----- ----- ----- ----- ----
Development:
Productive. . . . . 16 9.93 1 0.44 - -
Dry . . . . . . . . 5 3.20 - - - -
----- ----- ----- ----- ----- ----
Total . . . . . . 21 13.13 1 0.44 - -
----- ----- ----- ----- ----- ----
----- ----- ----- ----- ----- ----
Total:
Productive. . . . . 29 18.81 11 5.02 9 2.27
Dry . . . . . . . . 7 5.20 6 2.57 10 3.73
----- ----- ----- ----- ----- ----
Total . . . . . . 36 24.01 17 7.59 19 6.00
----- ----- ----- ----- ----- ----
----- ----- ----- ----- ----- ----
15
<PAGE>
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 December 31, 1996. Productive wells are
producing wells and wells capable of production.
ACTUAL (1)
-------------
GROSS NET
----- ---
Oil Wells . . . . . . . . . . . . . . . . . . . . . 2,323 708
Gas Wells . . . . . . . . . . . . . . . . . . . . . 1,292 238
----- ---
Total . . . . . . . . . . . . . . . . . . . . . . 3,615 946
----- ---
----- ---
- ----------------
(1) One well with multiple completions is counted as a single well.
ACREAGE
The following table sets forth certain information regarding the Company's
developed and undeveloped leasehold acreage as of December 31, 1996. Acreage
in which the Company's interest is limited to royalty, overriding royalty,
mineral and similar interests is excluded.
<TABLE>
DEVELOPED UNDEVELOPED TOTAL
----------------- ----------------- -----------------
REGION GROSS NET GROSS NET GROSS NET
------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Permian Basin. . . . . . 220,859 48,038 124,781 72,373 345,640 120,411
Gulf Coast . . . . . . . 138,569 57,595 41,123 34,962 179,692 92,557
Rocky Mountain . . . . . 19,652 6,603 30,091 14,209 49,743 20,812
Other. . . . . . . . . . 57,079 14,585 46,546 26,198 103,625 40,783
------- ------- ------- ------- ------- -------
Total. . . . . . . . . . 436,159 126,821 242,541 147,742 678,700 274,563
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</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 in return
for a 50% interest in Redeco. After the initial $2.0 million expenditure,
which was incurred in August 1996, the Company and the other member of Redeco
are responsible for bearing 50.0% each of future expenses. To date, three
wells, drilled by the government in the 1960s, have been reentered and two
new wells have been completed by the Company in Moldova. The Company
continues to evaluate the Concession for further development.
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
16
<PAGE>
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.
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.
The Company maintains insurance of various types to cover its operations,
including liability coverage and 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.
17
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Reform Act.
See "Special Note Regarding Forward-Looking Statements" for additional
factors relating to such statements.
The Company is a defendant or codefendant in minor lawsuits that have arisen
in the ordinary course of business. While the outcome of 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of the year ended December 31, 1996.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company completed its initial public offering of Common Stock on October
2, 1996. On October 3, 1996 the Common Stock commenced trading on the Nasdaq
Stock Market's National Market (the "Nasdaq National Market") under the
trading symbol "COSE". The following table sets forth the high and low
closing price for the period presented:
1996 HIGH LOW
------ ------
Fourth Quarter (October 3 inception of trading)........ $13.63 $11.75
The Company had approximately 1300 record and beneficial holders of its Common
Stock at December 31, 1996.
The Company has never declared or paid any cash dividends on its Common Stock.
The Company's Board of Directors does not anticipate paying any cash
dividends in the foreseeable future, as it intends to retain cash to finance
the growth of the Company's business. In addition, the payment of any
dividends is prohibited by the terms of the Company's Credit Facility with its
secured lenders. The payment of any cash dividends on the Common Stock in the
future will depend on such factors as the earnings, anticipated capital
requirements, and operating and financial condition of the Company and any
other factors deemed relevant by the Board of Directors.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data of Costilla Energy,
Inc. and Predecessor. 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 herein. Costilla Energy, Inc. and Predecessor
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>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues............................. $ 53,919 $ 21,693 $ 7,637 $ 4,231 $ 2,362
Total revenues................................. 55,026 21,816 7,836 4,397 2,887
Expenses:
Oil and gas production....................... 21,774 10,355 2,351 1,688 1,340
General and administrative................... 5,238 3,571 1,184 952 388
Compensation related to option settlement.... - 656 - - -
Exploration and abandonments................. 2,550 1,650 793 218 4
Depreciation, depletion and amortization..... 12,430 5,958 1,847 884 404
Interest..................................... 11,281 4,591 1,458 605 365
Other........................................ - 2 - - -
-------- -------- -------- ------- -------
Income (loss) before income taxes and
extraordinary item........................... 1,753 (4,967) 203 50 386
Net income (loss).............................. (4,440) (4,970) 163 73 368
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities......................... $ 12,350 $ 6,366 $ 1,527 $ 322 $ 140
Investing activities......................... (64,129) (62,467) (12,146) (6,731) (1,432)
Financing activities......................... 61,531 58,830 10,618 6,315 1,450
OTHER FINANCIAL DATA:
Capital expenditures........................... $ 70,017 $ 62,220 $ 11,868 $ 6,862 $ 3,720
Adjusted EBITDA (1)............................ 27,108 7,232 4,301 1,757 1,159
Adjusted EBITDA/interest expense (1)........... 2.4x 1.6x 2.9x 2.9x 3.2x
BALANCE SHEET DATA (AS OF PERIOD END):
Working capital................................ $ 10,320 $ 2,496 $ 1,081 $ 1,612 $ 185
Total assets................................... 162,790 87,367 24,904 13,290 6,675
Total debt..................................... 100,262 71,494 23,613 12,034 5,352
Redeemable predecessor capital................. - 11,576 - - -
Predecessor capital............................ - (7,445) (747) 51 434
Stockholders' Equity........................... 40,569 - - - -
</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 early extinguishment of debt, net of a
deferred tax benefit, to net income (loss), and excluding a nonrecurring
gain on the sale of substantially all of the assets of a subsidiary in
1996. The ratio of Adjusted EBITDA to interest expense is calculated by
dividing Adjusted EBITDA by interest. 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.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Reform Act.
See "Special Note Regarding Forward-Looking Statements" for additional factors
relating to such statements.
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 $38.7 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 and
production, especially due to the 1995 Acquisition and the 1996 Acquisition.
The following table sets forth certain operating data of Costilla for the
periods presented:
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
OIL AND GAS PRODUCTION:
Oil (MBbls)................................. 1,726 950 330
Gas (Mmcf).................................. 9,205 4,806 1,600
MBOE........................................ 3,260 1,751 597
AVERAGE SALES PRICES (1):
Oil (per Bbl)............................... $19.87 $15.53 $15.25
Gas (per Mcf)............................... 2.13 1.45 1.63
PRODUCTION COST (2):
Per BOE (3)................................. $ 6.68 $ 5.91 $ 3.94
Per dollar of sales......................... 0.40 0.48 0.31
DEPRECIATION, DEPLETION AND AMORTIZATION:
Per BOE...................................... $ 3.81 $ 3.40 $ 3.09
Per dollar of sales.......................... 0.23 0.27 0.24
21
<PAGE>
_____________
(1) Before deduction of production taxes and net of any hedging results.
(2) Production cost includes lease operating expenses and production and ad
valorem taxes, if applicable, and excludes depreciation, depletion and
amortization.
(3) Production costs per BOE in 1995 and 1996 were unusually high as a result
of relatively high workover expenses with respect to properties acquired
in the 1995 Acquisition and the 1996 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.
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 sales by the proceeds received from
the related option. The net effect of the Company's commodity hedging
activities reduced oil and gas revenues by $1,705,000, $80,000 and $9,000 for
the years ended December 31, 1996, 1995, and 1994, respectively.
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 in 1996 by
$442,000 prior to repayment of the Company's floating rate debt and $8,000 for
the year ended December 31, 1995. Concurrent with the payment of all of the
Company's floating rate debt from proceeds of the Offerings in the fourth
quarter of 1996, the interest rate swap agreements ceased to qualify as
hedges. These interest rate swap agreements were marked-to-market and the
related liability recorded. The liability for the two interest rate swap
agreements was $1,712,000 at December 31, 1996. The Company must mark the
agreements to market at the end of each reporting period and the net change
during the reporting period will be treated as investment gain or loss. At
March 11, 1997 the value of the agreements was an approximate $1.5 million
liability.
The Company's predecessor was classified as a partnership 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
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company's total oil and gas revenues for the year ended December 31, 1996
were $53,919,000, representing an increase of $32,226,000 (149%) over revenues
of $21,693,000 in 1995. This increase was primarily due to the 1996
Acquisition and 1995 Acquisition, which accounted for approximately
$12,754,000 and $14,059,000 of the revenue increase, respectively. The
remainder of the increase was due to a combination of increased product
prices, successful drilling activities and the enhancement of existing
production. The average oil price per barrel received in 1996 was $19.87
compared to $15.53 in 1995, a 28% increase, and the average gas price received
in 1996 was $2.13 compared to $1.45 in 1995, a 47% increase.
22
<PAGE>
Oil and gas production was 3,260 MBOE in 1996 compared to 1,751 MBOE in 1995,
an increase of 86%. Of the 1,509 MBOE increase, approximately 723 MBOE was
due to the properties acquired in the 1996 Acquisition and 562 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 year ended December 31, 1996
compared to $123,000 in 1995, representing a decrease of $83,000, which was
primarily comprised of $195,000 in losses on investments held for trading
purposes and an increase in interest income of $67,000 in 1996 due to
increased funds earning interest. Also in 1996, the Company realized gains of
$ 1,067,000 on various transactions for which no comparable sales were
recorded in 1995.
Oil and gas production costs in 1996 were $21,774,000 ($6.68 per BOE),
compared to $10,355,000 in 1995 ($5.91 per BOE), representing an increase of
$11,419,000 (110%), due principally to the 1996 Acquisition and to a lesser
extent the 1995 Acquisition. On a per BOE basis, production costs increased
$0.77 due primarily to higher production costs per BOE for the properties
acquired in the 1996 Acquisition.
General and administrative expenses for the year ended December 31, 1996 were
$5,238,000, representing an increase of $1,667,000 (47%) from 1995 of
$3,571,000. 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 and 1996 Acquisitions. However, as noted above,
production volumes increased 86% and, therefore, general and administrative
expenses per BOE decreased to $1.61 per BOE for the year ended December 31,
1996 from the $2.04 per BOE in 1995.
Results of operations for the year ended December 31, 1995 include non-cash
compensation expense of $656,000 deemed to have been accrued to a minority
interest owner of the Company who was deemed to have benefited from the
cancellation of an option to purchase an additional interest held by the
other minority interest owner.
Exploration and abandonment expense increased to $2,550,000 in 1996 compared
to $1,650,000 in 1995. The Company incurred $913,000 of seismic costs for
the year ended December 31, 1996, compared to $790,000 which were incurred in
1995. Dry hole and abandonment costs increased to $1,524,000 in 1996 from
$860,000 in 1995.
Depreciation, depletion and amortization expense for 1996 was $12,430,000
compared to $5,958,000 for 1995, representing an increase of $6,472,000
(109%). During 1996, depreciation, depletion and amortization on oil and gas
production was provided at an average rate of $3.81 per BOE compared to $3.40
per BOE for 1995. The increases were due primarily to the 1996 and 1995
Acquisitions.
Interest expense was $11,281,000 in 1996, compared to $4,591,000 in 1995.
The $6,690,000 (146%) increase was attributable primarily to increased levels
of debt which the Company used to finance the 1996 Acquisition. The average
amounts of applicable interest-bearing debt in 1996 and 1995 were $95,671,000
and $49,972,000, respectively. The effective annualized interest rate in
1996 was 11.8%, as compared to 9.2% in 1995.
Results of operations for the year ended December 31, 1996 include an
extraordinary charge of $4,975,000, net of the related deferred tax benefit
of $1,042,000, related to the early extinguishment of the Company's prior
bank credit facilities ( the "1995 Credit Facility and the Bridge Facility").
The 1995 Credit Facility was replaced by the Bridge Facility in June 1996
and the Bridge Facility was paid off with proceeds from the Offerings in
October 1996.
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 $13,373,000 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.
23
<PAGE>
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.
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.
Results of operations for the year ended December 31, 1995 include non-cash
compensation expense of $656,000 deemed to have been accrued to a minority
interest owner of the Company in connection with the cancellation of an
option to purchase an additional interest in the Company held by the other
minority interest owner.
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
(223%). 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.
LIQUIDITY AND CAPITAL RESOURCES
NET CASH USED IN OPERATING ACTIVITIES
For the year ended December 31, 1996, net cash provided by operating
activities increased to $12.4 million from $6.4 million for 1995. Cash
provided by operations, before changes in operating assets and liabilities,
increased to $14.7 million from $1.7 million for 1995 due primarily to the
1996 Acquisition and the increase in results of operations therefrom.
NET CASH USED IN INVESTING ACTIVITIES
Net cash used in investing activities for the year ended December 31, 1996
was $64.1 million. Approximately $38.7 million was used for the 1996
Acquisition, $28.7 million was used for other oil and gas expenditures and
$3.0 million was used for other property and equipment. During the year
ended December 31, 1996, approximately $6.3 million net cash was provided by
sales of oil and gas properties. 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, $14.9 million for additional
acquisition of producing oil and gas properties and exploration and
development activities 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, which was fully funded prior to the Company's initial public offering
of Common Stock in October 1996. Approximately $74.5 million was for the
24
<PAGE>
extension and refinancing of prior debt, $42.5 million was used for the 1996
Acquisition and approximately $8.0 million was used for general corporate
purposes.
CAPITAL RESOURCES
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 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 various mineral 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
its budgeted 1997 capital expenditures. However, because the Company's
ultimate 1997 capital expenditures, future cash flows and the availability of
financing are subject to a number of variables, there can be no assurance
that the Company's capital resources will be sufficient to maintain its
capital expenditures. In addition, 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.
The Company has the Credit Facility with NationsBank of Texas, N.A. (the
"Bank"). The Credit Facility provides 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 provides for a
maximum availability of $50.0 million (which amount was also the initial
borrowing base), $100,000 of which was borrowed at December 31, 1996.
Availability under the borrowing base is initially limited to $20.0 million
for working capital and $30.0 million for acquisitions of oil and gas
properties meeting certain criteria established by the Bank. Borrowings
under the Credit Facility bear interest at the Company's option at a floating
rate 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 is payable quarterly and principal is amortized in twelve equal
installments commencing, October 1998. Under the Credit Facility, the
Company is obligated to pay certain fees to the Bank, including a commitment
fee based on the unused portion of the commitment. The Credit Facility
contains customary restrictive covenants (including restrictions on the
payment of dividends and the incurrence of additional indebtedness) and
requires 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 and
a minimum tangible net worth. At December 31, 1996, the Company's current
ratio was 2.0 to 1.0, the ratio of Adjusted EBITDA to interest expense was
3.9 to 1 and the Company exceeded the tangible net worth test.
Borrowings under the Credit Facility are secured by substantially
all of the assets of the Company.
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 Company's capital budget for 1997 is
$26.0 million of which approximately $7.2 will be expended for exploratory
drilling, approximately $13.6 million for exploitation activities,
approximately $2.5 million for the purchase of undeveloped acreage and
approximately $2.7 million for new seismic projects.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
For the financial statements and supplementary data required by this Item 8,
see the Index to Consolidated Financial Statements on page F-1 in this Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
26
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated herein by reference to
the Company's definitive proxy statement which will be filed with the
Commission within 120 days after December 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference to
the Company's definitive proxy statement which will be filed with the
Commission within 120 days after December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference to
the Company's definitive proxy statement which will be filed with the
Commission within 120 days after December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference to
the Company's definitive proxy statement which will be filed with the
Commission within 120 days after December 31, 1996.
27
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS
For a list of the consolidated financial statements filed as part of this
Form 10-K, see the Index to Consolidated Financial Statements on page F-1.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1996.
EXHIBITS
Exhibit
Number Description of Exhibit
- ------- ----------------------
*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
Indenture)
*4.2 Indenture dated as of October 1, 1996 by and between State Street
Bank and Trust Company, as Trustee, and the Company, as Issuer
**4.3 Form of Stock Certificate
***10.1 Credit Agreement dated October 10, 1996 between NationsBank of
Texas, N.A., as agent, the Lenders named therein and 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, 1995 between the Government of
the Republic of Moldova and Resource Development Company Ltd.,
L.L.C. (DE)
*10.4 Consolidation Agreement dated October 8, 1996
*10.5 1996 Stock Option Plan
*10.6 Outside Directors Stock Option Plan
*10.7 Employment Agreement between the Company and Bobby W. Page
effective June 30, 1996
*10.8 Employment Agreement between the Company and Cadell S. Liedtke
effective October 8, 1996
*10.9 Employment Agreement between the Company and Michael J. Grella
effective October 8, 1996
*10.10 Employment Agreement between the Company and Henry G. Musselman
effective October 8, 1996
*10.11 Purchase and Sale Agreement dated April 3, 1995 by and between
Parker & Parsley Development L.P., 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
*10.12 Purchase and Sale Agreement dated March 8, 1996 by and between
Parker & Parsley Development L.P., 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
*10.13 Bonus Incentive Plan
28
<PAGE>
***10.14 Letter Agreement dated December 18, 1996 by and between Statewide
Minerals, Inc., as Seller, Boldrick Partners, as Buyer
***10.15 Stock Purchase Agreement dated December 31, 1996 by and between ERI
Investments, Inc. and the Company
***12.1 Computation of Ratio of Adjusted EBITDA to Interest Expense
**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.
***24.1 Power of Attorney
***24.2 Certified copy of resolution of Board of Directors of Costilla
Energy, Inc. authorizing signature by Power of Attorney
***27.1 Financial Data Schedule
* Incorporated by reference to Registration Statement on Form S-1, File
No. 333-08909
** Incorporated by reference to Registration Statement on Form S-1, File
No. 333-08913.
*** Filed herewith
FINANCIAL STATEMENT SCHEDULES
No Financial Statement Schedules are required with this report. For a list
of the consolidated financial statements filed as a part of this report,
see the Index to Consolidated Financial Statements on page F-1.
REPORTS ON FORM 8-K
The Company did not file a report on Form 8-K during the last quarter of
the period covered by this report.
29
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
COSTILLA ENERGY, INC.
Date: March 26, 1997 By: */s/ CADELL S. LIEDTKE
--------------------------------
Cadell S. Liedtke
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Date: March 26, 1997 */s/ CADELL S. LIEDTKE
--------------------------------
Cadell S. Liedtke
Chairman of the Board
and Chief Executive Officer
Date: March 26, 1997 */s/ MICHAEL J. GRELLA
--------------------------------
Michael J. Grella
President and Chief Operating Officer
and Director
Date: March 26, 1997 */s/ HENRY G. MUSSELMAN
--------------------------------
Henry G. Musselman
Executive Vice President
and Director
Date: March 26, 1997 */s/ W. D. KENNEDY
--------------------------------
W. D. Kennedy
Director
Date: March 26, 1997 */s/ JERRY J. LANGDON
--------------------------------
Jerry J. Langdon
Director
Date: March 26, 1997 /s/ BOBBY W. PAGE
--------------------------------
Bobby W. Page
Senior Vice President and Chief Financial
Officer (principal accounting officer)
Date: March 26, 1997 *By: /s/ BOBBY W. PAGE
--------------------------------
Bobby W. Page
Agent and Attorney in fact
30
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Financial Statements of Costilla Energy, Inc.:
Independent Auditors' Reports . . . . . . . . . . . . . . . . . . . . . . . . F - 2
Consolidated Balance Sheets as of December 31, 1996 and 1995. . . . . . . . . F - 4
Consolidated Statements of Operations for the years ended December31, 1996,
1995 and 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F - 5
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . . F - 6
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F - 7
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . F - 8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Costilla Energy, Inc.:
We have audited the accompanying consolidated balance sheets of Costilla
Energy, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 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 audits provide 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, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
---------------------------------
KPMG PEAT MARWICK LLP
Midland, Texas
March 10, 1997
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Costilla Energy, Inc.:
We have audited the accompanying consolidated statement of operations,
stockholders' equity, and cash flows of the predecessor entities of Costilla
Energy, Inc. and subsidiaries, as detailed in Note 1 to the consolidated
financial statements, for the year ended December 31, 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 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 results of operations and the
cash flows of Costilla Energy, Inc. and subsidiaries for the year ended
December 31, 1994, in conformity with generally accepted accounting
principles.
/s/ ELMS, FARIS & CO., P. C.
------------------------------------
ELMS, FARIS & CO., P. C.
Midland, Texas
March 31, 1995
F-3
<PAGE>
COSTILLA ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
ASSETS
DECEMBER 31,
---------------------
1996 1995
--------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,618 $ 2,866
Accounts receivable:
Trade, net 6,675 3,154
Affiliates 332 507
Oil and gas sales 9,031 3,915
Prepaid and other current assets 1,753 439
--------- --------
Total current assets 30,409 10,881
--------- --------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Oil and gas properties, using the successful efforts
method of accounting:
Proved properties 140,477 79,897
Unproved properties 4,482 2,903
Accumulated depletion, depreciation and amortization (20,435) (9,413)
--------- --------
124,524 73,387
Other property and equipment, net 2,420 679
--------- --------
Total property, plant and equipment 126,944 74,066
--------- --------
OTHER ASSETS:
Deferred charges (Note 2) 4,503 1,736
Note receivable - other 250 -
Note receivable - affiliate 684 684
--------- --------
Total other assets 5,437 2,420
--------- --------
$ 162,790 $ 87,367
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 98 $ -
Trade accounts payable 12,718 5,467
Undistributed revenue 3,517 1,227
Other current liabilities 3,756 1,533
--------- --------
Total current liabilities 20,089 8,227
--------- --------
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 7) 100,262 71,494
--------- --------
DEFERRED REVENUE - 3,319
--------- --------
OTHER NONCURRENT LIABILITIES 1,870 196
--------- --------
REDEEMABLE PREDECESSOR CAPITAL - 11,576
--------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Predecessor capital - (7,445)
Preferred stock, $.10 par value (3,000,000 shares authorized;
no shares outstanding - -
Common stock, $.10 par value (20,000,000 shares authorized;
10,475,000 shares outstanding at December 31, 1996) 1,047 -
Additional paid-in capital 41,081 -
Retained earnings (deficit) (1,559)
--------- --------
Total stockholders' equity (deficit) 40,569 (7,445)
--------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 9) - -
--------- --------
$ 162,790 $ 87,367
--------- --------
--------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
COSTILLA ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Oil and gas sales $ 53,919 $ 21,693 $ 7,637
Interest and other 40 123 87
Gain on sale of assets 1,067 - 112
-------- -------- --------
55,026 21,816 7,836
-------- -------- --------
EXPENSES:
Oil and gas production 21,325 10,024 2,349
Oil and gas production - affiliates 449 331 2
General and administrative 4,682 2,910 634
General and administrative - affiliates 556 661 550
Compensation related to option settlement - 656 -
Exploration and abandonments 2,550 1,652 793
Depreciation, depletion and amortization 12,430 5,958 1,847
Interest 11,281 4,591 1,458
-------- -------- --------
53,273 26,783 7,633
-------- -------- --------
Income (loss) before federal income taxes and
extraordinary item 1,753 (4,967) 203
PROVISION FOR FEDERAL INCOME TAXES
Current 176 3 8
Deferred 1,042 - 32
-------- -------- --------
Income (loss) before extraordinary item 535 (4,970) 163
Extraordinary loss resulting from early
extinguishment of debt, net of the related
deferred tax benefit of $1,042 (Notes 5 and 7) (4,975) - -
-------- -------- --------
NET INCOME (LOSS) $ (4,440) $ (4,970) $ 163
-------- -------- --------
-------- -------- --------
NET INCOME (LOSS) APPLICABLE TO PREDECESSOR CAPITAL $ (5,337) $ (7,812) $ 163
-------- -------- --------
-------- -------- --------
INCOME (LOSS) PER SHARE:
Income (loss) before extraordinary item $ 0.08 $ (0.96) $ 0.03
Extraordinary loss resulting from
early extinguishment of debt, net of
deferred tax benefit (0.77) - -
-------- -------- --------
Net income (loss) $ (0.69) $ (0.96) $ 0.03
-------- -------- --------
-------- -------- --------
Net income (loss) applicable to predecessor capital $ (0.82) $ (1.50) $ 0.03
-------- -------- --------
-------- -------- --------
WEIGHTED AVERAGE SHARES OUTSTANDING 6,473 5,200 5,200
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
COSTILLA ENERGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
TOTAL
STOCKHOLDERS'
ADDITIONAL RETAINED EQUITY AND
PREDECESSOR COMMON PAID-IN EARNINGS PREDECESSOR
CAPITAL STOCK CAPITAL (DEFICIT) CAPITAL
----------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 (PREDECESSOR) $ 51 $ - $ - $ - $ 51
Net income 163 - - - 163
Withdrawals (961) - - - (961)
------- ------ -------- ------- -------
BALANCE AT DECEMBER 31, 1994 (PREDECESSOR) (747) - - - (747)
Issuance of predecessor interest 1,266 - - - 1,266
Issuance costs (753) - - - (753)
Net loss (4,970) - - - (4,970)
Withdrawals (55) - - - (55)
Imputed capital contribution on
settlement of option 656 - - - 656
Preferred return and accretion of
redeemable predecessor capital (2,842) - - - (2,842)
------- ------ -------- ------- -------
BALANCE AT DECEMBER 31, 1995 (PREDECESSOR) (7,445) - - - (7,445)
Net loss (2,881) - - (1,559) (4,440)
Preferred return and accretion of
redeemable predecessor capital (2,456) - - - (2,456)
Common stock issued, net - 527 60,052 - 60,579
Distributions to members (4,218) 4,218 - -
Transfer of predecessor capital and
issuance of common stock pursuant
to the Offerings 17,000 520 (23,189) - (5,669)
------- ------ -------- ------- -------
BALANCE AT DECEMBER 31, 1996 $ - $1,047 $ 41,081 $(1,559) $40,569
------- ------ -------- ------- -------
------- ------ -------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
COSTILLA ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (4,440) $ (4,970) $ 163
ADJUSTMENTS TO RECONCILE NET INCOME
(LOSS) TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation, depletion and amortization 12,430 5,958 1,847
Exploration and abandonments 491 - -
Amortization of deferred charges 1,131 137 -
Other noncash 103 (75) 35
Compensation related to option settlement - 656 -
Gain on sale of oil and gas properties (1,067) - (112)
Extraordinary loss resulting from early
extinguishment of debt 6,017 - -
--------- -------- --------
14,665 1,706 1,933
Changes in operating assets and liabilities:
Increase in accounts receivable (8,462) (4,818) (1,535)
Decrease (increase) in other assets (1,076) (216) 301
Increase in accounts payable 6,067 3,745 723
Increase in other liabilities 4,475 2,655 102
Increase (decrease) in deferred revenue (3,319) 3,294 3
--------- -------- --------
Net cash provided by operating activities 12,350 6,366 1,527
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (67,010) (61,500) (11,819)
Proceeds from sale of oil and gas properties 6,388 - 112
Additions to other property and equipment (3,007) (720) (49)
Advances on notes receivable - other (500) - -
Advances on affiliate notes receivable - (247) (390)
--------- -------- --------
Net cash used in investing activities (64,129) (62,467) (12,146)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt 228,707 62,704 11,579
Payments of long-term debt (199,840) (11,232) -
Proceeds from issuance of common stock, net 60,579 - -
Proceeds from redeemable predecessor capital - 10,000 -
Deferred loan and financing costs (8,191) (2,587) -
Redemption of member's interest (15,506) - -
Distributions to members and withdrawals (4,218) (55) (961)
--------- -------- --------
Net cash provided by financing activities 61,531 58,830 10,618
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 9,752 2,729 (1)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,866 137 138
--------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,618 $ 2,866 $ 137
--------- -------- --------
--------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND NATURE OF OPERATIONS
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 was formed for the
purpose of conducting a $60 million initial public offering of common stock
and a $100 million senior notes offering (the "Offerings"), which Offerings
were completed in early October 1996.
At December 31, 1994, the financial statements of the LLC and its
affiliates were combined. The combining companies were owned by three
individuals prior to the formation of the LLC. Such individuals owned
exactly the same proportionate interest in each of the combining companies
prior to their combination into the LLC on February 14, 1995. Each
individual held exactly the same proportionate interest in the combining
companies as was their proportionate interest in the LLC after its formation.
Management believes, based on the exact same proportionate interests being
held in the combining companies and the LLC before and after the date of its
formation, that the combination lacks substance and is not the purchase of a
minority interest.
The LLC was formed on February 14, 1995 as the successor to CSL
Partners, a Texas general partnership, which was organized on January 11,
1989. Subsequent to the formation of the LLC, NationsBank Capital
Corporation ("NBCC") acquired a 30% interest in the LLC as described in Note
12. Contemporaneously with the closings of the Offerings: (1) the redeemable
membership interests of NBCC in the LLC were redeemed for $15.5 million; (2)
the LLC was merged into Costilla (the "Merger") and an aggregate of 5,200,000
shares of Common Stock were issued to the members of the LLC; (3) Costilla
acquired all of the issued and outstanding stock of Valley and the assets of
CSL for $0.7 million; and (4) $4.2 million in distributions were made to the
members of the LLC, $3.4 million of which was provided to former members for
certain income tax effects of the Merger. The LLC was an unincorporated
association of several individuals and a corporation and ceased to exist on
the date of the Offerings.
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, 1996, 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, 1996 Costilla had three wholly owned subsidiaries: (i)
Costilla Petroleum Corporation, a Texas corporation ("CPC"), which operated
properties owned by Costilla and owned minor interests in the same
properties, (ii) Statewide Minerals, Inc., a Texas corporation
("Statewide"), which had engaged in the purchase of small royalty and mineral
interests; and (iii) Valley, which owns several small gas gathering systems,
a small gas processing plant, certain salt water disposal systems and gas
compressors. Costilla and CPC were the sole members of two Texas limited
liability companies through which the Company's Moldovan operations are
conducted.
F-8
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. During the year ended December 31, 1996, the Company
had sales to one customer which accounted for 11.2% of total revenues.
During the year ended December 31, 1995, the Company had sales to one
customer which accounted for 17.7% of total revenues.
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 AND DERIVATIVE FINANCIAL INSTRUMENTS
The financial instruments that the Company accounts for as hedging
contracts must meet the following criteria: the underlying asset or
liability must expose the Company to price or interest rate risk that is not
offset in another asset or liability, the hedging contract must reduce that
price or interest rate risk, and the instrument must be designated as a hedge
at the inception of the contract and throughout the contract period. In
order to qualify as a hedge, there must be clear correlation between changes
in the fair value of the financial instrument and the fair value of the
underlying asset or liability such that changes in the market value of the
financial instrument will be offset by the effect of price or interest rate
changes on the exposed items.
Premiums paid for commodity option contracts and interest rate swap
agreements which qualify as hedges 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.
When these derivative financial instruments cease to qualify as hedges, these
instruments are classified as investments held for trading purposes.
Investments held for trading purposes are marked to market at the end of each
reporting period and the net balance change is recorded as other income in
the consolidated statement of operations for the applicable period.
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.
F-9
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 over their 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, on a depletable unit
basis, is less than the carrying amount of such 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 the
issuance of $100 million of senior notes and with obtaining the 1996 Credit
Facility (see Note 7 for definitions and descriptions of each). These costs
are being amortized over the lives of the related instruments.
DEFERRED REVENUE
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 31, 1996, for a total fixed price of $3,429,610. Income
from such agreements is generally recognized in the period of delivery.
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.
F-10
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, the
Company has only adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). See Note 12 for the pro forma disclosures of compensation
expense determined under the fair-value provisions of SFAS 123.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Under the asset and liability method of SFAS
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS
109, the effect on deferred tax assets and liabilities of a change in tax
rate is recognized in income in the period that includes the enactment date.
EARNING PER SHARE
Primary net income (loss) per share is computed based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. Common stock equivalent shares arising from
stock options are computed using the treasury stock method. There were no
potentially dilutive securities, other than common stock equivalents.
Consequently, primary and fully diluted earnings per share do not differ.
For the periods prior to the Offerings, the weighted average shares
outstanding attributable to predecessor capital are the 5,200,000 shares
issued to the predecessor members upon conversion of the LLC.
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 1995 and 1994 financial
statements to conform to the 1996 presentation.
(3) ACQUISITION OF OIL AND GAS PROPERTIES
On June 14, 1996, the Company consummated the purchase from Parker and
Parsley Petroleum Company of certain oil and gas properties for an estimated
adjusted purchase price of approximately $38.7 million (the "1996
Acquisition"). 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 acquisition closing date, June 14, 1996.
The Company sold for approximately $3.3 million its wholly-owned subsidiary,
Costilla Pipeline Corporation, which owned the Three Rivers Pipeline
F-11
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purchased in the 1996 Acquisition. Certain other acquired properties, which
were located outside the Company's areas of strategic focus, were sold in
1996. No gain or loss was recorded on these sales.
In June 1995 the Company acquired a group of oil and gas properties from
Parker and Parsley Petroleum Company for approximately $46.6 million (the
"1995 Acquisition"). The properties are located in the Permian Basin, Gulf
Coast and Rocky Mountain regions. 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
acquisition date of June 12, 1995. Certain other acquired properties, which
were located outside 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 1995 Acquisition and 1996 Acquisition, net of the related
properties sold, had occurred on January 1, 1995. The pro forma amounts are
not necessarily indicative of the results that may be reported in the future.
YEARS ENDED
DECEMBER 31,
1996 1995
------- --------
(IN THOUSANDS)
Revenues. . . . . . . . . . . . . . . . . . . . . . $64,251 $ 51,896
Net loss before extraordinary item. . . . . . . . . (689) (11,385)
Net loss per share before extraordinary item. . . . (0.11) (2.19)
(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 on a
depletable unit basis and compared such future cash flows to the carrying
amount of the related 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, 1996
or 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.
F-12
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1996:
OIL GAS
VOLUME VOLUME STRIKE PRICE
(BBLS) (MMBTU) PER BBL/MMBTU
--------- --------- ------------------
Oil:
1997 . . . . . . . . . . . . . . . . .1,912,500 - $16.52 - $20.65(a)
Gas:
1997 . . . . . . . . . . . . . . . . . - 1,500,000 $1.65(b)
- -----------------------
(a) Represents the weighted-average price of a purchased put option contract
and of a collar established with the purchase of a put option contract and
the sale of a call option contract.
(b) Represents the strike price on a purchased put option contract.
INTEREST RATE SWAP AGREEMENTS. Prior to the Offerings, the Company
utilized two interest rate swap agreements to reduce the potential impact of
increases in interest rates on floating-rate long-term debt. Concurrent with
the issuance of the $100 million of 10.25% fixed-rate senior notes in early
October 1996, the two interest rate swap agreements ceased to be hedges.
These interest rate swap agreements were marked-to-market and the related
liability recorded. The liability for the two interest rate swap agreements
was $1,712,000 at December 31, 1996. The average balance of this liability
during the quarter ended December 31, 1996 was approximately $1,700,000.
During the quarter ended December 31, 1996, the Company recorded investment
losses of $207,300 on the interest rate swap agreements. The following table
sets forth the terms, fixed rates, and notional amounts of the interest rate
swap agreements in place as of December 31, 1996:
NOTIONAL
PRINCIPAL FIXED
TERM AMOUNT INTEREST RATE
- -------------------------------- ----------- -------------
Jan. 25, 1996 to Jan. 25, 1999 $24 million 7.50%
May 24, 1995 to May 27, 1997 (a) $60 million 5.99%
- -----------------------
(a) Subject to extension until May 24, 1999 at the option of the
counterparty.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1996 and 1995.
FASB Statement No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS, defines the fair value of a financial instrument as the amount
at which the instrument could be exchanged in a current transaction between
willing parties.
F-13
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
1996 1995
------------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- ------- -----
<S> <C> <C> <C> <C>
Financial Assets: (IN THOUSANDS)
Cash, cash equivalents and restricted cash. . .$ 12,618 $ 12,618 $ 2,866 $ 2,866
Receivables (trade) . . . . . . . . . . . . . . 6,675 6,675 3,154 3,154
Receivables (oil and gas sales) . . . . . . . . 9,031 9,031 3,915 3,915
Commodity option contracts. . . . . . . . . . . 592 (2,172) 165 555
Notes receivable -- affiliate . . . . . . . . . 684 542 684 684
Notes receivable -- other . . . . . . . . . . . 500 500 0 0
Financial liablilites:
Payables (trade). . . . . . . . . . . . . . . . 12,718 12,718 5,467 5,467
Deferred revenue. . . . . . . . . . . . . . . . - - 3,319 2,950
Long-term debt. . . . . . . . . . . . . . . . . 100,262 105,512 71,494 71,494
Interest rate swap and option agreements. . . . 1,712 1,712 146 (2,970)
</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, NOTES RECEIVABLE-OTHER AND TRADE PAYABLES: The
carrying amounts approximate fair value because of the short maturity of
those instruments.
COMMODITY OPTION CONTRACTS: The carrying amount comprises the unamortized
premiums paid for the option contracts. The fair value is estimated using
option pricing models and essentially values the potential for the option
contracts to become in-the-money through changes in commodity prices during
the remaining terms.
NOTES RECEIVABLE-AFFILIATE: The amounts reported relate to notes
receivable from an affiliated company. The carrying amount reflects an
estimate of net present value using an assumed annual interest rate of 9%
based upon the anticipated note payment schedule.
DEFERRED REVENUE: 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 Corporation's long-term debt is
based upon the quoted market price for this issue at December 31, 1996.
INTEREST RATE SWAP AGREEMENTS: At December 31, 1996, the Company had two
interest rate swap agreements outstanding with an aggregate notional amount
of $84 million. These agreements are more fully described in Note 5. The
carrying amount is equal to the sum of the unamortized premiums paid for the
agreements and the fair value. The fair values of each of the open interest
rate swap agreements were obtained from bank quotes and represent the
estimated amount the Company would pay upon termination of the agreements at
December 31, 1996, taking into consideration interest rates at that date.
F-14
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) LONG-TERM DEBT
Long-term debt consists of the following (thousands):
DECEMBER 31,
-------------------
1996 1995
-------- -------
10 1/4% Senior Notes due 2006 . . . . .$100,000 $ -
Revolver Note . . . . . . . . . . . . . 100 59,824
Term notes. . . . . . . . . . . . . . . - 11,670
Other notes payable . . . . . . . . . . 260 -
-------- --------
100,360 71,494
Less current maturities. . . . . 98 -
-------- --------
$100,262 $ 71,494
-------- --------
-------- --------
In October 1996, the Company issued $100 million aggregate principal
amount of 10.25% Senior Notes due October 1, 2006 (the "Notes"). The notes
were sold at par and interest is payable April 1 and October 1, commencing
April 1, 1997. The Notes may not be redeemed prior to October 1, 2001, and
thereafter at a premium reducing to par, plus interest, by maturity. There
is no mandatory redemption of the Notes required prior to maturity. The notes
are general unsecured senior obligations of the Company and rank equally in
right of payment with all other senior indebtedness of the Company and senior
in right of payment of all existing future subordinated indebtedness of the
Company. The Notes are subject to an Indenture between the Company and a
trustee. The Indenture restricts, among other things, the Company's ability
to incur additional indebtedness, pay dividends or make certain other
restricted payments, incur liens, engage in any sale and leaseback
transaction, sell stock of subsidiaries, apply net proceeds from certain
assets 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, or enter into certain transactions with affiliates.
Net proceeds from the sale of the Notes of approximately $96.1 million were
used to repay existing indebtedness.
In October 1996, the Company entered into a credit agreement (the "1996
Credit Facility") with NationsBank of Texas, N.A. (the "Bank"). The 1996
Credit Facility provides a revolving line of credit with the availability of
funds and letters of credit being subject to a borrowing base determination
at least semiannually. The borrowing base provides a maximum availability of
$50.0 million (which amount is also the initial borrowing base), $100,000 of
which was outstanding at December 31, 1996. Availability under the borrowing
base is initially limited to $20.0 million for working capital and $30.0
million for acquisitions of oil and gas properties meeting certain criteria
established by the Bank. Borrowings under the 1996 Credit Facility bear
interest, at the Company's option, at a floating rate 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 is payable
quarterly and principal will be amortized in twelve equal installments
commencing two years from the date of the credit agreement. Under the 1996
Credit Facility, the Company is obligated to pay certain fees to the Bank,
including a commitment fee which ranges from 0.30% to 0.40% based on
the unused portion of the commitment. The 1996 Credit Facility contains
customary restrictive covenants (including restrictions on the payment of
dividends and the incurrence of additional indebtedness) and requires 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. Borrowings under the 1996 Credit Facility are secured by
substantially all of the assets of the Company and any subsidiary of the
Company that guarantees the Company's obligations under the 1996 Credit
Facility. Initially, none of the Company's subsidiaries have guaranteed the
Company's obligations under the 1996 Credit Facility.
In June, 1996, the Company entered into a loan agreement with
NationsBridge, L.L.C. to provide financing of up to $125 million ("Bridge
Loan"). The proceeds of this Bridge Loan were used to finance the 1996
Acquisition, to refinance the 1995 Credit Facility and for other general
corporate purposes. The Company
F-15
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
capitalized certain costs incurred in obtaining the Bridge Loan and amortized
these costs over the estimated life of the Bridge Loan. Concurrent with the
Offerings, the $2,665,000 remaining unamortized balance of these deferred
charges were expensed as an extraordinary item.
In June, 1995, the Company entered into a Credit Agreement ("1995 Credit
Facility") with a syndicate of banks to provide financing for an aggregate
$185 million senior secured revolving line of credit ("Revolver Notes") and
an aggregate $15 million in senior secured term notes ("Term Notes"). In
June 1996, these notes in a total amount of $71,494,000 were paid off with a
portion of the proceeds of the Bridge Loan. The Company capitalized certain
costs incurred in obtaining the 1995 Credit Facility and amortized these
costs over the lives of the notes. Concurrent with the Bridge Loan, the
$1,640,000 remaining unamortized balance of these deferred charges were
expensed as an extraordinary item.
Maturities of long-term debt at December 31, 1996 are as follows
(thousands):
1997 . . . . . . . . . . . . . . . . . . $ 98
1998 . . . . . . . . . . . . . . . . . . 62
1999 . . . . . . . . . . . . . . . . . . 101
2000 . . . . . . . . . . . . . . . . . . -
2001 . . . . . . . . . . . . . . . . . . 100
Thereafter . . . . . . . . . . . . . . . 100,000
The Company paid interest on long-term debt of $8,838,971, $4,453,684 and
$1,356,604 in 1996, 1995 and 1994, respectively.
(8) INCOME TAXES
Concurrent with the Offerings and upon consummation of the Corporate
Reorganization, the Company became a tax paying entity for U.S. Federal
income tax purposes. At that date, the tax basis of the Company's assets and
liabilities exceeded the book basis by approximately $3,500,000, resulting in
a deferred tax asset of approximately $1,200,000. A valuation allowance was
provided for 100% of this deferred tax asset.
Income tax provision (benefit), generated from $2,978,000 of net income
before extraordinary item from the date of the Corporate Reorganization
through December 31, 1996, and amounts separately allocated were
as follows (thousands):
Income (loss) before extraordinary item $ 1,218
Extraordinary loss resulting from early
extinguishment of debt (1,042)
--------
$ 176
--------
--------
The Company's effective tax rate does not differ materially from the U.S.
Federal statutory rate.
F-16
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities were as follows
at December 31, 1996:
Deferred tax assets:
Net operating loss carryforwards $ 2,805
Interest rate swap agreements held
for trading purposes 599
-------
Total gross deferred tax asset 3,404
-------
Deferred tax liabilities:
Oil and gas properties, principally due
to differences in depletion and the
deduction of intangible drilling costs
for tax purposes 1,692
-------
Net deferred tax asset 1,712
Valuation allowance of net deferred tax asset (1,712)
-------
Net deferred tax asset, net of valuation allowance $ -
-------
-------
A valuation is provided for when it is more likely than not that some
portion of the deferred tax assets will not be realized. Due to uncertainties
arising from a lack of earnings history and based on management's intentions
to continue an aggressive drilling program (generating intangible drilling
costs which are projected to create future losses for tax purposes), it does
not appear more likely than not that the Company will be able to utilize all
the available carryforwards prior to their ultimate expiration.
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $8 million, which are available to offset future regular taxable
income, if any. The carryforwards expire December 31, 2011.
(9) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases equipment and office facilities under operating leases
on which rental expense for the years ended December 31, 1996, 1995 and 1994
was $416,442, $311,221, and $197,533, respectively. Future minimum lease
commitments under noncancellable operating leases at December 31, 1996 are as
follows (thousands):
1997................................... $ 275,695
1998................................... 273,943
1999................................... 260,324
2000................................... 233,880
2001................................... 286,850
Thereafter............................. 1,395,886
EMPLOYMENT AGREEMENTS
During the period from June through October, 1996, the Company entered
into employment agreements with four of its executive officers. The
employment agreements are each for three years and each will automatically
renew for successive one-year periods thereafter unless the employee is
notified to the contrary. These employment agreements provide for base annual
salary levels totaling $990,000 for 1997.
F-17
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each employee would receive his salary for the remaining term of the
applicable employment agreement if the Company were to terminate such person's
employment other than for cause. If such person were to voluntarily leave his
employment with the Company prior to the second anniversary of the employment
agreement no further payments would be required. With the exception of one of
the Company's executive officers, if a voluntary termination were to occur
after the second anniversary of the employee agreement, such person would be
entitled to one year's salary from the date of termination. With the exception
of one of the Company's executive officers, the employee agreements provide
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 employee agreement.
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 paid Redeco $90,000 and agreed to bear the first
$2.0 million of Concession expenses in return for a 50.0% interest in Redeco.
Upon reaching the $2.0 million in 1996, Redeco elected, according to the
agreement, to pay the Company for half of all amounts expended in excess of
$750,000 plus interest. 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. The Company has no
material fixed financial commitments with respect to the Concession. As of
December 31, 1996, the Company's share of costs expended was $1,909,349.
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 $96,000. As of December 31, 1996, no amounts had been drawn on these
letters of credit.
(10) 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 $58,713, $22,531, and $8,921 in 1996, 1995 and 1994, respectively.
(11) REDEEMABLE PREDECESSOR CAPITAL AND PREDECESSOR 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. Of this amount $1,266,000 was attributed
to the non-redeemable portion of predecessor capital and $8,734,000 was
attributed to redeemable predecessor capital. Preferred return and accretion
of predecessor capital included in the consolidated statements of operations
and the consolidated statements of stockholders' equity includes accretion of
the amount attributable to redeemable predecessor capital to $10,000,000 over
a two year period beginning February 17, 1995. As described below, the
redemption amount was ultimately to be equal to $10,000,000 plus a preferred
return and an additional redemption amount related to NBCC's redeemable
interest not subject to preferential return.
Concurrent with the Offerings, NBCC's membership interest was redeemed
for a total of $15,506,614 and 936,000 common shares were issued to NBCC.
After accounting for the Underwriter's exercise of its over-
F-18
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
allotment option in November 1996, NBCC owns 8.94% of the 10,475,000 common
shares outstanding at December 31, 1996. The following table details the
redemption price paid to NBCC:
NBCC Preferred Capital Contribution................. $10,000,000
Preferred Return.................................... 2,732,376
-----------
Adjusted NBCC Preferred Capital Contribution........ 12,732,376
PLUS: 10% Redemption Premium........................ 1,273,238
PLUS: Aggregate Redemption Price of NBCC's
Redeemable Unrestricted Common Units.......... 1,500,000
-----------
Total Redemption Price Paid NBCC.................... $15,505,614
-----------
-----------
Redeemable predecessor capital was subject to a preferential return of
15% per annum and was 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, Inc. (the "Regulations"). The 15% preferred return was treated as a
reduction of predecessor capital. The redemption price to be paid by the
Company was equal to the initial amount received for the preferred units plus
a premium, determined in the year the units are purchased, as follows:
Year after Premium
February 17, 1995 Percentage
----------------- ----------
1 10%
2 10%
3 8%
4 6%
5 4%
6 2%
7 0%
8 0%
In addition, a portion of NBCC's interest not subject to preferential
return was classified as redeemable predecessor capital as the Company could
have been be required to repurchase such interest upon the occurrence of
certain events similar to those events requiring redemption of the redeemable
predecessor capital described above and, in any event, on or after February
17, 2000. Such interest could have, at the Company's option, been 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 have paid in either instance would be
determined by the year in which the predecessor capital was repurchased as
follows:
Before Aggregate
February 17 Redemption Price
----------- ----------------
1996 $ 1
1997 1,500,000
1998 3,000,000
1999 4,500,000
2000 5,500,000
F-19
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to the Offerings in October 1996, the ultimate redemption price of
$5,500,000 was being accrued ratably over the period from February 17, 1995
through February 17, 2000 and was treated as a reduction of predecessor
capital.
(12) STOCK-BASED COMPENSATION
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 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 the 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. As of December 31, 1996, no options
had been granted under this plan.
BONUS INCENTIVE PLAN
The Company has adopted the Bonus Incentive Plan, concurrent with 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 150,000 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 the Common Stock during that
year, are eligible to participate in the plan. Bonus awards will be
determined based upon 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. As of
December 31, 1996, no shares of Common Stock have been issued pursuant to this
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 adjustments 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 the 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 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
F-20
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 transferable other than by will, the laws of descent and
distribution or pursuant to a qualified domestic relations order. 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 in 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. The Board of Directors may
amend without stockholder approval, in any respect other than any amendment
that requires stockholder approval by law, and may modify any outstanding
option, including the repricing of non-qualifying options, with the consent of
the option holder. There are currently approximately 100 employees who are
eligible to participate in the plan.
During 1996, the Company granted 711,750 stock options pursuant to the
1996 Stock Option Plan, leaving 138,250 options available for future grant
under the plan as of December 31, 1996. The options granted during the year
have a term of ten (10) years and an exercise price of $12.50 per share, a
price equal to the market price on the date of the grant. The fair value, as
calculated under the provision of SFAS 123, of the options granted in 1996 was
$6.73 per share.
The Company applies APB 25 and related Interpretations in accounting for
its stock option awards. Accordingly, no compensation expense has been
recognized for its stock option awards. If compensation expense for the stock
option awards had been determined consistent with SFAS 123, the Company's net
loss and net loss per share, for the year ended December 31, 1996 would have
been adjusted to the following pro forma amounts:
Net loss $(6,285,276)
Net loss per share $ (0.97)
The pro forma net loss and pro forma net loss per share amounts noted
above are not likely to be representative of the pro forma amounts to be
reported in future years. Pro forma adjustments in future years will include
compensation expense associated with the options granted in 1996 plus
compensation expense associated with any options awarded in future years. As
a result, such pro forma compensation expense is likely to be higher than the
levels reflected for 1996 if any options are awarded in future years.
Under SFAS 123, the fair value of each stock option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1996:
Risk-free interest rate 6.25%
Expected life 5 years
Expected volatility 54%
Expected dividend yield 0%
(13) 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, 511 Tex L.C.
("511 Tex"), and 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,
1996. 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
amount of $294,000,
F-21
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1996, the Company paid $520,519 to A&P for goods and services
provided. During 1995, the Company paid $612,139 to A&P for goods and
services provided.
During 1996, 1995 and 1994, the Company paid $517,352, $592,920 and
$549,620, respectively, to CSL for management fees and lease payments on
equipment.
During 1996, the Company paid $50,742 to 511 Tex for office rent. During
1995, the Company paid $67,896 to 511 Tex for office rent.
During 1996, 1995 and 1994 the Company paid $484,000, $440,884 and
$2,458, respectively, to Valley for gas compression and salt water disposal
charges. During 1996, Valley paid the Company $383,139 for operating costs
of its salt water disposal wells and gas compressors. During 1995, Valley
paid the Company $109,399 for operating costs of its salt water disposal
wells and gas compressors.
On December 31, 1996, certain officers and related party entities owed
the Company $321,310 plus accrued interest of $1,431. During March
1997, the Company has received full payment for these amounts.
During 1996 and 1995 the LLC paid $75,000 each year to NationsBank
Capital Corp. for management fees. No management fees are due to NationsBank
Capital Corp. for any period subsequent to the Offerings.
(14) SUBSEQUENT EVENTS
On January 1, 1997 Costilla Petroleum Corporation was merged into its
parent, Costilla Energy, Inc. and Costilla Energy, Inc. assumed the business,
assets and liabilities of Costilla Petroleum Corporation. The merger was
effected for administrative purposes and to further reflect the Corporate
Reorganization whereby business will be conducted through the Company rather
than its predecessor, Costilla Energy, L.L.C.
On March 1, 1997 Valley Gathering Company was merged into its parent,
Costilla Energy, Inc. and Costilla Energy, Inc. assumed the business, assets
and liabilities of Valley Gathering Company. The merger was effected for
administrative purposes and to further reflect the Corporate Reorganization
whereby business will be conducted through the Company rather than its
predecessor, Costilla Energy, L.L.C.
On March 5, 1997 Statewide was dissolved. This dissolution was effected
for administrative purposes subsequent to the sale on December 31, 1996 of
substantially all of the assets of Statewide for net proceeds of
approximately $3.0 million. The remaining unsold producing oil and gas
property was transferred to its parent, Costilla Energy, Inc., on December
31, 1996.
On March 6, 1997, the Company sold its 40.5% interest in a Delaware
limited liability company which owns and operates a gas pipeline and
associated facilities in Louisiana. This membership interest had been held
for resale. The Company sold its interest to another member of the limited
liability company for $1,071,150. This amount represented the Company's
actual investment of $1,019,771 plus interest of $51,379 since the date of
the Company's original investment in April, 1996. The effective date of the
sale was the date of the Company's original investment in April, 1996. The
Company received a cash payment of $918,184 on March 6, 1997. In addition,
the Company received a $152,966 note due in full on July 1, 1997 plus
interest at 5.62%.
F-22
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) OIL AND GAS EXPENDITURES
The following table reflects costs incurred in oil and gas property
acquisition, exploration and development activities:
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------- ------- -------
(THOUSANDS)
Property acquisition costs:
Proved $39,505 $52,470 $ 9,649
Unproved 721 1,742 1,232
Exploration 6,760 5,627 2,167
Development 17,723 158 -
------- ------- -------
$64,709 $59,997 $13,048
------- ------- -------
------- ------- -------
(16) 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, 1995 and 1994 and by Williamson Petroleum Consultants as of December 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 $24.17 per Bbl and
a gas price of $3.96 per Mcf as of December 31, 1996 and an oil price of
$17.79 per Bbl and a gas price of $2.03 per Mcf as of December 31, 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
than those of currently producing oil and gas properties. Accordingly, these
estimates are expected to change as additional information becomes available
in the future.
F-23
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OIL AND NATURAL
CONDENSATE (MBBLS) GAS (MMCF)
------------------ ----------
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 . . . . . . . 1,782 5,440
Extensions and discoveries . . . . . . . . . . 1,169 13,581
Production . . . . . . . . . . . . . . . . . . (1,726) (9,205)
Sales of minerals-in-place . . . . . . . . . . (119) (482)
Purchases of minerals-in-place . . . . . . . . 5,106 32,786
------ -------
Balance, December 31, 1996 . . . . . . . . . . 17,000 120,272
------ -------
------ -------
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
December 31, 1996. . . . . . . . . . . . . . . 14,018 90,023
F-24
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 shows 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>
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- --------
(THOUSANDS)
<S> <C> <C> <C>
Future cash flows . . . . . . . . . . . . . . . . . . . $ 887,100 $ 350,653 $122,098
Future costs:
Production. . . . . . . . . . . . . . . . . . . . . . (323,288) (145,510) (46,345)
Development . . . . . . . . . . . . . . . . . . . . . (25,469) (16,806) (7,157)
--------- --------- --------
Future net cash flows before income taxes . . . . . . . 538,343 188,337 68,596
Future income taxes . . . . . . . . . . . . . . . . . . 144,836 - -
--------- --------- --------
Future net cash flows . . . . . . . . . . . . . . . . . 393,507 188,337 68,596
10% annual discount for estimated timing of
cash flows . . . . . . . . . . . . . . . . . . . . . . (165,273) (75,041) (31,817)
--------- --------- --------
Standardized measure of discounted net cash
flows. . . . . . . . . . . . . . . . . . . . . . . . . $ 228,234 $ 113,296 $ 36,779
--------- --------- --------
--------- --------- --------
</TABLE>
F-25
<PAGE>
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM
PROVED RESERVES (IN THOUSANDS)
<TABLE>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
-------- -------- -------
(THOUSANDS)
<S> <C> <C> <C>
Increase (decrease):
Purchase of minerals-in place . . . . . . . . . . . . $ 49,966 $ 77,343 $15,231
Extensions and discoveries and improved
recovery, net of future production and
development costs. . . . . . . . . . . . . . . . . . 25,910 9,799 4,072
Accretion of discount . . . . . . . . . . . . . . . . 11,330 3,678 2,638
Net change in sales prices net of production
costs. . . . . . . . . . . . . . . . . . . . . . . . 108,160 (3,422) 503
Changes in estimated future
development costs. . . . . . . . . . . . . . . . . . 4,187 (2,419) 940
Revisions of quantity estimates . . . . . . . . . . . 29,485 (2,855) (7,248)
Net change in income taxes. . . . . . . . . . . . . . (83,570) - -
Sales, net of production costs. . . . . . . . . . . . (32,146) (11,338) (5,286)
Sales of minerals in place. . . . . . . . . . . . . . (1,330) - -
Changes of production rates (timing) and
other. . . . . . . . . . . . . . . . . . . . . . . . 2,946 5,731 (448)
-------- -------- -------
Net increase. . . . . . . . . . . . . . . . . . . . 114,938 76,517 10,402
Standardized measure of discounted future
net cash flows:
Beginning of period. . . . . . . . . . . . . . . . 113,296 36,779 26,377
-------- -------- -------
End of period. . . . . . . . . . . . . . . . . . . $228,234 $113,296 $36,779
-------- -------- -------
-------- -------- -------
</TABLE>
The 1996 future cash flows shown above include amounts attributable to
proved undeveloped reserves requiring approximately $24.6 million of future
development costs. If these reserves are not developed, the standardized
measure of discounted future net cash flows for 1996 shown above would be
reduced by approximately $44.4 million.
F-26
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
*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
Indenture)
*4.2 Indenture dated as of October 1, 1996 by and between State Street
Bank and Trust Company, as Trustee, and the Company, as Issuer
**4.3 Form of Stock Certificate
***10.1 Credit Agreement dated October 10, 1996 between NationsBank of
Texas, N.A., as agent, the Lenders named therein and 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, 1995 between the Government of
the Republic of Moldova and Resource Development Company Ltd.,
L.L.C. (DE)
*10.4 Consolidation Agreement dated October 8, 1996
*10.5 1996 Stock Option Plan
*10.6 Outside Directors Stock Option Plan
*10.7 Employment Agreement between the Company and Bobby W. Page
effective June 30, 1996
*10.8 Employment Agreement between the Company and Cadell S. Liedtke
effective October 8, 1996
*10.9 Employment Agreement between the Company and Michael J. Grella
effective October 8, 1996
*10.10 Employment Agreement between the Company and Henry G. Musselman
effective October 8, 1996
*10.11 Purchase and Sale Agreement dated April 3, 1995 by and between
Parker & Parsley Development L.P., 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
*10.12 Purchase and Sale Agreement dated March 8, 1996 by and between
Parker & Parsley Development L.P., 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
*10.13 Bonus Incentive Plan
***10.14 Letter Agreement dated December 18, 1996 by and between Statewide
Minerals, Inc., as Seller, Boldrick Partners, as Buyer
<PAGE>
Exhibit
Number Description of Exhibit
- ------- ----------------------
***10.15 Stock Purchase Agreement dated December 31, 1996 by and between ERI
Investments, Inc. and the Company
***12.1 Computation of Ratio of Adjusted EBITDA to Interest Expense
**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.
***24.1 Power of Attorney
***24.2 Certified copy of resolution of Board of Directors of Costilla
Energy, Inc. authorizing signature by Power of Attorney
***27.1 Financial Data Schedule
- -------------------
* Incorporated by reference to Registration Statement on Form S-1, File
No. 333-08909
** Incorporated by reference to Registration Statement on Form S-1, File
No. 333-08913.
*** Filed herewith
<PAGE>
EXHIBIT 10.1
===============================================================================
CREDIT AGREEMENT
--------------------------------------
COSTILLA ENERGY, INC.
and
NATIONSBANK OF TEXAS, N.A.
as Agent
and CERTAIN FINANCIAL INSTITUTIONS
as Lenders
--------------------------------------
October 10, 1996
===============================================================================
<PAGE>
CREDIT AGREEMENT
TABLE OF CONTENTS
Page
CREDIT AGREEMENT........................................................... 1
ARTICLE I - Definitions and References..................................... 1
Section 1.1. Defined Terms............................................ 1
Section 1.2. Exhibits and Schedules; Additional Definitions........... 17
Section 1.3. Amendment of Defined Instruments......................... 17
Section 1.4. References and Titles.................................... 17
Section 1.5. Calculations and Determinations.......................... 17
ARTICLE II - The Loans..................................................... 18
Section 2.1. Making of the Loans...................................... 18
Section 2.2. Requests for Advances.................................... 20
Section 2.3. Use of Proceeds.......................................... 20
Section 2.4. Rate Elections........................................... 21
Section 2.5. Commitment Fees.......................................... 22
Section 2.6. Borrowing Base Fee....................................... 22
Section 2.7. Optional Prepayments..................................... 22
Section 2.8. Payments to Lenders...................................... 23
Section 2.9. Initial Borrowing Base................................... 24
Section 2.10. Subsequent Determinations of Borrowing Base............. 24
Section 2.11. Automatic Borrowing Base Reductions; Mandatory
Prepayments............................................ 25
Section 2.12. Borrower's Reduction of Borrowing Base.................. 26
Section 2.13. Capital Reimbursement................................... 26
Section 2.14. Increased Cost of LIBOR Rate Portions................... 27
Section 2.15. Availability............................................ 28
Section 2.16. Funding Losses.......................................... 28
Section 2.17. Reimbursable Taxes...................................... 29
ARTICLE III - Letters of Credit............................................ 29
Section 3.1. Letters of Credit........................................ 29
Section 3.2. Requesting Letters of Credit............................. 30
Section 3.3. Reimbursement and Participations......................... 31
Section 3.4. Letter of Credit Fees.................................... 32
Section 3.5. No Duty to Inquire....................................... 32
Section 3.6. LC Collateral............................................ 34
ARTICLE IV - Conditions Precedent to Lending............................... 35
Section 4.1. Documents to be Delivered................................ 35
Section 4.2. Additional Conditions Precedent.......................... 37
i
<PAGE>
ii
<PAGE>
ARTICLE V - Representations and Warranties................................. 38
Section 5.1. Borrower's Representations and Warranties................ 38
Section 5.2. Representation by Lenders................................ 42
ARTICLE VI - Covenants of Borrower......................................... 42
Section 6.1. Affirmative Covenants.................................... 42
Section 6.2. Negative Covenants....................................... 49
ARTICLE VII - Security..................................................... 54
Section 7.1. The Security............................................. 54
Section 7.2. Agreement to Deliver Security Documents.................. 54
Section 7.3. Perfection and Protection of Security Interests and
Liens................................................... 54
Section 7.4. Bank Accounts; Offset.................................... 54
Section 7.5. Production Proceeds...................................... 55
Section 7.6. Guaranties............................................... 55
ARTICLE VIII - Events of Default and Remedies.............................. 56
Section 8.1. Events of Default........................................ 56
Section 8.2. Remedies................................................. 58
Section 8.3. Indemnity................................................ 59
ARTICLE IX - Agent......................................................... 59
Section 9.1. Appointment and Authority................................ 59
Section 9.2. Exculpation, Agent's Reliance, Etc....................... 60
Section 9.3. Lenders' Credit Decisions................................ 60
Section 9.4. Indemnification.......................................... 61
Section 9.5. Rights as Lender......................................... 61
Section 9.6. Sharing of Set-Offs and Other Payments................... 61
Section 9.7. Investments.............................................. 62
Section 9.8. Benefit of Article IX.................................... 62
Section 9.9. Resignation.............................................. 62
ARTICLE X - Miscellaneous.................................................. 63
Section 10.1. Waivers and Amendments; Acknowledgements................ 63
Section 10.2. Survival of Agreements; Cumulative Nature............... 65
Section 10.3. Notices................................................. 65
Section 10.4. Joint and Several Liability; Parties in Interest........ 66
Section 10.5. Governing Law; Submission to Process.................... 66
Section 10.6. Limitation on Interest.................................. 66
Section 10.7. Termination; Limited Survival........................... 67
Section 10.8. Severability............................................ 67
Section 10.9. Counterparts............................................ 68
SECTION 10.10. WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC............ 68
Section 10.11. Assignments and Participations......................... 68
iii
<PAGE>
SCHEDULES AND EXHIBITS:
Lender Schedule
Schedule 1 - Disclosure Schedule
Schedule 2 - Security Schedule
Schedule 3 - Examined Properties
Exhibit A - Form of Note
Exhibit B - Request for Advances
Exhibit C - Rate Election
Exhibit D - Certificate Accompanying Financial Statements
Exhibit E - Opinion of Cotton, Bledsoe, Tighe & Dawson, P.C.,
counsel for Borrower
Exhibit F - Form of Guaranty
Exhibit G - Agreement to be Bound
iv
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is made as of October 10, 1996, by and among Costilla
Energy, Inc., a Delaware corporation ("Borrower"), NationsBank of Texas, N.A. as
Agent ("Agent"), and the Lenders referred to below.
WHEREAS, Borrower has obtained capital and loans through the issuance of
its common stock under the Registration Statement and the Senior Unsecured Notes
pursuant to the Indenture.
WHEREAS, funds obtained from the foregoing have been used to repay in full
certain bridge loans made to Costilla LLC by NationsBridge, L.L.C.
WHEREAS, Borrower has requested that Lenders make new loans to Borrower for
the purposes described herein; and
WHEREAS, Lenders are willing to do so on the terms and conditions contained
in this Agreement;
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained herein the parties hereto agree as follows:
ARTICLE I - DEFINITIONS AND REFERENCES
Section 1.1. DEFINED TERMS. As used in this Agreement, each of the
following terms has the meaning given it in this Section 1.1 or in the sections
and subsections referred to below:
"A&P NOTES" means those certain promissory notes dated December 31, 1994
and May 22, 1996, respectively, by A&P Meter Service and Supply, Inc., the first
originally made payable to the order of CSL Partners in the original principal
amount of $370,000, with Allonge by Borrower making note payable to the order of
Agent, and the second originally made payable to Costilla LLC in the amount of
$247,000, with Allonge by Borrower making note payable to the order of Agent.
"ACQUISITION ADVANCES" has the meaning given it in Section 2.1(c)
1
<PAGE>
"ADJUSTED LIBOR RATE" means, with respect to each particular LIBOR Rate
Portion and the associated LIBOR Rate and Reserve Percentage, the rate per annum
calculated by Agent (rounded upwards, if necessary, to the next higher 0.01%)
determined on a daily basis pursuant to the following formula:
Adjusted LIBOR Rate =
LIBOR RATE + LIBOR Spread
-----------------------------
(100.0% - Reserve Percentage)
If the Reserve Percentage changes during the Interest Period for a LIBOR Rate
Portion, Agent may, at its option, either change the Reserve Percentage for
such LIBOR Rate Portion, without notice to Borrower, or leave it unchanged for
the duration of such Interest Period. The Adjusted LIBOR Rate shall in no
event, however, exceed the Highest Lawful Rate.
"ADVANCES" means, collectively, all Working Capital Advances and all
Acquisition Advances.
"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. A Person shall be
deemed to be "controlled by" any other Person if such other Person possesses,
directly or indirectly, the power:
(a) to vote 10% or more of the securities (on a fully diluted basis)
having ordinary voting power for the election of directors or managing
general partners; or
(b) to direct or cause the direction of the management and policies
of such Person whether by contract or otherwise.
"AGENT" means NationsBank, as Agent hereunder, and its successors in such
capacity.
"AGREEMENT" means this Credit Agreement.
"APPROVED STOCKHOLDERS" means each of Cadell S. Liedtke, Michael J. Grella
and Henry G. Musselman and the spouses, 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.
"AUTOMATIC BORROWING BASE REDUCTION" has the meaning set forth in Section
2.11.
"AUTOMATIC BORROWING BASE REDUCTION DATE" has the meaning set forth in
Section 2.11.
"BASE RATE" means the sum of (a) the greater of the Prime Rate from time to
time
2
<PAGE>
in effect or (ii) the Federal Funds Rate from time to time in effect plus
one-half percent (0.5%) per annum, PLUS (b) the Base Rate Spread. As used in
this paragraph, the "PRIME RATE" means the rate of interest established by
NationsBank from time to time as its "prime rate". Such rate is set by
NationsBank as a general reference rate of interest, taking into account such
factors as it may deem appropriate, it being understood that many of
NationsBank's commercial or other loans are priced in relation to such rate,
that it is not necessarily the lowest or the best rate actually charged to any
customer, that it may not correspond with further increases or decreases in
interest rates charged by other lenders or market rates in general and that
NationsBank may make various commercial or other loans at rates of interest
having no relationship to such rate. If the Prime Rate of NationsBank changes
after the date hereof the Base Rate shall be automatically increased or
decreased, as the case may be, without notice to Borrower from time to time as
of the effective time of each change in the Prime Rate. The Base Rate shall
in no event, however, exceed the Highest Lawful Rate.
"BASE RATE PORTION" means that portion of the unpaid principal balance of
the Loans which is not made up of LIBOR Rate Portions.
"BASE RATE SPREAD" shall mean for each day, the rate based on the
Utilization Percentage for such day and calculated pursuant to the following
table:
===============================================================================
UTILIZATION PERCENTAGE BASE RATE SPREAD
- -------------------------------------------------------------------------------
less than fifty percent (50%) zero percent (0.000%) per annum
- -------------------------------------------------------------------------------
equal to or greater than fifty one-quarter of one percent (0.250%)
percent (50%), but less than per annum
seventy-five percent (75%)
- -------------------------------------------------------------------------------
equal to or greater than one-half of one percent (0.500%) per
seventy-five percent (75%) annum
===============================================================================
The Base Rate for any Base Rate Portion shall change, without notice to
Borrower, whenever the Utilization Percentage changes.
"BORROWER" means Costilla Energy, Inc., a Delaware corporation.
"BORROWER'S ADJUSTED CONSOLIDATED NET INCOME" means for any period,
Borrower's Consolidated net income for such period, provided that there shall be
excluded from such net income (to the extent otherwise included therein) the
following: (a) the net income of any Person in which Borrower or any
Consolidated subsidiary of Borrower has an interest (which interest does not
cause the net income of such other Person to be Consolidated with the net income
of Borrower in accordance with GAAP), except to the extent of the amount of
dividends or distributions actually paid in such period by such other Person to
the Borrower or to a Consolidated Subsidiary of Borrower, as the case may be,
(b) the net income (but not loss) of any Consolidated Subsidiary of Borrower to
the extent that the declaration or payment of dividends or similar distributions
or transfers or loans by that Consolidated Subsidiary is not at
3
<PAGE>
the time permitted by operation of the terms of its charter or any agreement,
instrument, law, rule or regulation applicable to such Consolidated
Subsidiary, or is otherwise restricted or prohibited in each case determined
in accordance with GAAP; (c) any extraordinary gains or losses, including
gains or losses attributable to Property sales not in the ordinary course of
business; and (d) the cumulative effect of a change in accounting principles
and any gains or losses attributable to write-ups or write-downs of assets.
"BORROWER'S CONSOLIDATED DEBT" means all Consolidated liabilities and
similar balance sheet items of Borrower, together with all other Restricted Debt
of Related Persons.
"BORROWER'S CONSOLIDATED TANGIBLE NET WORTH" means the remainder of all
Consolidated assets of Borrower, other than intangible assets (including without
limitation as intangible assets such assets as patents, copyrights, licenses,
franchises, goodwill, trade names, trade secrets and leases other than oil, gas
or mineral leases or leases required to be capitalized under GAAP), minus
Borrower's Consolidated Debt.
"BORROWING BASE" means, at the particular time in question, either the
amount provided for in Section 2.09 or the amount determined by Agent in
accordance with the provisions of Section 2.10, as reduced automatically
pursuant to Section 2.11 or by Borrower pursuant to Section 2.12; provided,
however, that in no event shall the Borrowing Base ever exceed the amount equal
to the Maximum Loan Amount.
"BORROWING BASE DEFICIENCY" means, at the time in question, the amount by
which (a) the sum of (i) the aggregate unpaid principal balance of the Loans
outstanding at such time PLUS (ii) the aggregate amount of LC Obligations at
such time, exceeds (b) the Borrowing Base in effect at such time.
"BUSINESS DAY" means a day, other than a Saturday or Sunday, on which
commercial banks are open for business with the public in Dallas, Texas. Any
Business Day in any way relating to LIBOR Rate Portions (such as the day on
which an Interest Period begins or ends) must also be a day on which, in the
judgment of Agent, significant transactions in dollars are carried out in the
interbank eurocurrency market.
"CHANGE IN CONTROL" means any of the following:
(a) 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 25% of the total Voting Stock of the
Borrower; or
(b) the Borrower is merged with or into or consolidated with another
Person and immediately after giving effect to the merger or consolidation, (i)
less than 25% 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 Borrower immediately prior to such merger or
4
<PAGE>
consolidation, and (ii) 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 25% of the total voting
power of the Voting Stock of the surviving or resulting Person; or
(c) the Borrower, 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 Borrower 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 Borrower or a wholly owned Subsidiary); or
(d) during any consecutive two-year period, individuals who at the
beginning of such period constituted the board of directors of the Borrower
(together with any new directors whose election by such board of directors or
whose nomination for election by the stockholders of the Borrower 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 Borrower then in office; or
(e) the liquidation or dissolution of the Borrower.
"COLLATERAL" means all property of any kind which is subject to a Lien in
favor of Lenders (or in favor of Agent for the benefit of Lenders) or which,
under the terms of any Security Document, is purported to be subject to such a
Lien.
"COLLATERAL ACCOUNT" has the meaning given it in the Collateral Account
Pledge Agreement (as defined in the Security Schedule).
"CONSOLIDATED" refers to the consolidation of any Person, in accordance
with GAAP, with its properly consolidated subsidiaries. References herein to a
Person's Consolidated financial statements, financial position, financial
condition, liabilities, etc. refer to the consolidated financial statements,
financial position, financial condition, liabilities, etc. of such Person and
its properly consolidated subsidiaries.
"COSTILLA LLC" means Costilla Energy, L.L.C., a Texas limited liability
company, as predecessor by merger to Borrower.
"DEBT" means, as to any Person, all indebtedness, liabilities and
obligations of such Person, whether matured or unmatured, liquidated or
unliquidated, primary or secondary, direct or indirect, absolute, fixed or
contingent, and whether or not required to be considered pursuant to GAAP.
5
<PAGE>
"DEFAULT" means any Event of Default and any default, event or condition
which would, with the giving of any requisite notices and the passage of any
requisite periods of time, constitute an Event of Default.
"DETERMINATION DATE" has the meaning given it in Section 2.10.
"DISCLOSURE REPORT" means either a notice given by Borrower under Section
6.1(d) or a certificate given by Borrower's chief financial officer under
Section 6.1(b)(ii).
"DISCLOSURE SCHEDULE" means Schedule 1 hereto and the documents attached
thereto or referred to therein.
"EBITDA" means, for any period, the sum (determined without duplication on
a Consolidated basis and in accordance with GAAP) of (a) Borrower's Consolidated
Adjusted Net Income (or net loss), and (b) Borrower's Consolidated taxes,
interest, exploration and abandonment costs, depreciation, amortization and
depletion expenses and extraordinary loss resulting from extinguishment of Debt
taken into account in determining such net income (or net loss) for such period.
"ENERGY" means Costilla Redeco Energy, L.L.C., a Texas limited liability
company.
"ENGINEERING REPORT" means the Initial Engineering Report and each
engineering report delivered pursuant to Section 6.1(b)(v).
"ENVIRONMENTAL LAWS" means any and all federal, state and local statutes,
laws, regulations, ordinances, rules, judgments, orders, decrees, permits,
concessions, grants, franchises, licenses, agreements or other governmental
restrictions relating to the environment or to emissions, discharges, releases
or threatened releases of pollutants, contaminants, chemicals, or industrial,
toxic or hazardous substances or wastes into the environment including ambient
air, surface water, ground water, or land, or otherwise relating to the
manufacture, processing, distribution use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants, chemicals, or industrial,
toxic or hazardous substances or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, together with all rules and regulations promulgated
with respect thereto.
"ERISA PLAN" means any employee pension benefit plan subject to Title IV of
ERISA maintained by any Related Person or any Affiliate thereof with respect to
which any Related Person has a fixed or contingent liability.
"EVALUATION DATE" means each of the following:
6
<PAGE>
(a) Each date which either Borrower or Agent (acting on its own
behalf or at the request of Majority Lenders), at their respective options,
specifies as a date as of which the Borrowing Base is to be redetermined,
PROVIDED THAT each such date must be the last date of a current calendar
month and that neither Borrower nor Agent (whether acting on its own behalf
or at the request of Majority Lenders) shall be entitled to request any
such redetermination more than once during any six-month period; and
(b) February 28 and July 31 of each year, beginning February 28,
1997.
"EVENT OF DEFAULT" has the meaning given it in Section 8.1.
"EXCHANGE ACT" means the Securities and Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100th of one percent (1%)) equal to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of Dallas, Texas on the Business
Day next succeeding such day; PROVIDED, that (a) if the day for which such rate
is to be determined is not a Business Day, the Federal Funds Rate for such day
shall be such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day, and (b) if such rate is not so
published for any day, the Federal Funds Rate for such day shall be such rate as
reported by any publicly available source of similar market data selected by
Agent that, in Agent's sole judgment reasonably exercised, accurately reflects
such rate on overnight Federal funds transactions.
"FINAL MATURITY DATE" means the fifth anniversary of the date hereof or, if
earlier, the date on which the Notes become due and payable in full.
"FIRST REDUCTION DATE" means September 30, 1998.
"FISCAL QUARTER" means a three-month period ending on March 31, June 30,
September 30 or December 31 of any year.
"FISCAL YEAR" means a twelve-month period ending on December 31 of any
year.
"GAAP" means those generally accepted accounting principles and practices
which are recognized as such by the Financial Accounting Standards Board (or any
generally recognized successor) and which, in the case of Borrower and its
Consolidated subsidiaries, are applied for all periods after the date hereof in
a manner consistent with the manner in which such principles and practices were
applied to the audited Initial Financial Statements. If any change in any
accounting principle or practice is required by the Financial Accounting
Standards
7
<PAGE>
Board (or any such successor) in order for such principle or practice to
continue as a generally accepted accounting principle or practice, all
reports and financial statements required hereunder with respect to Borrower
or with respect to Borrower and its Consolidated subsidiaries may be prepared
in accordance with such change, but all calculations and determinations to be
made hereunder may be made in accordance with such change only after notice
of such change is given to each Lender and Majority Lenders agree to such
change insofar as it affects the accounting of Borrower or of Borrower and
its Consolidated subsidiaries.
"GUARANTOR" means any Subsidiary of Borrower which hereafter executes and
delivers a guaranty to Agent pursuant to Section 7.6, and any other Person
who has guaranteed some or all of the Obligations and has been accepted by
Agent as a Guarantor.
"HAZARDOUS MATERIALS" means any substances categorized as hazardous under
any Environmental Law, or any substances that may form the basis of liability
under any Environmental Law.
"HIGHEST LAWFUL RATE" means, with respect to each Lender, the maximum
nonusurious rate of interest that such Lender is permitted under applicable
law to contract for, take, charge, or receive with respect to its Loans. All
determinations herein of the Highest Lawful Rate, or of any interest
determined by reference to the Highest Lawful Rate, shall be made separately
for each Lender as appropriate to assure that the Loan Documents are not
construed to obligate any Person to pay interest to any Lender at a rate in
excess of the Highest Lawful Rate applicable to such Lender.
"INDENTURE" means that certain indenture by and between Borrower, as
issuer, and State Street Bank and Trust Company, as Trustee, pursuant to
which Borrower issued the Senior Unsecured Notes.
"INITIAL ENGINEERING REPORT" means the engineering reports concerning oil
and gas properties of Related Persons dated July 18, 1996, prepared by
Williamson Petroleum Consultants, Inc. as of April 1, 1996.
"INITIAL FINANCIAL STATEMENTS" means (i) the audited annual Consolidated
financial statements of Costilla LLC dated as of December 31, 1995, and (ii)
the unaudited Consolidated and consolidating financial statements of Costilla
LLC for the six months ended June 30, 1996.
"INTEREST PERIOD" means, with respect to each particular LIBOR Rate
Portion of a Loan, a period of 1, 2, 3 or 6 months, as specified in the Rate
Election applicable thereto, beginning on and including the date specified in
such Rate Election (which must be a Business Day), and ending on but not
including the same day of the month as the day on which it began (e.g., a
period beginning on the third day of one month shall end on but not include
the third day of another month), provided that each Interest Period which
would otherwise end on a day which
8
<PAGE>
is not a Business Day shall end on the next succeeding Business Day (unless
such next succeeding Business Day is the first Business Day of a calendar
month, in which case such Interest Period shall end on the immediately
preceding Business Day). No Interest Period may be elected which would
extend past the date on which the associated Note is due and payable in full.
"ISSUING BANK" means NationsBank in its capacity as the issuer of Letters
of Credit hereunder, and its successors in such capacity.
"LATE PAYMENT RATE" means eighteen percent (18%) per annum, but in no event
to exceed the Highest Lawful Rate.
"LC APPLICATION" means any application for a letter of credit hereafter
made by Borrower to Issuing Bank.
"LC COLLATERAL" has the meaning given it in Section 3.6.
"LC CONDITIONS" has the meaning given it in Section 3.1.
"LC OBLIGATIONS" means at the time in question, the sum of the Matured LC
Obligations plus the Maximum Drawing Amount.
"LENDERS" means each signatory hereto (other than Borrower), including
NationsBank in its capacity as a Lender hereunder rather than as Agent or
Issuing Bank, and the successors of each as holder of a Note.
"LETTER OF CREDIT" means any standby or commercial letter of credit issued
by Issuing Bank at the application of Borrower, which may be issued for the
account of any Related Person, PROVIDED, any and all reimbursement obligations,
fees and other amounts payable in connection with any and all such Letters of
Credit shall be Obligations of Borrower as set forth in Article III.
"LIBOR RATE" means, with respect to each particular LIBOR Rate Portion
within a LIBOR Tranche and with respect to the related Interest Period, the rate
of interest per annum determined by Agent in accordance with its customary
general practices to be representative of the rates at which deposits of dollars
are offered to NationsBank at approximately 9:00 a.m. Dallas, Texas time two
Business Days prior to the first day of such Interest Period (by prime banks in
the interbank eurocurrency market which have been selected by NationsBank in
accordance with its customary general practices) for delivery on the first day
of such Interest Period in an amount equal or comparable to the aggregate amount
of the LIBOR Rate Portions of NationsBank within such LIBOR Tranche and for a
period of time equal or comparable to the length of such Interest Period. The
LIBOR Rate determined by Agent with respect to a particular LIBOR Rate Portion
shall be fixed at such rate for the duration of the associated
9
<PAGE>
Interest Period. If Agent is unable so to determine the LIBOR Rate for any
LIBOR Rate Portion, Borrower shall be deemed not to have elected such LIBOR
Rate Portion.
"LIBOR RATE PORTION" means any portion of the unpaid principal balance of
a Loan which Borrower designates as such in a Rate Election.
"LIBOR SPREAD" shall mean for each day the percentage rate based on the
Utilization Percentage for such day and calculated pursuant to the following
table:
===============================================================================
UTILIZATION PERCENTAGE LIBOR SPREAD
---------------------- ------------
- -------------------------------------------------------------------------------
less than fifty percent (50%) one and three-eighths of one percent
(1.375%) per annum
- -------------------------------------------------------------------------------
equal to or greater than fifty percent one and five-eighths of one percent
(50%), but less than seventy-five (1.625%) per annum
percent (75%)
- -------------------------------------------------------------------------------
equal to or greater than seventy-five two percent (2.000%) per annum
percent (75%)
===============================================================================
The LIBOR Spread for any LIBOR Rate Portion shall change, without notice to
Borrower, whenever the Utilization Percentage changes. The LIBOR Spread shall
in no event, however, exceed the Highest Lawful Rate.
"LIBOR TRANCHE" has the meaning given to it in Section 2.4.
"LIEN" means, with respect to any property or assets, any right or interest
therein of a creditor to secure Debt owed to him or any other arrangement with
such creditor which provides for the payment of such Debt out of such property
or assets or which allows him to have such Debt satisfied out of such property
or assets prior to the general creditors of any owner thereof, including any
lien, mortgage, security interest, pledge, deposit, production payment, rights
of a vendor under any title retention or conditional sale agreement or lease
substantially equivalent thereto, tax lien, mechanic's or materialman's lien, or
any other charge or encumbrance for security purposes, whether arising by law or
agreement or otherwise, but excluding any right of offset which arises without
agreement in the ordinary course of business. "LIEN" also means any filed
financing statement, any registration of a pledge (such as with an issuer of
uncertificated securities), or any other arrangement or action which would serve
to perfect a Lien described in the preceding sentence, regardless of whether
such financing statement is filed, such registration is made, or such
arrangement or action is undertaken before or after such Lien exists.
"LOAN" has the meaning given it in Section 2.1(a). "LOANS" means all
Lenders' Loans.
10
<PAGE>
"LOAN DOCUMENTS" means this Agreement, the Notes, the LC Applications, the
Letters of Credit, the Security Documents, and all other agreements,
certificates, documents, instruments and writings at any time delivered in
connection herewith or therewith (exclusive of term sheets, commitment letters,
correspondence and similar documents used in the negotiation hereof, except to
the extent the same contain information about Borrower or its Affiliates,
properties, business or prospects).
"MAJORITY LENDERS" means at any time Lenders collectively having Percentage
Shares totalling in the aggregate at least sixty-six and two-thirds percent
(66 2/3%).
"MATURED LC OBLIGATIONS" means all amounts paid by Issuing Bank on drafts
or demands for payment drawn or made under or purported to be under any Letter
of Credit (or under or in connection with any LC Application) which have not
been repaid to Issuing Bank (with the proceeds of an Advance or otherwise).
"MAXIMUM DRAWING AMOUNT" means at the time in question the sum of the
maximum amounts which Issuing Bank might then or thereafter be called upon to
advance under all Letters of Credit then outstanding.
"MAXIMUM LOAN AMOUNT" means the sum of the Maximum Working Capital Advance
Amount and the Maximum Acquisition Advance Amount.
"MAXIMUM ACQUISITION ADVANCE AMOUNT" means the amount of $30,000,000.
"MAXIMUM WORKING CAPITAL ADVANCE AMOUNT" means (i) from the date hereof
until the date on which Petroleum is merged into Borrower, with Borrower being
the surviving entity, the amount of $3,000,000 and thereafter (ii) the amount of
$20,000,000.
"MORTGAGE" has the meaning given it in the Security Schedule.
"MORTGAGED PROPERTIES" has the meaning given it in the Mortgage.
"NATIONSBANK" means NationsBank of Texas, N.A. in its individual capacity,
and its successors and assigns.
"NET PROCEEDS OF EQUITY" means all proceeds of the sale of equity interests
in Borrower or any of its Subsidiaries, net of out-of-pocket costs of issuance
and sale.
"NOTE" has the meaning given to it in Section 2.1(a). "NOTES" means all
Lenders' Notes.
11
<PAGE>
"OBLIGATIONS" means all Debt from time to time owing by any Related Person
to Agent or any Lender under or pursuant to any of the Loan Documents, including
all LC Obligations. "OBLIGATION" means any part of the Obligations.
"OPERATING" means Costilla Redeco Operating, L.L.C., a Texas limited
liability company.
"PERCENTAGE SHARE" means, with respect to any Lender (a) when used in
Sections 2.1, 2.4, 2.5 or 3.3 in any Request for Advance or when no Loans are
outstanding hereunder, the percentage set forth opposite such Lender's name with
respect to the Loans on the Lender Schedule attached hereto, and (b) when used
otherwise, the percentage obtained by dividing (i) the sum of the unpaid
principal balance of such Lender's Loans at the time in question plus the
Matured LC Obligations which such Lender has funded pursuant to Section 3.3(c)
plus the portion of the Maximum Drawing Amount which such Lender might be
obligated to fund under Section 3.3(c), by (ii) the sum of the aggregate unpaid
principal balance of all Loans at such time plus the aggregate amount of
LC Obligations outstanding at such time.
"PERMITTED INVESTMENTS" means the following investments in or, in the case
of clauses (g) through (j) below, investments in, capital contributions to
and/or loans to:
(a) investments in open market commercial paper, maturing within 220
days after acquisition thereof, which has the highest or second highest
credit rating given by either Rating Agency;
(b) investments in marketable obligations, maturing within 180 days
after acquisition thereof, 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;
(c) investments in demand deposits, and time deposits (including
certificates of deposit) maturing within 12 months from the date of deposit
thereof, with any office of any Lender or with a domestic office of any
national or state bank or trust company which is organized under the laws
of the United States of America or any state therein, which has capital,
surplus and undivided profits of at least $500,000,000, and whose
certificates of deposit have at least the third highest credit rating given
by either Rating Agency;
(d) investments in oil and gas leases to which proved oil and/or gas
reserves are attributable;
(e) investments in oil and gas leases to which no proved oil and/or
gas reserves are attributable in an amount not to exceed $2,500,000 during
any Fiscal Year,
12
<PAGE>
after deducting any portion of such investments which have been reimbursed
to Borrower by Persons other than the Related Persons;
(f) investments in the A&P Notes;
(g) investments in and/or loans to Republic Gas Partners, L.L.C., a
Texas limited liability company, in an amount not to exceed $1,000,000 in
the aggregate at any time;
(h) investments in and/or loans to Petroleum;
(i) investments in and/or loans to Energy and Operating in a
collective aggregate amount not to exceed $2,500,000 during any Fiscal
Year; and
(j) investments in and/or loans to Subsidiaries of Borrower (other
than Energy, Operating and Petroleum) in a collective aggregate amount not
to exceed $2,000,000 during any Fiscal Year.
As used in the foregoing definition (and elsewhere herein), "RATING AGENCY"
means either Standard & Poor's Ratings Group (a division of McGraw Hill, Inc.)
or Moody's Investors Service, Inc., or their respective successors.
"PERSON" means an individual, corporation, partnership, limited liability
company, association, joint stock company, trust or trustee thereof, estate or
executor thereof, unincorporated organization or joint venture, court or
governmental unit or any agency or subdivision thereof, or any other legally
recognizable entity.
"PETROLEUM" means Costilla Petroleum Corporation, a Texas corporation.
"PROHIBITED LIEN" means any Lien not expressly allowed under Section
6.2(b).
"QUALIFIED PROPERTIES" means oil and gas properties to be purchased by
Borrower which meet all of the following criteria:
(a) at least ninety percent (90%) of the reserve value attributable
to such properties (calculated by Borrower under pricing guidelines
established by Agent from time to time in accordance with its customary
practices and standards for loans in similar amounts to borrowers similarly
situated, at the times and under the circumstances then prevailing which
are considered by Agent in its discretion) is characterized as proved
developed producing reserves under standards recognized by the oil and gas
industry.
13
<PAGE>
(b) all reserves attributable to such properties are located in the
United States of America or in off-shore areas under the jurisdiction of
any State or the continental United States of America.
(c) the interest to be acquired by Borrower in such properties is a
direct working interest or royalty interest.
(d) Borrower has delivered to Agent title opinions covering a
substantial part of the reserves (as designated by Agent) in accordance
with guidelines established by Agent from time to time in its sole
discretion.
(e) Borrower has performed environmental due diligence on such
properties in accordance with standards established by Agent from time to
time in its sole discretion.
(f) Upon the purchase of such properties by Borrower, such properties
shall become subject to a first-priority perfected Lien in favor of Agent
for the benefit of Lenders to secure the Obligations.
"RATE ELECTION" has the meaning given to it in Section 2.4.
"REGISTRATION STATEMENT" means, collectively, those two S-1 Registration
Statements filed by Borrower with the Securities and Exchange Commission for the
issuance of common stock of Borrower, one of which became effective on October
2, 1996 and one of which became effective on October 8, 1996.
"REGULATION D" means Regulation D of the Board of Governors of the Federal
Reserve System as from time to time in effect.
"RELATED PERSON" means any of Borrower and each Subsidiary of Borrower.
"REQUEST FOR ADVANCE" means a written or telephonic request, or a written
confirmation, made by Borrower which meets the requirements of Section 2.2.
"RESERVE PERCENTAGE" means, on any day with respect to each particular
LIBOR Rate Portion in a LIBOR Tranche, the maximum reserve requirement, as
determined by Agent (including without limitation any basic, supplemental,
marginal, emergency or similar reserves), expressed as a percentage and rounded
to the next higher 0.01%, which would then apply to NationsBank under Regulation
D with respect to "Eurocurrency liabilities" (as such term is defined in
Regulation D) equal in amount to NationsBank's LIBOR Rate Portion in such LIBOR
Tranche, were NationsBank to have any such "Eurocurrency liabilities". If such
reserve requirement shall change after the date hereof, the Reserve Percentage
shall be automatically increased or decreased, as the case may be, from time to
time as of the effective time of each such change in such reserve requirement.
14
<PAGE>
"RESTRICTED DEBT" of any Person means Debt in any of the following
categories:
(a) Debt for borrowed money,
(b) Debt constituting an obligation to pay the deferred purchase
price of property,
(c) Debt evidenced by a bond, debenture, note or similar instrument,
(d) Debt which (i) would under GAAP be shown on such Person's balance
sheet as a liability, and (ii) is payable more than one year from the date
of creation thereof (other than reserves for taxes and reserves for
contingent obligations),
(e) Debt arising under futures contracts, swap contracts, or similar
agreements,
(f) Debt constituting principal under leases capitalized in
accordance with GAAP,
(g) Debt arising under conditional sales or other title retention
agreements,
(h) Debt owing under direct or indirect guaranties of Debt of any
other Person or constituting obligations to purchase or acquire or to
otherwise protect or insure a creditor against loss in respect of Debt of
any other Person (such as obligations under working capital maintenance
agreements, agreements to keep-well, or agreements to purchase Debt,
assets, goods, securities or services), but excluding endorsements in the
ordinary course of business of negotiable instruments in the course of
collection,
(i) Debt (for example, repurchase agreements) consisting of an
obligation to purchase securities or other property, if such Debt arises
out of or in connection with the sale of the same or similar securities or
property,
(j) Debt with respect to letters of credit or applications or
reimbursement agreements therefor,
(k) Debt with respect to payments received in consideration of oil,
gas, or other minerals yet to be acquired or produced at the time of
payment (including obligations under "take-or-pay" contracts to deliver gas
in return for payments already received, the undischarged balance of any
production payment created by such Person or for the creation of which such
Person directly or indirectly received payment, and obligations with
respect to gas imbalances), OR
15
<PAGE>
(l) Debt with respect to other obligations to deliver goods or
services in consideration of advance payments therefor;
provided, however, that the "RESTRICTED DEBT" of any Person shall not include
Debt that was incurred by such Person on ordinary trade terms to vendors,
suppliers, or other Persons providing goods and services for use by such Person
in the ordinary course of its business, unless and until such Debt is
outstanding more than ninety (90) days past the original invoice or billing date
therefor.
"SECURITY DOCUMENTS" means the instruments listed in the Security Schedule
and all other security agreements, deeds of trust, mortgages, chattel mortgages,
pledges, guaranties, financing statements, continuation statements, extension
agreements and other agreements or instruments now, heretofore, or hereafter
delivered by any Related Person to Agent in connection with this Agreement or
any transaction contemplated hereby to secure or guarantee the payment of any
part of the Obligations or the performance of any Related Person's other duties
and obligations under the Loan Documents.
"SECURITY SCHEDULE" means Schedule 2 hereto.
"SENIOR UNSECURED NOTES" means the $100,000,000 of Senior Unsecured Notes
due 2006 issued under the Indenture.
"SMI" means Statewide Minerals, Inc., a Texas corporation.
"SUBSIDIARY" means, with respect to any Person, any corporation,
association, partnership, joint venture, or other business or corporate entity,
enterprise or organization which is directly or indirectly (through one or more
intermediaries) controlled by or owned fifty percent or more by such Person.
"TERMINATION EVENT" means (a) the occurrence with respect to any ERISA Plan
of (i) a reportable event described in Sections 4043(b)(5) or (6) of ERISA or
(ii) any other reportable event described in Section 4043(b) of ERISA other than
a reportable event not subject to the provision for 30-day notice to the Pension
Benefit Guaranty Corporation pursuant to a waiver by such corporation under
Section 4043(a) of ERISA, or (b) the withdrawal of any Related Person or of any
Affiliate of any Related Person from an ERISA Plan during a plan year in which
it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or
(c) the filing of a notice of intent to terminate any ERISA Plan or the
treatment of any ERISA Plan amendment as a termination under Section 4041 of
ERISA, or (d) the institution of proceedings to terminate any ERISA Plan by the
Pension Benefit Guaranty Corporation under Section 4042 of ERISA, or (e) any
other event or condition which might constitute grounds under Section 4042 of
ERISA for the termination of, or the appointment of a trustee to administer, any
ERISA Plan.
16
<PAGE>
"UTILIZATION PERCENTAGE" means for each day the percentage determined for
such day by dividing (i) the sum of the aggregate unpaid principal balance of
the Loans at the end of such day PLUS the amount of all outstanding LC
Obligations at the end of such day by (ii) the amount of the Borrowing Base in
effect at the end of such day.
"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, including but not limited to non-voting capital stock of Borrower
which is convertible at any time into a class of capital stock normally entitled
to vote in the election of directors.
"WORKING CAPITAL" means funds used for general corporate purposes,
including the acquisition of oil and gas properties.
"WORKING CAPITAL ADVANCES" has the meaning given it in Section 2.1(b).
Section 1.2. EXHIBITS AND SCHEDULES; ADDITIONAL DEFINITIONS. All Exhibits
and Schedules attached to this Agreement are a part hereof for all purposes.
Reference is hereby made to the Security Schedule for the meaning of certain
terms defined therein and used but not defined herein, which definitions are
incorporated herein by reference.
Section 1.3. AMENDMENT OF DEFINED INSTRUMENTS. Unless the context
otherwise requires or unless otherwise provided herein the terms defined in this
Agreement which refer to a particular agreement, instrument or document also
refer to and include all renewals, extensions, modifications, amendments and
restatements of such agreement, instrument or document, provided that nothing
contained in this section shall be construed to authorize any such renewal,
extension, modification, amendment or restatement.
Section 1.4. REFERENCES AND TITLES. All references in this Agreement to
Exhibits, Schedules, articles, sections, subsections and other subdivisions
refer to the Exhibits, Schedules, articles, sections, subsections and other
subdivisions of this Agreement unless expressly provided otherwise. Titles
appearing at the beginning of any subdivisions are for convenience only and do
not constitute any part of such subdivisions and shall be disregarded in
construing the language contained in such subdivisions. The words "this
Agreement", "this instrument", "herein", "hereof", "hereby", "hereunder" and
words of similar import refer to this Agreement as a whole and not to any
particular subdivision unless expressly so limited. The phrases "this section"
and "this subsection" and similar phrases refer only to the sections or
subsections hereof in which such phrases occur. The word "or" is not exclusive,
and the word "including" (in its various forms) means "including without
limitation". Pronouns in masculine, feminine and neuter genders shall be
construed to include any other gender, and words in the singular form shall be
construed to include the plural and vice versa, unless the context otherwise
requires.
17
<PAGE>
Section 1.5. CALCULATIONS AND DETERMINATIONS. All calculations of
interest made under the Loan Documents with respect to LIBOR Rate, Adjusted
LIBOR Rate, LIBOR Rate Spread and any other calculations with respect to LIBOR
Rate Portions shall be made on the basis of actual days elapsed (including the
first day but excluding the last) and a year of 360 days and all other
calculations made under the Loan Documents shall be made on the basis of actual
days elapsed (including the first day but excluding the last) and a year of 365
or 366 days, as applicable. Each determination by Agent, any Lender or Issuing
Bank of amounts to be paid under Sections 2.13 through 2.17 or any other matters
which are to be determined hereunder by Agent, any Lender or Issuing Bank (such
as any LIBOR Rate, LIBOR Spread, Utilization Percentage, Adjusted LIBOR Rate,
Business Day, Interest Period, or Reserve Percentage) shall, in the absence of
manifest error, be conclusive and binding. Unless otherwise expressly provided
herein or unless Majority Lenders otherwise consent all financial statements and
reports furnished to Agent or any Lender hereunder shall be prepared and all
financial computations and determinations pursuant hereto shall be made in
accordance with GAAP.
ARTICLE II - THE LOANS
Section 2.1. MAKING OF THE LOANS.
(a) ADVANCES. Subject to the terms and conditions in Subparagraphs
(b) and (c) below, each Lender agrees to make Advances to Borrower upon
request from time to time prior to the Final Maturity Date. The obligation
of Borrower to repay to each Lender the aggregate amount of all Advances
made by such Lender (such Lender's "LOAN"), together with interest accruing
in connection therewith, shall be evidenced by a single promissory note
(such Lender's "NOTE") made by Borrower payable to the order of such Lender
in the form of Exhibit A with appropriate insertions. The amount of
principal owing on any Lender's Note at any given time shall be the
aggregate amount of all Advances theretofore made by such Lender minus all
payments of principal theretofore received by such Lender on such Note.
Interest on each Note shall accrue and be due and payable as provided
herein and therein. Prior to the Final Maturity Date and subject to the
terms and conditions hereof, Borrower may borrow, repay, and reborrow under
the Notes. The entire unpaid balance of the Loans and all interest accrued
thereon shall be due and payable in full on the Final Maturity Date.
(b) WORKING CAPITAL ADVANCES. Subject to the terms and conditions
hereof, each Lender agrees to make advances to Borrower to be used for
Working Capital and to refinance Matured LC Obligations (such Lender's
"WORKING CAPITAL ADVANCES") upon request from time to time prior to the
Final Maturity Date, so long as:
(i) each Working Capital Advance by such Lender DOES NOT EXCEED
such Lender's Percentage Share of the aggregate amount of Working
Capital Advances then requested from all Lenders;
18
<PAGE>
(ii) the sum of (A) the aggregate amount of such Lender's Working
Capital Advances outstanding at such time and the Working Capital
Advances then requested by Borrower, plus (B) the Maximum Drawing
Amount for which such Lender is liable to purchase participations
under Section 3.3(c) and the amount of Matured LC Obligations which
have been funded by such Lender, DOES NOT EXCEED (C) the lesser of
such Lender's Percentage Share of the Maximum Working Capital Advance
Amount and the Borrowing Base in effect as of the date on which the
requested Working Capital Advance is to be made;
(iii) the aggregate amount of all Advances outstanding at
such time plus the Working Capital Advances then requested by Borrower
and all LC Obligations outstanding at such time DOES NOT EXCEED the
Borrowing Base in effect as of the date on which the requested Working
Capital Advance is to be made; and
(iv) The aggregate amount of all Working Capital Advances
requested of all Lenders in any Request for Advance is greater than or
equal to $500,000 or equal to the unadvanced portion of the Borrowing
Base.
(c) ACQUISITION ADVANCES. Subject to the terms and conditions
hereof, each Lender agrees to make advances to Borrower for the acquisition
of Qualified Properties (such Lender's "ACQUISITION ADVANCES") upon request
from time to time prior to the Final Maturity Date, so long as:
(i) the Acquisition Advances requested for the purchase of
Qualified Properties DO NOT EXCEED sixty percent (60%) of the reserve
value attributable to such Qualified Properties (calculated by
Borrower under pricing guidelines established by Agent from time to
time in accordance with its customary practices and standards for
loans in similar amounts to borrowers similarly situated, at the times
and under the circumstances then prevailing which are considered by
Agent in its discretion);
(ii) each Acquisition Advance by such Lender DOES NOT EXCEED such
Lender's Percentage Share of the aggregate amount of Acquisition
Advances then requested from all Lenders;
(iii) the aggregate amount of such Lender's Acquisition
Advances outstanding at such time and the Acquisition Advances then
requested by Borrower, DOES NOT EXCEED the lesser of such Lender's
Percentage Share of the Maximum Acquisition Advance Amount and the
Borrowing Base in effect as of the date on which the requested
Acquisition Advance is to be made;
19
<PAGE>
(iv) the aggregate amount of all Advances outstanding at such
time plus the Acquisition Advances then requested by Borrower and all
LC Obligations outstanding at such time does not exceed the Borrowing
Base in effect as of the date on which the requested Acquisition
Advance is to be made; and
(v) the aggregate amount of all Acquisition Advances requested
of all Lenders in any Request for Advance is greater than or equal to
$500,000 or is equal the unadvanced portion of the Borrowing Base.
Section 2.2. REQUESTS FOR ADVANCES. Borrower must give to Agent at least
one Business Day's prior written notice, or telephonic notice promptly confirmed
in writing, of any requested Advances, after which Agent shall give each Lender
prompt notice thereof. Each such written request or confirmation must be made
in the form and substance of the "Request for Advances" attached hereto as
Exhibit B, duly completed and must designate whether such Advances are Working
Capital Advances or Acquisition Advances. Each such telephonic request shall be
deemed a representation, warranty, acknowledgment and agreement by Borrower as
to the matters which are required to be set out in such written confirmation.
If all conditions precedent to such Advances have been met, each Lender will on
the date requested promptly remit to Agent at Agent's office in Dallas, Texas
the amount of such Lender's Advance in immediately available funds, and upon
receipt of such funds, unless to its actual knowledge any conditions precedent
to such Advances have been neither met nor waived as provided herein, Agent
shall promptly make the Advances available to Borrower. Each Request for
Advances shall be irrevocable and binding on Borrower. Unless Agent shall have
received prompt notice from a Lender that such Lender will not make available to
Agent such Lender's Advance, Agent may in its discretion assume that such Lender
has made such Advance available to Agent in accordance with this section and
Agent may if it chooses, in reliance upon such assumption, make such Advance
available to Borrower. If and to the extent such Lender shall not so make its
Advance available to Agent, such Lender and Borrower severally agree to pay or
repay to Agent within two Business Days after demand the amount of such Advance
together with interest thereon, for each day from the date such amount is made
available to Borrower until the date such amount is paid or repaid to Agent, to
be calculated as to such Lender at the Federal Funds Rate, and to be calculated
as to Borrower at the interest rate applicable at the time to the other Advances
made on such date. If any Lender fails to make such payment to Agent within
such two Business Day-period, such Lender shall in addition to such amount pay
interest thereon, for each day from the date such Advance is made available to
Borrower until the date such amount is paid or repaid to Agent, at the interest
rate applicable at the time to the other Advances made on such date. The
failure of any Lender to make any Advance to be made by it hereunder shall not
relieve any other Lender of its obligation hereunder, if any, to make its
Advance, but no Lender shall be responsible for the failure of any other Lender
to make any Advance to be made by such other Lender.
Section 2.3. USE OF PROCEEDS.
20
<PAGE>
(a) All funds from Working Capital Advances shall be used by Borrower
only for Working Capital and to refinance Matured LC Obligations, and
(b) Borrower shall use all funds from Acquisition Advances to finance
the acquisition of Qualified Properties.
(c) Borrower shall use all Letters of Credit for general corporate
purposes of Related Persons.
(d) In no event shall the funds from any Advance or any Letter of
Credit be used directly or indirectly by any Person for personal, family,
household or agricultural purposes or for the purpose, whether immediate,
incidental or ultimate, of purchasing, acquiring or carrying any "margin
stock" or any "margin securities" (as such terms are defined respectively
in Regulation U and Regulation G promulgated by the Board of Governors of
the Federal Reserve System) or to extend credit to others directly or
indirectly for the purpose of purchasing or carrying any such margin stock
or margin securities. Borrower represents and warrants to Lender that
Borrower is not engaged principally, or as one of Borrower's important
activities, in the business of extending credit to others for the purpose
of purchasing or carrying such margin stock or margin securities.
Section 2.4. RATE ELECTIONS. Borrower may from time to time designate all
or any portions of the outstanding Working Capital Advances or the outstanding
Acquisition Advances (including any yet to be made Working Capital Advances or
Acquisition Advances, as the case may be, which are to be made prior to or at
the beginning of the designated Interest Period but excluding any portions of
the Loans which are required to be repaid prior to the end of the designated
Interest Period) as a "LIBOR Tranche", which term refers to a set of LIBOR Rate
Portions of the Working Capital Advances or a set of LIBOR Rate Portions of the
Acquisition Advances with identical Interest Periods and with each Lender
participating in such LIBOR Tranche in accordance with its Percentage Share of
the outstanding Working Capital Advances or the outstanding Acquisition Advances
as the case may be. Without the consent of Majority Lenders, Borrower may make
no such election during the continuance of a Default, and Borrower may make such
an election with respect to already existing LIBOR Rate Portions only if such
election will take effect at or after the termination of the Interest Period
applicable thereto. Each election by Borrower of a LIBOR Tranche shall:
(a) Be made in writing in the form and substance of the "Rate
Election" attached hereto as Exhibit C, duly completed;
(b) Specify the aggregate amount of the outstanding Working Capital
Advances or the aggregate amount of outstanding Acquisition Advances which
Borrower desires to designate as such LIBOR Tranche, the first day of the
Interest Period which is to apply thereto, and the length of such Interest
Period; and
21
<PAGE>
(c) Be received by Agent not later than 10:00 a.m., Dallas, Texas
time, on the third Business Day preceding the first day of the specified
Interest Period.
Promptly after receiving any such election (a "RATE ELECTION") which meets the
requirements of this section, Agent shall notify each Lender thereof. Each Rate
Election shall be irrevocable. Borrower may make no Rate Election which does
not specify an Interest Period complying with the definition of "Interest
Period" in Section 1.1, and the aggregate amount of the LIBOR Tranche elected in
any Rate Election must be $1,000,000 or a higher integral multiple of $100,000.
Upon the termination of each Interest Period the portion of each Loan within the
related LIBOR Tranche shall, unless the subject of a new Rate Election then
taking effect, automatically become a part of the Base Rate Portion of such Loan
and become subject to all provisions of the Loan Documents governing such Base
Rate Portion. Borrower shall have no more than five (5) LIBOR Tranches in
effect at any time.
Section 2.5. COMMITMENT FEES. In consideration of each Lender's
commitment to make Advances, Borrower will pay to Agent for the account of each
Lender a nonusage fee determined on a daily basis by applying the applicable
Commitment Fee Rate to such Lender's Percentage Share of the unused portion of
the Borrowing Base on each day, determined for each such day by deducting from
the amount of the Borrowing Base at the end of such day the sum of (i) the
aggregate unpaid principal balance of the Loans at the end of such day PLUS (ii)
the amount of all outstanding LC Obligations at the end of such day. This
nonusage fee shall be due and payable in arrears on the first day of each Fiscal
Quarter and on the Final Maturity Date. The applicable "COMMITMENT FEE RATE"
for each day shall be based on the Utilization Percentage for such day and
calculated pursuant to the following table:
===============================================================================
UTILIZATION PERCENTAGE APPLICABLE COMMITMENT FEE RATE
---------------------- ------------------------------
- -------------------------------------------------------------------------------
less than fifty percent (50%) three-tenths of one percent (0.300%)
per annum
- -------------------------------------------------------------------------------
equal to or greater than fifty seven-twentieths of one percent (0.35%)
percent (50%), but less than per annum
seventy-five percent (75%)
- -------------------------------------------------------------------------------
equal to or greater than seventy- two-fifths of one percent (0.40%)
five percent (75%) per annum
===============================================================================
Section 2.6. BORROWING BASE FEE. On each Determination Date, Borrower
will pay to Agent for the account of each Lender, a borrowing base fee in an
amount equal to one-quarter of one percent (0.250%) of the amount by which the
new Borrowing Base designated on such Determination Date exceeds the amount of
the Borrowing Base in effect on the day immediately preceding such Determination
Date.
22
<PAGE>
Section 2.7. OPTIONAL PREPAYMENTS. Borrower may, upon one Business Day's
notice to each Lender, from time to time and without premium or penalty prepay
the Notes, in whole or in part, so long as the aggregate amounts of all partial
prepayments of principal on the Notes equals $500,000 or any higher integral
multiple of $500,000, so long as Borrower does not prepay any LIBOR Rate
Portion, and so long as Borrower does not make any prepayments which would
reduce the unpaid principal balance of the Loans to less than $100,000 without
first either (a) terminating this Agreement or (b) providing assurance
satisfactory to Agent in its discretion that Lenders' legal rights under the
Loan Documents are in no way affected by such reduction. Each prepayment of
principal under this section shall be accompanied by all interest then accrued
and unpaid on the principal so prepaid. Any principal or interest prepaid
pursuant to this section shall be in addition to, and not in lieu of, all
payments otherwise required to be paid under the Loan Documents at the time of
such prepayment.
Section 2.8. PAYMENTS TO LENDERS. Borrower will make each payment which
it owes under the Loan Documents to Agent for the account of the Lender or
Issuing Bank to whom such payment is owed. Each such payment must be received
by Agent not later than 11:00 a.m., Dallas, Texas time, on the date such payment
becomes due and payable, in lawful money of the United States of America,
without set-off, deduction or counterclaim, and in immediately available funds.
Any payment received by Agent after such time will be deemed to have been made
on the next following Business Day. Should any such payment become due and
payable on a day other than a Business Day, the maturity of such payment shall
be extended to the next succeeding Business Day, and, in the case of a payment
of principal or past due interest, interest shall accrue and be payable thereon
for the period of such extension as provided in the Loan Document under which
such payment is due. Each payment under a Loan Document shall be due and
payable in Dallas County, Texas at the place provided in such Loan Document and,
if no specific place of payment is provided, shall be due and payable at the
place of payment of NationsBank's Note. When Agent collects or receives money
on account of the Obligations, Agent shall distribute all money so collected or
received, and Lenders shall apply all such money they receive from Agent, as
follows:
(a) first, for the payment of all Obligations which are then due (and
if such money is insufficient to pay all such Obligations, first to any
reimbursements due Agent under Section 6.1(i) or (j) or Issuing Bank under
Section 3.3(a), and then to the partial payment of all other Obligations
then due in proportion to the amounts thereof, or as Lenders shall
otherwise agree);
(b) then, so long as no Default or Event of Default has occurred and
is continuing, to the prepayment of Working Capital Advances or Acquisition
Advances outstanding under the Notes as directed in writing by Borrower,
together with accrued and unpaid interest on the outstanding Advances so
prepaid;
23
<PAGE>
(c) then for the prepayment of amounts owing under the Loan Documents
(other than Working Capital Advances and Acquisition Advances outstanding
under the Notes) if so specified by Borrower;
(d) then for the prepayment of Working Capital Advances and
Acquisition Advances outstanding under the Notes, together with accrued and
unpaid interest on the outstanding Advances so prepaid;
(e) then, for the payment or prepayment of any other Obligations; and
(f) last, for the pro rata payment of any other indebtedness or
obligations to Lenders secured by the Security Documents.
All payments applied to principal or interest on any Note shall be applied first
to any interest then due and payable, then to principal then due and payable,
and last to any prepayment of principal and interest in compliance with Sections
2.7 and 2.8. All distributions of amounts described in any of subsections (b),
(c) or (d) above shall be made by Agent pro rata to Agent and each Lender then
owed Obligations described in such subsection in proportion to all amounts owed
to Agent and all Lenders which are described in such subsection; provided that
if any Lender then owes payments to Issuing Bank for the purchase of a
participation under Section 3.3(c) hereof, any amounts otherwise distributable
under this section to such Lender shall be deemed to belong to Issuing Bank, to
the extent of such unpaid payments, and Agent shall apply such amounts to make
such unpaid payments rather than distribute such amounts to such Lender.
Section 2.9. INITIAL BORROWING BASE. During the period from the date
hereof to the first Determination Date the Borrowing Base shall be $50,000,000.
Section 2.10. SUBSEQUENT DETERMINATIONS OF BORROWING BASE. By each
Evaluation Date Borrower shall furnish to each Lender all information, reports
and data which Agent has then requested concerning Related Persons' businesses
and properties (including Related Persons' oil and gas properties and interests
and the reserves and production relating thereto), together with the Engineering
Report described in Section 6.1(b)(v). Within forty-five days after receiving
such information, reports and data, or as promptly thereafter as practicable,
Majority Lenders shall agree upon an amount for the Borrowing Base, which, if
Majority Lenders do not agree on such amount, the Borrowing Base shall be the
lowest amount determined by any Lender: provided, however, that all Lenders must
agree on any increase in the Borrowing Base and provided further that ON AND
AFTER THE FIRST REDUCTION DATE THE BORROWING BASE SHALL NOT BE INCREASED ABOVE
THE AMOUNT OF THE BORROWING BASE IN EFFECT AT THE TIME THE BORROWING BASE IS
REDETERMINED OR AUTOMATICALLY REDUCED. Agent shall by notice to Borrower
designate such amount as the new Borrowing Base available to Borrower hereunder,
which designation shall take effect immediately on the date such notice is sent
(a "DETERMINATION DATE") and shall remain in effect until but not including the
next date as of
24
<PAGE>
which the Borrowing Base is redetermined. If Borrower does not furnish all
such information, reports and data by the date specified in the first
sentence of this section, Agent may nonetheless designate the Borrowing Base
at any amount which Majority Lenders determine, and may redesignate the
Borrowing Base from time to time thereafter at any amount which all Lenders
redetermine, until each Lender receives all such information, reports and
data, whereupon Majority Lenders shall designate a new Borrowing Base as
described above. Majority Lenders shall determine the amount of the
Borrowing Base based upon the loan collateral value which they in their
discretion assign to the various oil and gas properties of Related Persons at
the time in question and based upon such other factors (including without
limitation the assets, liabilities, cash flow, business, properties,
prospects, management and ownership of Borrower and its Affiliates) as they
in their discretion deem significant. It is expressly understood that
Majority Lenders and Agent have no obligation to agree upon or designate the
Borrowing Base at any particular amount, whether in relation to the Maximum
Loan Amount, any prior Borrowing Base or otherwise, and that Lenders'
commitments to advance funds hereunder is determined by reference to the
Borrowing Base from time to time in effect, which Borrowing Base shall be
used for calculating commitment fees under Section 2.5 and, to the extent
permitted by law and regulatory authorities, for the purposes of Section 2.13.
Section 2.11. AUTOMATIC BORROWING BASE REDUCTIONS; MANDATORY PREPAYMENTS.
(a) The Borrowing Base shall be reduced automatically (an "AUTOMATIC
BORROWING BASE REDUCTION") by the Quarterly Reduction Amount as defined below in
this section) on the last day of each Fiscal Quarter, beginning on the First
Reduction Date (each such day is herein called an "AUTOMATIC BORROWING BASE
REDUCTION DATE"). To the extent that a Borrowing Base Deficiency exists on any
Automatic Borrowing Base Reduction Date as a result of an Automatic Borrowing
Base Reduction, Borrower shall immediately prepay the principal of the Loans in
an amount at least equal to the lesser of (i) such Borrowing Base Deficiency or
(ii) the unpaid principal balance of the Loans. As used in this subsection (a),
the term "QUARTERLY REDUCTION AMOUNT" means an amount equal to one-twelfth of
the Borrowing Base in effect on the First Reduction Date.
(b) If a Borrowing Base Deficiency exists other than as a result of an
Automatic Borrowing Base Reduction, Borrower shall, within ten (10) days after
Agent gives notice of such fact to Borrower, either:
(i) prepay the principal of the Loans in an amount at least equal to
the lesser of (A) such Borrowing Base Deficiency or (B) the unpaid
principal balance of the Loans (in this section called a "MANDATORY
PREPAYMENT AMOUNT"), or
(ii) give notice to Agent electing to prepay such Mandatory Prepayment
Amount in six (6) (or fewer) installments. Each such installment shall
equal or exceed one-sixth of such Borrowing Base Deficiency; the first such
installment shall be paid
25
<PAGE>
with the giving of such notice and the subsequent installments shall be due
and payable at one month intervals thereafter until such Borrowing Base
Deficiency has been eliminated, or
(iii) give notice to Agent electing to provide to Agent (and
provide to Agent within 30 days after receipt of such notice from Agent)
deeds of trust, mortgages, chattel mortgages, security agreements,
financing statements and other Security Documents in form and substance
satisfactory to Agent, granting, confirming, and perfecting first and prior
liens or security interests in additional oil and gas properties, or such
other Collateral as is acceptable to Majority Lenders, having a Borrowing
Base value at least equal to such Borrowing Base Deficiency (as determined
by Majority Lenders in the same manner as the Borrowing Base as provided in
Section 2.11), or
(iv) give notice to Agent and Lenders electing a combination of the
foregoing.
(c) In the event that any Borrowing Base Deficiency (whether or not
resulting from an Automatic Borrowing Base Reduction) exceeds the unpaid
principal balance of the Loans (i.e. because of LC Obligations), the remaining
amount of such Borrowing Base Deficiency shall be eliminated as set forth in
Section 3.6(a) unless Borrower shall have the option to provide Agent with
additional Collateral to eliminate such remaining Borrowing Base Deficiency as
set forth in Section 2.11(b)(iii), and Borrower elects to, and does, provide
such additional Collateral.
(d) Each prepayment of principal under this Section 2.11 shall be applied
to the regular installments of principal due under the Notes in the inverse
order of their maturities. Each prepayment of principal under this section
shall be accompanied by all interest then accrued and unpaid on the principal so
prepaid. Any principal or interest prepaid pursuant to this section shall be in
addition to, and not in lieu of, all payments otherwise required to be paid
under the Loan Documents at the time of such prepayment.
Section 2.12. BORROWER'S REDUCTION OF BORROWING BASE. Until the second
anniversary of the date hereof, Borrower may, during the fifteen-day period
beginning on each Determination Date (each such period, in this section, an
"OPTION PERIOD"), reduce the Borrowing Base from the amount designated by Agent
to any lesser amount. To exercise such option Borrower must within an Option
Period send notice to Agent of the amount of the Borrowing Base chosen by
Borrower. If Borrower does not affirmatively exercise this option during an
Option Period the Borrowing Base shall be the amount designated by Agent. Any
choice by Borrower of a Borrowing Base shall be effective as of the first day of
the Option Period during which such choice was made and shall continue in effect
until the next date as of which the Borrowing Base is redetermined.
Section 2.13. CAPITAL REIMBURSEMENT. If at any time after the date
hereof, and from time to time, any Lender or Issuing Bank determines that the
adoption or modification of any
26
<PAGE>
applicable law, rule or regulation regarding taxation, such Lender's or
Issuing Bank's required levels of reserves, deposits, insurance or capital
(including any allocation of capital requirements or conditions), or similar
requirements, or any interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation, administration or compliance of such Lender or Issuing Bank
with any of such requirements, has or would have the effect of (a) increasing
such Lender's costs relating to the Obligations owing to such Lender or
Issuing Bank's costs relating to the provisions hereof concerning the
issuance of Letters of Credit, or (b) reducing the yield or rate of return of
such Lender on such Obligations or of Issuing Bank on such Letters of Credit,
to a level below that which such Lender or Issuing Bank could have achieved
but for the adoption or modification of any such requirements, Borrower
shall, within thirty (30) days after any request sent by such Lender or
Issuing Bank to Borrower (with a copy to Agent), pay to Agent for the account
of such Lender or Issuing Bank such additional amounts as (in such Lender's
or Issuing Bank's sole judgment, after reasonable computation) will
compensate such Lender or Issuing Bank for such increase in costs or
reduction in yield or rate of return of such Lender or Issuing Bank. No
failure by such Lender or Issuing Bank to immediately demand payment of any
additional amounts payable under this section shall constitute a waiver of
such Lender's or Issuing Bank's right to demand payment of such amounts at
any subsequent time. Nothing herein contained shall be construed or so
operate as to require Borrower to pay any interest, fees, costs or charges
not permitted by Section 10.6.
Section 2.14. INCREASED COST OF LIBOR RATE PORTIONS. If any applicable
domestic or foreign law, treaty, rule or regulation (whether now in effect or
hereinafter enacted or promulgated, including Regulation D) or any
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof (whether or not having the
force of law):
(a) shall change the basis of taxation of payments to any Lender or
Issuing Bank of any principal, interest, or other amounts attributable to
any LIBOR Rate Portion or otherwise due under this Agreement in respect of
any LIBOR Rate Portion or any Letter of Credit (other than taxes imposed on
the overall net income of such Lender or any lending office of such Lender
or Issuing Bank by any jurisdiction in which such Lender or any such
lending office or Issuing Bank is located); or
(b) shall change, impose, modify, apply or deem applicable any
reserve, special deposit or similar requirements in respect of any LIBOR
Rate Portion of any Lender or any Letter of Credit (excluding those for
which such Lender is fully compensated pursuant to adjustments made in the
definition of LIBOR Spread) or against assets of, deposits with or for the
account of, or credit extended by, such Lender or Issuing Bank; or
(c) shall impose on any Lender or Issuing Bank or the interbank
eurocurrency deposit market any other condition affecting any LIBOR Rate
Portion or
27
<PAGE>
Letter of Credit, the result of which is to increase the cost to any
Lender of funding or maintaining any LIBOR Rate Portion or the cost to
Issuing Bank of issuing any Letter of Credit or to reduce the amount of any
sum receivable by any Lender or Issuing Bank in respect of any LIBOR Rate
Portion or Letter of Credit by an amount deemed by such Lender or Issuing
Bank to be material,
then such Lender or Issuing Bank shall promptly notify Agent and Borrower in
writing of the happening of such event and of the amount required to compensate
such Lender or Issuing Bank for such event (on an after-tax basis, taking into
account any taxes on such compensation), whereupon (i) Borrower shall pay such
amount to Agent for the account of such Lender or Issuing Bank and (ii) Borrower
may elect, by giving to Agent and such Lender not less than three Business Days'
notice, to convert all (but not less than all) of any such LIBOR Rate Portion
into a part of the Base Rate Portion.
Section 2.15. AVAILABILITY. If (a) any change in applicable laws,
treaties, rules or regulations or in the interpretation or administration
thereof of or in any jurisdiction whatsoever, domestic or foreign, shall make it
unlawful or impracticable for any Lender to fund or maintain LIBOR Rate Portions
or for Issuing Bank to issue Letters of Credit, or shall materially restrict the
authority of any Lender to purchase or take offshore deposits of dollars (i.e.,
"eurodollars") or the authority of Issuing Bank to issue Letters of Credit, or
(b) any Lender determines that matching deposits appropriate to fund or maintain
any LIBOR Rate Portion are not available to it, or (c) any Lender determines
that the formula for calculating the Adjusted LIBOR Rate does not fairly reflect
the cost to such Lender of making or maintaining loans based on such rate, then,
upon notice by such Lender or Issuing Bank to Borrower and Agent, Borrower's
right to elect LIBOR Rate Portions of such Lender's Loan or to apply for Letters
of Credit shall be suspended to the extent and for the duration of such
illegality, impracticability or restriction and all LIBOR Rate Portions of such
Lender's Loan (or portions thereof) which are then outstanding or are then the
subject of any Rate Election and which cannot lawfully or practicably be
maintained or funded shall immediately become or remain part of the Base Rate
Portion of such Lender's Loan. Borrower agrees to indemnify Agent, each Lender
and Issuing Bank and hold it harmless against all costs, expenses, claims,
penalties, liabilities and damages which may result from any such change in law,
treaty, rule, regulation, interpretation or administration. Such
indemnification shall be on an after-tax basis, taking into account any taxes
imposed on the amounts paid as indemnity.
Section 2.16. FUNDING LOSSES. In addition to its other obligations
hereunder, Borrower will indemnify Agent and each Lender against, and reimburse
Agent and each Lender on demand for, any loss or expense incurred or sustained
by Agent or such Lender (including any loss or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by a Lender to
fund or maintain LIBOR Rate Portions or Advances), as a result of (a) any
payment or prepayment (whether authorized or required hereunder or otherwise) of
all or a portion of a LIBOR Rate Portion on a day other than the day on which
the applicable Interest Period ends, (b) any payment or prepayment, whether
28
<PAGE>
required hereunder or otherwise, of a Loan made after the delivery, but before
the effective date, of a Rate Election, if such payment or prepayment prevents
such Rate Election from becoming fully effective, (c) the failure of any Advance
to be made or of any Rate Election to become effective due to any condition
precedent not being satisfied or due to any other action or inaction of any
Related Person, or (d) any conversion (whether authorized or required hereunder
or otherwise) of all or any portion of any LIBOR Rate Portion into a Base Rate
Portion or into a different LIBOR Rate Portion on a day other than the day on
which the applicable Interest Period ends. Such indemnification shall be on an
after-tax basis, taking into account any taxes imposed on the amounts paid as
indemnity.
Section 2.17. REIMBURSABLE TAXES. Borrower covenants and agrees that:
(a) Borrower will indemnify Agent and each Lender against and
reimburse Agent and each Lender for all present and future income, stamp
and other taxes, levies, costs and charges whatsoever imposed, assessed,
levied or collected on or in respect of this Agreement or any LIBOR Rate
Portions (whether or not legally or correctly imposed, assessed, levied or
collected), excluding, however, any taxes imposed on or measured by the
overall net income of Agent or such Lender or any lending office of Agent
or such Lender by any jurisdiction in which Agent or such Lender or any
such lending office is located (in this section, collectively,
"REIMBURSABLE TAXES"). Such indemnification shall be on an after-tax
basis, taking into account any taxes imposed on the amounts paid as
indemnity.
(b) All payments on account of the principal of, and interest on,
each Lender's Loan and each Lender's Note, and all other amounts payable by
Borrower to Agent and each Lender hereunder, shall be made in full without
set-off or counterclaim and shall be made free and clear of and without
deductions or withholdings of any nature by reason of any Reimbursable
Taxes, all of which will be for the account of Borrower. In the event of
Borrower being compelled by law or other regulations to make any such
deduction or withholding from any payment to Agent or any Lender, Borrower
shall pay on the due date of such payment, by way of additional interest,
such additional amounts as are needed to cause the amount receivable by
Agent or such Lender after such deduction or withholding to equal the
amount which would have been receivable in the absence of such deduction or
withholding. If Borrower should make any deduction or withholding as
aforesaid, Borrower shall within 60 days thereafter forward to Agent or
such Lender an official receipt or other official document evidencing
payment of such deduction or withholding.
(c) If Borrower is ever required to pay any Reimbursable Tax with
respect to any LIBOR Rate Portion Borrower may elect, by giving to Agent
and each Lender not less than three Business Days' notice, to convert all
(but not less than all) of any such LIBOR Rate Portion into a part of the
Base Rate Portion, but such election shall
29
<PAGE>
not diminish Borrower's obligation to pay all Reimbursable Taxes or any
other amounts owing to Lenders under Sections 2.14 through 2.16.
ARTICLE III - LETTERS OF CREDIT
Section 3.1. LETTERS OF CREDIT. Subject to the terms and conditions
hereof, Borrower may until the Final Maturity Date request Issuing Bank to issue
one or more Letters of Credit, provided that, after taking such Letter of Credit
into account:
(a) the sum of the aggregate amount of all Working Capital Advances
outstanding at such time plus the aggregate amount of LC Obligations at
such time, does not exceed the Maximum Working Capital Advance Amount;
(b) the sum of the aggregate amount of all Advances outstanding at
such time plus the aggregate amount of LC Obligations at such time, does
not exceed the Borrowing Base at such time;
(c) the aggregate amount of LC Obligations at such time does not
exceed $1,000,000;
(d) the expiration date of such Letter of Credit is prior to the end
of the Final Maturity Date;
(e) such Letter of Credit is to be used for general corporate
purposes of Related Persons;
(f) such Letter of Credit is not directly or indirectly used to
assure payment of or otherwise support any Person's Debt for borrowed
money;
(g) the issuance of such Letter of Credit will be in compliance with
all applicable governmental restrictions, policies, and guidelines and will
not subject Issuing Bank to any cost not anticipated on the date hereof;
(h) the form and terms of such Letter of Credit are acceptable to
Agent and Issuing Bank in their sole and absolute discretion; and
(i) all other conditions in this Agreement to the issuance of such
Letter of Credit have been satisfied.
Issuing Bank will honor any such request if the foregoing conditions (a) through
(i) (in the following Section 3.2 called the "LC CONDITIONS") have been met as
of the date of issuance of such Letter of Credit. Issuing Bank, with the
consent of Majority Lenders, may choose to
30
<PAGE>
honor any such request for any other Letter of Credit, but has no obligation
to do so and may refuse to issue any other requested Letter of Credit for any
reason which Issuing Bank in its sole discretion deems relevant.
Section 3.2. REQUESTING LETTERS OF CREDIT. Borrower must make written
application for any Letter of Credit at least three Business Days before the
date on which Borrower desires for Issuing Bank to issue such Letter of Credit.
By making any such written application Borrower shall be deemed to have
represented and warranted that the LC Conditions described in Section 3.1 will
be met as of the date of issuance of such Letter of Credit. Each such written
application for a Standby or Commercial Letter of Credit must be made in writing
using the forms therefor customarily used by Issuing Bank, the terms and
provisions of which are hereby incorporated herein by reference (or in such
other form as may mutually be agreed upon by Issuing Bank and Borrower). Three
Business Days after the LC Conditions for a Letter of Credit have been met as
described in Section 3.1 (or if Issuing Bank otherwise desires to issue such
Letter of Credit), Issuing Bank will issue such Letter of Credit at Issuing
Bank's office in Dallas, Texas. If any provisions of any LC Application
conflict with any provisions of this Agreement, the provisions of this Agreement
shall govern and control.
Section 3.3. REIMBURSEMENT AND PARTICIPATIONS.
(a) REIMBURSEMENT BY BORROWER. Each Matured LC Obligation shall
constitute a loan by Issuing Bank to Borrower. Borrower promises to pay to
Issuing Bank, or to Issuing Bank's order, on demand, the full amount of each
Matured LC Obligation, together with interest thereon at the Late Payment Rate.
(b) LETTER OF CREDIT ADVANCES. If the beneficiary of any Letter of Credit
makes a draft or other demand for payment thereunder then Borrower may, during
the interval between the making thereof and the honoring thereof by Issuing
Bank, request Lenders to make Working Capital Advances to Borrower in the amount
of such draft or demand, which Working Capital Advances shall be made
concurrently with Issuing Bank's payment of such draft or demand and shall be
immediately used by Issuing Bank to repay the amount of the resulting Matured LC
Obligation. Such a request by Borrower shall be made in compliance with all of
the provisions hereof, provided that for the purposes of clause (b) of the first
sentence of Section 2.1 the amount of such Working Capital Advances shall be
considered but the amount of the Matured LC Obligation to be concurrently paid
by such Working Capital Advances shall not be considered.
(c) PARTICIPATION BY LENDERS. Issuing Bank irrevocably agrees to grant
and hereby grants to each Lender, and to induce Issuing Bank to issue Letters of
Credit hereunder, each Lender irrevocably agrees to accept and purchase and
hereby accepts and purchases from Issuing Bank, on the terms and conditions
hereinafter stated and for such Lender's own account and risk an undivided
interest equal to such Lender's Percentage Share of Issuing Bank's obligations
and rights under each Letter of Credit issued hereunder and the amount of
31
<PAGE>
each Matured LC Obligation paid by Issuing Bank thereunder. Each Lender
unconditionally and irrevocably agrees with Issuing Bank that, if a Matured
LC Obligation is paid under any Letter of Credit for which Issuing Bank is
not reimbursed in full by Borrower in accordance with the terms of this
Agreement and the related LC Application (including any reimbursement by
means of concurrent Working Capital Advances or by the application of LC
Collateral), such Lender shall within two Business Days (in all circumstances
and without set-off or counterclaim) pay to Issuing Bank on demand, in
immediately available funds at Issuing Bank's address for notices hereunder,
such Lender's Percentage Share of such Matured LC Obligation (or any portion
thereof which has not been reimbursed by Borrower), together with interest
thereon, for each day from the date such amount was paid by Issuing Bank
under such Letter of Credit until the date such amount is paid to Agent at
the Federal Funds Rate. If any Lender fails to make such payment to Issuing
Bank within such two Business-Day period, such Lender shall in addition to
such amount pay interest thereon, for each day from the date such amount was
paid by Issuing Bank under such Letter of Credit until the date such amount
is paid or repaid to Agent, at the Base Rate. Each Lender's obligation to
pay Issuing Bank pursuant to the terms of this subsection is irrevocable and
unconditional.
(d) DISTRIBUTIONS TO PARTICIPANTS. Whenever Issuing Bank has in
accordance with this section received from any Lender payment of such Lender's
Percentage Share of any Matured LC Obligation, if Issuing Bank thereafter
receives any payment of such Matured LC Obligation or any payment of interest
thereon (whether directly from Borrower or by application of LC Collateral or
otherwise, and excluding only interest for any period prior to Issuing Bank's
demand that such Lender make such payment of its Percentage Share), Issuing Bank
will distribute to such Lender its Percentage Share of the amounts so received
by Issuing Bank; PROVIDED, HOWEVER, that if any such payment received by Issuing
Bank must thereafter be returned by Issuing Bank, such Lender shall return to
Issuing Bank the portion thereof which Issuing Bank has previously distributed
to it.
(e) CALCULATIONS. A written advice setting forth in reasonable detail the
amounts owing under this section, submitted by Issuing Bank to Borrower or any
Lender from time to time, shall be conclusive, absent manifest error, as to the
amounts thereof.
Section 3.4. LETTER OF CREDIT FEES. In consideration of Issuing Bank's
issuance of Letters of Credit, Borrower agrees to pay:
(a) an issuance fee for each Letter of Credit in the amount of
one-eighth percent (0.125%) of the face amount of such Letter of Credit,
payable to Issuing Bank for its own account at the time of issuance of such
Letter of Credit;
(b) a letter of credit fee for each Letter of Credit in the amount of
the greater of (i) the LIBOR Spread applicable at the time the Letter of
Credit is issued multiplied by the face amount of such Letter of Credit or
(ii) $500, in each case payable to Agent
32
<PAGE>
at the time of issuance of such Letter of Credit for the account of Lenders
in accordance with their Percentage Shares.
Section 3.5. NO DUTY TO INQUIRE.
(a) DRAFTS AND DEMANDS. Issuing Bank is authorized and instructed to
accept and pay drafts and demands for payment under any Letter of Credit without
requiring, and without responsibility for, any determination as to the existence
of any event giving rise to said draft, either at the time of acceptance of
payment or thereafter. Issuing Bank and Lenders may act in reliance upon any
drafts or demand for payment believed in good faith to have been authorized,
whether or not made by an authorized officer, representative or agent of any
beneficiary under any Letter of Credit, and payment by Issuing Bank to any such
beneficiary when requested by any such purported officer, representative or
agent is hereby authorized and approved. Borrower agrees to hold Issuing Bank
and each Lender harmless and indemnified against any liability or claim in
connection with or arising out of the subject matter of this section, WHICH
INDEMNITY SHALL APPLY WHETHER OR NOT ANY SUCH LIABILITY OR CLAIM IS IN ANY WAY
OR TO ANY EXTENT CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR OMISSION
OF ANY KIND BY ISSUING BANK OR ANY LENDER, provided only that Issuing Bank or
such Lender shall not be entitled to indemnification for that portion, if any,
of any liability or claim which is proximately caused by its own individual
gross negligence or willful misconduct, as determined in a final judgment.
(b) EXTENSION OF MATURITY. If the maturity of any Letter of Credit is
extended by its terms or by law or governmental action, if any extension of the
maturity or time for presentation of drafts or any other modification of the
terms of any Letter of Credit is made at the request of any Related Person, or
if the amount of any Letter of Credit is increased at the request of any Related
Person, this Agreement shall be binding upon all Related Persons with respect to
such Letter of Credit as so extended, increased or otherwise modified, with
respect to drafts and property covered thereby, and with respect to any action
taken by Issuing Bank or any of Issuing Bank's correspondents in accordance with
such extension, increase or other modification.
(c) TRANSFEREES OF LETTERS OF CREDIT. If any Letter of Credit provides
that it is transferable, Issuing Bank shall have no duty to determine the proper
identity of anyone appearing as transferee of such Letter of Credit, nor shall
Issuing Bank be charged with responsibility of any nature or character for the
validity or correctness of any transfer or successive transfers, and payment by
Issuing Bank to any purported transferee or transferees as determined by Issuing
Bank is hereby authorized and approved, and Borrower further agrees to hold
Issuing Bank and each Lender harmless and indemnified against any liability or
claim in connection with or arising out of the foregoing, WHICH INDEMNITY SHALL
APPLY WHETHER OR NOT ANY SUCH LIABILITY OR CLAIM IS IN ANY WAY OR TO ANY EXTENT
CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR
33
<PAGE>
OMISSION OF ANY KIND BY ISSUING BANK OR ANY LENDER, provided only that
Issuing Bank or such Lender shall not be entitled to indemnification for that
portion, if any, of any liability or claim which is proximately caused by its
own individual gross negligence or willful misconduct, as determined in a
final judgment.
Section 3.6. LC COLLATERAL.
(a) LC OBLIGATIONS IN EXCESS OF BORROWING BASE. If, after the making of
all mandatory prepayments required under Section 2.11, the outstanding LC
Obligations will exceed the Borrowing Base, then in addition to prepayment of
the entire principal balance of the Loans Borrower will immediately pay to
Issuing Bank an amount equal to such excess. Issuing Bank will hold such amount
as security for the remaining LC Obligations ("LC COLLATERAL") until such LC
Obligations become Matured LC Obligations, at which time such LC Collateral may
be applied to such Matured LC Obligations. Neither this subsection nor the
following subsection shall, however, limit or impair any rights which Issuing
Bank may have under any other document or agreement relating to any Letter of
Credit or LC Obligation, including any LC Application, or any rights which
Issuing Bank or Lenders may have to otherwise apply any payments by Borrower and
any LC Collateral under Section 2.11.
(b) ACCELERATION OF LC OBLIGATIONS. If the Obligations or any part
thereof become immediately due and payable pursuant to Section 8.1 then, unless
Majority Lenders otherwise specifically elect to the contrary (which election
may thereafter by retracted by Majority Lenders at any time), all LC Obligations
shall become immediately due and payable without regard to whether or not actual
drawings or payments on the Letters of Credit have occurred, and Borrower shall
be obligated to pay to Issuing Bank immediately an amount equal to the aggregate
LC Obligations which are then outstanding. All amounts so paid shall first be
applied to Matured LC Obligations and then held by Issuing Bank as LC Collateral
until such LC Obligations become Matured LC Obligations, at which time such LC
Collateral shall be applied to such Matured LC Obligations.
(c) INVESTMENT OF LC COLLATERAL. Pending application thereof, all LC
Collateral shall be invested by Issuing Bank in such interest-bearing
investments as Issuing Bank may choose in its sole discretion reasonably
exercised. All interest on such investments shall be reinvested or applied to
Matured LC Obligations. When all Obligations have been satisfied in full,
including all LC Obligations, all Letters of Credit have expired or been
terminated, and all of Borrower's reimbursement obligations in connection
therewith have been satisfied in full, Issuing Bank shall release any remaining
LC Collateral. Borrower hereby assigns and grants to Issuing Bank a continuing
security interest in all LC Collateral paid by it to Issuing Bank, all
investments purchased with such LC Collateral, and all proceeds thereof to
secure its Matured LC Obligations and its Obligations under this Agreement, the
Note, and the other Loan Documents, and Borrower agrees that such LC Collateral
and investments shall be subject to all of the terms and conditions of the
Mortgage. Borrower further agrees that Issuing Bank shall have all of the
rights and remedies of a secured party under the Uniform Commercial
34
<PAGE>
Code as adopted in the State of Texas with respect to such security interest
and that an Event of Default under this Agreement shall constitute a default
for purposes of such security interest.
(d) PAYMENT OF LC COLLATERAL. When Borrower is required to provide LC
Collateral for any reason and fails to do so on the day when required, Issuing
Bank or any Lender may, without notice to Borrower or any other Related Person,
provide such LC Collateral (whether by application of proceeds of other
Collateral, by transfers from other accounts maintained with Issuing Bank, any
Lender, or otherwise) using any available funds of Borrower or any other Person
also liable to make such payments. Any such amounts which are required to be
provided as LC Collateral and which are not provided on the date required shall,
for purposes of each Security Document, be considered past due Obligations owing
hereunder, and Agent, each Lender and Issuing Bank are hereby authorized to
exercise their respective rights under each Security Document to obtain such
amounts.
ARTICLE IV - CONDITIONS PRECEDENT TO LENDING
Section 4.1. DOCUMENTS TO BE DELIVERED. No Lender has any obligation to
make its first Advance, and Issuing Bank has no obligation to issue the first
Letter of Credit, unless Agent shall have received all of the following duly
executed and delivered in multiple counterparts for each Lender and in form,
substance and date satisfactory to Agent:
(a) This Agreement and any other documents that Lenders are to
execute in connection herewith.
(b) Each Lender's Note.
(c) Certain certificates of Borrower including:
(i) An "Omnibus Certificate" of the Secretary and of the
President of Borrower, which shall contain the names and signatures of
the officers of Borrower authorized to execute Loan Documents and
which shall certify to the truth, correctness and completeness of the
following exhibits attached thereto: (1) a copy of resolutions duly
adopted by the board of directors of Borrower and in full force and
effect at the time this Agreement is entered into, authorizing the
execution of this Agreement and the other Loan Documents delivered or
to be delivered in connection herewith and the consummation of the
transactions contemplated herein and therein, (2) a copy of the charter
of Borrower and all amendments thereto, which shall contain the
Articles of Merger of Costilla LLC into Borrower, certified by the
Secretary of State of Delaware, and (3) a copy of the bylaws of
Borrower; and
35
<PAGE>
(ii) A "Compliance Certificate" of the President and the Chief
Financial Officer of even date with such Advance or such date of
issuance of such Letter of Credit, in which such officers certify to
the satisfaction of the conditions set out in subsections (a), (b),
(c) and (d) of Section 4.2.
(d) A certificate (or certificates) of the due formation, valid
existence and good standing of Borrower in its state of organization,
issued by the appropriate authorities of such jurisdiction.
(e) A favorable opinion of Cotton, Bledsoe, Tighe & Dawson, P.C.,
counsel for Related Persons, substantially in the form set forth in Exhibit
D, together with the certificate provided for in such Exhibit.
(f) Each Security Document listed in the Security Schedule.
(g) Certificates of Borrower's good standing and due qualification to
do business, issued by appropriate officials in any states in which
Borrower owns property subject to Security Documents.
(h) Title opinions or other title assurances in form, substance and
authorship satisfactory to Agent, and verification of lease operating
expenses and oil and gas prices satisfactory to Agent.
(i) A certificate of the President of Borrower, certifying to the
truth, correctness, and completeness of certain representations contained
therein concerning the environmental condition of the oil and gas
properties owned by Borrower and Related Persons in form and substance
satisfactory to Agent and its counsel.
(j) CSL Partner's audited Consolidated financial statements for the
Fiscal Year ended December 31, 1994, Costilla LLC's audited Consolidated
financial statements for the Fiscal Year ended December 31, 1995, and
Costilla LLC's unaudited Consolidated and consolidating financial
statements for the two consecutive Fiscal Quarters ended June 30, 1996,
each satisfactory to Agent.
(k) Agent shall have received confirmation that Borrower has received
the net proceeds from the issuance of the Senior Unsecured Notes, in a
principal amount equal to or greater than $100,000,000 (less underwriting
discounts, commissions and offering expenses), and that such proceeds have
been applied to the prepayment of indebtedness of Costilla LLC to
NationsBridge, L.L.C.
(l) Agent shall have received confirmation that Borrower has received
the proceeds from the issuance of the equity securities described in the
Registration Statement in a gross amount equal to or greater than
$60,000,000 (less underwriting
36
<PAGE>
discounts, commissions and offering expenses), and that such proceeds have
been applied to the prepayment of indebtedness of Costilla LLC to
NationsBridge, L.L.C. to the extent necessary to repay such indebtedness
in full after taking into account the repayment described above in
Subparagraph (k).
(m) Agent shall have received from Borrower verification of insurance
satisfactory to Agent in its sole discretion.
(n) Borrower shall have paid to Agent all fees due to Agent and
Lenders hereunder and all fees and expenses of Agent's counsel payable
under this Agreement.
(o) Costilla LLC shall have merged with and into Borrower, with
Borrower being the surviving corporation.
Section 4.2. ADDITIONAL CONDITIONS PRECEDENT. No Lender has any
obligation to make any Advance (including its first), and Issuing Bank has no
obligation to issue any Letter of Credit (including the first) unless the
following conditions precedent have been satisfied:
(a) All representations and warranties made by any Related Person in
any Loan Document shall be true on and as of the date of such Advance or
the date of issuance of such Letter of Credit (except to the extent that
the facts upon which such representations are based have been changed by
the extension of credit hereunder) as if such representations and
warranties had been made as of the date of such Advance or the date of
issuance of such Letter of Credit.
(b) No Default shall exist at the date of such Advance or the date of
issuance of such Letter of Credit.
(c) No material adverse change shall have occurred to Borrower's
Consolidated financial condition or businesses since the date of this
Agreement.
(d) Each Related Person shall have performed and complied with all
agreements and conditions required in the Loan Documents to be performed or
complied with by it on or prior to the date of such Advance or the date of
issuance of such Letter of Credit.
(e) The making of such Advance or the issuance of such Letter of
Credit shall not be prohibited by any law or any regulation or order of any
court or governmental agency or authority and shall not subject any Lender
or Issuing Bank to any penalty or other onerous condition under or pursuant
to any such law, regulation or order.
37
<PAGE>
(f) Agent shall have received all documents and instruments which
Agent has then requested, in addition to those described in Section 4.1
(including opinions of legal counsel for the Related Persons and Agent;
organizational and business documents and records; documents evidencing
governmental authorizations, consents, approvals, licenses and exemptions;
and certificates of public officials and of officers and representatives of
Related Persons and other Persons), as to (i) the accuracy and validity of
or compliance with all representations, warranties and covenants made by
any Related Person in this Agreement and the other Loan Documents, (ii) the
satisfaction of all conditions contained herein or therein, and (iii) all
other matters pertaining hereto and thereto. All such additional documents
and instruments shall be satisfactory to Agent in form, substance and date.
ARTICLE V - REPRESENTATIONS AND WARRANTIES
Section 5.1. BORROWER'S REPRESENTATIONS AND WARRANTIES. To confirm each
Lender's understanding concerning Related Persons and Related Persons'
businesses, properties and obligations and to induce Agent, each Lender and
Issuing Bank to enter into this Agreement and to make the Loans and issue
Letters of Credit, Borrower represents and warrants to Agent and each Lender
that:
(a) NO DEFAULT. Borrower is not in default in the performance of any
of the covenants and agreements contained herein. No event has occurred
and is continuing which constitutes a Default.
(b) ORGANIZATION AND GOOD STANDING. Each Related Person is duly
organized, validly existing and in good standing under the laws of its
state of organization, having all powers required to carry on its business
and enter into and carry out the transactions contemplated hereby. Each
such Related Person is duly qualified, in good standing, and authorized to
do business in all other jurisdictions within the United States wherein the
character of the properties owned or held by it or the nature of the
business transacted by it makes such qualification necessary, except where
the failure so to qualify will not have any material adverse effect on
Borrower on a Consolidated basis. Each such Related Person has taken all
actions and procedures customarily taken in order to enter, for the purpose
of conducting business or owning property, each jurisdiction outside the
United States wherein the character of the properties owned or held by it
or the nature of the business transacted by it makes such actions and
procedures desirable.
(c) AUTHORIZATION. Each Related Person has duly taken all action
necessary to authorize the execution and delivery by it of the Loan
Documents to which it is a party and to authorize the consummation of the
transactions contemplated thereby and
38
<PAGE>
the performance of its obligations thereunder. Borrower is duly authorized
to borrow funds hereunder.
(d) NO CONFLICTS OR CONSENTS. The execution and delivery by the
various Related Persons of the Loan Documents to which each is a party, the
performance by each of its obligations under such Loan Documents, and the
consummation of the transactions contemplated by the various Loan
Documents, do not and will not (i) conflict with any provision of (1) to
the best knowledge of Borrower, any domestic or foreign law, statute, rule
or regulation, (2) the organizational documents of any Related Person, or
(3) any agreement, judgment, license, order or permit applicable to or
binding upon any Related Person, (ii) result in the acceleration of any
Debt owed by any Related Person, or (iii) result in or require the creation
of any Lien upon any assets or properties of any Related Person except as
expressly contemplated in the Loan Documents. Except as expressly
contemplated in the Loan Documents no consent, approval, authorization or
order of, and no notice to or filing with, any court or governmental
authority or third party is required in connection with the execution,
delivery or performance by any Related Person of any Loan Document or to
consummate any transactions contemplated by the Loan Documents.
(e) ENFORCEABLE OBLIGATIONS. This Agreement is, and the other Loan
Documents when duly executed and delivered will be, legal, valid and
binding obligations of each Related Person which is a party hereto or
thereto, enforceable in accordance with their terms except as such
enforcement may be limited by bankruptcy, insolvency or similar laws of
general application relating to the enforcement of creditors' rights.
(f) INITIAL FINANCIAL STATEMENTS. The Initial Financial Statements
fairly present (i) Costilla LLC's Consolidated and each other Related
Person's financial position at the respective dates thereof, (ii) the
Consolidated results of Costilla LLC and the results of each other Related
Person's operations, and (iii) Costilla LLC's Consolidated cash flows for
the respective periods thereof. Since the date of the audited annual
Initial Financial Statements no material adverse change has occurred in
Borrower's Consolidated financial condition or businesses. All Initial
Financial Statements of the Related Persons were prepared in accordance
with GAAP.
(g) OTHER OBLIGATIONS AND RESTRICTIONS. No Related Person has any
outstanding Debt of any kind (including contingent obligations, tax
assessments, and unusual forward or long-term commitments) which is, in the
aggregate, material with respect to Borrower's Consolidated financial
condition and not disclosed in the Disclosure Schedule or a Disclosure
Report. No Related Person is subject to or restricted by any franchise,
contract, deed, charter restriction, or other instrument or restriction
which is materially likely in the foreseeable future to materially and
39
<PAGE>
adversely affect the businesses, properties, prospects, operations, or
financial condition of Borrower on a Consolidated basis.
(h) FULL DISCLOSURE. No certificate, statement or other information
delivered herewith or heretofore by any Related Person to Agent, any Lender
or Issuing Bank in connection with the negotiation of this Agreement or in
connection with any transaction contemplated hereby contains any untrue
statement of a material fact or omits to state any material fact known to
any Related Person (other than industry-wide risks normally associated with
the types of businesses conducted by the Related Persons) necessary to make
the statements contained herein or therein not misleading as of the date
made or deemed made. There is no fact known to any Related Person that has
not been disclosed to Agent and each Lender in writing which could
materially and adversely affect Borrower's Consolidated properties,
businesses, prospects or condition (financial or otherwise). To the best
knowledge of Borrower, there are no statements or conclusions in any
Engineering Report which are based upon or include misleading information
or fail to take into account material information regarding the matters
reported therein, it being understood that each Engineering Report is
necessarily based upon professional opinions, estimates and projections and
that Borrower does not warrant that such opinions, estimates and
projections will ultimately prove to have been accurate. Borrower has
heretofore delivered to Agent and each Lender true, correct and complete
copies of the Initial Financial Statements and the Initial Engineering
Report.
(i) LITIGATION. Except as disclosed in the Disclosure Schedule: (i)
there are no actions, suits or legal, equitable, arbitrative or
administrative proceedings pending, or to the knowledge of any Related
Person threatened, against any Related Person before any federal, state,
municipal or other court, department, commission, body, board, bureau,
agency, or instrumentality, domestic or foreign, which do or, as determined
by Borrower in good faith, may materially and adversely affect Borrower on
a Consolidated basis, its ownership or use of any of its assets or
properties, its businesses or financial condition or prospects, or the
right or ability of any Related Person to enter into the Loan Documents to
which it is a party or to consummate the transactions contemplated thereby
or to perform its obligations thereunder and (ii) there are no outstanding
judgments, injunctions, writs, rulings or orders by any such governmental
entity against any Related Person or any Related Person's stockholders,
partners, directors or officers which have or may have any such effect.
(j) ERISA LIABILITIES. All currently existing ERISA Plans are listed
in the Disclosure Schedule or a Disclosure Report. Except as disclosed in
the Disclosure Schedule or a Disclosure Report, no Termination Event has
occurred with respect to any ERISA Plan and the Related Persons are in
compliance with ERISA in all material respects. No Related Person is
required to contribute to, or has any other absolute or contingent
liability in respect of, any "multiemployer plan" as defined in Section
4001
40
<PAGE>
of ERISA. Except as set forth in the Disclosure Schedule or a
Disclosure Report: (i) no "accumulated funding deficiency" (as defined in
Section 412(a) of the Internal Revenue Code of 1986, as amended) exists
with respect to any ERISA Plan, whether or not waived by the Secretary of
the Treasury or his delegate, and (ii) the current value of each ERISA
Plan's benefits does not exceed the current value of such ERISA Plan's
assets available for the payment of such benefits by more than $500,000.
(k) ENVIRONMENTAL AND OTHER LAWS. Except as disclosed in the
Disclosure Schedule or a Disclosure Report: (i) the Related Persons are
conducting their businesses in material compliance with all applicable
federal, state or local laws, including Environmental Laws, and have and
are in material compliance with all licenses and permits required under any
such laws; (ii) none of the operations or properties of any Related Person
is the subject of federal, state or local investigation evaluating whether
any material remedial action is needed to respond to a release of any
Hazardous Materials into the environment or to the improper storage or
disposal (including storage or disposal at offsite locations) of any
Hazardous Materials; (iii) no Related Person (and to the best knowledge of
Borrower, no other Person) has filed any notice under any federal, state or
local law indicating that any Related Person is responsible for the
improper release into the environment, or the improper storage or disposal,
of any material amount of any Hazardous Materials or that any material
amount of Hazardous Materials have been improperly released, or are
improperly stored or disposed of, upon any property of any Related
Person; (iv) no Related Person has transported or arranged for the
transportation of any material amount of Hazardous Material to any location
which is (1) listed on the National Priorities List under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended,
listed for possible inclusion on such National Priorities List by the
Environmental Protection Agency in its Comprehensive Environmental
Response, Compensation and Liability Information System List, or listed on
any similar state list or (2) the subject of federal, state or local
enforcement actions or other investigations which may lead to claims
against any Related Person for clean-up costs, remedial work, damages to
natural resources or for personal injury claims (whether under
Environmental Laws or otherwise); (v) no Related Person otherwise has any
known material contingent liability under any Environmental Laws or in
connection with the release into the environment, or the storage or
disposal, of any Hazardous Materials; and (vi) without limiting the
foregoing, no material adverse change has occurred with respect to the
matters described in clauses (i) through (v) above since June 14, 1996.
(l) NAMES AND PLACES OF BUSINESS. Except as disclosed in the
Disclosure Schedule, no Related Person has, during the preceding five
years, been known by, or used any other corporate, trade, or fictitious
name, except as disclosed in the Disclosure Schedule. Except as otherwise
indicated in the Disclosure Schedule or a Disclosure Report, the chief
executive office and principal place of business of each Related Person is
(and for the preceding five years have been) located at the address of
41
<PAGE>
Borrower set out in Section 10.3. Except as indicated in the Disclosure
Schedule or a Disclosure Report, no Related Person has any other office or
place of business.
(m) BORROWER'S SUBSIDIARIES. Borrower does not presently have any
Subsidiary or own any stock in any other corporation or association except
those listed in the Disclosure Schedule or a Disclosure Report. No Related
Person is a member of any general or limited partnership, joint venture or
association of any type whatsoever except those listed in the Disclosure
Schedule or a Disclosure Report and associations, joint ventures or other
relationships (i) which are established pursuant to a standard form
operating agreement or similar agreement or which are partnerships for
purposes of federal income taxation only, (ii) which are not corporations
or partnerships (or subject to the Uniform Partnership Act) under
applicable state law, AND (iii) whose businesses are limited to the
exploration, development and operation of oil, gas or mineral properties
and interests owned directly by the parties in such associations, joint
ventures or relationships. Except as otherwise revealed in a Disclosure
Report, Borrower owns, directly or indirectly, the equity interest in each
of its Subsidiaries which is indicated in the Disclosure Schedule.
(n) TITLE TO PROPERTIES. Each Related Person has good and defensible
title to all of its material properties and assets, free and clear of all
Prohibited Liens and of all impediments to the use of such properties and
assets in such Related Person's business, except that no representation or
warranty is made with respect to any oil, gas or mineral property or
interest to which no proved oil or gas reserves are attributed in the most
recent Engineering Report.
(o) GOVERNMENT REGULATION. No Related Person owing Obligations is
subject to regulation under the Public Utility Holding Company Act of 1935,
the Federal Power Act, the Investment Company Act of 1940 (as any of the
preceding acts have been amended) or any other statute, law, regulation or
decree which regulates the incurring by such Person of Debt, including
statutes, laws, regulations or decrees relating to common contract carriers
or the sale of electricity, gas, steam, water or other public utility
services.
(p) INSIDER. No Related Person, nor any Person having "control" (as
that term is defined in 12 U.S.C. Section 375b(9) or in regulations
promulgated pursuant thereto) of any Related Person, is a "director" or an
"executive officer" or "principal shareholder" (as those terms are defined
in 12 U.S.C. Section 375b(8) or (9) or in regulations promulgated pursuant
thereto) of any Lender, of a bank holding company of which any Lender is a
Subsidiary or of any Subsidiary of a bank holding company of which any
Lender is a Subsidiary.
Section 5.2. REPRESENTATION BY LENDERS. Each Lender hereby represents
that it will acquire its Notes for its own account in the ordinary course of its
commercial lending business;
42
<PAGE>
however, the disposition of such Lender's property shall at all times be and
remain within its control and, in particular and without limitation, such
Lender may sell or otherwise transfer its Notes, any participation interest
or other interest in its Notes, or any of its other rights and obligations
under the Loan Documents.
ARTICLE VI - COVENANTS OF BORROWER
Section 6.1. AFFIRMATIVE COVENANTS. To conform with the terms and
conditions under which each Lender is willing to have credit outstanding to
Borrower, and to induce Agent, each Lender and Issuing Bank to enter into this
Agreement and make the Loans and issue Letters of Credit, Borrower warrants,
covenants and agrees and shall cause each other Related Person to warrant,
covenant and agree, except as to Section 6.1(a), that until the full and final
payment of the Obligations and the termination of this Agreement, unless
Majority Lenders have previously agreed otherwise:
(a) PAYMENT AND PERFORMANCE. Borrower will pay all amounts due under
the Loan Documents in accordance with the terms thereof and will observe,
perform and comply with every covenant, term and condition expressed or
implied in the Loan Documents. Borrower will cause the other Related
Persons to observe, perform and comply with every such term, covenant and
condition.
(b) BOOKS, FINANCIAL STATEMENTS AND REPORTS. Each Related Person
will at all times maintain full and accurate books of account and records.
Borrower will maintain and will cause each Related Person to maintain a
standard system of accounting and will furnish the following statements and
reports to Agent and each Lender at Borrower's expense:
(i) As soon as available, and in any event within one hundred
five (105) days after the end of each Fiscal Year, complete audited
Consolidated financial statements of Borrower together with all notes
thereto, prepared in reasonable detail in accordance with GAAP,
together with an opinion, based on an audit using generally accepted
auditing standards, by independent certified public accountants
selected by Borrower and acceptable to Majority Lenders, stating that
such Consolidated financial statements have been so prepared. These
financial statements shall contain a Consolidated balance sheet as of
the end of such Fiscal Year and Consolidated statements of earnings,
of cash flows, and of changes in owners' equity for such Fiscal Year,
each setting forth in comparative form the corresponding figures for
the preceding Fiscal Year. In addition, within one hundred five (105)
days after the end of each Fiscal Year Borrower will furnish a report
signed by such accountants, containing calculations showing compliance
(or non-compliance) at the end of such Fiscal Year with the
requirements of Section 6.2(a), (k) and (l) (such calculations to be
43
<PAGE>
based solely on information obtained by such accountants during the
course of their audit) and stating that in making the examination and
reporting on the Consolidated financial statements described above
they did not conclude that any Default existed at the end of such
Fiscal Year or at the time of their report, or, if they did conclude
that a Default existed, specifying its nature and period of existence.
If Agent so requests, all of the financial statements described in
this Section 5.2(b)(i) shall also be prepared on a consolidating
basis.
(ii) As soon as available, and in any event within sixty (60)
days after the end of each Fiscal Quarter, complete unaudited
Consolidated financial statements from Borrower and Borrower's
consolidating balance sheet as of the end of such Fiscal Quarter and
Consolidated statements of Borrower's earnings and cash flows for the
period from the beginning of the then current Fiscal Year to the end
of such Fiscal Quarter, all in reasonable detail and prepared in
accordance with GAAP, subject to changes resulting from normal
year-end adjustments and without footnotes. In addition Borrower
will, together with each such set of financial statements and each set
of financial statements furnished under subsection (b)(i) of this
section, furnish a certificate in the form of Exhibit E signed by the
chief financial officer of Borrower stating that such financial
statements are accurate and complete in all material respects, stating
that he has reviewed the Loan Documents, containing calculations
showing compliance (or non-compliance) at the end of such Fiscal
Quarter with the requirements of Section 6.2(a), (k) and (l), and
stating that no Default exists at the end of such Fiscal Quarter or at
the time of such certificate or specifying the nature and period of
existence of any such Default. If Agent so requests, all of the
financial statements described in this Section 5.2(b)(ii) shall also
be prepared on a consolidating basis.
(iii) As soon as available, and in any event within one hundred
five (105) days after the end of each Fiscal Year (A) until the
cancellation of the A&P Notes, compiled or audited, if otherwise
prepared in the normal course of business, financial statements of A&P
Meter Service and Supply, Inc., prepared in reasonable detail in
accordance with GAAP, and (B) upon request of Agent, compiled or
audited, if otherwise prepared in the normal course of business,
financial statements of Republic Gas Partners, L.L.C., prepared in
reasonable detail in accordance with GAAP. These financial statements
shall contain a balance sheet as of the end of such Fiscal Year and
statements of earnings, of cash flows, and of changes in owners'
equity for such Fiscal Year, each setting forth in comparative form
the corresponding figures for the preceding Fiscal Year.
44
<PAGE>
(iv) Promptly upon their becoming available, copies of all
financial statements, reports, notices and proxy statements sent by
any Related Person to its stockholders or members.
(v) By February 28 of each year, an engineering report prepared
as of January 1 of such year by Williamson Petroleum Consultants,
Inc., or other independent petroleum engineers chosen by Borrower and
acceptable to Majority Lenders, and by August 15 of each year, an
engineering report prepared by Borrower's in-house engineering staff
as of July 1 of such year. Each such report shall cover all oil and
gas properties and interests owned by any Related Person which are
located in or offshore of the United States of America and which have
attributable to them proved oil or gas reserves; PROVIDED, properties
owned by SMI shall be reported in the aggregate as a single item.
Each such report shall be satisfactory to Agent, shall take into
account any "over-produced" status under gas balancing arrangements,
and shall contain information and analysis comparable in scope to that
contained in the Initial Engineering Report. Each such report shall,
if so requested by Agent, (A) distinguish (or shall be delivered
together with a certificate from an appropriate officer of Borrower
which distinguishes) those properties treated in such report which are
Collateral from those properties treated in such report which are not
Collateral and (B) distinguish (or shall be delivered together with a
certificate from an appropriate officer of Borrower which
distinguishes) those properties treated in such report which secure
both the Obligations and other indebtedness owing to any Person from
those properties treated in such report which secure only the
Obligations.
(vi) As soon as available, and in any event within forty-five
(45) days after the end of each Fiscal Quarter, a report describing by
lease or unit the gross volume of production, oil and gas prices and
sales attributable to production during such Fiscal Quarter from the
properties described in subsection (b)(v) above and describing the
related severance taxes, other taxes, and leasehold operating expenses
and capital costs attributable thereto and incurred during such Fiscal
Quarter.
(vii) Promptly upon their becoming available, copies of all
financial statements, reports, notices and proxy statements sent by
Borrower to its stockholders or debtholders and all registration
statements, periodic reports and other statements and schedules filed
by Borrower with any securities exchange, the Securities and Exchange
Commission or any similar governmental authority.
(c) OTHER INFORMATION AND INSPECTIONS. Each Related Person will
furnish to Agent and each Lender any information which Agent may from time
to time reasonably request in writing concerning any covenant, provision or
condition of the Loan
45
<PAGE>
Documents or any matter in connection with the Related Persons'
businesses and operations. Each Related Person will permit
representatives appointed by Agent, as may be directed by any Lender
(including independent accountants, agents, attorneys, appraisers and any
other Persons) to visit and inspect any of such Related Person's property
during normal business hours, including its books of account, other books
and records, and any facilities or other business assets, and to make
extra copies therefrom and photocopies and photographs thereof, and to
write down and record any information such representatives obtain, and
each Related Person shall permit Agent or its representatives to
investigate and verify the accuracy of the information furnished to
Agent, any Lender or Issuing Bank in connection with the Loan Documents
and to discuss all such matters with its officers, employees and
representatives. Each of Agent, Lenders and Issuing Bank agrees that,
until the occurrence of a Default, it will take all reasonable steps to
keep confidential any proprietary information given to it by any Related
Person, provided, however, that this restriction shall not apply to
information which (i) has at the time in question entered the public
domain, (ii) is required to be disclosed by law or by any order, rule or
regulation (whether valid or invalid) of any court or governmental agency
or authority, (iii) is disclosed to Agent's, any Lender's or Issuing
Bank's Affiliates, auditors, attorneys, or agents, or (iv) is furnished
to any other Lender or to any purchaser or prospective purchaser of
participations or other interests in any Loan or Loan Document.
(d) NOTICE OF MATERIAL EVENTS AND CHANGE OF ADDRESS. Borrower will
promptly notify Agent and each Lender:
(i) of any material adverse change in (1) Borrower's
Consolidated financial condition, or (2) the aggregate value of the
Collateral,
(ii) of the occurrence of any Default,
(iii) of the acceleration of the maturity of any Debt, including
but not limited to the Senior Unsecured Notes, owed by any Related
Person or of any default by any Related Person under any indenture,
mortgage, agreement, contract or other instrument to which any of them
is a party or by which any of them or any of their properties is
bound, if such acceleration or default might have a material adverse
effect upon Borrower's Consolidated financial condition or on the
value of any material part of the Collateral,
(iv) of the occurrence of any Termination Event,
(v) of any claim of $500,000 or more, any notice of potential
liability under any Environmental Laws which might exceed such amount,
or any other material adverse claim asserted against any Related
Person or with respect to any Related Person's properties, and
46
<PAGE>
(vi) of the filing of any suit or proceeding against any Related
Person in which an adverse decision could have a material adverse
effect upon Borrower's Consolidated financial condition, business or
operations or on the value of any material part of the Collateral.
Upon the occurrence of any of the foregoing the Related Persons will
take all necessary or appropriate steps to remedy promptly any such
material adverse change, Default, acceleration, default or Termination
Event, to protect against any such adverse claim, to defend any such suit
or proceeding, and to resolve all controversies on account of any of the
foregoing. Borrower will also notify Agent and Agent's counsel in writing
at least ten Business Days prior to the date that any Related Person
changes its name or the location of its chief executive office or principal
place of business or the place where it keeps its books and records
concerning the Collateral, furnishing with such notice any necessary
financing statement amendments or requesting Agent and its counsel to
prepare the same.
(e) MAINTENANCE OF PROPERTIES. Each Related Person will maintain,
preserve, protect, and keep all Collateral and all other property used or
useful in the conduct of its business in good condition, ordinary wear and
tear excepted, and in compliance with all applicable laws, rules and
regulations, and will from time to time make all repairs, renewals and
replacements needed to enable the business and operations carried on in
connection therewith to be conducted at all times.
(f) MAINTENANCE OF EXISTENCE AND QUALIFICATIONS. Each Related Person
will maintain and preserve its existence and its rights and franchises in
full force and effect and will qualify to do business in all states or
jurisdictions where required by applicable law, except where the failure so
to qualify will not have any material adverse effect on Borrower on a
Consolidated basis.
(g) PAYMENT OF TRADE DEBT, TAXES, ETC. Each Related Person will
(i) timely file all required tax returns; (ii) timely pay all taxes,
assessments, and other governmental charges or levies imposed upon it or
upon its income, profits or property; (iii) within ninety (90) days after
the same becomes due pay all Debt owed by it on ordinary trade terms to
vendors, suppliers and other Persons providing goods and services used by
it in the ordinary course of its business; (iv) pay and discharge when due
all other Debt now or hereafter owed by it; and (v) maintain appropriate
accruals and reserves for all of the foregoing in accordance with GAAP.
Each Related Person may, however, delay paying or discharging any of the
foregoing so long as it is in good faith contesting the validity thereof by
appropriate proceedings and has set aside on its books adequate reserves
therefor.
(h) INSURANCE. Each Related Person will keep or cause to be kept
adequately insured by financially sound and reputable insurers its surface
equipment, vehicles and
47
<PAGE>
all other property of a character usually insured by similar Persons
engaged in the same or similar businesses. Any insurance policies
covering Collateral shall be endorsed, if requested by Agent, (i) to
provide for payment of losses to Agent for the account of Lenders as
their interests may appear, (ii) to provide that such policies may not be
cancelled, reduced or affected in any manner for any reason without
fifteen days prior notice to Agent, (iii) to provide for any other matters
specified in any applicable Security Document or which Agent may
reasonably require; and (iv) to provide for insurance against fire,
casualty and any other hazards normally insured against, in the amount of
the full value (less a reasonable deductible not to exceed amounts
customary in the industry for similarly situated businesses and
properties) of the property insured. Each Related Person shall at all
times maintain insurance against its liability for injury to persons or
property, which insurance shall be by financially sound and reputable
insurers.
(i) PAYMENT OF EXPENSES. Whether or not the transactions
contemplated by this Agreement are consummated, Borrower will promptly (and
in any event, within 30 days after any invoice or other statement or
notice) pay all reasonable costs and expenses incurred by or on behalf of
(i) Agent and its Affiliates (including attorneys' fees) in connection with
(1) the negotiation, syndication, preparation, execution and delivery of
the Loan Documents, and any and all consents, waivers or other documents or
instruments relating thereto, (2) the filing, recording, refiling and
re-recording of any Loan Documents and any other documents or instruments
or further assurances required to be filed or recorded or refiled or
re-recorded by the terms of any Loan Document, and (3) the borrowings
hereunder, the administration of Letters of Credit, and other action
reasonably required in the course of administration hereof, and (ii) Agent,
any Lender or Issuing Bank (including attorneys' fees) in connection with
the defense or enforcement of the Loan Documents or the defense of Agent's,
any Lender's or Issuing Bank's exercise of its rights thereunder (including
costs and expenses of determining whether and how to carry out such defense
or enforcement).
(j) PERFORMANCE ON BORROWER'S BEHALF. If any Related Person fails to
pay any taxes, insurance premiums, expenses, attorneys' fees or other
amounts it is required to pay under any Loan Document, Agent may pay the
same. Borrower shall immediately reimburse Agent for any such payments and
each amount paid by Agent shall constitute an Obligation owed hereunder
which is due and payable on the date such amount is paid by Agent.
(k) INTEREST. Borrower hereby promises to Agent, Lenders and Issuing
Bank to pay interest at the Late Payment Rate on all Obligations which
Borrower has in this Agreement promised to pay (including Obligations to
pay fees or to reimburse or indemnify Agent, any Lender or Issuing Bank)
and which are not paid when due. Such interest shall accrue from the date
such Obligations become due until they are paid.
48
<PAGE>
(l) COMPLIANCE WITH AGREEMENTS AND LAW. Each Related Person will
perform all material obligations it is required to perform under the terms
of each indenture, mortgage, deed of trust, security agreement, lease,
franchise, agreement, contract or other instrument or obligation to which
it is a party or by which it or any of its properties is bound. Each
Related Person will conduct its business and affairs in compliance with all
laws, regulations, and orders applicable thereto, including Environmental
Laws.
(m) EVIDENCE OF COMPLIANCE. Each Related Person will furnish to
Agent and each Lender at such Related Person's or Borrower's expense all
evidence which Agent from time to time reasonably requests in writing as to
the accuracy and validity of or compliance with all representations,
warranties and covenants made by any Related Person in the Loan Documents,
the satisfaction of all conditions contained therein, and all other matters
pertaining thereto.
Section 6.2. NEGATIVE COVENANTS. To conform with the terms and conditions
under which each Lender is willing to have credit outstanding to Borrower, and
to induce Agent, each Lender and Issuing Bank to enter into this Agreement and
make the Loans and issue Letters of Credit, Borrower warrants, covenants and
agrees and shall cause each other Related Person to warrant, covenant and agree
that until the full and final payment of the Obligations and the termination of
this Agreement, unless Majority Lenders have previously agreed otherwise:
(a) RESTRICTED DEBT. No Related Person will in any manner owe or be
liable for Restricted Debt except:
(i) the Obligations.
(ii) Debt arising under futures contracts or swap contracts
expressly permitted by Section 6.2(o).
(iii) Debt arising under the Indenture in a principal amount
not to exceed $100,000,000.
(iv) Credit extensions, advances and loans permitted under
Section 6.2(g).
(v) miscellaneous items of Restricted Debt not described in
subsections (i), (ii), (iii) and (iv) of this subsection (a) which do
not in the aggregate (taking into account all such Restricted Debt of
all Related Persons) exceed $750,000 at any one time outstanding.
49
<PAGE>
(b) LIMITATION ON LIENS. No Related Person will create, assume or
permit to exist any Lien upon any of the properties or assets which it now
owns or hereafter acquires, except, to the extent not otherwise forbidden
by the Security Documents:
(i) Liens which secure Obligations only.
(ii) statutory Liens for taxes, statutory mechanics' and
materialmen's Liens incurred in the ordinary course of business, and
other similar Liens incurred in the ordinary course of business,
provided such Liens do not secure Restricted Debt and secure only Debt
which is not delinquent or which is being contested as provided in
Section 6.1(g).
(iii) "Permitted Encumbrances" (as such term is defined in
the Mortgage) on the Collateral or on any other property of any
Related Person.
(c) LIMITATION ON MERGERS, ISSUANCES OF SECURITIES. Except as
expressly provided in this subsection no Related Person will merge or
consolidate with or into any other business entity. Any Subsidiary of
Borrower may, however, be merged into or consolidated with (i) another
Subsidiary of Borrower, provided that if either Subsidiary is a Guarantor
the surviving subsidiary will also be a Guarantor, or (ii) Borrower, so
long as Borrower is the surviving business entity; provided that no Default
or Event of Default exists immediately prior to or after such Merger.
Borrower will not issue any shares of stock other than common stock in
Borrower and any options or warrants giving the holders thereof only the
right to acquire such interests. No Subsidiary of Borrower will issue any
additional securities or any options, warrants or other rights to acquire
such additional securities except to Borrower and only to the extent not
otherwise forbidden under the terms hereof. No Subsidiary of Borrower will
allow any diminution of Borrower's interest (direct or indirect) therein.
(d) LIMITATION ON SALES OF PROPERTY. No Related Person will sell,
transfer, lease, exchange, alienate or dispose of any properties valued in
the Borrowing Base or any of its other material assets or properties or any
material interest therein except:
(i) equipment which is worthless or obsolete or which is
replaced by equipment of equal suitability and value;
(ii) inventory (including oil and gas sold as produced and
seismic data) which is sold in the ordinary course of business on
ordinary trade terms;
(iii) interests in oil and gas properties, or portions
thereof, to which no proved reserves of oil, gas or other liquid or
gaseous hydrocarbons are attributed in the most recent Engineering
Report;
50
<PAGE>
(iv) during each period from and including a Determination Date
until but not including the next succeeding Determination Date, sales
of properties valued in the Borrowing Base whose value as set forth in
the Engineering Report most recently furnished to Agent and Lenders as
of the time of sale does not in the aggregate exceed $750,000. At
Borrower's request, Agent shall release its Liens on the properties
sold by Borrower in accordance with this subsection at Borrower's
expense; and
(v) oil and gas properties owned by Borrower located in the
states of Oklahoma and Kansas that are sold by January 31, 1997. At
Borrower's request, Agent shall release its Liens on the properties
sold by Borrower in accordance with this subsection at Borrower's
expense.
No Related Person will sell, transfer or otherwise dispose of capital stock
of any of Borrower's Subsidiaries except that any Subsidiary of Borrower
may sell or issue its own capital stock to the extent not otherwise
prohibited hereunder. No Related
51
<PAGE>
Person will discount, sell, pledge or assign any notes payable to it,
accounts receivable or future income except to the extent expressly
permitted under the Loan Documents.
(e) LIMITATION ON DIVIDENDS, REDEMPTIONS AND PREPAYMENTS ON SENIOR
UNSECURED NOTES. No Related Person will:
(i) declare or pay any dividends on, or make any other
distribution in respect of any interest in it, nor will any Related
Person directly or indirectly make any capital contribution to or
purchase, redeem, acquire or retire any securities in any Related
Person (whether such interests are now or hereafter issued,
outstanding or created);
(ii) cause or permit any reduction or retirement of the capital
stock of any Related Person, except as expressly provided in this
section; or
(iii) purchase, repurchase, defease or make any prepayments
on the Senior Unsecured Notes.
Notwithstanding clauses (i), (ii) and (iii) of this Section 6.2(e),
dividends, distributions, contributions, purchases, redemptions,
acquisitions, retirements or reductions may be made by any Subsidiary with
respect to any shares of its capital stock owned by Borrower, and by
Borrower to its Subsidiaries, to the extent permitted by the investment
restrictions of Section 6.2(f).
(f) LIMITATION ON INVESTMENTS AND NEW BUSINESSES. Except for
Permitted Investments, no Related Person will (i) make any expenditure or
commitment or incur any obligation or enter into or engage in any
transaction except in the ordinary course of business, (ii) engage directly
or indirectly in any business or conduct any operations except in
connection with or incidental to its present businesses and
operations, (iii) make any acquisitions of or capital contributions to or
other investments in any Person, or (iv) make any significant acquisitions
or investments in any properties.
(g) LIMITATION ON CREDIT EXTENSIONS. Except for Permitted
Investments, no Related Person will extend credit, make advances or make
loans other than (i) normal and prudent extensions of credit to customers
buying goods and services in the ordinary course of business, which
extensions shall not be for longer periods than those extended by similar
businesses operated in a normal and prudent manner, and (ii) loans by
Subsidiaries of Borrower to Borrower.
(h) TRANSACTIONS WITH AFFILIATES. Except as disclosed in the
Disclosure Schedule, no Related Person will engage in any material
transaction with any of its Affiliates on terms which are less favorable to
it than those which would have been
52
<PAGE>
obtainable at the time in arm's-length dealing with Persons other than
such Affiliates, except for transactions approved in writing by all
Lenders from time to time.
(i) CERTAIN CONTRACTS; AMENDMENTS; MULTIEMPLOYER ERISA PLANS. Except
as expressly provided for in the Loan Documents, no Related Person 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 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. No Related Person will enter into any
"take-or-pay" contract or other contract or arrangement for the purchase of
goods or services which obligates it to pay for such goods or service
regardless of whether they are delivered or furnished to it. No Related
Person will amend or permit any amendment to any contract or lease which
releases, qualifies, limits, makes contingent or, as may be determined by
Borrower in good faith, detrimentally affects the rights and benefits of
Agent or any Lender under or acquired pursuant to any Security Documents.
No Related Person will incur any obligation to contribute to any
"multiemployer plan" as defined in Section 4001 of ERISA. Borrower will
not amend or agree to amend the Indenture without the prior written consent
of Lenders.
(j) FISCAL YEAR. No Related Person will change its fiscal year.
(k) CURRENT RATIO. As of the end of any Fiscal Quarter, commencing
with the Fiscal Quarter ending on December 31, 1996, the ratio of
Borrower's Consolidated current assets to Borrower's Consolidated current
liabilities will never be less than 1.0 to 1.0. For purposes of this
subsection, (i) Borrower's Consolidated current liabilities will be
calculated (A) including all LC Obligations as current liabilities (other
than any Letter of Credit that on its face expressly prohibits any drawing
thereunder within one year from the time of calculation), and (B) without
including any payments of principal on the Notes or the Senior Unsecured
Notes which are required to be repaid within one year from the time of
calculation, and (ii) Borrower's Consolidated current assets will be
calculated including up to $10,000,000 of the unused portion of the
Borrowing Base.
(l) TANGIBLE NET WORTH. As of the end of any Fiscal Quarter,
commencing with the Fiscal Quarter ending on December 31, 1996, Borrower's
Consolidated Tangible Net Worth will never be less than the sum of (i)
$30,000,000 PLUS (ii) fifty percent (50%) of Borrower's Adjusted
Consolidated Net Income for each Fiscal Quarter, if positive, and zero
percent (0%) if negative, determined on a cumulative basis, for the period
beginning October 1, 1996 and ending on the last day of the most recent
Fiscal Quarter as of the time in question PLUS (iii) seventy-five percent
(75%) of the Net Proceeds of Equity received after the date hereof.
53
<PAGE>
(m) LEASE PAYMENTS. Related Persons shall not make any payments
under any leases including capital leases (other than oil and gas leases)
in any fiscal year in an aggregate amount in excess of $1,000,000.
(n) BORROWER'S EBITDA TO INTEREST EXPENSE. As of the end of any
Fiscal Quarter, commencing with the Fiscal Quarter ending on December 31,
1996, the ratio of EBITDA to interest expense shall never be less than 2.0
to 1.0., and shall be calculated as follows: (i) for the period ending
December 31, 1996, EBITDA and interest expense shall be calculated for the
Fiscal Quarter ending on such date on an annualized basis, (ii) for the
period ending March 31, 1997, EBITDA and interest expense shall be
calculated for the Fiscal Quarter ending on such date and the immediately
preceding Fiscal Quarter on an annualized basis, (iii) for the period
ending June 30, 1997, EBITDA and interest expense shall be calculated for
the Fiscal Quarter ending on such date and the immediately preceding two
Fiscal Quarters on an annualized basis, and (iv) for the period ending
September 30, 1997 and as of the end of each Fiscal Quarter thereafter,
EBITDA and interest expense shall be calculated for such Fiscal Quarter and
the three immediately preceding Fiscal Quarters.
(o) HEDGING. No Related Person will enter into any forward, future,
swap or hedging contracts except in accordance with its customary
practices; PROVIDED THAT:
(i) at no time will amounts maturing in any month under any
hedging contracts for the sale of crude oil and/or natural gas which
provide for a floor, but not a cap, exceed at any time one hundred
percent (100%) of the estimated production for such month from proved
producing reserves of Related Persons; and
(ii) at no time will any forward, future, swap or hedging
contracts for the sale of crude oil and/or natural gas, other than any
such contracts described in clause (i) above, exceed seventy-five
percent (75%) of the estimated production for such month from proved
producing reserves of Related Persons;
(iii) none of the hedging contracts described in clauses (i)
and (ii) above shall (x) cover the same estimated production for any
month, (y) contain any term or provision which could require Borrower
to meet margin calls, or otherwise to put up money or other assets
against the event of its nonperformance, prior to actual default in
performing its obligations thereunder, or which are otherwise
inconsistent with or more speculative than the past hedging practices
of Borrower, or (z) have a counterparty with a minimum long-term
unsecured debt rating less than "A-" by Standard & Poor's Corporation
or "A3" by Moody's Investors Service, Inc.
54
<PAGE>
ARTICLE VII - SECURITY
Section 7.1. THE SECURITY. The Obligations will be secured by the
Security Documents listed in the Security Schedule and any additional Security
Documents hereafter delivered by any Related Person and accepted by Agent.
Section 7.2. AGREEMENT TO DELIVER SECURITY DOCUMENTS. Borrower and each
Guarantor agrees to deliver, to further secure the Obligations whenever
requested by Agent in its sole and absolute discretion, deeds of trust,
mortgages, chattel mortgages, security agreements, financing statements and
other Security Documents in form and substance satisfactory to Agent for the
purpose of granting, confirming, and perfecting first and prior liens or
security interests in any real or personal property now owned or hereafter
acquired by any of the Related Persons. Borrower also agrees to deliver,
whenever requested by Agent in its sole and absolute discretion, favorable title
opinions from legal counsel acceptable to Agent with respect to any properties
of Borrower or any Subsidiary of Borrower which is a Guarantor and interests
designated by Agent, based upon abstract or record examinations to dates
acceptable to Agent and (a) stating that such Related Person has good and
defensible title to such properties and interests, free and clear of all
Prohibited Liens, (b) confirming that such properties and interests are subject
to Security Documents securing the Obligations that constitute and create legal,
valid and duly perfected first deed of trust or mortgage liens in such
properties and interests and first priority assignments of and security
interests in the oil and gas attributable to such properties and interests and
the proceeds thereof, and (c) covering such other matters as Agent may request.
Section 7.3. PERFECTION AND PROTECTION OF SECURITY INTERESTS AND LIENS.
Borrower will from time to time deliver to Agent any financing statements,
continuation statements, extension agreements and other documents, properly
completed and executed (and acknowledged when required) by the Related Persons
in form and substance satisfactory to Agent, which Agent requests for the
purpose of perfecting, confirming, or protecting any Liens or other rights in
Collateral securing any Obligations.
Section 7.4. BANK ACCOUNTS; OFFSET. To secure the repayment of the
Obligations Borrower hereby grants to Agent, each of its Affiliates, each Lender
and Issuing Bank a security interest, a lien, and a right of offset, each of
which shall be in addition to all other interests, liens, and rights of Agent,
any Lender or Issuing Bank at common law, under the Loan Documents, or
otherwise, and each of which shall be upon and against (a) any and all moneys,
securities or other property (and the proceeds therefrom) of Borrower now or
hereafter held or received by or in transit to Agent, any Lender or Issuing Bank
from or for the account of Borrower, whether for safekeeping, custody, pledge,
transmission, collection or otherwise, (b) any and all deposits (general or
special, time or demand, provisional or final), other than deposits of funds
held by Borrower for the benefit of third parties, of Borrower with Agent, any
Lender or Issuing Bank, and (c) any other credits and claims of Borrower at any
55
<PAGE>
time existing against Agent, any Lender or Issuing Bank, including claims under
certificates of deposit. At any time and from time to time after the occurrence
of any Default, each of Agent, Lenders and Issuing Bank is hereby authorized to
foreclose upon, or to offset against the Obligations then due and payable (in
either case without notice to Borrower), any and all items hereinabove referred
to. The remedies of foreclosure and offset are separate and cumulative, and
either may be exercised independently of the other without regard to procedures
or restrictions applicable to the other.
Section 7.5. PRODUCTION PROCEEDS. All of the "Production Proceeds" (as
defined in the Security Documents) accruing to the property covered by the
Security Documents shall be paid to a lockbox in the name of Borrower and
initially deposited in the Collateral Account, which shall be subject to the
terms and conditions of the Collateral Account Pledge Agreement (as defined in
the Security Schedule). Procedures for establishing and maintaining such
lockbox and related accounts set forth in the Collateral Account Pledge
Agreement may be changed by written agreement of Borrower and Agent from time to
time without the consent of any Lender. In no case shall any failure, whether
purposed or inadvertent, by Agent or Lenders to collect directly any such
Production Proceeds constitute in any way a waiver, remission or release of any
of their rights under the Security Documents, nor shall any release of any
Production Proceeds by Agent or Lenders to any Related Person constitute a
waiver, remission, or release of any other Production Proceeds or of any rights
of Agent or Lenders to collect other Production Proceeds thereafter.
Section 7.6. GUARANTIES.
(a) Borrower shall cause each of its Subsidiaries to execute and deliver
to Agent an absolute and unconditional guaranty of the timely repayment of the
Obligations and the due and punctual performance of the obligations of Borrower
hereunder, which guaranty shall be substantially in the form of Exhibit F
attached hereto:
(i) if such Subsidiary of Borrower executes and delivers a Guaranty
under the Indenture.
(ii) upon Agent's written request if an Event of Default has occurred
and is continuing.
(iii) if a Borrowing Base Deficiency exists and Borrower does not
comply with Section 2.11 hereof.
(b) Borrower will cause each of its Subsidiaries to deliver to Agent,
simultaneously with its delivery of such a guaranty, (i) security documents
pledging all assets of such Subsidiary in favor of Agent for the benefit of
Lenders securing (A) the punctual performance of the obligations of such
Subsidiary under the guaranty and (B) the timely repayment of the Obligations
and the due and punctual performance of the obligations of Borrower hereunder,
56
<PAGE>
which such security documents shall be satisfactory to Agent in form and
substance; and (ii) written evidence satisfactory to Agent and its counsel that
such Subsidiary has taken all action necessary to duly approve and authorize its
execution, delivery and performance of such guaranty and any other documents
which it is required to execute.
ARTICLE VIII - EVENTS OF DEFAULT AND REMEDIES
Section 8.1. EVENTS OF DEFAULT. Each of the following events constitutes
an Event of Default under this Agreement:
(a) Any Related Person fails to pay any interest owing by it on any
Obligation within five days of the date when due, or any Related Person
fails to pay any other Obligation owing by it when due and payable, whether
at a date for the payment of a fixed installment or as a contingent or
other payment becomes due and payable or as a result of acceleration or
otherwise;
(b) Any Related Person fails (other than as referred to in subsection
(a) above) to duly observe, perform or comply with any covenant, agreement,
condition or provision of any Loan Document, except for Section 6.2(e) of
this Agreement, and such failure remains unremedied for a period of twenty
(20) days from such failure;
(c) Any Related Person fails to duly observe, perform or comply with
any covenant, agreement, condition or provision of Section 6.2(e) of this
Agreement;
(d) Any representation or warranty previously, presently or hereafter
made in writing by or on behalf of any Related Person in connection with
any Loan Document shall prove to have been false or incorrect in any
material respect on any date on or as of which made, or any Loan Document
at any time ceases to be valid, binding and enforceable as warranted in
Section 5.1(e) for any reason other than its release or subordination by
Agent;
(e) Except as otherwise provided in subsections (a), (b) or (c)
above, any "default" or "event of default" occurs under any Loan Document
which defines either such term, and the same is not remedied within the
applicable period of grace (if any) provided in such Loan Document;
(f) A default or event of default occurs under the Indenture and such
default or event of default is not remedied within the applicable period of
grace (if any) provided in the Indenture;
(g) Any Related Person fails to duly observe, perform or comply with
any agreement with any Person or any term or condition of any instrument,
if such
57
<PAGE>
agreement or instrument is materially significant to Borrower and its
subsidiaries on a Consolidated basis, and such failure is not remedied
within the applicable period of grace (if any) provided in such agreement
or instrument;
(h) Any Related Person (i) fails to pay any portion, when such
portion is due, of any of its Debt having an unpaid principal amount in
excess of $500,000, or (ii) breaches or defaults in the performance of any
agreement or instrument by which any such Debt is issued, evidenced,
governed, or secured, and any such failure, breach or default continues
beyond any applicable period of grace provided therefor;
(i) A Change in Control shall occur;
(j) Either (i) any "accumulated funding deficiency" (as defined in
Section 412(a) of the Internal Revenue Code of 1986, as amended) in excess
of $500,000 exists with respect to any ERISA Plan, whether or not waived by
the Secretary of the Treasury or his delegate, or (ii) any Termination
Event occurs with respect to any ERISA Plan and the then current value of
such ERISA Plan's benefit liabilities exceeds the then current value of
such ERISA Plan's assets available for the payment of such benefit
liabilities by more than $500,000 (or in the case of a Termination Event
involving the withdrawal of a substantial employer, the withdrawing
employer's proportionate share of such excess exceeds such amount);
(k) Any material adverse change occurs in Borrower's Consolidated
financial condition or Borrower's Consolidated businesses or operations.
(l) Any Related Person:
(i) suffers the entry against it of a judgment, decree or order
for relief by a court of competent jurisdiction in an involuntary
proceeding commenced under any applicable bankruptcy, insolvency or
other similar law of any jurisdiction now or hereafter in effect,
including the federal Bankruptcy Code, as from time to time amended,
or has any such proceeding commenced against it which remains
undismissed for a period of thirty days; or
(ii) commences a voluntary case under any applicable bankruptcy,
insolvency or similar law now or hereafter in effect, including the
federal Bankruptcy Code, as from time to time amended; or applies for
or consents to the entry of an order for relief in an involuntary case
under any such law; or makes a general assignment for the benefit of
creditors; or fails generally to pay (or admits in writing its
inability to pay) its debts as such debts become due; or takes action
to authorize any of the foregoing; or
58
<PAGE>
(iii) suffers the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of all or a substantial part of its assets or of any
part of the Collateral in a proceeding brought against or initiated by
it, and such appointment or taking possession is neither made
ineffective nor discharged within thirty days after the making
thereof, or such appointment or taking possession is at any time
consented to, requested by, or acquiesced to by it; or
(iv) suffers the entry against it of a final judgment for the
payment of money in excess of $500,000 (not covered by insurance
satisfactory to Agent in its discretion), unless the same is
discharged within thirty days after the date of entry thereof or an
appeal or appropriate proceeding for review thereof is taken within
such period and a stay of execution pending such appeal is obtained;
or
(v) suffers a writ or warrant of attachment or any similar
process to be issued by any court against all or any substantial part
of its assets or any part of the Collateral, and such writ or warrant
of attachment or any similar process is not stayed or released within
thirty days after the entry or levy thereof or after any stay is
vacated or set aside.
Upon the occurrence of an Event of Default described in subsection (l)(i),
(l)(ii) or (l)(iii) of this section with respect to Borrower, all of the
Obligations shall thereupon be immediately due and payable, without demand,
presentment, notice of demand or of dishonor and nonpayment, protest, notice of
protest, notice of intention to accelerate, declaration or notice of
acceleration, or any other notice or declaration of any kind, all of which are
hereby expressly waived by Borrower, each other Related Person who at any time
ratifies or approves this Agreement. During the continuance of any other Event
of Default, Agent at any time and from time to time may (and upon written
instructions from Majority Lenders, Agent shall), without notice to Borrower or
any other Related Person, declare any or all of the Obligations immediately due
and payable, and all such Obligations shall thereupon be immediately due and
payable, without demand, presentment, notice of demand or of dishonor and
nonpayment, protest, notice of protest, notice of intention to accelerate,
declaration or notice of acceleration, or any other notice or declaration of any
kind, all of which are hereby expressly waived by Borrower and each other
Related Person who at any time ratifies or approves this Agreement. After any
such acceleration (whether automatic or due to any declaration by Agent), any
obligation of any Lender to make any further Advances or Issuing Bank to issue
any additional Letters of Credit shall be permanently terminated.
Section 8.2. REMEDIES. If any Default shall occur and be continuing, each
Lender may protect and enforce its rights under the Loan Documents by any
appropriate proceedings, including proceedings for specific performance of any
covenant or agreement contained in any Loan Document, and each Lender may
enforce the payment of any Obligations due it or enforce any other legal or
equitable right which it may have. All rights, remedies and powers
59
<PAGE>
conferred upon Agent and Lenders under the Loan Documents shall be deemed
cumulative and not exclusive of any other rights, remedies or powers
available under the Loan Documents or at law or in equity.
Section 8.3. INDEMNITY. Borrower agrees to indemnify Agent, each Lender
and Issuing Bank, upon demand, from and against any and all liabilities,
obligations, claims, losses, damages, penalties, fines, actions, judgments,
suits, settlements, costs, expenses or disbursements (including reasonable fees
of attorneys, accountants, experts and advisors) of any kind or nature
whatsoever (in this section collectively called "liabilities and costs") which
to any extent (in whole or in part) may be imposed on, incurred by, or asserted
against Agent, such Lender or Issuing Bank growing out of, resulting from or in
any other way associated with any of the Collateral, the Loan Documents and the
transactions and events (including the enforcement or defense thereof) at any
time associated therewith or contemplated therein (including any violation or
noncompliance with any Environmental Laws by any Related Person or any
liabilities or duties of any Related Person, Agent, any Lender or Issuing Bank
with respect to Hazardous Materials found in or released into the environment).
THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND
COSTS ARE IN ANY WAY OR TO ANY EXTENT OWED, IN WHOLE OR IN PART, UNDER ANY CLAIM
OR THEORY OF STRICT LIABILITY, OR ARE CAUSED, IN WHOLE OR IN PART, BY ANY
NEGLIGENT ACT OR OMISSION OF ANY KIND BY AGENT, ANY LENDER OR ISSUING BANK,
PROVIDED ONLY THAT NONE OF AGENT, ANY LENDER OR ISSUING BANK SHALL BE ENTITLED
UNDER THIS SECTION TO RECEIVE INDEMNIFICATION FOR THAT PORTION, IF ANY, OF ANY
LIABILITIES AND COSTS WHICH IS PROXIMATELY CAUSED BY ITS OWN INDIVIDUAL GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT, AS DETERMINED IN A FINAL JUDGMENT. If any
Person (including Borrower or any of its Affiliates) ever alleges such gross
negligence or willful misconduct by Agent, any Lender or Issuing Bank, the
indemnification provided for in this section shall nonetheless be paid upon
demand, subject to later adjustment or reimbursement, until such time as a court
of competent jurisdiction enters a final judgment as to the extent and effect of
the alleged gross negligence or willful misconduct. As used in this section the
terms "Agent", "Lender" and Issuing Bank shall refer not only to the Persons
designated as such in Section 1.1 but also to each director, officer, agent,
attorney, employee, representative and Affiliate of such Person.
ARTICLE IX - AGENT
Section 9.1. APPOINTMENT AND AUTHORITY. Each Lender hereby irrevocably
authorizes Agent, and Agent hereby undertakes, to receive payments of principal,
interest and other amounts due hereunder as specified herein and to take all
other actions and to exercise such powers under the Loan Documents as are
specifically delegated to Agent by the terms hereof or thereof, together with
all other powers reasonably incidental thereto. The relationship of
60
<PAGE>
Agent to Lenders is only that of one commercial bank acting as administrative
agent for others, and nothing in the Loan Documents shall be construed to
constitute Agent a trustee or other fiduciary for any holder of any of the
Notes or of any participation therein nor to impose on Agent duties and
obligations other than those expressly provided for in the Loan Documents.
With respect to any matters not expressly provided for in the Loan Documents
and any matters which the Loan Documents place within the discretion of
Agent, Agent shall not be required to exercise any discretion or take any
action, and it may request instructions from Lenders with respect to any such
matter, in which case it shall be required to act or to refrain from acting
(and shall be fully protected and free from liability to all Lenders in so
acting or refraining from acting) upon the instructions of Majority Lenders
(including itself), provided, however, that Agent shall not be required to
take any action which exposes it to a risk of personal liability that it
considers unreasonable or which is contrary to the Loan Documents or to
applicable law. Upon receipt by Agent from Borrower of any communication
calling for action on the part of Lenders or upon notice from any Lender to
Agent of any Default or Event of Default, Agent shall promptly notify each
Lender thereof.
Section 9.2. EXCULPATION, AGENT'S RELIANCE, ETC. NEITHER AGENT NOR ANY OF
ITS DIRECTORS, OFFICERS, AGENTS, ATTORNEYS, OR EMPLOYEES SHALL BE LIABLE FOR ANY
ACTION TAKEN OR OMITTED TO BE TAKEN BY ANY OF THEM UNDER OR IN CONNECTION WITH
THE LOAN DOCUMENTS, INCLUDING THEIR NEGLIGENCE OF ANY KIND, EXCEPT THAT EACH
SHALL BE LIABLE FOR ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. Without
limiting the generality of the foregoing, Agent (a) may treat the payee of any
Note as the holder thereof until Agent receives written notice of the assignment
or transfer thereof in accordance with this Agreement, signed by such payee and
in form satisfactory to Agent; (b) may consult with legal counsel (including
counsel for Borrower), independent public accountants and other experts selected
by it and shall not be liable for any action taken or omitted to be taken in
good faith by it in accordance with the advice of such counsel, accountants or
experts; (c) makes no warranty or representation to any Lender and shall not be
responsible to any Lender for any statements, warranties or representations made
in or in connection with the Loan Documents; (d) shall not have any duty to
ascertain or to inquire as to the performance or observance of any of the terms,
covenants or conditions of the Loan Documents on the part of any Related Person,
or to inspect the property (including the books and records) of any Related
Person; (e) shall not be responsible to any Lender for the due execution,
legality, validity, enforceability, genuineness, sufficiency or value of any
Loan Document or any instrument or document furnished in connection
therewith; (f) may rely upon the representations and warranties of the Related
Persons and the Lenders in exercising its powers hereunder; and (g) shall incur
no liability under or in respect of the Loan Documents by acting upon any
notice, consent, certificate or other instrument or writing (including any
telecopy, telegram, cable or telex) believed by it to be genuine and signed or
sent by the proper Person or Persons.
Section 9.3. LENDERS' CREDIT DECISIONS. Each Lender acknowledges that it
has, independently and without reliance upon Agent or any other Lender, made its
own analysis of Borrower and the transactions contemplated hereby and its own
independent decision to enter
61
<PAGE>
into this Agreement and the other Loan Documents. Each Lender also acknowledges
that it will, independently and without reliance upon Agent or any other Lender
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under the Loan Documents.
Section 9.4. INDEMNIFICATION. Each Lender agrees to indemnify Agent (to
the extent not reimbursed by Borrower within ten (10) days after demand) from
and against such Lender's Percentage Share of any and all liabilities,
obligations, claims, losses, damages, penalties, fines, actions, judgments,
suits, settlements, costs, expenses or disbursements (including reasonable fees
of attorneys, accountants, experts and advisors) of any kind or nature
whatsoever (in this section collectively called "liabilities and costs") which
to any extent (in whole or in part) may be imposed on, incurred by, or asserted
against Agent growing out of, resulting from or in any other way associated with
any of the Collateral, the Loan Documents and the transactions and events
(including the enforcement thereof) at any time associated therewith or
contemplated therein (including any violation or noncompliance with any
Environmental Laws by any Person or any liabilities or duties of any Person with
respect to Hazardous Materials found in or released into the environment). THE
FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND COSTS
ARE IN ANY WAY OR TO ANY EXTENT OWED, IN WHOLE OR IN PART, UNDER ANY CLAIM OR
THEORY OF STRICT LIABILITY, OR ARE CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT
ACT OR OMISSION OF ANY KIND BY AGENT, PROVIDED ONLY THAT NO LENDER SHALL BE
OBLIGATED UNDER THIS SECTION TO INDEMNIFY AGENT FOR THAT PORTION, IF ANY, OF ANY
LIABILITIES AND COSTS WHICH IS PROXIMATELY CAUSED BY AGENT'S OWN INDIVIDUAL
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, AS DETERMINED IN A FINAL JUDGMENT.
Cumulative of the foregoing, each Lender agrees to reimburse Agent promptly upon
demand for such Lender's Percentage Share of any costs and expenses to be paid
to Agent by Borrower under Section 6.1(i) to the extent that Agent is not timely
reimbursed for such expenses by Borrower as provided in such section. As used
in this section the term "Agent" shall refer not only to the Person designated
as such in Section 1.1 but also to each director, officer, agent, attorney,
employee, representative and Affiliate of such Person.
Section 9.5. RIGHTS AS LENDER. In its capacity as a Lender, Agent shall
have the same rights and obligations as any Lender and may exercise such rights
as though it were not Agent. NationsBank, any successor Agent, or any of their
respective Affiliates may accept deposits from, lend money to, act as Trustee
under indentures of, and generally engage in any kind of business with any
Related Person or their Affiliates, including without limitation equity
investments by NationsBank or any of its Affiliates, all as if NationsBank were
not Agent hereunder and without any duty to account therefor to any other
Lender.
Section 9.6. SHARING OF SET-OFFS AND OTHER PAYMENTS. Each of Agent and
Lender agrees that if it shall, whether through the exercise of rights under
Security Documents or
62
<PAGE>
rights of banker's lien, set off, or counterclaim against Borrower or
otherwise, obtain payment of a portion of the aggregate Obligations owed to
it which, taking into account all distributions made by Agent under Section
2.9, causes Agent or such Lender to have received more than it would have
received had such payment been received by Agent and distributed pursuant to
Section 2.9, then (a) it shall be deemed to have simultaneously purchased and
shall be obligated to purchase interests in the Obligations as necessary to
cause Agent and all Lenders to share all payments as provided for in Section
2.9, and (b) such other adjustments shall be made from time to time as shall
be equitable to ensure that Agent and all Lenders share all payments of
Obligations as provided in Section 2.9; provided, however, that nothing
herein contained shall in any way affect the right of Agent or any Lender to
obtain payment (whether by exercise of rights of banker's lien, set-off or
counterclaim or otherwise) of indebtedness other than the Obligations.
Borrower expressly consents to the foregoing arrangements and agrees that any
holder of any such interest or other participation in the Obligations,
whether or not acquired pursuant to the foregoing arrangements, may to the
fullest extent permitted by law exercise any and all rights of banker's lien,
set-off, or counterclaim as fully as if such holder were a holder of the
Obligations in the amount of such interest or other participation. If all or
any part of any funds transferred pursuant to this section is thereafter
recovered from the seller under this section which received the same, the
purchase provided for in this section shall be deemed to have been rescinded
to the extent of such recovery, together with interest, if any, if interest
is required pursuant to court order to be paid on account of the possession
of such funds prior to such recovery.
Section 9.7. INVESTMENTS. Whenever Agent in good faith determines that it
is uncertain about how to distribute to Lenders any funds which it has received,
or whenever Agent in good faith determines that there is any dispute among
Lenders about how such funds should be distributed, Agent may choose to defer
distribution of the funds which are the subject of such uncertainty or dispute.
If Agent in good faith believes that the uncertainty or dispute will not be
promptly resolved, or if Agent is otherwise required to invest funds pending
distribution to Lenders, Agent shall invest such funds pending distribution; all
interest on any such investment shall be distributed upon the distribution of
such investment and in the same proportion and to the same Persons as such
investment. All moneys received by Agent for distribution to Lenders (other
than to the Person who is Agent in its separate capacity as a Lender) shall be
held by Agent pending such distribution solely as Agent for such Lenders, and
Agent shall have no equitable title to any portion thereof.
Section 9.8. BENEFIT OF ARTICLE IX. The provisions of this Article (other
than the following Section 9.9) are intended solely for the benefit of Agent and
Lenders, and no Related Person shall be entitled to rely on any such provision
or assert any such provision in a claim or defense against Agent or any Lender.
Agent and Lenders may waive or amend such provisions as they desire without any
notice to or consent of Borrower, any other Related Person.
Section 9.9. RESIGNATION. Agent may resign at any time by giving written
notice thereof to Lenders and Borrower. Each such notice shall set forth the
date of such resignation.
63
<PAGE>
Upon any such resignation Majority Lenders shall have the right to appoint a
successor Agent, subject to Borrower's consent, such consent not to be
unreasonably withheld. A successor must be appointed for any retiring Agent,
and such Agent's resignation shall become effective when such successor
accepts such appointment. If, within thirty days after the date of the
retiring Agent's resignation, no successor Agent has been appointed and has
accepted such appointment, then the retiring Agent may appoint a successor
Agent, which shall be a commercial bank organized or licensed to conduct a
banking or trust business under the laws of the United States of America or
of any state thereof. Upon the acceptance of any appointment as Agent
hereunder by a successor Agent, the retiring Agent shall be discharged from
its duties and obligations under this Agreement and the other Loan Documents.
After any retiring Agent's resignation hereunder the provisions of this
Article IX shall continue to inure to its benefit as to any actions taken or
omitted to be taken by it while it was Agent under the Loan Documents.
ARTICLE X - MISCELLANEOUS
Section 10.1. WAIVERS AND AMENDMENTS; ACKNOWLEDGEMENTS.
(a) WAIVERS AND AMENDMENTS. No failure or delay (whether by course
of conduct or otherwise) by Agent or any Lender in exercising any right,
power or remedy which Agent or such Lender may have under any of the Loan
Documents shall operate as a waiver thereof or of any other right, power or
remedy, nor shall any single or partial exercise by Agent or such Lender of
any such right, power or remedy preclude any other or further exercise
thereof or of any other right, power or remedy. No waiver of any provision
of any Loan Document and no consent to any departure therefrom shall ever
be effective unless it is in writing and signed as provided below in this
section, and then such waiver or consent shall be effective only in the
specific instances and for the purposes for which given and to the extent
specified in such writing. No notice to or demand on any Related Person
shall in any case of itself entitle any Related Person to any other or
further notice or demand in similar or other circumstances. This Agreement
and the other Loan Documents set forth the entire understanding between the
parties hereto with respect to the transactions contemplated herein and
therein and supersede all prior discussions and understandings with respect
to the subject matter hereof and thereof, and no waiver, consent, release,
modification or amendment of or supplement to this Agreement or the other
Loan Documents shall be valid or effective against any party hereto unless
the same is in writing and signed by (i) if such party is Borrower, by
Borrower, (ii) if such party is Agent, by Agent and (iii) if such party is a
Lender, by such Lender or by Agent on behalf of Lenders with the written
consent of Majority Lenders (which consent has already been given as
provided in Section 10.7). Notwithstanding the foregoing or anything to
the contrary herein, Agent shall not, without the prior consent of each
individual Lender, execute and deliver on behalf of such Lender any waiver
or amendment which would: (1)
64
<PAGE>
waive any of the conditions specified in Article IV (provided that Agent
may in its discretion withdraw any request it has made under Section
4.2(f)), (2) increase the Maximum Loan Amount, the Maximum Working Capital
Advance Amount or the Maximum Acquisition Advance Amount or subject such
Lender to any additional obligations, (3) reduce any fees hereunder, or
the principal of, or interest on, such Lender's Notes, (4) postpone any
date fixed for any payment of any fees hereunder, or principal of, or
interest on, such Lender's Notes, (5) amend the definition herein of
"Majority Lenders" or otherwise change the aggregate amount of Percentage
Shares which is required for Agent, Lenders or any of them to take any
particular action under the Loan Documents, (6) release Borrower from its
obligation to pay such Lender's Notes or release any Guarantor from its
obligations under its guarantee of the Obligations, if any, (7) reduce the
number of Lenders required to agree on the Borrowing Base as set forth in
Section 2.11 or to consent to an assignment or transfer of any Related
Person's rights, duties or obligations under Section 10.4 to less than all
Lenders, or (8) in any period between Determination Dates, release any
Collateral valued in the Borrowing Base whose aggregate value exceeds
$500,000, except as expressly permitted by Section 6.2(d) which releases
may be given by Agent without the consent of any Lender.
(b) ACKNOWLEDGEMENTS AND ADMISSIONS. Borrower hereby represents,
warrants, acknowledges and admits that (i) it has been advised by counsel
in the negotiation, execution and delivery of the Loan Documents to which
it is a party, (ii) it has made an independent decision to enter into this
Agreement and the other Loan Documents to which it is a party, without
reliance on any representation, warranty, covenant or undertaking by Agent
or any Lender, whether written, oral or implicit, other than as expressly
set out in this Agreement or in another Loan Document delivered on or after
the date hereof, (iii) there are no representations, warranties, covenants,
undertakings or agreements by Agent or any Lender as to the Loan Documents
except as expressly set out in this Agreement or in another Loan Document
delivered on or after the date hereof, (iv) neither Agent nor any Lender has
any fiduciary obligation toward Borrower with respect to any Loan Document
or the transactions contemplated thereby, (v)the relationship pursuant to
the Loan Documents between Borrower, on one hand, and Agent and each
Lender, on the other hand, is and shall be solely that of debtor and
creditor, respectively, (vi) no partnership or joint venture exists with
respect to the Loan Documents between any of Borrower, Agent and
Lenders, (vii) Agent is not Borrower's Agent, but Agent for Lenders, (viii)
should an Event of Default or Default occur or exist Agent and each Lender
will determine in its sole discretion and for its own reasons what remedies
and actions it will or will not exercise or take at that time, (ix) without
limiting any of the foregoing, Borrower is not relying upon any
representation or covenant by Agent or any Lender, or any representative
thereof, and no such representation or covenant has been made, that Agent
or any Lender will, at the time of an Event of Default or Default, or at
any other time, waive, negotiate, discuss, or take or refrain from taking
any action permitted
65
<PAGE>
under the Loan Documents with respect to any such Event of Default or
Default or any other provision of the Loan Documents, and (x) Agent and
all Lenders have relied upon the truthfulness of the acknowledgements in
this section in deciding to execute and deliver this Agreement and to
make their Loans.
THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Section 10.2. SURVIVAL OF AGREEMENTS; CUMULATIVE NATURE. All of the
Related Persons' various representations, warranties, covenants and agreements
in the Loan Documents shall survive the execution and delivery of this Agreement
and the other Loan Documents and the performance hereof and thereof, including
the making or granting of the Loans and the delivery of the Notes and the other
Loan Documents, and shall further survive until all of the Obligations are paid
in full to Agent, Lenders and Issuing Bank and all of Agent's, Lenders' and
Issuing Bank's obligations to Borrower are terminated. All statements and
agreements contained in any certificate or other instrument delivered by any
Related Person to Agent, any Lender or Issuing Bank under any Loan Document
shall be deemed representations and warranties by Borrower or agreements and
covenants of Borrower under this Agreement. The representations, warranties,
indemnities, and covenants made by Related Persons in the Loan Documents, and
the rights, powers, and privileges granted to Agent, Lenders and Issuing Bank in
the Loan Documents, are cumulative, and, except for expressly specified waivers
and consents, no Loan Document shall be construed in the context of another to
diminish, nullify, or otherwise reduce the benefit to Agent, any Lender or
Issuing Bank of any such representation, warranty, indemnity, covenant, right,
power or privilege. In particular and without limitation, no exception set out
in this Agreement to any representation, warranty, indemnity, or covenant herein
contained shall apply to any similar representation, warranty, indemnity, or
covenant contained in any other Loan Document, and each such similar
representation, warranty, indemnity, or covenant shall be subject only to those
exceptions which are expressly made applicable to it by the terms of the various
Loan Documents.
Section 10.3. NOTICES. All notices, requests, consents, demands and other
communications required or permitted under any Loan Document shall be in
writing, unless otherwise specifically provided in such Loan Document (provided
that Agent may give telephonic notices to Lenders), and shall be deemed
sufficiently given or furnished if delivered by personal delivery, by telecopy
or telex, by delivery service with proof of delivery, or by registered or
certified United States mail, postage prepaid, to Borrower and the other Related
Persons at the address of Borrower specified on the signature pages hereto
and to Agent, Issuing Bank and the other Lenders at their addresses specified
on the signature pages hereto
66
<PAGE>
(unless changed by similar notice in writing given by the particular Person
whose address is to be changed). Any such notice or communication shall be
deemed to have been given (a) in the case of personal delivery or delivery
service, as of the date of first attempted delivery during regular business
hours at the address provided herein, (b) in the case of telecopy or telex,
upon receipt, or (c) in the case of registered or certified United States
mail, three days after deposit in the mail; provided, however, that no
Request for Advance or Rate Election shall become effective until actually
received by Agent.
Section 10.4. JOINT AND SEVERAL LIABILITY; PARTIES IN INTEREST. All
Obligations which are incurred by two or more Related Persons shall be their
joint and several obligations and liabilities. All grants, covenants and
agreements contained in the Loan Documents shall bind and inure to the benefit
of the parties thereto and their respective successors and assigns; PROVIDED,
HOWEVER, that no Related Person may assign or transfer any of its rights or
delegate any of its duties or obligations under any Loan Document without the
prior consent of all Lenders. Neither Borrower nor any Affiliates of Borrower
shall directly or indirectly purchase or otherwise retire any Obligations owed
to any Lender nor will any Lender accept any offer to do so, unless each Lender
shall have received substantially the same offer with respect to the same
Percentage Share of the Obligations owed to it. If Borrower or any Affiliate of
Borrower at any time purchases some but less than all of the Obligations owed to
Agent, Issuing Bank and all Lenders, such purchaser shall not be entitled to any
rights of Agent, Issuing Bank or Lender under the Loan Documents unless and
until Borrower or its Affiliates have purchased all of the Obligations.
Section 10.5. GOVERNING LAW; SUBMISSION TO PROCESS. Except to the extent
that the law of another jurisdiction is expressly elected in a Loan Document,
the Loan Documents shall be deemed contracts and instruments made under the laws
of the State of Texas and shall be construed and enforced in accordance with and
governed by the laws of the State of Texas and the laws of the United States of
America, without regard to principles of conflicts of law. Chapter 15 of Texas
Revised Civil Statutes Annotated Article 5069 (which regulates certain revolving
credit loan accounts and revolving tri-party accounts) does not apply to this
Agreement or to the Notes. Borrower hereby irrevocably submits itself, each
other Related Person to the non-exclusive jurisdiction of the state and federal
courts sitting in the State of Texas and agrees and consents that service of
process may be made upon it or any Related Person in any legal proceeding
relating to the Loan Documents or the Obligations by any means allowed under
Texas or federal law.
Section 10.6. LIMITATION ON INTEREST. Agent, Lenders, the Related Persons
and any other parties to the Loan Documents intend to contract in strict
compliance with applicable usury law from time to time in effect. In
furtherance thereof such Persons stipulate and agree that none of the terms and
provisions contained in the Loan Documents shall ever be construed to create a
contract to pay, for the use, forbearance or detention of money, interest in
excess of the maximum amount of interest permitted to be charged by applicable
law from time to time in effect. Neither any Related Person nor any present or
future guarantors, endorsers, or other
67
<PAGE>
Persons hereafter becoming liable for payment of any Obligation shall ever be
liable for unearned interest thereon or shall ever be required to pay
interest thereon in excess of the maximum amount that may be lawfully charged
under applicable law from time to time in effect, and the provisions of this
section shall control over all other provisions of the Loan Documents which
may be in conflict or apparent conflict herewith. Agent and Lenders expressly
disavow any intention to charge or collect excessive unearned interest or
finance charges in the event the maturity of any Obligation is accelerated.
If (a) the maturity of any Obligation is accelerated for any reason, (b) any
Obligation is prepaid and as a result any amounts held to constitute interest
are determined to be in excess of the legal maximum, or (c) Agent or any
Lender or any other holder of any or all of the Obligations shall otherwise
collect moneys which are determined to constitute interest which would
otherwise increase the interest on any or all of the Obligations to an amount
in excess of that permitted to be charged by applicable law then in effect,
then all sums determined to constitute interest in excess of such legal limit
shall, without penalty, be promptly applied to reduce the then outstanding
principal of the related Obligations or, at Agent's or such Lender's or
holder's option, promptly returned to Borrower or the other payor thereof
upon such determination. In determining whether or not the interest paid or
payable, under any specific circumstance, exceeds the maximum amount
permitted under applicable law, Agent, Lenders and Related Persons (and any
other payors thereof) shall to the greatest extent permitted under applicable
law, (i) characterize any non-principal payment as an expense, fee or premium
rather than as interest, (ii) exclude voluntary prepayments and the effects
thereof, and (iii) amortize, prorate, allocate, and spread the total amount
of interest throughout the entire contemplated term of the instruments
evidencing the Obligations in accordance with the amounts outstanding from
time to time thereunder and the maximum legal rate of interest from time to
time in effect under applicable law in order to lawfully charge the maximum
amount of interest permitted under applicable law. In the event applicable
law provides for an interest ceiling under Texas Revised Civil Statutes
Annotated article 5069-1.04, that ceiling shall be the indicated rate ceiling
and shall be used when appropriate in determining the Highest Lawful Rate.
As used in this section the term "applicable law" means the laws of the State
of Texas or the laws of the United States of America, whichever laws allow
the greater interest, as such laws now exist or may be changed or amended or
come into effect in the future.
Section 10.7. TERMINATION; LIMITED SURVIVAL. In its sole and absolute
discretion Borrower may at any time that no Obligations are owing elect in a
written notice delivered to Agent to terminate this Agreement. Upon receipt by
Agent of such a notice, if no Obligations are then owing this Agreement and all
other Loan Documents shall thereupon be terminated and the parties thereto
released from all prospective obligations thereunder. Notwithstanding the
foregoing or anything herein to the contrary, any waivers or admissions made by
any Related Person in any Loan Document, any Obligations under Sections 2.13
through 2.17, and any obligations which any Person may have to indemnify or
compensate Agent or any Lender shall survive any termination of this Agreement
or any other Loan Document. At the request and expense of Borrower, Agent shall
prepare and execute all necessary instruments to reflect and effect such
termination of the Loan Documents. Agent is hereby authorized to execute all
68
<PAGE>
such instruments on behalf of all Lenders, without the joinder of or further
action by any Lender.
Section 10.8. SEVERABILITY. If any term or provision of any Loan Document
shall be determined to be illegal or unenforceable all other terms and
provisions of the Loan Documents shall nevertheless remain effective and shall
be enforced to the fullest extent permitted by applicable law.
Section 10.9. COUNTERPARTS. This Agreement may be separately executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to constitute one
and the same Agreement.
SECTION 10.10. WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC. EACH OF
BORROWER, AGENT AND LENDERS HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND
IRREVOCABLY (a) WAIVES, TO THE MAXIMUM EXTENT IT MAY LAWFULLY AND EFFECTIVELY DO
SO, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED
HEREON, OR DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN
CONNECTION WITH THE LOAN DOCUMENTS OR ANY TRANSACTION CONTEMPLATED THEREBY OR
ASSOCIATED THEREWITH, BEFORE OR AFTER MATURITY; (b) WAIVES, TO THE MAXIMUM
EXTENT IT MAY LAWFULLY AND EFFECTIVELY DO SO, ANY RIGHT IT MAY HAVE TO CLAIM
OR RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL
DAMAGES; AND (c) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS
AGREEMENT, THE OTHER LOAN DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY
AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS
CONTAINED IN THIS SECTION. BORROWER HEREBY REPRESENTS AND ACKNOWLEDGES THAT
IT IS A "BUSINESS CONSUMER" FOR THE PURPOSES OF THE TEXAS DECEPTIVE TRADE
PRACTICES - CONSUMER PROTECTION ACT, THAT IT HAS ASSETS OF $5,000,000 OR MORE
ACCORDING TO ITS MOST RECENT FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, THAT IT HAS KNOWLEDGE AND
EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT ENABLE IT TO EVALUATE THE
MERITS AND RISKS OF CREDIT TRANSACTIONS GENERALLY AND OF THE TRANSACTIONS
CONTEMPLATED BY THE LOAN DOCUMENTS IN PARTICULAR, AND THAT IT IS NOT IN A
SIGNIFICANTLY DISPARATE BARGAINING POSITION WITH RESPECT TO THE PARTIES TO
AND THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS; BORROWER HEREBY
WAIVES TO THE MAXIMUM EXTENT IT MAY LAWFULLY AND EFFECTIVELY DO SO, THE
PROVISIONS OF THE TEXAS DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT
69
<PAGE>
(OTHER THAN SECTION 17.555 THEREOF), AS FROM TIME TO TIME AMENDED.
Section 10.11. ASSIGNMENTS AND PARTICIPATIONS.
(a) ASSIGNMENTS. Each Lender shall have the right to sell, assign or
transfer all or any part of such Lender's Notes, commitment to make Advances,
Loans and rights and Obligations relating to Letters of Credit and the
associated rights and obligations under all Loan Documents to one or more
financial institutions, pension plans, investment funds, or similar purchasers;
PROVIDED, that in connection with each sale, assignment or transfer, the
applicable Lender will consider the opinion and recommendation of Borrower,
which opinion and recommendation shall in no way be binding upon such Lender,
and each such sale, assignment, or transfer shall be with the consent of Agent
and so long as no Default or Event of Default has occurred and is continuing,
with the consent of Borrower, which in each case will not be unreasonably
withheld. The assignee, transferee or recipient shall have, to the extent of
such sale, assignment, or transfer, the same rights, benefits and obligations as
it would if it were such Lender and a holder of such Notes, including, without
limitation, the right to vote on decisions requiring consent or approval of all
Lenders or Majority Lenders and the obligation to fund its Percentage Share of
any Advances or Loans and payments made under Letters of Credit directly to
Agent. Each Lender in making each such sale, assignment, or transfer must
dispose of a pro rata portion of the Loan made by such Lender and such Lender's
LC Obligations, each such sale, assignment, or transfer shall be in a principal
amount not less than $10,000,000 and no Lender may offer to sell its Notes and
Loans or interests therein in violation of any securities laws. No such
assignment shall become effective until (I) the assigning Lender delivers to
Agent copies of all written assignments and other documents evidencing any such
assignment or related thereto and an Agreement to be Bound in the form of
Exhibit G, providing for the assignee's ratification and agreement to be bound
by the terms of this Agreement and the other Loan Documents and (II) Agent shall
have received from assignor or assignee an assignment fee in the amount of
$2,500. Within five (5) Business Days after its receipt of notice that the
Agent has received copies of any assignment and the other documents relating
thereto, the assignee shall notify Borrower of the outstanding principal balance
of the Notes payable to such Lender and shall execute and deliver to Agent (for
delivery to the relevant assignee) new Notes evidencing such assignee's assigned
Loans and, if the assignor Lender has retained a portion of its Loans,
replacement Notes in the principal amount of the Loans retained by the assignor
Lender (such Notes to be in exchange for, but not in payment of, the Notes held
by such Lender).
(b) PARTICIPATION. Each Lender shall have the right to grant
participations in all or any part of such Lender's Notes, commitment to make
Advances, Loans and rights and Obligations relating to Letters of Credit and the
associated rights and obligations under all Loan Documents to one or more
pension plans, investment funds, financial institutions or similar purchasers;
PROVIDED that (i) each Lender granting a participation shall upon request give
notice of any such participation to Agent, (ii) each such participation shall be
in a
70
<PAGE>
principal amount not less than $1,000,000, (iii) each Lender granting a
participation shall retain the right to vote hereunder, and no participant
shall be entitled to vote hereunder on decisions requiring consent or
approval of Majority Lenders (except as set forth in (v) below), (iv) each
Lender and Borrower shall be entitled to deal with the Lender granting a
participation in the same manner as if no participation had been granted, and
(v) no participant shall ever have any right by reason of its participation
to exercise any of the rights of Lenders hereunder, except that any Lender
may agree with any participant that such Lender will not, without the consent
of such participant, consent to any amendment or waiver described in Section
10.1(a) requiring approval of 100% of the Lenders.
(c) DISTRIBUTION OF INFORMATION. It is understood and agreed that any
Lender may provide to assignees and participants and prospective assignees and
participants financial information and reports and data concerning the Related
Persons and their and properties and operations which was provided to such
Lender pursuant to this Agreement, subject to Section 6.1(c).
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
71
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed as of the date first written
above.
COSTILLA ENERGY, INC.
Borrower
By: /s/ MICHAEL J. GRELLA
-------------------------------
Michael J. Grella, President
Address:
400 West Illinois Street
Suite 1000
Midland, Texas 79701
Attention: Michael J. Grella
Telephone: (915) 683-3092
Telecopy: (915) 686-6080
72
<PAGE>
NATIONSBANK OF TEXAS, N.A.
Agent and Lender
By: /s/ FRANK K. STOWERS
-------------------------------
Frank K. Stowers
Vice President
Address:
NationsBank of Texas, N.A.
303 West Wall
Midland, Texas 79701
Telephone: (915) 685-2179
Telecopy: (915) 685-2009
73
<PAGE>
THE FIRST NATIONAL BANK
OF BOSTON, Lender
By: /s/
-------------------------------
Name:
Title:
Address:
The First National Bank of Boston
Energy Division 01-08-02
100 Federal Street
Boston, Massachusetts 02110
Attention: Carol Holley
Telephone: (617) 434-1921
Telecopy: (617) 434-3652
74
<PAGE>
CHRISTIANIA BANK OG KREDITKASSE,
Lender
By: /s/
-------------------------------
Name:
Title:
By: /s/
-------------------------------
Name:
Title:
Address:
Christiania Bank og Kreditkasse
11 West 42nd Street, 7th Floor
New York, New York 10036
Attention: John Thieroff
Telephone: (212) 827-4800
Telecopy: (212) 827-4888
75
<PAGE>
UNION BANK OF CALIFORNIA, N.A.
Lender
By: /s/
-------------------------------
Name:
Title:
By: /s/
-------------------------------
Name:
Title:
Address:
Union Bank of California, N.A.
500 North Akard Street
Suite 4200
Dallas, Texas 75201
Attention: Carl Stutzman
Telephone: (214) 922-4200
Telecopy: (214) 922-4209
76
<PAGE>
Exhibit 10.14
December 18, 1996
Mr. James P. Boldrick
Mr. James Miles Boldrick
Boldrick Partners
1801 West Wall
Midland, Texas 79701
Re: Sale of Oil and Gas Properties of Statewide Minerals, Inc.
Gentlemen:
This letter (this "Agreement") when executed by you in the space provided
below, shall set forth our agreement concerning the sale by Statewide Minerals,
Inc. ("Seller") to Boldrick Partners ("Buyer") of the oil and gas properties
described on EXHIBIT "A" attached hereto and made a part hereof and all other
assets of Seller, less and except the Excluded Properties (as defined herein)
(the "Properties").
1. PURCHASE AND SALE. Effective as of seven o'clock a.m. on October 1,
1996 (the "Effective Time") Seller agrees to sell the Properties to Buyer and
Buyer agrees to buy the Properties from Seller upon the terms and conditions set
forth in this Agreement.
2. PURCHASE PRICE. The purchase price (the "Purchase Price") to be paid
for the Properties shall be the sum of THREE MILLION TWO HUNDRED THOUSAND
DOLLARS ($3,200,000), adjusted as follows:
(a) In connection with the oil and gas assets of Seller constituting
part of the Properties, the Purchase Price shall be adjusted upward by (i) the
value of all oil, gas and other hydrocarbons produced from the Properties prior
to Effective Time and paid to Buyer, such value to be the actual price received
less taxes deducted by the purchaser; and (ii) the amount of all verifiable
expenditures paid by Seller in connection with the Properties and attributable
to times subsequent to the Effective Time.
(b) In connection with the oil and gas assets of Seller constituting
part of the Properties, the Purchase Price shall be adjusted downward by (i)
proceeds received by Seller from the
<PAGE>
Mr. James P. Boldrick
Mr. James Miles Boldrick
December 18, 1996
Page 2
sale of oil, gas or other hydrocarbons attributable to the Properties and
produced after the Effective Time; and (ii) an amount equal to all unpaid ad
valorem, property, production, severance and similar taxes and assessments
(but not including income taxes) based upon or measured by the ownership of
property or the production of hydrocarbons or the receipt of proceeds
therefrom accruing to the Properties prior to the Effective Time and assumed
or paid by Buyer.
3. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents the
following:
(a) Seller is a duly organized, validly existing corporation
organized under the laws of and in good standing in the State of Texas, and has
all requisite power and authority and is entitled to carry on its business in
Texas. Seller has the authority to enter into this Agreement, and Seller's
execution, delivery and performance of this Agreement will not (i) conflict with
or violate Seller's articles of incorporation or bylaws, or any agreement or
instrument to which Seller is a party or by which Seller is bound, or any law,
administrative regulation or rule, judgment, decree, order or statute applicable
to Seller, or (ii) constitute a material breach of, or any event of default
under, any contract to which Seller is a party or by which Seller or its assets
are bound, or constitute the happening of an event or condition upon which any
other party to such a contract or agreement may exercise any right or option
which will materially adversely affect any of the Properties.
(b) The execution and delivery of this Agreement (including all
actions of Seller taken pursuant to this Agreement) have been authorized by all
necessary action on the part of the Seller. This Agreement constitutes a
binding obligation of Seller enforceable in accordance with its terms, subject,
however, to the effects of bankruptcy, insolvency, reorganization, moratorium
and similar laws, as well as to principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
(c) No lien, claim, suit, action or other proceeding is pending or
before any court or governmental agency which might (i) result in substantial
impairment or loss of Seller's title to any part of the Properties, or (ii)
hinder or impede the consummation of the transactions contemplated by this
Agreement. Seller shall promptly notify Buyer of any such proceeding arising
prior to the Closing with respect to which Seller receives actual notice.
(d) While Seller has owned the Properties, all ad valorem, property,
production, severance and similar taxes based on or measured by the ownership of
property or the production of hydrocarbons or the receipt of proceeds therefrom
on the Properties have been properly paid prior to becoming delinquent and all
such taxes and assessments which would become delinquent prior to the Closing
shall have been properly paid by Seller.
<PAGE>
Mr. James P. Boldrick
Mr. James Miles Boldrick
December 18, 1996
Page 3
(e) 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 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 PROPERTIES OR THEIR FITNESS FOR ANY
PURPOSE; AND (c) WITHOUT ANY OTHER EXPRESS, IMPLIED, STATUTORY OR OTHER WARRANTY
OR REPRESENTATION WHATSOEVER. AT CLOSING, BUYER SHALL HAVE WAIVED ITS RIGHT TO
PHYSICALLY INSPECT THE PROPERTIES FOR ALL PURPOSES. BUYER IS RELYING SOLELY
UPON ITS OWN INVESTIGATIONS WITH RESPECT TO THE PROPERTIES, AND, BUYER 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 BUYER IN CONNECTION WITH THIS AGREEMENT, INCLUDING, WITHOUT
LIMITATION, ANY DESCRIPTION OF THE PROPERTIES, PRICING ASSUMPTIONS, OR QUALITY
OR QUANTITY OF HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE PROPERTIES OR
THE ABILITY OR POTENTIAL OF THE PROPERTIES TO PRODUCE HYDROCARBONS OR THE
ENVIRONMENTAL CONDITION OF THE PROPERTIES OR ANY OTHER MATTERS CONTAINED IN
CONFIDENTIAL INFORMATION AND ANY OTHER MATERIALS FURNISHED OR MADE AVAILABLE TO
BUYER 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 BUYER OR BUYER'S REPRESENTATIVES ARE PROVIDED TO OR FOR THE BENEFIT OF BUYER
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 BUYER'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
<PAGE>
Mr. James P. Boldrick
Mr. James Miles Boldrick
December 18, 1996
Page 4
DISCLAIMERS OF REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS PARAGRAPH.
4. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and
warrants that:
(a) Buyer is a duly organized, validly existing general partnership
organized under the laws of and in good standing in the State of Texas, and has
all requisite power and authority and is entitled to carry on its business in
Texas. Buyer has the authority to enter into this Agreement, and Buyer's
execution, delivery and performance of this Agreement will not (i) conflict with
or violate Buyer's general partnership agreement, or any agreement or instrument
to which Buyer is a party or by which Buyer is bound, or any law, administrative
regulation or rule, judgment, decree, order or statute applicable to Buyer, or
(ii) constitute a material breach of, or any event of default under, any
contract to which Buyer is a party or by which Buyer or its assets are bound, or
constitute the happening of an event or condition upon which any other party to
such a contract or agreement may exercise any right or option which will
materially adversely affect the Seller.
(b) The execution and delivery of this Agreement (including all
actions of Buyer taken pursuant to this Agreement) have been authorized by all
necessary action on the part of the Buyer. This Agreement constitutes a binding
obligation of Buyer enforceable in accordance with its terms, subject, however,
to the effects of bankruptcy, insolvency, reorganization, moratorium and similar
laws, as well as to principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
(c) Buyer is not a party to any suit, action or other proceeding
before any court or governmental agency as of the date of this Agreement to
which Buyer is a party and which might hinder or impede the consummation of the
transactions contemplated by this Agreement. Buyer shall promptly notify Seller
of any such proceeding arising prior to the Closing with respect to which Buyer
receives actual notice. There are no bankruptcy, reorganization or arrangement
proceedings pending, being contemplated by or threatened against Buyer.
5. COVENANTS OF SELLER. Seller covenants and agrees with Buyer that:
(a) Prior to Closing, Seller will make available to Buyer for
examination in Seller's offices all title and other information relating to the
Properties insofar as the same are in Seller's possession and will cooperate
with Buyer in Buyer's efforts to obtain, at Buyer's expense, such additional
information relating to the Properties as Buyer may reasonably desire, to the
extent in each case that Seller may do so without violating any obligation of
confidence or other contractual commitment of Seller to a third party. Seller
shall permit Buyer, at Buyer's expense, to inspect and photocopy such
information and records at any reasonable time during the term of this Agreement
but only to the extent, in each case, that Seller may do so without violating
any obligation of confidence
<PAGE>
Mr. James P. Boldrick
Mr. James Miles Boldrick
December 18, 1996
Page 5
or contractual commitment. Seller shall also permit Buyer to perform, at
Buyer's sole cost, risk and expense such field inspections of the Properties
as Buyer may deem necessary. The covenants of Seller set forth in this
Section 5(a) are expressly subject to the "Limitation and Disclaimer of
Representations and Warranties" contained in Section 3(e) above.
(b) Without the prior written consent of Buyer, Seller will not
encumber, sell or otherwise dispose of any of the Properties prior to the
Closing, other than the sale of oil, gas and other hydrocarbons produced, saved
and sold in the ordinary course of business.
6. TITLE. Seller represents and warrants to Buyer that at the Closing
Seller shall have Defensible Title to the Properties. The term "Defensible
Title" means title which is free of mortgages, liens, security interests and
encumbrances placed on the Properties by Seller. The term "Title Defect" means
any condition which renders Seller's title to the Properties to be less than
Defensible Title.
7. OBJECTIONS TO TITLE OR PROPERTY CONDITIONS. If title examination
reveals any Title Defect, Buyer shall give notice thereof to Seller on or before
five (5) days prior to Closing. Seller, at its option, may attempt to cure any
Title Defect raised by Buyer within such time. If the Title Defect cannot be
cured within such time or Seller elects not to cure any such Title Defect,
Seller and Buyer will attempt to negotiate a reduction in the Purchase Price to
reflect the value of the property to which such Title Defect relates. If prior
to Closing Seller is unable to cure or elects not to cure any such Title Defect,
Buyer shall have the option to (i) terminate this Agreement without liability of
either party to the other, or (ii) waive the Title Defect and proceed to
Closing. The failure of either party to cure title or other condition after
undertaking to do so shall not create any liability for such party.
8. SELLER'S CONDITIONS TO CLOSING. The obligations of Seller at Closing
are subject, at the option of Seller, to the satisfaction at or prior to Closing
of the following conditions:
(a) All representations and warranties of Buyer contained in this
Agreement shall be true in all material respects at and as of the Closing; Buyer
shall provide Seller with certificates executed by a responsible officer of
Buyer to such effect; and Buyer shall have performed and satisfied all material
obligations in all material respects required by this Agreement to be performed
and satisfied by Buyer at or prior to Closing.
(b) No suit or other proceeding shall be pending before any court or
governmental agency seeking to restrain or prohibit or declare illegal, or
seeking substantial damages in connection with, the purchase and sale
contemplated by this Agreement.
9. BUYER'S CONDITIONS TO CLOSING. The obligations of Buyer at Closing
are subject, at the option of Buyer, to the satisfaction at or prior to Closing
of the following conditions:
<PAGE>
Mr. James P. Boldrick
Mr. James Miles Boldrick
December 18, 1996
Page 6
(a) All representations and warranties of Seller contained in this
Agreement shall be true in all material respects at and as of the Closing;
Seller shall provide Buyer with certificates executed by a responsible officer
of Seller to such effect; Seller can convey to Buyer title to the Properties as
set forth in Section 6 hereof, free and clear of all mortgages, liens, security
interests and encumbrances which may have been placed on the Properties by
Seller; and Seller shall have performed and satisfied all material agreements in
all material respects required by this Agreement to be performed and satisfied
by Seller at or prior to Closing.
(b) No suit or other proceeding shall be pending before any court or
governmental agency seeking to restrain or prohibit or declare illegal, or
seeking substantial damages in connection with, the purchase and sale
contemplated by this Agreement.
10. CLOSING. Consummation of the transactions contemplated by this
Agreement shall occur on or before December 31, 1996, at 2:00 p.m., at the
offices of Seller in Midland, Texas (the "Closing"). At the Closing, the
following events shall occur, each being a condition precedent to the others and
each being deemed to have occurred simultaneously with the others:
(a) Seller shall execute, acknowledge and deliver to Buyer a
recordable Assignment, Bill of Sale and Conveyance on the form attached hereto
as EXHIBIT "B" (in counterparts to facilitate recording).
(b) On or before December 30, 1996, at 5:00 p.m., Seller and Buyer
shall execute and deliver a settlement statement (the "Preliminary Settlement
Statement") that shall set forth the Closing Amount (as hereinafter defined) and
each adjustment and the calculation of such adjustments used to determine such
amount. The term "Closing Amount" shall mean the Purchase Price adjusted as
provided above.
(c) Buyer shall pay the Closing Amount to Seller by cashier's check
or certified funds, or by wire transfer in immediately available funds received
prior to the close of banking hours on the day of Closing as follows:
Account: Costilla Energy, Inc.
Account No.: 3750767438
NationsBank of Texas, N.A.
ABA Routing No.: 111000012
Attention: Frank K. Stowers
NationsBank of Texas - Midland
(915) 685-2179
(d) Seller shall deliver to Buyer exclusive possession of the
Properties.
<PAGE>
Mr. James P. Boldrick
Mr. James Miles Boldrick
December 18, 1996
Page 7
(e) Buyer shall deliver to Seller a certificate of incumbency as to
those partners of Buyer executing instruments in connection with this Agreement.
Seller shall deliver to Buyer (i) a copy of the resolutions adopted by Seller
authorizing this transaction and the consummation thereof, certified by the
secretary or assistant secretary of Seller to be a true and correct copy, and
(ii) a certificate of incumbency as to those officers of Seller executing
instruments in connection with this Agreement.
(f) Seller and Buyer shall execute, acknowledge and deliver transfer
orders or letters in lieu thereof directing all purchasers of production to make
payment to Buyer of proceeds attributable to production from the Properties
after the Effective time.
(g) Seller shall deliver to Buyer the original files of Seller
relating to the Properties.
11. OBLIGATIONS AFTER CLOSING. The parties hereto shall have the
following obligations after Closing:
(a) Within 60 days after the Closing, Seller shall prepare and
deliver to Buyer, in accordance with this Agreement and generally accepted
accounting principles, a statement ("Seller's Final Settlement Statement")
setting forth each adjustment to Purchase Price that was not finally determined
as of the Closing. Within 75 days after the Closing, Buyer shall deliver to
Seller a written notice containing any changes that Buyer proposes be made to
the Seller's Final Settlement Statement. The parties shall undertake to agree
with respect to the amounts due pursuant to such proposals within 90 days after
the Closing. The final agreed price paid by Buyer to Seller for the Properties
after all adjustments is hereinafter referred to as the "Final Purchase Price."
The date upon which such agreement is reached or upon which the Final Purchase
Price is established shall be herein called the "Final Settlement Date." If the
Final Purchase Price is more than the Closing Amount, Buyer shall pay to Seller
in immediately available funds the amount of such difference. If the Final
Purchase Price is less than the Closing Amount, Seller shall cause to be paid to
Buyer, in immediately available funds, the amount of such difference. Payment
by Buyer or Seller shall be made within five days of the Final Settlement Date.
(b) Seller shall pay all sales taxes occasioned by the sale of the
Properties. Buyer shall pay all documentary, filing and recording fees
required in connection with the filing and recording of any assignments. All ad
valorem taxes, real property taxes, personal property taxes and similar
obligations concerning the Properties with respect to the tax period in which
the Effective Time occurs shall be apportioned as of the Effective Time between
Seller and Buyer.
(c) After Closing, Seller and Buyer shall execute, acknowledge and
deliver, or cause to be executed, acknowledged and delivered, such instruments
and take such other actions, including payment of monies, as may be necessary or
advisable to carry out their obligations under this
<PAGE>
Mr. James P. Boldrick
Mr. James Miles Boldrick
December 18, 1996
Page 8
Agreement and under any document, certificate or other instrument delivered
pursuant hereto or required by law.
(d) If at any time subsequent to the Closing Buyer comes into
possession of money or property belonging to the Seller, such money or other
property shall be promptly delivered to the Seller. If at any time subsequent
to the Closing Seller comes into possession of money or property belonging to
the Buyer, such money or other property shall be promptly delivered to the
Buyer.
(e) [OMITTED]
(f) Seller agrees that within sixty (60) days after Closing Seller
will be dissolved or change its name. From and after the Closing, Seller shall
have no objection to Buyer using the name "Statewide Minerals Company", or any
variation thereof. In addition, following Closing Seller will cooperate with
Buyer in attempting to cause Seller's post office box and telephone number to be
transferred to Buyer.
(g) All representations and warranties of the parties hereto, and all
obligations of the parties hereunder, except those contained in the assignments
to be delivered at Closing and except those contained in this Section 11, shall
terminate at Closing and shall be of no force and effect.
12. TERMINATION. This Agreement may be terminated (i) as provided in
Section 7 hereof, or (ii) except as otherwise provided herein, by either party
hereto if Closing has not occurred on or before the date set forth above for
Closing. If this Agreement is terminated for any reason or is breached, nothing
contained herein shall be construed to limit Seller's or Buyer's legal or
equitable remedies including, without limitation, damages for the breach or
failure of any representation, warranty, covenant or agreement contained herein
and the right to enforce specific performance of this Agreement.
13. [OMITTED]
14. GENERAL PROVISIONS.
(a) All notices hereunder shall be in writing, dated and signed by
the party giving the same. Each notice shall be either (i) delivered in person
to the address of the party for whom it is intended at the address of such party
as shown below, or (ii) delivered to the United States Postal Service in a
secure and sealed envelope or other suitable wrapper addressed to the party for
whom it is intended at the address of such party as provided below, with
sufficient postage affixed, certified or registered mail, return receipt
requested, or (iii) sent by facsimile. If such notice is so mailed, the
effective date of such notice shall be the date of delivery or attempted
delivery if the same is not delivered and is returned to the party attempting to
give such notice. The address at which any party
<PAGE>
Mr. James P. Boldrick
Mr. James Miles Boldrick
December 18, 1996
Page 9
hereto is to receive notice may be changed from time to time by such party by
giving notice of the new address to all other parties hereto. The address of
the Seller is the letterhead address shown on the first page of this
Agreement, and the address of the Buyer is the same as the address of this
letter.
(b) This Agreement may not be amended nor any rights hereunder waived
except by an instrument in writing signed by both parties hereto.
(c) The headings of the sections of this Agreement are for
convenience of reference only and shall not affect any of the provisions of this
Agreement.
(d) References made in this Agreement, including use of a pronoun,
shall be deemed to include where applicable, masculine, feminine, singular or
plural, individuals, partnerships or corporations. As used in this Agreement,
"person" shall mean any natural person, corporation, partnership, trust, estate
or other entity.
(e) This Agreement and the transactions contemplated hereby shall be
construed in accordance with, and governed by, the laws of the State of Texas.
In the event of any litigation or other proceedings in connection with this
Agreement, the venue for any such proceeding shall be in a court of competent
jurisdiction located in Midland County, Texas.
(f) This Agreement constitutes the entire understanding among the
parties with respect to the subject matter hereof, superseding all negotiations
and prior understandings relating to such subject matter.
(g) This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and, except as otherwise prohibited, their
respective successors and assigns. Nothing contained in this Agreement, or
implied herefrom, is intended to confer upon any other person or entity any
benefits, rights or remedies.
(h) Buyer or Seller may assign all or any portion of their
respective rights or delegate any portion of their duties hereunder without the
consent of the other party hereto, but any assigning party shall give the other
party prompt written notice of any such assignment.
(i) If a court of competent jurisdiction determines that any
provision of this Agreement is void, illegal or unenforceable, the other
provisions of this Agreement shall remain in full force and effect and the
provisions that are determined to be void, illegal or unenforceable shall be
limited so that they shall remain in effect to the extent permissible by law.
(j) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, THE
PROPERTIES DO NOT INCLUDE AND BUYER AGREES AND
<PAGE>
Mr. James P. Boldrick
Mr. James Miles Boldrick
December 18, 1996
Page 10
ACKNOWLEDGES THAT SELLER HAS RESERVED FROM THE PROPERTIES AND HEREBY RESERVES
UNTO ITSELF ANY AND ALL OF ITS INTEREST IN (a) ALL MICROSOFT OFFICE SUITE
COMPUTER SOFTWARE, ALL ENERTECH OIL AND GAS COMPUTER SOFTWARE AND ALL LASSER,
INC. COMPUTER SOFTWARE; (b) SOUTH TIMBALIER BLOCK 203, SOUTH TIMBALIER AREA,
OUTER CONTINENTAL SHELF, BEING THOSE LANDS COVERED BY OIL AND GAS LEASE NO.
OCS-G-1269 DATED JUNE 1, 1962, FROM THE UNITED STATES OF AMERICA, AS LESSOR,
TO THE CALIFORNIA COMPANY, AS LESSEE, RECORDED IN BOOK 646, PAGE 510889,
__________________ PARISH, LOUISIANA, AND THE OCS-G-1269A #2, 3, 4 AND 5
WELLS; AND (c) ALL MONIES, REFUNDS, PROCEEDS, RECEIPTS, CREDITS, RECEIVABLES,
ACCOUNTS AND INCOME ATTRIBUTABLE TO ITS ASSETS AND ACCRUING PRIOR TO THE
EFFECTIVE TIME ((a) THROUGH (c), COLLECTIVELY THE "EXCLUDED PROPERTIES").
If the foregoing correctly sets forth our agreement in this matter, please
so indicate by executing two copies of this letter in the space provided below
and returning a fully executed copy to the undersigned whereupon this letter
shall become a binding agreement between us.
Very truly yours,
STATEWIDE MINERALS, INC.
By: /s/ Michael J. Grella
Michael J. Grella
President
/jmg
AGREED TO AND ACCEPTED this
_______ day of December, 1996
Boldrick Partners, a Texas general
partnership
By: /s/ JAMES PRATT BOLDRICK
---------------------------------
James Pratt Boldrick
General Partner
By: /s/ JAMES MILES BOLDRICK
---------------------------------
James Miles Boldrick
General Partner
<PAGE>
Exhibit "A"
All of Seller's interests in all oil, gas and other mineral interests,
royalty interests, and overriding royalty interests, of every kind and
character, and wherever located, including, without limitation, all of Seller's
mineral, royalty and overriding royalty interests in the wells and lands
described on the following pages of this Exhibit "A" or described in the deeds
or other instruments described in the following pages of this Exhibit "A",
together with all of Seller's interest in (i) all oil, gas, mineral and other
hydrocarbon substances produced from said properties from and after the
Effective Time, and (ii) all contracts, agreements, land files, division order
files, title files, other files and data related to said properties; LESS AND
EXCEPT THE EXCLUDED PROPERTIES.
<PAGE>
EXHIBIT "B"
ASSIGNMENT, BILL OF SALE AND CONVEYANCE
STATE OF )
) KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF )
That, for and in consideration of the sum of Ten Dollars ($10.00) and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, STATEWIDE MINERALS, INC., a Texas corporation, having its
principal place of business at 400 West Illinois, Suite 1000, Midland, Midland
County, Texas 79701 (hereinafter called "ASSIGNOR"), does hereby ASSIGN,
TRANSFER and CONVEY, effective as of October 1, 1996, at 7:00 a.m., at the
location of the respective Properties (the "EFFECTIVE TIME"), unto BOLDRICK
PARTNERS, a Texas general partnership composed of James Pratt Boldrick and James
Miles Boldrick, having its principal place of business at 1801 West Wall,
Midland, Texas 79701 (hereinafter called "ASSIGNEE"), the following described
properties, LESS AND EXCEPT THE EXCLUDED PROPERTIES (the "PROPERTIES"):
All of Assignor's assets and properties of every kind and character,
and wherever located, including, without limitation, all of Assignor's
mineral, royalty and overriding royalty interests in the lands
described on EXHIBIT "A" attached hereto and made a part hereof, or
described in the deeds or other instruments described in EXHIBIT "A"
attached hereto, together with all of Assignor's interest in (i) all
oil, gas, mineral and other hydrocarbon substances produced from said
properties from and after the Effective Time, and (ii) all contracts,
agreements, land files, division order files, title files, and other
files and data related to said properties.
This Assignment, Bill of Sale and Conveyance is subject to the following
terms, covenants and conditions:
1. THIS ASSIGNMENT IS MADE (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 PROPERTIES OR THEIR
FITNESS FOR ANY PURPOSE; and (c) WITHOUT ANY OTHER EXPRESS, IMPLIED, STATUTORY
OR OTHER WARRANTY OR REPRESENTATION WHATSOEVER. ASSIGNEE SHALL BE DEEMED TO
HAVE WAIVED ITS RIGHT TO PHYSICALLY INSPECT ASSIGNOR'S PROPERTIES FOR ALL
PURPOSES. ASSIGNEE IS RELYING SOLELY UPON ITS OWN INVESTIGATIONS WITH RESPECT
TO THE PROPERTIES AND ASSIGNEE SHALL ACCEPT ALL OF THE SAME IN THEIR "AS IS,
WHERE IS" CONDITION. IN ADDITION, ASSIGNOR HAS MADE AND 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
<PAGE>
Mr. James P. Boldrick
Mr. James Miles Boldrick
December 18, 1996
Page 13
HEREAFTER FURNISHED OR MADE AVAILABLE TO ASSIGNEE IN CONNECTION WITH THIS
ASSIGNMENT, INCLUDING, WITHOUT LIMITATION, ANY DESCRIPTION OF THE PROPERTIES,
PRICING ASSUMPTIONS, OR QUALITY OR QUANTITY, OF HYDROCARBON RESERVES (IF ANY)
ATTRIBUTABLE TO THE PROPERTIES OR THE ABILITY OR POTENTIAL OF THE PROPERTIES
TO PRODUCE HYDROCARBONS OR THE ENVIRONMENTAL CONDITIONS OF THE PROPERTIES OR
ANY OTHER MATTERS CONTAINED IN CONFIDENTIAL INFORMATION AND ANY OTHER
MATERIALS FURNISHED OR MADE AVAILABLE TO ASSIGNEE BY ASSIGNOR OR BY
ASSIGNOR'S AGENTS OR REPRESENTATIVES. ANY AND ALL SUCH DATA, RECORDS,
REPORTS, PROJECTIONS, INFORMATION AND OTHER MATERIALS FURNISHED BY ASSIGNOR
OR BY ASSIGNOR'S AGENTS OR REPRESENTATIVES OR OTHERWISE MADE AVAILABLE TO
ASSIGNEE ARE AND WERE PROVIDED TO ASSIGNEE AS A CONVENIENCE, AND SHALL NOT
CREATE OR GIVE RISE TO ANY LIABILITY OF OR AGAINST ASSIGNOR OR ITS AGENTS OR
REPRESENTATIVES. ANY RELIANCE ON OR USE OF THE SAME SHALL BE AT ASSIGNEE'S
SOLE RISK.
2. This Assignment, Bill of Sale and Conveyance is made with full rights
of substitution and subrogation of Assignee, to the extent of the interest
hereby assigned, in and to all covenants and warranties by others heretofore
given or made with respect to the Properties.
3. This Assignment, Bill of Sale and Conveyance is made subject to
governmental and regulatory agency rules and regulations and subject to all the
terms and the express and implied covenants and conditions of the instruments
described on Exhibit "A" and of any other matter appearing of record or of which
Assignee has either notice or knowledge. Further, the terms, covenants and
conditions hereof shall be binding upon and shall inure to the benefit of the
Assignor and the Assignee and their respective successors and assigns, and such
terms, covenants and conditions shall be covenants running with the land herein
assigned and with each transfer or assignment of said land.
4. This Assignment, Bill of Sale and Conveyance is made and shall be
subject to the terms and provisions of that certain Purchase and Sale Letter
Agreement between Assignor, as Seller, and Assignee, as Buyer, dated December
18, 1996, which shall prevail in the event of any conflict between the terms and
provisions hereof and thereof.
5. Notwithstanding anything in this Assignment, Bill of Sale and
Conveyance to the contrary, the Properties do not include and Assignee agrees
and acknowledges that Assignor has reserved and hereby reserves unto itself any
and all of its interest in (a) all Microsoft Office Suite computer software,
all Enertech Oil and Gas computer software and all Lasser, Inc. computer
software; (b) South Timbalier Block 203, South Timbalier Area, Outer
Continental Shelf, being those lands covered by Oil and Gas Lease No. OCS-G-1269
dated June 1, 1962, from the United States of
<PAGE>
Mr. James P. Boldrick
Mr. James Miles Boldrick
December 18, 1996
Page 14
America, as Lessor, to the California Company, as Lessee, recorded in Book 646,
Page 510889, __________________ Parish, Louisiana, and the OCS-G-1269A #2, 3, 4
and 5 wells; and (c) all monies, refunds, proceeds, receipts, credits,
receivables, accounts and income attributable to its assets and accruing prior
to the Effective Time ((a) through (c), collectively the "EXCLUDED PROPERTIES").
6. This Assignment, Bill of Sale and Conveyance may be executed in any
number of counterparts and each counterpart shall be deemed to be an original
instrument, but all counterparts shall constitute but one Assignment, Bill of
Sale and Conveyance. To facilitate recordation, there may be omitted from
certain counterparts of this instrument all or part of Exhibit "A".
TO HAVE AND TO HOLD the Properties unto the Assignee, and its successors
and assigns, subject to the terms, covenants and conditions hereinabove set
forth.
EXECUTED this ______ day of December, 1996, to be effective in all respects
as of the Effective Time.
ASSIGNOR: STATEWIDE MINERALS, INC.
By:
----------------------------------------------
Name:
Title:
ASSIGNEE: BOLDRICK PARTNERS
By:
----------------------------------------------
James Pratt Boldrick, General Partner
By:
----------------------------------------------
James Miles Boldrick, General Partner
[Appropriate Acknowledgments to be Attached]
<PAGE>
Exhibit 10.15
STOCK PURCHASE AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into this 31st day of
December, 1996, by and between ERI Investments, Inc., a Delaware corporation
(hereinafter referred to as "Purchaser"), and Costilla Energy, Inc., a Delaware
corporation (hereinafter referred to as "Seller").
W I T N E S S E T H:
WHEREAS, Seller is the owner of 1,000 shares of Common Stock, par value
$0.01 per share (the "Shares"), of Costilla Pipeline Corporation, a Texas
corporation (hereinafter referred to as "Company"), constituting all of the
issued and outstanding shares of capital stock of Company;
WHEREAS, Seller desires to sell to Purchaser, and Purchaser desires to
purchase from Seller, the natural gas pipeline business currently conducted by
Company in the Commonwealth of Pennsylvania consisting of the assets described
in Exhibit A attached hereto (the "Assets") and certain liabilities related to
the assets as agreed to herein (all of such Assets together with such
liabilities being referred to herein as the "Business"); and
WHEREAS, on the Closing Date, as hereinafter defined, Seller shall sell to
Purchaser, and Purchaser shall purchase from Seller, the Shares, for the
Purchase Price and upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter contained, the parties hereto agree as follows:
ARTICLE I
SALE AND PURCHASE OF SHARES
1.1. SALE OF SHARES. On the terms and subject to the conditions set
forth in this Agreement, Seller hereby agrees to sell, assign and transfer to
Purchaser, and Purchaser hereby agrees to purchase from Seller, on the Closing
Date, the Shares.
1.2 PURCHASE PRICE AND PAYMENT. On the Closing Date, Purchaser shall
purchase the Shares for an aggregate of Three Million Three Hundred Thousand
Dollars ($3,300,000), subject to adjustment pursuant to Section 1.3 and Section
1.4 hereof (the "Purchase Price"). The Purchase Price shall be paid on the
Closing Date by wire transfer in immediately available federal funds into an
account designated by Seller. Seller shall designate said account at least
three (3) days prior to the Closing Date.
<PAGE>
1.3 ADJUSTMENTS TO PURCHASE PRICE: The Purchase Price shall be
adjusted as follows:
a. The Purchase Price shall be adjusted upward by the following
("Sellers' Credits"):
(1) The amount of all payments made by Seller in the ordinary
course of business for direct and actual (i) operating expenses, (including,
without limitation, employee expenses directly charged to the Company pursuant
to any applicable third party agreement and overhead charges under third party
agreements, but not including corporate overhead costs or employee expenses
indirectly charged to the Company or any internal general and administrative
charge(s)) and (ii) capital or maintenance expenditures under any outstanding
authority for expenditures or otherwise reasonably incurred (including, without
limitation, (x) royalties, rentals and other charges, and (y) ad valorem,
property, sales or use, and any other taxes (excluding income or profits taxes)
based upon or measured by the ownership of Assets or the receipt of proceeds
therefrom) attributable to the operation of the Company from and after the
Effective Time in accordance with generally accepted accounting principles; and
(2) any other amount provided for elsewhere in this Agreement or
otherwise agreed upon by Seller and Purchaser.
b. The Purchase Price shall be adjusted downward by the following
("Purchaser's Credits"):
(1) the amount of Revenues received by or credited to Seller
from or otherwise attributable to the Company after the Effective Time. For
purposes of this Section, "Revenues" shall mean the actual proceeds of sale of
natural gas transportation services sold during the period after the Effective
Time, as hereinafter defined, which are attributable to the Company and received
by or credited to Seller (or remitted by Company to Seller), and any other
monies or credits received or collected by Seller (or remitted by Company to
Seller) attributable to the ownership or operation of the Assets from and after
the Effective Time.
(2) the amount of all unpaid ad valorem, property, and similar
taxes and assessments (but not including income, franchise, or similar taxes)
based upon or measured by the ownership of property or the receipt of proceeds
therefrom and unpaid royalties and rentals, which are payable or which accrue to
the Company prior to the Effective Time, which amount shall, where possible, be
computed based upon the tax rate and values applicable to the tax period in
question; and
(3) the amount of any refunds paid by Purchaser to
transportation customers of Company for transportation service provided by
Company prior to the Effective Time which refunds are required to be paid by the
Federal Energy Regulatory Commission ("FERC") in Docket No. PR95-9.
2
<PAGE>
(4) any other amount provided for elsewhere in this Agreement or
otherwise agreed upon by Seller and Purchaser.
1.4 CLOSING AND POST CLOSING ACCOUNTING. Prior to the Closing Date,
Seller shall furnish Purchaser with an estimated accounting with all relevant
supporting information (the "Preliminary Settlement Statement") showing the
estimated amount of any Seller's Credits and the estimated amount of any
Purchaser's Credits, subject to being finally adjusted within one hundred eighty
(180) days after the Closing Date as hereinafter provided. An estimated credit
due Seller shall increase the Purchase Price paid at Closing by that amount and
an estimated credit due Purchaser shall reduce the Purchase Price paid at
Closing by that amount. Within one hundred twenty (120) days after the Closing
Date, Seller shall provide to Purchaser, for Purchaser's concurrence, an
accounting with all relevant supporting information (the "Final Settlement
Statement") of the actual amounts of Seller's and Purchaser's Credits for the
adjustments set out in Section 1.3. Purchaser shall have the right for sixty
(60) days after receipt of the Final Settlement Statement to audit and reach
agreement with Seller on such adjustments. The date upon which such agreement
is reached shall be herein called the Final Settlement Date. Within ten (10)
business days after the Final Settlement Date, those credits agreed upon by
Purchaser and Seller shall be netted and the final settlement shall be paid in
cash by the party owing same, via wire transfer as directed in writing by the
receiving party or, if less than $5,000 by corporate check.
ARTICLE II
THE CLOSING; THE EFFECTIVE TIME
2.1 CLOSING DATE: CLOSING.
a. The closing hereunder (herein called the "Closing") shall
take place via telecopier and mail on December 31, 1996. The date of the
Closing is referred to in this Agreement as the "Closing Date".
b. All proceedings to be taken and all documents to be executed
and delivered by all parties at the Closing shall be deemed to have been taken
and executed simultaneously and no proceedings shall be deemed taken nor any
documents executed or delivered until all have been taken, executed and
delivered.
2.2 EFFECTIVE TIME. The effective time of the purchase and sale
contemplated herein shall be 11:59 p.m. on December 31, 1996 (the "Effective
Time").
3
<PAGE>
ARTICLE III
DELIVERIES AT THE CLOSING
3.1 DELIVERIES BY SELLER. At the Closing, Seller shall deliver, or
shall cause to be delivered, to Purchaser the following:
a. A certificate representing the Shares, which certificate
shall be duly endorsed in blank or, in lieu thereof, shall have affixed thereto
stock powers executed in blank, and in proper form for transfer. In addition,
there shall be affixed to such certificates all requisite stock transfer tax
stamps, if any, or, in lieu thereof, a check from Seller to the order of
Purchaser to defray the cost of all such stock transfer taxes, if any.
b. The certified resolutions of the Board of Directors of
Seller referred to in Section 8.1(a) hereof.
c. The consents or waivers of third parties referred to in
Section 4.7 hereof
d. The resignations of the Directors and officers of the
Company referred to in Section 8.1(d).
e. The consent of Seller to the utilization by Purchaser of the
name "Three Rivers Pipeline" in the form required by the Secretary of State of
the Commonwealth of Pennsylvania.
3.2 DELIVERIES BY PURCHASER. At the Closing, Purchaser shall deliver
to Seller the following:
a. A wire transfer of funds, in the aggregate amount of the
Purchase Price, as provided in Section 1.2 hereof.
b. The certified resolutions of the Board of Directors of
Purchaser referred to in Section 8.2(a) hereof.
c. A certificate of insurance showing that Purchaser has
coverages in place for the Company and the Assets as of the Effective Time in
such types and amounts as are sufficient to ensure fully against the risks to
which the Company is normally exposed in the conduct of its operations.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Purchaser as follows:
4
<PAGE>
4.1 ORGANIZATION AND GOOD STANDING. Each of Seller and Company is a
corporation duly organized, validly existing and in good standing under the laws
of its respective state of incorporation, and has full corporate power and
authority to own its properties and carry on its business as it is now being
conducted. Company is duly qualified as a foreign corporation and is in good
standing under the laws of the Commonwealth of Pennsylvania. The copies of
Company's Certificate of Incorporation and By-Laws that have been previously
delivered to Purchaser are accurate and complete.
4.2. CAPITALIZATION. The authorized capital stock of Company consists
of 100,000 shares of Common Stock, par value $0.01 per share, of which 1,000 are
validly issued and outstanding as of the date hereof. All of such issued and
outstanding shares are fully paid and non-assessable. No shares of Common Stock
are held by Company as treasury stock. There is no existing subscription,
option, warrant, call, commitment or other right or agreement binding on Seller
or Company requiring, and there are no convertible securities of Company
outstanding which upon conversion would require, the issuance of any additional
shares of Common Stock of Company, other securities convertible into shares of
Common Stock or other equity securities of Company.
4.3 SUBSIDIARIES. Company does not own or control any voting shares
of any corporation. Company has no direct or indirect investment or interest in
or control over any other corporation, partnership, joint venture or other
business entity.
4.4 OWNERSHIP OF SHARES. Seller is the record and beneficial owner
of the Shares, free and clear of any ownership claims by third parties and any
security interests lines, charges, encumbrances pledges or rights of others.
Seller has the corporate power and authority to enter into this Agreement, and,
the full legal right to sell, assign, transfer, and deliver to Purchaser good
and valid title to the Shares, free and clear of any and all security interests,
liens, pledges, encumbrances, charges, voting trusts, and other agreements or
claims of any kind whatsoever.
4.5 AUTHORIZATION OF AGREEMENT. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by the necessary corporate action of Seller. This Agreement has
been duly executed and delivered by Seller and constitutes the legal, valid and
binding obligation of Seller, enforceable against it in accordance with its
terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium, and other similar laws now or hereafter in effect
affecting creditors' rights and remedies generally and subject, as to
enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity).
4.6 NO CONFLICTS. The execution, delivery and performance by Seller
of this Agreement and the consummation of the transactions contemplated hereby
do not
5
<PAGE>
and will not (with or without the giving of notice or the passage of time or
both) (a) conflict with or require the consent of any person or entity under the
Certificate of Incorporation, By-Laws or other governing documents of Seller,
Company or any of Seller's Subsidiaries, as the case may be, (b) violate any
provision of any law, rule or regulation applicable to Seller, Company, or the
Assets, as the case may be, (c) violate any order, judgment or decree applicable
to Seller or Company, as the case may be, (d) result in the creation of any
security interest, lien, charge or encumbrance upon the assets or properties of
Seller or Company as the case may be or (e) give rise to any preferential
purchase rights.
4.7 CONSENTS. No consent, approval or authorization of or
designation, declaration or filing with, any governmental authority or other
third party is required on the part of Seller in connection with Seller's
execution, delivery and performance of this Agreement, except for those
consents, approvals or authorizations that are listed in Schedule 4.7 hereto.
4.8 REAL PROPERTY INTEREST. Except as noted in Schedule 4.8, Company
possesses all easements, rights of way, licenses, permits, surface leases, fee
estates and other real property interests necessary to comprise a valid,
enforceable, continuous right-of-way for the Assets described in Exhibit A.
4.9 FINANCIAL STATEMENTS. Seller has delivered to Purchaser the
unaudited balance sheet of Company and supporting schedules, as of October 31,
1996 (the "Balance Sheet Date") (such Balance Sheet (and supporting schedules)
as of the Balance Sheet Date is herein referred to as the "Pro Forma Balance
Sheet") and the related unaudited Statement of Operations and General Ledger.
Each of the foregoing statements is in accordance with the books and records of
Company as of the date and for the periods indicated, adjusted for actual cash
receipts and payables as of the date and for the periods indicated, and present
fairly the financial position and results of operations of Company as of the
date and for the periods indicated.
4.10 NO UNDISCLOSED LIABILITIES. As of the Balance Sheet Date,
Company does not have any indebtedness or liability (whether accrued, absolute,
contingent or otherwise, and whether due or to become due) required to be shown
on a balance sheet prepared in accordance with GAAP (or the notes thereto) which
is not shown on the Pro Forma Balance Sheet, or expressly disclosed herein or in
a schedule hereto (whether or not such balance sheets are accompanied by notes).
Company has not incurred since the Balance Sheet Date (i) any funded
indebtedness whatsoever or (ii) any indebtedness or liability which is
outstanding on the date hereof and is required to be shown on a balance sheet in
accordance with GAAP, other than those relating to operating or capital expenses
incurred in the ordinary course of business and expressly disclosed herein or in
a Schedule hereto.
6
<PAGE>
4.11 NO MATERIAL ADVERSE CHANGE. With respect to Company since the
Balance Sheet Date there has been no material adverse change in the Business,
Assets, liabilities, or financial condition or results of operations.
4.12 TAXES. All federal, state, local and foreign taxes, including,
without limitation, income, remittance, property, sales, use, franchise,
withholding, capital stock. excise, value added, employees' income withholding,
social security, and unemployment taxes, and all federal, state, or local
levies, royalties, imposts, duties, licenses and registration fees and charges
of any nature whatsoever, including with respect to all of the foregoing, any
interest and penalties thereon (all of the foregoing, including interest and
penalties, being referred to collectively as "Taxes"), for which Company may be
liable have in all respects been paid when due and payable or, with respect to
Taxes for which Company may be liable after the Balance Sheet Date, have in all
material respects been adequately accrued. There is no action, suit,
proceeding, audit, investigation or claim pending or threatened, and to the best
knowledge of Seller, no issue relating to Taxes has been raised in writing by
the Internal Revenue Service or any other taxing authority in any examination,
in respect of any Taxes for which Company may be liable which would have a
material adverse effect on the Business, Assets or financial condition of the
Company Assets. Neither Seller nor Company (or, in the case of a Combined
Return, any corporation included in such Combined Return) has executed (or been
requested to execute) or filed with the Internal Revenue Service, or any other
taxing authority; (x) any agreement or other document extending, or having the
effect of extending, the period of assessment or collection of any Taxes, or (y)
any power of attorney with respect to Taxes.
4.13 MATERIAL CONTRACTS. Except as listed in Schedule 4.13, Company
is not by name, or by succession in interest bound by, or, to the best knowledge
of Seller otherwise bound by or subject to any (i) contract for the
transportation or sale of natural gas; (ii) contract for the employment of any
officer or employee or any consulting agreement; (iii) agreement for the sale or
lease of any of the Assets; (iv) contract or commitment for capital expenditures
pertaining to the Assets; (v) lease of machinery or other equipment related to
the assets; (vi) loan agreement, promissory note issued by it, guarantee,
subordination or similar type of agreement; or (vii) agreement, contract or
commitment relating to the acquisition of the assets, liabilities or any
interest in any business enterprise. A complete and correct copy of each
agreement listed in Schedule 4.13 has been made available to Purchaser. To the
best knowledge of Seller, all contracts listed on Schedule 4.13 have been duly
authorized, executed and delivered by Company and are in full force and effect
and constitute legal binding and enforceable obligations of the Company.
4.14 LITIGATION.
a. There is no lawsuit, proceeding, claim, or investigation
pending or, to the best knowledge of Seller, threatened which might question the
validity or propriety of this Agreement or the consummation of any of the
transactions contemplated hereby. There is no outstanding order, injunction,
order of any court or governmental agency
7
<PAGE>
against or naming Company materially affecting the conduct of its Businesses
or Assets. Neither Seller nor Company has received notice of any pending or
threatened (in writing) condemnation, taking or similar proceeding affecting
any material properties owned or used by Company in the Business.
b. There is no lawsuit, proceeding, claim, or investigation
pending, or, to the best knowledge of Seller, threatened against Seller, its
Subsidiaries or its assets which would, if determined adversely to Seller, its
subsidiaries or assets, result in the impairment or loss of any material part of
Sellers assets (i) materially hinder or impede the operation of all or any
portion of Seller's business, or (ii) adversely affect Seller's ability to
perform its obligations under this Agreement; or (iv) materially restrain,
prohibit or impose damages on Purchaser or Company with respect to the
transactions contemplated herein.
4.15 TITLE TO PROPERTIES: ABSENCE OF ENCUMBRANCES. Except as shown in
Schedule 4.15, Company has good and defensible title to all properties (real and
personal) and assets reflected on the Pro Forma Balance Sheet or that comprise
the Assets, free and clear of any and all liens, mortgages, pledges, security
interests, restrictions, prior assignments, claims and encumbrances of any kind
whatsoever, except for imperfections of title, if any, as are not material in
character or amount or do not materially detract from the value or interfere
with the use of the Assets for the purposes for which they are presently used or
otherwise materially impair business operations.
4.16 MINUTE BOOKS. The minute books of Company, as previously made
available to Purchaser, contain complete and accurate records of all meetings
and accurately reflect all other corporate action of the stockholders and board
of directors of Company. The stock certificate books and stock transfer ledgers
of Company are true and complete. All stock transfer taxes levied or payable
with respect to all transfers of shares of Company prior to the Closing Date
have been paid and appropriate transfer tax stamps affixed.
4.17 EMPLOYEES AND EMPLOYEE BENEFIT PLANS. There are no employees of
Company. Company has no employee benefit plans or benefit arrangements in
effect which cover or provide benefits to employees of Company or Seller
("Plans"). Company has no existing or future obligation or liability with
respect to any officer or employee of Company or Seller.
4.18 PERMITS AND COMPLIANCE WITH LAWS. Where Company is or was
required to file for and obtain issuance of in Company's name any necessary
governmental certificates, consents, permits or authorizations, noncompliance
with which or the failure to file for and obtain issuance of which would have a
materially adverse effect upon the business, Company has satisfied such
requirements. The books, records and accounts of Company accurately and fairly
reflect its transactions in all material respects, and Company has not directly
or indirectly made domestic or foreign payments of an illegal or questionable
nature which would have required disclosure to its
8
<PAGE>
stockholders, the public or to the Securities and Exchange Commission were it
subject to the reporting and filing requirements of the federal securities laws.
4.19 COMPLIANCE WITH ENVIRONMENTAL LAWS.
a. Company (i) by name is not subject to any consent decree,
compliance order or administrative order issued pursuant to, or is the subject
of any pending investigation under, applicable Environmental Laws, (ii) has not
itself actually received written notice under the citizen suit provision of any
applicable Environmental Law, and (iii) has not itself actually received any
written request nor written notice of any request for information, notice of
violation, demand letter, administrative inquiry, complaint or claim from any
person, including any governmental authority, involving any alleged violation of
Environmental Laws, or the release or threatened release of any Polluting
Substances (hereinafter defined).
b. To the best knowledge of Seller, the ownership, operation
and use of the Assets do not violate and have not violated any Environmental
Laws.
c. Without limitation of (b) above, to the best knowledge of
Seller, neither the Assets nor Company are in violation of or subject to any
existing, pending or threatened (in writing) investigation or inquiry by any
Governmental Authority or to any removal or remedial obligations under any
Environmental Laws.
d. As used herein "Environmental Laws" shall mean all local,
state and federal laws, rules and regulations relating to pollution or
protection of the environment (including ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
with respect to the Assets, the Comprehensive Environmental Response,
Compensation and Liability Act of 1976, as amended, the Toxic Substances Control
Act, the Clean Water Act, the Safe Drinking Water Act, the Clean Air Act, the
Pipeline Safety Act, the Endangered Species Act, the National Historic
Preservation Act, the Environmental Protection and Enhancement Act, and all
other laws relating to (i) emissions, discharges or releases of pollutants,
contaminants, chemicals, polychlorinated biphenyls ("PCBs", industrial solid
wastes, or toxic or hazardous substances or wastes (collectively, "Polluting
Substances") or (ii) the manufacture, processing, distribution, use, treatment,
handling, storage, disposal or transportation of Polluting Substances.
"Governmental Authority" shall mean any federal, state, local, or other
governmental or administrative authority or agency.
4.20 GAS IMBALANCES. There are no material gas imbalances as between
Company and any third party with respect to the Assets.
4.21 INSURANCE AND SURETY BONDS. Schedule 4.21 lists all liability
insurance policies of Seller and/or Company, all property and casualty insurance
policies all of which are, to the best knowledge of Seller, now in full force
and effect. There are no notices of any pending or, to the best knowledge of
Seller, threatened terminations
9
<PAGE>
with respect to any of such insurance policies or surety bonds and to the best
knowledge of Seller, Seller and Company are in compliance with all material
conditions contained in such policies and surety bonds other than the maturity
dates set forth in such policies and surety bonds.
4.22 ACCURACY. Company has made available to Purchaser all of its
files, documents of title and other records regarding the Assets. To the best
knowledge of Seller, all such files, document of title, and other records
delivered and made available to Purchaser by Seller are true and accurate all
material respects and no documents or information were intentionally omitted
therefrom that are necessary to make same not misleading in any material
respect. Neither Seller nor Company has intentionally withheld any material
fact necessary to be disclosed in order to prevent the statements,
representations or warranties contained herein from being misleading.
4.23 CONSULTANT AND VENDOR CONTRACTS. Schedule 4.23 lists all
contracts entered into by Company with consultants and service vendors. All of
such contracts will be terminated at Closing without liability to Company or
Purchaser.
4.24 PERSONAL PROPERTY. To the best knowledge of Seller, the
machinery and equipment included in the personal property have been maintained
in accordance with customary oil and gas industry standards and practices, and
such machinery and equipment in all material respects is in working order.
4.25 SELLER AND COMPANY FILINGS. All filings made by Seller with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Securities Act"), or the Securities Exchange Act of 1934, as amended (the
"Exchange Act") ("Seller Filings") comply as to form and otherwise in all
material respects with the applicable requirements of the Securities Act, the
Exchange Act and the rules and regulations thereunder. None of the information
contained therein is false or misleading with respect to any material fact, or
omits 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. To the best knowledge of Seller, no filings have
been made or are required to be made by the Company with the Securities and
Exchange Commission.
4.26 FERC. To the extent required by law, Company and Seller are in
compliance with the Natural Gas Act, Natural Gas Policy Act, and the Regulations
contained in 18 CFR Sections 1 ET SEQ. The operations of Company are in
material compliance with the Statement of Conditions to Gas Transportation on
file with and approved by FERC. With the exception of the proceeding at FERC in
Docket No. PR95-9, Seller is not aware of any proceeding, Docket, or issue at
the FERC, the resolution of which will materially effect the transaction
contemplated by this Agreement.
10
<PAGE>
ARTICLE V
REPRESENTATIONS, WARRANTIES AND ACKNOWLEDGMENTS OF
PURCHASER
Purchaser hereby represents and warrants to Seller as follows:
5.1. ORGANIZATION AND GOOD STANDING. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has full corporate power and authority to own its properties and
carry on its business as it is now being conducted.
5.2. AUTHORIZATION OF AGREEMENT. Purchaser has the corporate power
and authority to enter into this Agreement. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by the necessary corporate action of Purchaser. This Agreement
has been duly executed and delivered by Purchaser and constitutes the legal,
valid and binding obligation of Purchaser, enforceable against it in accordance
with its terms, subject to applicable bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium, and other similar laws now or hereafter
in effect affecting creditors' rights and remedies generally and subject, as to
enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity).
5.3. NO CONFLICTS. The execution, delivery and performance by
Purchaser of this Agreement and the consummation of the transactions
contemplated hereby do not and will not (with the giving of notice or the
passage of time or both) (a) conflict with the Certificate of Incorporation,
by-laws or other governing documents of Purchaser, (b) violate any provision
of any law, rule or regulation applicable to Purchaser, (c) violate any
order, judgment or decree applicable to Purchaser, or (d) conflict with, or
result in a breach or default under, any agreement or other instrument to
which Purchaser is a party or by which it may be bound.
5.4 CONSENTS. No consent, approval or authorization of, or
designation, declaration or filing with, any governmental authority or other
third party is required on the part of Purchaser in connection with Purchaser's
execution, delivery and performance of this Agreement.
5.5 NO LAWSUITS. There is not lawsuit, proceeding or investigation
pending or, to the best knowledge of Purchaser, threatened against Purchaser
which might question the validity or propriety of this Agreement or the
consummation of any of the transactions contemplated hereby.
5.6 INVESTMENT REPRESENTATION. Purchaser possesses such knowledge
and experience in financial and business matters that it is capable of
evaluating the merits
11
<PAGE>
and risks of its investment hereunder. Purchase is acquiring the Shares for its
own account, for investment purposes only and not with a view to the
distribution thereof.
5.7 FINANCING. Purchaser has sufficient funds available to pay the
Purchase Price.
5.8 ACKNOWLEDGMENTS.
a. Except as and to the extent set forth in this Agreement,
Purchaser acknowledges and agrees that Seller makes no representations or
warranties whatsoever, and that Seller disclaims all liability and
responsibility for any representation, warranty, statement, or information made
or communicated (orally or in writing) to Purchaser or to any officer, employee,
agent, or representative of Purchaser (including, but not limited to, any
opinion, information, or advice which may have been provided to Purchaser by any
officer, employee, agent, consultant or representative of Seller, Company or any
of its Subsidiaries).
b. In determining to acquire the Shares, Purchaser has made its
own investigation, analysis, and evaluation of the Assets and Business of
Company including, without limitation limited visual on-site, inspection of the
surface of the Assets, and based thereon and on the representations, warranties,
covenants and agreements made by Seller in this Agreement, Purchaser has formed
an independent judgment concerning Company's Business, Assets, liabilities,
financial condition, results of operations, and prospects and the inherent risks
associated therewith.
c. Except for the representations, warranties, covenants and
indemnities made in this Agreement or in any document delivered pursuant to this
Agreement by Seller, the Assets are accepted by Purchaser "AS IS" and "WHERE
IS".
ARTICLE VI
COVENANTS OF SELLER
6.1 TRANSFER OF DOCUMENTS: OPPORTUNITY TO ASK QUESTIONS. Seller
shall transfer all of Company's, and to the extent same relate directly to
Company, Sellers corporate records, books of account, property interest
documents, and all other documents reasonably requested by Purchaser and its
managerial employees within thirty (30) days after Closing. Seller shall
further cause the managerial and staff employees, of Seller to be available upon
reasonable notice to answer questions of Purchaser's representatives concerning
the Assets and Business of Company and shall further cause them to make
available all relevant books and records in connection with such questions. If
any questions or information requests of Purchaser shall require Seller to
utilize outside counsel or consultants, Purchaser shall reimburse Seller for the
reasonable costs and expenses of such utilization provided that Purchaser
consents to such utilization.
12
<PAGE>
6.2 NOTICE TO PURCHASER. Seller will promptly notify Purchaser of
the receipt (a) of any written notice or written claim or written threat of
notice or claim of which Seller becomes aware relating to any default or breach
by Company, or of any termination or cancellation, or written threat of
termination or cancellation, of any of the Material Contracts (b) of any filed
or threatened litigation against the Company or the Assets, or (c) any notice,
order, or other correspondence received by Seller pertaining directly or
indirectly to an actual or alleged violation of any Environmental Law.
6.3 CONSENTS. Seller shall cooperate with purchaser and use
commercially reasonable efforts to obtain any other consents to the transactions
contemplated hereby.
6.4 CONFIDENTIALITY. After the Closing Date, Seller shall not,
directly or indirectly, use or provide to, or permit any affiliate, directly or
indirectly, to use or provide any other person any nonpublic information
concerning the Business or operations (financial or other) of Company, except,
as on the advice of counsel, Seller is required in governmental filings or
judicial, administrative or arbitration proceedings to provide said information.
Seller may disclose information concerning the sale of Company and the
consummation of the transactions contemplated herein to securities analysts,
parties providing or proposing to provide financial accommodations to Seller,
holders of Sellers' securities or prospective holders thereof and accounting,
financial petroleum engineering or other consultants to Seller having a need to
know any such information.
6.5 PRE-CLOSING OPERATIONS. Seller shall be solely responsible for
the Business of the Company prior to Closing, and shall undertake such measures
as are ordinarilly required for the conduct of Business including, without
limitation, the collection of revenues, payment of expenses, the preparation and
filing of reports and the maintenance of accounting records, regardless of
whether such measures are required before or after the Closing Date.
6.6 COMPETITION. Until the expiration of two years from Closing,
Seller, for itself or through any subsidiary, shall not engage, directly or
indirectly, alone or in association with any other party in the provision of
natural gas transportation service in the Commonwealth of Pennsylvania.
ARTICLE VII.
COVENANTS OF PURCHASER
Purchaser hereby covenants and agrees that:
7.1 COOPERATION WITH SELLER. After Closing, Purchaser shall
cooperate with Seller in providing Seller such additional information and
explanation of any materials or matters relating to the Assets, provided
such assistance is reasonably
13
<PAGE>
requested and Seller agrees to reimburse Purchaser for all out of pocket costs
that Purchaser may reasonably incur pursuant to this paragraph.
7.2 CHANGE OF NAME. Within thirty (30) days after the Effective
Time, Purchaser will make filings with the offices of the Secretary of State in
the State of Texas and the Commonwealth of Pennsylvania to change the name of
Company to delete "Costilla" from the name, and thereafter shall refrain from
using "Costilla" in the operation of the Company.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE CLOSING
8.1. CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATION. The obligation
of Purchaser to consummate the purchase of the Shares on the Closing Date is
subject to the satisfaction (or waiver by Purchaser where permitted by
applicable law) of the following conditions:
a. RESOLUTIONS. Purchaser shall have received a certificate of
a duly authorized officer of Seller, dated the Closing Date, setting forth the
resolutions of the Board of Directors of Seller authorizing the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby and certifying that such resolutions were duly adopted and have not been
rescinded or amended as of the Closing Date.
b. THIRD PARTY CONSENTS. The consents or waivers of those
persons listed on Schedule 4.15 hereto to the sale of the Shares to Purchaser
shall have been obtained, and signed copies thereof shall have been delivered to
Purchaser except as agreed to by Seller and Purchaser.
c. RESIGNATIONS. Seller shall have delivered resignations
effective as of the Closing Date of all or directors of Company (the
"Resignations"), and certified resolutions of Company effecting the removal of
all incumbent officers of Company.
d. TERMINATION OF CONTRACTS. Seller shall have delivered all
written terminations of all consulting and vendor contracts identified in
Schedule 4.23.
8.2. CONDITIONS PRECEDENT TO SELLER'S OBLIGATION. The obligation of
Seller to consummate the sale, transfer and assignment to Purchaser of the
Shares on the Closing Date is subject to the satisfaction (or waiver by Seller
where permitted by applicable law) of the following conditions:
14
<PAGE>
a. RESOLUTIONS. Seller shall have received a certificate of a
duly authorized officer of Purchaser, dated the Closing Date, setting forth the
resolutions of the Board of Directors of Purchaser authorizing the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby, and certifying that such resolutions were duly adopted and have not been
rescinded or amended as of the Closing Date.
ARTICLE IX
INDEMNIFICATION AND RELATED MATTERS
9.1 INDEMNIFICATION BY SELLER. Subject to the provisions of this
Article IX, Seller agrees to indemnify, reimburse and hold Purchaser, Company,
and their respective stockholders, directors, officers, employees, agents,
consultants and affiliates (the "Purchaser Group") harmless from and against any
and all damage, loss, cost, expense, obligation, claim or liability, including
reasonable counsel fees and expenses of investigation, defending and prosecuting
litigation (collectively the "Damages") suffered by the Purchaser Group as a
result of, caused by, arising out of, or in any way related to:
a. The breach of any of the representations and warranties made
by Seller in this Agreement; PROVIDED, however, that with respect to
representations and warranties made as of a specified date, it is understood
that this Section 9.1(a) shall apply only to the breach of any such
representations and warranties as of such specified date;
b. The failure of Seller to comply in all material respects
with any of the covenants contained in this Agreement which are required to be
performed by Seller;
c. Any Taxes (i) for which Seller is responsible as provided in
Section 10.1; or (ii) related to a breach or inaccuracy of Section 4.12 or the
breach of the covenants and agreements made by Seller in Article X.
d. Legal actions, claims, lawsuits, penalties, fines,
remediation costs and expenses relating to the environmental condition of the
Assets resulting from acts, circumstances or omissions during the period prior
to the Effective Time.
e. the acquisition of the Shares of Company by Seller and its
affiliates or pursuant to any agreements executed or delivered or any filings
made in connection with such acquisition.
9.2 INDEMNIFICATION BY PURCHASER. Subject to the provisions of this
Article IX, Purchaser agrees to indemnify, reimburse and hold Seller and its
stockholders. directors, officers, employees, agents, consultants and affiliates
(the "Seller
15
<PAGE>
Group") harmless from and against any and all Damages suffered by the Seller
Group as a result of, caused by, arising out of or in any way relating to:
a. The breach of any of the representations and warranties made
by Purchaser in this Agreement; PROVIDED, however, with respect to
representations and warranties made as of a specified date, it is understood
that this Section 9.2(a) shall apply only to the breach of such representations
and warranties as of such specified date;
b. The failure of Purchaser to comply in all material respects
with any of the covenants contained in this Agreement which are required to be
performed by Purchaser; and
c. Except for those matters for which Seller has agreed to
indemnify the Purchaser Group the ownership and operation of the Assets after
the Adjustment Time.
9.3 DETERMINATION OF DAMAGES. In calculating any amounts payable to
Purchaser pursuant to Section 9.1 hereof or payable to Seller pursuant to
Section 9.2 hereof, Seller or Purchaser, as the case may be, shall receive
credit for any insurance recoveries; and no amount shall be included for
Purchaser's or Seller's, as the case may be, special, consequential, or punitive
damages.
9.4 INDEPENDENT INDEMNIFICATION OBLIGATIONS. Each of the indemnities
and hold harmless obligations set forth in this Agreement shall be separate and
independent obligations of the party obligated and the beneficiary of the
obligation shall be entitled to make a claim pursuant to any applicable
indemnity obligation.
9.5 LIMITATION ON INDEMNIFICATION LIABILITIES. The indemnifications
in favor of Purchaser contained in Section 9.1 hereof and the indemnifications
in favor of Seller contained in Section 9.2 hereof (a) shall not be effective
unless (i) for any single claim that is asserted, the aggregate dollar amount of
all Damages associated with any such claim exceeds $10,000 or (ii) for all
asserted claims, the aggregate dollar amount of all Damages associated with all
such claims exceeds $150,000 (in either case, the "Threshold Amount"). If
Damages exceed the Threshold Amount, the party claiming indemnification shall be
indemnified for all Damages including the initial amounts necessary to reach the
Threshold Amount. Notwithstanding the foregoing or any other provision of this
Article IX, the respective liability of Purchaser or Seller to indemnify the
other shall not exceed the Purchase Price.
9.6 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS, INDEMNITIES
AND AGREEMENTS. The representations, warranties, covenants, indemnities, and
agreements made in this Agreement shall survive the Closing without limitation
as to time except as follows:
16
<PAGE>
a. The representations and warranties made by Seller in Section
4 and the indemnity by Seller in Section 9.1(a) related to the foregoing
representations and warranties, shall only survive the Closing for the following
periods:
(i) for claims related to acts, omissions or circumstances
attributable to the period of time prior to the Effective
Date two (2) years after the Closing Date;
(ii) for claims that are based on fraud attributable to Seller
whether or not attributable to the period prior to or after
the Effective Date five (5) years after the Closing Date.
b. The representations and warranties made by Purchaser in
Section 5 and the indemnity by Purchaser in Section 9.2(a) related to the
foregoing representations and warranties, shall only survive the Closing for the
following periods:
(i) for claims related to acts, omissions or circumstances
attributable to the period of time after the Effective Date
two (2) years after the Closing Date;
(ii) for claims that are based on fraud attributable to Purchaser
whether or not attributable to the period prior to or after
the Effective Date five (5) years after the Closing Date.
The parties hereto further agree that in order to assert a claim for
indemnification pursuant to this Agreement for a breach of any representation,
warranty, covenant or other agreement by the other party hereto, the party
seeking indemnification must provide written notice of such claim pursuant to
Section 9.7 hereof within the time periods specified by such Section, if any.
9.7 NOTICE OF INDEMNIFICATION. In the event any legal proceeding
shall be threatened or instituted or any claim or demand shall be asserted or
discovered by any person in respect of which payment may be sought by one party
hereto from the other party under the provisions of this Article IX, the party
seeking indemnification (the "Indemnitee") shall promptly cause written notice
of the assertion of any such claim of which it has knowledge which is covered by
this indemnity to be forwarded to the other party (the "Indemnitor"), and in the
case of indemnity the survival of which is limited, prior to the expiration of
the applicable period set forth in Section 9.6. Any notice of a claim by reason
of any of the representations, warranties, covenants, or agreements contained in
this Agreement shall state specifically the representation, warranty, covenant,
or agreement with respect to which the claim is made, the facts giving rise to
an alleged bass for the claim, and the amount of the liability asserted against
the Indemnitor by reason of the claim.
17
<PAGE>
9.8 INDEMNIFICATION PROCEDURE FOR THIRD-PARTY CLAIMS. In the event of
the initiation of any legal or administrative or other proceeding against an
Indemnitee by a third party for which indemnification is sought pursuant to this
Article IX, the Indemnitor shall have the absolute right after the receipt of
notice, at its option and at its own expense, to be represented by counsel of
its choice, and to defend against, negotiate, settle or otherwise deal with any
proceeding, claim, or demand which relates to any loss, liability or damage
indemnified against hereunder; provided, however, that the Indemnitee may
participate in any such proceeding with counsel of its choice and at its
expense. The parties hereto agree to cooperate fully with each other in
connection with the defense, negotiation or settlement of any such legal
proceeding, claim or demand. To the extent the indemnitor elects not to defend
such proceeding, claim or demand, and the Indemnitee defends against or
otherwise deals with any such proceeding, claim or demand, the Indemnitee may
retain counsel, at the expense of the Indemnitor, and control the defense and
settlement of such proceeding.
9.9. EXCLUSIVE REMEDY. The exclusive remedy available to a party
hereto in respect of the matters covered by Section 9.1 or Section 9.2 hereof
shall be to proceed in the manner and subject to the limitations contained in
this Article IX.
9.10 BROKERS. Seller agrees to indemnify and hold Purchaser harmless
from and against any and all liability to which Purchaser or Company may be
subjected by reason of any broker's, finder's or similar fee with respect to the
transactions contemplated by this Agreement to the extent that such fee is
attributable to any action undertaken by or on behalf of Seller. Purchaser
agrees to indemnify and hold Seller harmless from and against any and all
liability to which Seller may be subjected by reason of any broker's, finder's
or similar fee with respect to the transactions contemplated by this Agreement.
ARTICLE X
TAX MATTERS
10.1 SELLER'S PRE-CLOSING TAX LIABILITY. Seller shall be solely
responsible for the payment of all Taxes payable with respect to Company
attributable to any period ending on or before the Closing Date. Seller shall
indemnify Purchaser from any such Taxes (including any interest and penalties
thereon) in accordance with the provisions of Section 9.1. In the case of any
such Taxes computed for a period that includes the Closing Date but that ends
after the Closing Date, Seller shall be liable for no more than its share of
such Taxes computed on a daily basis. Seller shall provide Purchaser for its
review and concurrence draft copies of all applicable short year tax returns for
the periods ending December 31, 1996 within ninety (90) days after the Closing
Date.
10.2 CLAIMS AND SUITS FOR REFUND. With respect to any pending or
subsequently filed claim for refund by Company of the Taxes referenced in
Section 10.1, Purchaser agrees to notify Seller within ten days of such
claim. Seller will retain
18
<PAGE>
complete discretion to prosecute or settle on behalf of Company each of such
claims or suits at Seller's expense.
Purchaser further agrees to provide Seller with all reasonable cooperation
in obtaining such refunds (including the execution of appropriate powers of
attorney) and to make the records and personnel of Company available to assist
Seller or any counsel designated by Seller to prosecute any such claim or suit
for refund.
Except as otherwise provided in Section 1.4, in the event that any refund
of Taxes for which Seller is responsible under this Agreement is received by
Purchaser or Company, Purchaser will pay to Seller within fifteen days an amount
equal to such refund plus any interest received on such refund, provided,
however, that Purchaser shall retain any such refund to the extent it is
attributable to the carryback of any item that arose in a period following the
Closing.
10.3 ASSISTANCE AND RECORDS. Purchaser shall provide Seller with
assistance as Seller may reasonably request in connection with tax returns or
administrative or judicial action proceedings involving Seller and Company.
Such assistance shall include making employees available to Seller and its
counsel, providing additional information and explanation of any material to be
provided, and furnishing relevant materials. Seller will retain complete
discretion in conducting and resolving any audit or administrative or judicial
proceeding relating to any Taxes with respect to periods ending on or before the
Closing Date. Purchaser will notify Seller within five days of any such matter
that could affect Seller's Tax liability. Purchaser will retain and, upon the
request of Seller, provide any records or information that may be relevant to
such matter. Seller agrees to reimburse Purchaser for all out of pocket costs
that Purchaser may reasonably incur pursuant to this paragraph.
ARTICLE XI
EXPENSES
11.1 REGULATORY EXPENSES. Purchaser shall be responsible for, and
bear all costs related to preparing and prosecuting all filings, pleadings and
applications to the Public Utility Commission of Pennsylvania the FERC and any
other regulatory agency as may be required to receive such authorizations as are
necessary to effectuate the terms of this Agreement.
11.2 TRANSACTION EXPENSES. Each party shall be solely responsible for
all expenses incurred by it in connection with this transaction (including, but
not limited to fees and expenses of its counsel, accountants, brokers, and
finders) and shall not be entitled to any reimbursement therefore from the other
party, except as otherwise provided herein. Sales, use, and transfer taxes
(excluding taxes on gross income, net income or gross receipts), as well as
duties, levies or other governmental charges imposed with respect to transfers
undertaken pursuant to this Agreement shall be shared equally by Buyer and
Seller.
19
<PAGE>
ARTICLE XII
POST-CLOSING ASSISTANCE
12.1 POST CLOSING ASSISTANCE. Purchaser may require certain
services from Seller for up to 180 days after Closing. Purchaser and Seller
may execute a separate service agreement which sets forth the services to be
provided by Seller and the manner of compensation from Purchaser. The
execution or non-execution of such service agreement shall not effect the
obligations of the Purchaser and Seller to cooperate and exchange information
under this Agreement.
ARTICLE XIII
GENERAL
13.1 SPECIFIC PERFORMANCE. The parties hereto acknowledge that
irreparable damage would result if this Agreement is not specifically enforced.
Therefore, the rights and obligations of the parties under this Agreement,
including, without limitation, their respective rights and obligations to sell
and to purchase the Shares, shall be enforceable by a decree of specific
performance issued by any court of competent jurisdiction, and appropriate
injunctive relief may be applied for and granted in connection therewith. Such
remedies shall, however, be cumulative and not exclusive and shall be in
addition to any other remedies which any party may have under this Agreement or
otherwise if this Agreement shall be breached prior to the consummation of the
transactions contemplated hereby.
13.2 NOTICES. Any notices or other communications required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given when delivered personally or transmitted by telecopier, receipt
acknowledge, or in the case of documented overnight delivery service or
registered or certified mail, return receipt requested, postage prepaid, on the
date shown on the receipt therefor:
a. if to Purchaser:
ERI Investments, Inc.
911 Washington Street
Wilmington, Delaware
Attn: Treasurer
Telecopy No.: (302) 428-1410
with a copy to:
Equitrans, L.P.
3500 Park Lane
Pittsburgh, PA 15071
Attn: Frank H. Markle
Telecopy No. (412) 553-6563
20
<PAGE>
b. if to Seller:
Costilla Energy, Inc.
P. O. Box 10369
Midland, TX 79702
Attn: Henry G. Musselman
Telecopy No. (915) 686-6081
13.3 AMENDMENTS. This Agreement may be amended, modified, superseded
or canceled and any of the terms, covenants, representations, warranties, or
conditions hereof may be haired only by an instrument in writing signed by each
of the parties hereto or, in the case of a waiver, by or on behalf of the party
waiving compliance.
13.4 ENTIRE AGREEMENT. This Agreement, including the schedules
hereto, any written amendments to the foregoing satisfying the requirements of
Section 12.3 hereof, and the Confidentiality Agreement and Letter Agreement
referred to in Section 5.3 hereof, constitute the entire agreement among the
parties with respect to the subject matter hereof and thereof, and supersede any
previous agreements and understandings between the parties with respect to such
matters.
13.5 SUCCESSORS. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and
assigns, including, without limitation, successors and assigns to all or any
portion of the Assets.
13.6 HEADINGS. The Article and Section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
13.7 JURISDICTION: CONSENT TO SERVICE OF PROCESS. THIS AGREEMENT
SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE
COMMONWEALTH OF PENNSYLVANIA.
13.8 EXPENSES. Whether or not the transactions contemplated hereby
are consummated, the parties hereto shall pay their oven respective expenses.
13.9 SEVERABILITY. If at any time subsequent to the date hereof, any
provision of this Agreement shall be held by any court of competent jurisdiction
to be illegal, void or unenforceable, such provision shall be of no force and
effect, but the illegality or unenforceability of such provision shall have no
effect upon and shall not impair the enforceability of any other provision of
this Agreement.
13.10 PUBLIC ANNOUNCEMENTS. Neither Seller (nor any of its
affiliates) nor Purchaser (nor any of its affiliates) shall make any public
statements, including,
21
<PAGE>
without limitation, any press releases, with respect to this Agreement and the
transactions contemplated hereby without the prior written consent of the other
party (which consent may not be unreasonably withheld), except as may be
required by law or listing agreements with national securities exchanges and
then only after prior consultation with the other party.
13.11 FURTHER ASSURANCES. From and after the Closing Date,
Purchaser and Seller shall take such further action and execute any instruments
and documents reasonably necessary to carry out the purposes of this Agreement
or any document delivered or executed in connection with this Agreement.
13.12 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed and original, but all of which taken
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement,
as of the date first written above.
COSTILLA ENERGY, INC.
By /s/ HENRY G. MUSSELLMAN
----------------------------------------
Name: Henry G. Musselman
Title: Executive Vice President
ERI INVESTMENTS, INC.
By /s/ JEFFREY C. SWOVELAND
----------------------------------------
Name: Jeffrey C. Swoveland
Title: President
22
<PAGE>
EXHIBIT "A"
ASSETS TO BE ACQUIRED
The Assets conveyed and acquired herein consist of all of the following:
(a) that certain 8-inch approximately 122 mile pipeline extending from a
point where the pipeline crosses the Airco Arroyo 20" nitrogen line
southeast of the Ohio River near Midland, Pennsylvania, to a point of
interconnection with Peoples Natural Gas near Hollidaysburg,
Pennsylvania, including without limitation, the 4-inch lateral line
extending from the 8-inch line to McKees Rocks, Pennsylvania in
Allegheny County, all as shown on the map attached hereto as Exhibit
"A-l" (the "Pipeline");
(b) all rights-of-way, servitudes and easements across, over and through
properties which the Pipeline is located;
(c) all properties held in fee all surface leases and other real property
rights and interests used or useful in, or incident to, the
construction, ownership or operation of the Pipeline;
(d) all licenses, permits and approvals incident to, or used or useful in
connection with the ownership, construction or operation of the
Pipeline;
(e) all equipment, facilities buildings and other improvements, pipe, pipe
racks, pumps, engines, compressors, separators, block valves, heaters,
measurements and pigging facilities, tanks and other equipment,
warehouse stocks of pipe, spare parts and all other personal property
of every kind located on the properties herein conveyed, appurtenant
thereto or used or useful in connection with the construction,
ownership or operation of the Pipeline or any of the other Assets;
(f) any and all contractual rights, warranties and guarantees in favor of
Seller which affect the ownership or operation of the Pipeline or any
of the other assets herein conveyed;
(g) any and all files, books and records relating to the construction,
ownership or operation of the Pipeline. including, without limitation
all files pertaining to rights-of-way environmental compliance,
construction, claims and causes of actions or governmental
proceedings.
(h) the trade and business name "Three Rivers Pipeline" and derivatives
thereof, together with all marks, logos and symbols relating thereto.
<PAGE>
EXHIBIT 12.1
COSTILLA ENERGY, INC.
ADJUSTED EBITDA/INTEREST EXPENSE
(in thousands)
<TABLE>
Years Ended December 31,
--------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net income (loss) $(4,440) $(4,970) $ 163 $ 73 $ 368
Interest income 11,281 4,454 1,458 605 365
Income taxes 1,218 3 40 (23) 18
Exploration and abandonment 2,550 1,650 793 218 4
Depreciation, depletion and 12,430 6,095 1,847 884 404
amortization
Gain from sale of substantially all the (906) -- -- -- --
assets of wholly-owned subsidiary
Extraordinary loss resulting from
early extinguishment of debt, net of the
related deferred tax benefit of $1,042 4,975 -- -- -- --
------- ------- ------ ------ ------
ADJUSTED EBITDA $27,108 $ 7,232 $4,301 $1,757 $1,159
------- ------- ------ ------ ------
------- ------- ------ ------ ------
ADJUSTED EBITDA/Interest expense 2.4x 1.6x 2.9x 2.9x 3.2x
------- ------- ------ ------ ------
------- ------- ------ ------ ------
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Costilla Energy, Inc. has the following subsidiary (as defined in Rule 405
of the Rules and Regulations promulgated under the Securities Act of 1993, as
amended) as of March 17, 1997.
Costilla Redeco Energy, L.L.C., a Texas limited liability company.
<PAGE>
EXHIBIT 23.1
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
Costilla Energy, Inc.
We consent to incorporation by reference in the registration statements (No.
333-16513, No. 333-16515 and No. 333-16517) on Form S-8 of our report dated
March 10, 1997, relating to the consolidated balance sheets of Costilla Energy,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended, which report appears in the December 31, 1996, annual
report on Form 10-K of Costilla Energy, Inc.
KPMG PEAT MARWICK LLP
Midland, Texas
March 26, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ENGINEERS
As independent engineering consultant, we hereby consent to the use of
our report entitled "Evaluation and Gas Reserves to the Interests of Costilla
Petroleum Corporation in Certain Properties, Effective January 1, 1997, for
Disclosure to the Securities and Exchange Commission, Williamson Project
6.8453" dated February 21, 1997 and data extracted therefrom (and all
references to our Firm) included in or made a part of this Form 10-K Annual
Report to be filed on or about March 25, 1997 and to the incorporation by
reference of this Form 10-K Annual Report (including the use of our reports
and references to our Firm herein) into those certain Registration Statements
on Form S-8 filed by Costilla Energy, Inc. with the Securities and Exchange
Commission, file numbers 333-16513, 333-16515 and 333-16517 covering the
Bonus Incentive Plan of Costilla Energy, Inc., the Outside Directors Stock
Option Plan of Costilla Energy, Inc., and the 1996 Stock Option Plan of
Costilla Energy, Inc., respectively.
/s/ Williamson Petroleum Consultants, Inc.
WILLIAMSON PETROLEUM CONSULTANTS, INC.
Houston, Texas
March 24, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF ELMS, FARIS & CO., P.C.
The Board of Directors
Costilla Energy, Inc.
We consent to incorporation by reference in the registration statements (No.
333-16513, No. 333-16515 and No. 333-16517) on Form S-8 of our report dated
March 31, 1995, relating to the consolidated statements of operations,
stockholders' equity, and cash flows for the year ended December 31, 1994 of the
predecessor entities of Costilla Energy, Inc. and subsidiaries, which report
appears in the December 31, 1996, annual report on Form 10-K of Costilla Energy,
Inc.
ELMS, FARIS & CO., P.C.
Midland, Texas
March 25, 1997
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, the undersigned, being certain of the
Officers and all of the Directors of Costilla Energy, Inc. (the "Company"), a
Delaware Corporation, do hereby constitute and appoint Cadell S. Liedtke,
Michael J. Grella and Bobby W. Page, or any one of them, with full power of
substitution, our true and lawful attorneys and agents, to do any and all acts
and things in our names in the capacities indicated which Cadell S. Liedtke,
Michael J. Grella and Bobby W. Page, or any one of them, may deem necessary or
advisable to enable the Company to comply with the Securities Exchange Act of
1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission in connection with the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, including
specifically, but not limited to, the power and authority to sign such Form
10-K, any and all amendments thereto and any other forms or documents related
to such Form 10-K which are required under federal securities laws for us, or
any of us, in our names in the capacities indicated; and we do hereby ratify
and confirm all that Cadell S. Liedtke, Michael J. Grella and Bobby W. Page,
or any one of them, shall do or cause to be done by virtue hereof. This Power
of Attorney may be signed in any number of counterparts, and each such
counterpart shall be considered an original hereof.
IN WITNESS WHEREOF I have hereunto set my hand this 17th day of March,
1997.
/s/ CADELL S. LIEDTKE
-----------------------------------------
CADELL S. LIEDTKE, Chairman of the Board,
Chief Executive Officer and Director
/s/ MICHAEL J. GRELLA
-----------------------------------------
MICHAEL J. GRELLA, President, Chief
Operating Officer and Director
/s/ HENRY G. MUSSELMAN
-----------------------------------------
HENRY G. MUSSELMAN, Executive Vice
President and Director
/s/ BOBBY PAGE
-----------------------------------------
BOBBY W. PAGE, Senior Vice President,
Treasurer and Chief Financial Officer
/s/ JERRY LANGDON
-----------------------------------------
JERRY LANGDON, Director
/s/ W. D. KENNEDY
-----------------------------------------
W. D. KENNEDY, Director
<PAGE>
Exhibit 24.2
CERTIFICATE OF RESOLUTION
I, Clifford N. Hair, Jr., Secretary of Costilla Energy, Inc., a Delaware
Corporation, do hereby certify that the Board of Directors of Costilla Energy,
Inc., duly adopted the following resolutions on March 17, 1997.
RESOLVED, that the directors and officers of the Company are hereby
authorized and directed to execute and deliver a Power of Attorney to Cadell S.
Liedtke, Michael J. Grella and Bobby W. Page in the following form:
"KNOW ALL MEN BY THESE PRESENTS, the undersigned, being certain of the
Officers and all of the Directors of Costilla Energy, Inc. (the "Company"), a
Delaware Corporation, do hereby constitute and appoint Cadell S. Liedtke,
Michael J. Grella and Bobby W. Page, or any one of them, with full power of
substitution, our true and lawful attorneys and agents, to do any and all acts
and things in our names in the capacities indicated which Cadell S. Liedtke,
Michael J. Grella and Bobby W. Page, or any one of them, may deem necessary or
advisable to enable the Company to comply with the Securities Exchange Act of
1934, as amended, and any rules, regulations and requirements of the Securities
and Exchange Commission in connection with the Company's Annual Report on Form
10-K for the year ended December 31, 1996, including specifically, but not
limited to, the power and authority to sign such Form 10-K, any and all
amendments thereto and any other forms or documents related to such Form 10-K
which are required under federal securities laws for us, or any of us, in our
names in the capacities indicated; and we do hereby ratify and confirm all that
Cadell S. Liedtke, Michael J. Grella and Bobby W. Page, or any one of them,
shall do or cause to be done by virtue hereof. This Power of Attorney may be
signed in any number of counterparts, and each such counterpart shall be
considered an original hereof."; and
That the officers of the Company are hereby authorized and directed to take
all such further action as they may deem advisable in order to carry out the
intent and purposes of the foregoing resolution.
IN WITNESS WHEREOF, I have hereunto set my hand on behalf of this
corporation this 17th day of March, 1997.
/s/ Clifford N. Hair, Jr.
-------------------------------------------
Clifford N. Hair, Jr., Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITIED FINANCIAL STATEMENTS OF COSTILLA ENERGY INC. FOR THE YEAR END DECEMBER
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,618
<SECURITIES> 0
<RECEIVABLES> 16,038
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 30,409
<PP&E> 147,379
<DEPRECIATION> (20,435)
<TOTAL-ASSETS> 162,790
<CURRENT-LIABILITIES> 20,089
<BONDS> 100,262
0
0
<COMMON> 1,047
<OTHER-SE> 39,522
<TOTAL-LIABILITY-AND-EQUITY> 162,790
<SALES> 53,919
<TOTAL-REVENUES> 55,026
<CGS> 21,774
<TOTAL-COSTS> 24,324
<OTHER-EXPENSES> 12,430
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,281
<INCOME-PRETAX> 1,753
<INCOME-TAX> 1,218
<INCOME-CONTINUING> 535
<DISCONTINUED> 0
<EXTRAORDINARY> (4,975)
<CHANGES> 0
<NET-INCOME> (4,440)
<EPS-PRIMARY> (.69)
<EPS-DILUTED> (.69)
</TABLE>
