<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-K/A
(Amendment No. 1)
[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.
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<PAGE>
COSTILLA ENERGY, INC.
TABLE OF CONTENTS
PAGE
----
PART II.
Item 8. Financial Statements and Supplementary Data. 3
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K. 4
SIGNATURES 6
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 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/A.
3
<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
4
<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.
*** Previously filed
**** 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.
5
<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: November 10, 1997 By: */s/ MICHAEL J. GRELLA
--------------------------------
Michael J. Grella
President
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: November 10, 1997 */s/ CADELL S. LIEDTKE
--------------------------------
Cadell S. Liedtke
Chairman of the Board
Date: November 10, 1997 */s/ MICHAEL J. GRELLA
--------------------------------
Michael J. Grella
President and Chief Executive Officer
and Director
Date: November 10, 1997 */s/ HENRY G. MUSSELMAN
--------------------------------
Henry G. Musselman
Executive Vice President,
Chief Operating Officer
and Director
Date: November 10, 1997 */s/ W. D. KENNEDY
--------------------------------
W. D. Kennedy
Director
Date: November 10, 1997 */s/ JERRY J. LANGDON
--------------------------------
Jerry J. Langdon
Director
Date: November 10, 1997 /s/ BOBBY W. PAGE
--------------------------------
Bobby W. Page
Senior Vice President and Chief Financial
Officer (principal accounting officer)
Date: November 10, 1997 *By: /s/ BOBBY W. PAGE
--------------------------------
Bobby W. Page
Agent and Attorney in fact
6
<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
-------- -------- --------
-------- -------- --------
PREFERRED RETURN, ACCRETION AND REDEMPTION
PREMIUM ON REDEEMABLE MEMBERS' CAPITAL $ (3,930) $ (2,842) $ -
-------- -------- --------
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM
APPLICABLE TO COMMON EQUITY $ (3,395) $ (7,812) $ 163
-------- -------- --------
-------- -------- --------
NET INCOME (LOSS) APPLICABLE TO
COMMON EQUITY $ (8,370) $ (7,812) $ 163
-------- -------- --------
-------- -------- --------
INCOME (LOSS) PER SHARE:
Income (loss) before extraordinary item $ (0.52) $ (1.50) $ 0.03
Extraordinary loss resulting from
early extinguishment of debt, net of
deferred tax benefit (0.77) - -
-------- -------- --------
Net income (loss) $ (1.29) $ (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 (3,930) - - - (3,930)
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 18,474 520 (23,189) - (4,195)
------- ------ -------- ------- -------
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.
EARNINGS 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. Primary net income (loss) per share is
reduced by the preferred return, accretion and redemption premium on
redeemable members' capital for the years ended December 31, 1996 and 1995.
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. . . . . . . . . (4,830) (14,227)
Net loss per share before extraordinary item. . . . (0.75) (2.74)
(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 $ (1.58)
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.
*** Previously filed
**** Filed herewith
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED 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> (8,370)
<EPS-PRIMARY> (1.29)
<EPS-DILUTED> (1.29)
</TABLE>
