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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, 1997
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 X NO
----- ------
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 $10.38 per share on March 24, 1998 was $55,819,280.
Number of shares of Common Stock outstanding as of March 24, 1998..... 9,981,000
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, 1998 and which is incorporated herein by
reference.
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COSTILLA ENERGY, INC.
TABLE OF CONTENTS
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Page
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PART I .
<S> <C> <C>
Item 1. Business. 3
Item 2. Properties. 10
Item 3. Legal Proceedings. 16
Item 4. Submission of Matters to a Vote of Security Holders. 16
PART II.
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters. 17
Item 6. Selected Financial Data. 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 19
Item 8. Financial Statements and Supplementary Data. 27
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. 27
PART III.
Item 10. Directors and Executive Officers of the Registrant. 28
Item 11. Executive Compensation. 28
Item 12. Security Ownership of Certain Beneficial Owners and Management. 28
Item 13. Certain Relationships and Related Transactions. 28
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 29
SIGNATURES 32
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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
may be deemed to be "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements, other than statements of historical facts, included in
this Form 10-K that address activities, events or developments that Costilla
Energy, Inc. ("Costilla" or the "Company") expects, projects, believes or
anticipates will or may occur in the future, including such matters as oil and
gas reserves, future drilling and operations, future production of oil and gas,
future net cash flows, future capital expenditures and other such matters, are
forward-looking statements. These statements are based on certain assumptions
and analysis made by management of the Company in light of its experience and
its perception of historical trends, current conditions, expected future
developments and other factors it believes are appropriate in the
circumstances. Such statements are subject to a number of assumptions, risks
and uncertainties, including general economic and business conditions, prices
of oil and gas, the business opportunities (or lack thereof) that may be
presented to and pursued by the Company, changes in laws or regulations and
other factors, many of which are beyond the control of the Company.
ITEM 1. BUSINESS.
Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements". See "Special Note Regarding
Forward-Looking Statements" for additional factors relating to such statements.
GENERAL
Costilla 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 South/East Texas
region, the Rocky Mountain region and the Permian Basin area of Texas and New
Mexico. In addition the Company owns 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 began operating in 1988 and conducted an initial public
offering of its common stock (the "IPO") in October 1996. As of January 1,
1998, the Company had total estimated net proved reserves of 15.0 Mmbbls of oil
and 148.6 Bcf of gas, aggregating 39.7 MMBOE, with a PV-10 Value of
approximately $196.7 million. The Company also has a substantial acreage
position consisting of 953,268 gross (713,107 net) acres at December 31, 1997,
665,734 gross (607,703 net) of which are undeveloped. The Company has
identified in excess of 600 drilling locations, of which 147 are included in
its proved reserves at January 1, 1998.
The Company began active efforts to acquire and develop oil and gas
properties in 1993 and, from January 1, 1993 to December 31, 1997, closed eight
acquisitions for an aggregate purchase price of approximately $138 million. The
Company has not participated in the auction process, but rather has made
acquisitions through negotiated transactions.
The three most significant acquisitions have been:
o The acquisition of 6.0 MMBOE (as of July 1, 1997) of proved reserves,
extensive undeveloped acreage and seismic data (the "Ballard Acquisition")
from Ballard Petroleum LLC ("Ballard") in August 1997 for approximately
$41.2 million, strengthening the Company's position in the Rocky Mountain
Region.
o The acquisition of 10.6 MMBOE of proved reserves and undeveloped acreage
located in the Permian Basin and South/East Texas regions in June 1996 for
approximately $38.7 million (the "1996 Acquisition").
o The acquisition of 14.4 MMBOE of proved reserves and undeveloped acreage
in the Permian Basin, South/East Texas and Rocky Mountain regions in June
1995 for approximately $46.6 million (the "1995 Acquisition").
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Costilla has in-house exploration expertise which uses 3-D seismic
technology as a primary tool to identify drilling opportunities. Since the IPO,
the Company has made 13 new exploratory discoveries utilizing 3-D technology,
which have added proved reserves of 7.4 MMBOE at January 1, 1998. The Company
experienced an approximately 60% success rate in its 1997 exploratory drilling
activities, and an overall success rate of approximately 83% in its 1997
drilling activities.
Through its acquisition, development and exploration activities, the
Company has grown substantially over the last four years, as measured by
reserves, production and cash flow.
o Estimated proved reserves have increased from 6.0 MMBOE at January 1, 1994
to 39.7 MMBOE at January 1, 1998, representing a compound annual growth
rate of 60%.
o PV-10 Values have increased from $26.4 million at January 1, 1994 to $196.7
million at January 1, 1998, representing a compound annual growth rate of
65%.
o The Company has increased its average net daily production from 827 BOE
for the year ended December 31, 1993 to 12,671 BOE for the year ended
December 31, 1997, representing a compound annual growth rate of 98%.
o Adjusted EBITDA has increased from $1.8 million for the year ended
December 31, 1993 to $40.0 million for the year ended December 31, 1997
(pro forma for the Ballard Acquisition) which represents a compound annual
growth rate of 117%.
o The Company's reserve growth has been achieved at an average all-in
finding cost of $4.32 per BOE for the period from January 1, 1993 to
January 1, 1998.
Oil and gas terms used herein are defined under "-Definition of
Certain Oil and Gas Terms".
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 by utilizing a three-pronged approach
which combines an active exploration program using 3-D seismic and other
technological advances with strategic property acquisitions and focused
development drilling. The Company's management and technical staff have
significant oil and natural gas experience in the areas of drilling and
completion, production operations, acquisitions and divestitures and reservoir
engineering. Most members of the Company's technical staff, having spent
substantial portions of their careers specializing in the Company's core
operating regions, have in-depth knowledge of these regions. The Company seeks
to reduce its operating and commodity risks by holding a geographically diverse
portfolio of properties, the reserves attributable to which were approximately
62% natural gas and 38% oil at January 1, 1998. The elements of the Company's
strategy may be further described as follows:
o Exploration Efforts. The Company has a staff of experienced geophysicists
and geologists who perform extensive analysis of the Company's exploration
prospects to carefully focus its 3-D seismic surveys and identify
potential drilling locations. This focus allows the Company to direct the
size and scope of its exploration program in order to improve the
likelihood of success while managing overall exploration costs. The
Company's exploration efforts are concentrated currently on known
producing regions, where it can utilize the technical expertise and
experience of its staff to identify exploration prospects which may have
been previously overlooked.
o Strategic Property Acquisitions. The Company seeks to acquire producing
properties where it has identified opportunities to increase production
and reserves through both development and exploration activities. The
Company has increased the value of the properties it has acquired by using
its expertise and experience with current and advancing seismic, drilling
and production technology to aggressively manage its operations of
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existing proved properties and successfully identify and develop
previously unproved reserves on acquired acreage. The Company seeks to
acquire reserves which 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.
o Development of Existing Properties. The Company is actively pursuing
development of its existing properties.
o Control of Operations. The Company prefers to operate and own the
majority working interest in its properties. This gives the Company
greater control over future development, drilling, completion and lifting
costs and the marketing of production. At January 1, 1998, the Company
operated wells constituting approximately 76% of its total PV-10 Value.
RECENT DEVELOPMENTS
The Company has had a number of recent significant developments with
respect to acquisitions, exploration successes and cost reduction efforts
through asset sales.
Acquisitions
In keeping with its strategy to acquire properties with substantial
exploration potential, the Company consummated one significant acquisition in
1997 and an additional acquisition in January 1998. While both transactions
have proved reserves and current production, there are significant acreage
positions and exploration prospects included in each acquisition.
Ballard Acquisition. In August 1997, the Company closed the Ballard
Acquisition for approximately $41.2 million. The oil and gas properties
acquired are located primarily in the Rocky Mountain region and had, as of July
1, 1997, approximately 6.0 MMBOE of proved reserves and 212,085 net undeveloped
acres. The Company also acquired the rights to 150 square miles of 3-D seismic
data and 42,000 miles of 2-D seismic data. The Company and Ballard have entered
into an Acquisition and Exploration Agreement that establishes an area of
mutual interest in the Rocky Mountain region in which the parties will jointly
own, acquire, explore and develop properties.
Manti Acquisition. In January 1998 the Company closed a transaction
with Manti Resources, Inc. and acquired producing properties and associated
acreage located in south Texas (the "Manti Acquisition") in close proximity to
an exploration area the Company has been developing. The Manti Acquisition
included approximately 1.3 MMBOE of proved reserves at January 1, 1998,
approximately 30 square miles of 3-D seismic data and 16,202 gross and net
undeveloped acres. The purchase price was $10.5 million.
Exploration
S.W. Speaks Field, Lavaca County, Texas. The Company has drilled its
initial exploratory well, the Migl-Mitchell #1, to a total depth of 14,950 feet.
The well is located within the Company's 46 square mile 3-D seismic survey and
it encountered two sand zones which totaled 190 feet of productive expanded
Wilcox sandstone. The well was completed from the lower of the two sands on
December 24, 1997. Testing of this well indicates an open flow potential of 116
Mmcf of gas per day. Gas sales commenced on January 20, 1998 and through March
24, 1998 this well has produced a total of 360 Mmcf of gas. As of March 15,
1998, completion operations are underway on the second well, which was drilled
to a total depth of 15,847 feet. This second well has penetrated three
productive Wilcox sand zones totaling 274 feet. The Company's working interest
in both of the initial wells is 100%. The Company owns 11,131 gross acres in
this field with a 57.7% average working interest. The Company is planning to
drill four wells in this field during 1998.
Hopewell Project, Harrison and Panola Counties, Texas. The Company has
acquired 6,060 gross acres in a contiguous block on this project with a 100%
working interest. The project straddles two major producing structures in the
state line area of Texas and Louisiana. The Company's acreage position has
existing production from various formations and is underdeveloped in comparison
to offsetting leases. The Company has identified 100 drilling locations of
which 25 have been classified as containing proved undeveloped reserves at
January 1, 1998. The Company has drilled and completed the initial well at an
average rate of 19 Bbls of oil and 1,660 Mcf of gas per
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day from the Cotton Valley sand, and intends to dually complete the well in the
Travis Peak formation. The Company plans to drill eight wells on the Hopewell
project during 1998.
Scott and Hopper Field, Brooks County, Texas. The Company has drilled
and completed the Scott and Hopper GU 1-5 well from the shallow Vicksburg
formation at an initial rate of approximately 2,000 Mcf of gas per day. The
well is located on the producing acreage acquired in the Manti Acquisition. The
Company owns a 3-D survey of the acreage and has identified 10 additional
drilling locations. The Company owns 15,882 gross acres on the field with an
average working interest of 100%. The Company has plans to drill at least five
wells in the Scott and Hopper field during 1998.
Edwards/McElroy Ranch Prospect, Ector and Crane Counties, Texas. At
December 31, 1997, the Company had successfully completed a total of 26 wells
on the 80 square miles of 3-D seismic data. These wells have resulted in five
new discoveries in four formations. Costilla Energy has identified in excess of
50 drilling locations on the Company's 11,970 gross and net acres on this
prospect. The Company is planning to drill three wells in this project during
1998.
Divestitures
The Company continuously evaluates its properties to identify
opportunities to divest properties which are marginally economic, have high
per-unit costs or have limited potential. From January 1, 1997 through December
31, 1997, the Company sold 6.6 MMBOE of what it considered high operating cost
reserves.
Concho Sale. In December 1997, the Company consummated the sale of oil
and gas properties to Concho Resources, Inc. for $16.2 million (the "Concho
Sale"). These properties had assigned proved reserves of 4.9 MMBOE at December
31, 1997, consisted of approximately 1,600 gross wells, approximately 90% of
which were non-operated, included high operating cost properties and did not
fit the Company's overall business strategy.
Gulf Production Sale. In January 1998, the Company sold its interest
in approximately 190 gross wells in Oklahoma, approximately 75% of which were
non-operated, to Gulf Partners L.L.C. and Gulf Production Corp. for $2.5
million (the "Gulf Production Sale"). The properties had assigned proved
reserves of 0.7 MMBOE at January 1, 1998 and did not fit the Company's business
strategy.
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.
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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, which affect the
marketing of gas produced by the Company, as well as the revenues received by
the Company for sales of such production. Since the mid-1980s, the FERC has
issued a series of orders, culminating in Order Nos. 636, 636-A and 636-B
("Order 636"), that have significantly altered the marketing and transportation
of gas. Order 636 mandates a fundamental restructuring of interstate pipeline
sales and transportation 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. One of the FERC's
purposes in issuing the orders is to increase competition within all phases of
the gas industry. Order 636 and subsequent FERC orders on rehearing have been
appealed and are pending judicial review. It is difficult to predict the
ultimate impact of the orders on the Company and its gas marketing efforts.
Generally, Order 636 has eliminated or substantially reduced the interstate
pipelines' traditional role as wholesalers of natural gas, and has
substantially increased competition and volatility in natural gas markets.
While significant regulatory uncertainty remains, Order 636 may ultimately
enhance the Company's ability to market and transport its gas, although it may
also subject the Company to greater competition and the more restrictive
pipeline imbalance tolerances and greater associated penalties for violation of
such tolerances.
Sales of oil and natural gas liquids by the Company are not regulated
and are made at market prices. The price the Company receives from the sale of
these products is affected by the cost of transporting the products to market.
Effective as of January 1, 1995, the FERC implemented regulations establishing
an indexing system for transportation rates for oil pipelines, which,
generally, would index such rates to inflation, subject to certain conditions
and limitations. These regulations could increase the cost of transporting oil
and natural liquids by pipeline, although the most recent adjustment generally
decreased rates. The Company is not able to predict with certainty what effect,
if any, these regulations will have on it, but, other factors being equal, the
regulations may, over time, tend to increase transportation costs or reduce
wellhead prices for oil and natural gas liquids.
ENVIRONMENTAL MATTERS
Operations of the Company are subject to numerous and constantly
changing federal, state and local laws and regulations governing the discharge
of materials into the environment or otherwise relating to environmental
protection. These laws and regulations may require the acquisition of certain
permits, restrict or prohibit the types, quantities and concentration of
substances that can be released into the environment in connection with
drilling and production, restrict or prohibit drilling activities that could
impact wetlands, endangered or threatened species or other protected natural
resources and impose substantial liabilities for pollution resulting from the
Company's operations. Such laws and regulations may substantially increase the
cost of exploring for, developing or producing oil and gas and may prevent or
delay the commencement or continuation of a given project. In the opinion of
the Company's management, the Company is in substantial compliance with current
applicable environmental laws and regulations, and the cost of compliance with
such laws and regulations has not been material and is not expected to be
material during the next fiscal year. Nevertheless, changes in existing
environmental laws and regulations or in interpretations thereof could have a
significant impact on the operating costs of the Company, as well as the oil
and gas industry in general. For instance, legislation has been proposed in
Congress from time to time that would reclassify certain oil and gas production
wastes as "hazardous wastes," which reclassification would make
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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
could have similar impact on the Company.
The Comprehensive Environmental Response, Compensation, and Liability
Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or the site where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. Persons who are or were responsible for releases of hazardous substances
found at the site and persons who are or were responsible for releases of
hazardous substances under CERCLA may be subject to joint and several liability
for the costs of cleaning up the hazardous substances that have been released
into the environment and for damages to natural resources, and it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the hazardous
substances released into the environment. The Company is able to control
directly the operation of only those wells with respect to which its acts as
operator. Notwithstanding the Company's lack of 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, 1997, the Company had 138 full time employees, the
majority of whom hold options under the Company's stock option plan. None of
the Company's employees is subject to a collective bargaining agreement. The
Company considers its relations with its employees to be good. In addition to
its employees, Costilla utilizes 10 consultants, and through its arrangements
with Ballard, has access to the approximately 30 employees of Ballard for oil
and gas activities within the Rocky Mountain region area of mutual interest.
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.
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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 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.
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ITEM 2. PROPERTIES.
PRINCIPAL PROPERTIES
The following table sets forth certain information, as of January 1,
1998, which relates to the principal oil and gas properties owned by the
Company.
<TABLE>
<CAPTION>
PROVED RESERVES
--------------------------------------------------
TOTAL OIL PERCENT OF
GROSS OIL GAS EQUIVALENT TOTAL OIL
WELLS (MBbls) (Mmcf) (MBOE) EQUIVALENT
------- ------- ------- ---------- ----------
REGION
<S> <C> <C> <C> <C> <C>
South/East Texas ................................. 559 2,034 87,699 16,651 41.9%
Rocky Mountain ................................... 625 6,390 26,975 10,886 27.4
Permian Basin .................................... 608 5,818 28,387 10,549 26.6
Other - Domestic ................................. 247 315 4,258 1,024 2.6
Foreign - Moldova ................................ 26 395 1,318 615 1.5
------- ------- ------- ------- ----------
Total ............................................ 2,065 14,952 148,637 39,725 100.00%
======= ======= ======= ======= ==========
</TABLE>
SOUTH/EAST TEXAS. At January 1, 1998, 41.9% of the Company's proved
reserves were concentrated in the South/East Texas region, on shore.
S.W. Speaks Field, Lavaca County, Texas. The Company has drilled its
initial exploratory well, the Migl-Mitchell #1, to a total depth of 14,950 feet.
The well is located within the Company's 46 square mile 3-D seismic survey and
it encountered two sand zones which totaled 190 feet of productive expanded
Wilcox sandstone. The well was completed from the lower of the two sands on
December 24, 1997. Testing of this well indicates an open flow potential of 116
Mmcf of gas per day. Gas sales commenced on January 20, 1998 and through March
24, 1998 this well has produced a total of 360 Mmcf of gas. As of March 15,
1998, completion operations are underway on the second well, which was drilled
to a total depth of 15,847 feet. This second well has penetrated three
productive Wilcox sand zones totaling 274 feet. The Company's working interest
in both of the initial wells is 100%. The Company owns 11,131 gross acres in
this field with a 57.7% average working interest. The Company is planning to
drill four wells in this field during 1998.
Scott and Hopper Field, Brooks County, Texas. The Company has drilled
and completed the Scott and Hopper GU 1-5 well from the shallow Vicksburg
formation at an initial rate of approximately 2,000 Mcf of gas per day. The
well is located on the producing acreage acquired in the Manti Acquisition. The
Company owns a 3-D survey of the acreage and has identified 10 additional
drilling locations. The Company owns 15,882 gross acres on the field with an
average working interest of 100%. The Company has plans to drill at least five
wells in the Scott and Hopper field during 1998.
Hopewell Project, Harrison and Panola Counties, Texas. The Company has
acquired 6,060 gross acres in a contiguous block on this project with a 100%
working interest. The project straddles two major producing structures in the
state line area of Texas and Louisiana. The Company's acreage position has
existing production from various formations and is underdeveloped in comparison
to offsetting leases. The Company has identified 100 drilling locations of
which 25 have been classified as containing proved undeveloped reserves at
January 1, 1998. The Company has drilled and completed the initial well at an
average rate of 19 Bbls of oil and 1,660 Mcf of gas per day from the Cotton
Valley sand, and intends to dually complete the well in the Travis Peak
formation. The Company plans to drill eight wells on the Hopewell project
during 1998.
10
<PAGE> 11
Sealy Field, Austin County, Texas. The Sealy field is a highly faulted
area which is further complicated by salt domes and is ideally suited to 3-D
seismic exploration. The Company has completed the acquisition and processing
of a 50 square mile 3-D survey and is currently engaged in interpretation of
the resulting data. The Company owns 19,048 gross acres in the Sealy field with
100% working interest. The Company expects to start drilling operations during
the fourth quarter of 1998.
Cotton Valley, Limestone and Freestone Counties, Texas. The Company
owns a non-operated interest in the previously announced McMahon #4 well, a
Cotton Valley reef discovery which has been completed. Gas sales commenced on
March 6, 1998. As of March 13, 1998, the well was producing more than 9,000 Mcf
of gas per day. The Cotton Valley sandstone is encountered above the Cotton
Valley reef. The Company has gained significant experience in utilizing new
hydraulic fracturing techniques resulting in the completion of wells in the
Cotton Valley sandstone that might otherwise be considered non-commercial. The
Company owns 2,984 gross acres. The Company plans to drill two Cotton Valley
sandstone wells in 1998.
ROCKY MOUNTAINS. At January 1, 1998, 27.4% of the Company's proved
reserves were concentrated in the Rocky Mountain region, which includes
Montana, North Dakota, Wyoming, Colorado and Utah. The Company significantly
increased both its reserves and undeveloped acres in the Rocky Mountain region
as a result of the Ballard Acquisition.
O'Brien Springs Anticline Prospect, Carbon County, Wyoming. The
Company has acquired a 35 square mile 3-D seismic survey over the O'Brien
Springs Anticline. This 12 mile long structurally complex trend is expected to
yield several undrilled closures. The Company is encouraged by preliminary
interpretation of the data. Prospective horizons include the Tensleep, Nugget,
Dakota and Frontier sands at depths of up to 7,000 feet. The Company has 19,181
gross acres on this prospect and an approximate 30% working interest. The
Company plans to drill an initial test during 1998.
Island Butte Field, Montezuma County, Colorado. The Company owns 4,196
gross acres in this field with a 57.5% average working interest. Recent
activity includes the conversion of non-producing wells to salt water disposal
systems and installation of submersible pumps on productive wells resulting in
increased production and a reduction in operating expenses. During 1998, the
Company is planning to drill two horizontal wells and two vertical wells in the
field.
PERMIAN BASIN. At January 1, 1998, 26.6% of the Company's proved
reserves were concentrated in the Permian Basin, an approximately 70-county
region in West Texas and Southeast New Mexico.
Edwards/McElroy Ranch Prospect, Ector and Crane Counties, Texas. At
December 31, 1997, the Company had successfully completed a total of 26 wells
on the 80 square miles of 3-D seismic data. These wells have resulted in five
new discoveries in four formations. Costilla Energy has identified in excess of
50 drilling locations on the Company's 11,970 gross and net acres on this
prospect. The Company is planning to drill three wells in this project during
1998.
MARKETING ARRANGEMENTS
The Company sells the majority of its crude oil production based on
the posted price, plus market averages, in each area in which its crude oil is
produced. The majority of the Company's gas production is sold at spot market
prices. The term "spot market" is used herein to refer to contracts with terms
of six months or less or contracts which call for a redetermination of sales
prices every six months or earlier. The Company does not believe that the loss
of any of its principal oil or gas purchasers would have a material adverse
effect on it.
11
<PAGE> 12
OIL AND GAS RESERVES
The Company's estimated total proved reserves of oil and gas as of
January 1, 1998 were as follows:
<TABLE>
<CAPTION>
JANUARY 1, 1998
---------------------------
OIL GAS
(MBbls) (Mmcf) MBOE
------- ------- -------
<S> <C> <C> <C>
Proved developed producing .................................. 10,366 63,170 20,894
Proved developed non-producing .............................. 280 21,747 3,905
Proved undeveloped .......................................... 4,306 63,720 14,926
------- ------- -------
Total proved ............................................. 14,952 148,637 39,725
======= ======= =======
</TABLE>
If the Manti Acquisition and the Gulf Production Sale (both of which
were consummated in January 1998) were included in the January 1, 1998
estimates the total proved reserves would have been:
<TABLE>
<CAPTION>
PRO FORMA
JANUARY 1, 1998
---------------------------
OIL GAS
(MBbls) (Mmcf) MBOE
------- ------- -------
<S> <C> <C> <C>
Proved developed producing ................................. 10,300 62,216 20,669
Proved developed non-producing ............................. 312 24,018 4,315
Proved undeveloped ......................................... 4,352 65,753 15,311
------- ------- -------
Total proved ............................................ 14,964 151,987 40,295
======= ======= =======
</TABLE>
The future net cash flows from the Company's estimated proved reserves
as of January 1, 1998 were as follows:
<TABLE>
<CAPTION>
PRO FORMA
JANUARY 1, 1998 JANUARY 1, 1998 (1)
------------------ -------------------
(in thousands)
<S> <C> <C>
Future net cash flows before income taxes . . . . . . $ 305,387 $ 313,145
Future net cash flows before income taxes,
discounted at 10% . . . . . . . . . . . . . . . . $ 196,678 $ 202,452
</TABLE>
- ----------------------
(1) Includes adjustments for the Manti Acquisition and the Gulf Production
Sale.
The domestic reserve estimates at January 1, 1998 were prepared by the
Company of which approximately 72% were reviewed by Williamson Petroleum
Consultants, Inc. Reserve estimates attributable to Moldova were prepared by W.
Scott Epley, P.E.
There are numerous uncertainties in estimating quantities of proved
reserves and in projecting future rates of production and the timing of
development expenditures, including many factors beyond the control of the
Company. The reserve data set forth in this Form 10-K are estimates only.
Although the Company believes such estimates to be reasonable, reserve
estimates are imprecise and should be expected to change as additional
information becomes available. Furthermore, estimates of oil and gas reserves,
of necessity, are projections based on engineering data, and there are
uncertainties inherent in the interpretation of such data as well as the
projection of future rates of production and the timing of development
expenditures. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be exactly measured, and
the accuracy of any reserve estimate is a function of the quality of available
data and of engineering and geological interpretation and judgment.
Accordingly, estimates of the economically recoverable quantities of oil and
gas attributable to any particular group of properties, classifications of such
reserves based on risk of recovery, and estimates of the future
12
<PAGE> 13
net cash flows expected therefrom prepared by different engineers or by the
same engineers at different times may vary substantially. Moreover, there can
be no assurance that the reserves set forth herein will ultimately be produced
or that the proved undeveloped reserves will be developed within the periods
anticipated. Variances from the estimates contained herein could be material.
In addition, the estimates of future net revenues from proved reserves of the
Company and the present value thereof are based upon certain assumptions about
production levels, prices and costs, which may not be correct. The Company
emphasizes with respect to such estimates that the discounted future net cash
flows should not be construed as representative of the fair market value of the
proved oil and gas properties belonging to the Company, because discounted
future net cash flows are based upon projected cash flows that do not provide
for changes in oil and gas prices or for escalation of expenses and capital
costs. The meaningfulness of such estimates is highly dependent upon the
accuracy of the assumptions upon which they were based. Actual results may
differ materially from the results estimated.
While the Company's oil and gas reserves are attributable to
approximately 2,000 proved wells and locations, approximately 15% of the
Company's total proved reserves at January 1, 1998 were attributable to two
wells in the Southwest Speaks Field in Lavaca County, Texas. Both wells were
completed in the first quarter of 1998. Estimates of proved undeveloped
reserves, as well as estimates made early in the productive life of wells, may
be less reliable than reserve estimates attributable to wells which have longer
production histories. Any downward revision of the reserve estimates
attributable to the Southwest Speaks Field, or any interference in production
from such Field, could have a material adverse affect on the Company's future
cash flows and financial results.
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.
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Production:
Oil (MBbls) .................................. 2,175 1,726 950
Gas (Mmcf) ................................... 14,698 9,205 4,806
MBOE ......................................... 4,625 3,260 1,751
Average Sales Price:
Oil (per Bbl) ................................ $ 17.77 $ 19.87 $ 15.53
Gas (per Mcf) ................................ 2.29 2.13 1.45
Costs Per BOE:
Production costs, including severance taxes... $ 6.49 $ 6.68 $ 5.91
Depreciation, depletion and amortization...... 5.71 3.81 3.40
</TABLE>
13
<PAGE> 14
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, 1997, the Company
was in the process of drilling seven gross (2.64 net) wells and was in the
process of completing one gross (one net) well as a producer which are not
reflected in the following table. The Company also drilled, or participated in
the drilling of 11 gross (3.89 net) service wells utilized as salt water
disposal or water injection wells which are not reflected in the following
table.
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
GROSS NET GROSS NET GROSS NET
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Exploratory:
Productive ...... 15 8.38 13 8.88 10 4.58
Dry ............. 10 5.81 2 2.00 6 2.57
------- ------- ------- ------- ------- -------
Total ......... 25 14.19 15 10.88 16 7.15
======= ======= ======= ======= ======= =======
Development:
Productive ...... 86 58.72 16 9.93 1 0.44
Dry ............. 11 8.54 5 3.20 -- --
------- ------- ------- ------- ------- -------
Total ......... 97 67.26 21 13.13 1 0.44
======= ======= ======= ======= ======= =======
Total:
Productive ...... 101 67.11 29 18.81 11 5.02
Dry ............. 21 14.35 7 5.20 6 2.57
------- ------- ------- ------- ------- -------
Total ........... 122 81.46 36 24.01 17 7.59
======= ======= ======= ======= ======= =======
</TABLE>
The Company does not own any drilling rigs and all of its drilling
activities are conducted by independent contractors under standard drilling
contracts.
PRODUCTIVE WELL SUMMARY
The following table sets forth the Company's gross and net interests in
productive oil and gas wells as of December 31, 1997. Productive wells are
producing wells and wells capable of production.
<TABLE>
<CAPTION>
ACTUAL (1)
-------------------
GROSS NET
------- -------
<S> <C> <C>
Oil Wells .............................................. 1,348 677
Gas Wells .............................................. 623 205
------- -------
Total .............................................. 1,971 882
======= =======
</TABLE>
- ----------
(1) A well with multiple completions is counted as a single well.
14
<PAGE> 15
ACREAGE
The following table sets forth certain information regarding the
Company's developed and undeveloped leasehold acreage as of December 31, 1997.
Acreage in which the Company's interest is limited to royalty, overriding
royalty, mineral and similar interests is excluded.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL
----------------- ----------------- -----------------
REGION GROSS NET GROSS NET GROSS NET
- ---------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Permian Basin ...... 74,012 35,626 80,535 62,377 154,547 98,003
South/East Texas ... 140,935 46,700 77,412 63,388 218,347 110,088
Rocky Mountain ..... 56,491 20,503 484,373 458,629 540,864 479,132
Other .............. 16,096 2,575 23,414 23,309 39,510 25,884
------- ------- ------- ------- ------- -------
Total .............. 287,534 105,404 665,734 607,703 953,268 713,107
======= ======= ======= ======= ======= =======
</TABLE>
OTHER ACTIVITIES
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 then affiliated
with the Company. The Company paid Redeco $90,000 and bore the first $2.0
million of concession expenses in return for a 50.0% interest in Redeco. The
Company and the other member of Redeco are each responsible for bearing 50.0% of
future expenses. The Concession Agreement covers the entire country
(representing approximately 8.0 million acres) with respect to oil and gas and
other minerals, and continues for various time periods depending on the nature
of the activity conducted. During 1997, Redeco drilled four successful gas wells
in southern Moldova which led to the first sales of Moldovan-produced natural
gas. Assuming satisfactory third party financing is arranged, thirty-five
additional wells are planned for 1998 following completion of a 15 mile pipeline
constructed by Redeco which will allow sales of produced gas into the Moldovan
gas distribution system. Redeco has also completed a 25 mile 2-D seismic survey.
TITLE TO PROPERTIES
The Company has obtained title opinions on substantially all of its producing
properties and believes that it has satisfactory title to such properties in
accordance with standards generally accepted in the oil and gas industry. As is
customary in the oil and gas industry, the Company performs a minimal title
investigation before acquiring undeveloped properties. A title opinion is
obtained prior to the commencement of drilling operations on such properties.
The Company's properties are subject to customary royalty interests, liens
incident to operating agreements, liens for current taxes and other burdens
which the Company believes do not materially interfere with the use of or affect
the value of such properties.
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. The limits provided under its liability policies total $21.0
million. In addition, the Company maintains operator's extra expense coverage
which provides for care, custody and control of all material wells drilled by
the Company as operator. The Company
15
<PAGE> 16
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 assurance can be given that the Company will be able to maintain adequate
insurance in the future at rates it considers reasonable.
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, 1997.
16
<PAGE> 17
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 under the trading symbol "COSE". The
following table sets forth the high and low closing price for the periods
presented:
<TABLE>
<CAPTION>
1996 HIGH LOW
------ ------
<S> <C> <C>
Fourth Quarter (October 3 inception of trading) ..... $13.63 $11.75
1997
First Quarter ....................................... $15.50 $11.75
Second Quarter ...................................... $14.50 $12.00
Third Quarter ....................................... $14.25 $ 9.00
Fourth Quarter ...................................... $16.00 $12.00
</TABLE>
The Company had approximately 1,300 record and beneficial holders of
its Common Stock at December 31, 1997.
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.
17
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data of Costilla
Energy, Inc. and its predecessors. 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 its
predecessors acquired significant producing oil and gas properties in certain of
the periods presented which affect the comparability of the historical financial
and operating information. The historical results are not necessarily indicative
of the Company's future operations or financial results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues .............................. $ 72,300 $ 53,919 $ 21,693 $ 7,637 $ 4,231
Total revenues .................................. 76,501 55,026 21,816 7,836 4,397
Expenses:
Oil and gas production ........................ 30,029 21,774 10,355 2,351 1,688
General and administrative .................... 8,407 5,238 3,571 1,184 952
Compensation related to option settlement ..... -- -- 656 -- --
Exploration and abandonments .................. 6,588 2,550 1,652 793 218
Depreciation, depletion and amortization ...... 26,409 12,430 5,958 1,847 884
Impairment of oil and gas properties .......... 28,189 -- -- -- --
Interest ...................................... 12,979 11,281 4,591 1,458 605
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and
extraordinary item ............................ (36,100) 1,753 (4,967) 203 50
Net income (loss) ............................... (36,471) (4,440) (4,970) 163 73
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities .......................... $ 25,032 $ 12,350 $ 6,366 $ 1,527 $ 322
Investing activities .......................... (92,597) (64,129) (62,467) (12,146) (6,731)
Financing activities .......................... 58,562 61,531 58,830 10,618 6,315
OTHER FINANCIAL DATA:
Capital expenditures ............................ $ 113,924 $ 70,017 $ 62,220 $ 11,868 $ 6,862
Adjusted EBITDA (1) ............................. 38,065 27,108 7,232 4,301 1,757
Adjusted EBITDA/interest expense (1) ............ 3.1x 2.6x 1.6x 2.9x 2.9x
BALANCE SHEET DATA (AS OF PERIOD END):
Working capital (deficit) ....................... $ (11,511) $ 10,320 $ 2,654 $ 1,081 $ 1,612
Total assets .................................... 194,088 162,790 87,367 24,904 13,290
Total debt, less current maturities ............. 163,087 100,262 71,494 23,613 12,034
Redeemable predecessor capital .................. -- -- 11,576 -- --
Predecessor capital ............................. -- -- (7,445) (747) 51
Stockholders' Equity ............................ 410 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, impairment of oil and gas properties,
exploration and abandonment costs and extraordinary items. 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.
18
<PAGE> 19
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. In June 1995, Costilla
consummated the 1995 Acquisition for a purchase price of approximately $46.6
million, in June 1996, Costilla consummated the 1996 Acquisition for a purchase
price of approximately $38.7 million and in August 1997, Costilla consummated
the Ballard Acquisition for a purchase price of approximately $41.2 million.
The Company's strategy is to utilize its technical staff and
technological advances to increase its oil and gas reserves, production and cash
flow from operations through an active exploration program and the acquisition
and development 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 development of acquired properties.
The Company has grown primarily through acquisitions which 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 development activities to
complement its acquisition efforts.
The Company has shown a significant increase in its oil and gas reserves and
production, especially due to its acquisitions from 1995 through 1997. The
following table sets forth certain operating data of Costilla for the periods
presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
OIL AND GAS PRODUCTION:
Oil (MBbls) .......................... 2,175 1,726 950
Gas (Mmcf) ........................... 14,698 9,205 4,806
MBOE ................................. 4,625 3,260 1,751
AVERAGE SALES PRICES (1):
Oil (per Bbl) ........................ $ 17.77 $ 19.87 $ 15.53
Gas (per Mcf) ........................ 2.29 2.13 1.45
PRODUCTION COST (2):
Per BOE .............................. $ 6.49 $ 6.68 $ 5.91
Per dollar of sales .................. 0.42 0.40 0.48
DEPRECIATION, DEPLETION AND AMORTIZATION:
Per BOE .............................. $ 5.71 $ 3.81 $ 3.40
Per dollar of sales .................. 0.36 0.23 0.27
</TABLE>
- ----------
(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.
19
<PAGE> 20
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. If market prices of oil and gas exceed the strike price of
call options, the Company is obligated to pay the contracting counterparty an
amount equal to the contracted volumes times the difference between the market
price and the strike price, therefore, reducing the effective price received
for oil and gas sales by the amount paid to the counterparty. The net effect of
the Company's commodity hedging activities reduced oil and gas revenues by
$1,226,000, $1,705,000, and $80,000 for the years ended December 31, 1997, 1996
and 1995, respectively. The Company has purchased put options on 6,500 Bbls of
oil per day which establish a floor price of $18.50 per Bbl and sold call
options on 6,500 Bbls of oil per day at $22.55 per Bbl. These oil option
contracts continue through August 1998. The referenced oil prices are based
upon the price at which West Texas Intermediate crude oil ("WTI") trades on the
New York Mercantile Exchange ("NYMEX"). The Company has historically received a
gross wellhead sales price for oil of approximately 82 - 90% of the NYMEX
price. The Company has also purchased put options on 5,000 Mmbtu of gas per day
which provide for a floor of $2.00 per Mmbtu through October 1998.
Additionally, the Company has purchased put options on 40,000 Mmbtu of gas per
day which establish a floor price of $2.15 per Mmbtu and sold call options on
40,000 Mmbtu of gas per day at $2.55 per Mmbtu. These gas option contracts are
for the period April 1998 through October 1998. The referenced gas prices are
based upon the index price for Houston Ship Channel gas sales, which is
approximately 97% of NYMEX. The Company has historically received a gross
wellhead sales price for gas of approximately 87 - 90% of NYMEX.
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 its then outstanding floating-rate indebtedness. The net
effect of the Company's interest rate hedging activities decreased interest
expense by approximately $25,000 for the year ended December 31, 1997. The net
effect of the Company's interest rate hedging activities increased interest
expense by approximately $442,000 for the year ended December 31, 1996.
Concurrent with the payment of all of the Company's floating rate debt from
proceeds of the initial public offering and the notes offering consummated 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 of $1,712,000 was recorded. A $60 million interest rate swap
expired in May 1997. As a result of the Company's borrowings against its line of
credit, which bears interest on a floating rate basis, the remaining $24 million
interest rate swap agreement again qualified as a hedge beginning in August
1997. At each borrowing date from October 1996 to August 1997, a portion of the
interest rate swap agreement was marked-to-market with the resulting gains or
losses recorded as investment income or loss while the hedge portion is being
amortized over the remaining life of the agreement. As a result of expiration
and marking the agreements to market, the Company recorded a net investment gain
of approximately $510,000 during the year ended December 31, 1997. Concurrent
with the payment of all of the Company's floating rate debt from proceeds of the
notes offering in January 1998, the interest rate swap agreement ceased to
qualify as a hedge. As a result of marking-to-market the interest rate swap
agreement in January 1998, the Company recorded an additional liability of
approximately $23,000.
The Company's predecessor was classified as a partnership for federal
income tax purposes. Therefore, no income taxes were paid or provided by the
Company prior to the Company's IPO and the offering of the Existing Notes.
Future tax amounts, if any, will be dependent upon several factors, including
but not limited to the Company's results of operations.
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<PAGE> 21
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The Company's total oil and gas revenues for the year ended December
31, 1997 were $72,300,000, representing an increase of $18,381,000 (34%) over
revenues of $53,919,000 in 1996. This increase was primarily due to successful
drilling activities and the 1996 Acquisition, which accounted for approximately
$11,099,000 and $9,214,000 of increased revenue, respectively. The Ballard
Acquisition accounted for approximately $3,372,000 of the increase. Gas
imbalances accounted for approximately $2,340,000 of the increase, with an
average price of $1.56 per Mcf. Approximately 50% of the gas imbalance relates
to production in prior periods against which a valuation allowance had been
recorded due to uncertainty of ultimate collection. During the year ended
December 31, 1997, uncertainties related to these imbalances were substantially
reduced and the related valuation allowance reversed. Management does not
expect similar effects from gas imbalances in future periods. These increases
were partially offset by the $2,152,000 net effect of lower commodity prices.
The average oil price per barrel received in 1997 was $17.77 compared to $19.87
in 1996, an 11% decrease, and the average gas price received in 1997 was $2.29
compared to $2.13 in 1996, a 7% increase. The sale of certain properties in
April 97 and December 31, 1996 also partially offset the increased revenues in
the amount of $3,607,000.
Oil and gas production was 4,625 MBOE in 1997 compared to 3,260 MBOE
in 1996, a 42% increase. Of the 1,365 MBOE increase, approximately 657 MBOE was
due to successful drilling activities and 539 MBOE was due to the properties
acquired in the 1996 Acquisition. Gas imbalances accounted for approximately
249 MBOE of the increase. The Ballard Acquisition properties accounted for
approximately 219 MBOE of the increase. The sale of certain properties in April
1997 and December 1996 partially offset the increased production volumes.
Interest and other revenues were $940,000 for the year ended
December 31, 1997 compared to $40,000 in 1996, representing an increase of
$900,000. Of this increase, $223,000 was related to increased interest income
due to increased funds earning interest. Gains on investment transactions of
$510,000 were recorded for the year ended December 31, 1997 related to an
interest rate swap contract which was marked-to-market. In the year ended
December 31, 1996 losses of $195,000 were recognized on certain investment
transactions. During 1997, losses of $146,000 related to an oil collar which
was marked-to-market. No comparable transactions existed in 1996.
Other income was $3,261,000 for the year ended December 31, 1997
compared to $1,067,000 for 1996, representing an increase of $2,194,000 (206%).
Gains from the sale of certain oil and gas properties increased by
approximately $2,118,000. The remainder of the increase was due primarily to a
gain of approximately $70,000 recognized on the sale of the Company's interest
in a partnership which owned the Independence Plaza Building in Midland, Texas.
Oil and gas production costs for the year ended December 31, 1997 were
$30,029,000 ($6.49 per BOE), compared to $21,774,000 in 1996 ($6.68 per BOE),
representing an increase of $8,255,000 (38%), with approximately $4,026,000 of
the increase relating to the 1996 Acquisition and $1,583,000 to successful
drilling activities. The remainder of the increase was due primarily to
increased treating and transportation costs due to increased gas production
and, to a lesser extent, the Ballard Acquisition, offset in part by the sale of
certain high operating cost properties in April 1997. On a per BOE basis,
production costs decreased $0.19 (3%) due to a combination of the sale of
certain high operating cost properties in April 1997, the gas imbalance volumes
and lower production costs on newly completed wells.
General and administrative expenses for the year ended December 31,
1997 were $8,407,000, representing an increase of $3,169,000 (66%) from 1996 of
$5,238,000. The increase is primarily due to additional personnel and related
costs necessary to accommodate the acceleration of the Company's oil and gas
activities, the Ballard Acquisition, increased insurance costs and other costs
for a full twelve month period related to becoming a public company in October,
1996.
Exploration and abandonment expense increased to $6,588,000 for the
year ended December
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<PAGE> 22
31, 1997 compared to $2,550,000 in 1996. The Company incurred $2,117,000 of
seismic costs for the year ended December 31, 1997, compared to $913,000 in
1996. Dry hole and abandonment costs increased to $3,584,000 in 1997 from
$1,524,000 in 1996. The Company incurred $887,000 of other geological and
geophysical costs during the year ended December 31, 1997, compared to $113,000
in 1996. The increase in exploration and abandonments expense was primarily
related to the Company's increased drilling activities in 1997 compared to a
very low level of activity in 1996.
D D & A expense for the year ended December 31, 1997 was $26,409,000
compared to $12,430,000 for 1996, representing an increase of $13,979,000
(112%). During the 1997 period, D D & A on oil and gas production was provided
at an average rate of $5.71 per BOE compared to $3.81 per BOE for 1996.
Approximately $3,751,000 of this increase was due to successful drilling
activities, $3,078,000 related to the 1996 Acquisition and an additional
$1,018,000 of the increase was due to the recording of gas imbalances. The
remainder of the increase was due primarily to the effect of lower oil and gas
prices at December 31, 1997 than those experienced at December 31, 1996.
Impairment of oil and gas properties for the year ended December 31,
1997 was $28,189,000. No comparable expense was recorded in 1996. This
impairment expense was determined under the guidelines of FAS 121 (Impairment
of Long-Lived Assets) using estimates of net undiscounted cash flow and
estimated present values for the Company's oil and gas reserves based upon the
non-escalated prices used in the Company's December 31, 1997 reserve report.
Interest expense was $12,979,000 for the year ended December 31, 1997,
compared to $11,281,000 for the comparable period in 1996. The $1,698,000 (15%)
increase was attributable primarily to increased levels of debt offset in part
by a decrease in the effective interest rate. The average amounts of applicable
interest-bearing debt in 1997 and 1996 were $128,207,000 and $95,671,000,
respectively. The effective annualized interest rate in 1997 was 10.1%, as
compared to 11.8% in 1996.
Results of operations for the year ended December 31, 1997 include an
extraordinary charge of $219,000 compared to $4,975,000 for the comparable
period in 1996. These extraordinary charges related to the early extinguishment
of the Company's prior bank credit facilities and consisted of the unamortized
balance of previously capitalized debt issuance costs.
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 per Mcf received in 1996 was $2.13 compared
to $1.45 in 1995, a 47% increase.
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, in each case including
enhancements of production after such 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
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<PAGE> 23
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 received by 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 and
amortization of financing costs. 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 IPO and the sale of the
Existing Notes in October 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net Cash Used in Operating Activities
For the year ended December 31, 1997, net cash provided by operating
activities increased to $25.0 million from $12.4 million for the corresponding
period in 1996. Cash provided by operations, before changes in operating assets
and liabilities, increased to $16.6 million from $14.7 million for the
comparable period in 1996 due primarily to the Ballard Acquisition, 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,
1997 was $92.6 million. Approximately $41.2 million was used for the Ballard
Acquisition, $70.4 million was used for other oil and gas expenditures and $2.3
million was used for other property and equipment. During the year ended
December 31, 1997, approximately $21.3 million net cash was provided by sales
of oil and gas properties. For the year ended December 31, 1996, net cash used
in investing activities was $64.1 million. Approximately $38.7 million was used
23
<PAGE> 24
for the 1996 Acquisition, $28.3 million for additional acquisition of producing
oil and gas properties and exploration and development activities and $3.0
million primarily for other property and equipment. During that period,
approximately $6.3 million net cash was provided by sales of oil and gas
properties.
Financing Activities
For the year ended December 31, 1997, the Company incurred $87.3
million of debt, of which approximately $33.5 million was used to repay certain
prior bank debt, $41.2 million was used for the Ballard acquisition and the
remainder was used in connection with its exploration and development
activities. In addition, the Company used approximately $3.8 million for the
purchase of 330,500 shares of its common stock. 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 in October 1996. Approximately
$74.5 million was used for the extension and refinancing of prior debt, $38.7
million was used for the 1996 Acquisition and approximately $11.8 million was
used for general corporate purposes. In October 1996, this senior credit
facility was paid with the proceeds from the initial public offering and an
offering of senior notes, and the Company entered into a new $50.0 million
credit agreement. Approximately $19.9 million was outstanding under this senior
credit facility prior to its refinancing in August 1997.
The Company replaced the above described senior credit facility with
the Revolving Credit Facility in August 1997. Approximately $19.9 million was
used for the extension and refinancing of the prior senior credit facility and
$11.2 million was used as a portion of the purchase price in the Ballard
Acquisition. The Revolving Credit Facility provides for a maximum availability
of $75.0 million, with an initial borrowing base of $50.0 million. Borrowings
under the Revolving Credit Facility bear interest, at the Company's option, at
a floating rate which is at or above the lender's prime rate or above the
applicable Eurodollar rate, depending on the percentage of committed funds
which have been borrowed. Interest is payable quarterly as to base rate loans,
and at the end of the applicable interest period as to Eurodollar rate loans.
The borrowing base of the Revolving Credit Facility is automatically reduced by
5% each quarter beginning in August 1999, and payments of principal are
required in each such quarter in which the outstanding principal balance is
greater than the reduced borrowing base. The remaining balance is payable on
August 31, 2002, the maturity date of the Revolving Credit Facility. In
connection with the sale of certain oil and gas properties on December 31, 1997
for proceeds of $16.2 million, the borrowing base was reduced to $36.5 million,
$33.0 of which was borrowed at December 31, 1997.
Contemporaneous with entering into the Revolving Credit Facility, the
Company also entered into the Acquisition Credit Facility to provide the
remaining financing for the Ballard Acquisition. The Acquisition Credit
Facility was a term loan in the amount of $30.0 million which was repaid in
full in connection with the sale of notes by the Company described in the
following paragraph.
In January 1998 the Company issued $80 million of 10 1/4% Senior Notes
due 2006 (the "Supplemental Notes Offering"). The net proceeds of the
Supplemental Notes Offering were approximately $78.8 million. The Company used
$30.0 million to repay the Acquisition Credit Facility and $32.5 million to
repay all but $0.5 million of the Revolving Credit Facility. In mid-January
1998 approximately $10.0 million of the remaining proceeds were used to fund
the Manti Acquisition.
Capital Resources
Funding for the Company's business activities has historically been
provided by bank financings, cash flow from operations, equity sales, property
divestitures and joint ventures with industry participants. The 1995
Acquisition, 1996 Acquisition and Ballard Acquisition were substantially funded
by bank financings. The Company plans to execute its business strategy with
cash flow from operations, net proceeds from the Supplemental Notes Offering
and borrowings available under the Revolving 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.
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<PAGE> 25
The Company believes that the increased availability under the
Revolving Credit Facility resulting from the application of net proceeds of the
Supplemental Notes Offering, the remaining net proceeds from the Supplemental
Notes Offering and cash flow from operations will be sufficient for its
budgeted 1998 capital expenditures. However, because the Company's ultimate
1998 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 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.
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.
Since December 31, 1997 oil and gas prices have continued to
deteriorate. The Company estimates that its cash flow would be reduced by $1.9
million and $2.1 million for each $1 per barrel reduction in the price of oil
and for each $0.10 per Mcf reduction in the price of gas, respectively.
Capital Expenditures
The Company originally announced a 1998 capital budget of
approximately $70.0 million of which approximately $22.0 million was budgeted
for the acquisition of undeveloped acreage, seismic and exploitation
activities. Given the current low level of oil prices and its extensive
undeveloped acreage and seismic inventory, the Company has elected to
temporarily defer non-drilling activities pending an improvement in oil prices.
In addition, the Company intends to concentrate its drilling activities on gas
prospects. Since a significant portion of the Company's 1998 capital budget is
discretionary, the Company is able to increase or decrease its level of
activity as product prices warrant.
Recent Accounting Pronouncements
INFORMATION SYSTEMS FOR THE YEAR 2000 - The Company will be required
to modify its information systems in order to accurately process data
referencing the year 2000. Because of the importance of occurrence dates in the
oil and gas industry, the consequences of not pursuing these modifications
could be very significant to the Company's ability to manage and report
operating activities. The Company's third-party software vendor for its
integrated oil and gas information system is currently modifying the system to
accurately handle the Year 2000 issue. All necessary programming modifications
are scheduled to be completed by December 31, 1998. From a cost viewpoint,
these modifications will be part of the routine updates the Company receives
from its third-party software vendor as part of its systems support contract
already in place. Thus, the Company believes it will not incur any marginal
costs with respect to the Year 2000 issue.
REPORTING COMPREHENSIVE INCOME - In June 1997, the FASB issued
Statement of Accounting Standards No. 130 "Reporting Comprehensive Income"
("FAS 130") which establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Specifically, FAS 130 requires that an enterprise (i)
classify items of other comprehensive income by their nature in a financial
statement and (ii) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
anticipates that it will adopt the provisions of FAS 130 in its year ended
December 31, 1998 consolidated financial statements.
Comprehensive income consists of the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. Specifically, this includes net income and other
comprehensive income, which is made up of certain changes in assets and
liabilities that are not reported in a statement of operations but are included
in the balances within a separate component of equity in a statement of
financial position. Such changes include, but are not limited to, unrealized
gains for marketable securities and future contracts, foreign currency
translation adjustments and minimum pension liability adjustments.
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<PAGE> 26
SEGMENT REPORTING - In June 1997, the FASB issued Statement of
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("FAS 131") which establishes standards for public
business enterprises for reporting information about operating segments in
annual financial statements and requires that such enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This statement also establishes standards for related disclosures
about products and services, geographic areas, and major customers. FAS 131 is
effective for financial statements for periods beginning after December 15,
1997.
The Company operates in the one product line of oil and gas production
in limited geographic areas. This information and information about major
customers historically has been disclosed in the Company's annual financial
statements. The Company plans to implement SFAS 131 in its year ended December
31, 1998 financial statements.
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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.
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<PAGE> 28
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, 1997.
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, 1997.
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, 1997.
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, 1997.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
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, although the Company did file an
amendment to Form 8-K dated November 12, 1997, amending its Form 8-K dated
September 12, 1997, which amendment included financial statements related to an
acquisition of oil and gas properties by the Company reported under Item 2 of
the original Form 8-K.
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 Exhibit 4.2)
*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 First Supplemental Indenture dated January 16, 1998
by and between State Street Bank and Trust Company,
as Trustee, and the Company, as Issuer (including
form of Global Certificate)
#4.4 Form of Note
**4.5 Form of Stock Certificate
*10.1 Lease Agreement dated January 12, 1996 between
Independence Plaza,Ltd. and Costilla Energy, L.L.C.
*10.2 Concession Agreement dated July 6, 1995 between the
Government of the Republic of Moldova and Resource
Development Company Ltd., L.L.C. (DE)
*10.3 Consolidation Agreement dated October 8, 1996
*10.4 1996 Stock Option Plan
*10.5 Employment Agreement between the Company and Bobby
W. Page effective June 30, 1996
*10.6 Employment Agreement between the Company and Cadell
S. Liedtke effective October 8, 1996
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<PAGE> 30
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
*10.7 Employment Agreement between the Company and
Michael J. Grella effective October 8, 1996
*10.8 Employment Agreement between the Company and Henry
G. Musselman effective October 8, 1996
*10.9 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
*10.10 Bonus Incentive Plan
+10.11 First and Second Amendments to 1996 Stock Option
Plan of Costilla Energy, Inc.
+10.12 First Amendment to Outside Directors Stock Option
Plan of Costilla Energy, Inc.
+10.13 First, Second and Third Amendments to Bonus
Incentive Plan of Costilla Energy, Inc.
++10.14 Purchase and Sale Agreement dated July 2, 1997
between Ballard Petroleum LLC, as seller, and the
Company, as buyer
++10.15 Acquisition and Exploration Agreement effective as
of July 1, 1997 by and between Ballard Petroleum,
LLC and the Company
#10.16 Purchase Agreement dated January 13, 1998 among BT
Alex. Brown Incorporated and Prudential Securities
Incorporated, as Initial Purchasers, and the
Company, as Issuer
#10.17 Registration Rights Agreement dated January 16,
1998 among BT Alex. Brown Incorporated and
Prudential Securities Incorporated, as Initial
Purchasers, and the Company, as Issuer
#10.18 Amendment to Employment Agreement between the
Company and Cadell S. Liedtke dated April 15, 1997
#10.19 Amendment to Employment Agreement between the
Company and Michael J. Grella dated April 15, 1997
#10.20 Amendment to Employment Agreement between the
Company and Henry G. Musselman dated April 15,
1997
#10.21 Second Amendment to Employment Agreement between
the Company and Henry G. Musselman dated April 15,
1997
#10.22 Amendment to Employment Agreement between the
Company and Bobby W. Page dated April 15, 1997
#10.23 Amended and Restated Credit Agreement dated as
of August 28, 1997 between Bankers Trust Company,
as Agent and Union Bank of California, N.A., as
Co-Agent and the Company
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<PAGE> 31
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
#12.1 Computation of Ratio of Adjusted EBITDA to
Interest Expense
#21.1 Subsidiaries of the Registrant
#23.1 Consent of KPMG Peat Marwick LLP
#23.2 Consent of Williamson Petroleum Consultants
#23.3 Consent of W. Scott Epley, P.E.
#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.
+ Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997.
++ Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
# Filed herewith.
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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, 1998 By: */s/ MICHAEL J. GRELLA
--------------------------------------
Michael J. Grella
President, Chief Executive
Officer and Director
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, 1998 */s/ CADELL S. LIEDTKE
--------------------------------------
Cadell S. Liedtke
Chairman of the Board
and Director
Date: March 26, 1998 */s/ MICHAEL J. GRELLA
--------------------------------------
Michael J. Grella
President, Chief Executive Officer
and Director
Date: March 26, 1998 */s/ HENRY G. MUSSELMAN
--------------------------------------
Henry G. Musselman
Executive Vice President, Chief
Operating Officer and Director
Date: March 26, 1998 */s/ SAMUEL J. ATKINS, III
--------------------------------------
Samuel J. Atkins, III
Director
Date: March 26, 1998 */s/ W. D. KENNEDY
--------------------------------------
W. D. Kennedy
Director
Date: March 26, 1998 */s/ JERRY J. LANGDON
--------------------------------------
Jerry J. Langdon
Director
Date: March 26, 1998 /s/ BOBBY W. PAGE
--------------------------------------
Bobby W. Page
Senior Vice President and Chief
Financial Officer (principal
accounting officer)
Date: March 26, 1998 *By: /s/ BOBBY W. PAGE
--------------------------------------
Bobby W. Page
Agent and Attorney in fact
32
<PAGE> 33
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Financial Statements of Costilla Energy, Inc.:
Independent Auditors' Report....................................................................... F - 2
Consolidated Balance Sheets as of December 31, 1997 and 1996....................................... F - 3
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995................................................................................... F - 4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997,
1996 and 1995................................................................................... F - 5
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995................................................................................... F - 6
Notes to Consolidated Financial Statements......................................................... F - 7
</TABLE>
F-1
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Costilla Energy, Inc.:
We have audited the consolidated financial statements of Costilla Energy, Inc.
and subsidiaries as listed in the accompanying index. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Midland, Texas
March 6, 1998
F-2
<PAGE> 35
COSTILLA ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,615 $ 12,618
Accounts receivable:
Trade, net 5,241 6,675
Affiliates -- 332
Oil and gas sales 9,312 9,031
Prepaid and other current assets 912 1,753
--------- ---------
Total current assets 19,080 30,409
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Oil and gas properties, using the successful efforts
method of accounting:
Proved properties 199,355 140,477
Unproved properties 35,971 4,482
Accumulated depletion, depreciation and amortization (71,152) (20,435)
--------- ---------
164,174 124,524
Other property and equipment, net 3,766 2,420
--------- ---------
Total property, plant and equipment 167,940 126,944
--------- ---------
OTHER ASSETS:
Deferred charges 4,212 4,503
Note receivable - other -- 250
Other 2,856 684
--------- ---------
Total other assets 7,068 5,437
--------- ---------
$ 194,088 $ 162,790
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 98 $ 98
Trade accounts payable 22,490 12,718
Undistributed revenue 4,566 3,517
Other current liabilities 3,437 3,756
--------- ---------
Total current liabilities 30,591 20,089
--------- ---------
LONG-TERM DEBT, LESS CURRENT MATURITIES 163,087 100,262
--------- ---------
OTHER NONCURRENT LIABILITIES -- 1,870
--------- ---------
STOCKHOLDERS' EQUITY :
Preferred stock, $.10 par value (3,000,000 shares authorized;
no shares outstanding) -- --
Common stock, $.10 par value (20,000,000 shares authorized;
10,150,500 shares outstanding at December 31, 1997 and
10,475,000 shares outstanding at December 31, 1996) 1,015 1,047
Additional paid-in capital 37,425 41,081
Retained deficit (38,030) (1,559)
--------- ---------
Total stockholders' equity 410 40,569
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
--------- ---------
$ 194,088 $ 162,790
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 36
COSTILLA ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Oil and gas sales $ 72,300 $ 53,919 $ 21,693
Interest and other 940 40 123
Gain on sale of assets 3,261 1,067 --
--------- --------- ---------
76,501 55,026 21,816
--------- --------- ---------
EXPENSES:
Oil and gas production 30,029 21,325 10,024
Oil and gas production - affiliates -- 449 331
General and administrative 8,407 4,682 2,910
General and administrative - affiliates -- 556 661
Compensation related to option settlement -- -- 656
Exploration and abandonments 6,588 2,550 1,652
Depreciation, depletion and amortization 26,409 12,430 5,958
Impairment of oil and gas properties 28,189 -- --
Interest 12,979 11,281 4,591
--------- --------- ---------
112,601 53,273 26,783
--------- --------- ---------
Income (loss) before federal income taxes and extraordinary item (36,100) 1,753 (4,967)
PROVISION FOR FEDERAL INCOME TAXES
Current 62 176 3
Deferred 90 1,042 --
--------- --------- ---------
Income (loss) before extraordinary item (36,252) 535 (4,970)
Extraordinary loss resulting from early extinguishment of debt,
net of deferred tax benefit of $129 and $1,042 (219) (4,975) --
--------- --------- ---------
NET LOSS $ (36,471) $ (4,440) $ (4,970)
========= ========= =========
PREFERRED RETURN AND ACCRETION OF
REDEEMABLE MEMBERS' CAPITAL $ -- $ (3,930) $ (2,842)
========= ========= =========
LOSS BEFORE EXTRAORDINARY ITEM
APPLICABLE TO COMMON EQUITY $ (36,252) $ (3,395) $ (7,812)
========= ========= =========
NET LOSS APPLICABLE TO COMMON EQUITY $ (36,471) $ (8,370) $ (7,812)
========= ========= =========
LOSS PER SHARE:
Loss before extraordinary item $ (3.49) $ (0.52) $ (1.50)
Extraordinary loss resulting from early extinguishment of debt,
net of deferred tax benefit (0.02) (0.77) --
--------- --------- ---------
NET LOSS $ (3.51) $ (1.29) $ (1.50)
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 10,383 6,473 5,200
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 37
COSTILLA ENERGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
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, 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
Net loss -- -- -- (36,471) (36,471)
Common stock issued, net -- 1 74 -- 75
Common stock repurchased and retired -- (33) (3,730) -- (3,763)
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1997 $ -- $ 1,015 $ 37,425 $(38,030) $ 410
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 38
COSTILLA ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (36,471) $ (4,440) $ (4,970)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization 26,409 12,430 5,958
Impairment of oil and gas properties 28,189 -- --
Exploration and abandonments 1,517 491 --
Amortization of deferred charges 262 1,131 137
Deferred income tax expense (39) -- --
Allowance for doubtful accounts 208 -- --
Other noncash -- 103 (75)
Compensation related to option settlement -- -- 656
Gain on sale of oil and gas properties (3,261) (1,067) --
Extraordinary loss resulting from early extinguishment of debt 348 6,017 --
Gain on investment transactions (534) -- --
--------- --------- ---------
16,628 14,665 1,706
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,485 (8,462) (4,818)
Decrease (increase) in other assets (3,585) (1,076) (216)
Increase (decrease) in accounts payable 10,822 6,067 3,745
Increase (decrease) in other liabilities (318) 4,475 2,655
Increase (decrease) in deferred revenue -- (3,319) 3,294
--------- --------- ---------
Net cash provided by operating activities 25,032 12,350 6,366
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (111,580) (67,010) (61,500)
Proceeds from sale of oil and gas properties 21,327 6,388 --
Additions to other property and equipment (2,344) (3,007) (720)
Advances on notes receivable - other -- (500) --
Advances on affiliate notes receivable -- -- (247)
--------- --------- ---------
Net cash used in investing activities (92,597) (64,129) (62,467)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt 96,304 228,707 62,704
Payments of long-term debt (33,480) (199,840) (11,232)
Proceeds from issuance of common stock, net 75 60,579 --
Purchase of common stock (3,763) -- --
Proceeds from redeemable predecessor capital -- -- 10,000
Deferred loan and financing costs (574) (8,191) (2,587)
Redemption of member's interest -- (15,506) --
Distributions to members and withdrawals -- (4,218) (55)
--------- --------- ---------
Net cash provided by financing activities 58,562 61,531 58,830
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,003) 9,752 2,729
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,618 2,866 137
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,615 $ 12,618 $ 2,866
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 39
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND NATURE OF OPERATIONS
Costilla Energy, Inc. ("Costilla" or the "Company") 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, and
its wholly owned subsidiaries, to acquire the assets of CSL Management
Corporation ("CSL") (which owned 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.
The Company is an oil and gas exploration and production concern with
properties located principally in South and East Texas, the Rocky Mountains and
the Permian Basin regions of the United States.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
As of December 31, 1997 and 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 owned 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.
On January 1, 1997 CPC was merged into its parent and Costilla assumed the
business, assets and liabilities of CPC. On March 1, 1997 Valley was merged into
its parent and Costilla assumed the business, assets and liabilities of Valley.
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 properties were
transferred to Costilla on December 31, 1996.
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.
F-7
<PAGE> 40
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997, the Company had sales to two customers
each which exceeded 10% of total revenues, one for 14.5% and another for 12.2%.
During the year ended December 31, 1996, the Company had sales to one customer
which accounted for 11.2% 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 (loss) 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.
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.
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 amount received is
treated as a reduction of the cost of the interest retained.
F-8
<PAGE> 41
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 as determined based upon
discounted future net cash flows.
Deferred Charges
The Company capitalized certain costs incurred in connection with the
issuance of $100 million of senior notes and with obtaining the Revolving Credit
Facility (see Note 7 for definitions and descriptions of each). These costs are
being amortized over the lives of the related instruments.
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. As of December 31, 1997, the Company had recorded a net gas
imbalance receivable for gas previously produced of approximately $2,341,000,
comprised of approximately 1,496,000 mcf at a net price of $1.56 per mcf.
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.
F-9
<PAGE> 42
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share
In February, 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128")
which simplifies the existing standards for computing earnings per share ("EPS")
and makes them comparable to international standards. In accordance with the
provisions of FAS 128, the Company adopted FAS 128 in its year ended December
31, 1997 financial statements, although no restatement of prior period EPS
information has been necessary. Under FAS 128, primary EPS is replaced by
"basic" EPS, which excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. "Diluted" EPS, which is computed similarly to
fully-diluted EPS, reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. For the years ended December 31, 1997, 1996 and
1995, the computation of diluted net loss per share was antidilutive; therefore,
the amounts reported for basic and diluted net loss per share were the same.
Basic and diluted 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. 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. Such
liabilities are generally recorded at their undiscounted amounts unless the
amount and timing of payments is fixed or reliably determinable.
Reclassifications
Certain reclassifications have been made to the 1995 financial statements
to conform to the 1996 and 1997 presentation.
(3) ACQUISITION OF OIL AND GAS PROPERTIES
On August 28, 1997, the Company consummated the purchase from Ballard
Petroleum LLC ("Ballard") of certain oil and gas properties for an adjusted
purchase price of approximately $41.2 million (the "Ballard Acquisition"). The
properties are located primarily in the Rocky Mountain region of the United
States. 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, August 28, 1997. In
addition, the Company and Ballard have entered into an Acquisition and
Exploration Agreement that establishes an area of mutual interest in the Rocky
Mountain region in which the parties will jointly own, acquire, explore and
develop 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 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 subsequently sold
for approximately $3.3 million its wholly-owned subsidiary, Costilla Pipeline
Corporation, which owned the Three
F-10
<PAGE> 43
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rivers Pipeline 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 an adjusted purchase price of
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 1996 Acquisition , net of the related properties sold, and the Ballard
Acquisition had occurred on January 1, 1996. The pro forma amounts are not
necessarily indicative of the results that may be reported in the future.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Revenues ............................................................... $ 82,189 $ 75,563
Net income (loss) before extraordinary item ........................... (39,029) 1,007
Net income (loss) per share before extraordinary item .................. (3.76) 0.10
</TABLE>
(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, were required to adopt FAS 121 for fiscal years beginning after
December 15, 1995.
In order to determine whether an impairment had occurred at December 31,
1997, 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. If the costs of a depletable unit did not
appear to be recoverable, impairment on the depletable unit was recorded equal
to the difference between the estimated present value and the costs. These
estimates of net undiscounted cash flow and estimated present values for the
Company's total oil and gas reserves were based upon the non-escalated prices
used in the Company's December 31, 1997 reserve report. Based on this process, a
noncash pre-tax writedown of $28,189,000 in the carrying amount of the Company's
proved properties was recorded at December 31, 1997. No writedown in the
carrying amount of the Company's proved properties was recorded at December 31,
1996.
(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 only deals
with reputable financial
F-11
<PAGE> 44
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
institutions as counterparties and anticipates that such counterparties will be
able to fully satisfy their obligations under the contracts. The Company does
not obtain collateral or other security to support financial instruments subject
to credit risk but monitors the credit standing of the counterparties.
Commodity Hedges. The Company utilizes option contracts to hedge the effect
of price changes on future oil and gas production. If market prices of oil and
gas exceed the strike price of put options, the options will expire unexercised,
therefore, reducing the effective price received for oil and gas sales by the
cost of the related option. If market prices of oil and gas exceed the strike
price of call options, the Company is obligated to pay the contracting
counterparty an amount equal to the contracted volumes times the difference
between the market price and the strike price, therefore, reducing the effective
price received for oil and gas sales by the amount paid to the counterparty.
The net effect of the Company's commodity hedging activities reduced oil
and gas revenues by $1,226,000, $1,705,000, and $80,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
The following table sets forth the future volumes hedged by year and the
weighted-average strike price of the option contracts at December 31, 1997:
<TABLE>
<CAPTION>
OIL GAS
DAILY VOLUME DAILY VOLUME STRIKE PRICE
(BBLS) (MMBTU) TERM PER BBL/MMBTU
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Oil:
1998 ............................... 6,500 -- Jan 98 - Aug 98 $18.50 - $22.55(a)
Gas:
1998 ............................... -- 5,000 Jan 98 - Oct 98 $2.00 (b)
</TABLE>
- ------------------
(a) Represents the strike prices 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.
In March 1998 the Company purchased put options on 40,000 Mmbtu of gas per
day, establishing a floor price of $2.15 per Mmbtu, and sold call options on
40,000 Mmbtu of gas per day, establishing a ceiling price at $2.55 per Mmbtu,
for the period April 1998 through October 1998.
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. A $60 million interest rate swap agreement expired in May 1997. As a
result of the Company's borrowings against its line of credit, which bears
interest on a floating rate basis, the remaining $24 million interest rate swap
agreement again fully qualified as a hedge in August 1997. At each borrowing
date from October 1996 to August 1997, a portion of the interest rate swap
agreement was marked-to-market with the resulting gains or losses recorded as
investment income or loss while the hedge portion was being amortized over the
remaining life of the agreement. As a result of expiration and marking the
agreements to market, the Company recorded a net investment gain of
approximately $510,000 during the year ended December 31, 1997. Concurrent with
the payment of all of the Company's floating rate debt from proceeds of the 1998
Notes (as defined and discussed in Note 7), the interest rate swap agreement
ceased to qualify as a hedge. As a result of marking-to-market the interest rate
swap agreement at that time, the Company recorded an additional liability of
approximately $23,000. The interest rate swap agreement in place as of December
31, 1997 has a notional amount of $24 million with a fixed rate of 7.5% and will
expire in January, 1999.
F-12
<PAGE> 45
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 1997 and 1996. FASB
Statement No. 107, Disclosures about Fair Value of Financial Instruments,
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
1997 1996
------------------------ --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- --------- ---------- -------
Financial Assets: (IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash, cash equivalents and restricted cash ....... $ 3,615 $ 3,615 $ 12,618 $ 12,618
Receivables (trade) .............................. 5,241 5,241 6,675 6,675
Receivables (oil and gas sales) .................. 9,312 9,312 9,031 9,031
Commodity option contracts ....................... 190 1,488 592 (2,172)
Gas imbalances receivable ........................ 2,341 3,087 -- --
Notes receivable - affiliate ..................... 476 476 684 542
Notes receivable - other ......................... 250 250 500 500
Financial liabilities:
Payables (trade) ................................. 22,490 22,490 12,718 12,718
Long-term debt ................................... 163,087 167,587 100,262 105,512
Interest rate swap and option agreements ......... 521 493 1,712 1,712
</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.
Gas imbalances receivable: The carrying amount reflects the net quantity of
gas imbalances receivable based upon current prices at December 31, 1997.
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.
Long-term debt: The fair value of the Company's long-term debt is based
upon the quoted market price for the senior notes at December 31, 1997 and 1996
and the carrying amounts outstanding under the two credit facilities at December
31, 1997 (see Note 7 for a complete discussion of long-term debt).
Interest rate swap agreements: At December 31, 1997, the Company had an
interest rate swap agreement outstanding with a notional amount of $24 million.
This agreement is more fully described in Note 5. The carrying amount is equal
to the sum of the unamortized premiums paid for the agreement and the fair
value. The fair values
F-13
<PAGE> 46
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of each of the open interest rate swap agreements was obtained from bank quotes
and represent the estimated amount the Company would pay upon termination of the
agreements at December 31, 1997 and 1996, taking into consideration interest
rates at that date.
(7) LONG-TERM DEBT
Long-term debt consists of the following (thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
10.25% Senior Notes due 2006 ......................... $100,000 $100,000
Revolving Credit Facility ............................ 33,000 100
Acquisition Credit Facility .......................... 30,000 --
Other notes payable .................................. 185 260
-------- --------
163,185 100,360
Less current maturities ................. 98 98
-------- --------
$163,087 $100,262
======== ========
</TABLE>
In August 1997, the Company entered into a credit agreement (the "Revolving
Credit Facility") with Bankers Trust Company, as agent, to refinance its
existing bank indebtedness and to finance a portion of the Ballard Acquisition
purchase price. The Revolving Credit Facility provides for a maximum
availability of $75.0 million, $33.0 million of which was borrowed at December
31, 1997 against an available borrowing base of $36.5 million at such date.
Borrowings under the Revolving Credit Facility bear interest, at the Company's
option, at a floating rate which is at or above the Lender's prime rate or above
the applicable Eurodollar rate, depending on the percentage of committed funds
which have been borrowed. Interest is payable quarterly as to base rate loans,
and at the end of the applicable interest period as to Eurodollar loans. The
borrowing base of the Revolving Credit Facility is automatically reduced by 5%
each quarter beginning in August 1999, and payments of principal are required in
each quarter in which the outstanding principal balance is greater than the
reduced borrowing base. The remaining balance is payable on August 28, 2002, the
maturity date of the Revolving Credit Facility. Under the Revolving Credit
Facility, the Company is obligated to pay certain fees to the lender, including
a commitment fee based on the unused portion of the commitment. The Revolving
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 (i) a current ratio of not less than 1.0 to
1.0, including amounts available under the Revolving Credit Facility and
excluding current maturities under the Revolving Credit Facility and the
Acquisition Credit Facility, (ii) a ratio of EBITDA to interest expense of not
less than 2.50 to 1 and (iii) a minimum tangible net worth. Borrowings under the
Revolving Credit Facility are secured by substantially all of the assets of the
Company.
In August 1997, the Company also entered into a second credit agreement
(the "Acquisition Credit Facility") with Bankers Trust Company, as agent, to
provide funds for a substantial portion of the Ballard Acquisition purchase
price. The Acquisition Credit Facility is a term loan in the amount of $30.0
million and is subject to a borrowing base to be determined at least
semi-annually. Borrowings under the Acquisition Credit Facility bear interest,
at the Company's option, at a floating rate which is above the Lender's prime
rate or the applicable Eurodollar rate. Interest is payable quarterly as to base
rate loans, and at the end of the applicable interest period as to Eurodollar
loans. Principal payments commence in February 1998, and are $1.7 million
quarterly for the first year and $1.4 million each quarter thereafter for two
years, with all remaining amounts due at maturity, February 28, 2001. Borrowings
under the Acquisition Credit Facility are secured by the assets acquired in the
Ballard Acquisition.
F-14
<PAGE> 47
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1996 Credit Facility
provided for 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 provided a maximum availability of $50.0
million (which amount was also the initial borrowing base), $100,000 of which
was outstanding at December 31, 1996. Availability under the borrowing base was
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 lender. Borrowings under the 1996 Credit Facility bore interest, at the
Company's option, at a floating rate which was at or above the NationsBank, N.A.
prime rate or the LIBOR rate, depending on the percentage of committed funds
which were borrowed. Interest was payable quarterly and principal was to be
amortized in twelve equal installments commencing two years from the date of the
credit agreement. Under the 1996 Credit Facility, the Company was obligated to
pay certain fees to the lender, including a commitment fee which ranged from
0.30% to 0.40% based on the unused portion of the commitment. The 1996 Credit
Facility contained customary restrictive covenants (including restrictions on
the payment of dividends and the incurrence of additional indebtedness) and
required 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 were
secured by substantially all of the assets of the Company and any subsidiary of
the Company that guaranteed the Company's obligations under the 1996 Credit
Facility. None of the Company's subsidiaries 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
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.
In January 1998, the Company issued an additional $80 million aggregate
principal amount of 10.25% Senior Notes due October 1, 2006 (the " 1998 Notes").
The notes were sold at a premium (102.5%) and interest is payable April 1 and
October 1, commencing April 1, 1998. The 1998 Notes may not be redeemed prior to
October 1, 2001, and thereafter at a premium reducing to par, plus interest, by
maturity. The 1998 Notes are subject to the same terms and conditions as the
Notes. Net proceeds from the sale of the 1998 Notes of approximately $78.8
F-15
<PAGE> 48
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million were used to repay the Acquisition Credit Facility in full, all but
$500,000 of the Revolving Credit Facility and the remainder was used for general
corporate working capital needs.
In light of the issuance of the 1998 Notes and the concurrent repayment of
the Acquisition Credit Facility , there are no current maturities of long-term
debt. Therefore, all amounts owed under the Revolving Credit Facility and
Acquisition Facility as of December 31, 1997 have been classified as long-term
obligations.
The Company paid interest on long-term debt of $12,198,937, $8,838,971 and
$4,453,684 in 1997, 1996 and 1995, respectively.
(8) INCOME TAXES
Concurrent with the Offerings, 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) and amounts separately allocated were as
follows (thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------
1997 1996
------- -------
<S> <C> <C>
Income (loss) before extraordinary item $ 152 $ 1,218
Extraordinary loss resulting from early
extinguishment of debt (129) (1,042)
------- -------
$ 23 $ 176
======= =======
</TABLE>
In 1997, the Company's effective tax rate differs from the U.S. Federal
statutory rate primarily because of a valuation allowance established for net
operating loss carryforwards, as discussed below. The Company's effective tax
rate does not differ materially from the U.S. Federal statutory rate in 1996.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 15,331 $ 2,805
Interest rate swap agreements 116 599
Oil and gas properties, principally due
to differences in depletion, impairment
and the deduction of intangible drilling
costs for tax purposes 1,253 (1,692)
Other 1,365 --
-------- --------
Net deferred tax asset 18,065 1,712
Valuation allowance of net deferred tax asset (18,065) (1,712)
-------- --------
Net deferred tax asset, net of valuation allowance $ -- $ --
======== ========
</TABLE>
F-16
<PAGE> 49
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A valuation allowance 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, 1997, the Company had net operating loss carryforwards of
approximately $43.8 million, which are available to offset future regular
taxable income, if any. The carryforwards expire December 31, 2011 and 2012.
(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, 1997, 1996 and 1995 was
$376,978, $416,442 and $311,221, respectively. Future minimum lease commitments
under noncancellable operating leases at December 31, 1997 are as follows
(thousands):
<TABLE>
<S> <C>
1998.......................................... $ 394,372
1999.......................................... 376,699
2000.......................................... 327,517
2001.......................................... 352,302
2002.......................................... 343,924
Thereafter........................................ 1,023,048
</TABLE>
Employment Agreements
In 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 $1,035,000 for 1998.
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
F-17
<PAGE> 50
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
material fixed financial commitments with respect to the Concession. As of
December 31, 1997, the Company's share of costs expended was $3,681,137.
Letters of Credit
As a result of certain bonding and hedging counterparty requirements, the
Company has caused irrevocable letters of credit to be issued by a bank totaling
$996,000. As of December 31, 1997, 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
$122,336, $58,713, and $22,531 in 1997, 1996 and 1995, 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-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:
<TABLE>
<S> <C>
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
===========
</TABLE>
F-18
<PAGE> 51
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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, up to an aggregate of
$5,500,000. 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.
The plan was amended during 1997 to provide that a total of 100,000 shares
be authorized and reserved for issuance under this plan and that each person
qualifying as an outside director shall receive an option for 5,000 shares each
year that such person is elected as a director of the Company. During the year
ended December 31, 1997, options on 15,000 shares were granted under this plan,
leaving 85,000 options available for future grant under the plan as of December
31, 1997. The options granted during 1997 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 grant. The weighted average fair value, as calculated under the
provisions of FAS 123, of the options granted in 1997 was $8.56 per share.
Bonus Incentive Plan
The Bonus Incentive 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
F-19
<PAGE> 52
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The plan was amended during 1997 to provide that the plan be administered
by the Compensation Committee of the Board of Directors, that awards of
incentive compensation under this plan be made within 120 days after the
expiration of each fiscal year and the removal of the exclusion of ten percent
or more shareholders as eligible participants in the plan. During the year ended
December 31, 1997, 4,500 shares were issued under this plan at the current
market price of $13.38 per share.
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 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 135 employees
who are eligible to participate in the plan.
The plan was amended during 1997 to provide that the plan be administered
by the Compensation Committee of the Board of Directors and that a total of
1,250,000 shares be authorized and reserved for issuance under this plan.
No options were issued under this plan during 1997. During 1996, the
Company granted 711,750 stock options pursuant to the 1996 Stock Option Plan,of
which 1,500 shares were exercised in 1997. There were 547,750 options available
for future grant under the plan as of December 31, 1997. The options granted
during 1996 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 weighted
average 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, 1997 and 1996 would
have been adjusted to the following pro forma amounts:
F-20
<PAGE> 53
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net loss $ (37,740,000) $ (6,285,276)
Net loss per share (3.63) (1.58)
</TABLE>
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 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- -------------
<S> <C> <C>
Risk-free interest rate 6.25% 6.25%
Expected life 5 years 5 years
Expected volatility 80% 54%
Expected dividend yield 0% 0%
</TABLE>
(13) RELATED PARTY TRANSACTIONS
Certain members and officers of the Company have owned interests in and
held 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. 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, including accrued interest and is dated May
22, 1996. The note is unsecured and is payable upon demand. During 1997, the
Company created an allowance of $208,000 related to these notes to reflect the
estimated present value of anticipated future payments on these notes. During
1997, 1996 and 1995, the Company paid $561,343, $520,519 and $612,139,
respectively, to A&P for goods and services provided.
During 1996 and 1995, the Company paid $517,352 and $592,920, respectively,
to CSL for management fees and lease payments on equipment.
During 1996 and 1995, the Company paid $50,742 and $67,896, respectively,
to 511 Tex for office rent.
During 1996 and 1995 the Company paid $484,000 and $440,884, respectively,
to Valley for gas compression and salt water disposal charges. During 1996 and
1995, Valley paid the Company $383,139 and $109,399, respectively, for operating
costs of its salt water disposal wells and gas compressors.
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.
F-21
<PAGE> 54
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) OIL AND GAS EXPENDITURES
The following table reflects costs incurred in oil and gas property acquisition,
exploration and development activities:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
----------- ----------- -----------
(THOUSANDS)
<S> <C> <C> <C>
Property acquisition costs:
Proved $ 25,731 $ 39,505 $ 52,470
Unproved 32,415 721 1,742
Exploration 16,194 6,760 5,627
Development 43,942 17,723 158
----------- ----------- -----------
$ 118,282 $ 64,709 $ 59,997
=========== =========== ===========
</TABLE>
(15) 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, 1997 and
1995 and by Williamson Petroleum Consultants as of December 31, 1996. Williamson
Petroleum Consultants performed a review of approximately 72% of the Company's
estimated United States reserves as of December 31, 1997 (on a PV-10 basis). The
Moldova reserve estimates were prepared by W. Scott Epley, P.E. as of December
31, 1997. 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
United States reserve estimates utilizing an oil price of $15.29 per Bbl and a
gas price of $2.20 per Mcf as of December 31, 1997 and an oil price of $24.17
per Bbl and a gas price of $3.96 per Mcf as of December 31, 1996. The Company
has presented the Moldovan reserve estimates utilizing an oil price of $16.00
per Bbl and a gas price of $2.08 per Mcf as of December 31, 1997.
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-22
<PAGE> 55
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
UNITED STATES MOLDOVA TOTAL
------------------------------- --------------------- -----------------------
OIL AND NATURAL OIL AND NATURAL OIL AND NATURAL
CONDENSATE GAS CONDENSATE GAS CONDENSATE GAS
(MBbls) (MMcf) (MBbls) (MMcf) (MBbls) (MMcf)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Total Proved Reserves:
Balance, January 1, 1995 ............... 4,009 27,512 -- -- 4,009 27,512
Revisions of previous estimates ... (570) 425 -- -- (570) 425
Extensions and discoveries ........ 605 8,922 -- -- 605 8,922
Production ........................ (950) (4,806) -- -- (950) (4,806)
Purchases of minerals-in-place .... 7,694 46,099 -- -- 7,694 46,099
-------- -------- -------- -------- -------- --------
Balance, December 31, 1995 ............. 10,788 78,152 -- -- 10,788 78,152
Revisions of previous estimates ... 1,782 5,440 -- -- 1,782 5,440
Extensions and discoveries ........ 1,169 13,581 -- -- 1,169 13,581
Production ........................ (1,726) (9,205) -- -- (1,726) (9,205)
Sales of minerals-in-place ........ (119) (482) -- -- (119) (482)
Purchases of minerals-in-place .... 5,106 32,786 -- -- 5,106 32,786
-------- -------- -------- -------- -------- --------
Balance, December 31, 1996 ............. 17,000 120,272 -- -- 17,000 120,272
Revisions of previous estimates ... (3,651) 3,064 -- -- (3,651) 3,064
Extensions and discoveries ........ 2,465 58,888 395 1,318 2,860 60,206
Production ........................ (2,175) (14,698) -- -- (2,175) (14,698)
Sales of minerals-in-place ........ (2,065) (27,743) -- -- (2,065) (27,743)
Purchases of minerals-in-place .... 2,983 7,536 -- -- 2,983 7,536
-------- -------- -------- -------- -------- --------
Balance, December 31, 1997 ............. 14,557 147,319 395 1,318 14,952 148,637
======== ======== ======== ======== ======== ========
Proved Developed Reserves:
December 31, 1994 ................. 2,632 16,340 -- -- 2,632 16,340
December 31, 1995 ................. 8,566 57,393 -- -- 8,566 57,393
December 31, 1996 ................. 14,018 90,023 -- -- 14,018 90,023
December 31, 1997 ................. 10,646 84,558 -- 359 10,646 84,917
</TABLE>
F-23
<PAGE> 56
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 shown below are not
intended to represent estimates of the fair value of oil and gas properties.
Estimates of fair value should also consider probable reserves, anticipated
future oil and gas prices, interest rates, changes in development and production
costs and risks associated with future production. Because of these and other
considerations, any estimate of fair value is necessarily subjective and
imprecise.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
UNITED STATES
Future cash flows ......................................................... $ 547,584 $ 887,100 $ 350,653
Future costs:
Production ........................................................... (205,454) (323,288) (145,510)
Development .......................................................... (41,291) (25,469) (16,806)
--------- --------- ---------
Future net cash flows before income taxes ................................. 300,839 538,343 188,337
Future income taxes ....................................................... 31,249 144,836 --
--------- --------- ---------
Future net cash flows ..................................................... 269,590 393,507 188,337
10% annual discount for estimated timing of
cash flows ........................................................... (95,704) (165,273) (75,041)
--------- --------- ---------
Standardized measure of discounted net cash flows ......................... $ 173,886 $ 228,234 $ 113,296
========= ========= =========
MOLDOVA
Future cash flows ......................................................... $ 9,063 $ -- $ --
Future costs:
Production ........................................................... (1,943) -- --
Development .......................................................... (2,572) -- --
--------- --------- ---------
Future net cash flows before income taxes ................................. 4,548 -- --
Future income taxes ....................................................... 951 -- --
--------- --------- ---------
Future net cash flows ..................................................... 3,597 -- --
10% annual discount for estimated timing of
cash flows ........................................................... (1,560) -- --
--------- --------- ---------
Standardized measure of discounted net cash flows ......................... $ 2,037 $ -- $ --
========= ========= =========
</TABLE>
F-24
<PAGE> 57
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
(THOUSANDS)
TOTALS
<S> <C> <C> <C>
Future cash flows ......................................................... $ 556,647 $ 887,100 $ 350,653
Future costs:
Production ........................................................... (207,397) (323,288) (145,510)
Development .......................................................... (43,863) (25,469) (16,806)
--------- --------- ---------
Future net cash flows before income taxes ................................. 305,387 538,343 188,337
Future income taxes ....................................................... 32,200 144,836 --
--------- --------- ---------
Future net cash flows ..................................................... 273,187 393,507 188,337
10% annual discount for estimated timing of
cash flows ........................................................... (97,264) (165,273) (75,041)
--------- --------- ---------
Standardized measure of discounted net cash flows ......................... $ 175,923 $ 228,234 $ 113,296
========= ========= =========
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows From Proved
Reserves (In Thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(THOUSANDS)
UNITED STATES
Increase (decrease):
Purchase of minerals-in place ............................................. $ 22,753 $ 49,966 $ 77,343
Extensions and discoveries and improved recovery, net
of future production and development costs ............................. 69,140 25,910 9,799
Accretion of discount ..................................................... 22,823 11,330 3,678
Net change in sales prices net of production costs ........................ (170,943) 108,160 (3,422)
Changes in estimated future development costs ............................. 2,515 4,187 (2,419)
Revisions of quantity estimates ........................................... (17,890) 29,485 (2,855)
Net change in income taxes ................................................ 63,408 (83,570) --
Sales, net of production costs ............................................ (42,271) (32,146) (11,338)
Sales of minerals in place ................................................ (29,975) (1,330) --
Changes of production rates (timing) and other ............................ 26,092 2,946 5,731
--------- --------- ---------
Net increase (decrease) ................................................ (54,348) 114,938 76,517
Standardized measure of discounted future net cash flows:
Beginning of period ................................................ 228,234 113,296 36,779
--------- --------- ---------
End of period ...................................................... $ 173,886 $ 228,234 $ 113,296
========= ========= =========
</TABLE>
F-25
<PAGE> 58
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
(THOUSANDS)
<S> <C> <C> <C>
MOLDOVA
Increase (decrease):
Purchase of minerals-in place ........................... $ -- $ -- $ --
Extensions and discoveries and improved recovery, net
of future production and development costs ........... 2,576 -- --
Accretion of discount ................................... -- -- --
Net change in sales prices net of production costs ...... -- -- --
Changes in estimated future development costs ........... -- -- --
Revisions of quantity estimates ......................... -- -- --
Net change in income taxes .............................. (539) -- --
Sales, net of production costs .......................... -- -- --
Sales of minerals in place .............................. -- -- --
Changes of production rates (timing) and other .......... -- -- --
--------- --------- ---------
Net increase (decrease) .............................. 2,037 -- --
Standardized measure of discounted future net cash flows:
Beginning of period .............................. -- -- --
--------- --------- ---------
End of period .................................... $ 2,037 $ -- $ --
========= ========= =========
TOTALS
Increase (decrease):
Purchase of minerals-in place ........................... $ 22,753 $ 49,966 $ 77,343
Extensions and discoveries and improved recovery, net
of future production and development costs ........... 71,716 25,910 9,799
Accretion of discount ................................... 22,823 11,330 3,678
Net change in sales prices net of production costs ...... (170,943) 108,160 (3,422)
Changes in estimated future development costs ........... 2,515 4,187 (2,419)
Revisions of quantity estimates ......................... (17,890) 29,485 (2,855)
Net change in income taxes .............................. 62,869 (83,570) --
Sales, net of production costs .......................... (42,271) (32,146) (11,338)
Sales of minerals in place .............................. (29,975) (1,330) --
Changes of production rates (timing) and other .......... 26,092 2,946 5,731
--------- --------- ---------
Net increase (decrease) .............................. (52,311) 114,938 76,517
Standardized measure of discounted future net cash flows:
Beginning of period .............................. 228,234 113,296 36,779
--------- --------- ---------
End of period .................................... $ 175,923 $ 228,234 $ 113,296
========= ========= =========
</TABLE>
The 1997 future cash flows shown above include amounts attributable to
proved undeveloped reserves requiring approximately $42.5 million of future
development costs. If these reserves are not developed, the standardized measure
of discounted future net cash flows for 1997 shown above would be reduced by
approximately $42.3 million.
F-26
<PAGE> 59
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
*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 Exhibit 4.2)
*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 First Supplemental Indenture dated January 16, 1998
by and between State Street Bank and Trust Company,
as Trustee, and the Company, as Issuer (including
form of Global Certificate)
#4.4 Form of Note
**4.5 Form of Stock Certificate
*10.1 Lease Agreement dated January 12, 1996 between
Independence Plaza,Ltd. and Costilla Energy, L.L.C.
*10.2 Concession Agreement dated July 6, 1995 between the
Government of the Republic of Moldova and Resource
Development Company Ltd., L.L.C. (DE)
*10.3 Consolidation Agreement dated October 8, 1996
*10.4 1996 Stock Option Plan
*10.5 Employment Agreement between the Company and Bobby
W. Page effective June 30, 1996
*10.6 Employment Agreement between the Company and Cadell
S. Liedtke effective October 8, 1996
</TABLE>
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
*10.7 Employment Agreement between the Company and
Michael J. Grella effective October 8, 1996
*10.8 Employment Agreement between the Company and Henry
G. Musselman effective October 8, 1996
*10.9 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
*10.10 Bonus Incentive Plan
+10.11 First and Second Amendments to Stock Option Plan of
Costilla Energy, Inc.
+10.12 First Amendment to Outside Directors Stock Option
Plan of Costilla Energy, Inc.
+10.13 First, Second and Third Amendments to Bonus
Incentive Plan of Costilla Energy, Inc.
++10.14 Purchase and Sale Agreement dated July 2, 1997
between Ballard Petroleum LLC, as seller, and the
Company, as buyer
++10.15 Acquisition and Exploration Agreement effective as
of July 1, 1997 by and between Ballard Petroleum,
LLC and the Company
#10.16 Purchase Agreement dated January 14, 1998 among BT
Alex. Brown Incorporated and Prudential Securities
Incorporated, as Initial Purchasers, and the
Company, as Issuer
#10.17 Registration Rights Agreement dated January 16,
1998 among BT Alex. Brown Incorporated and
Prudential Securities Incorporated, as Initial
Purchasers, and the Company, as Issuer
#10.18 Amendment to Employment Agreement between the
Company and Cadell S. Liedtke dated April 15, 1997
#10.19 Amendment to Employment Agreement between the
Company and Michael J. Grella dated April 15, 1997
#10.20 Amendment to Employment Agreement between the
Company and Henry G. Musselman dated April 15,
1997
#10.21 Second Amendment to Employment Agreement between
the Company and Henry G. Musselman dated April 15,
1997
#10.22 Amendment to Employment Agreement between the
Company and Bobby W. Page dated April 15, 1997
#12.1 Computation of Ratio of Adjusted EBITDA to Interest
Expense
#21.1 Subsidiaries of the Registrant
</TABLE>
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
#23.1 Consent of KPMG Peat Marwick LLP
#23.2 Consent of Williamson Petroleum Consultants
#23.3 Consent of W. Scott Epley, P.E.
#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
</TABLE>
* 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.
+ Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997.
++ Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
# Filed herewith.
<PAGE> 1
Exhibit 4.3
COSTILLA ENERGY, INC.
10 1/4% SENIOR NOTES DUE 2006
-----------------
FIRST SUPPLEMENTAL INDENTURE
Dated as of January 16, 1998
to
INDENTURE
Dated as of October 1, 1996
-----------------
STATE STREET BANK AND TRUST COMPANY
<PAGE> 2
FIRST SUPPLEMENTAL INDENTURE, dated as of January 16, 1998
(the "Supplemental Indenture"), by and between Costilla Energy, Inc., a
corporation duly organized and existing under the laws of the State of
Delaware, having its principal office at 400 West Illinois, Suite 1000,
Midland, Texas 79701 (the "Company") and State Street Bank and Trust Company,
as Trustee (the "Trustee").
R E C I T A L S:
WHEREAS, the Company and the Trustee have heretofore executed
and delivered that certain Indenture, dated as of October 1, 1996 (the
"Indenture") providing for the issuance of its 10 1/4% Senior Notes due 2006
(the "Notes"). All terms used, but not otherwise defined, in this First
Supplemental Indenture shall have the meanings assigned to such terms in the
Indenture;
WHEREAS, Section 9.02 of the Indenture provides that, the
Company and the Trustee may amend or supplement the Indenture with the consent
of holders of not less than a majority in principal amount of the outstanding
Notes;
WHEREAS, Section 9.07 of the Indenture provides that the
Trustee shall execute any supplemental indenture or other amendment authorized
pursuant to Article IX of the Indenture; and
WHEREAS, all things necessary to make this First Supplemental
Indenture a valid and binding agreement of the Company and the Trustee and a
valid amendment of and supplement to the Indenture have been done;
NOW, THEREFORE, the Company and the Trustee hereby agree as
follows:
ARTICLE ONE
(a) Section 1.01 of the Indenture is hereby amended as
follows:
(i) The following definitions are hereby amended in their
entirety to read as follows:
"Credit Facility" means a credit facility that may be entered
into among the Company and the lenders parties thereto, including any
related note guarantees, collateral documents, instruments and
agreements executed in connection therewith and in each case as such
agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time,
including any agreements extending the maturity of, renewing,
refunding, replacing, refinancing, increasing or otherwise
restructuring all or any portion of the Indebtedness under such
agreements.
<PAGE> 3
"Notes" means the Existing Notes and the New Notes.
(ii) Clause (b) of the definition of "Permitted
Liens" is amended to read as follows:
"Liens under the Credit Facility;"
(iii) The following definitions are added:
"Exchange Notes" has the meaning set forth in the Registration
Rights Agreement.
"Existing Notes" means the $100,000,000 aggregate principal
amount of 10 1/4% Senior Notes of the Company issued on October 8,
1996.
"IAI Global Note" means any Global Note representing the
aggregate principal amount of New Notes held by Institutional
Accredited Investors.
"Institutional Accredited Investor" means an institution that
is an "accredited investor" as that term is defined in Rule 501(a)(1),
(2), (3) or (7) under the Securities Act.
"New Notes" means the 10 1/4% Senior Notes of the Company
issued at any time after the Issue Date (other than any Notes issued
in exchange for Existing Notes pursuant to Section 2.06 or 2.07 under
the Indenture).
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations of the Commission promulgated
thereunder.
"Private Exchange Notes" has the meaning set forth in the
Registration Rights Agreement.
"Registration Rights Agreement" means the Registration Rights
Agreement dated as of January 16, 1998 between the Company, BT Alex.
Brown Incorporated and Prudential Securities Incorporated.
"Regulation S" means Regulation S under the Securities Act.
"Regulation S Global Note" means a Global Note representing
the aggregate principal amount of New Notes held by Non-U.S. Persons.
"Restricted Security" has the meaning assigned to such term in
Rule 144(a)(3) under the Securities Act; provided, however,
that the Trustee shall be entitled to request and conclusively rely on
an Opinion of Counsel with respect to whether any Note constitutes a
Restricted Security.
<PAGE> 4
"144A Global Note" means a Global Note representing the
aggregate principal amount of New Notes held by QIBs.
"Private Placement Legend" means the legend initially set
forth in the Notes in the form set forth in Section 2.16 herein.
"Qualified Institutional Buyer" or "QIB" shall have the
meaning specified in Rule 144A under the Securities Act.
"Non-U.S. Person" means a person who is not a U.S. person, as
defined in Regulation S.
(b) The first sentence of Section 2.02 of the Indenture
is hereby amended to read as follows:
"The aggregate principal amount of Notes outstanding at any
one time shall not exceed $180,000,000 except as provided in Section
2.07 hereof; provided, however, that any New Notes issued under this
Indenture shall be issued in accordance with Section 4.12 of this
Indenture.
(c) The first sentence of the fourth paragraph of Section
2.02 of the Indenture is hereby amended to read as follows:
"Upon compliance by the Company with the provisions of the
preceding paragraphs of this Section 2.02, the Trustee shall, upon
receipt of the Company Order requesting such action, (1) authenticate
Notes for original issuance in an aggregate principal amount not to
exceed $180,000,000 in the form of a Global Note or (2) authenticate
Exchange Notes or Private Exchange Notes for issuance in exchange for
a like principal amount of Notes."
(d) Article II of the Indenture is hereby amended by
adding the following Sections:
Section 2.16 Restrictive Legend. Each Note that constitutes
a Restricted Security shall bear the following legend (the "Private Placement
Legend") on the face thereof until after the second anniversary of the later of
the date of issuance of such note and the last date on which the Company or any
Affiliate of the Company was the owner of such Note (or any predecessor
security) (or such shorter period of time as, in the opinion of counsel, is
permitted by Rule 144(k) under the Securities Act or any successor provision
thereunder) (or such longer period of time as may be required under the
Securities Act or applicable state securities laws in the opinion of counsel
for the Company, unless otherwise agreed by the Company and the Holder
thereof):
3
<PAGE> 5
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH BELOW. BY ITS
ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) OR (B) IT IS AN "ACCREDITED INVESTOR" (AS DEFINED IN
RULE 501(a)(1), (2), (3), OR (7) UNDER THE SECURITIES ACT) (AN
"ACCREDITED INVESTOR"), OR (C) IT IS NOT A U.S. PERSON AND IS
ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH
RULE 904 UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT PRIOR
TO THE DATE THAT IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE
DATE AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATED PERSON
OF THE COMPANY WAS THE OWNER OF THIS SECURITY RESELL OR OTHERWISE
TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY
THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL
BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C)
INSIDE THE UNITED STATES TO AN ACCREDITED INVESTOR THAT, PRIOR TO SUCH
TRANSFER, FURNISHES (OR HAS FURNISHED ON ITS BEHALF BY A U.S.
BROKER-DEALER) TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON
TRANSFER OF THIS SECURITY (THE FORM OF WHICH LETTER CAN BE OBTAINED
FROM THE TRUSTEE FOR THIS SECURITY), (D) OUTSIDE THE UNITED STATES IN
AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE
SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION
PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), OR (F)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS
SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS
LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS SECURITY PRIOR TO THE
DATE THAT IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE AND
THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATED PERSON OF THE
COMPANY WAS THE OWNER OF THIS SECURITY, IF THE PROPOSED TRANSFEREE IS
AN ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER,
FURNISH TO THE TRUSTEE AND THE COMPANY SUCH CERTIFICATIONS, LEGAL
OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE
TO CONFIRM THAT
4
<PAGE> 6
SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION,"
"UNITED STATES" AND "U.S. PERSON" HAVE THE MEANING GIVEN TO THEM BY
REGULATION S UNDER THE SECURITIES ACT.
Section 2.17 Special Transfer Provisions
(a) Transfers to Non-QIB Institutional Accredited
Investors and Non-U.S. Persons. The following provisions shall apply with
respect to the registration of any proposed transfer of a Note constituting a
Restricted Security to any Institutional Accredited Investor which is not a QIB
or to any Non-U.S. Person:
(i) the Registrar shall register the transfer of any
Note constituting a Restricted Security, whether or not such Note
bears the Private Placement Legend, if (x) the date of the requested
transfer is after the second anniversary of the Issue Date (provided,
however, that neither the Company nor any Affiliate of the Company
has, to the best of the Trustee's knowledge, held any beneficial
interest in such Note, or portion thereof, at any time on or prior to
the second anniversary of the Issue Date) or (y) (1) in the case of a
transfer to an Institutional Accredited Investor which is not a QIB
(excluding Non-U.S. Persons), the proposed transferee has delivered to
the Registrar a certificate substantially in the form of Exhibit D
hereto or (2) in the case of a transfer to a Non-U.S. Person, the
proposed transferor has delivered to the Registrar a certificate
substantially in the form of Exhibit E hereto; and
(ii) if the proposed transferee is a member of, or
participant in, the Depositary (an "Agent Member") and the Notes to be
transferred consist of Certificated Notes which after transfer are to
be evidenced by an interest in the IAI Global Note or Regulation S
Global Note, as the case may be, upon receipt by the Registrar of (x)
written instructions given in accordance with the Depositary's and the
Registrar's procedures and (y) the appropriate certificate, if any,
required by clause (y) of paragraph (i) above, the Registrar shall
register the transfer and reflect on its books and records the date
and an increase in the principal amount of the IAI Global Note or
Regulation S Global Note, as to case may be, in an amount equal to the
principal amount of Certificated Notes to be transferred, and the
Trustee shall cancel the Certificated Notes so transferred; and
(iii) if the proposed transferor is an Agent Member
seeking to transfer an interest in a Global Note, upon receipt by the
Registrar of (x) written instructions given in accordance with the
Depositary's and the Registrar's procedures and (y) the appropriate
certificate, if any, required by clause (y) of paragraph (i) above,
the Registrar shall register the transfer and reflect on its books and
records the date and (A) a decrease in the principal amount of the
Global Note from which such interests are to be transferred in an
amount
5
<PAGE> 7
equal to the principal amount of the Notes to be transferred and (B)
an increase in the principal amount of the IAI Global Note or the
Regulation S Global Note, as the case may be, in an amount equal to
the principal amount of the Notes to be transferred.
(b) Transfers to QIBs. The following provisions shall
apply with respect to the registration of any proposed transfer of a Note
constituting a Restricted Security to a QIB (excluding transfers to Non-U.S.
Persons):
(i) the Registrar shall register the transfer if such
transfer is being made by a proposed transferor who has checked the
box provided for on the form of Note stating, or has otherwise advised
the Company and the Registrar in writing, that the sale has been made
in compliance with the provisions of Rule 144A to a transferee who has
signed the certification provided for on the form of Note stating, or
has otherwise advised the Company and the Registrar in writing, that
it is purchasing the Note for its own account or an account with
respect to which it exercises sole investment discretion and that it
and any such account is a QIB within the meaning of Rule 144A, and is
aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the
Company as it has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the
transferor is relying upon its foregoing representations in order to
claim the exemption from registration provided by Rule 144A; and
(ii) if the proposed transferee is an Agent Member, and
the Notes to be transferred consist of Certificated Notes which after
transfer are to be evidenced by an interest in a 144A Global Note,
upon receipt by the Registrar of written instructions given in
accordance with the Depositary's and the Registrar's procedures, the
Registrar shall reflect on its books and records the date and an
increase in the principal amount of such 144A Global Note in an amount
equal to the principal amount of the Certificated Notes to be
transferred, and the Trustee shall cancel the Certificated Notes so
transferred; and
(iii) if the proposed transferor is an Agent Member
seeking to transfer an interest in the IAI Global Note or the
Regulation S Global Note, upon receipt by the Registrar of written
instructions given in accordance with the Depositary's and the
Registrar's procedures, the Registrar shall register the transfer and
reflect on its books and records the date and (A) a decrease in the
principal amount of the IAI Global Note or the Regulation S Global
Note, as the case may be, in an amount equal to the principal amount
of the Notes to be transferred and (B) an increase in the principal
amount of the 144A Global Note in an amount equal to the principal
amount of the Notes to be transferred.
(c) Restrictions on Transfer and Exchange of Global
Notes. Notwithstanding any other provisions of this Indenture, a Global Note
may not be transferred as a whole except by the Depositary to a nominee of the
Depositary or by a nominee of the Depositary to the Depositary or any such
nominee to a successor Depositary or a nominee of such successor Depositary.
6
<PAGE> 8
(d) Private Placement Legend. Upon the transfer,
exchange or replacement of Notes not bearing the Private Placement Legend, the
Registrar shall deliver Notes that do not bear the Private Placement Legend.
Upon the transfer, exchange or replacement of Notes bearing the Private
Placement Legend, the Registrar shall deliver only Notes that bear the Private
Placement Legend unless (i) the requested transfer is after the second
anniversary of the Issue Date (provided, however, that neither the Company nor
any Affiliate of the Company has, to the best of the Trustee's knowledge, held
any beneficial interest in such Note, or portion thereof, at any time prior to
or on the third anniversary of the Issue Date), or (ii) there is delivered to
the Registrar an Opinion of Counsel reasonably satisfactory to the Company and
the Trustee to the effect that neither such legend nor the related restrictions
on transfer are required in order to maintain compliance with the provisions of
the Securities Act.
(e) General. By its acceptance of any Note bearing the
Private Placement Legend, each Holder of such a Note acknowledges the
restrictions on transfer of such Note set forth in this Indenture and in the
Private Placement Legend and agrees that it will transfer such Note only as
provided in this Indenture.
The Registrar shall retain copies of all letters, notices and
other written communications received pursuant to this Section 2.17. The
Company shall have the right to inspect and make copies of all such letters,
notices or other written communications at any reasonable time during the
Registrar's normal business hours upon the giving of reasonable written notice
to the Registrar.
(f) Transfers of Notes Held by Affiliates. Any
certificate (i) evidencing a Note that has been transferred to an Affiliate of
the Company within two years after the Issue Date, as evidenced by a notation
on the Assignment Form for such transfer or in the representation letter
delivered in respect thereof or (ii) evidencing a Note that has been acquired
from an Affiliate (other than by an Affiliate) in a transaction or a chain of
transactions not involving any public offering, shall, until two years after
the last date on which the Company or any Affiliate of the Company was an owner
of such Note, in each case, bear a legend in substantially the form set forth
in Section 2.16 hereof, unless otherwise agreed by the Company (with written
notice thereof to the Trustee).
(g) Exhibit D and Exhibit E hereto are hereby made
Exhibits to the Indenture.
ARTICLE TWO
(a) Except as expressly amended hereby, the Indenture is
in all respects ratified and confirmed and all the terms, conditions and
provisions thereof shall remain in full force and effect.
All provisions of this First Supplemental Indenture shall be
deemed to be incorporated in, and made a part of the Indenture and the
Indenture as supplemented by this First
7
<PAGE> 9
Supplemental Indenture shall be read, taken and construed as one and the same
instrument for all purposes.
(b) The Trustee accepts the trusts created by the
Indenture, as supplemented by this First Supplemental Indenture, and agrees to
perform the same upon the terms and subject to the conditions in the Indenture.
The Trustee shall not be responsible in any manner whatsoever for or in respect
of the validity or sufficiency of this First Supplemental Indenture, or the due
execution hereof by the Company, or for or in respect of the recitals hereof,
all of which recitals are made by the Company solely.
(c) This First Supplemental Indenture may be executed in
any number of counterparts, each of which so executed shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed as of the day and year first above
written.
COSTILLA ENERGY, INC.
By: /s/ Bobby W. Page
---------------------------------------
Name: Bobby W. Page
Title: Senior Vice President
STATE STREET BANK AND TRUST
COMPANY
By: /s/ Daniel Golden
---------------------------------------
Trust Officer
<PAGE> 10
EXHIBIT A
Form of Certificate To Be
Delivered in Connection with
Transfers to Non-QIB Accredited Investors
[ ], [ ]
STATE STREET BANK AND TRUST COMPANY
[ ]
[ ]
Attention: Corporate Trust Dept.
Re: COSTILLA ENERGY, INC. (the "Company")
10 1/4% Senior Notes due 2006 (the "Notes")
Ladies and Gentlemen:
In connection with our proposed purchase of 10 1/4% Senior
Notes due 2006 (the "Notes") of COSTILLA ENERGY, INC. (the "Company"), we
confirm that:
1. We understand that any subsequent transfer of the
Notes is subject to certain restrictions and conditions set forth in
the indenture relating to the Notes (the "Indenture") and the
undersigned agrees to be bound by, and not to resell, pledge or
otherwise transfer the Notes except in compliance with, such
restrictions and conditions and the Securities Act of 1933, as amended
(the "Securities Act"), and all applicable State securities laws.
2. We understand that the offer and sale of the Notes
have not been registered under the Securities Act, and that the Notes
may not be offered or sold within the United States or to, or for the
account or benefit of, U.S. persons except as permitted in the
following sentence. We agree, on our own behalf and on behalf of any
accounts for which we are acting as hereinafter stated, that if we
should sell any Notes, we will do so only (i) to the Company or any
subsidiary thereof, (ii) inside the United States in accordance with
Rule 144A under the Securities Act to a "qualified institutional
buyer" (as defined in Rule 144A promulgated under the Securities Act)
that, prior to such transfer, furnishes (or has furnished on its
behalf by a U.S. broker-dealer) to the Trustee (as defined in the
Indenture) a signed letter containing certain representations and
agreements relating to the restrictions on transfer of the Notes (the
form of which letter can be obtained from the Trustee), (iii) outside
the United States in accordance with Rule 904 of Regulation S
promulgated under the Securities Act (provided that any such sale or
transfer in Canada or to or for the benefit
A1
<PAGE> 11
of a Canadian resident must be effected pursuant to an exemption from
the prospectus and registration requirements under applicable Canadian
securities laws), (iv) pursuant to the exemption from registration
provided by Rule 144 under the Securities Act (if available), or (v)
pursuant to an effective registration statement under the Securities
Act, and we further agree to provide to any person purchasing any of
the Notes from us a notice advising such purchaser that resales of the
Notes are restricted as stated herein.
3. We understand that, on any proposed resale of any
Notes, we will be required to furnish to the Trustee, the Company such
certification, legal opinions and other information as the Trustee and
the Company may reasonably require to confirm that the proposed sale
complies with the foregoing restrictions. We further understand that
the Notes purchased by us will bear a legend to the foregoing effect.
4. We are an institutional "accredited investor" (as
defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the
Securities Act) and have such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and
risks of our investment in the Notes, and we and any accounts for
which we are acting are each able to bear the economic risk of our or
their investment, as the case may be.
5. We are acquiring the Notes purchased by us for our
account or for one or more accounts (each of which is an institutional
"accredited investor") as to each of which we exercise sole investment
discretion.
A2
<PAGE> 12
You, the Company, the Trustee and others are entitled to rely
upon this letter and are irrevocably authorized to produce this letter or a
copy hereof to any interested party in any administrative or legal proceeding
or official inquiry with respect to the matters covered hereby.
Very truly yours,
[Name of Transferee]
By:
-----------------------------------
Name:
Title:
<PAGE> 13
EXHIBIT B
Form of Certificate To Be Delivered
in Connection with Transfers
Pursuant to Regulation S
[ ], [ ]
STATE STREET BANK AND TRUST COMPANY
[ ]
[ ]
Attention: Corporate Trust Dept.
Re: COSTILLA ENERGY, INC. (the "Company")
10 1/4% Senior Notes due 2004 (the "Notes")
Ladies and Gentlemen:
In connection with our proposed sale of $[ ]
aggregate principal amount of the Notes, we confirm that such sale has been
effected pursuant to and in accordance with Regulation S under the U.S.
Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we
represent that:
(1) the offer of the Notes was not made to a person in
the United States;
(2) either (a) at the time the buy offer was originated,
the transferee was outside the United States or we and any person
acting on our behalf reasonably believed that the transferee was
outside the United States, or (b) the transaction was executed in, on
or through the facilities of a designated offshore securities market
and neither we nor any person acting on our behalf knows that the
transaction has been prearranged with a buyer in the United States;
(3) no directed selling efforts have been made in the
United States in contravention of the requirements of Rule 903(b) or
Rule 904(b) of Regulation S, as applicable;
(4) the transaction is not part of a plan or scheme to
evade the registration requirements of the Securities Act; and
(5) we have advised the transferee of the transfer
restrictions applicable to the Notes.
B1
<PAGE> 14
You, the Company and counsel for the Company are entitled to
rely upon this letter and are irrevocably authorized to produce this letter or
a copy hereof to any interested party in any administrative or legal
proceedings or official inquiry with respect to the matters covered hereby.
Terms used in this certificate have the meanings set forth in Regulation S.
Very truly yours,
[Name of Transferee]
By:
-----------------------------------
Authorized Signatory
B2
<PAGE> 1
Exhibit 4.4
COSTILLA ENERGY, INC.
No.
CUSIP No. 22161GAB9
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH BELOW. BY ITS
ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) OR (B) IT IS AN "ACCREDITED INVESTOR" (AS DEFINED IN
RULE 501(a)(1), (2), (3), OR (7) UNDER THE SECURITIES ACT) (AN
"ACCREDITED INVESTOR"), OR (C) IT IS NOT A U.S. PERSON AND IS
ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH
RULE 904 UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT PRIOR
TO THE DATE THAT IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE
DATE AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATED PERSON
OF THE COMPANY WAS THE OWNER OF THIS SECURITY RESELL OR OTHERWISE
TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY
THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL
BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C)
INSIDE THE UNITED STATES TO AN ACCREDITED INVESTOR THAT, PRIOR TO SUCH
TRANSFER, FURNISHES (OR HAS FURNISHED ON ITS BEHALF BY A U.S.
BROKER-DEALER) TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON
TRANSFER OF THIS SECURITY (THE FORM OF WHICH LETTER CAN BE OBTAINED
FROM THE TRUSTEE FOR THIS SECURITY), (D) OUTSIDE THE UNITED STATES IN
AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE
SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION
PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), OR (F)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS
SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS
LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS SECURITY PRIOR TO THE
DATE THAT IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE AND
THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATED PERSON OF THE
COMPANY WAS THE OWNER OF THIS
<PAGE> 2
SECURITY, IF THE PROPOSED TRANSFEREE IS AN ACCREDITED INVESTOR, THE
HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE
COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS
EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS
BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS
USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND
"U.S. PERSON" HAVE THE MEANING GIVEN TO THEM BY REGULATION S UNDER THE
SECURITIES ACT.
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO.
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY TO COSTILLA ENERGY, INC. OR THE REGISTRAR FOR
REGISTRATION OF TRANSFER OR EXCHANGE AND ANY NOTE ISSUED IS REGISTERED
IN THE NAME OF CEDE & CO. OR SUCH OTHER ENTITY AS HAS BEEN REQUESTED
BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND
ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS
HAS BEEN REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFER OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE,
AND NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A
SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF
INTERESTS IN THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN
ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.06 OF THE
INDENTURE, DATED AS OF OCTOBER 1, 1996, AS AMENDED BY THE FIRST
SUPPLEMENTAL INDENTURE DATED AS OF JANUARY 16, 1998, BETWEEN COSTILLA
ENERGY, INC. AND THE TRUSTEE NAMED THEREIN, PURSUANT TO WHICH THIS
NOTE WAS ISSUED.
<PAGE> 3
GLOBAL NOTE
REPRESENTING 10 1/4% SENIOR NOTES DUE 2006
Costilla Energy, Inc., a Delaware corporation, for value
received, hereby promises to pay to CEDE & CO., or its registered assigns, the
principal sum indicated on Schedule A hereof, on October 1, 2006.
Reference is hereby made to the further provisions of this
Note set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof by manual signature,
this Note shall not be entitled to any benefit under the Indenture or be valid
or obligatory for any purposes.
IN WITNESS WHEREOF, the Company has caused this Note to be
duly executed under its corporate seal.
COSTILLA ENERGY, INC.
By:
Name:
Title:
[Corporate Seal]
Attest:
By:
Name:
Title:
Dated:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
STATE STREET BANK AND TRUST COMPANY,
as Trustee, certifies that this
is one of the Notes referred to
in the Indenture.
By:
Authorized Signatory
<PAGE> 4
REVERSE SIDE OF GLOBAL NOTE
COSTILLA ENERGY, INC.
GLOBAL NOTE
REPRESENTING 10 1/4% SENIOR NOTES DUE 2006
i. Indenture.
This Note is one of a duly authorized issue of debt securities
of the Company (as defined below) designated as its "10 1/4% Senior Notes due
2006" (herein called the "Notes") limited in aggregate principal amount to
$80,000,000, issued under an indenture dated as of October 1, 1996, as amended
by the First Supplemental Indenture dated as of January 16, 1998 (as amended or
supplemented from time to time, the "Indenture") between the Company, certain
subsidiaries of the Company and State Street Bank and Trust Company, as trustee
(the "Trustee," which term includes any successor Trustee under the Indenture),
to which Indenture reference is hereby made for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the Company,
subsidiaries of the Company that have guaranteed the payment of the Notes (the
"Subsidiary Guarantors"), the Trustee and each Holder of Notes and of the terms
upon which the Notes are, and are to be, authenticated and delivered. The
summary of the terms of this Note contained herein does not purport to be
complete and is qualified by reference to the Indenture. All terms used in
this Note which are not defined herein shall have the meanings assigned to them
in the Indenture.
The Indenture restricts, among other things, the Company's and
its Subsidiaries' ability to incur additional indebtedness and issue preferred
stock, incur liens, pay dividends or make certain other restricted payments,
apply net proceeds from certain asset sales, enter into certain transactions
with affiliates, incur indebtedness, merge or consolidate with any other
person, sell stock of Subsidiaries or sell, assign, transfer, lease, convey or
otherwise dispose of substantially all of the assets of the Company. The
Indenture permits, under certain circumstances, Subsidiaries of the Company to
be deemed Unrestricted Subsidiaries and thus not subject to the restrictions of
the Indenture.
ii. Principal and Interest.
Costilla Energy, Inc., a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company"), promises to pay the principal
amount set forth on Schedule A of this Note to the Holder hereof on October 1,
2006.
<PAGE> 5
The Company shall pay interest on this Note at a rate of 10
1/4% per annum semiannually in arrears on April 1, and October 1, of each year,
commencing on April 1, 1998, to the Holder hereof until the principal amount
hereof is paid or duly provided for. Interest shall accrue from the original
issue date or from the most recent Interest Payment Date thereafter to which
interest has been paid or duly provided for. The interest so payable, and
punctually paid or duly provided for, on any Interest Payment Date will,
subject to certain exceptions provided in the Indenture, be paid to the Person
in whose name this Note (or the Note in exchange or substitution for which this
Note was issued) is registered at the close of business on the Record Date for
interest payable on such Interest Payment Date. The Record Date for any
interest payment is the close of business on March 15, or September 15, as the
case may be, whether or not a Business Day, immediately preceding the Interest
Payment Date on which such interest is payable. Any such interest not so
punctually paid or duly provided for ("Defaulted Interest") shall forthwith
cease to be payable to the Holder on such Record Date and shall be paid as
provided in Section 2.11 of the Indenture. Interest will be computed on the
basis of a 360-day year of twelve 30-day months.
Each payment of interest in respect of an Interest Payment
Date will include interest accrued through the day before such Interest Payment
Date. If an Interest Payment Date falls on a day that is not a Business Day,
the interest payment to be made on such Interest Payment Date will be made on
the next succeeding Business Day with the same force and effect as if made on
such Interest Payment Date, and no additional interest will accrue as a result
of such delayed payment.
To the extent lawful, the Company shall pay interest on
overdue principal, overdue premium, and Defaulted Interest (without regard to
any applicable grace period), at the interest rate borne on the Notes. The
Company's obligation pursuant to the previous sentence shall apply whether such
overdue amount is due at its Stated Maturity, as a result of the Company's
obligations pursuant to Section 3.05, Section 4.07 or Section 4.08 of the
Indenture, or otherwise.
iii. Method of Payment.
The Company, through the Paying Agent, shall pay interest on
this Note to the registered Holder of this Note, as provided above. The Holder
must surrender this Note to a Paying Agent to collect principal payments. The
Company will pay principal, premium, if any, and interest in money of the
United States of America that at the time of payment is legal tender for
payment of all debts public and private. Principal, premium, if any, and
interest will be payable at the office of the Paying Agent but, at the option
of the Company, interest may be paid by check mailed to the registered Holders
at their registered addresses; provided that all payments with respect to Notes
the Holders of which have given wire transfer instructions to the Company will
be required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof.
iv. Paying Agent and Registrar.
<PAGE> 6
0 Initially, the Trustee will act as Paying Agent and Registrar
under the Indenture. The Company may, upon written notice to the Trustee,
appoint and change any Paying Agent or Registrar. The Company or any of its
subsidiaries may act as Paying Agent or Registrar.
v. Optional Redemption.
The Notes may not be redeemed at the Company's option prior to
October 1, 2001. Thereafter, the Notes will be subject to redemption at the
option of the Company, in whole or in part, upon not less than 30 calendar
days' nor more than 60 calendar days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued
and unpaid interest thereon (if any) to the applicable Redemption Date, if
redeemed during the twelve-month period beginning on October 1 of the years
indicated below:
<TABLE>
Year Percentage
---- ----------
<S> <C>
2001 105.125%
2002 103.417%
2003 101.708%
2004 and thereafter 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or before
October 1, 1999, the Company may (but shall not have the obligation to) redeem
up to $30.0 million in aggregate principal amount of the Notes and Existing
Notes (as defined in the Indenture) at a redemption price of 110.25% of the
principal amount thereof, plus accrued and unpaid interest thereon to the
Redemption Date, with the net proceeds of an Equity Offering made by the
Company; provided that at least $150.0 million in aggregate principal amount of
Notes and Existing Notes remains outstanding immediately after the occurrence
of such redemption.
The Notes are not subject to any sinking fund.
vi. Notice of Redemption.
At least 30 calendar days but not more than 60 calendar days
before a Redemption Date, the Company will send a notice of redemption,
first-class mail, postage prepaid, to Holders of Notes to be redeemed at the
addresses of such Holders as they appear in the Security Register.
If less than all of the Notes are to be redeemed at any time,
the Notes to be redeemed will be chosen by the Trustee in accordance with the
Indenture. If any Note is redeemed subsequent to a Record Date with respect to
any Interest Payment Date specified above and on or prior to such Interest
Payment Date, then any accrued interest will be paid on such Interest Payment
Date to the Holder of the Note at the close of business on such Record Date.
If money in an amount sufficient to pay the Redemption Price of all Notes (or
portions thereof) to be redeemed on the Redemption Date is deposited with the
Paying Agent on or before the applicable
<PAGE> 7
Redemption Date and certain other conditions are satisfied, interest on the
Notes or portions thereof to be redeemed on the applicable Redemption Date will
cease to accrue.
vii. Repurchase at the Option of Holders upon Change of
Control.
Upon the occurrence of a Change of Control, each Holder of
Notes shall have the right to require the Company to purchase such Holder's
Notes, in whole or in part, in a principal amount that is an integral multiple
of $1,000, pursuant to a Change of Control Offer, at a purchase price in cash
equal to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest thereon to the Change of Control Payment Date.
Within 30 calendar days following any Change of Control, the
Company shall send, or cause to be sent, by first-class mail, postage prepaid,
a notice regarding the Change of Control Offer to each Holder of Notes. The
Holder of this Note may elect to have this Note or a portion hereof in an
authorized denomination purchased by completing the form entitled "Option of
Holder to Elect Purchase" appearing below and tendering this Note pursuant to
the Change of Control Offer. Unless the Company defaults in the payment of the
Change of Control Purchase Price with respect thereto, all Notes or portions
thereof accepted for payment pursuant to the Change of Control Offer will cease
to accrue interest from and after the Change of Control Payment Date.
viii. Repurchase at the Option of Holders upon Asset Sale.
If at any time the Company or any Subsidiary engages in any
Asset Sale, the Company shall, within 30 calendar days of the date the amount
of Excess Proceeds exceeds $5.0 million, use the then-existing Excess Proceeds
to make an offer to purchase from all Holders, on a pro rata basis, Notes in an
aggregate principal amount equal to the maximum principal amount that may be
purchased out of the then-existing Excess Proceeds, at a purchase price in cash
in an amount equal to 100% of the principal amount thereof plus accrued and
unpaid interest thereon, if any, to the Asset Sale Payment Date. Upon
completion of an Asset Sale Offer (including payment of the Asset Sale Purchase
Price for accepted Notes), any surplus Excess Proceeds that were the subject of
such offer shall cease to be Excess Proceeds, and the Company may then use such
amounts for general corporate purposes.
Within 30 calendar days of the date the amount of Excess
Proceeds exceeds $5.0 million, the Company shall send, or cause to be sent, by
first-class mail, postage prepaid, a notice regarding the Asset Sale Offer to
each Holder of Notes. The Holder of this Note may elect to have this Note or a
portion hereof in an authorized denomination purchased by completing the form
entitled "Option of Holder to Elect Purchase" appearing below and tendering
this Note pursuant to the Asset Sale Offer. Unless the Company defaults in the
payment of the Asset Sale Purchase Price with respect thereto, all Notes or
portions thereof selected for payment pursuant to the Asset Sale Offer will
cease to accrue interest from and after the Asset Sale Payment Date.
<PAGE> 8
ix. The Global Note.
So long as this Global Note is registered in the name of the
Depositary or its nominee, members of, or participants in, the Depositary
("Agent Members") shall have no rights under the Indenture with respect to this
Global Note held on their behalf by the Depositary or the Trustee as its
custodian, and the Depositary may be treated by the Company, the Trustee and
any agent of the Company or the Trustee as the absolute owner of this Global
Note for all purposes. Notwithstanding the foregoing, nothing herein shall (i)
prevent the Company, the Trustee or any agent of the Company or the Trustee,
from giving effect to any written certification, proxy or other authorization
furnished by the Depositary or (ii) impair, as between the Depositary and its
Agent Members, the operation of customary practices governing the exercise of
the rights of a Holder of Notes.
The Holder of this Global Note may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests in this Global Note through Agent Members, to take any action which a
Holder of Notes is entitled to take under the Indenture or the Notes.
Whenever, as a result of optional redemption by the Company, a
Change of Control Offer, an Asset Sale Offer or an exchange for Certificated
Notes, this Global Note is redeemed, repurchased or exchanged in part, this
Global Note shall be surrendered by the Holder thereof to the Trustee who shall
cause an adjustment to be made to Schedule A hereof so that the principal
amount of this Global Note will be equal to the portion not redeemed,
repurchased or exchanged and shall thereafter return this Global Note to such
Holder; provided that this Global Note shall be in a principal amount of $1,000
or an integral multiple of $1,000.
x. Transfer and Exchange.
The Holder of this Global Note shall, by acceptance of this
Global Note, agree that transfers of beneficial interests in this Global Note
may be effected only through a book entry system maintained by such Holder (or
its agent), and that ownership of a beneficial interest in the Notes
represented thereby shall be required to be reflected in book entry form.
Transfers of this Global Note shall be limited to transfers in
whole and not in part, to the Depositary, its successors, and their respective
nominees. Interests of beneficial owners in this Global Note shall be
transferred in accordance with the rules and procedures of the Depositary (or
its successors).
This Global Note shall be exchanged by the Company for one or
more Certificated Notes if (a) the Depositary (i) has notified the Company that
it is Unwilling or unable to continue as, or ceases to be, a clearing agency
registered under Section 17A of the Exchange Act and (ii) a successor to the
Depositary registered as a clearing agency under Section 17A of the Exchange
Act is not able to be appointed by the Company within 90 calendar days or (b)
the Depositary is
<PAGE> 9
at any time unwilling or unable to continue as Depositary and a successor to
the Depositary is not able to be appointed by the Company within 90 calendar
days. If an Event of Default occurs and is continuing, the Company shall, at
the request of the Holder hereof, exchange all or part of this Global Note for
one or more Certificated Notes; provided that the principal amount of each of
such Certificated Notes and this Global Note, after such exchange, shall be
$1,000 or an integral multiple thereof. Whenever this Global Note is exchanged
as a whole for one or more Certificated Notes, it shall be surrendered by the
Holder to the Trustee for cancellation. Whenever this Global Note is exchanged
in part for one or more Certificated Notes, it shall be surrendered by the
Holder to the Trustee and the Trustee shall make the appropriate notations
hereon pursuant to Section 2.05(c) of the Indenture. All Certificated Notes
issued in exchange for this Global Note or any portion hereof shall be
registered in such names, and delivered, as the Depositary shall instruct the
Trustee.
The Holder of this Note shall have the right to obtain from
the Company the information specified in Section 4.16 of the Indenture.
xi. Denominations.
The Notes are issuable only in registered form without coupons
in denominations of $1,000 and integral multiples thereof of principal amount.
xii. Unclaimed Money.
If money for the payment of principal, premium, if any, or
interest remains unclaimed for two years, the Trustee or Paying Agent shall pay
the money back to the Company at its request unless an abandoned property law
designates another Person. After any such payment, Holders entitled to the
money must look only to the Company and not to the Trustee for payment unless
such abandoned property law designates another Person.
xiii. Discharge and Defeasance.
Subject to certain conditions, the Company at any time may
terminate some or all of its obligations under the Notes and the Indenture if
the Company irrevocably deposits with the Trustee money or U.S. Government
Obligations for the payment of principal, premium, if any, and interest on the
Notes to redemption or maturity, as the case may be.
xiv. Amendment, Waiver.
Subject to certain exceptions set forth in the Indenture, (i)
the Indenture, the Subsidiary Guarantees or the Notes may be amended with the
written consent of the Holders of at least a majority in principal amount of
the outstanding Notes and (ii) any past Default and its consequences may be
waived with the written consent of the Holders of at least a majority in
principal amount of the outstanding Notes. Subject to certain exceptions set
forth in the Indenture
<PAGE> 10
and the Subsidiary Guarantees, without the consent of any Holder of Notes, the
Company, the Subsidiary Guarantors and the Trustee may amend the Indenture, the
Subsidiary Guarantees or the Notes (i) to evidence the succession of another
Person to (A) the Company and the assumption by such successor of the covenants
of the Company under the Indenture and contained in the Notes or (B) a
Subsidiary Guarantor and the assumption by such successor of the covenants of
such Subsidiary Guarantor contained in its Subsidiary Guarantee; (ii) to add
additional covenants or to surrender rights and powers conferred on the Company
or any Subsidiary; (iii) to add any additional Events of Default; (iv) to
provide for uncertificated Notes in addition to or in place of Certificated
Notes; (v) to evidence and provide for the acceptance of appointment under the
Indenture of a successor Trustee; (vi) to secure the Notes or the Subsidiary
Guarantees; (vii) to cure any ambiguity in the Indenture or the Subsidiary
Guarantees, to correct or supplement any provision in the Indenture or the
Subsidiary Guarantees which may be inconsistent with any other provision
therein or to add any other provisions with respect to matters or questions
arising under the Indenture, provided that such actions shall not adversely
affect the interests of the Holders in any material respect; (viii) to comply
with the requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act; or (ix) to
release any Subsidiary Guarantor pursuant to the Indenture.
xv. Defaults and Remedies.
If an Event of Default occurs and is continuing, the Trustee
or the Holders of at least 25% in principal amount of the Notes, subject to
certain limitations, may declare all the Notes to be immediately due and
payable. Certain events of bankruptcy or insolvency are Events of Default and
shall result in the Notes being immediately due and payable upon the occurrence
of such Events of Default without any further act of the Trustee or any Holder.
Holders of Notes may not enforce the Indenture or the Notes
except as provided in the Indenture. The Trustee may refuse to enforce the
Indenture or the Notes unless it receives reasonable indemnity or security.
Subject to certain limitations, Holders of a majority in principal amount of
the Notes may direct the Trustee in its exercise of any trust or power under
the Indenture. The Holders of a majority in principal amount of the then
outstanding Notes, by written notice to the Trustee, may rescind any
declaration of acceleration and its consequences if the rescission would not
conflict with any judgment or decree, and if a Events of Default have been
cured or waived except nonpayment of principal, interest or premium that has
become due solely because of the acceleration.
xvi. Subsidiary Guarantee.
Subject to the limitations set forth in the Indenture and the
Subsidiary Guarantees, the payment of principal of, premium, if any, and
interest on the Notes will be guaranteed by each Subsidiary Guarantor.
<PAGE> 11
xvii. Individual Rights of Trustee.
Subject to certain limitations imposed by the Trust Indenture
Act, the Trustee or any Paying Agent or Registrar, in its individual or any
other capacity, may become the owner or pledgee of Notes and may otherwise deal
with the Company or its Affiliates with the same rights it would have if it
were not Trustee, Paying Agent or Registrar, as the case may be, under the
Indenture.
xviii. No Recourse Against Certain Others.
No director, officer, employee, incorporator or stockholder of
the Company or any Subsidiary Guarantor, as such, shall have any liability for
any obligations of the Company or such Subsidiary Guarantor under the Notes,
the Subsidiary Guarantees or the Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation, solely by
reason of its status as a director, officer, employee, incorporator or
stockholder of the Company or any Subsidiary Guarantor. By accepting a Note,
each Holder waives and releases all such liability (but only such liability) as
part of the consideration for issuance of such Note to such Holder.
xix. Governing Law.
THE INDENTURE AND THIS NOTE SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE.
The Company will furnish to any Holder of Notes upon written
request and without charge to the Holder a copy of the Indenture which has in
it the text of this Note. Requests may be made to:
Costilla Energy, Inc.
400 West Illinois, 10th Floor
Midland, Texas 79701
Attention: Chief Financial Officer
<PAGE> 12
SCHEDULE A
SCHEDULE OF PRINCIPAL AMOUNT
The initial principal amount at maturity of this Note shall be $79,480,000.
The following decreases/increase in the principal amount at maturity of this
Note have been made:
<TABLE>
<CAPTION>
Total Principal
Amount at Notation
Decrease in Increase in Maturity Made by
Date of Principal Principal Following such or on
Decrease/ Amount at Amount at Decrease/ Behalf of
Increase Maturity Maturity Increase Trustee
- --------- ----------- ----------- -------------- ---------
<S> <C> <C> <C> <C>
- --------- ----------- ----------- ------------- ---------
- --------- ----------- ----------- ------------- ---------
- --------- ----------- ----------- ------------- ---------
- --------- ----------- ----------- ------------- ---------
- --------- ----------- ----------- ------------- ---------
</TABLE>
<PAGE> 13
ASSIGNMENT
(To be executed by the registered Holder
if such Holder desires to transfer this Note)
FOR VALUE RECEIVED ____________________ hereby sells, assigns and transfers
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAX IDENTIFYING NUMBER OF TRANSFEREE
-------------------------------------------------------------------------
(Please print name and address of transferee)
this Note, together with all right, title and interest herein, and does hereby
irrevocably constitute and appoint _____________________________ Attorney to
transfer this Note on the Security Register, with full power of substitution.
Dated:
---------------------
- ---------------------------
Signature of Holder Signature Guaranteed by an
institution member of the
Signature Guaranty Medallion
Program:
NOTICE: The signature to the foregoing Assignment must correspond to
the name as written upon the face of this Note in every
particular, without alteration or any change whatsoever.
<PAGE> 14
OPTION OF HOLDER TO ELECT PURCHASE
(check as appropriate)
[ ] In connection with the Change of Control Offer made pursuant to
Section 4.07 of the Indenture, the undersigned hereby elects to have
[ ] the entire principal amount
[ ] $_________________ ($1,000 in principal amount or an integral
multiple thereof) of this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or __________________ an amount in
cash equal to 101% of the principal amount indicated in the preceding
sentence, plus accrued and unpaid interest thereon, if any, to the
Change of Control Payment Date.
[ ] In connection with the Asset Sale Offer made pursuant to Section 4.08
of the Indenture, the undersigned hereby elects to have
[ ] the entire principal amount
[ ] $_________________ ($1,000 in principal amount or an integral
multiple thereof) of this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or ______________________ an amount
in cash equal to 100% of the principal amount indicated in the
preceding sentence, plus accrued and unpaid interest thereon, if any,
to the Asset Sale Payment Date.
Dated:
Signature of Holder Signature Guaranteed by an
institution member of the
Signature Guaranty Medallion
Program
NOTICE: The signature to the foregoing must correspond to the name as written
upon the face of this Note in every particular, without alteration or
any change whatsoever.
<PAGE> 1
Exhibit 10.16
COSTILLA ENERGY, INC.
$80,000,000
10 1/4% SENIOR NOTES DUE 2006
PURCHASE AGREEMENT
January 14, 1998
BT Alex. Brown Incorporated
Prudential Securities Incorporated
c/o BT Alex. Brown Incorporated
One Bankers Trust Plaza
130 Liberty Street
New York, New York 10006
Ladies and Gentlemen:
Costilla Energy, Inc. (the "Company"), a Delaware corporation, hereby
confirms its agreement with you (the "Initial Purchasers"), as set forth below.
1. The Securities. Subject to the terms and conditions herein
contained, the Company proposes to issue and sell to the Initial Purchasers
$80,000,000 aggregate principal amount of the Company's 10 1/4% Senior Notes
due 2006 (the "Securities"). The Securities are to be issued under an
indenture dated as of October 1, 1996, between the Company and State Street
Bank and Trust Company, as trustee (the "Trustee"), as amended by the
Supplemental Indenture to be dated as of January 16, 1998 between the Company
and the Trustee (as so amended, the "Indenture").
The Securities will be offered and sold to you without being
registered under the Securities Act of 1933, as amended (the "Act"), in
reliance on exemptions therefrom.
In connection with the sale of the Securities, the Company has
prepared a preliminary offering memorandum dated January 5 , 1998 (the
"Preliminary Memorandum") and a final offering memorandum dated January 14,
1998 (the "Final Memorandum," the Preliminary Memorandum and the Final
Memorandum each herein being referred to as a "Memorandum") setting forth or
including a description of the terms of the Securities, the terms of the
offering of the Securities, a description
<PAGE> 2
of the Company and any material developments relating to the Company occurring
after the date of the most recent historical financial statements included
therein. Unless otherwise indicated, all references herein to the Preliminary
Memorandum or the Final Memorandum shall be deemed to include any documents
filed under the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder (the "Exchange Act") which are incorporated by reference
therein. As used herein, the term "Incorporated Documents" means the documents
which at the time are incorporated by reference in the Preliminary Offering
Memorandum or the Final Memorandum or any amendment or supplement thereto.
The Initial Purchasers and their direct and indirect transferees of
the Securities will be entitled to the benefits of the Registration Rights
Agreement, substantially in the form attached hereto as Exhibit A (the
"Registration Rights Agreement"), pursuant to which the Company will agree,
among other things, to file a registration statement (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission")
registering the Exchange Notes (as defined in the Registration Rights
Agreement) under the Act.
2. Representations and Warranties of the Company. The Company
represents and warrants to and agrees with each of the Initial Purchasers that:
(a) Neither the Preliminary Memorandum as of the date
thereof nor the Final Memorandum nor any amendment or supplement
thereto as of the date thereof and at all times subsequent thereto up
to the Closing Date (as defined in Section 3 below) contained or
contains any untrue statement of a material fact or omitted or omits
to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth
in this Section 2(a) do not apply to statements or omissions made in
reliance upon and in conformity with information relating to any of
the Initial Purchasers furnished to the Company in writing by the
Initial Purchasers expressly for use in the Preliminary Memorandum,
the Final Memorandum or any amendment or supplement thereto.
(b) The Incorporated Documents heretofore filed were
filed in a timely manner and, when they were filed (or, if any
amendment with respect to any such document was filed, when such
amendment was filed), conformed in all material respects to the
requirements of the Exchange Act and did not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; and any further Incorporated Documents will, when so
filed, be filed in a timely manner and conform in all material
respects to the requirements of the Exchange Act and will not contain
an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading.
(c) As of the Closing Date, the Company will have the
authorized, issued and outstanding capitalization set forth in the
Final Memorandum (other than any changes due to the repurchase of
common stock pursuant to the Company's existing stock repurchase
2
<PAGE> 3
program and the exercise of outstanding stock options); all of the
outstanding shares of capital stock of the Company and each of its
subsidiaries (each, a "Subsidiary" and collectively, the
"Subsidiaries") have been, and as of the Closing Date will be, duly
authorized and validly issued, are fully paid and nonassessable and
were not issued in violation of any preemptive or similar rights;
except as set forth in the Final Memorandum, all of the outstanding
shares of capital stock of the Company and the Subsidiaries will be
free and clear of all liens, encumbrances, equities and claims or
restrictions on transferability (other than those imposed by the Act
and the securities or "Blue Sky" laws of certain jurisdictions) or
voting.
(d) Each of the Company and the Subsidiaries is duly
organized, validly existing and in good standing under the laws of its
jurisdiction of organization and has all requisite corporate or other
power and authority to own its properties and conduct its business as
now conducted and as described in the Final Memorandum; each of the
Company and the Subsidiaries is duly qualified to do business and is
in good standing in all other jurisdictions where the ownership or
leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified would not,
individually or in the aggregate, have a material adverse effect on
the general affairs, management, business, condition (financial or
otherwise), prospects or results of operations of the Company and the
Subsidiaries, taken as a whole (any such event, a "Material Adverse
Effect").
(e) The Company has all requisite corporate power and
authority to execute, deliver and perform each of its obligations
under the Securities, the Exchange Notes (as defined in the
Registration Rights Agreement) and the Private Exchange Notes (as
defined in the Registration Rights Agreement). The Securities, when
issued, will be in the form contemplated by the Indenture. The
Securities, the Exchange Notes and the Private Exchange Notes have
each been duly and validly authorized by the Company and, when
executed by the Company and authenticated by the Trustee in accordance
with the provisions of the Indenture and, in the case of the
Securities, when delivered to and paid for by the Initial Purchasers
in accordance with the terms of this Agreement, will have been duly
executed, issued and delivered and will constitute valid and legally
binding obligations of the Company, entitled to the benefits of the
Indenture, and enforceable against the Company in accordance with
their terms, except that the enforcement thereof may be subject to (i)
bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other similar laws now or hereafter in effect relating
to creditors' rights generally, and (ii) general principles of equity
and the discretion of the court before which any proceeding therefor
may be brought (regardless of whether such enforcement is considered
in a proceeding in equity or at law).
(f) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under the
Indenture. The Indenture has been qualified under the Trust Indenture
Act of 1939, as amended (the "TIA"). The Indenture has been duly and
validly authorized by the Company and, when executed and delivered in
accordance with
3
<PAGE> 4
its terms (assuming the due authorization, execution and delivery by
the Trustee), will have been duly executed and delivered and will
constitute a valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms, except
that the enforcement thereof may be subject to (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally and (ii)
general principles of equity and the discretion of the court before
which any proceeding therefor may be brought (regardless of whether
such enforcement is considered in a proceeding in equity or at law).
(g) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under the
Registration Rights Agreement. The Registration Rights Agreement has
been duly and validly authorized by the Company and, when executed and
delivered by the Company (assuming due authorization, execution and
delivery by the other parties thereto), will have been duly executed
and delivered and will constitute a valid and legally binding
agreement of the Company, enforceable against the Company in
accordance with its terms, except that (A) the enforcement thereof may
be subject to (i) bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights generally and (ii) general
principles of equity and the discretion of the court before which any
proceeding therefor may be brought (regardless of whether such
enforcement is considered in a proceeding in equity or at law) and (B)
any rights to indemnity or contribution thereunder may be limited by
federal and state securities laws and public policy considerations.
(h) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby.
This Agreement and the consummation by the Company of the transactions
contemplated hereby have been duly and validly authorized by the
Company. This Agreement has been duly executed and delivered by the
Company.
(i) No consent, approval, authorization or order of any
court or governmental agency or body, or third party is required for
the performance of this Agreement by the Company or the consummation
of the other transactions contemplated hereby, except such as have
been obtained and such as may be required under state securities or
"Blue Sky" laws in connection with the purchase and resale of the
Securities by the Initial Purchasers. Neither the Company nor any of
the Subsidiaries is (i) in violation of its certificate of
incorporation or bylaws, (ii) in breach or violation of any statute,
judgment, decree, order, rule or regulation applicable to any of them
or any of their respective properties or assets, except for any such
breach or violation which would not, individually or in the aggregate,
have a Material Adverse Effect, or (iii) in breach of or default under
(nor has any event occurred which, with notice or passage of time or
both, would constitute a default under) or in violation of any of the
terms or provisions of any indenture, mortgage, deed of trust, loan
agreement, note, lease, license, franchise agreement, permit,
certificate, contract or other agreement or instrument to which any of
them is a party or to which their respective
4
<PAGE> 5
properties or assets are subject (collectively, "Contracts"), except
for any such breach, default, violation or event which would not,
individually or in the aggregate, have a Material Adverse Effect.
(j) The execution, delivery and performance by the
Company of this Agreement, the Indenture, the Securities, the Exchange
Notes, the Private Exchange Notes and the Registration Rights
Agreement and the consummation of the transactions contemplated hereby
and thereby, and the fulfillment of the terms hereof and thereof, will
not conflict with or constitute or result in a breach of or a default
under (or an event which with notice or passage of time or both would
constitute a default under) or violation of or cause an acceleration
of any obligation under, or result in the imposition or creation of
(or the obligation to create or impose) a lien on any property or
assets of the Company or any Subsidiary with respect to (i) the terms
or provisions of any Contract, except for any such conflict, breach,
violation, default or event which would not, individually or in the
aggregate, have a Material Adverse Effect, (ii) the certificate of
incorporation or bylaws of the Company or any of the Subsidiaries, or
(iii) (assuming compliance with all applicable state securities or
"Blue Sky" laws and assuming the accuracy of the representations and
warranties of the Initial Purchasers in Section 8 hereof) any statute,
judgment, decree, order, rule or regulation of any court or
governmental agency or body applicable to the Company, the
Subsidiaries or any of their respective properties or assets, except
for any such conflict, breach or violation which would not,
individually or in the aggregate, have a Material Adverse Effect.
(k) Each of the Indenture, the Securities, the Exchange
Notes, the Private Exchange Notes and the Registration Rights
Agreement conforms in all material respects to the description thereof
in the Final Memorandum.
(l) The consolidated financial statements of the Company
and the related notes thereto included in the Final Memorandum present
fairly in all material respects the financial position, results of
operations and cash flows of the Company at the dates and for the
periods to which they relate and have been prepared in accordance with
generally accepted accounting principles applied on a consistent
basis, except as otherwise stated therein, and comply as to form in
all material respects with the applicable accounting requirements of
the Act and the rules and regulations thereunder. The summary and
selected financial and statistical data included in the Final
Memorandum present fairly in all material respects the information
shown therein and have been prepared and compiled on a basis
consistent with the audited financial statements included therein,
except as otherwise stated therein, and comply as to form in all
material respects with the applicable accounting requirements of the
Act and the rules and regulations thereunder. KPMG Peat Marwick LLP
is an independent public accounting firm within the meaning of the
Act.
(m) (i) The pro forma financial statements (including the
notes thereto) and other pro forma financial information included in
the Final Memorandum (A) comply as to form
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<PAGE> 6
in all material respects with the applicable requirements of
Regulation S-X promulgated under the Exchange Act, (B) have been
prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements and (C) have been properly
computed on the bases described therein, and (ii) the assumptions used
in the preparation of the pro forma financial statements and other pro
forma financial information included in the Final Memorandum are
reasonable and the adjustments used therein are appropriate to give
effect to the transactions or circumstances referred to therein.
(n) Except as described in the Final Memorandum, there is
not pending or, to the best knowledge of the Company, threatened any
action, suit, proceeding, inquiry or investigation to which the
Company is a party, or to which any of its properties or assets are
subject, before or brought by any court, arbitrator or governmental
agency or body, which, if determined adversely to the Company or any
such Subsidiary, would have a Material Adverse Effect, or which seeks
to restrain, enjoin, prevent the consummation of or otherwise
challenge the issuance or sale of the Securities to be sold hereunder
or the consummation of the other transactions described in the Final
Memorandum.
(o) Each of the Company and the Subsidiaries owns or
possesses adequate licenses or other rights to use all patents,
trademarks, service marks, trade names, copyrights and know-how
necessary to conduct the businesses now or proposed to be operated by
it as described in the Final Memorandum, and neither the Company nor
any of the Subsidiaries has received any notice of infringement of or
conflict with (or knows of no such infringement of or conflict with)
asserted rights of others with respect to any patents, trademarks,
service marks, trade names, copyrights or know-how which, if such
assertion of infringement or conflict were sustained, would,
individually or in the aggregate, have a Material Adverse Effect.
(p) Each of the Company and the Subsidiaries possesses
all licenses, permits, certificates, consents, orders, approvals and
other authorizations from, and has made or will have made all
declarations and filings with, all federal, state, local and other
governmental authorities, all self-regulatory organizations and all
courts and other tribunals presently required or necessary to own or
lease, as the case may be, and to operate its properties and to carry
on its business as now or proposed to be conducted as set forth in the
Final Memorandum ("Permits"), except where the failure to obtain such
Permits would not, individually or in the aggregate, have a Material
Adverse Effect; each of the Company and the Subsidiaries has fulfilled
and performed all of its obligations with respect to such Permits and
no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other
material impairment of the rights of the holder of any such Permit,
except for the lack of performance under, or the revocation or
termination of, any Permit which would not, individually or in the
aggregate, have a Material Adverse Effect; and neither the Company nor
any Subsidiary has received any notice of any proceeding relating to
revocation or modification of any such Permit, except
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<PAGE> 7
as described in the Final Memorandum and except where such revocation
or modification would not, individually or in the aggregate, have a
Material Adverse Effect.
(q) Since the respective dates as of which information is
given in the Final Memorandum and except as described therein, there
has been no material adverse change, or any fact known to the Company
which could reasonably be expected to result in a material adverse
change, in the general affairs, management, business, condition
(financial or otherwise) or results of operations of the Company and
its Subsidiaries taken as a whole, whether or not arising from
transactions in the ordinary course of business, or any loss of, or
damage to, properties (whether or not insured) which could reasonably
be expected to affect materially and adversely the general affairs,
management, business, condition (financial or otherwise) or results
of operations of the Company and its Subsidiaries taken as a whole.
Since the date of the latest balance sheet presented in the Final
Memorandum, except as expressly disclosed in the Final Memorandum,
neither the Company nor any of its Subsidiaries has (i) incurred or
undertaken any liabilities or obligations, direct or contingent, that
are material to the Company and its Subsidiaries taken as a whole,
(ii) entered into any material transaction not in the ordinary course
of business and consistent with past practice or (iii) declared or
paid any dividend or made any distribution on any shares of its
capital stock or redeemed, purchased or otherwise acquired or agreed
to redeem, purchase or otherwise acquire any shares of its capital
stock (other than any dividends or distributions to the Company).
(r) Each of the Company and Subsidiaries has filed all
necessary federal, state and foreign income and franchise tax returns,
except where the failure to so file such returns would not,
individually or in the aggregate, have a Material Adverse Effect, and
has paid all taxes shown as due thereon. Other than tax deficiencies
which the Company or any of the Subsidiaries is contesting in good
faith and for which the Company or such Subsidiary has provided
adequate reserves, there are no tax deficiencies that have been
asserted against the Company or any Subsidiary that would have,
individually or in the aggregate, a Material Adverse Effect.
(s) None of the Company or any of the Subsidiaries or any
agent acting on their behalf has taken or will take any action that
might cause this Agreement or the sale of the Securities to violate
Regulation G, T, U or X of the Board of Governors of the Federal
Reserve System, in each case as in effect, or as the same may
hereafter be in effect, on the Closing Date.
(t) Each of the Company and the Subsidiaries has good and
defensible title to all property (including interests in oil and gas
leases) described in the Final Memorandum as being owned by it free
and clear of all liens, charges, encumbrances or restrictions, except
as described in the Final Memorandum or to the extent the failure to
have such title or the existence of such liens, charges, encumbrances
or restrictions would not have, individually or in the aggregate, a
Material Adverse Effect. All leases (other than interests in oil and
gas
7
<PAGE> 8
leases), contracts and agreements to which the Company or any
Subsidiary is a party or by which the Company or such Subsidiary is
bound are valid and enforceable against the Company or such Subsidiary
and, to the knowledge of the Company, are valid and enforceable
against the other party or parties thereto and are in full force and
effect with only such exceptions as would not have, individually or in
the aggregate, a Material Adverse Effect.
(u) There are no legal or governmental proceedings
involving or affecting the Company, any of the Subsidiaries or any of
their respective properties or assets that would be required to be
described in a prospectus pursuant to the Act that are not described
in the Final Memorandum, nor are there any material contracts or other
documents that would be required to be described in a prospectus
pursuant to the Act that are not described in the Final Memorandum.
(v) Except as would not, individually or in the
aggregate, have a Material Adverse Effect, (A) each of the Company and
the Subsidiaries is in compliance with and not subject to liability
under applicable Environmental Laws, (B) each of the Company and the
Subsidiaries has made all filings and provided all notices required
under any applicable Environmental Law, and has in full force and
effect and is in compliance with all Permits required under any
applicable Environmental Laws, (C) there is no civil, criminal or
administrative action, suit, demand, claim, hearing, notice of
violation, investigation, proceeding, notice or demand letter or
request for information pending or, to the knowledge of the Company,
threatened against the Company or any Subsidiary under any
Environmental Law, (D) no lien, charge, encumbrance or restriction has
been recorded under any Environmental Law with respect to any assets,
facility or property owned, operated, leased or controlled by the
Company or any Subsidiary, (E) neither the Company nor any Subsidiary
has received notice that it has been identified as a potentially
responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), or any
comparable state law, and (F) no property or facility of the Company
or any Subsidiary is (i) listed or proposed for listing on the
National Priorities List under CERCLA or (ii) listed in the
Comprehensive Environmental Response, Compensation, Liability
Information System List promulgated pursuant to CERCLA, or on any
comparable list maintained by any state or local governmental
authority.
For purposes of this Agreement, "Environmental Laws" means the
common law and all applicable federal, state and local laws or
regulations, codes, orders, decrees, judgments or injunctions issued,
promulgated, approved or entered thereunder, relating to pollution or
protection of public or employee health and safety or the environment,
including, without limitation, laws relating to (i) emissions,
discharges, releases or threatened releases of hazardous materials,
into the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata), (ii)
the manufacture, processing, distribution, use, generation, treatment,
storage, disposal, transport or handling of hazardous
8
<PAGE> 9
materials, and (iii) underground and aboveground storage tanks, and
related piping, and emissions, discharges, releases or threatened
releases therefrom.
(w) There is no strike, labor dispute, slowdown or work
stoppage with the employees of the Company or the Subsidiaries which
is pending or, to the knowledge of the Company, threatened.
(x) Each of the Company and the Subsidiaries carries
insurance in such amounts and covering such risks in such amounts as
are prudent and customary in the businesses in which they are engaged.
(y) Neither the Company nor any Subsidiary has any
liability for any prohibited transaction or funding deficiency or any
complete or partial withdrawal liability with respect to any pension,
profit sharing or other plan which is subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), to which
the Company or any Subsidiary makes or ever has made a contribution
and in which any employee of the Company or any Subsidiary is or has
ever been a participant. With respect to such plans, each of the
Company and the Subsidiaries is in compliance in all material respects
with all applicable provisions of ERISA.
(z) Each of the Company and the Subsidiaries (i) makes
and keeps books and records which are accurate in all material
respects and (ii) maintains internal accounting controls which provide
reasonable assurance that (A) transactions are executed in accordance
with management's authorization, (B) transactions are recorded as
necessary to permit preparation of its financial statements and to
maintain accountability for its assets, (C) access to its assets is
permitted only in accordance with management's authorization and (D)
the reported accountability for its assets is compared with existing
assets at reasonable intervals.
(aa) Neither the Company nor any Subsidiary will be an
"investment company" or "promoter" or "principal underwriter" for an
"investment company," as such terms are defined in the Investment
Company Act of 1940, as amended, and the rules and regulations
thereunder.
(bb) No holder of securities of the Company (other than
the Registrable Notes (as defined in the Registration Rights
Agreement)) will be entitled to have such securities registered under
the registration statements required to be filed by the Company
pursuant to the Registration Rights Agreement.
(cc) Immediately after the consummation of the
transactions contemplated by this Agreement, the fair value and
present fair saleable value of the assets of each of the Company and
the Subsidiaries will exceed the sum of its stated liabilities and
identified contingent liabilities; neither the Company nor any of the
Subsidiaries is, or will be after giving effect to the execution,
delivery and performance of this Agreement and the
9
<PAGE> 10
consummation of the transactions contemplated hereby, (a) left with
unreasonably small capital with which to carry on its business as it
is proposed to be conducted, (b) unable to pay its debts (contingent
or otherwise) as they mature, or (c) otherwise insolvent.
(dd) Neither the Company nor any of the Subsidiaries nor
any of their respective Affiliates (as defined in Rule 501(b) of
Regulation D under the Act) has directly, or through any agent, (i)
sold, offered for sale, solicited offers to buy or otherwise
negotiated in respect of any "security" (as defined in the Act) which
is or could be integrated with the sale of the Securities in a manner
that would require the registration under the Act of the Securities or
(ii) engaged in any form of general solicitation or general
advertising (as those terms are used in Regulation D under the Act) in
connection with the offering of the Securities or in any manner
involving a public offering within the meaning of Section 4(2) of the
Act.
(ee) Assuming the accuracy of the representations and
warranties of the Initial Purchasers in Section 8 hereof, it is not
necessary in connection with the offer, sale and delivery of the
Securities to the Initial Purchasers in the manner contemplated by
this Agreement to register any of the Securities under the Act or to
qualify the Indenture under the TIA.
(ff) No securities of the Company are of the same class
(within the meaning of Rule 144A under the Act) as the Securities and
listed on a national securities exchange registered under Section 6 of
the Exchange Act, or quoted in a U.S. automated inter-dealer quotation
system.
(gg) Neither the Company nor any Subsidiary has taken, nor
will take, directly or indirectly, any action designed to, or that
might be reasonably expected to, cause or result in stabilization or
manipulation of the price of the Securities.
(hh) Neither the Company nor the Subsidiaries, nor any of
their respective Affiliates (as defined in Rule 501(b) of Regulation D
under the Act) or any person acting on any of their behalf (other than
the Initial Purchasers as to which the Company and the Subsidiaries
make no representation) has engaged in any directed selling efforts
(as that term is defined in Regulation S under the Act ("Regulation
S")) with respect to the Securities; the Company and its respective
Affiliates and any person acting on any of their behalf (other than
the Initial Purchasers as to which the Company and the Subsidiaries
make no representation) have complied with the offering restrictions
requirement of Regulation S.
Any certificate signed by any officer of the Company or any Subsidiary
and delivered to any Initial Purchaser or to counsel for the Initial Purchasers
shall be deemed a joint and several representation and warranty by the Company
and each of the Subsidiaries to each Initial Purchaser as to the matters
covered thereby.
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<PAGE> 11
3. Purchase, Sale and Delivery of the Securities. On the basis
of the representations, warranties, agreements and covenants herein contained
and subject to the terms and conditions herein set forth, the Company agrees to
issue and sell to the Initial Purchasers, and each of the Initial Purchasers
agrees, acting severally and not jointly, to purchase the Securities, at
100.25% of their principal amount, in the respective principal amounts set
forth opposite their names on Schedule I hereto.
One or more certificates in definitive form for the Securities that
the Initial Purchasers have agreed to purchase hereunder, and in such
denomination or denominations and registered in such name or names as the
Initial Purchasers request upon notice to the Company at least 48 hours prior
to the Closing Date, shall be delivered by or on behalf of the Company to the
Initial Purchasers, against payment by or on behalf of the Initial Purchasers
of the purchase price therefor by wire transfer of immediately available funds
payable to such account or account as the Company shall specify prior to the
Closing Date, or by such means as the parties hereto shall agree prior to the
Closing Date. Such delivery of and payment for the Securities shall be made at
the offices of Cahill Gordon & Reindel, 80 Pine Street, New York, New York, at
10:00 A.M., New York time, on January 16, 1998, or at such other place, time or
date as the Initial Purchasers and the Company may agree upon, such time and
date of delivery against payment being herein referred to as the "Closing
Date." The Company will make such certificate or certificates for the
Securities available for checking and packaging by the Initial Purchasers at
the offices of BT Alex. Brown Incorporated in New York, New York or such other
place as BT Alex. Brown Incorporated may designate, at least 24 hours prior to
the Closing Date.
4. Offering by the Initial Purchasers. The Initial Purchasers
propose to make an offering of the Securities at the price and upon the terms
set forth in the Final Memorandum as soon as practicable after this Agreement
is entered into and as in the sole judgment of the Initial Purchasers is
advisable.
5. Covenants of the Company. The Company covenants and agrees
with each of the Initial Purchasers that:
(a) The Company will not amend or supplement the Final
Memorandum or any amendment or supplement thereto of which the Initial
Purchasers and counsel to the Initial Purchasers shall not previously
have been advised and furnished a copy for a reasonable period of time
prior to the proposed amendment or supplement and as to which the
Initial Purchasers shall not have given their consent, which consent
shall not be unreasonably withheld. The Company will promptly, upon
the reasonable request of the Initial Purchasers or counsel for the
Initial Purchasers, make any amendments or supplements to the
Preliminary Memorandum or the Final Memorandum that may be necessary
or advisable in connection with the resale of the Securities by the
Initial Purchasers (but in no event longer than 180 days after the
Closing Date).
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<PAGE> 12
(b) The Company will cooperate with the Initial
Purchasers in arranging for the qualification of the Securities for
offering and sale under the securities or "Blue Sky" laws of such
jurisdictions as the Initial Purchasers may designate and will
continue such qualification in effect for as long as may be necessary
to complete the resale of the Securities by the Initial Purchasers
(but in no event longer than 180 days after the Closing Date);
provided, however, that in connection therewith the Company shall not
be required to qualify as a foreign corporation or to execute a
general consent to service of process in any jurisdiction or subject
the Company to any tax in any such jurisdiction where it is not then
so subject.
(c) If, at any time prior to the completion of the
distribution by the Initial Purchasers of the Securities or the
Private Exchange Notes, any event occurs or information becomes known
as a result of which the Final Memorandum as then amended or
supplemented would include an untrue statement of a material fact, or
omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, or if for any other reason it is necessary at any time
to amend or supplement the Final Memorandum in order to comply with
applicable law, the Company will promptly notify the Initial
Purchasers thereof and will prepare, at the Company's expense, an
amendment to the Final Memorandum that corrects such statement or
omission or effects such compliance.
(d) The Company will, without charge, provide to the
Initial Purchasers and to counsel for the Initial Purchasers as many
copies of the Preliminary Memorandum and the Final Memorandum or any
amendment or supplement thereto as the Initial Purchasers may
reasonably request.
(e) The Company will apply the net proceeds from the sale
of the Securities substantially as set forth under "Use of Proceeds"
in the Final Memorandum.
(f) For so long as any Securities remain outstanding, the
Company will upon request furnish to the Initial Purchasers copies of
all reports and other communications (financial or otherwise)
furnished by the Company to the Trustee or the holders of the
Securities and, as soon as available, copies of any reports or
financial statements furnished to or filed by the Company with the
Commission or any national securities exchange on which any class of
securities of the Company may be listed.
(g) Prior to the Closing Date, the Company will furnish
to the Initial Purchasers, as soon as they have been prepared by or
are available to the Company, a copy of any unaudited interim
consolidated financial statements of the Company for any period
subsequent to the period covered by its most recent financial
statements appearing in the Final Memorandum.
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<PAGE> 13
(h) Neither the Company nor any of its Affiliates will
sell, offer for sale or solicit offers to buy or otherwise negotiate
in respect of any "security" (as defined in the Act) that could be
integrated with the sale of the Securities in a manner that would
require the registration under the Act of the Securities.
(i) The Company will not, and will not permit any of the
Subsidiaries to, engage in any form of general solicitation or general
advertising (as those terms are used in Regulation D under the Act) in
connection with the offering of the Securities or in any manner
involving a public offering within the meaning of Section 4(2) of the
Act.
(j) For so long as any of the Securities remain
outstanding, the Company will make available, upon request, to any
holder of such Securities and any prospective purchasers thereof the
information specified in Rule 144A(d)(4) under the Act, unless the
Company is then subject to Section 13 or 15(d) of the Exchange Act.
(k) The Company will use its best efforts to (i) permit
the Securities to be designated PORTAL securities in accordance with
the rules and regulations adopted by the NASD relating to trading in
the Private Offerings, Resales and Trading through Automated Linkages
market (the "PORTAL Market") and (ii) permit the Securities to be
eligible for clearance and settlement through The Depository Trust
Company.
6. Expenses. The Company agrees to pay all costs and expenses
incident to the performance of its obligations under this Agreement, whether or
not the transactions contemplated herein are consummated or this Agreement is
terminated pursuant to Section 11 hereof, including all costs and expenses
incident to: (i) the printing, word processing or other production of
documents with respect to such transactions, including any costs of printing
the Preliminary Memorandum and the Final Memorandum and any amendments or
supplements thereto, and any "Blue Sky" memoranda, (ii) all arrangements
relating to the delivery to the Initial Purchasers of copies of the foregoing
documents, (iii) the fees and disbursements of the counsel, the accountants and
any other experts or advisors retained by the Company, (iv) the preparation
(including printing), issuance and delivery to the Initial Purchasers of any
certificates evidencing the Securities, (v) the qualification of the Securities
under state securities and "Blue Sky" laws, including filing fees and
reasonable fees and disbursements of counsel for the Initial Purchasers
relating thereto, (vi) the expenses of the Company in connection with any
meetings with prospective investors in the Securities, (vii) the fees and
expenses of the Trustee, including fees and expenses of its counsel, and (viii)
all expenses and listing fees incurred in connection with the application for
quotation of the Securities on the PORTAL Market, (ix) any fees charged by
investment rating agencies for the rating of the Securities, and (x) all
reasonable out-of-pocket expenses of the Initial Purchasers incurred in
connection with the transactions contemplated hereby.
7. Conditions of the Initial Purchasers' Obligations. The
obligation of the Initial Purchasers to purchase and pay for the Securities
shall, in their sole discretion, be subject to the satisfaction or waiver of
the following conditions on or prior to the Closing Date:
13
<PAGE> 14
(a) On the Closing Date, the Initial Purchasers shall
have received the opinion, dated as of the Closing Date and addressed
to the Initial Purchasers, of Cotton, Bledsoe, Tighe & Dawson, a
Professional Corporation, counsel for the Company, in form and
substance satisfactory to counsel for the Initial Purchasers, to the
effect that:
(i) The Company and each of the
Subsidiaries is duly organized or incorporated, validly
existing and in good standing under the laws of its
jurisdiction of incorporation and has all requisite corporate
or other power and authority to own, lease and operate its
properties and to conduct its business as described in the
Final Memorandum. Each of the Company and the Material
Subsidiaries is duly qualified as a foreign corporation or
limited liability company and in good standing in each
jurisdiction where the ownership or leasing of its properties
or the conduct of its business requires such qualification,
except where the failure to be so qualified would not have,
individually or in the aggregate, a Material Adverse Effect.
(ii) The Company has the authorized
capitalization set forth in the Final Memorandum; all of the
outstanding shares of capital stock of the Subsidiaries are
owned, directly or indirectly, by the Company, free and clear
of all perfected security interests, other than security
interests granted to the lenders under the Company's existing
secured credit facility, and, to the knowledge of such
counsel, free and clear of all other liens, encumbrances,
equities and claims or restrictions on transferability (other
than those imposed by the Act and the securities or "Blue Sky"
laws of certain jurisdictions) or voting.
(iii) No holder of securities of the Company
or any Subsidiary (other than the Registrable Notes) is
entitled to have such securities registered under a
registration statement filed by the Company pursuant to the
Registration Rights Agreement.
(iv) The Company has all requisite corporate
power and authority to execute, deliver and perform its
obligations under this Agreement and to consummate the
transactions contemplated hereby; this Agreement and the
consummation by the Company of the transactions contemplated
hereby have been duly and validly authorized by the Company.
This Agreement has been duly executed and delivered by the
Company.
(v) The Indenture (assuming the due
authorization, execution and delivery thereof by the Trustee),
constitutes the valid and legally binding agreement of the
Company, enforceable against the Company in accordance with
its terms, except that the enforcement thereof may be subject
to (i) bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws now or hereafter
in effect relating to creditors' rights generally and (ii)
general principles of equity and the discretion of the court
before which any proceeding therefor may be
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<PAGE> 15
brought (regardless of whether such enforcement is considered
in a proceeding in equity or at law). The Indenture has been
qualified under the TIA.
(vi) The Securities are in the form
contemplated by the Indenture. The Securities have each been
duly and validly authorized, executed and delivered by the
Company. The Securities, when paid for by the Initial
Purchasers in accordance with the terms of this Agreement
(assuming the due authorization, execution and delivery of the
Indenture by the Trustee and due authentication and delivery
of the Securities by the Trustee in accordance with the
Indenture), will constitute the valid and legally binding
obligations of the Company, entitled to the benefits of the
Indenture, and enforceable against the Company in accordance
with their terms, except that the enforcement thereof may be
subject to (i) bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally
and (ii) general principles of equity and the discretion of
the court before which any proceeding therefor may be brought
(regardless of whether such enforcement is considered in a
proceeding in equity or at law).
(vii) The Exchange Notes and the Private
Exchange Notes have been duly and validly authorized by the
Company. When the Exchange Notes and the Private Exchange
Notes have been duly executed and delivered by the Company in
accordance with the terms of the Registration Rights Agreement
and the Indenture (assuming the due authorization, execution
and delivery of the Indenture by the Trustee and due
authentication and delivery of the Exchange Notes and the
Private Exchange Notes by the Trustee in accordance with the
Indenture), will constitute the valid and legally binding
obligations of the Company, entitled to the benefits of the
Indenture, and enforceable against the Company, in accordance
with their terms, except that the enforcement thereof may be
subject to (i) bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally
and (ii) general principles of equity and the discretion of
the court before which any proceeding therefor may be brought
(regardless of whether such enforcement is considered in a
proceeding in equity or at law).
(viii) The Company has all requisite
corporate power and authority to execute, deliver and perform
its obligations under the Registration Rights Agreement; the
Registration Rights Agreement has been duly and validly
authorized, executed and delivered by the Company. The
Registration Rights Agreement (assuming due authorization,
execution and delivery thereof by the Initial Purchasers)
constitutes the valid and legally binding agreement of the
Company enforceable against the Company in accordance with its
terms, except that (A) the enforcement thereof may be subject
to (i) bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws now or hereafter
in effect relating to
15
<PAGE> 16
creditors' rights generally and (ii) general principles of
equity and the discretion of the court before which any
proceeding therefor may be brought (regardless of whether such
enforcement is considered in a proceeding in equity or at law)
and (B) any rights to indemnity or contribution thereunder may
be limited by federal and state securities laws and public
policy considerations.
(ix) Each of the Indenture, the Securities,
the Exchange Notes, the Private Exchange Notes and the
Registration Rights Agreement conforms as to legal matters in
all material respects to the descriptions thereof contained in
the Final Memorandum.
(x) No legal or governmental proceedings
are pending or, to the knowledge of such counsel, threatened
to which the Company or any Subsidiary is a party or to which
the property or assets of the Company or any Subsidiary is
subject which would be required under the Act to be described
in a registration statement or in a prospectus and are not
described in the Final Memorandum, or which seek to restrain,
enjoin, prevent the consummation of or otherwise challenge the
issuance or sale of the Securities to be sold hereunder or the
consummation of the other transactions described in the Final
Memorandum.
(xi) To the knowledge of such counsel, no
contract, agreement or other document to which the Company or
any Subsidiary is a party would be required under the Act to
be described in a registration statement or prospectus that is
not described in the Final Memorandum.
(xii) The statements in the Final Memorandum,
insofar as they are descriptions of contracts, agreements or
other legal documents, or refer to statements of law or legal
conclusions, are accurate and present fairly the information
described therein.
(xiii) Neither the Company nor any Subsidiary
is (i) in violation of its certificate of incorporation or
bylaws, (ii) in breach or violation of any statute, judgment,
decree, order, rule or regulation applicable to it or any of
its properties or assets and known to such counsel, except for
any such breach or violation which would not, individually or
in the aggregate, have a Material Adverse Effect, or (iii) to
the knowledge of such counsel, in breach or default under (nor
has any event occurred which, with notice or passage of time
or both, would constitute a default under) or in violation of
any of the terms or provisions of any Contracts known to such
counsel, except for any such breach, default, violation or
event which would not, individually or in the aggregate, have
a Material Adverse Effect.
(xiv) The execution, delivery and performance
of this Agreement, the Indenture, the Registration Rights
Agreement, and the consummation of the
16
<PAGE> 17
transactions contemplated hereby and thereby (including,
without limitation, the issuance and sale of the Securities to
the Initial Purchasers) will not conflict with or constitute
or result in a breach or a default under (or an event which
with notice or passage of time or both would constitute a
default under) or violation of or cause an acceleration of any
obligation under, or result in the imposition or creation of
(or the obligation to create or impose) a lien on any property
or assets of the Company or any Subsidiary with respect to (i)
the terms or provisions of any Contract known to such counsel,
(ii) the certificate of incorporation or bylaws of the Company
or any Subsidiary, or (iii) (assuming compliance with all
applicable state securities or "Blue Sky" laws and assuming
the accuracy of the representations and warranties of the
Initial Purchasers in Section 8 hereof) any statute, judgment,
decree, order, rule or regulation applicable to the Company or
any Subsidiary and known to such counsel and applicable to
transactions of the type contemplated by the Final Memorandum.
(xv) No consent, approval, authorization or
order of any governmental authority is required for the
issuance and sale by the Company of the Securities to the
Initial Purchasers or the other transactions contemplated in
this Agreement, except such as may be required under Blue Sky
laws, as to which such counsel need express no opinion, and
those which have previously been obtained.
(xvi) To the knowledge of such counsel, the
Company and the Subsidiaries have obtained all Permits
necessary to conduct the businesses now or proposed to be
conducted by them as described in the Final Memorandum, the
lack of which would, individually or in the aggregate, have a
Material Adverse Effect; each of the Company and the
Subsidiaries has fulfilled and performed all of its
obligations with respect to such Permits and no event has
occurred which allows, or after notice or lapse of time would
allow, revocation or termination thereof or results in any
other material impairment of the rights of the holder of any
such Permit, except for any such revocation or termination
which would not have a Material Adverse Effect.
(xvii) None of the Company or the Subsidiaries
is, or immediately after the sale of the Securities to be sold
hereunder and the application of the proceeds from such sale
(as described in the Final Memorandum under the caption "Use
of Proceeds") will be, an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
(xviii) No registration under the Act of the
Securities is required in connection with the sale of the
Securities to the Initial Purchasers as contemplated by this
Agreement and the Final Memorandum or in connection with the
initial resale of the Securities by the Initial Purchasers in
accordance with Section 8 of this Agreement, in each case
assuming (i) that the purchasers who buy such Securities in
the initial resale thereof are qualified institutional buyers
as defined in Rule 144A
17
<PAGE> 18
promulgated under the Act ("QIBs") or, in the case of offers
outside of the United States, persons other than U.S. persons,
(ii) the accuracy of the Initial Purchasers' representations
in Section 8 and those of the Company contained in this
Agreement regarding the absence of a general solicitation in
connection with the sale of such Securities to the Initial
Purchasers and the initial resale thereof, and (iii) the due
performance by the Initial Purchasers of the agreements set
forth in Section 8 hereof.
(xix) Neither the consummation of the
transactions contemplated by this Agreement nor the sale,
issuance, execution or delivery of the Securities will violate
Regulation G, T, U or X of the Board of Governors of the
Federal Reserve System.
At the time the foregoing opinion is delivered, such counsel
shall additionally state that it has participated in conferences with
officers and other representatives of the Company, representatives of
the independent public accountants for the Company, representatives of
the Initial Purchasers and counsel for the Initial Purchasers, at
which conferences the contents of the Final Memorandum and related
matters were discussed, and, although it has not independently
verified and is not passing upon and assumes no responsibility for the
accuracy, completeness or fairness of the statements contained in the
Final Memorandum (except to the extent specified in subsection
7(a)(ix) and (xii)), no facts have come to its attention which lead it
to believe that the Final Memorandum, on the date thereof or at the
Closing Date, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements contained therein, in the light of
the circumstances under which they were made, not misleading (it being
understood that such firm need express no opinion with respect to the
financial statements and related notes thereto and the other
financial, statistical, accounting, reserve and well data included in
the Final Memorandum). The opinion of such counsel described in this
Section shall be rendered to the Initial Purchasers at the request of
the Company and shall so state therein.
References to the Final Memorandum in this subsection (a)
shall include any amendment or supplement thereto prepared in
accordance with the provisions of this Agreement at the Closing Date.
In rendering such opinion, such counsel may state that they
express no opinion as to the laws of any jurisdiction other than the
federal laws of the United States, the laws of the State of Texas and
the General Corporation Law of the State of Delaware. Such counsel
may also state that, insofar as such opinion involves factual matters,
such counsel have relied, to the extent they deem proper, upon
certificates of officers of the Company and certificates of public
officials; provided that such certificates have been provided to the
Initial Purchasers.
(b) The Initial Purchasers shall have received an
opinion, dated the Closing Date, of Cahill Gordon & Reindel, counsel
for the Initial Purchasers, with respect to certain legal
18
<PAGE> 19
matters relating to this Agreement, and such other related matters as
the Initial Purchasers may reasonably require. In rendering such
opinion, Cahill Gordon & Reindel shall have received and may rely upon
such certificates and other documents and information as they may
reasonably request to pass upon such matters.
(c) The Initial Purchasers shall have received from KPMG
Peat Marwick LLP, independent public accountants for the Company,
comfort letters, dated the date hereof and the Closing Date, in form
and substance reasonably satisfactory to the Initial Purchasers and
counsel for the Initial Purchasers.
(d) The representations and warranties of the Company
contained in this Agreement shall be true and correct in all material
respects on and as of the Closing Date as if made on and as of the
Closing Date; each of the Company shall have performed all covenants
and agreements and satisfied all conditions on its part to be
performed or satisfied hereunder at or prior to the Closing Date; and,
except as set forth in the Final Memorandum (exclusive of any
amendment or supplement thereto after the date hereof) subsequent to
the date of the most recent financial statements in such Final
Memorandum, there shall have been no event or development that,
individually or in the aggregate, has or would be reasonably likely to
have a Material Adverse Effect.
(e) The issuance and sale of the Securities pursuant to
this Agreement shall not be enjoined (temporarily or permanently) and
no restraining order or other injunctive order shall have been issued
or any action, suit or proceeding shall have been commenced with
respect to this Agreement before any court or governmental authority.
(f) The Initial Purchasers shall have received
certificates, dated the Closing Date, signed on behalf of the Company
by its Chief Executive Officer and Chief Financial Officer to the
effect that:
(i) The representations and warranties of the
Company in this Agreement are true and correct in all material
respects as if made on and as of the Closing Date, and the
Company has performed in all material respects all covenants
and agreements and satisfied all conditions on its part to be
performed or satisfied hereunder at or prior to the Closing
Date;
(ii) At the Closing Date, since the date hereof or
since the date of the most recent financial statements in the
Final Memorandum (exclusive of any amendment or supplement
thereto after the date hereof), no event or events have
occurred, no information has become known nor does any
condition exist that, individually or in the aggregate, would
have a Material Adverse Effect; and
(iii) The sale of the Securities hereunder has not
been enjoined (temporarily or permanently).
19
<PAGE> 20
(g) On the Closing Date, the Initial Purchasers shall
have received the Registration Rights Agreement executed by the
Company and such agreement shall be in full force and effect at all
times from and after the Closing Date.
(h) On or before the Closing Date, the Initial Purchasers
and counsel for the Initial Purchasers shall have received such
further documents, certificates and schedules or instruments relating
to the business, corporate, legal and financial affairs of the Company
as they shall have heretofore reasonably requested from the Company.
All such documents, opinions, certificates and schedules or
instruments delivered pursuant to this Agreement will comply with the
provisions hereof only if they are reasonably satisfactory in all material
respects to the Initial Purchasers and counsel for the Initial Purchasers. The
Company shall furnish to the Initial Purchasers such conformed copies of such
documents, opinions, certificates and schedules or instruments in such
quantities as the Initial Purchasers shall reasonably request.
8. Offering of Securities; Restrictions on Transfer. Each of the
Initial Purchasers represents and warrants (as to itself only) that it is a
QIB. Each of the Initial Purchasers agrees with the Company (as to itself
only) that (i) it has not and will not solicit offers for, or offer or sell,
the Securities by any form of general solicitation or general advertising (as
those terms are used in Regulation D under the Act) or in any manner involving
a public offering within the meaning of Section 4(2) of the Act; and (ii) it
has and will solicit offers for the Securities only from, and will offer the
Securities only to (A) in the case of offers inside the United States, persons
whom the Initial Purchasers reasonably believe to be QIBs or, if any such
person is buying for one or more institutional accounts for which such person
is acting as fiduciary or agent, only when such person has represented to the
Initial Purchasers that each such account is a QIB, to whom notice has been
given that such sale or delivery is being made in reliance on Rule 144A, and,
in each case, in transactions under Rule 144A and (B) in the case of offers
outside the United States, to persons other than U.S. persons ("foreign
purchasers," which term shall include dealers or other professional fiduciaries
in the United States acting on a discretionary basis for foreign beneficial
owners (other than an estate or trust)).
9. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless the Initial Purchasers and the affiliates,
directors, officers, agents, representatives and employees of the Initial
Purchasers, and each other person, if any, who controls any Initial Purchaser
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
against any losses, claims, damages or liabilities, joint or several, to which
any Initial Purchaser or any such affiliate, director, officer, agent,
representative, employee or controlling person may become subject under the
Act, the Exchange Act or otherwise, insofar as any such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue
statement of any material fact contained in (A) any Memorandum
or any amendment or supplement thereto or (B)
20
<PAGE> 21
any application or other document, or any amendment or
supplement thereto, executed by the Company or based upon
written information furnished by or on behalf of the Company
filed in any jurisdiction in order to qualify the Securities
under the securities or "Blue Sky" laws thereof or filed with
any securities association or securities exchange (each, an
"Application"); or
(ii) the omission or alleged omission to state, in
any Memorandum or any amendment or supplement thereto, or any
Application, a material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading,
and will reimburse, as incurred, the Initial Purchasers and each such
affiliate, director, officer, agent, representative and employee and each such
controlling person for any legal or other expenses reasonably incurred by the
Initial Purchasers, such affiliate, director, officer, agent, representative or
employee or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable (i) in any such case to the extent that any such
loss, claim, damage, or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
any Memorandum or any amendment or supplement thereto, or any Application, in
reliance upon and in conformity with written information furnished to the
Company by the Initial Purchasers specifically for use therein or (ii) with
respect to the Preliminary Memorandum, to the extent that any such loss, claim,
damage or liability arises solely from the fact that the Initial Purchasers
sold Securities to a person to whom there was not sent or given a copy of the
Final Memorandum (as amended or supplemented) at or prior to the written
confirmation of such sale if the Company shall have previously furnished copies
thereof to the Initial Purchasers in accordance with Section 5(d) hereof and
the Final Memorandum (as amended or supplemented) would have corrected any such
untrue statement or omission. This indemnity agreement will be in addition to
any liability that the Company may otherwise have to the indemnified parties.
The Company shall not be liable under this paragraph (a) for any settlement of
any claim or action effected without their consent, which consent shall not be
unreasonably withheld or delayed.
The Initial Purchasers shall not, without the prior written consent of
the Company, effect any settlement or compromise of any pending or threatened
proceeding in respect of which the Company is or could have been a party, or
indemnity could have been sought hereunder by the Company, unless such
settlement (A) includes an unconditional written release of the Company, in
form and substance reasonably satisfactory to the Company, from all liability
on claims that are the subject matter of such proceeding and (B) does not
include any statement as to an admission of fault, culpability or failure to
act by or on behalf of the Company.
(b) The Initial Purchasers agree, severally and not
jointly, to indemnify and hold harmless the Company, its affiliates,
directors, officers, agents, representatives and employees and each
other person, if any, who controls the Company within the meaning of
21
<PAGE> 22
Section 15 of the Act or Section 20 of the Exchange Act against any
losses, claims, damages or liabilities to which the Company or any
such affiliate, director, officer, agent, representative, employees or
controlling person may become subject under the Act, the Exchange Act
or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon (i) any
untrue statement or alleged untrue statement of any material fact
contained in any Memorandum or any amendments or supplement thereto,
or any Application or (ii) the omission or the alleged omission to
state therein a material fact required to be stated in any Memorandum
or any amendment or supplement thereto, or any Application, or
necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in
reliance upon and in conformity with written information concerning
such Initial Purchaser furnished to the Company by such Initial
Purchaser specifically for use therein; and, subject to the limitation
set forth immediately preceding this clause, will reimburse, as
incurred, any legal or other expenses reasonably incurred by the
Company or any such affiliate, director, officer, agent,
representative, employee or controlling person in connection with
investigating or defending against or appearing as a third party
witness in connection with any such loss, claim, damage, liability or
action in respect thereof. This indemnity agreement will be in
addition to any liability that the Initial Purchasers may otherwise
have to the indemnified parties. The Initial Purchasers shall not be
liable under this Section 9 for any settlement of any claim or action
effected without their consent, which consent shall not be
unreasonably withheld or delayed.
The Company shall not, without the prior written consent of the
Initial Purchasers, effect any settlement or compromise of any pending or
threatened proceeding in respect of which any Initial Purchaser is or could
have been a party, or indemnity could have been sought hereunder by any Initial
Purchaser, unless such settlement (A) includes an unconditional written release
of the Initial Purchasers, in form and substance reasonably satisfactory to the
Initial Purchasers, from all liability on claims that are the subject matter of
such proceeding and (B) does not include any statement as to an admission of
fault, culpability or failure to act by or on behalf of any Initial Purchaser.
(c) Promptly after receipt by an indemnified party under
this Section 9 of notice of the commencement of any action for which
such indemnified party is entitled to indemnification under this
Section 9, such indemnified party will, if a claim in respect thereof
is to be made against the indemnifying party under this Section 9,
notify the indemnifying party of the commencement thereof in writing;
but the omission to so notify the indemnifying party (i) will not
relieve it from any liability under paragraph (a) or (b) above unless
and to the extent such failure results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) will
not, in any event, relieve the indemnifying party from any obligations
to any indemnified party other than the indemnification obligation
provided in paragraphs (a) and (b) above. In case any such action is
brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party
will be entitled to participate therein and, to the extent that it may
wish,
22
<PAGE> 23
jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to
such indemnified party; provided, however, that if (i) the use of
counsel chosen by the indemnifying party to represent the indemnified
party would present such counsel with a conflict of interest, (ii) the
defendants in any such action include both the indemnified party and
the indemnifying party and the indemnified party shall have been
advised by counsel that there may be one or more legal defenses
available to it and/or other indemnified parties that are different
from or additional to those available to the indemnifying party, or
(iii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after receipt by the
indemnifying party of notice of the institution of such action, then,
in each such case, the indemnifying party shall not have the right to
direct the defense of such action on behalf of such indemnified party
or parties and such indemnified party or parties shall have the right
to select separate counsel to defend such action on behalf of such
indemnified party or parties. After notice from the indemnifying
party to such indemnified party of its election so to assume the
defense thereof and approval by such indemnified party of counsel
appointed to defend such action, the indemnifying party will not be
liable to such indemnified party under this Section 9 for any legal or
other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the
defense thereof, unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the immediately
preceding sentence (it being understood, however, that in connection
with such action the indemnifying party shall not be liable for the
expenses of more than one separate counsel (in addition to local
counsel) in any one action or separate but substantially similar
actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by BT Alex. Brown
Incorporated in the case of paragraph (a) of this Section 9 or the
Company in the case of paragraph (b) of this Section 9, representing
the indemnified parties under such paragraph (a) or paragraph (b), as
the case may be, who are parties to such action or actions) or (ii)
the indemnifying party has authorized in writing the employment of
counsel for the indemnified party at the expense of the indemnifying
party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the
costs and expenses of any settlement of such action effected by such
indemnified party without the prior written consent of the
indemnifying party (which consent shall not be unreasonably withheld),
unless such indemnified party waived in writing its rights under this
Section 9, in which case the indemnified party may effect such a
settlement without such consent.
(d) In circumstances in which the indemnity agreement
provided for in the preceding paragraphs of this Section 9 is
unavailable to, or insufficient to hold harmless, an indemnified party
in respect of any losses, claims, damages or liabilities (or actions
in respect thereof), each indemnifying party, in order to provide for
just and equitable contribution, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (i) the relative benefits
received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the offering of the Securities
23
<PAGE> 24
or (ii) if the allocation provided by the foregoing clause (i) is not
permitted by applicable law, not only such relative benefits but also
the relative fault of the indemnifying party or parties on the one
hand and the indemnified party on the other in connection with the
statements or omissions or alleged statements or omissions that
resulted in such losses, claims, damages or liabilities (or actions in
respect thereof). The relative benefits received by the Company on
the one hand and any Initial Purchaser on the other shall be deemed to
be in the same proportion as the total proceeds from the offering
(before deducting expenses) received by the Company bear to the total
discounts and commissions received by such Initial Purchaser. The
relative fault of the parties shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of
a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the
one hand, or such Initial Purchaser on the other, the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission or alleged statement or
omission, and any other equitable considerations appropriate in the
circumstances. The Company and the Initial Purchasers agree that it
would not be just and equitable if the amount of such contribution
were determined by pro rata or per capita allocation or by any other
method of allocation that does not take into account the equitable
considerations referred to in the first sentence of this paragraph
(d). Notwithstanding any other provision of this paragraph (d), no
Initial Purchaser shall be obligated to make contributions hereunder
that in the aggregate exceed the total discounts, commissions and
other compensation received by such Initial Purchaser under this
Agreement, less the aggregate amount of any damages that such Initial
Purchaser has otherwise been required to pay by reason of the untrue
or alleged untrue statements or the omissions or alleged omissions to
state a material fact, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. For purposes of this paragraph
(d), each affiliate, director, officer, agent, representative and
employee of an Initial Purchaser and each person, if any, who controls
an Initial Purchaser within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act shall have the same rights to
contribution as the Initial Purchasers, and each director and officer
of the Company and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, shall have the same rights to contribution as the
Company.
10. Survival Clause. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers and the Initial Purchasers set forth in this Agreement or made by or
on behalf of them, respectively, pursuant to this Agreement shall remain in
full force and effect, regardless of (i) any investigation made by or on behalf
of the Company, any of its officers or directors, the Initial Purchasers or
any controlling person referred to in Section 9 hereof and (ii) delivery of and
payment for the Securities. The respective agreements, covenants, indemnities
and other statements set forth in Sections 6, 9 and 15 hereof shall remain in
full force and effect, regardless of any termination or cancellation of this
Agreement.
24
<PAGE> 25
11. Termination. (a) This Agreement may be terminated in the
sole discretion of the Initial Purchasers by notice to the Company given prior
to the Closing Date in the event that the Company shall have failed, refused or
been unable to perform, in all material respects, all obligations and satisfy
all conditions on its part to be performed or satisfied hereunder at or prior
thereto or, if at or prior to the Closing Date:
(i) either (i) the Company shall have sustained any loss
or interference with respect to its businesses or properties from
fire, flood, hurricane, accident or other calamity, whether or not
covered by insurance, or from any strike, labor dispute, slow down or
work stoppage or any legal or governmental proceeding, which loss or
interference, in the sole judgment of the Initial Purchasers, has had
or has a Material Adverse Effect, or (ii) there shall have been, in
the sole judgment of the Initial Purchasers, any event or development
that, individually or in the aggregate, has or could be reasonably
likely to have a Material Adverse Effect (including without limitation
a change in control of the Company), except in each case as described
in the Final Memorandum (exclusive of any amendment or supplement
thereto);
(ii) trading in securities generally on the New York Stock
Exchange, the American Stock Exchange or the NASDAQ National Market
shall have been suspended or maximum or minimum prices shall have been
established on any such exchange or market;
(iii) a banking moratorium shall have been declared by New
York or United States authorities;
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, or (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or any other national or international
calamity or emergency or (C) any material change in the financial
markets of the United States that, in the case of (A), (B) or (C)
above and in the sole judgment of the Initial Purchasers, makes it
impracticable or inadvisable to proceed with the offering or the
delivery of the Securities as contemplated by the Final Memorandum; or
(v) any securities of the Company shall have been
downgraded or placed on any "watch list" for possible downgrading by
any nationally recognized statistical rating organization.
(b) Termination of this Agreement pursuant to this
Section 11 shall be without liability of any party to any other party
except as provided in Section 10 hereof.
12. Information Supplied by the Initial Purchasers. The
statements set forth in the legend on the inside front cover concerning
over-allotment and trading activities by the Initial Purchasers, the last
paragraph of the cover page and the third and seventh paragraphs of the section
entitled
25
<PAGE> 26
"Private Placement" constitute the only information furnished by the Initial
Purchasers to the Company for the purposes of Sections 2(a) and 9 hereof.
13. Notices. All communications hereunder shall be in writing
and, if sent to the Initial Purchasers, shall be mailed or delivered or
telecopied and confirmed in writing to BT Alex. Brown Incorporated, One Bankers
Trust Plaza, 130 Liberty Street, New York, New York 10006, Attention:
Corporate Finance Department, and if sent to the Company, shall be mailed,
delivered or telecopied and confirmed in writing to the Company at Costilla
Energy, Inc., 400 West Illinois, Suite 1000, Midland, Texas 79701 Attention:
Chief Financial Officer.
14. Successors. This Agreement shall inure to the benefit of and
be binding upon the Initial Purchasers, the Company and their respective
successors, assigns and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of
this Agreement, or any provisions herein contained; this Agreement and all
conditions and provisions hereof being intended to be and being for the sole
and exclusive benefit of the Initial Purchasers, the Company and their
respective successors, assigns and legal representatives and for the benefit of
no other person except that (i) the indemnities of the Company contained in
Section 9 of this Agreement shall also be for the benefit of the affiliates,
directors, officers, agents, representatives and employees of the Initial
Purchasers and any person or persons who control any of the Initial Purchasers
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
and (ii) the indemnities of the Initial Purchasers contained in Section 9 of
this Agreement shall also be for the benefit of the affiliates, directors,
officers, agents, representatives and employees of the Company and any person
or persons who control the Company within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act. No purchaser of any of the Securities from
the Initial Purchasers will be deemed a successor because of such purchase.
15. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS
AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAW.
16. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
26
<PAGE> 27
S-1
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among the Company
and the Initial Purchasers.
Very truly yours,
COSTILLA ENERGY, INC.
By: /s/ Bobby W. Page
----------------------------------
Name: Bobby W. Page
Title: Senior Vice President
1
<PAGE> 28
S-2
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
BT ALEX. BROWN INCORPORATED
By: /s/ Richard J. Doleshek
--------------------------------
Name: Richard J. Doleshek
Title: Managing Director
PRUDENTIAL SECURITIES INCORPORATED
By: /s/ Peter Horan
--------------------------------
Name: Peter Horan
Title: Managing Director
2
<PAGE> 29
SCHEDULE I
<TABLE>
<CAPTION>
Principal Amount of
Initial Purchaser Securities To Be Purchased
- ----------------- --------------------------
<S> <C>
BT Alex. Brown Incorporated . . . . . . . . . . . . . . . . . $ 60,000,000
Prudential Securities Incorporated . . . . . . . . . . . . . 20,000,000
----------
Total . . . . . . . . . . . $ 80,000,000
==========
</TABLE>
3
<PAGE> 1
Exhibit 10.17
- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
Dated as of January 16, 1998
Among
COSTILLA ENERGY, INC.
as Issuer
and
BT ALEX. BROWN INCORPORATED,
and
PRUDENTIAL SECURITIES INCORPORATED
as Initial Purchasers
10-1/4% Senior Notes due 2006
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3. Shelf Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4. Additional Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5. Registration Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6. Registration Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8. Rules 144 and 144A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
9. Underwritten Registrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
10. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
(a) No Inconsistent Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
(b) Adjustments Affecting Registrable Notes . . . . . . . . . . . . . . . . . . . . . . 25
(c) Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
(d) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
(e) Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
(f) Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
(g) Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
(h) Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
(i) Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
(j) Securities Held by the Issuer or Its Affiliates . . . . . . . . . . . . . . . . . . 27
(k) Third-Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
(l) Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
-i-
<PAGE> 3
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is dated as of
January 16, 1998, among COSTILLA ENERGY, INC., a Delaware corporation (the
"Issuer"), and BT ALEX. BROWN INCORPORATED and Prudential Securities
Incorporated as initial purchasers (the "Initial Purchasers"). This Agreement
is entered into in connection with the Purchase Agreement, dated as of January
14, 1998, among the Issuer and the Initial Purchasers (the "Purchase
Agreement"), which provides for the sale by the Issuer to the Initial
Purchasers of U.S. $80,000,000 aggregate principal amount of the Issuer's
10-1/4% Senior Notes due 2006 (the "Notes"). In order to induce the Initial
Purchasers to enter into the Purchase Agreement, the Issuer has agreed to
provide the registration rights set forth in this Agreement for the benefit of
the Initial Purchasers and any subsequent holder or holders of the Notes. The
execution and delivery of this Agreement is a condition to the Initial
Purchasers' obligation to purchase the Notes under the Purchase Agreement.
The parties hereby agree as follows:
1. Definitions
As used in this Agreement, the following terms shall have the
following meanings:
Additional Interest: See Section 4 hereof.
Advice: See the last paragraph of Section 5 hereof.
Agreement: See the introductory paragraph hereto.
Applicable Period: See Section 2 hereof.
Effectiveness Date: The 160th day after the Issue Date;
provided, however, that with respect to any Shelf Registration, the
Effectiveness Date shall be the 90th day after the Filing Date with respect
thereto.
Effectiveness Period: See Section 3 hereof.
Event Date: See Section 4 hereof.
Exchange Act: The Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC promulgated thereunder.
Exchange Notes: See Section 2 hereof.
1
<PAGE> 4
Exchange Offer: See Section 2 hereof.
Exchange Offer Registration Statement: See Section 2 hereof.
Existing Notes: the Issuer's 10 1/4% Senior Notes due 2006
issued on October 8, 1996 in an aggregate principal amount of $100,000,000.
Filing Date: (A) If no Registration Statement has been filed
by the Issuer pursuant to this Agreement, the 100th day after the Issue Date;
provided, however, that if a Shelf Notice is given within 10 days of the Filing
Date, then the Filing Date with respect to the Initial Shelf Registration shall
be the 15th calendar day after the date of the giving of such Shelf Notice; and
(B) in each other case (which may be applicable notwithstanding the
consummation of the Exchange Offer), the 30th day after the delivery of a Shelf
Notice.
Holder: Any holder of a Registrable Note or Registrable
Notes.
Indemnified Person: See Section 7(c) hereof.
Indemnifying Person: See Section 7(c) hereof.
Indenture: The Indenture, dated as of October 1, 1996,
between the Issuer and State Street Bank and Trust Company, as Trustee,
pursuant to which the Notes are being issued, as amended by the Supplemental
Indenture dated as of January 16, 1998, between the Issuer and the Trustee and
as the same may be amended or supplemented from time to time in accordance with
the terms thereof.
Initial Purchasers: See the introductory paragraphs hereto.
Initial Shelf Registration: See Section 3(a) hereof.
Inspectors: See Section 5(n) hereof.
Issue Date: January 16, 1998, the date of original issuance of
the Notes.
Issuer: See the introductory paragraphs hereto.
NASD: See Section 5(s) hereof.
Participant: See Section 7(a) hereof.
Participating Broker-Dealer: See Section 2 hereof.
2
<PAGE> 5
Person: An individual, trustee, corporation, partnership,
joint stock Issuer, trust, unincorporated association, union, business
association, firm or other legal entity.
Private Exchange: See Section 2 hereof.
Private Exchange Notes: See Section 2 hereof.
Prospectus: The prospectus included in any Registration
Statement (including, without limitation, any prospectus subject to completion
and a prospectus that includes any information previously omitted from a
prospectus filed as part of an effective registration statement in reliance
upon Rule 430A promulgated under the Securities Act and any term sheet filed
pursuant to Rule 434 under the Securities Act), as amended or supplemented by
any prospectus supplement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.
Purchase Agreement: See the introductory paragraphs hereof.
Records: See Section 5(n) hereof.
Registrable Notes: Each Note upon its original issuance and
at all times subsequent thereto, each Exchange Note as to which Section
2(c)(iv) hereof is applicable upon original issuance and at all times
subsequent thereto and each Private Exchange Note upon original issuance
thereof and at all times subsequent thereto, until (i) a Registration Statement
(other than, with respect to any Exchange Note as to which Section 2(c)(iv)
hereof is applicable, the Exchange Offer Registration Statement) covering such
Note, Exchange Note or Private Exchange Note has been declared effective by the
SEC and such Note, Exchange Note or such Private Exchange Note, as the case may
be, has been disposed of in accordance with such effective Registration
Statement, (ii) such Note has been exchanged pursuant to the Exchange Offer for
an Exchange Note or Exchange Notes that may be resold without restriction under
state and federal securities laws, (iii) such Note, Exchange Note or Private
Exchange Note, as the case may be, ceases to be outstanding for purposes of the
Indenture or (iv) such Note, Exchange Note or Private Exchange Note, as the
case may be, may be resold without restriction pursuant to Rule 144 under the
Securities Act.
Registration Statement: Any registration statement of the
Issuer that covers any of the Notes, the Exchange Notes or the Private Exchange
Notes filed with the SEC under the Securities Act, including the Prospectus,
amendments and supplements to such registration statement, including
post-effective amendments, all exhibits, and all material incorporated by
reference or deemed to be incorporated by reference in such registration
statement.
Rule 144: Rule 144 promulgated under the Securities Act, as
such Rule may be amended from time to time, or any similar rule (other than
Rule 144A) or regulation hereafter
3
<PAGE> 6
adopted by the SEC providing for offers and sales of securities made in
compliance therewith resulting in offers and sales by subsequent holders that
are not affiliates of the issuer of such securities being free of the
registration and prospectus delivery requirements of the Securities Act.
Rule 144A: Rule 144A promulgated under the Securities Act, as
such Rule may be amended from time to time, or any similar rule (other than
Rule 144) or regulation hereafter adopted by the SEC.
Rule 415: Rule 415 promulgated under the Securities Act, as
such Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the SEC.
SEC: The Securities and Exchange Commission.
Securities Act: The Securities Act of 1933, as amended, and
the rules and regulations of the SEC promulgated thereunder.
Shelf Notice: See Section 2(c) hereof.
Shelf Registration: See Section 3(b) hereof.
Subsequent Shelf Registration: See Section 3(b) hereof.
TIA: The Trust Indenture Act of 1939, as amended.
Trustee: The trustee under the Indenture and the trustee (if
any) under any indenture governing the Exchange Notes and Private Exchange
Notes.
Underwritten registration or underwritten offering: A
registration in which securities of one or more of the Issuer are sold to an
underwriter for reoffering to the public.
2. Exchange Offer
(a) The Issuer shall file with the SEC, no later than the
Filing Date, a Registration Statement (the "Exchange Offer Registration
Statement") on an appropriate registration form with respect to a registered
offer (the "Exchange Offer") to exchange any and all of the Registrable Notes
for a like aggregate principal amount of notes (the "Exchange Notes") of the
Issuer that are identical in all material respects to the Notes except that the
Exchange Notes shall contain no restrictive legend thereon. The Exchange Offer
shall comply with all applicable tender offer rules and regulations under the
Exchange Act and other applicable law. The Issuer shall use its best efforts
to (x) cause the Exchange Offer Registration Statement to be declared effective
under the Securities Act on or before the Effectiveness Date; (y) keep the
Exchange Offer open for at least 30 days (or longer if required by applicable
law) after the date that notice of the Exchange Offer is mailed to Holders; and
(z) consummate the Exchange Offer on or prior to the
4
<PAGE> 7
45th day following the date on which the Exchange Offer Registration Statement
is declared effective by the SEC. If, after the Exchange Offer Registration
Statement is initially declared effective by the SEC, the Exchange Offer or the
issuance of the Exchange Notes thereunder is interfered with by any stop order,
injunction or other order or requirement of the SEC or any other governmental
agency or court, the Exchange Offer Registration Statement shall be deemed not
to have become effective for purposes of this Agreement.
Each Holder that participates in the Exchange Offer will be required,
as a condition to its participation in the Exchange Offer, to represent to the
Issuer in writing (which may be contained in the applicable letter of
transmittal) that any Exchange Notes to be received by it will be acquired in
the ordinary course of its business, that at the time of the consummation of
the Exchange Offer such Holder will have no arrangement or understanding with
any Person to participate in the distribution of the Exchange Notes, and that
such Holder is not an affiliate of the Issuer within the meaning of the
Securities Act.
Upon consummation of the Exchange Offer in accordance with this
Section 2, the provisions of this Agreement shall continue to apply, mutatis
mutandis, solely with respect to Registrable Notes that are Private Exchange
Notes, Exchange Notes as to which Section 2(c)(iv) is applicable and Exchange
Notes held by Participating Broker-Dealers (as defined), and the Issuer shall
have no further obligation to register Registrable Notes (other than Private
Exchange Notes and other than in respect of any Exchange Notes as to which
clause 2(c)(iv) hereof applies) pursuant to Section 3 hereof.
No securities other than the Exchange Notes shall be included in the
Exchange Offer Registration Statement.
(b) The Issuer shall include within the Prospectus
contained in the Exchange Offer Registration Statement a section entitled "Plan
of Distribution," reasonably acceptable to the Holders, which shall contain a
summary statement of the positions taken or policies made by the staff of the
SEC with respect to the potential "underwriter" status of any broker-dealer
that is the beneficial owner (as defined in Rule 13d-3 under the Exchange Act)
of Exchange Notes received by such broker-dealer in the Exchange Offer as a
result of market making and other trading activities (a "Participating
Broker-Dealer"), whether such positions or policies have been publicly
disseminated by the staff of the SEC or such positions or policies represent
the prevailing views of the staff of the SEC. Such "Plan of Distribution"
section shall also expressly permit, to the extent permitted by applicable
policies and regulations of the SEC, the use of the Prospectus by all Persons
subject to the prospectus delivery requirements of the Securities Act,
including, to the extent permitted by applicable policies and regulations of
the SEC, all Participating Broker-Dealers, and include a statement describing
the means by which Participating Broker-Dealers may resell the Exchange Notes
in compliance with the Securities Act.
The Issuer shall use its best efforts to keep the Exchange Offer
Registration Statement effective and to amend and supplement the Prospectus
contained therein in order to permit such
5
<PAGE> 8
Prospectus to be lawfully delivered by all Persons subject to the prospectus
delivery requirements of the Securities Act for such period of time as is
necessary to comply with applicable law in connection with any resale of the
Exchange Notes covered thereby; provided, however, that such period shall not
exceed 180 days after such Exchange Offer Registration Statement is declared
effective (or such longer period if extended pursuant to the last paragraph of
Section 5 hereof) (the "Applicable Period").
If, prior to consummation of the Exchange Offer, any Holder holds any
Notes acquired by it that have, or that are reasonably likely to be determined
to have, the status of an unsold allotment in an initial distribution, or any
Holder is not entitled to participate in the Exchange Offer, the Issuer upon
the request of any such Holder shall simultaneously with the delivery of the
Exchange Notes in the Exchange Offer, issue and deliver to any such Holder, in
exchange (the "Private Exchange") for such Notes held by any such Holder, a
like principal amount of notes (the "Private Exchange Notes") of the Issuer,
that are identical in all material respects to the Exchange Notes except for
the placement of a restrictive legend on such Private Exchange Notes. The
Private Exchange Notes shall be issued pursuant to the same indenture as the
Exchange Notes and bear the same CUSIP number as the Exchange Notes.
In connection with the Exchange Offer, the Issuer shall:
(1) mail, or cause to be mailed, to each Holder entitled
to participate in the Exchange Offer a copy of the Prospectus forming
part of the Exchange Offer Registration Statement, together with an
appropriate letter of transmittal and related documents;
(2) keep the Exchange Offer open for not less than 30
days after the date that notice of the Exchange Offer is mailed to
Holders (or longer if required by applicable law);
(3) utilize the services of a depositary for the Exchange
Offer with an address in the Borough of Manhattan, The City of New
York;
(4) permit Holders to withdraw tendered Notes at any time
prior to the close of business, New York time, on the last business
day on which the Exchange Offer shall remain open; and
(5) otherwise comply in all material respects with all
applicable laws, rules and regulations.
As soon as practicable after the close of the Exchange Offer
and the Private Exchange, if any, the Issuer shall:
(1) accept for exchange all Registrable Notes validly
tendered and not validly withdrawn pursuant to the Exchange
Offer and the Private Exchange, if any;
6
<PAGE> 9
(2) deliver to the Trustee for cancellation all
Registrable Notes so accepted for exchange; and
(3) cause the Trustee to authenticate and deliver
promptly to each Holder of Notes, Exchange Notes or Private
Exchange Notes, as the case may be, equal in principal amount
to the Notes of such Holder so accepted for exchange.
The Exchange Offer and the Private Exchange shall not be subject to
any conditions, other than that (i) the Exchange Offer or Private Exchange, as
the case may be, does not violate applicable law or any applicable
interpretation of the staff of the SEC, (ii) no action or proceeding shall have
been instituted or threatened in any court or by any governmental agency which
might materially impair the ability of the Issuer to proceed with the Exchange
Offer or the Private Exchange, and no material adverse development shall have
occurred in any existing action or proceeding with respect to the Issuer and
(iii) all governmental approvals shall have been obtained, which approvals the
Issuer deems necessary for the consummation of the Exchange Offer or Private
Exchange.
The Exchange Notes and the Private Exchange Notes shall be issued
under (i) the Indenture or (ii) an indenture identical in all material respects
to the Indenture and which, in either case, has been qualified under the TIA or
is exempt from such qualification and shall provide that the Exchange Notes
shall not be subject to the transfer restrictions set forth in the Indenture.
The Indenture or such indenture shall provide that the Exchange Notes, the
Private Exchange Notes, the Notes and the Existing Notes shall vote and consent
together on all matters as one class and that none of the Exchange Notes, the
Private Exchange Notes, the Notes or the Existing Notes will have the right to
vote or consent as a separate class on any matter.
(c) If, (i) because of any change in law or in currently
prevailing interpretations of the staff of the SEC, the Issuer is not permitted
to effect the Exchange Offer, (ii) the Exchange Offer is not consummated within
205 days of the Issue Date, (iii) any holder of Private Exchange Notes so
requests in writing to the Issuer within 60 days after the consummation of the
Exchange Offer, or (iv) in the case of any Holder that participates in the
Exchange Offer, such Holder does not receive Exchange Notes on the date of the
exchange that may be sold without restriction under state and federal
securities laws (other than due solely to the status of such Holder as an
Initial Purchaser, a person participating in the distribution of the Notes or
an affiliate of the Issuer within the meaning of the Securities Act), then in
the case of each of clauses (i) to and including (iv) of this sentence, the
Issuer shall promptly deliver to the Holders and the Trustee written notice
thereof (the "Shelf Notice") and shall file a Shelf Registration pursuant to
Section 3 hereof.
3. Shelf Registration
If at any time a Shelf Notice is delivered as contemplated by
Section 2(c) hereof, then:
7
<PAGE> 10
(a) Shelf Registration. The Issuer shall file with the
SEC a Registration Statement for an offering to be made on a continuous basis
pursuant to Rule 415 covering all of the Registrable Notes as to which Section
2(c) is applicable (the "Initial Shelf Registration"). The Issuer shall use
its best efforts to file with the SEC the Initial Shelf Registration on or
before the applicable Filing Date. The Initial Shelf Registration shall be on
Form S-1 or another appropriate form permitting registration of such
Registrable Notes for resale by Holders in the manner or manners designated by
them (including, without limitation, one underwritten offering). The Issuer
shall not permit any securities other than the Registrable Notes to be included
in the Initial Shelf Registration or any Subsequent Shelf Registration (as
defined below).
The Issuer shall use its best efforts to cause the Initial Shelf
Registration to be declared effective under the Securities Act on or prior to
the Effectiveness Date and to keep the Initial Shelf Registration continuously
effective under the Securities Act until the date which is two years from the
Effectiveness Date (the "Effectiveness Period"), or such shorter period ending
when (i) all Registrable Notes covered by the Initial Shelf Registration have
been sold in the manner set forth and as contemplated in the Initial Shelf
Registration or (ii) a Subsequent Shelf Registration covering all of the
Registrable Notes covered by and not sold under the Initial Shelf Registration
or an earlier Subsequent Shelf Registration has been declared effective under
the Securities Act; provided, however, that the Effectiveness Period in respect
of the Initial Shelf Registration shall be extended to the extent required to
permit dealers to comply with the applicable prospectus delivery requirements
of Rule 174 under the Securities Act and as otherwise provided herein.
(b) Subsequent Shelf Registrations. If the Initial Shelf
Registration or any Subsequent Shelf Registration ceases to be effective for
any reason at any time during the Effectiveness Period (other than because of
the sale of all of the securities registered thereunder), the Issuer shall use
its best efforts to obtain the prompt withdrawal of any order suspending the
effectiveness thereof, and in any event shall within 30 days of such cessation
of effectiveness amend the Initial Shelf Registration in a manner to obtain the
withdrawal of the order suspending the effectiveness thereof, or file an
additional "shelf" Registration Statement pursuant to Rule 415 covering all of
the Registrable Notes covered by and not sold under the Initial Shelf
Registration or an earlier Subsequent Shelf Registration (each, a "Subsequent
Shelf Registration"). If a Subsequent Shelf Registration is filed, the Issuer
shall use its best efforts to cause the Subsequent Shelf Registration to be
declared effective under the Securities Act as soon as practicable after such
filing and to keep such subsequent Shelf Registration continuously effective
for a period equal to the number of days in the Effectiveness Period less the
aggregate number of days during which the Initial Shelf Registration or any
Subsequent Shelf Registration was previously continuously effective. As used
herein the term "Shelf Registration" means the Initial Shelf Registration and
any Subsequent Shelf Registration.
(c) Supplements and Amendments. The Issuer shall
promptly supplement and amend any Shelf Registration if required by the rules,
regulations or instructions applicable to the registration form used for such
Shelf Registration, if required by the Securities Act, or if
8
<PAGE> 11
reasonably requested by the Holders of a majority in aggregate principal amount
of the Registrable Notes covered by such Registration Statement or by any
underwriter of such Registrable Notes.
4. Additional Interest
(a) The Issuer and the Initial Purchasers agree that the
Holders will suffer damages if the Issuer fails to fulfill its obligations
under Section 2 or Section 3 hereof and that it would not be feasible to
ascertain the extent of such damages with precision. Accordingly, the Issuer
agrees to pay, as liquidated damages, additional interest on the Notes
("Additional Interest") under the circumstances and to the extent set forth
below (each of which shall be given independent effect):
(i) if (A) neither the Exchange Offer
Registration Statement nor the Initial Shelf Registration has
been filed on or prior to the applicable Filing Date or (B)
notwithstanding that the Issuer has consummated or will
consummate the Exchange Offer, the Issuer is required to file
a Shelf Registration and such Shelf Registration is not filed
on or prior to the Filing Date applicable thereto, then,
commencing on the day after any such Filing Date, Additional
Interest shall accrue on the principal amount of the Notes at
a rate of 0.50% per annum for the first 90 days immediately
following each such Filing Date, and such Additional Interest
rate shall increase by an additional 0.50% per annum at the
beginning of each subsequent 90-day period; or
(ii) if (A) neither the Exchange Offer
Registration Statement nor the Initial Shelf Registration is
declared effective by the SEC on or prior to the relevant
Effectiveness Date or (B) notwithstanding that the Issuer has
consummated or will consummate the Exchange Offer, the Issuer
is required to file a Shelf Registration and such Shelf
Registration is not declared effective by the SEC on or prior
to the Effectiveness Date in respect of such Shelf
Registration, then, commencing on the day after such
Effectiveness Date, Additional Interest shall accrue on the
principal amount of the Notes at a rate of 0.50% per annum for
the first 90 days immediately following the day after such
Effectiveness Date, and such Additional Interest rate shall
increase by an additional 0.50% per annum at the beginning of
each subsequent 90-day period; or
(iii) if (A) the Issuer has not exchanged Exchange
Notes for all Notes validly tendered in accordance with the
terms of the Exchange Offer on or prior to the 45th day after
the date on which the Exchange Offer Registration Statement
relating thereto was declared effective or (B) if applicable,
a Shelf Registration has been declared effective and such
Shelf Registration ceases to be effective at any time during
the Effectiveness Period, then Additional Interest shall
accrue on the principal amount of the Notes at a rate of 0.50%
per annum for the first 90 days commencing on the (x) 46th day
after such effective date, in the case of (A) above,
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<PAGE> 12
or (y) the day such Shelf Registration ceases to be effective
in the case of (B) above, and such Additional Interest rate
shall increase by an additional 0.50% per annum at the
beginning of each such subsequent 90-day period;
provided, however, that the Additional Interest rate on the Notes may not
exceed at any one time in the aggregate 1.0% per annum; provided, further,
however, that (1) upon the filing of the applicable Exchange Offer Registration
Statement or the applicable Shelf Registration as required hereunder (in the
case of clause (i) above of this Section 4), (2) upon the effectiveness of the
Exchange Offer Registration Statement or the applicable Shelf Registration
Statement as required hereunder (in the case of clause (ii) of this Section 4),
or (3) upon the exchange of the applicable Exchange Notes for all Notes
tendered (in the case of clause (iii)(A) of this Section 4), or upon the
effectiveness of the applicable Shelf Registration Statement which had ceased
to remain effective (in the case of (iii)(B) of this Section 4), Additional
Interest on the Notes in respect of which such events relate as a result of
such clause (or the relevant subclause thereof), as the case may be, shall
cease to accrue.
(b) The Issuer shall notify the Trustee within three
business days after each and every date on which an event occurs in respect of
which Additional Interest is required to be paid (an "Event Date"). Any
amounts of Additional Interest due pursuant to (a)(i), (a)(ii) or (a)(iii) of
this Section 4 will be payable in cash semiannually on each April 1 and October
1 (to the holders of record on the March 15 and September 15 immediately
preceding such dates), commencing with the first such date occurring after any
such Additional Interest commences to accrue. The amount of Additional
Interest will be determined by multiplying the applicable Additional Interest
rate by the principal amount of the Registrable Notes, multiplied by a
fraction, the numerator of which is the number of days such Additional Interest
rate was applicable during such period (determined on the basis of a 360-day
year comprised of twelve 30-day months and, in the case of a partial month, the
actual number of days elapsed), and the denominator of which is 360.
5. Registration Procedures
In connection with the filing of any Registration Statement pursuant
to Sections 2 or 3 hereof, the Issuer shall effect such registrations to permit
the sale of the securities covered thereby in accordance with the intended
method or methods of disposition thereof, and pursuant thereto and in
connection with any Registration Statement filed by the Issuer hereunder the
Issuer shall:
(a) Prepare and file with the SEC prior to the applicable
Filing Date, a Registration Statement or Registration Statements as prescribed
by Sections 2 or 3 hereof, and use its best efforts to cause each such
Registration Statement to become effective and remain effective as provided
herein; provided, however, that, if (1) such filing is pursuant to Section 3
hereof, or (2) a Prospectus contained in the Exchange Offer Registration
Statement filed pursuant to Section 2 hereof is required to be delivered under
the Securities Act by any Participating Broker-Dealer who seeks to sell
Exchange Notes during the Applicable Period relating thereto, before filing any
Registration Statement or Prospectus or any amendments or supplements thereto,
the Issuer shall
10
<PAGE> 13
furnish to and afford the Holders of the Registrable Notes covered by such
Registration Statement or each such Participating Broker-Dealer, as the case
may be, their counsel and the managing underwriters, if any, a reasonable
opportunity to review copies of all such documents (including copies of any
documents to be incorporated by reference therein and all exhibits thereto)
proposed to be filed (in each case at least five days prior to such filing, or
such later date as is reasonable under the circumstances). The Issuer shall
not file any Registration Statement or Prospectus or any amendments or
supplements thereto if the Holders of a majority in aggregate principal amount
of the Registrable Notes covered by such Registration Statement, or any such
Participating Broker-Dealer, as the case may be, their counsel, or the managing
underwriters, if any, shall reasonably object; provided, however, the Filing
Date shall be extended to afford the Issuer a reasonable period of time to make
such changes as shall be requested by such Holders.
(b) Prepare and file with the SEC such amendments and
post-effective amendments to each Shelf Registration Statement or Exchange
Offer Registration Statement, as the case may be, as may be necessary to keep
such Registration Statement continuously effective for the Effectiveness Period
or the Applicable Period, as the case may be; cause the related Prospectus to
be supplemented by any Prospectus supplement required by applicable law, and as
so supplemented to be filed pursuant to Rule 424 (or any similar provisions
then in force) promulgated under the Securities Act; and comply with the
provisions of the Securities Act and the Exchange Act applicable to each of
them with respect to the disposition of all securities covered by such
Registration Statement as so amended or in such Prospectus as so supplemented
and with respect to the subsequent resale of any securities being sold by a
Participating Broker-Dealer covered by any such Prospectus. The Issuer shall
be deemed not to have used their best efforts to keep a Registration Statement
effective during the Effective Period or the Applicable Period, as the case may
be, relating thereto if the Issuer voluntarily takes any action that would
result in selling Holders of the Registrable Notes covered thereby or
Participating Broker-Dealers seeking to sell Exchange Notes not being able to
sell such Registrable Notes or such Exchange Notes during that period unless
such action is required by applicable law or permitted by this Agreement.
(c) If (1) a Shelf Registration is filed pursuant to
Section 3 hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required to be
delivered under the Securities Act by any Participating Broker-Dealer who seeks
to sell Exchange Notes during the Applicable Period relating thereto from whom
the Issuer has received written notice that it will be a Participating
Broker-Dealer in the Exchange Offer, notify the selling Holders of Registrable
Notes, or each such Participating Broker-Dealer, as the case may be, their
counsel and the managing underwriters, if any, promptly (but in any event
within one day), and confirm such notice in writing, (i) when a Prospectus or
any Prospectus supplement or post-effective amendment has been filed, and, with
respect to a Registration Statement or any post-effective amendment, when the
same has become effective under the Securities Act (including in such notice a
written statement that any Holder may, upon request, obtain, at the sole
expense of the Issuer, one conformed copy of such Registration Statement or
post-effective amendment including financial statements and schedules,
documents incorporated
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or deemed to be incorporated by reference and exhibits), (ii) of the issuance
by the SEC of any stop order suspending the effectiveness of a Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus or the initiation of any proceedings for that purpose, (iii) if at
any time when a prospectus is required by the Securities Act to be delivered in
connection with sales of the Registrable Notes or resales of Exchange Notes by
Participating Broker-Dealers the representations and warranties of the Issuer
contained in any agreement (including any underwriting agreement) contemplated
by Section 5(m) hereof cease to be true and correct in all material respects,
(iv) of the receipt by the Issuer of any notification with respect to the
suspension of the qualification or exemption from qualification of a
Registration Statement or any of the Registrable Notes or the Exchange Notes to
be sold by any Participating Broker-Dealer for offer or sale in any
jurisdiction, or the initiation or threatening of any proceeding for such
purpose, (v) of the happening of any event, the existence of any condition or
any information becoming known that makes any statement made in such
Registration Statement or related Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect
or that requires the making of any changes in or amendments or supplements to
such Registration Statement, Prospectus or documents so that, in the case of
the Registration Statement, it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and that in the
case of the Prospectus, it will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and (vi) of the Issuer's determination
that a post-effective amendment to a Registration Statement would be
appropriate.
(d) If (1) a Shelf Registration is filed pursuant to
Section 3 hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required to be
delivered under the Securities Act by any Participating Broker-Dealer who seeks
to sell Exchange Notes during the Applicable Period, use its best efforts to
prevent the issuance of any order suspending the effectiveness of a
Registration Statement or of any order preventing or suspending the use of a
Prospectus or suspending the qualification (or exemption from qualification) of
any of the Registrable Notes or the Exchange Notes to be sold by any
Participating Broker-Dealer, for sale in any jurisdiction, and, if any such
order is issued, to use its best efforts to obtain the withdrawal of any such
order at the earliest possible moment.
(e) If a Shelf Registration is filed pursuant to Section
3 and if requested by the managing underwriter or underwriters (if any), the
Holders of a majority in aggregate principal amount of the Registrable Notes
being sold in connection with an underwritten offering or any Participating
Broker-Dealer, (i) as promptly as practicable incorporate in a prospectus
supplement or post-effective amendment such information as the managing
underwriter or underwriters (if any), such Holders, any Participating
Broker-Dealer or counsel for any of them reasonably request to be included
therein, (ii) make all required filings of such prospectus supplement or such
post- effective amendment as soon as practicable after an Issuer has received
notification of the matters
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<PAGE> 15
to be incorporated in such prospectus supplement or post-effective amendment,
and (iii) supplement or make amendments to such Registration Statement.
(f) If (1) a Shelf Registration is filed pursuant to
Section 3 hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required to be
delivered under the Securities Act by any Participating Broker-Dealer who seeks
to sell Exchange Notes during the Applicable Period, furnish to each selling
Holder of Registrable Notes and to each such Participating Broker-Dealer who so
requests and to their respective counsel and each managing underwriter, if any,
at the sole expense of the Issuer, one conformed copy of the Registration
Statement or Registration Statements and each post-effective amendment thereto,
including financial statements and schedules, and, if requested, all documents
incorporated or deemed to be incorporated therein by reference and all
exhibits.
(g) If (1) a Shelf Registration is filed pursuant to
Section 3 hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required to be
delivered under the Securities Act by any Participating Broker-Dealer who seeks
to sell Exchange Notes during the Applicable Period, deliver to each selling
Holder of Registrable Notes, or each such Participating Broker-Dealer, as the
case may be, their respective counsel, and the underwriters, if any, at the
sole expense of the Issuer, as many copies of the Prospectus or Prospectuses
(including each form of preliminary prospectus) and each amendment or
supplement thereto and any documents incorporated by reference therein as such
Persons may reasonably request; and, subject to the last paragraph of this
Section 5, the Issuer hereby consents to the use of such Prospectus and each
amendment or supplement thereto by each of the selling Holders of Registrable
Notes or each such Participating Broker-Dealer, as the case may be, and the
underwriters or agents, if any, and dealers (if any), in connection with the
offering and sale of the Registrable Notes covered by, or the sale by
Participating Broker-Dealers of the Exchange Notes pursuant to, such Prospectus
and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Notes or
any delivery of a Prospectus contained in the Exchange Offer Registration
Statement by any Participating Broker-Dealer who seeks to sell Exchange Notes
during the Applicable Period, use its best efforts to register or qualify, and
to cooperate with the selling Holders of Registrable Notes or each such
Participating Broker-Dealer, as the case may be, the managing underwriter or
underwriters, if any, and their respective counsel in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Notes for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any selling Holder, Participating Broker-Dealer, or the managing underwriter or
underwriters reasonably request in writing; provided, however, that where
Exchange Notes held by Participating Broker-Dealers or Registrable Notes are
offered other than through an underwritten offering, the Issuer agrees to cause
its counsel to perform Blue Sky investigations and file registrations and
qualifications required to be filed pursuant to this Section 5(h), keep each
such registration or qualification (or exemption therefrom) effective during
the period such Registration Statement is required to be kept effective and do
any and all other acts or things reasonably necessary or advisable to enable
the
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<PAGE> 16
disposition in such jurisdictions of the Exchange Notes held by Participating
Broker-Dealers or the Registrable Notes covered by the applicable Registration
Statement; provided, however, that the Issuer shall not be required to (A)
qualify generally to do business in any jurisdiction where it is not then so
qualified, (B) take any action that would subject it to general service of
process in any such jurisdiction where it is not then so subject or (C) subject
itself to taxation in excess of a nominal dollar amount in any such
jurisdiction where it is not then so subject.
(i) If a Shelf Registration is filed pursuant to Section
3 hereof, cooperate with the selling Holders of Registrable Notes and the
managing underwriter or underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Registrable Notes to be
sold, which certificates shall not bear any restrictive legends and shall be in
a form eligible for deposit with The Depository Trust Issuer; and enable such
Registrable Notes to be in such denominations and registered in such names as
the managing underwriter or underwriters, if any, or Holders may request.
(j) Use its best efforts to cause the Registrable Notes
covered by the Registration Statement to be registered with or approved by such
other governmental agencies or authorities as may be reasonably necessary to
enable the seller or sellers thereof or the underwriter or underwriters, if
any, to consummate the disposition of such Registrable Notes, except as may be
required solely as a consequence of the nature of such selling Holder's
business, in which case the Issuer will cooperate in all reasonable respects
with the filing of such Registration Statement and the granting of such
approvals.
(k) If (1) a Shelf Registration is filed pursuant to
Section 3 hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required to be
delivered under the Securities Act by any Participating Broker-Dealer who seeks
to sell Exchange Notes during the Applicable Period, upon the occurrence of any
event contemplated by paragraph 5(c)(v) or 5(c)(vi) hereof, as promptly as
practicable prepare and (subject to Section 5(a) hereof) file with the SEC, at
the sole expense of the Issuer, a supplement or post-effective amendment to the
Registration Statement or a supplement to the related Prospectus or any
document incorporated or deemed to be incorporated therein by reference, or
file any other required document so that, as thereafter delivered to the
purchasers of the Registrable Notes being sold thereunder or to the purchasers
of the Exchange Notes to whom such Prospectus will be delivered by a
Participating Broker-Dealer, any such Prospectus will not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Notwithstanding the
foregoing, the Issuer shall not be required to amend or supplement a
Registration Statement, any related Prospectus or any document incorporated
therein by reference, in the event that, and for a period not to exceed an
aggregate of 60 days in any calendar year if, (i) an event occurs and is
continuing as a result of which the Shelf Registration would, in the Issuer's
good faith judgment, contain an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, and (ii)
(a) the Issuer
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<PAGE> 17
determines in its good faith judgment that the disclosure of such event at such
time would have a material adverse effect on the business, operations or
prospects of the Issuer or (b) the disclosure otherwise relates to a pending
material business transaction that has not yet been publicly disclosed.
(l) Prior to the effective date of the first Registration
Statement relating to the Registrable Notes, (i) provide the Trustee with
certificates for the Registrable Notes in a form eligible for deposit with The
Depository Trust Issuer and (ii) provide a CUSIP number for the Registrable
Notes.
(m) In connection with any underwritten offering of
Registrable Notes pursuant to a Shelf Registration, enter into an underwriting
agreement as is customary in underwritten offerings of debt securities similar
to the Notes in form and substance reasonably satisfactory to the Issuer and
take all such other actions as are reasonably requested by the managing
underwriter or underwriters in order to expedite or facilitate the registration
or the disposition of such Registrable Notes and, in such connection, (i) make
such representations and warranties to, and covenants with, the underwriters
with respect to the business of the Issuer any of the subsidiaries of the
Issuer (including any acquired business, properties or entity, if applicable)
and the Registration Statement, Prospectus and documents, if any, incorporated
or deemed to be incorporated by reference therein, in each case, as are
customarily made by issuers to underwriters in underwritten offerings of debt
securities similar to the Notes, and confirm the same in writing if and when
requested in form and substance reasonably satisfactory to the Issuer; (ii)
obtain the written opinions of counsel to the Issuer and written updates
thereof in form, scope and substance reasonably satisfactory to the managing
underwriter or underwriters, addressed to the underwriters covering the matters
customarily covered in opinions reasonably requested in underwritten offerings
and such other matters as may be reasonably requested by the managing
underwriter or underwriters; (iii) use its best efforts to obtain "cold
comfort" letters and updates thereof in form, scope and substance reasonably
satisfactory to the managing underwriter or underwriters from the independent
accountants of the Issuer (and, if necessary, any other independent accountants
of the Issuer any subsidiary of the Issuer or of any business acquired by the
Issuer for which financial statements and financial data are, or are required
to be, included or incorporated by reference in the Registration Statement),
addressed to each of the underwriters, such letters to be in customary form and
covering matters of the type customarily covered in "cold comfort" letters in
connection with underwritten offerings of debt securities similar to the Notes
and such other matters as reasonably requested by the managing underwriter or
underwriters as permitted by the Statement on Auditing Standards No. 72; and
(iv) if an underwriting agreement is entered into, the same shall contain
indemnification provisions and procedures no less favorable to the sellers and
underwriters, if any, than those set forth in Section 7 hereof (or such other
provisions and procedures acceptable to Holders of a majority in aggregate
principal amount of Registrable Notes covered by such Registration Statement
and the managing underwriter or underwriters or agents, if any). The above
shall be done at each closing under such underwriting agreement, or as and to
the extent required thereunder.
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(n) If (1) a Shelf Registration is filed pursuant to
Section 3 hereof, or (2) a Prospectus contained in the Exchange Offer
Registration Statement filed pursuant to Section 2 hereof is required to be
delivered under the Securities Act by any Participating Broker-Dealer who seeks
to sell Exchange Notes during the Applicable Period, make available for
inspection by any selling Holder of such Registrable Notes being sold, or each
such Participating Broker-Dealer, as the case may be, any underwriter
participating in any such disposition of Registrable Notes, if any, and any
attorney, accountant or other agent retained by any such selling Holder or each
such Participating Broker-Dealer, as the case may be, or underwriter
(collectively, the "Inspectors"), at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and instruments of the Issuer and subsidiaries of the Issuer
(collectively, the "Records") as shall be reasonably necessary to enable them
to exercise any applicable due diligence responsibilities, and cause the
officers, directors and employees of the Issuer and any of its subsidiaries to
supply all information reasonably requested by any such Inspector in connection
with such Registration Statement and Prospectus. Each Inspector shall agree in
writing that it will keep the Records confidential and that it will not
disclose any of the Records that the Issuer determines, in good faith, to be
confidential and notifies the Inspectors in writing are confidential unless (i)
the disclosure of such Records is necessary to avoid or correct a material
misstatement or material omission in such Registration Statement or Prospectus,
(ii) the release of such Records is ordered pursuant to a subpoena or other
order from a court of competent jurisdiction, (iii) disclosure of such
information is necessary or advisable, in the opinion of counsel for any
Inspector, in connection with any action, claim, suit or proceeding, directly
or indirectly, involving or potentially involving such Inspector and arising
out of, based upon, relating to, or involving this Agreement or the Purchase
Agreement, or any transactions contemplated hereby or thereby or arising
hereunder or thereunder, or (iv) the information in such Records has been made
generally available to the public; provided, however, that prior notice shall
be provided as soon as practicable to the Issuer of the potential disclosure of
any information by such Inspector pursuant to clauses (i), (ii) or (iii) of
this sentence to permit the Issuer to obtain a protective order (or waive the
provisions of this paragraph (n)) and that such Inspector shall take such
actions as are reasonably necessary to protect the confidentiality of such
information (if practicable) to the extent such action is otherwise not
inconsistent with, an impairment of or in derogation of the rights and
interests of the Holder or any Inspector.
(o) Provide an indenture trustee for the Registrable
Notes or the Exchange Notes, as the case may be, and cause the Indenture or the
trust indenture provided for in Section 2(a) hereof, as the case may be, to be
qualified under the TIA not later than the effective date of the first
Registration Statement relating to the Registrable Notes; and in connection
therewith, cooperate with the trustee under any such indenture and the Holders
of the Registrable Notes, to effect such changes to such indenture as may be
required for such indenture to be so qualified in accordance with the terms of
the TIA; and execute, and use its best efforts to cause such trustee to
execute, all documents as may be required to effect such changes, and all other
forms and documents required to be filed with the SEC to enable such indenture
to be so qualified in a timely manner.
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(p) Comply with all applicable rules and regulations of
the SEC and make generally available to its securityholders earnings statements
satisfying the provisions of Section 11(a) of the Securities Act and Rule 158
thereunder (or any similar rule promulgated under the Securities Act) no later
than 60 days after the end of any fiscal quarter (or 120 days after the end of
any 12-month period if such period is a fiscal year) (i) commencing at the end
of any fiscal quarter in which Registrable Notes are sold to underwriters in a
firm commitment or best efforts underwritten offering and (ii) if not sold to
underwriters in such an offering, commencing on the first day of the first
fiscal quarter of the Issuer after the effective date of a Registration
Statement, which statements shall cover said 12-month periods.
(q) Upon consummation of the Exchange Offer or a Private
Exchange, obtain an opinion of counsel to the Issuer, in a form customary for
underwritten transactions, addressed to the Trustee for the benefit of all
Holders of Registrable Notes participating in the Exchange Offer or the Private
Exchange, as the case may be, that the Exchange Notes or Private Exchange
Notes, as the case may be, and the related indenture constitute legal, valid
and binding obligations of the Issuer, enforceable against the Issuer in
accordance with their respective terms, subject to customary exceptions and
qualifications.
(r) If the Exchange Offer or a Private Exchange is to be
consummated, upon delivery of the Registrable Notes by Holders to the Issuer
(or to such other Person as directed by the Issuer) in exchange for the
Exchange Notes or the Private Exchange Notes, as the case may be, the Issuer
shall mark, or cause to be marked, on such Registrable Notes that such
Registrable Notes are being cancelled in exchange for the Exchange Notes or the
Private Exchange Notes, as the case may be; in no event shall such Registrable
Notes be marked as paid or otherwise satisfied.
(s) Cooperate with each seller of Registrable Notes
covered by any Registration Statement and each underwriter, if any,
participating in the disposition of such Registrable Notes and their respective
counsel in connection with any filings required to be made with the National
Association of Securities Dealers, Inc. (the "NASD").
(t) Use its best efforts to take all other steps
reasonably necessary to effect the registration of the Exchange Notes and/or
Registrable Notes covered by a Registration Statement contemplated hereby.
The Issuer may require each seller of Registrable Notes as to which
any registration is being effected to furnish to the Issuer such information
regarding such seller and the distribution of such Registrable Notes as the
Issuer may, from time to time, reasonably request. The Issuer may exclude from
such registration the Registrable Notes of any seller so long as such seller
fails to furnish such information within a reasonable time after receiving such
request. Each seller as to which any Shelf Registration is being effected
agrees to furnish promptly to the Issuer all information required to be
disclosed in order to make the information previously furnished to the Issuer
by such seller not materially misleading.
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If any such Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Issuer, then such Holder shall
have the right to require (i) the insertion therein of language, in form and
substance reasonably satisfactory to such Holder, to the effect that the
holding by such Holder of such securities is not to be construed as a
recommendation by such Holder of the investment quality of the securities
covered thereby and that such holding does not imply that such Holder will
assist in meeting any future financial requirements of the Issuer, or (ii) in
the event that such reference to such Holder by name or otherwise is not
required by the Securities Act or any similar federal statute then in force,
the deletion of the reference to such Holder in any amendment or supplement to
the Registration Statement filed or prepared subsequent to the time that such
reference ceases to be required.
Each Holder of Registrable Notes and each Participating Broker-Dealer
agrees by its acquisition of such Registrable Notes or Exchange Notes to be
sold by such Participating Broker-Dealer, as the case may be, that, upon actual
receipt of any notice from the Issuer of the happening of any event of the
kind described in Section 5(c)(ii), 5(c)(iv), 5(c)(v), or 5(c)(vi) hereof, such
Holder will forthwith discontinue disposition of such Registrable Notes covered
by such Registration Statement or Prospectus or Exchange Notes to be sold by
such Holder or Participating Broker-Dealer, as the case may be, until such
Holder's or Participating Broker-Dealer's receipt of the copies of the
supplemented or amended Prospectus contemplated by Section 5(k) hereof, or
until it is advised in writing (the "Advice") by the Issuer that the use of the
applicable Prospectus may be resumed, and has received copies of any amendments
or supplements thereto. In the event that the Issuer shall give any such
notice, the Applicable Period shall be extended by the number of days during
such periods from and including the date of the giving of such notice to and
including the date when each seller of Registrable Notes covered by such
Registration Statement or Exchange Notes to be sold by such Participating
Broker-Dealer, as the case may be, shall have received (x) the copies of the
supplemented or amended Prospectus contemplated by Section 5(k) hereof or (y)
the Advice.
6. Registration Expenses
All fees and expenses incident to the performance of or compliance
with this Agreement by the Issuer shall be borne by the Issuer whether or not
the Exchange Offer Registration Statement or any Shelf Registration is filed or
becomes effective or the Exchange Offer is consummated, including, without
limitation, (i) all registration and filing fees (including, without
limitation, (A) fees with respect to filings required to be made with the NASD
in connection with an underwritten offering and (B) fees and expenses of
compliance with state securities or Blue Sky laws (including, without
limitation, fees and disbursements of counsel in connection with Blue Sky
qualifications of the Registrable Notes or Exchange Notes and determination of
the eligibility of the Registrable Notes or Exchange Notes for investment under
the laws of such jurisdictions (x) where the holders of Registrable Notes are
located, in the case of the Exchange Notes, or (y) as provided in Section 5(h)
hereof, in the case of Registrable Notes or Exchange Notes to be sold by a
Participating Broker-Dealer during the Applicable Period)), (ii) printing
expenses, including, without limitation, expenses of printing certificates for
Registrable Notes or Exchange Notes in
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<PAGE> 21
a form eligible for deposit with The Depository Trust Issuer and of printing
prospectuses if the printing of prospectuses is requested by the managing
underwriter or underwriters, if any, by the Holders of a majority in aggregate
principal amount of the Registrable Notes included in any Registration
Statement or in respect of Registrable Notes or Exchange Notes to be sold by
any Participating Broker-Dealer during the Applicable Period, as the case may
be, (iii) messenger, telephone and delivery expenses, (iv) fees and
disbursements of counsel for the Issuer and reasonable fees and disbursements
of one special counsel for all of the sellers of Registrable Notes (exclusive
of any counsel retained pursuant to Section 7 hereof), (v) fees and
disbursements of all independent certified public accountants referred to in
Section 5(m)(iii) hereof (including, without limitation, the expenses of any
special audit and "cold comfort" letters required by or incident to such
performance), (vi) Securities Act liability insurance, if the Issuer desires
such insurance, (vii) fees and expenses of all other Persons retained by the
Issuer, (viii) internal expenses of the Issuer (including, without limitation,
all salaries and expenses of officers and employees of the Issuer performing
legal or accounting duties), (ix) the expense of any annual audit, (x) any fees
and expenses incurred in connection with the listing of the securities to be
registered on any securities exchange, and the obtaining of a rating of the
securities, in each case, if applicable, and (xi) the expenses relating to
printing, word processing and distributing all Registration Statements,
underwriting agreements, indentures and any other documents necessary in order
to comply with this Agreement.
7. Indemnification
(a) The Issuer agrees to indemnify and hold harmless each
Holder of Registrable Notes and each Participating Broker-Dealer selling
Exchange Notes during the Applicable Period, the officers, directors, employees
and agents of each such Person, and each Person, if any, who controls any such
Person within the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act (each, a "Participant"), from and against any and all
losses, claims, damages, judgments, liabilities and expenses (including,
without limitation, the reasonable legal fees and other expenses actually
incurred in connection with any suit, action or proceeding or any claim
asserted) caused by, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement (or any amendment thereto) or Prospectus (as amended or supplemented
if the Issuer shall have furnished any amendments or supplements thereto) or
any preliminary prospectus, or caused by, arising out of or based upon any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the case of the
Prospectus in light of the circumstances under which they were made, not
misleading, except insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with information relating to
any Participant furnished to the Issuer in writing by such Participant
expressly for use therein.
(b) Each Participant agrees, severally and not jointly,
to indemnify and hold harmless the Issuer, its directors, its officers who sign
the Registration Statement and each Person who controls the Issuer within the
meaning of Section 15 of the Securities Act or Section 20 of the
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Exchange Act to the same extent (but on a several, and not joint, basis) as the
foregoing indemnity from the Issuer to each Participant, but only with
reference to information relating to such Participant furnished to the Issuer
in writing by such Participant expressly for use in any Registration Statement
or Prospectus, any amendment or supplement thereto, or any preliminary
prospectus. The liability of any Participant under this paragraph shall in no
event exceed the proceeds received by such Participant from sales of
Registrable Notes or Exchange Notes giving rise to such obligations.
(c) If any suit, action, proceeding (including any
governmental or regulatory investigation), claim or demand shall be brought or
asserted against any Person in respect of which indemnity may be sought
pursuant to either of the two preceding paragraphs, such Person (the
"Indemnified Person") shall promptly notify the Persons against whom such
indemnity may be sought (the "Indemnifying Persons") in writing, and the
Indemnifying Persons, upon request of the Indemnified Person, shall retain
counsel reasonably satisfactory to the Indemnified Person to represent the
Indemnified Person and any others the Indemnifying Persons may reasonably
designate in such proceeding and shall pay the fees and expenses actually
incurred by such counsel related to such proceeding; provided, however, that
the failure to so notify the Indemnifying Persons (i) will not relieve it from
any liability under paragraph (a) or (b) above unless and to the extent such
failure results in the forfeiture by the Indemnifying Party of substantial
rights and defenses and (ii) will not, in any event, relieve the Indemnifying
Party from any obligations to any indemnified party other than the
indemnification obligation provided in paragraphs (a) and (b) above. In any
such proceeding, any Indemnified Person shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Person unless (i) the Indemnifying Persons and the Indemnified
Person shall have mutually agreed to the contrary, (ii) the Indemnifying
Persons shall have failed within a reasonable period of time to retain counsel
reasonably satisfactory to the Indemnified Person or (iii) the named parties in
any such proceeding (including any impleaded parties) include both any
Indemnifying Person and the Indemnified Person or any affiliate thereof and
representation of both parties by the same counsel would be inappropriate due
to actual or potential differing interests between them. It is understood
that, unless there exists a conflict among Indemnified Persons, the
Indemnifying Persons shall not, in connection with such proceeding or separate
but substantially similar related proceeding in the same jurisdiction arising
out of the same general allegations, be liable for the fees and expenses of
more than one separate firm (in addition to any local counsel) for all
Indemnified Persons, and that all such fees and expenses shall be reimbursed
promptly as they are incurred. Any such separate firm for the Participants and
such control Persons of Participants shall be designated in writing by
Participants who sold a majority in interest of Registrable Notes and Exchange
Notes sold by all such Participants and shall be reasonably acceptable to the
Issuer, and any such separate firm for the Issuer, its directors, its officers
and such control Persons of the Issuer shall be designated in writing by such
Issuer and shall be reasonably acceptable to the Holders.
The Indemnifying Persons shall not be liable for any settlement of any
proceeding effected without its prior written consent (which consent shall not
be unreasonably withheld or delayed), but if settled with such consent or if
there be a final non-appealable judgment for the plaintiff for
20
<PAGE> 23
which the Indemnified Person is entitled to indemnification pursuant to this
Agreement, each of the Indemnifying Persons agrees to indemnify and hold
harmless each Indemnified Person from and against any loss or liability by
reason of such settlement or judgment. No Indemnifying Person shall, without
the prior written consent of the Indemnified Persons (which consent shall not
be unreasonably withheld or delayed), effect any settlement or compromise of
any pending or threatened proceeding in respect of which any Indemnified Person
is or could have been a party, or indemnity could have been sought hereunder by
such Indemnified Person, unless such settlement (A) includes an unconditional
written release of such Indemnified Person, in form and substance reasonably
satisfactory to such Indemnified Person, from all liability on claims that are
the subject matter of such proceeding and (B) does not include any statement as
to an admission of fault, culpability or failure to act by or on behalf of such
Indemnified Person.
(d) If the indemnification provided for in the first and
second paragraphs of this Section 7 is for any reason unavailable to, or
insufficient to hold harmless, an Indemnified Person in respect of any losses,
claims, damages or liabilities referred to therein, then each Indemnifying
Person under such paragraphs, in lieu of indemnifying such Indemnified Person
thereunder and in order to provide for just and equitable contribution, shall
contribute to the amount paid or payable by such Indemnified Person as a result
of such losses, claims, damages or liabilities in such proportion as is
appropriate to reflect (i) the relative benefits received by the Indemnifying
Person or Persons on the one hand and the Indemnified Person or Persons on the
other from the offering of the Notes or (ii) if the allocation provided by the
foregoing clause (i) is not permitted by applicable law, not only such relative
benefits but also the relative fault of the Indemnifying Person or Persons on
the one hand and the Indemnified Person or Persons on the other in connection
with the statements or omissions or alleged statements or omissions that
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof) as well as any other relevant equitable considerations. The relative
benefits received by the Issuer on the one hand and the Participants on the
other shall be deemed to be in the same proportion as the total proceeds from
the offering (net of discounts and commissions but before deducting expenses)
of the Notes received by the Issuer bears to the total proceeds received by
such Participant from the sale of Registrable Notes or Exchange Notes, as the
case may be, in each case as set forth in the table on the cover page of the
Offering Memorandum in respect of the sale of the Notes. The relative fault of
the parties shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Issuer on the one hand or such Participant or such other Indemnified
Person, as the case may be, on the other, the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission, and any other equitable considerations appropriate in
the circumstances.
(e) The parties agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Participants were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an Indemnified Person as a result of the losses,
claims, damages,
21
<PAGE> 24
judgments, liabilities and expenses referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any reasonable legal or other expenses actually incurred by such
Indemnified Person in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 7, in no event
shall a Participant be required to contribute any amount in excess of the
amount by which proceeds received by such Participant from sales of Registrable
Notes or Exchange Notes, as the case may be, exceeds the amount of any damages
that such Participant has otherwise been required to pay or has paid by reason
of such untrue or alleged untrue statement or omission or alleged omission. No
Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
(f) Any losses, claims, damages, liabilities or expenses
for which an indemnified party is entitled to indemnification or contribution
under this Section 7 shall be paid by the Indemnifying Party to the Indemnified
Party as such losses, claims, damages, liabilities or expenses are incurred.
The indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Issuer set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Holder or any person who controls a
Holder, the Issuer, its directors, officers, employees or agents or any person
controlling the Issuer, and (ii) any termination of this Agreement.
(g) The indemnity and contribution agreements contained
in this Section 7 will be in addition to any liability which the Indemnifying
Persons may otherwise have to the Indemnified Persons referred to above.
Rules 144 and 144A
The Issuer covenants and agrees that it will file the reports required
to be filed by it under the Securities Act and the Exchange Act and the rules
and regulations adopted by the SEC thereunder in a timely manner in accordance
with the requirements of the Securities Act and the Exchange Act and, if at any
time the Issuer is not required to file such reports, the Issuer will, upon the
request of any Holder or beneficial owner of Registrable Notes, make available
such information necessary to permit sales pursuant to Rule 144A under the
Securities Act. The Issuer further covenants and agrees, for so long as any
Registrable Notes remain outstanding that it will take such further action as
any Holder of Registrable Notes may reasonably request, all to the extent
required from time to time to enable such holder to sell Registrable Notes
without registration under the Securities Act within the limitation of the
exemptions provided by (a) Rule 144(k) and Rule 144A under the Securities Act,
as such Rules may be amended from time to time, or (b) any similar rule or
regulation hereafter adopted by the SEC.
22
<PAGE> 25
8. Underwritten Registrations
If any of the Registrable Notes covered by any Shelf Registration are
to be sold in an underwritten offering, the investment banker or investment
bankers and manager or managers that will manage the offering will be selected
by the Holders of a majority in aggregate principal amount of such Registrable
Notes included in such offering and shall be reasonably acceptable to the
Issuer.
No Holder of Registrable Notes may participate in any underwritten
registration hereunder unless such Holder (a) agrees to sell such Holder's
Registrable Notes on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements and (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
underwriting arrangements.
9. Miscellaneous
(a) No Inconsistent Agreements. The Issuer has not, as of
the date hereof, and the Issuer shall not, after the date of this Agreement,
enter into any agreement with respect to any of its securities that is
inconsistent with the rights granted to the Holders of Registrable Notes in
this Agreement or otherwise conflicts with the provisions hereof. The rights
granted to the Holders hereunder do not in any way conflict with and are not
inconsistent with the rights granted to the holders of the Issuer's other
issued and outstanding securities under any such agreements. The Issuer will
not enter into any agreement with respect to any of its securities which will
grant to any Person piggy-back registration rights with respect to any
Registration Statement.
(b) Adjustments Affecting Registrable Notes. The Issuer
shall not, directly or indirectly, take any action with respect to the
Registrable Notes as a class that would adversely affect the ability of the
Holders of Registrable Notes to include such Registrable Notes in a
registration undertaken pursuant to this Agreement.
(c) Amendments and Waivers. The provisions of this
Agreement may not be amended, modified or supplemented, and waivers or consents
to departures from the provisions hereof may not be given, otherwise than with
the prior written consent of (I) the Issuer and (II)(A) the Holders of not less
than a majority in aggregate principal amount of the then outstanding
Registrable Notes and (B) in circumstances that would adversely affect the
Participating Broker-Dealers, the Participating Broker-Dealers holding not less
than a majority in aggregate principal amount of the Exchange Notes held by all
Participating Broker-Dealers; provided, however, that Section 7 and this
Section 10(c) may not be amended, modified or supplemented without the prior
written consent of each Holder and each Participating Broker- Dealer (including
any person who was a Holder or Participating Broker-Dealer of Registrable Notes
or Exchange Notes, as the case may be, disposed of pursuant to any Registration
Statement) affected by any such amendment, modification or supplement.
Notwithstanding the foregoing, a
23
<PAGE> 26
waiver or consent to depart from the provisions hereof with respect to a matter
that relates exclusively to the rights of Holders of Registrable Notes whose
securities are being sold pursuant to a Registration Statement and that does
not directly or indirectly affect, impair, limit or compromise the rights of
other Holders of Registrable Notes may be given by Holders of at least a
majority in aggregate principal amount of the Registrable Notes being sold
pursuant to such Registration Statement.
(d) Notices. All notices and other communications
(including, without limitation, any notices or other communications to the
Trustee) provided for or permitted hereunder shall be made in writing by
hand-delivery, registered first-class mail, next-day air courier or facsimile:
(i) if to a Holder of the Registrable
Notes or any Participating Broker-Dealer, at the most
current address of such Holder or Participating
Broker-Dealer, as the case may be, set forth on the
records of the registrar under the Indenture.
(ii) if to the Issuer, at the address as
follows:
COSTILLA ENERGY, Inc.
400 West Illinois
Suite 1000
Midland, Texas 79701
Facsimile No.: (915) 686-6080
Attention: Chief Financial Officer
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; five business days
after being deposited in the mail, postage prepaid, if mailed; one business day
after being timely delivered to a next-day air courier; and when receipt is
acknowledged by the addressee, if sent by facsimile.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address and in the manner specified in such Indenture.
(e) Successors and Assigns. This Agreement shall inure
to the benefit of and be binding upon the successors and assigns of each of the
parties hereto, the Holders and the Participating Broker-Dealers.
(f) Counterparts. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
24
<PAGE> 27
(g) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO
CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO AGREES TO
SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION
OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT.
(i) Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to
be invalid, illegal, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions set forth herein shall remain in full
force and effect and shall in no way be affected, impaired or invalidated, and
the parties hereto shall use their best efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.
(j) Securities Held by the Issuer or Its Affiliates.
Whenever the consent or approval of Holders of a specified percentage of
Registrable Notes is required hereunder, Registrable Notes held by the Issuer
or its affiliates (as such term is defined in Rule 405 under the Securities
Act) shall not be counted in determining whether such consent or approval was
given by the Holders of such required percentage.
(k) Third-Party Beneficiaries. Holders of Registrable
Notes and Participating Broker-Dealers are intended third-party beneficiaries
of this Agreement, and this Agreement may be enforced by such Persons.
(l) Entire Agreement. This Agreement, together with the
Purchase Agreement and the Indenture, is intended by the parties as a final and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein and therein and any and all
prior oral or written agreements, representations, or warranties, contracts,
understandings, correspondence, conversations and memoranda between the Holders
on the one hand and the Issuer on the other, or between or among any agents,
representatives, parents, subsidiaries, affiliates, predecessors in interest or
successors in interest with respect to the subject matter hereof and thereof
are merged herein and replaced hereby.
25
<PAGE> 28
S-1
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
COSTILLA ENERGY, INC.
By: /s/ Bobby W. Page
---------------------------------
Name: Bobby W. Page
Title: Senior Vice President
1
<PAGE> 29
S-2
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
BT ALEX. BROWN INCORPORATED,
PRUDENTIAL SECURITIES INCORPORATED
as Initial Purchasers
By: BT Alex. Brown Incorporated
By: /s/ Richard J. Doleshek
----------------------------------
Name: Richard J. Doleshek
Title: Managing Director
2
<PAGE> 1
EXHIBIT 10.18
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") is
entered into April 15, 1997 by and between COSTILLA ENERGY, INC. (the
"Company") and CADELL S. LIEDTKE ("Liedtke").
R E C I T A L S
A. The Company and Liedtke entered into an Employment
Agreement dated September 1, 1996, which Employment Agreement became effective
October 14, 1996 (the "Original Agreement").
B. The Company and Liedtke have agreed to modify the
Original Agreement by this Amendment for the sole purpose of modifying
Liedtke's title under Section 3 of the Original Agreement.
NOW, THEREFORE, the Company and Liedtke for good and valuable
consideration, the receipt and sufficiency of which are acknowledged agree to
modify the Original Agreement as follows:
1. Section 3 of the Original Agreement is deleted and
replaced to read in its entirety as follows:
"Liedtke's title during his term of employment shall be
Chairman of the Board. During the term of this Agreement, and
subject to the other provisions of this Agreement, Liedtke
shall diligently provide services to the Company."
2. Except as modified by this Agreement, all other terms
of the Original Agreement shall remain unchanged.
EXECUTED the date and year first above written.
COSTILLA ENERGY, INC.
By: /s/ Michael J. Grella
-----------------------------------
Michael J. Grella, President
/s/ Cadell S. Liedtke
----------------------------------
CADELL S. LIEDTKE
1
<PAGE> 1
EXHIBIT 10.19
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") is
entered into April 15, 1997 by and between COSTILLA ENERGY, INC. (the
"Company") and MICHAEL J. GRELLA ("Grella").
R E C I T A L S
A. The Company and Grella entered into an Employment
Agreement dated September 1, 1996, which Employment Agreement became effective
October 14, 1996 (the "Original Agreement").
B. The Company and Grella have agreed to modify the
Original Agreement by this Amendment for the purposes of modifying Grella's
title under Section 3 of the Original Agreement.
NOW, THEREFORE, the Company and Grella for good and valuable
consideration, the receipt and sufficiency of which are acknowledged agree to
modify the Original Agreement as follows:
1. Section 3 of the Original Agreement is deleted and
replaced to read in its entirety as follows:
"Grella's title during his term of employment shall be
President and Chief Executive Officer. During the term of
this Agreement, and subject to the other provisions of this
Agreement, Grella shall diligently provide services to the
Company."
2. Section 5 of the Original Agreement is deleted and
replaced to read in its entirety as follows:
"As compensation for the services to be rendered by Grella,
the Company shall pay Grella a base salary at the annual rate
of $300,000 (the "Base Salary") beginning on the closing date;
however, the Base Salary may be adjusted from time to time by
the Compensation Committee of the Board of Directors of the
Company based upon factors to be determined by the
Compensation Committee of the Board of Directors of the
Company."
3. Except as modified by this Agreement, all other terms
of the Original Agreement shall remain unchanged.
EXECUTED the date and year first above written.
COSTILLA ENERGY, INC.
By: /s/ Cadell S. Liedtke
-------------------------------
Cadell S. Liedtke,
Chairman of the Board
/s/ Michael J. Grella
-------------------------------
MICHAEL J. GRELLA
<PAGE> 1
EXHIBIT 10.20
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") is
entered into April 15, 1997 by and between COSTILLA ENERGY, INC. (the
"Company") and HENRY G. MUSSELMAN ("Musselman").
R E C I T A L S
A. The Company and Musselman entered into an Employment
Agreement dated September 1, 1996, which Employment Agreement became effective
October 14, 1996 (the "Original Agreement").
B. The Company and Musselman have agreed to modify the
Original Agreement by this Amendment for the sole purpose of modifying
Musselman's title under Section 3 of the Original Agreement.
NOW, THEREFORE, the Company and Musselman for good and
valuable consideration, the receipt and sufficiency of which are acknowledged
agree to modify the Original Agreement as follows:
1. Section 3 of the Original Agreement is deleted and
replaced to read in its entirety as follows:
"Musselman's title during his term of employment shall be
Executive Vice President and Chief Operating Officer. During
the term of this Agreement, and subject to the other
provisions of this Agreement, Musselman shall diligently
provide services to the Company."
2. Except as modified by this Agreement, all other terms
of the Original Agreement shall remain unchanged.
EXECUTED the date and year first above written.
COSTILLA ENERGY, INC.
By: /s/ Michael J. Grella
-------------------------------
Michael J. Grella, President
/s/ Henry G. Musselman
-------------------------------
HENRY G. MUSSELMAN
<PAGE> 1
EXHIBIT 10.21
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement (the
"Amendment") is entered into April 15, 1997 by and between COSTILLA ENERGY,
INC. (the "Company") and HENRY G. MUSSELMAN ("Musselman").
R E C I T A L S
A. The Company and Musselman entered into an Employment
Agreement dated September 1, 1996, which Employment Agreement became effective
October 14, 1996 and which was amended by that one certain Amendment to
Employment Agreement dated April 15, 1997 by and between the Company and
Musselman ( collectively, the "Agreement").
B. The Company and Musselman have agreed to modify the
Agreement by this Amendment for the sole purpose of increasing Musselman's
salary under Section 5 of the Agreement to $250,000.
NOW, THEREFORE, the Company and Musselman for good and
valuable consideration, the receipt and sufficiency of which are acknowledged
agree to modify the Agreement as follows:
1. Section 5 of the Agreement is deleted and replaced to
read in its entirety as follows:
"As compensation for services to be rendered by Musselman, the
Company shall pay Musselman a Base Salary at the annual rate
of $250,000 beginning on April 15, 1997. Notwithstanding the
quotation of the Base Salary at an annual rate, Musselman will
only be paid on a prorata basis for the actual days worked if
his employment is terminated."
2. Except as modified by this Agreement, all other terms
of the Original Agreement shall remain unchanged.
EXECUTED the date and year first above written.
COSTILLA ENERGY, INC.
By: /s/ Michael J. Grella
-------------------------------
Michael J. Grella, President
/s/ Henry G. Musselman
-------------------------------
HENRY G. MUSSELMAN
<PAGE> 1
EXHIBIT 10.22
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") is
entered into April 15, 1997 by and between COSTILLA ENERGY, INC. (the
"Company") and BOBBY W. PAGE ("Page").
R E C I T A L S
A. Costilla Petroleum Corporation and Costilla Energy,
L.L.C. (collectively, the "Predecessor Entities") and Page entered into an
Employment Agreement dated June 30, 1996, (the "Original Agreement").
B. The Company has assumed the obligations of the
Predecessor Entities under the Original Agreement as a result of mergers
between the Predecessor Entities and the Company.
C. The Company and Page have agreed to modify the
Original Agreement by this Amendment for the sole purpose of modifying Page's
title under Section 4 of the Original Agreement.
NOW, THEREFORE, the Company and Page for good and valuable
consideration, the receipt and sufficiency of which are acknowledged agree to
modify the Agreement as follows:
1. The first sentence of Section 4 of the Agreement is
deleted and replaced to read in its entirety as follows:
"Page's title during his term of employment shall be Senior
Vice President, Secretary, Treasurer and Chief Financial
Officer."
2. Except as modified by this Agreement, all other terms
of the Original Agreement shall remain unchanged.
EXECUTED the date and year first above written.
COSTILLA ENERGY, INC.
By: /s/ Michael J. Grella
-------------------------------
Michael J. Grella, President
/s/ Bobby W. Page
-------------------------------
BOBBY W. PAGE
<PAGE> 1
EXHIBIT 12.1
COSTILLA ENERGY, INC.
ADJUSTED EBITDA/INTEREST EXPENSE
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net income (loss) $(36,471) $ (4,440) $ (4,970) $ 163 $ 73
Interest expense 12,979 11,281 4,591 1,458 605
Income taxes 152 1,218 3 40 (23)
Exploration and abandonment 6,588 2,550 1,652 793 218
Depreciation, depletion and amortization 26,409 12,430 5,958 1,847 884
Impairment of oil and gas properties 28,189 -- -- -- --
Gain from sale of substantially all the assets
of wholly-owned subsidiary -- (906) -- -- --
Extraordinary loss resulting from early
extinguishment of debt, net of the related
deferred tax benefit of $129 and $1,042 219 4,975 -- -- --
-------- -------- -------- -------- --------
ADJUSTED EBITDA $ 38,065 $ 27,108 $ 7,234 $ 4,301 $ 1,757
======== ======== ======== ======== ========
Interest expense per consolidated financial statements $ 12,979 $ 11,281 $ 4,591 $ 1,458 $ 605
Less: amortization deferred charges (518) (1,028) -- -- --
-------- -------- -------- -------- --------
Interest expense - net of deferred charges amortization $ 12,461 $ 10,253 $ 4,591 $ 1,458 $ 605
======== ======== ======== ======== ========
ADJUSTED EBITDA/Interest expense - net of
deferred charges amortization 3.1x 2.6x 1.6x 2.9x 2.9x
======== ======== ======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Costilla Energy, Inc. has the following subsidiaries (as defined in
Rule 405 of the Rules and Regulations promulgated under the Securities Act of
1933, as amended) as of March 15, 1998:
Costilla Redeco Energy, L.L.C., a Texas limited liability company.
Costilla Energy Pipeline Corporation, a Texas corporation.
<PAGE> 1
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 on Form
S-8 filed by Costilla Energy, Inc. (No. 333-16513, No. 333-16515, No.
333-16517, No. 333-38747 and No. 333-38751) of our report dated March 6, 1998,
relating to the consolidated balance sheets of Costilla Energy, Inc. and
subsidiaries as of December 31, 1997, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997, which report
appears in the annual report on Form 10-K of Costilla Energy, Inc. for the year
ended December 31, 1997.
KPMG PEAT MARWICK LLP
Midland, Texas
March 26, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ENGINEERS
As independent engineering consultants, we hereby consent to the use
of our reports 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 26, 1998 and to the incorporation by reference of this Form 10-K
Annual Report (including the use of our report 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, and file numbers 333-38747 and 333-38751 covering additional
shares under the Outside Directors Stock Option Plan and the 1996 Stock Option
Plan, respectively.
WILLIAMSON PETROLEUM CONSULTANTS, INC.
Houston, Texas
March 25, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ENGINEER
As an independent engineering consultant, I hereby consent to the use
of my report entitled "Evaluation of Proved Oil and Gas Reserves to the
Interests of Costilla Energy, Inc. Relative to the Baimaclia and Victorovca Gas
Fields in Cantemir County and the Valeri Oil Field in Vulcaneste County of the
Republic of Moldova, Eastern Europe, Effective January 1, 1998, Pursuant to the
Requirements of the Securities and Exchange Commission, Project 8.0128" and data
extracted therefrom (and all references to me and my Firm) included in or made a
part of this Form 10-K Annual Report and to the incorporation by reference of
this Form 10-K Annual Report (including the use of my report and references to
me and my 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, and file numbers 333-38747 and 333-38751 covering additional
shares under the Outside Directors Stock Option Plan and the 1996 Stock Option
Plan, respectively.
W. SCOTT EPLEY, P.E.
Midland, Texas
March 26, 1998
<PAGE> 1
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, 1997, 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 law 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 maybe
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 19th day of March
1998.
\s\ Cadell S. Liedtke
------------------------------------------
CADELL S. LIEDTKE, Chairman of the Board
and Director
\s\ Michael J. Grella
------------------------------------------
MICHAEL J. GRELLA, President, Chief
Executive Officer and Director
\s\ Henry G. Musselman
------------------------------------------
HENRY G. MUSSELMAN, Executive Vice
President, Chief Operating Officer
and Director
\s\ Bobby W. Page
------------------------------------------
BOBBY W. PAGE, Senior Vice President,
Treasurer, Chief Financial Officer
and Secretary
\s\ Jerry Langdon
------------------------------------------
JERRY LANGDON, Director
\s\ W. D. Kennedy
------------------------------------------
W. D. KENNEDY, Director
\s\ Samuel J. Atkins, III
------------------------------------------
SAMUEL J. ATKINS, III, Director
<PAGE> 1
Exhibit 24.2
CERTIFICATE OF RESOLUTIONS
I, Bobby W. Page, 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 19,1998.
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, regulation 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, 1997, including specifically, but not
limited to, the power and authority to sign 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
RESOLVED FURTHER, 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 19th day of March, 1998.
\s\ Bobby W. Page
------------------------------------
BOBBY W. PAGE, Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF COSTILLA ENERGY, INC. FOR THE YEAR ENDED
DECEMBER 31, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,615
<SECURITIES> 0
<RECEIVABLES> 14,553
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,080
<PP&E> 240,238
<DEPRECIATION> 72,298
<TOTAL-ASSETS> 194,088
<CURRENT-LIABILITIES> 30,591
<BONDS> 163,087
0
0
<COMMON> 1,015
<OTHER-SE> (605)
<TOTAL-LIABILITY-AND-EQUITY> 194,088
<SALES> 72,300
<TOTAL-REVENUES> 76,501
<CGS> 30,029
<TOTAL-COSTS> 36,617
<OTHER-EXPENSES> 54,598
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,979
<INCOME-PRETAX> (36,100)
<INCOME-TAX> 152
<INCOME-CONTINUING> (36,252)
<DISCONTINUED> 0
<EXTRAORDINARY> (219)
<CHANGES> 0
<NET-INCOME> (36,471)
<EPS-PRIMARY> (3.51)
<EPS-DILUTED> (3.51)
</TABLE>
