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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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
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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)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
------------------
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
------ ------
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF AUGUST 10, 1998 . . . . . . . . . . . . . . . 9,855,600
</TABLE>
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<PAGE> 2
COSTILLA ENERGY, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (unaudited) and
December 31, 1997........................................................ 3
Consolidated Statements of Operations for the three and six months
ended June 30, 1998 and 1997 (unaudited)................................. 4
Consolidated Statements of Cash Flows for the three and six months
ended June 30, 1998 and 1997 (unaudited)................................. 5
Notes to Consolidated Financial Statements (unaudited)..................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................... 18
Signatures................................................................................... 19
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COSTILLA ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ---------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 17,089 $ 3,615
Accounts receivable:
Trade, net 3,081 5,241
Oil and gas sales 7,954 9,312
Prepaid and other current assets 1,439 912
--------- ---------
Total current assets 29,563 19,080
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Oil and gas properties, using the successful efforts
method of accounting:
Proved properties 233,420 199,355
Unproved properties 47,076 35,971
Accumulated depletion, depreciation and amortization (84,658) (71,152)
--------- ---------
195,838 164,174
Other property and equipment, net 3,628 3,766
--------- ---------
Total property, plant and equipment 199,466 167,940
--------- ---------
OTHER ASSETS:
Deferred charges 6,829 4,212
Other 2,400 2,856
--------- ---------
Total other assets 9,229 7,068
--------- ---------
$ 238,258 $ 194,088
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 98 $ 98
Trade accounts payable 16,299 22,490
Undistributed revenue 3,312 4,566
Other current liabilities 5,577 3,437
--------- ---------
Total current liabilities 25,286 30,591
--------- ---------
LONG-TERM DEBT, LESS CURRENT MATURITIES 182,441 163,087
--------- ---------
OTHER NONCURRENT LIABILITIES 313 --
--------- ---------
STOCKHOLDERS' EQUITY :
Preferred stock, $.10 par value (3,000,000 shares authorized; 50,000
shares outstanding at June 30, 1998 and
no shares outstanding at December 31, 1997) 5 --
Common stock, $.10 par value (20,000,000 shares authorized;
9,981,000 shares outstanding at June 30, 1998 and
10,150,500 shares outstanding at December 31, 1997) 998 1,015
Additional paid-in capital 83,552 37,425
Retained deficit (54,337) (38,030)
--------- ---------
Total stockholders' equity 30,218 410
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
--------- ---------
$ 238,258 $ 194,088
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
COSTILLA ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales $ 16,670 $ 15,279 $ 32,015 $ 34,892
Interest and other 155 154 360 920
Gain on sale of assets -- -- 337 --
-------- -------- -------- --------
16,825 15,433 32,712 35,812
-------- -------- -------- --------
EXPENSES:
Oil and gas production 7,441 6,794 14,226 14,163
General and administrative 2,577 1,856 5,070 3,370
Exploration and abandonments 2,078 1,774 5,228 3,115
Depreciation, depletion and amortization 8,305 4,806 14,364 9,720
Interest 5,094 2,809 9,833 5,516
-------- -------- -------- --------
25,495 18,039 48,721 35,884
-------- -------- -------- --------
Loss before federal income taxes and
extraordinary item (8,670) (2,606) (16,009) (72)
PROVISION FOR FEDERAL INCOME TAXES
Current -- -- -- 62
Deferred -- (191) -- --
-------- -------- -------- --------
Loss before extraordinary item (8,670) (2,415) (16,009) (134)
Extraordinary loss resulting from early
extinguishment of debt -- -- (299) --
-------- -------- -------- --------
NET LOSS $ (8,670) $ (2,415) $(16,308) $ (134)
======== ======== ======== ========
CUMULATIVE PREFERRED STOCK DIVIDEND $ 307 $ -- $ 307 $ --
======== ======== ======== ========
LOSS BEFORE EXTRAORDINARY ITEM
APPLICABLE TO COMMON EQUITY $ (8,977) $ (2,415) $(16,316) $ (134)
======== ======== ======== ========
NET LOSS APPLICABLE TO COMMON EQUITY $ (8,977) $ (2,415) $(16,615) $ (134)
======== ======== ======== ========
LOSS PER SHARE:
Loss before extraordinary item $ (0.90) $ (0.23) $ (1.63) $ (0.01)
Extraordinary loss resulting from early
extinguishment of debt -- -- (0.03) --
-------- -------- -------- --------
NET LOSS $ (0.90) $ (0.23) $ (1.66) $ (0.01)
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 9,981 10,459 10,027 10,468
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
COSTILLA ENERGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (8,670) $ (2,415) $ (16,308) $ (134)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation, depletion and amortization 8,305 4,806 14,364 9,720
Exploration and abandonments 165 11 262 58
Amortization of deferred charges 287 459 481 610
Deferred income tax expense -- (191) -- --
Allowance for doubtful accounts -- 208 -- 208
Gain on sale of oil and gas properties -- -- (337) 30
Extraordinary loss resulting from early extinguishment of debt -- -- 299 --
Gain on investment transactions (1) (224) (5) (981)
--------- --------- --------- ---------
86 2,654 (1,244) 9,511
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 3,606 2,485 3,518 1,864
Decrease (increase) in other assets 276 (21) 54 (429)
Increase (decrease) in accounts payable (5,662) (1,580) (7,445) 3,435
Increase (decrease) in other liabilities (2,158) (2,425) 2,141 191
--------- --------- --------- ---------
Net cash provided by (used in) operating activities (3,852) 1,113 (2,976) 14,572
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties (17,706) (20,672) (48,474) (35,878)
Proceeds from sale of oil and gas properties 658 1,842 3,158 2,709
Additions to other property and equipment (298) (613) (497) (1,284)
--------- --------- --------- ---------
Net cash used in investing activities (17,346) (19,443) (45,813) (34,453)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt 16,000 14,600 111,000 14,600
Payments of long-term debt (29,021) (19) (91,541) (37)
Proceeds from issuance of preferred stock, net 47,957 -- 47,957 --
Proceeds from issuance of common stock, net -- -- -- 14
Purchase of common stock -- (1,248) (1,841) (1,248)
Deferred loan and financing costs (123) -- (3,313) (61)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 34,813 13,333 62,262 13,268
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,615 (4,997) 13,473 (6,613)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,473 11,002 3,615 12,618
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,088 $ 6,005 $ 17,088 $ 6,005
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
COSTILLA ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial information as of June 30, 1998, and for the six
months ended June 30, 1998 and 1997, is unaudited. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in this form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission. However, in the opinion of management, these
interim financial statements include all the necessary adjustments to fairly
present the results of the interim periods and all such adjustments are of a
normal recurring nature. The interim consolidated financial statements should be
read in conjunction with the audited financial statements for the year ended
December 31, 1997.
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 (the
"LLC"), and its wholly owned subsidiaries, to acquire the assets of CSL
Management Corporation (which owned certain office equipment used by the
Company), and to acquire the stock of Valley Gathering Company. 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. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments to manage
well-defined commodity price and interest rate risks. The Company is exposed to
credit losses in the event of nonperformance by the counterparties to its
commodity hedges and its interest rate swap agreements. The Company only deals
with reputable financial 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 put option contracts and
costless collars to hedge the effect of price changes on a portion of its future
oil and gas production. Premiums paid and amounts receivable under the put
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.
A costless collar establishes both a floor price and a ceiling for the
commodity through the simultaneous purchase of a put option contract and the
sale of a call option contract. Since the value of the put option and the call
option offset at the time of their purchase, the collar is costless, therefore
there are no premiums to amortize. 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. Conversely, 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
6
<PAGE> 7
price and the strike price, therefore, reducing the effective price received
for oil and gas sales by the amount paid to the counterparty.
The Company has established a costless collar for oil by purchasing put
options in August 1997 on 6,500 Bbls of oil per day which establish a floor
price of $18.50 per Bbl and selling 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 established a costless collar for gas by purchasing put options on
40,000 Mmbtu of gas per day which establish a floor price of $2.40 per Mmbtu and
selling call options on 40,000 Mmbtu of gas per day at $2.55 per Mmbtu. These
gas option contracts continue through October 1998. The referenced gas prices
are based upon the index price for Houston Ship Channel gas sales. As of June
30, 1998 the Company had sold a put option on 40,000 Mmbtu of gas per day at
$2.00 per Mmbtu based upon the index price for Houston Ship Channel gas sales
during the months of September and October 1998.
Interest Rate Swap Agreements. The Company had an interest rate swap
agreement in place as of June 30, 1998 with a notional amount of $24 million, a
fixed rate of 7.5% and which will expire in January, 1999. Since the Company had
no material amount of floating rate debt outstanding at June 30, 1998, the
interest swap agreement did not qualify as a hedge and was marked to market with
the carrying value being a liability of approximately $313,000.
3. ACQUISITIONS
On August 28, 1997, the Company consummated the purchase from Ballard
Petroleum LLC ("Ballard") of certain oil and gas properties for an estimated
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 properties.
7
<PAGE> 8
Pro Forma Results of Operations
The following table reflects the pro forma results of operations for
the six months ended June 30, 1997, as though the Ballard Acquisition occurred
as of January 1, 1997. The pro forma amounts are not necessarily indicative of
results that may be reported in the future.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997
----------------
(IN THOUSANDS)
<S> <C>
Revenues $ 41,936
Net income before extraordinary items (163)
Net income per share before extraordinary items (0.02)
</TABLE>
4. LONG TERM DEBT
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, $0.5 million of which was borrowed at June 30,
1998 against an available borrowing base of $40.0 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, for the
last twelve months as of the end of each quarter, of not less than 1.75 to 1
through December 31, 1998, 2.3 to 1 through December 31, 1999 and 2.5 to 1
thereafter and (iii) a minimum tangible net worth. Borrowings under the
Revolving Credit Facility are secured by substantially all of the assets of the
Company.
Contemporaneous with entering into the Revolving Credit Facility, the
Company also entered into a second credit agreement (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 the 1998 Notes.
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
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<PAGE> 9
certain transactions with affiliates. Net proceeds from the sale of the Notes
of approximately $96.1 million were used to repay existing indebtedness.
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
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.
5. CONVERTIBLE PREFERRED STOCK
On June 3, 1998 the Company closed a private placement of 50,000 shares
of its 7% (8% Paid in Kind) Series A Cumulative Convertible Preferred Stock (the
"Preferred Stock") to Enron Capital & Trade Resources Corp. and Joint Energy
Development Investments II Limited Partnership for a purchase price of $50.0
million (the "Convertible Preferred Stock Offering"). Dividends accrue and are
payable quarterly, commencing September 15, 1998, in cash, or in certain
instances in shares of the Company's Common Stock. The dividend rate is 7% for
dividends paid in cash and 8% for dividends paid in shares of Common Stock. The
holders of the Preferred Stock may, at any time, convert shares of Preferred
Stock into shares of the Company's Common Stock at a conversion price of $12.39
which, subject to certain adjustments, would result in the issuance of 4,035,513
shares of Common Stock upon conversion of the Preferred Stock. The Registrant
may, at its option, redeem the shares of Preferred Stock after June 15, 2001,
subject to certain limitations, for a premium reducing to par on June 15, 2004
and thereafter. Net proceeds from the Convertible Preferred Stock Offering were
$48.0 million, of which $29.0 million was used to repay all but $0.5 million of
the Revolving Credit Facility and the remainder for general corporate purposes.
6. 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 has adopted the provisions of FAS 130 in its consolidated financial
statements for periods ending after December 31, 1997. The Company had no
financial instruments giving rise to comprehensive income during the three and
six month periods ended June 30, 1998.
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.
9
<PAGE> 10
COSTILLA ENERGY, INC.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance, or achievements of Costilla to be materially different
from any future results, performance, or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: the volatility of oil and gas prices, the Company's drilling results
and ability to replace oil and gas reserves, the availability of capital
resources, the reliance upon estimates of proved reserves, operating hazards and
uninsured risks, competition, government regulation, and the ability of the
Company to implement its business strategy, and other factors referenced in the
Company's public filings with the Securities and Exchange Commission.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Costilla is an independent energy company engaged in the exploration,
acquisition and development of oil and gas properties. The Company's predecessor
began operating in 1988 and through mid-1995 had grown primarily through a
series of small acquisitions of oil and gas properties and the exploitation of
those properties. In June 1995, Costilla consummated the acquisition of certain
oil and gas properties for a purchase price of approximately $46.6 million (the
"1995 Acquisition"), in June 1996, Costilla consummated the acquisition of
certain oil and gas properties for a purchase price of approximately $38.7
million (the "1996 Acquisition") 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.
10
<PAGE> 11
The following table sets forth certain operating data of Costilla for
the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
OIL AND GAS PRODUCTION:
Oil (Mbbls) 505 489 1,049 1,037
Gas (Mmcf) 4,130 3,437 7,562 6,721
MMCFE (1) 7,160 6,371 13,856 12,943
AVERAGE SALES PRICES (2):
Oil (per Bbbl) $ 15.42 $ 17.46 $ 15.39 $ 18.71
Gas (per Mcf) 2.15 1.96 2.10 2.30
COSTS PER MCFE (1):
Production cost $ 1.04 $ 1.07 $ 1.03 $ 1.09
Depreciation, depletion and amortization 1.16 0.75 1.04 0.75
General and administrative expenses 0.36 0.29 0.37 0.26
</TABLE>
--------------------
(1) MCFE represents equivalent Mcf of gas. In reference to oil, natural gas
equivalents are determined using the ratio of one barrel of crude oil ,
condensate or natural gas liquids to six Mcf of natural gas.
MMCFE represents one thousand Mcf of gas equivalent.
(2) Before deduction of production taxes and net of any hedging results.
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 put option contracts and costless collars to hedge
the effect of price changes on a portion of its future oil and gas production.
Premiums paid and amounts receivable under the put 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.
A costless collar establishes both a floor price and a ceiling for the
commodity through the simultaneous purchase of a put option contract and the
sale of a call option contract. Since the value of the put option and the call
option offset at the time of their purchase, the collar is costless, therefore
there are no premiums to amortize. 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. Conversely, 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.
11
<PAGE> 12
The net effect of the Company's commodity hedging activities increased
oil and gas revenues by $2,700,000 and $4,137,000 for the three and six month
periods ended June 30, 1998 and reduced oil and gas revenues by $236,000 and
$746,000 for the comparable periods in 1997. The Company has established a
costless collar for oil by purchasing put options on 6,500 Bbls of oil per day
which establish a floor price of $18.50 per Bbl and selling 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"). For the three months and six months ended June 30, 1998, the
Company has received a gross wellhead sales price for oil of approximately 74%
and 77%, respectively, of the NYMEX price. The Company has established a
costless collar for gas by purchasing put options on 40,000 Mmbtu of gas per day
which establish a floor price of $2.40 per Mmbtu and selling call options on
40,000 Mmbtu of gas per day at $2.55 per Mmbtu. These gas option contracts
continue through October 1998. The referenced gas prices are based upon the
index price for Houston Ship Channel gas sales, which is approximately 100% of
NYMEX. For the three months and six months ended June 30, 1998, the Company has
received a gross wellhead sales price for gas of approximately 93% of NYMEX. As
of June 30, 1998 the Company had sold a put option on 40,000 Mmbtu of gas per
day at $2.00 per Mmbtu based upon the index price for Houston Ship Channel gas
sales during the months of September and October 1998.
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 Company
had an interest rate swap agreement in place as of June 30, 1998 with a notional
amount of $24 million, a fixed rate of 7.5% and which will expire in January,
1999. Since the Company had no material amount of floating rate debt outstanding
at June 30, 1998, the interest swap agreement did not qualify as a hedge and was
marked to market with the carrying value being a liability of approximately
$313,000.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
The Company's oil and gas revenues for the three months ended June 30,
1998 were $16,670,000, representing an increase of $1,391,000 (9%) from revenues
of $15,279,000 in 1997. Lower oil prices offset in part by higher gas prices
combined to account for an overall decrease in revenues of $349,000 which was
more than offset by an increase in revenues due to a combination of successful
drilling activities and revenues related to properties purchased or sold. The
average net oil price per barrel received in 1998 was $15.42 compared to $17.46
in 1997, a 12% decrease, and the average net gas price received in 1998 was
$2.15 per Mcf compared to $1.96 in 1997, a 10% increase. Revenues received from
oil and gas hedges accounted for $4.46 per barrel and $0.11 per Mcf for the
three months ended June 30, 1998. Oil and gas hedges cost $0.24 per barrel and
$0.03 per Mcf for the comparable period in 1997.
Oil and gas production was 7,160 MMCFE in 1998 compared to 6,371 MMCFE
in 1997, a 12% increase. Additional production from a combination of successful
drilling activities and acquired properties was partially offset by production
related to properties sold.
Interest and other revenues were $155,000 for the three months ended
June 30, 1998, representing a $1,000 increase (1%) compared to $154,000 in 1997.
Interest income increased $26,000 to $90,000 for 1998 as compared with $64,000
in 1997 due to increased funds earning interest. Losses on investment
transactions of $39,000 and net gains of $63,000 were recorded for the three
months ended June 30, 1998 and 1997, respectively. These amounts related to an
interest rate swap contract which was marked-to-market. During the three months
ended June 30, 1998, the Company realized a gain of $100,000 from the release of
stock warrants it held in connection with a note receivable. No similar
transaction occurred in 1997.
Oil and gas production costs for the three month period ended June 30,
1998 were $7,441,000 ($1.04 per MCFE), compared to $6,794,000 in 1997 ($1.07 per
MCFE), representing a decrease of $647,000 (10%), due
12
<PAGE> 13
principally to a combination of lower production costs on both newly completed
wells and acquired properties and the sale of certain oil and gas properties.
General and administrative expenses for the three months ended June 30,
1998 were $2,577,000, representing an increase of $721,000 (39%) from 1997 of
$1,856,000. The increase is primarily due to an increase in personnel and
related costs necessary to accommodate the increase in the Company's oil and gas
activities, including the Acquisition and Exploration Agreement with Ballard
Petroleum.
Exploration and abandonment expense increased to $2,078,000 for the
three months ended June 30, 1998 compared to $1,774,000 in 1997. Dry hole and
abandonment costs increased to $1,301,000 in 1998 from $793,000 in 1997. The
Company incurred $334,000 of seismic costs for the three months ended June 30,
1998, compared to $812,000 in the comparable period in 1997. The Company
incurred $442,000 of other geological and geophysical costs during the three
month period ended June 30, 1998 compared to $169,000 for the same period in
1997. The increase in exploration and abandonments expense was primarily related
to the Company's increased exploratory drilling activities in 1998 compared to
1997.
Depreciation, depletion and amortization ("D D & A") expense for the
three month period ended June 30, 1998 was $8,305,000 compared to $4,806,000 for
1997, representing an increase of $3,499,000 (73%). During the 1998 period, D D
& A on oil and gas production was provided at an average rate of $1.16 per MCFE
compared to $0.75 per MCFE for 1997. Of the $3,449,000 increase, $2,612,000 was
due to the $0.41 per MCFE increase in D D & A rate necessitated by lower oil
prices at June 30, 1998 than those experienced at June 30, 1997.
Interest expense was $5,094,000 for the three months ended June 30,
1998, compared to $2,809,000 for the comparable period in 1997. The $2,285,000
(81%) increase was attributable to a combination of higher levels of average
outstanding indebtedness and the issuance in January 1998 of an additional $80
million of 10.25% senior notes due in 2006. The average amounts of applicable
interest-bearing debt in 1998 and 1997 were $197,615,000 and $104,300,000,
respectively. The effective annualized interest rate in 1998 was 10.3%, as
compared to 10.8% in 1997.
Six months Ended June 30, 1998 Compared to Six months Ended June 30, 1997
The Company's oil and gas revenues for the six months ended June 30,
1998 were $32,015,000, representing a decrease of $2,877,000 (8%) from revenues
of $34,892,000 in 1997. Lower commodity prices accounted for a decrease in
revenues of $4,818,000 which was partially offset by a combination of successful
drilling activities and revenues related to properties purchased or sold. The
average net oil price per barrel received in 1998 was $15.39 compared to $18.71
in 1997, an 18% decrease, and the average net gas price received in 1998 was
$2.10 compared to $2.30 in 1997, a 9% decrease. Revenues received from oil and
gas hedges accounted for $3.57 per barrel and $0.05 per Mcf for the six months
ended June 30, 1998. Oil and gas hedges cost $0.58 per barrel and $0.03 per Mcf
for the comparable period in 1997.
Oil and gas production was 13,856 MMCFE in 1998 compared to 12,943
MMCFE in 1997, a 7% increase. Additional production from a combination of
successful drilling activities and acquired properties was largely offset by
production related to properties sold.
Interest and other revenues were $360,000 for the six months ended June
30, 1998, representing a $560,000 decrease (61%) compared to $920,000 in 1997.
Interest income decreased $117,000 to $136,000 for 1998 as compared with
$253,000 in 1997 due to decreased funds earning interest. Losses on investment
transactions of $35,000 and gains on investment transactions of $604,000 were
recorded for the six months ended June 30, 1998 and 1997, respectively. These
gains related to an interest rate swap contract which was marked-to-market.
During the six months ended June 30, 1998, the Company realized a gain of
$100,000 from the release of stock warrants it held in connection with a note
receivable. No similar transaction occurred in 1997.
Gain on sale of assets was $337,000 for the six months ended June 30,
1998 compared to a loss of $30,000 for 1997, representing an increase of
$367,000 (1,213%). Gains from the sale of certain oil and gas properties
increased by approximately $367,000.
13
<PAGE> 14
Oil and gas production costs for the six month period ended June 30,
1998 were $14,226,000 ($1.03 per MCFE), compared to $14,163,000 in 1997 ($1.09
per MCFE), representing a decrease of $63,000. The 6% decrease in the oil and
gas production cost per MCFE is due principally to a combination of lower
production costs on both newly completed wells and acquired properties and the
sale of certain oil and gas properties.
General and administrative expenses for the six months ended June 30,
1998 were $5,070,000, representing an increase of $1,700,000 (50%) from 1997 of
$3,370,000. The increase is primarily due to an increase in personnel and
related costs necessary to accommodate the increase in the Company's oil and gas
activities, including the Acquisition and Exploration Agreement with Ballard
Petroleum.
Exploration and abandonment expense increased to $5,228,000 for the six
months ended June 30, 1998 compared to $3,115,000 in 1997. Dry hole and
abandonment costs increased to $3,994,000 in 1998 from $1,913,000 in 1997. The
Company incurred $624,000 of seismic costs for the six months ended June 30,
1998, compared to $892,000 in the comparable period in 1997. The Company
incurred $610,000 of other geological and geophysical costs during the six month
period ended June 30, 1998 compared to $309,000 for the same period in 1997. The
increase in exploration and abandonments expense was primarily related to the
Company's increased exploratory drilling activities in 1998 compared to 1997.
Depreciation, depletion and amortization ("D D & A") expense for the
six month period ended June 30, 1998 was $14,364,000 compared to $9,720,000 for
1997, representing an increase of $4,644,000 (48%). During the 1998 period, D D
& A on oil and gas production was provided at an average rate of $1.04 per MCF
compared to $0.75 per MCFE for 1997. Of the $4,644,000 increase, $3,753,000 was
due to the $0.29 per BOE increase in D D & A rate necessitated by lower oil and
gas prices at June 30, 1998 than those experienced at June 30, 1997.
Interest expense was $9,833,000 for the six months ended June 30, 1998,
compared to $5,516,000 for the comparable period in 1997. The $4,317,000 (78%)
increase was attributable to a combination of higher levels of average
outstanding indebtedness and the issuance in January 1998 of an additional $80
million of 10.25% senior notes due in 2006. The average amounts of applicable
interest-bearing debt in 1998 and 1997 were $189,583,000 and $102,263,000,
respectively. The effective annualized interest rate in 1998 was 10.4%, as
compared to 10.8% in 1997.
Results of operations for the six months ended June 30, 1998 include an
extraordinary charge of $299,000. There were no extraordinary charges for the
comparable period in 1997. These extraordinary charges related to the early
extinguishment of the Acquisition Credit Facility and consisted of previously
capitalized debt issuance costs. A portion of the proceeds from the 1998 Notes
was used to repay the Acquisition Credit Facility.
LIQUIDITY AND CAPITAL RESOURCES
Net Cash Provided By Operating Activities
For the six months ended June 30, 1998, net cash provided by operating
activities decreased to a negative $3.0 million from $14.6 million for 1997.
Cash provided by operations, before changes in operating assets and liabilities,
decreased to a negative $1.2 million from $9.5 million for the comparable period
in 1997 due primarily to lower oil and gas prices and exploratory dry holes.
With respect to the effect of lower commodity prices, oil and gas revenues
decreased by $4.8 million for the six months ended June 30, 1998 as compared to
the same period in 1997 because of lower oil and gas prices. Oil and gas
revenues attributable to commodity hedges amounted to $4.1 million for the six
months ended June 30, 1998, $3.7 million of which related to the oil hedge.
Net Cash Used in Investing Activities
Net cash used in investing activities for the six months ended June 30,
1998 was $45.8 million. Approximately $11.8 million was used for the
acquisition of oil and gas properties, with $10.2 million going to Manti
Resources ("Manti Acquisition"), $34.5 million was used for exploration and
development activities, $2.2 was used to acquire the remaining membership
interest in the limited liability company through which its Moldovan oil and gas
venture is conducted and $0.5 million for other property and equipment. Proceeds
from the sale of various oil and gas assets resulted in net cash provided from
investing activities of approximately $3.2 million. For
14
<PAGE> 15
the six months ended June 30, 1997, net cash used in investing activities was
$34.5 million. Approximately $35.9 million was used for exploration and
development activities, $1.3 million was used for other property and $2.7
million was provided by sales of oil and gas properties.
Financing Activities
For the six months ended June 30, 1998, the Company incurred $111.0
million of debt, of which approximately $91.5 million was used to repay certain
prior bank debt, $10.2 million was used for the Manti Acquisition and the
remainder was used in connection with its exploration and development
activities. In addition, the Company used approximately $1.8 million for the
purchase of 169,500 shares of its common stock. Finally, in June 1998, the
Company raised a net of approximately $48.0 million when it issued $50.0 million
of its 7% Series A Cumulative Convertible Preferred Stock. During the six months
ended June 30, 1997, the Company incurred $14.6 million of new debt which was
used in connection with its exploration and development activities and used
approximately $1.3 million , primarily for the purchase of 98,000 shares of its
common stock.
The Company entered into the Revolving Credit Facility in August 1997.
Approximately $19.9 million of the funds initially borrowed were used for the
extension and refinancing of a 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 current borrowing base of $40.0 million, $0.5 million of which was
borrowed at June 30, 1998. 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.
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 10.25% 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.
On June 3, 1998 the Company closed a private placement of 50,000 shares
of its 7% (8% Paid in Kind) Series A Cumulative Convertible Preferred Stock (the
"Preferred Stock") to Enron Capital & Trade Resources Corp. and Joint Energy
Development Investments II Limited Partnership for a purchase price of $50.0
million (the "Convertible Preferred Stock Offering"). Dividends accrue and are
payable quarterly, commencing September 15, 1998, in cash, or in certain
instances in shares of the Company's Common Stock. The dividend rate is 7% for
dividends paid in cash and 8% for dividends paid in shares of Common Stock. The
holders of the Preferred Stock may, at any time, convert shares of Preferred
Stock into shares of the Company's Common Stock at a conversion price of $12.39
which , subject to certain adjustments, would result in the issuance of
4,035,513 shares of Common Stock upon conversion of the Preferred Stock. The
Registrant may, at its option, redeem the shares of Preferred Stock after June
15, 2001, subject to certain limitations, for a premium reducing to par on June
15, 2004 and thereafter. Net proceeds from the Convertible Preferred Stock
Offering were $48.0 million, of which $29.0 million was used to repay all but
$0.5 million of the Revolving Credit Facility and the remainder for general
corporate purposes.
15
<PAGE> 16
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, net
proceeds from the Convertible Preferred Stock 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.
The Company believes that the increased availability under the
Revolving Credit Facility resulting from the application of net proceeds of the
Supplemental Notes Offering and the Convertible Preferred Stock Offering and
cash flow from operations will be sufficient for its 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.
The Company's oil hedge expires on August 31, 1998. As a result, the
Company expects that its cash flow for the four month period September through
December 1998 will be reduced by approximately $3.6 million when compared to
prior periods which included the oil hedge. The Company's estimate assumes that
oil prices are approximately the same as they were for July 1998. The Company
intends to monitor oil prices and follow its historic policy of hedging its oil
production if it believes it advantageous to do so.
Capital Expenditures
During the six months ended June 30, 1998 the Company had oil and gas
expenditures of approximately $39.7 million, exclusive of the $14.0 million
spent on the acquisition of existing oil and gas properties. The $39.7 million
of oil and gas expenditures consisted of $16.3 million of exploration costs,
$15.9 million of development costs, $4.4 million of undeveloped acreage and $5.3
million on wells in progress at June 30, 1998. The Company anticipates that its
capital expenditures for the third quarter of 1998 will be comparable to an
average of the levels for the first two quarters of 1998. The Company intends
to evaluate its fourth quarter capital expenditures based upon various factors,
including oil and gas prices and the results of its drilling activities, which
during 1998 have been almost entirely devoted to the drilling of gas wells.
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.
16
<PAGE> 17
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 established standards for related disclosures
about products and services, geographic areas, and major customers. FAS 131 is
effective for financial statements for years 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.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - In June 1998, The FASB
issued Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction.
Under this Statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk.
This Statement applies to all entities and is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Initial application of this
Statement should be as of the beginning of an entity's fiscal quarter; on that
date, hedging relationships must be designated anew and documented pursuant to
the provisions of this Statement. Earlier application of all of the provisions
of this Statement is encouraged, but it is permitted only as of the beginning of
any fiscal quarter that begins after issuance of this Statement. This Statement
should not be applied retroactively to financial statements of prior periods.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
*10.28 Securities Purchase Agreement dated as of June 3, 1998 between
Enron Capital & Trade Resources Corp. and Joint Energy
Development Investments II Limited Partnership, as purchasers,
and the Company
*10.29 Registration Rights Agreement dated as of June 3, 1998 between
Enron Capital & Trade Resources Corp. and Joint Energy
Development Investments II Limited Partnership, as purchasers,
and the Company
+10.30 Certificate of Designations of 7% (8% Paid in Kind) Series A
Cumulative Convertible Preferred Stock of Costilla Energy, Inc.
*10.31 Fifth Amendment to Amended and Restated Credit Agreement dated
as of June 30, 1998 between Bankers Trust Company, as Agent and
Union Bank of California, N.A., as Co-Agent and the Company
*27.1 Financial Data Schedule
</TABLE>
* Filed herewith
+ Incorporated by reference to the Company's Current Report on Form
8-K filed on June 5, 1998
REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on June 5, 1998
reporting the private placement of 50,000 shares of its 7% (8% Paid in
Kind) Series A Cumulative Convertible Preferred Stock to Enron Capital
& Trade Resources Corp. and Joint Energy Development Investments II
Limited partnership for a purchase price of $50.0 million.
Also, the Company filed a report on Form 8-K on June 15, 1998
reporting the exchange offer of registered 10 1/4% Senior Notes due
2006 for $80.0 million of outstanding unregistered 10 1/4% Senior Notes
due 2006.
18
<PAGE> 19
S I G N A T U R E S
Pursuant to the requirements 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: August 12, 1998 By: /s/ BOBBY W. PAGE
-----------------------------------
Bobby W. Page
Senior Vice President
and Chief Financial Officer
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
*10.28 Securities Purchase Agreement dated as of June 3, 1998 between
Enron Capital & Trade Resources Corp. and Joint Energy
Development Investments II Limited Partnership, as purchasers,
and the Company
*10.29 Registration Rights Agreement dated as of June 3, 1998 between
Enron Capital & Trade Resources Corp. and Joint Energy
Development Investments II Limited Partnership, as purchasers,
and the Company
+10.30 Certificate of Designations of 7% (8% Paid in Kind) Series A
Cumulative Convertible Preferred Stock of Costilla Energy, Inc.
*10.31 Fifth Amendment to Amended and Restated Credit Agreement dated
as of June 30, 1998 between Bankers Trust Company, as Agent and
Union Bank of California, N.A., as Co-Agent and the Company
*27.1 Financial Data Schedule
</TABLE>
* Filed herewith
+ Incorporated by reference to the Company's Current Report on Form
8-K filed on June 5, 1998
<PAGE> 1
EXHIBIT 10.28
================================================================================
SECURITIES PURCHASE AGREEMENT
DATED AS OF JUNE 3, 1998
BY AND BETWEEN
COSTILLA ENERGY, INC.
AND
ENRON CAPITAL & TRADE RESOURCES CORP.
AND
JOINT ENERGY DEVELOPMENT INVESTMENTS II LIMITED PARTNERSHIP
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6 -
"Affiliate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6 -
"Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6 -
"Certificate of Designation" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6 -
"Closing" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6 -
"Closing Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6 -
"Commission" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6 -
"Common Stock" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6 -
"Company" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6 -
"Contracts" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6 -
"Costs" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6 -
"Designated Directors" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6 -
"Dispute" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 7 -
"Dividend Stock" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 7 -
"ECT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 7 -
"ECTSC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 7 -
"Environmental Laws" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 7 -
"ERISA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 7 -
"Exchange Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 7 -
"Governmental Authority" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 7 -
"Indemnified Party" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8 -
"Indemnifying Party" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8 -
"Interested Stockholder" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8 -
"Intermediary" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8 -
"Loss" and "Losses" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8 -
"Material Adverse Effect" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8 -
"NASD" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8 -
"NASDAQ National Market System" . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8 -
"1935 Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8 -
"Notes" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8 -
"Own Company Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8 -
"Permits" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8 -
"Positions" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9 -
"Preferred Stock" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9 -
"Purchase Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9 -
"Purchaser" and "Purchasers" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9 -
</TABLE>
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<TABLE>
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"Registration Rights Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9 -
"Registration Statement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9 -
"SEC Reports" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9 -
"Securities Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9 -
"Subsidiary" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9 -
"Shares" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9 -
"Tax Returns" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9 -
"Transactions" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9 -
Section 1.2 OTHER DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9 -
Section 1.3 CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 10 -
ARTICLE II
ISSUANCE AND PURCHASE OF SERIES A PREFERRED STOCK
Section 2.1 ISSUANCE AND PURCHASE OF PREFERRED STOCK. . . . . . . . . . . . . . . . . . . . . . . . - 10 -
Section 2.2 THE CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 10 -
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 3.1 ABSENCE OF MISSTATEMENTS AND OMISSIONS. . . . . . . . . . . . . . . . . . . . . . . . . - 10 -
Section 3.2 COMMISSION REPORTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 11 -
Section 3.3 CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 11 -
Section 3.4 ORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 12 -
Section 3.5 POWER AND AUTHORITY; ENFORCEABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . - 12 -
Section 3.6 CONSENTS AND APPROVALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 13 -
Section 3.7 NO VIOLATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 13 -
Section 3.8 FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 13 -
Section 3.9 PRO FORMA FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 14 -
Section 3.10 LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 14 -
Section 3.11 INTELLECTUAL PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 14 -
Section 3.12 PERMITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 14 -
Section 3.13 NO ADVERSE CHANGE; ABSENCE OF LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . - 15 -
Section 3.14 TAX RETURNS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 15 -
Section 3.15 PROPERTIES AND CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 15 -
Section 3.16 NO UNDISCLOSED LITIGATION AND CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . - 16 -
Section 3.17 ENVIRONMENTAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 16 -
Section 3.18 LABOR MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 16 -
Section 3.19 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 17 -
Section 3.20 ERISA MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 17 -
Section 3.21 BOOKS AND RECORDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 17 -
Section 3.22 NO INVESTMENT COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 17 -
Section 3.23 REGISTRATION RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 17 -
Section 3.24 SOLVENCY MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 17 -
Section 3.25 NO INTEGRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 18 -
</TABLE>
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Section 3.26 NO REGISTRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 18 -
Section 3.27 RULE 144A MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 18 -
Section 3.28 BROKER'S OR FINDER'S COMMISSIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 18 -
Section 3.29 NO RESTRICTIONS ON AFFILIATES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 18 -
Section 3.30 USE OF PROCEEDS; MARGIN REGULATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . - 18 -
Section 3.31 PUBLIC UTILITY HOLDING COMPANY ACT MATTERS. . . . . . . . . . . . . . . . . . . . . . . - 18 -
Section 3.32 NO BURDENSOME RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 19 -
Section 3.33 NO ILLEGAL OR IMPROPER TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . - 19 -
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Section 4.1 AUTHORITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 20 -
Section 4.2 CONSENTS AND APPROVAL; NO VIOLATION. . . . . . . . . . . . . . . . . . . . . . . . . . - 20 -
Section 4.3 SECURITIES LAWS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 20 -
ARTICLE V
COVENANTS OF THE COMPANY
Section 5.1 USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 21 -
Section 5.2 CORPORATE EXISTENCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 21 -
Section 5.3 COMPLIANCE WITH LAWS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 21 -
Section 5.4 MAINTENANCE OF PROPERTIES AND PERMITS. . . . . . . . . . . . . . . . . . . . . . . . . - 21 -
Section 5.5 ACCOUNTING PRACTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 22 -
Section 5.6 RESTRICTIONS ON AFFILIATES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 22 -
Section 5.7 ACCESS TO INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 22 -
Section 5.8 SEC FILINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 22 -
Section 5.9 CERTAIN PUBLIC UTILITY MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 23 -
Section 5.10 RESERVATION OF COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 23 -
Section 5.11 QUOTATION ON NASDAQ. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 23 -
ARTICLE VI
PURCHASERS' CONDITIONS
Section 6.1 REPRESENTATIONS AND COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 23 -
Section 6.2 CERTIFICATE OF DESIGNATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 24 -
Section 6.3 REGISTRATION RIGHTS AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 24 -
Section 6.4 APPOINTMENT OF DIRECTOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 24 -
Section 6.5 DUE DILIGENCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 24 -
Section 6.6 MATERIAL ADVERSE EFFECT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 24 -
Section 6.7 REQUIRED CONSENTS AND APPROVALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 24 -
Section 6.8 NASD APPROVAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 24 -
Section 6.9 PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 24 -
Section 6.10 OPINION OF COUNSEL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 24 -
Section 6.11 ADDITIONAL DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 25 -
</TABLE>
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<TABLE>
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ARTICLE VII
COMPANY'S CONDITIONS
Section 7.1 REPRESENTATIONS AND COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 25 -
Section 7.2 REQUIRED CONSENTS AND APPROVALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 25 -
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
Section 8.1 TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 25 -
Section 8.2 SURVIVAL; FAILURE TO CLOSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 25 -
ARTICLE IX
OTHER PROVISIONS
Section 9.1 BROKERAGE FEES AND COMMISSIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 26 -
Section 9.2 BUSINESS OPPORTUNITY MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 26 -
Section 9.3 NO OBLIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 28 -
Section 9.4 BEST EFFORTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 28 -
Section 9.5 PUBLIC ANNOUNCEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 28 -
ARTICLE X
INDEMNIFICATION
Section 10.1 INDEMNIFICATION BY THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 28 -
Section 10.2 INDEMNIFICATION PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 28 -
Section 10.3 TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 29 -
ARTICLE XI
MISCELLANEOUS
Section 11.1 DISPUTE RESOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 29 -
Section 11.2 ENTIRE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 33 -
Section 11.3 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 33 -
Section 11.4 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 34 -
Section 11.5 SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 34 -
Section 11.6 EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 34 -
Section 11.7 DESCRIPTIVE HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 34 -
Section 11.8 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 34 -
Section 11.9 ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 34 -
Section 11.10 AMENDMENTS; WAIVERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 35 -
EXHIBIT A - REGISTRATION RIGHTS AGREEMENT
EXHIBIT B- CERTIFICATE OF DESIGNATION
</TABLE>
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<PAGE> 6
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (the "Agreement") is made and entered
into as of the 3rd of June, 1998, by and among Costilla Energy, Inc., a
Delaware corporation (the "Company"), and Enron Capital & Trade Resources
Corp., a Delaware corporation and Joint Energy Development Investments II
Limited Partnership, a Delaware limited partnership (individually, a
"Purchaser" and collectively, the "Purchasers").
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS. As used in this Agreement, the
following terms have the meanings indicated:
"Affiliate" and the terms contained in the definition thereof which
are themselves defined terms shall have the respective meanings given to such
terms in Rule 405 under the Securities Act.
"Agreement" has the meaning ascribed to such term in the first
paragraph hereof.
"Certificate of Designation" has the meaning ascribed to such term in
Section 2.1.
"Closing" has the meaning ascribed to such term in Section 2.2.
"Closing Date" has the meaning ascribed to such term in Section 2.2.
"Commission" has the meaning ascribed to such term in Section 3.2.
"Common Stock" means the common stock, $0.10 par value per share, of
the Company.
"Company" has the meaning ascribed to such term in the first paragraph
hereof.
"Contracts" means any indenture, mortgage, deed of trust, loan
agreement, note, lease, license, franchise agreement, permit, certificate,
contract or other agreement or instrument to which the Company or any of the
Subsidiaries is a party or to which their respective properties or assets are
subject.
"Costs" has the meaning ascribed to such term in Section 11.6.
"Designated Directors" has the meaning ascribed to such term in
Section 9.2.
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<PAGE> 7
"Dispute" has the meaning ascribed to such term in Section 11.1.
"Dividend Stock" means dividends paid on the Preferred Stock in
additional fully paid and nonassessable shares of Common Stock as provided in
Section 3(b) of the Certificate of Designation.
"ECT" means Enron Capital & Trade Resources Corp., a Delaware
corporation.
"ECTSC" means ECT Securities Corp., a Delaware corporation and an
Affiliate of Purchasers, or its successor by merger or other reorganization.
"Environmental Laws" means the common law and any and all laws,
statutes, ordinances, rules, regulations, orders, or determinations of any
Governmental Authority pertaining to health or the environment in effect in any
and all jurisdictions in which the Company or its Subsidiaries are conducting
or at any time have conducted business, or where any property of the Company or
its Subsidiaries is located, or where any hazardous substances generated by or
disposed of by the Company or its Subsidiaries are located, including but not
limited to the Oil Pollution Act of 1990, as amended ("OPA"), the Clean Air
Act, as amended, the Comprehensive Environmental, Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA"), the Federal Water Pollution
Control Act, as amended, the Occupational Safety and Health Act of 1970, as
amended, the Resource Conservation and Recovery Act of 1976, as amended
("RCRA"), the Safe Drinking Water Act, as amended, the Toxic Substances Control
Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as
amended, and other environmental conservation or protection laws. The term
"oil" has the meaning specified in OPA; the terms "hazardous substance,"
"release" and "threatened release" have the meanings specified in CERCLA, and
the terms "solid waste," "disposal" and "disposed" have the meanings specified
in RCRA; provided, however, if either CERCLA, RCRA or OPA is amended so as to
broaden the meaning of any term defined thereby, such broader meaning shall
apply subsequent to the effective date of such amendment, and provided,
further, that, to the extent the laws of the state in which any property of the
Company or its Subsidiaries is located establish a meaning for "oil,"
"hazardous substance," "release," "solid waste" or "disposal" which is broader
than that specified in either OPA, CERCLA, or RCRA, such broader meaning shall
apply with respect to such property.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
the same may from time to time be amended and supplemented, including any rules
or regulations issued in connection therewith.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Governmental Authority" means the United States, any foreign country,
state, county, city or other political subdivision, agency or instrumentality
thereof.
"Incorporated Documents" means all exhibits, appendices and annexes
included with or incorporated by reference in any of the SEC Reports.
- 7 -
<PAGE> 8
"Indemnified Party" has the meaning ascribed to such term in Section
10.1.
"Indemnifying Party" has the meaning ascribed to such term in Section
10.2.
"Interested Stockholder" has the meaning ascribed to such term in
Section 203(c)(v) of the Delaware General Corporation Law.
"Intermediary" has the meaning ascribed to such term in Section 9.1.
"Loss" and "Losses" have the meaning ascribed to such terms in Section
10.1.
"Material Adverse Effect" means any event or condition which,
individually or in the aggregate, could reasonably be expected to 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.
"NASD" means the National Association of Securities Dealers, Inc.
"NASDAQ National Market System" means the National Market System of
the National Association of Securities Dealers, Inc. Automated Quotation
System.
"1935 Act" has the meaning ascribed to such term in Section 3.31.
"Notes" shall mean the Corporation's $180,000,000 aggregate principal
amount of 10 1/4% Senior Notes Due 2006, including the terms of the related
Indenture dated as of October 1, 1996 as amended by the First Supplemental
Indenture dated as of January 16, 1998 between the Company and State Street
Bank and Trust Company, as Trustee.
"Own Company Securities" means the direct or indirect beneficial
ownership of any Shares or Common Stock underlying the Shares or any other
securities of the Company in the following amounts: (i) in the case of
Preferred Stock, any shares of Preferred Stock, (ii) in the case of Common
Stock or securities convertible into or exchangeable for Common Stock (other
than the Preferred Stock), an amount which constitutes or would be convertible
into or exchangeable for 5% or more of the then outstanding shares of Common
Stock, or (ii) in the case of other securities, an amount which has an
aggregate principal amount, stated value, liquidation value or original
issuance price, whichever is higher, of $2 million.
"Permits" means any licenses, permits, certificates, consents, orders,
approvals and other authorizations from, and 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 the
properties of the Company and the Subsidiaries and to carry on the business of
the Company and the Subsidiaries as now or proposed to be conducted as set
forth in the Prospectus and the SEC Reports.
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<PAGE> 9
"Positions" has the meaning ascribed to such term in Section 9.2.
"Preferred Stock" means the Series A Cumulative Convertible Preferred
Stock, $0.10 par value per share, of the Company.
"Prospectus" means the prospectus contained in the Registration
Statement in the form filed with the Commission pursuant to Rule 424 under the
Securities Act.
"Purchase Price" has the meaning ascribed to such term in Section 2.1.
"Purchaser" and "Purchasers" have the meanings ascribed to such terms
in the first paragraph hereof.
"Registration Rights Agreement" means the Registration Rights
Agreement in the form attached hereto as Exhibit A.
"Registration Statement" means the Company's Registration Statement on
Form S-4 (file No. 333-50347), filed by the Company under the Securities Act in
the form declared effective by the Commission on April 29, 1998.
"SEC Reports" means the Registration Statement, the Company's Annual
Report on Form 10-K for the Fiscal Year ended December 31, 1997, the Company's
Quarterly Report on Form 10-Q for the Quarter ended March 31, 1998, the
definitive Proxy Statement for the Annual Meeting of Stockholders held on May
29, 1998 and each other document, report or filing made by the Company and any
of its Subsidiaries since December 31, 1997 to and including the Closing Date
with the Commission, including, in each instance, all Incorporated Documents.
"Securities Act" means the Securities Act of 1933, as amended.
"Subsidiary" means, when used with reference to an entity, any
corporation, a majority of the outstanding voting securities of which are owned
directly or indirectly by such entity. Such term shall also refer to any other
partnership, limited partnership, limited liability company, joint venture,
trust, or other business entity in which such entity has a material interest.
"Shares" has the meaning ascribed to such term in Section 2.1.
"Tax Returns" has the meaning ascribed to such term in Section 3.14.
"Transactions" means the issuance and sale of the Shares to the
Purchasers and the other transactions contemplated by this Agreement and the
Registration Rights Agreement.
Section 1.2 OTHER DEFINITIONS. Other terms defined in this
Agreement have the meanings so given them.
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Section 1.3 CONSTRUCTION. Whenever the context requires, the
gender of all words used in this Agreement includes the masculine, feminine,
and neuter. Except as specified otherwise, all references to Articles and
Sections refer to articles and sections of this Agreement, and all references
to exhibits are to Exhibits attached to this Agreement, each of which is made a
part of this Agreement for all purposes. The word "including" shall mean
"including, without limitation" unless the context otherwise requires.
ARTICLE II
ISSUANCE AND PURCHASE OF SERIES A PREFERRED STOCK
Section 2.1 ISSUANCE AND PURCHASE OF PREFERRED STOCK. Subject to
the terms and conditions of this Agreement, the Company agrees to issue and
sell to the Purchasers (or the Purchasers' designees or Affiliates), in such
proportion as the Purchasers shall designate prior to the Closing Date, and the
Purchasers (or the Purchasers' designees or Affiliates) agree to subscribe for
and purchase from the Company, an aggregate of 50,000 shares (the "Shares") of
Preferred Stock of the Company having the relative rights, preferences,
privileges and limitations set forth on the "Certificate of Designations of 7%
(8% Paid in Kind) Series A Cumulative Convertible Preferred Stock" (the
"Certificate of Designation") attached hereto as Exhibit B and incorporated
herein for all purposes by this reference, for an aggregate purchase price of
$50,000,000 ($1,000.00 per share of Preferred Stock) (the "Purchase Price").
Section 2.2 THE CLOSING. Subject to the terms and conditions of
this Agreement, the issuance and purchase of the Shares shall take place at a
closing (the "Closing") to be held at the offices of Vinson & Elkins L.L.P.,
1001 Fannin Street, 23rd Floor, Houston, Texas, at 10:00 a.m. (Central time) on
June 3, 1998, or such later date as may be agreed by the parties. The date on
which the Closing occurs is referred to herein as the "Closing Date." On the
Closing Date, the Company will deliver certificates representing the validly
issued, fully paid and nonassessable Shares registered in the name of the
Purchasers and/or the Purchaser's nominees, designees or Affiliates upon
receipt of the Purchase Price therefor by wire transfer of immediately
available funds to an account designated by the Company, or by such other
method as is mutually agreed to by the Purchasers and the Company. Such
certificates shall bear appropriate restrictive legends deemed necessary by the
Company to comply with applicable securities laws. Effective as of the Closing
Date, the Company shall have filed with the Secretary of State of the State of
Delaware the Certificate of Designation.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchaser as of the date hereof
as follows:
Section 3.1 ABSENCE OF MISSTATEMENTS AND OMISSIONS. Neither the
Prospectus as of the date thereof, the SEC Reports, the Incorporated Documents
nor any amendment or supplement thereto as of the date thereof contained or
contains any untrue statement of a material fact or omitted
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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. No
representation or warranty made by the Company contained in this Agreement and
no statement contained in any certificate, list, exhibit or other instrument
specified in this Agreement, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary to make
the statements contained therein, in light of the circumstances under which
they were made, not misleading.
Section 3.2 COMMISSION REPORTS. The Company has made all filings
required to be made by it with the Securities and Exchange Commission (the
"Commission") pursuant to Sections 12, 13, 14 and 15 of the Exchange Act. All
of such filings (other than the Prospectus, the SEC Reports and the
Incorporated Documents), and all filings made by the Company with the
Commission pursuant to such sections, rules and regulations although not
required to be made, complied in all material respects, as to both form and
content, with all applicable requirements of the Exchange Act and the rules and
regulations thereunder, and, at the time of filing, did not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading. The Prospectus, the SEC Reports and
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,
as to both form and content, to the requirements of the Securities Act or
Exchange Act, as applicable; and any further SEC Reports and Incorporated
Documents will, when so filed, be filed in a timely manner and conform in all
material respects, as to both form and content, to the requirements of the
Exchange Act.
Section 3.3 CAPITALIZATION. (i) As of the Closing Date, (A)
the Company will have the authorized, issued and outstanding capitalization set
forth in the Prospectus and the SEC Reports (other than the Preferred Stock and
any changes due to the exercise of outstanding stock options), and (B) the
Certificate of Designation will have been filed with the Secretary of State of
the State of Delaware. All of the outstanding shares of capital stock of the
Company and each of 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 Prospectus and the SEC Reports and except for liens granted in
favor of the lenders under the Company's credit facility, all of the
outstanding shares of capital stock of the Subsidiaries will be free and clear
of all liens, encumbrances, equities and claims or restrictions on
transferability (other than those imposed by the Securities Act and the
securities or "Blue Sky" laws of certain jurisdictions).
(ii) Upon receipt by the Company of the Purchase Price,
the Shares shall be duly authorized, validly issued, fully paid and
non-assessable. Other than such action as may be requested by the NASD after
Closing, the Shares have been duly authorized for issuance by all requisite
corporate and other action, and the shares of Common Stock issuable upon
conversion of the Shares have been duly authorized for issuance by all
requisite corporate and other action and have been reserved for issuance, and
such shares of Common Stock when issued upon conversion of the Shares,
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and any shares of Dividend Stock issued as a dividend on or in respect of the
Shares will be validly issued, fully paid and non-assessable and free of any
legal or contractual preemptive rights.
Section 3.4 ORGANIZATION. 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 Prospectus and the SEC Reports; 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 have a Material Adverse Effect.
Section 3.5 POWER AND AUTHORITY; ENFORCEABILITY. (i) The Company
has all requisite corporate power and authority to execute, deliver and perform
each of its obligations under the Preferred Stock and the Certificate of
Designation. The Shares, when issued, will be in the form contemplated by the
Certificate of Designation. The issuance and sale of the Shares have been duly
and validly authorized by the Company and, when executed and delivered by the
Company and when delivered to and paid for by the 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 Certificate of Designation, 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).
(ii) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under this Agreement
and to engage in and perform the Transactions. This Agreement and the
Transactions have been duly and validly authorized by the Company and, when
executed and delivered in accordance with its terms (assuming the due
authorization, execution and delivery by the Purchasers), this Agreement 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 (A)
bankruptcy, insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights generally and (B) 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). Approval of the Agreement and
the Transactions contemplated thereby by the Board of Directors of the Company
constitutes approval by the Board of Directors of the Company of the Purchasers
(or their respective Affiliates or designees) becoming Interested Stockholders
of the Company prior to the time the Purchasers (or their respective Affiliates
or designees) became Interested Stockholders within the meaning of Section 203
of the Delaware General Corporation Law.
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(iii) 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 Purchasers),
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 (1) bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights generally and (2) 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.
Section 3.6 CONSENTS AND APPROVALS. 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 Transactions contemplated hereby, except such as have been
obtained or as may be requested by the National Association of Securities
Dealers, Inc. following the Closing Date. Neither the Company nor any of the
Subsidiaries is (i) in violation of its certificate or articles of
incorporation or organization or bylaws or regulations, (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 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 Contracts,
except for any such breach, default, violation or event which would not have a
Material Adverse Effect.
Section 3.7 NO VIOLATION. The execution, delivery and
performance by the Company of this Agreement, the Certificate of Designation,
the Preferred Stock 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 have a Material Adverse Effect, (ii) the certificate of
incorporation or bylaws of the Company or any of the Subsidiaries, or (iii) any
Permit or 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 have a Material Adverse Effect.
Section 3.8 FINANCIAL STATEMENTS. The consolidated financial
statements of the Company and the related notes thereto included in the
Prospectus and the SEC Reports present fairly in all
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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 Securities Act and the Exchange Act and the rules and regulations
thereunder. The selected financial and statistical data included in the
Prospectus 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 Securities Act and the rules and regulations
thereunder. KPMG Peat Marwick LLP is an independent public accounting firm
within the meaning of the Act.
Section 3.9 PRO FORMA FINANCIAL STATEMENTS. (i) The pro forma
financial statements (including the notes thereto) and other pro forma
financial information included in the Prospectus and the SEC Reports (A) comply
as to form 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
Prospectus and the SEC Reports are reasonable and the adjustments used therein
are appropriate to give effect to the transactions or circumstances referred to
therein.
Section 3.10 LITIGATION. Except as described in the Prospectus
and the SEC Reports, there is not pending or, to the best knowledge of the
Company, threatened any action, suit, proceeding, inquiry or investigation to
which the Company or any of its Subsidiaries is a party, or to which any of
their respective 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 Shares to be sold hereunder or
the consummation of the Transactions contemplated hereby.
Section 3.11 INTELLECTUAL PROPERTY. 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 Prospectus and the SEC Reports, 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 have a Material Adverse Effect.
Section 3.12 PERMITS. Each of the Company and the Subsidiaries
possesses all Permits, and has made or will have made prior to the Closing Date
all declarations and filings necessary or advisable to obtain any Permits,
except where the failure to obtain such Permits would not have a
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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 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 as described in the Prospectus and the
SEC Reports and except where such revocation or modification would not have a
Material Adverse Effect.
Section 3.13 NO ADVERSE CHANGE; ABSENCE OF LIABILITIES. Since the
respective dates as of which information is given in the Prospectus and the SEC
Reports 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 SEC Reports, except as expressly disclosed in the Prospectus
and the SEC Reports, 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).
Section 3.14 TAX RETURNS. Each of the Company and Subsidiaries
has filed all returns and reports of or relating to any federal, state, local
or foreign income, franchise, ad valorem, excise, withholding or other taxes
("Tax Returns") required to be filed on or before the date hereof, except where
the failure to so file such Tax Returns would not have a Material Adverse
Effect, and has paid all taxes shown as due on such Tax Returns. 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 is no claim against the Company or any of its Subsidiaries for
any taxes (including any penalties and interest), and no assessment, deficiency
or adjustment has been asserted or proposed that would have a Material Adverse
Effect.
Section 3.15 PROPERTIES AND CONTRACTS. 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 Prospectus and the SEC
Reports as being owned by it free and clear of all liens, charges, encumbrances
or restrictions, except as described in the Prospectus and the SEC Reports or
to the extent the failure to have such title or the existence of such liens,
charges, encumbrances or
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restrictions would not have a Material Adverse Effect. All contracts and
agreements and all leases (other than interests in oil and gas leases), to
which the Company or any Subsidiary is a party or by which the Company or such
Subsidiary is bound are valid, binding and enforceable against the Company or
such Subsidiary and, to the knowledge of the Company, are valid, binding and
enforceable against the other party or parties thereto and are in full force
and effect with only such exceptions as would not have a Material Adverse
Effect. The Company and each of the Subsidiaries, and to their best knowledge,
the other parties thereto, are not in default under any of their respective
contracts, agreements or leases, which default would have a Material Adverse
Effect.
Section 3.16 NO UNDISCLOSED LITIGATION AND CONTRACTS. 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 Securities Act that
are not described in the Prospectus and the SEC Reports, nor are there any
material contracts or other documents that would be required to be described in
a prospectus pursuant to the Securities Act that are not described in the
Prospectus and the SEC Reports.
Section 3.17 ENVIRONMENTAL MATTERS. Except as would not have a
Material Adverse Effect, (i) each of the Company and the Subsidiaries is in
compliance with and not subject to liability under applicable Environmental
Laws, (ii) 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, (iii) 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, (iv) 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, (v) neither the Company nor any Subsidiary has
received notice that it has been identified as a potentially responsible party
under CERCLA, or any comparable state law, (vi) no property or facility of the
Company or any Subsidiary is (A) listed or proposed for listing on the
National Priorities List under CERCLA or (B) 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; and (vii) there has been no exposure of
any person or property to any hazardous substances in connection with the
operations and activities of the Company and each Subsidiary which could
reasonably be expected to give rise to a claim for damages or compensation.
Section 3.18 LABOR MATTERS. 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, and none of
the Company or any of the Subsidiaries has suffered any strikes, walkouts, work
stoppages or other material labor difficulty within the last five years. There
are no collective bargaining agreements or multiemployer plans covering the
employees of the Company or any of its Subsidiaries.
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Section 3.19 INSURANCE. Each of the Company and the Subsidiaries
carries insurance in such amounts and covering such risks in such amounts as
are prudent and customary for persons of a similar size and reputation in the
businesses in which they are engaged.
Section 3.20 ERISA MATTERS. 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 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.
Section 3.21 BOOKS AND RECORDS. 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.
Section 3.22 NO INVESTMENT COMPANY. 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.
Section 3.23 REGISTRATION RIGHTS. No holder of securities of the
Company (other than the Shares) 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 other than registration
rights granted pursuant to that certain Consolidation Agreement dated as of
September 13, 1996, as amended October 8, 1996, by and among the Company,
Costilla Energy, L.L.C., CSL Management Corporation, Valley Gathering Company,
Cadell S. Liedtke, Michael J. Grella, Henry G. Musselman and NationsBanc
Capital Corporation.
Section 3.24 SOLVENCY MATTERS. Immediately after the consummation
of the transactions contemplated by this Agreement and the application of the
proceeds of the Shares, 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 consummation of
the transactions contemplated hereby, (i) left with unreasonably small capital
with which to carry on its business as it is proposed to be conducted, (ii)
unable to pay its debts (contingent or otherwise) as they mature, or (iii)
otherwise insolvent.
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Section 3.25 NO INTEGRATION. 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 Securities 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 Securities Act) which is or could
be integrated with the sale of the Shares in a manner that would require the
registration under the Securities Act of the Shares or (ii) engaged in any form
of general solicitation or general advertising (as those terms are used in
Regulation D under the Securities Act) in connection with the offering of the
Shares or in any manner involving a public offering within the meaning of
Section 4(2) of the Securities Act.
Section 3.26 NO REGISTRATION. It is not necessary in connection
with the offer, sale and delivery of the Shares to the Purchasers in the manner
contemplated by this Agreement to register any of the Shares under the
Securities Act or to register or qualify such offer, sale and delivery under
any applicable state "blue sky" or securities laws, based on available
non-public offering exemptions which are based, in part, on the representations
of the Purchasers in Section 4.3.
Section 3.27 RULE 144A MATTERS. No securities of the Company are
of the same class (within the meaning of Rule 144A under the Securities Act) as
the Preferred Stock 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.
Section 3.28 BROKER'S OR FINDER'S COMMISSIONS. No broker's or
finder's fees or commissions will be payable by the Company in connection with
the issuance and sale of the Shares or the Transactions.
Section 3.29 NO RESTRICTIONS ON AFFILIATES. The Company is not a
party to any agreement that would purport to impose restrictions or limitations
on its Affiliates (other than its controlled Affiliates), including Purchasers
and their respective Affiliates after the Transactions.
Section 3.30 USE OF PROCEEDS; MARGIN REGULATIONS. All proceeds
from the issuance of Shares will be used by the Company only in accordance with
the provisions of Section 5.1. No part of the proceeds from the issuance of
Shares will be used by the Company to purchase or carry any "margin stock"
(within the meaning of the regulations referred to in the following sentence)
or to extend credit to others for the purpose of purchasing or carrying any
"margin stock." Neither the purchase of the Shares nor the use of the proceeds
thereof will violate or be inconsistent with the provisions of Regulations G,
T, U or X of the Federal Reserve Board.
Section 3.31 PUBLIC UTILITY HOLDING COMPANY ACT MATTERS. The
Company and each of the Subsidiaries (i) does not and will not own or operate
any facility used for the generation, transmission or distribution for sale of
electric energy or any facility used for the retail distribution of natural or
manufactured gas, each within the meaning of the Public Utility Holding Company
Act of 1935, as amended and the rules and regulations of the Commission
thereunder (the "1935 Act"), (ii) is not and will not be an "electric utility
company" or a "gas utility company" within the meaning of the 1935 Act, (iii)
is not and will not be (A) a "holding company," (B) a "subsidiary company,"
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an "affiliate" or "associate company" of a "holding company" or (C) an
"affiliate" of a "subsidiary company" of a "holding company," each within the
meaning of the 1935 Act, and (iv) is not and will not be subject to regulation
as a public utility, public utility holding company (except to the extent
certain acquisitions may be subject to the regulatory approval of the
Commission pursuant to Section 9(a)(2) of the 1935 Act) or public service
company (or similar designation) by any state in the United States, by the
United States, by any foreign country or by any agency or instrumentality of
any of the foregoing; and (v) is not subject to any other federal or state law
or regulation which purports to restrict or regulate its ability to borrow
money.
Section 3.32 NO BURDENSOME RESTRICTIONS. Neither the Company nor
its Subsidiaries is a party to any agreement or instrument or subject to any
other obligation or any charter or corporate restriction or any provision of
any applicable law, rule or regulation which could have a Material Adverse
Effect.
Section 3.33 NO ILLEGAL OR IMPROPER TRANSACTIONS. Neither the
Company nor any Subsidiary has, nor has any director, officer or employee of
the Company or any Subsidiary, directly or indirectly, used funds or other
assets of the Company or any Subsidiary, or made any promise or undertaking in
such regard, for (a) illegal contributions, gifts, entertainment or other
expenses relating to political activity; (b) illegal payments to or for the
benefit of governmental officials or employees, whether domestic or foreign,
(c) illegal payments to or for the benefit of any person, firm, corporation or
other entity, or any director, officer, employee, agent or representative
thereof; (d) gifts, entertainment or other expenses that jeopardize the normal
business relations between the Company or any Subsidiary and any of its
customers; (e) the establishment or maintenance of a secret or unrecorded fund;
or (f) participated in or co-operated with an international boycott as defined
in Section 999 of the Code; and there have been no knowingly false or
fictitious entries made in the books or records of the Company or any
Subsidiary.
Section 3.34 COMPLETENESS OF INFORMATION. The copies of written
materials that the Company has delivered to or made available to the Purchasers
constitute accurate copies of the originals thereof, and the files and records
that the Company has delivered to or made available to the Purchasers, together
with the SEC Reports and the Prospectus constitute all material written factual
information in the possession of the Company or its affiliates concerning the
Company and its Subsidiaries. The Company is not aware of any fact, matter or
circumstance that has not been disclosed to the Purchasers that does or may
render any such materials, files, records, or other information untrue,
inaccurate, or misleading in any material respect. If any dispute arises as to
whether or not any matter was orally disclosed to the Purchasers, the Company
will have the burden of proving that such matters were in fact so disclosed.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
The Purchasers hereby severally represent and warrant to the Company as of
the date hereof as follows:
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Section 4.1 AUTHORITY. Each of the Purchasers has all requisite
corporate or partnership power and authority to execute and deliver this
Agreement and the Registration Rights Agreement and to consummate the
Transactions to be performed by the Purchasers. The execution and delivery of
this Agreement and the Registration Rights Agreement and the consummation of
the Transactions to be performed by the Purchasers have been duly and validly
authorized by all necessary action on the part of the Board of Directors or
General Partner of the Purchaser, as the case may be, and no other corporate or
similar proceedings are necessary to authorize the execution and delivery of
this Agreement and the Registration Rights Agreement by the Purchasers or to
consummate the Transactions to be performed by the Purchasers. This Agreement
and the Registration Rights Agreement has been duly and validly executed and
delivered by each of the Purchasers and, assuming this Agreement and the
Registration Rights Agreement constitute valid and binding obligations of the
Company, this Agreement and the Registration Rights Agreement constitute a
valid and binding agreement of each of the Purchasers, enforceable against it
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 brought
(regardless of whether such enforcement is considered in a proceeding in equity
or at law).
Section 4.2 CONSENTS AND APPROVAL; NO VIOLATION. Neither the
execution and delivery of this Agreement and the Registration Rights Agreement
by the Purchasers, the consummation of the Transactions to be performed by the
Purchasers, nor compliance by the Purchasers, with any of the provisions hereof
will (i) conflict with or result in any breach of any provisions of the
Articles of Incorporation, by-laws or Agreement of Limited Partnership of such
Purchaser, (ii) require any material consent, approval, authorization or permit
of, or filing with or notification to, any Governmental Authority, except for
consents, approvals, authorizations, permits, filings or notifications which
have been obtained or made, (iii) result in a default (with or without due
notice or lapse of time or both) or give rise to any right of termination,
cancellation or acceleration under any of the terms, conditions or provisions
of any material (meaning for purposes of this representation and warranty with
respect to Purchasers only those creating a monetary liability of $50,000,000
or more) indentures, loan or credit agreements, receivables sale or financing
agreements, lease financing agreements, capital leases, mortgages, security
agreements, bonds and notes (except bonds and notes issued pursuant to the
aforesaid indentures and loan or credit agreements), and guaranties of any such
obligations to which such Purchaser is a party or by which such Purchaser or
any of its assets may be bound, except for such defaults (or rights of
termination, cancellation or acceleration) as to which requisite waivers or
consents have been obtained, or (iv) violate any material order, writ,
injunction, decree, statute, rule or regulation applicable to such Purchaser or
any of its assets.
Section 4.3 SECURITIES LAWS. Each Purchaser has such knowledge
and experience in financial and business matters as enables it to evaluate the
merits and risks of an investment in the Shares. Each Purchaser is an
"accredited investor" as such term is defined in Rule 501 under the Securities
Act. Each Purchaser is acquiring the Shares for its own account and not with
the view to
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resale or redistribution thereof in violation of the Securities Act. Each
Purchaser acknowledges that it may not transfer the Shares or the Common Stock
underlying the Shares except pursuant to an effective registration statement
under the Securities Act or pursuant to an exemption from the registration
requirements of the Securities Act, and that a legend to such effect shall be
included on the certificate representing the Shares.
ARTICLE V
COVENANTS OF THE COMPANY
Section 5.1 USE OF PROCEEDS. The entire amount of the cash
proceeds from the issuance of the Shares shall be used by the Company on and
after the Closing Date to reduce indebtedness under the Company's revolving
credit facility and for general corporate purposes.
Section 5.2 CORPORATE EXISTENCE. For so long as the Purchasers
or any of their respective Affiliates or designees Own Company Securities, the
Company will do or cause to be done all things necessary to preserve and keep
in full force and effect the corporate existence, rights (charter and
statutory) and franchises of the Company and each of its Subsidiaries;
provided, however, that the Company shall not be required to preserve any such
right or franchise if the Board of Directors shall determine that the
preservation thereof is no longer desirable in the conduct of the business of
the Company and its Subsidiaries as a whole and that the loss thereof is not
disadvantageous in any material respect to the Purchasers.
Section 5.3 COMPLIANCE WITH LAWS. For so long as the Purchasers
or any of their respective Affiliates or designees Own Company Securities, the
Company shall and shall cause each of its Subsidiaries to comply with all
applicable federal, state and local laws, rules and regulations, including,
without limitation, Environmental Laws, except where failure to comply will not
have a Material Adverse Effect.
Section 5.4 MAINTENANCE OF PROPERTIES AND PERMITS. For so long
as the Purchaser or any of their respective Affiliates or designees Own Company
Securities, the Company will (i) cause all properties (except as to properties
not operated by the Company or a Subsidiary, as to which the Company shall use
commercially reasonable efforts) owned by the Company or any Subsidiary or used
or held for use in the conduct of its business or the business of any
Subsidiary to be maintained and kept in good condition, repair and working
order and supplied with all necessary equipment and will cause to be made all
necessary repairs, renewals, replacements, betterments and improvements
thereof, and (ii) keep in full force and effect or obtain valid Permits and
fulfill and perform all obligations with respect to such Permits as are
necessary or advisable to the operation of the business of the Company and the
Subsidiaries, all as in the judgment of the Company may be necessary so that
the business carried on in connection therewith may be properly and
advantageously conducted at all times; provided, however, that nothing in this
Section shall prevent the Company from discontinuing the maintenance of any of
such properties or Permits if such discontinuance is not disadvantageous in any
material respect to the Purchasers and would not have a Material Adverse
Effect.
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Section 5.5 ACCOUNTING PRACTICES. For so long as the Purchasers
or any of their respective Affiliates or designees Own Company Securities, the
Company shall not, and shall not permit any of its Subsidiaries to, materially
change any method of accounting employed in the preparation of their financial
statements from the methods employed in the preparation of the audited
consolidated financial statements of the Company for the year ended December
31, 1997, unless required to conform to generally accepted accounting
principles, recommended by the Company's independent auditors or approved in
writing by the Purchaser, which approval will not be unreasonably withheld or
delayed.
Section 5.6 RESTRICTIONS ON AFFILIATES. For so long as the
Purchaser or any of their respective Affiliates or designees Own Company
Securities, the Company and each of the Subsidiaries will not become a party to
or suffer to exist any agreement that would purport to impose restrictions or
limitations on the Purchasers and their respective Affiliates as Affiliates of
the Company or any of the Subsidiaries after the Closing Date (other than
restrictions on transactions with the Company and its Subsidiaries) without, in
each case, the prior written consent of the affected Purchaser.
Section 5.7 ACCESS TO INFORMATION. Between the date hereof and
the Closing Date, the Company will afford to the Purchasers and their
authorized representatives full access to the plant, offices, warehouses, or
other facilities and properties, including oil and gas properties, and to the
books and records of the Company and its Subsidiaries, will permit the
Purchasers and their representatives to make such reasonable inspections as
they may require and will cause its officers and those of its Subsidiaries to
furnish the Purchasers and their representatives with such financial and
operating data, environmental assessment and other information with respect to
the business, assets and properties of the Company and its Subsidiaries, as
applicable, as the Purchasers and their representatives may from time to time
request. No inspection or examination by the Purchasers or their
representatives will constitute a waiver of any claim against the Company for
misrepresentation or breach of this Agreement. Purchasers shall hold strictly
confidential all information obtained as a result of such access; provided,
that Purchasers shall not be obligated to hold confidential information which
(A) was or becomes generally available to the public other than as a result of
a disclosure by the Purchasers or their representatives, (B) was or becomes
available to the Purchasers on a nonconfidential basis from a source other than
the Company or its representatives, provided that such source is not bound by a
confidentiality agreement with the Company or otherwise prohibited from
transmitting the information to the Purchasers, or (C) is required to be
disclosed in order to comply with any applicable law, order, regulation or
ruling or the rules of any national securities exchange.
Section 5.8 SEC FILINGS. For so long as the Purchasers or any of
their respective Affiliates or designees Own Company Securities, the Company
covenants and agrees that it will (i) maintain on a current basis the filing of
all reports required to be filed by the Company pursuant to the Exchange Act
and the rules and regulations thereunder and promptly deliver to the Purchasers
or their Affiliates or designees copies of all such reports; (ii) use its
reasonable best efforts to achieve and maintain qualification for the use of
Form S-3 (or any successor form) under the Securities Act;
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<PAGE> 23
and (iii) cooperate with the Purchasers whenever the Purchasers wish to dispose
of any securities of the Company owned by either of them or any of their
respective Affiliates or designees under Rule 144 and/or Rule 144A under the
Securities Act, to the full extent feasible in order to consummate such
disposition.
Section 5.9 CERTAIN PUBLIC UTILITY MATTERS. For so long as the
Purchasers or any of their respective Affiliates or designees Own Company
Securities, neither the Company nor any Subsidiary will take any action that
would be inconsistent with the representations contained in Section 3.31
hereof.
Section 5.10 RESERVATION OF COMMON STOCK. The Company has
reserved for issuance and shall at all times keep reserved, out of the
authorized and unissued shares of the Company's Common Stock, a number of
shares sufficient to provide for the exercise of the rights of conversion
represented by the Shares and shall keep such shares free of any legal or
contractual preemptive rights. The Company will take all steps necessary to
keep the shares of Common Stock issuable upon conversion of the Shares duly
authorized for issuance by all requisite corporate and other action, and to
assure that such shares of Common Stock when issued upon conversion of the
Shares, and any shares of Dividend Stock issued as a dividend on or in respect
of the Shares will be validly issued, fully paid and non-assessable and free of
any legal or contractual preemptive rights.
Section 5.11 QUOTATION ON NASDAQ. The Company shall take all
necessary steps to cause the Common Stock issuable upon conversion of the
Shares and any shares of Dividend Stock issued as a dividend on or in respect
of the Shares to be listed for quotation on the NASDAQ National Market, and the
Company will file any and all agreements, forms and other documents, including,
without limitation, The NASDAQ National Market Notification Form for Listing of
Additional Shares and take all other action necessary for the listing of the
Common Stock issuable upon conversion of the Shares and any shares of Dividend
Stock issued as a dividend on or in respect of the Shares (or, in the case of
Dividend Stock, before the date of issuance thereof). The Company shall
maintain the designation and quotation, or listing, of its Common Stock on the
NASDAQ National Market (or on the New York Stock Exchange or the American Stock
Exchange) until the conversion, redemption or retirement of all the Preferred
Stock.
ARTICLE VI
PURCHASERS' CONDITIONS
The obligations of the Purchasers to effect the closing of the Shares on
the Closing Date are subject to the satisfaction of the following conditions
any one or more of which may be waived by the Purchasers.
Section 6.1 REPRESENTATIONS AND COVENANTS. The representations
and warranties contained in Article III hereof shall be true and correct in all
material respects on and as of the Closing Date as if made, and shall be deemed
to have been remade, on and as of the Closing Date. The Company shall have
complied with all of its obligations contained herein the performance of
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which is required on or prior to the Closing Date. The Purchasers shall have
received a certificate to the foregoing effect executed by an executive officer
of the Company.
Section 6.2 CERTIFICATE OF DESIGNATION. The Certificate of
Designation in the form of Exhibit B shall have been duly adopted by all
requisite corporate action and filed with the Secretary of State of the State
of Delaware on or before the Closing Date, and shall not have been amended or
modified.
Section 6.3 REGISTRATION RIGHTS AGREEMENT. The Registration
Rights Agreement in the form of Exhibit A shall have been duly adopted by all
requisite corporate action, executed and delivered by the Company and be in
full force and effect.
Section 6.4 APPOINTMENT OF DIRECTOR. If requested by Purchasers,
one designee of Purchaser shall have been appointed to the Board of Directors
of the Company.
Section 6.5 DUE DILIGENCE. The Purchasers shall, prior to the
Closing Date, be satisfied, in their sole discretion, with the results of their
legal and business due diligence of the Company.
Section 6.6 MATERIAL ADVERSE EFFECT. Since December 31, 1997,
there shall have occurred no event, act, or condition which has had, or could
have, a Material Adverse Effect.
Section 6.7 REQUIRED CONSENTS AND APPROVALS. (i) The
Transactions shall have been approved by the Board of Directors or General
Partner of each of the Purchasers, as applicable, and the Company (including
approval by the Board of Directors of the Company, before the Purchasers and
their respective Affiliates and designees become Interested Stockholders of the
Company, of the Purchasers and their respective Affiliates and designees
becoming Interested Stockholders of the Company within the meaning of Section
203 of the Delaware General Corporation Law), and (ii) all other filings,
consents, approvals and waivers necessary to the consummation of the purchase
and sale of the Shares and the Transactions or as requested by the Purchasers
shall have been obtained.
Section 6.8 NASD APPROVAL. All applications and related exhibits
and other materials necessary for the approval of the listing and trading on
the NASDAQ National Market System of the shares of Common Stock issuable upon
the conversion of the Preferred Stock shall have been filed with the National
Association of Securities Dealers, Inc.
Section 6.9 PAYMENTS. The Company shall have executed and
delivered to ECTSC a fee letter in a form reasonably acceptable to ECTSC and
shall have paid to ECTSC all fees required thereunder, and shall have paid to
or on behalf of the Purchaser all amounts payable pursuant to Section 11.6.
Section 6.10 OPINION OF COUNSEL. The Purchaser shall have
received an opinion of Cotton, Bledsoe, Tighe & Dawson, the Company's counsel,
at the Closing, in the form reasonably requested by the Purchaser.
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Section 6.11 ADDITIONAL DOCUMENTS. The Purchaser shall have
received such other certificates, instruments and documents from the Company
and each Subsidiary as it may reasonably request pursuant to this Agreement.
ARTICLE VII
COMPANY'S CONDITIONS
The obligations of the Company to issue and sell the Shares are subject to
the satisfaction of the following conditions any one or more of which may be
waived by the Company:
Section 7.1 REPRESENTATIONS AND COVENANTS. The representations
and warranties contained in Article IV hereof shall be true and correct in all
material respects on and as of the Closing Date as if made, and shall be deemed
to be remade, on and as of the Closing Date. The Purchasers shall have
complied with all of its obligations contained herein performance of which is
required on or prior to the Closing Date. The Company shall have received a
certificate to the foregoing effect executed by an officer of ECT.
Section 7.2 REQUIRED CONSENTS AND APPROVALS. (i) The
Transactions shall have been approved (A) by the Board of Directors or General
Partner of each of the Purchasers, as applicable, and the Company, and (B) the
stockholders of the Company if approval is required by the rules of NASDAQ or
requested by officials of the NASD, and (ii) all other consents, approvals and
waivers necessary to the consummation of the purchase and sale of the Shares
and the Transactions shall have been obtained.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
Section 8.1 TERMINATION. The transactions contemplated hereby
may be abandoned at any time prior to the Closing, as follows:
(i) By the mutual written consent of the Company and each
of the Purchasers;
(ii) by the Company, on one hand, or the Purchasers, on
the other hand, if there shall have been a breach by the other party of any of
the covenants contained herein or if any representation or warranty made by any
other party is untrue in any material respect, in either case in a manner not
capable of being cured on or before the Closing Date.
Section 8.2 SURVIVAL; FAILURE TO CLOSE. All representations,
warranties, indemnities, and covenants contained herein or made in writing by
any party in connection herewith will survive the execution and delivery of
this Agreement and any investigation made at any time by or on behalf of
Purchasers, except that any claim for a breach of a representation or warranty
must be brought within the period set forth in Section 10.3. Notwithstanding
anything herein to the contrary, in the event the funding by Purchasers of
their investment has not occurred on or before June 30, 1998, because
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one or more conditions set forth in Article VI or Article VII has not been
satisfied, either party may terminate its obligations under this Agreement by
written notice to the other; provided, however, that the provisions of this
Section 8.2 and Section 11.6 shall survive any such termination provided
further, however that no party may terminate this Agreement if such funding has
failed to occur because such party (or any Affiliate thereof) willfully or
negligently fails to perform or observe its material agreements and covenants
hereunder.
ARTICLE IX
OTHER PROVISIONS
Section 9.1 BROKERAGE FEES AND COMMISSIONS. Each party agrees to
pay, and to indemnify and hold harmless the other party from and against
liability for, any compensation to any finder, broker, agent, financial
advisor, or other intermediary (collectively, an "Intermediary") retained by
such party, or any other Intermediary in connection with the transactions
contemplated by this Agreement, and the fees and expenses of defending against
such liability or alleged liability.
Section 9.2 BUSINESS OPPORTUNITY MATTERS. (i) To the fullest
extent permitted by law, (A) the Company and Purchasers acknowledge and agree
that neither of the Purchasers nor any of their respective Affiliates or
designees, including any person(s) nominated by Purchasers pursuant to the
Certificate of Designation and serving as a member of the Board of Directors
of the Company (the "Designated Directors") shall be expressly or implicitly
restricted or proscribed pursuant to this Agreement, the relationship that
exists between Purchasers (or either of them) and the Company or otherwise,
from engaging in any type of business activity or owning an interest in any
type of business entity, regardless of whether such business activity is (or
such business entity engages in businesses that are) in direct or indirect
competition with the businesses or activities of the Company, any of the
Subsidiaries or any of their respective Affiliates. Without limiting the
foregoing and to the fullest extent permitted by law, Purchasers and the
Company acknowledge and agree that (1) neither the Company, any of the
Subsidiaries or any of their respective Affiliates nor any other person shall
have any rights, by virtue of this Agreement, the relationship that exists
between Purchasers (or either of them) and the Company or otherwise, in any
business venture or business opportunity of either Purchaser or any of their
respective Affiliates or designees or the Designated Directors, and neither of
the Purchasers nor their respective Affiliates or designees or the Designated
Directors shall have any obligation to offer any interest in any such business
venture or business opportunity to the Company, any of the Subsidiaries or any
of their respective Affiliates or any other person, or otherwise account to any
of such persons in respect of any such business ventures, (2) the activities of
each Purchaser or any of their respective Affiliates or designees or the
Designated Directors that are in direct or indirect competition with the
activities of the Company, any of the Subsidiaries or any of their respective
Affiliates are hereby approved by the Company, and (3) by virtue of this
Agreement or the Transactions it shall not be deemed a breach of any fiduciary
or other duties, if any, and whether express or implied, that may be owed by
either Purchaser or their respective Affiliates or designees or the Designated
Directors to the Company, any of the Subsidiaries or any of their respective
Affiliates or the Company's stockholders for either of the Purchasers to permit
itself or one of its Affiliates or designees or the Designated Directors to
engage
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in a business opportunity in preference or to the exclusion of the Company, any
of the Subsidiaries or any of their respective Affiliates or any other person.
(ii) (A) Specifically and without limiting the
generality of the foregoing, the Designated Directors may be directors or
employees of the general partner of Joint Energy Development Investments II
Limited Partnership, directors or employees of Enron Corp. or any of its
respective Subsidiaries or Affiliates, or directors or advisors of entities in
which Enron Corp., its Subsidiaries or Affiliates or Joint Energy Development
Investments II Limited Partnership have invested or may invest (collectively,
the "Positions"). In such Positions, such Designated Directors may encounter
business opportunities that the Company, any of the Subsidiaries or any of
their respective Affiliates may desire to pursue. The Company recognizes that
such opportunities may include, but shall not be limited to, identifying,
pursuing and investing in entities, engaging investment banking firms or other
underwriters for access to public and private securities markets, and obtaining
investment funds from institutional and private investors or others.
(B) Therefore, the Company agrees that the
Purchasers, their respective Affiliates or designees and the Designated
Directors shall have no obligation to the Company, any of the Subsidiaries or
any of their respective Affiliates, the other stockholders of the Company or to
any other person or entity to present any such business opportunity to the
Company before presenting and allowing time to develop such opportunity to any
other entities other than such opportunities presented to a Designated Director
solely in, and as a direct result of, his or her capacity as a director of the
Company; provided, that the preceding shall in no way allow a natural person or
Designated Director to usurp a corporate opportunity solely for his or her
personal benefit without first presenting and allowing time to develop such
opportunity to the entities set forth above. Notwithstanding the preceding
sentence, if an opportunity is separately presented to and developed by any
such other entity, including Enron Corp. or any of its respective Subsidiaries
or Affiliates, such entity shall be free to pursue such opportunity even if it
came to the Designated Director's attention solely as a result of and in his or
her capacity as a director of the Company.
(C) The Company acknowledges that, in any such case,
to the extent a court might hold that the conduct of such activity is a breach
of a duty to the Company, any of the Subsidiaries or any of their respective
Affiliates, or to any other person or entity (but only to the extent the
Company has the right to assert the claim on behalf of such other person or
entity), the Company hereby waives any and all claims and causes of action that
the Company, any of the Subsidiaries or any of their respective Affiliates or
any other person or entity may have for such activities.
(D) The Company further agrees that the waivers and
agreements in this Section 9.2 identify certain types and categories of
activities which do not violate the Designated Director's duty of loyalty to
the Company, and such types and categories are not manifestly unreasonable.
The waivers and agreements in this Section 9.2 apply equally to activities
conducted in the future and that have been conducted in the past.
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(ii) For purposes of this Section 9.2, the term
"Affiliate" when used to refer to Affiliates of Purchaser, shall exclude the
Company, each of the Subsidiaries and each of their respective Affiliates.
Section 9.3 NO OBLIGATION. The Company and the Purchasers
acknowledge and agree that the Company shall not be obligated to utilize the
services of Purchasers or any of their respective Affiliates with respect to
any future business venture or opportunity which is or may become available to
the Company or any of its Affiliates.
Section 9.4 BEST EFFORTS. Subject to the terms and conditions
herein provided, the Company and the Purchasers agree to use their best efforts
to take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the Transactions (including obtaining the
approval of the Stockholders of the Company if requested by officials of the
NASD).
Section 9.5 PUBLIC ANNOUNCEMENTS. The Company and the Purchasers
will consult with each other before issuing any press release or otherwise
making any public statements with respect to the existence of this Agreement or
the Transactions and shall not issue any press release or make any public
statement prior to such consultation, except as may be required by law or by
obligations pursuant to any listing agreements between the Company and NASDAQ.
ARTICLE X
INDEMNIFICATION
Section 10.1 INDEMNIFICATION BY THE COMPANY. The Company shall,
to the fullest extent permitted by law, and in addition to any such rights
which any Indemnified Party (as defined herein) may have pursuant to statute,
the Company's Certificate of Incorporation or other organizational or
constituent documents of the Company, or otherwise, indemnify and hold harmless
each Purchaser (including its subsidiaries, Affiliates, designees and persons
serving as officers, directors, partners, employees, representatives and
agents, each an "Indemnified Party") from and against any and all losses,
claims, damages, taxes, fines, penalties, costs, expenses and liabilities,
joint or several, including any investigation, legal and other expenses
incurred in connection with the investigation, defense, settlement or appeal
of, and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted ("Losses" or "Loss"), to which they, or any of them, may suffer
or incur which arise or result from the breach of any representation, warranty,
covenant or agreement of the Company under this Agreement or in any
certificate, schedule or exhibit delivered pursuant hereto, or by reason of any
claim, action or proceeding arising out of or resulting from a breach of such
representations, warranties covenants or agreements.
Section 10.2 INDEMNIFICATION PROCEDURES. Any Indemnified Party
that proposes to assert the right to be indemnified under this Article X shall,
promptly after receipt of notice of commencement of any claim or action against
such party or upon the discovery by such Indemnified Party of the Loss suffered
by it, in either case in respect of which a claim is to be made against the
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Company (the "Indemnifying Party") under Section 10.1, notify the Indemnifying
Party of the commencement of such action or the occurrence of such Loss,
enclosing a copy of all papers served or a brief description of the facts
resulting in such Loss, but the omission so to notify the Indemnifying Party
shall not relieve the Indemnifying Party from any liability that the
Indemnifying Party may have to any Indemnified Party under the foregoing
provisions of this Article X unless, and only to the extent that, such omission
results in the forfeiture of substantive rights or defenses by the Indemnifying
Party. The Indemnified Party shall have the right to retain its own counsel in
any such action and all reasonable fees, disbursements and other charges
incurred in the investigation, defense and/or settlement of such action shall
be advanced and reimbursed by the Indemnifying Party promptly as they are
incurred; provided, however, that the Indemnified Party shall agree to repay
any expenses so advanced hereunder if it is ultimately determined by a court of
competent jurisdiction that the Indemnified Party to whom such expenses are
advanced is not entitled to be indemnified as a matter of law. So long as the
Indemnified Party has reasonably concluded that no conflict of interest exists
and that the Indemnifying Party is financially capable of fulfilling its
obligations under this Article X, the Indemnifying Party may assume the defense
of any action hereunder with counsel reasonably satisfactory to the Indemnified
Party; provided, however, that the Indemnifying Party shall not settle any
action or claim for which indemnification is sought under this Article X
without the prior written consent of the Indemnified Party. In the event that
the Indemnifying Party does not assume defense of any action, it shall
nonetheless have the right to participate in (but not control) such action.
The Indemnifying Party shall not be liable for any settlement of any action or
claims effected without its written consent; provided that if such consent is
withheld and such action or claims are subsequently settled or prosecuted for a
greater amount, such Indemnifying Party or Parties shall be liable for the full
amount of such losses, damages, liabilities and expenses (including without
limitation any interest and penalties related thereto) without regard to any
limitations on indemnification set forth in this Article X.
Section 10.3 TERMINATION. The Company's obligation to indemnify
the Purchasers as set forth in this Section 10 shall terminate as to any Loss
asserted after the close of business in Houston, Texas on the third anniversary
of the Closing Date, other than any Loss suffered as a result of the breach of
any covenant contained in Sections 5.2, 5.3, 5.4, 5.5, 5.6, 5.8, and 5.9, which
may be asserted hereunder at any time the Purchasers or their respective
Affiliates and designees Own Company Securities, or as a result of the breach
of any covenant contained in Sections 5.10, 5.11 or the agreements set forth in
Section 9.2 and 11.6, which may be asserted indefinitely.
ARTICLE XI
MISCELLANEOUS
Section 11.1 DISPUTE RESOLUTION. (i) Agreement to Arbitrate. If
Purchasers and the Company are unable to resolve any controversy, dispute,
claim or other matter in question arising out of, or relating to, this
Agreement, the Registration Rights Agreement, any provision hereof or thereof,
the alleged breach hereof or thereof, or in any way relating to the subject
matter of this Agreement, the Transactions or the relationship between the
parties created by this Agreement, including questions concerning the scope and
applicability of this Section 11.1, whether sounding
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<PAGE> 30
in contract, tort or otherwise, at law or in equity, under State or federal
law, whether provided by statute or common law, for damages or any other relief
(any such controversy, dispute, claim or other matter in question, a
"Dispute"), on or before the 30th day following the receipt by the Company or
Purchasers of written notice of such Dispute from the other party(ies), which
notice describes in reasonable detail the nature of the dispute and the facts
and circumstances relating thereto, the Company or Purchasers may, by delivery
of written notice to the other party(ies), require that a senior officer of the
Company and of ECT meet at a mutually agreeable time and place in an attempt to
resolve such Dispute. Such meeting shall take place on or before the 15th day
following the date of the notice requiring such meeting, and if the Dispute has
not been resolved within 15 days following such meeting, the Company or
Purchasers may cause such Dispute to be resolved by binding arbitration in
Houston, Texas, by submitting such Dispute for arbitration within 30 days
following the expiration of such 15-day period. This agreement to arbitrate
shall be specifically enforceable against the parties.
(ii) The arbitration shall be governed by and conducted
pursuant to the Federal Arbitration Act: It is the intention of the parties
that the arbitration shall be governed by and conducted pursuant to the
Federal Arbitration Act, as such Act is modified by this Section 11.1. If it
is determined the Federal Arbitration Act is not applicable to this Agreement
(e.g., this Agreement does not evidence a transaction involving interstate
commerce), this agreement to arbitrate shall nevertheless be enforceable
pursuant to applicable State law. While the arbitrators may refer to
Commercial Arbitration Rules of the American Arbitration Association for
guidance with respect to procedural matters, the arbitration proceeding shall
not be administered by the American Arbitration Association but instead shall
be self-administered by the parties until the arbitrators are selected and then
the proceeding shall be administered by the arbitrators.
(iii) Authority of the Arbitrators: The validity,
construction, and interpretation of this agreement to arbitrate, and all
procedural aspects of the arbitration conducted pursuant to this agreement to
arbitrate, including but not limited to, the determination of the issues that
are subject to arbitration (i.e., arbitrability), the scope of the arbitrable
issues, allegations of "fraud in the inducement" to enter into this Agreement
or this arbitration provision, allegations of waiver, laches, delay or other
defenses to arbitrability, and the rules governing the conduct of the
arbitration (including the time for filing an answer, the time for the filing
of counterclaims, the times for amending the pleadings, the specificity of the
pleadings, the extent and scope of discovery, the issuance of subpoenas, the
times for the designation of experts, whether the arbitration is to be stayed
pending resolution of related litigation involving third parties not bound by
this arbitration agreement, the receipt of evidence, and the like), shall be
decided by the arbitrators.
(iv) Choice of law: The rules of arbitration of the
Federal Arbitration Act, as modified by this Agreement, shall govern procedural
aspects of the arbitration; to the extent the Federal Arbitration Act as
modified by this Agreement does not address a procedural issue, the arbitrators
may refer for guidance to the Commercial Arbitration Rules then in effect with
the American Arbitration Association. The arbitrators may refer for guidance
to the Federal Rules of Civil Procedure, the Federal Rules of Civil Evidence,
and the federal law with respect to the
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<PAGE> 31
discovery process, applicable legal privileges, and admissible evidence. In
deciding the substance of the parties' Dispute, the arbitrators shall refer to
the substantive laws of the State of Texas for guidance (excluding Texas
conflict-of-law rules or principles that might call for the application of the
law of another jurisdiction). Provided, however, IT IS EXPRESSLY AGREED THAT
NOTWITHSTANDING ANY OTHER PROVISION IN THIS SECTION 11.1 TO THE CONTRARY, THE
ARBITRATORS SHALL HAVE ABSOLUTELY NO AUTHORITY TO AWARD CONSEQUENTIAL DAMAGES
(SUCH AS LOSS OF PROFIT), TREBLE, EXEMPLARY OR PUNITIVE DAMAGES OF ANY TYPE
UNDER ANY CIRCUMSTANCES REGARDLESS OF WHETHER SUCH DAMAGES MAY BE AVAILABLE
UNDER TEXAS LAW, THE LAW OF ANY OTHER STATE, OR FEDERAL LAW, OR UNDER THE
FEDERAL ARBITRATION ACT, OR UNDER THE COMMERCIAL ARBITRATION RULES OF THE
AMERICAN ARBITRATION ASSOCIATION. The arbitrators shall have the authority to
assess the costs and expenses of the arbitration proceeding (including the
arbitrators' fees and expenses) against either or both parties. However, each
party shall bear its own attorneys fees and the arbitrators shall have no
authority to award attorneys fees.
(v) Selection of Arbitrators. When a Dispute has been
submitted for arbitration, within 30 days of such submission, the Company will
choose an arbitrator and Purchasers will choose an arbitrator. The two
arbitrators shall select a third arbitrator, failing agreement on which within
ninety days of the original notice, Purchasers and the Company (or either of
them) shall apply to any United States District Judge for the Southern District
of Texas, who shall appoint the third arbitrator. While the third arbitrator
shall be neutral, the two party-appointed arbitrators are not required to be
neutral and it shall not be grounds for removal of either of the two
party-appointed arbitrators or for vacating the arbitrators' award that either
of such arbitrators has past or present minimal relationships with the party
that appointed such arbitrator. Evident partiality on the part of an
arbitrator exists only where the circumstances are such that a reasonable
person would have to conclude there in fact existed actual bias and a mere
appearance or impression of bias will not constitute evident partiality or
otherwise disqualify an arbitrator. Minimal or trivial past or present
relationships between the neutral arbitrator and the party selecting such
arbitrator or any of the other arbitrators, or the failure to disclose such
minimal or trivial past or present relationships, will not by themselves
constitute evident partiality or otherwise disqualify any arbitrator. Upon
selection of the third arbitrator, each of the three arbitrators shall agree in
writing to abide faithfully by the terms of this agreement to arbitrate. The
three arbitrators shall make all of their decisions by majority vote. If one
of the party-appointed arbitrators refuses to participate in the proceedings or
refuses to vote, the decision of the other two arbitrators shall be binding.
If an arbitrator dies or becomes physically incapacitated and is unable to
fulfill his or her duties as an arbitrator, the arbitration proceeding shall
continue with a substitute arbitrator selected as follows: if the
incapacitated arbitrator is a party-appointed arbitrator, the party shall
promptly select a new arbitrator, and if the incapacitated arbitrator is the
neutral arbitrator, the two-party appointed arbitrators shall select a
substitute neutral arbitrator, failing agreement on which Purchasers and the
Company (or either of them) shall apply to any United States District Judge for
the Southern District of Texas, who shall appoint the substitute neutral
arbitrator.
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<PAGE> 32
(vi) Final Hearing and Arbitrators' Award: The final
hearing shall be conducted within 120 days of the selection of the third
arbitrator. The final hearing shall not exceed ten working days, with each
party to be granted one-half of the allocated time to present its case to the
arbitrators. There shall be a transcript of the hearing before the
arbitrators. The arbitrators shall render their ultimate decision within
twenty days of the completion of the final hearing completely resolving all of
the disputes between the parties that are the subject of the arbitration
proceeding. The arbitrators' ultimate decision after final hearing shall be in
writing, but shall be as brief as possible, and the arbitrators shall assign
their reasons for their ultimate decision. In the case the arbitrators award
any monetary damages in favor of either party, the arbitrators shall certify in
their award that they have not included any treble, exemplary or punitive
damages.
(vii) Finality of the Arbitrators' Award: The arbitrators'
award shall, as between the parties to this Agreement and those in privity with
them, be final and entitled to all of the protections and benefits of a final
judgment, e.g., res judicata (claim preclusion) and collateral estoppel (issue
preclusion), as to all Disputes, including compulsory counterclaims, that were
or could have been presented to the arbitrators. The arbitrators' award shall
not be reviewable by or appealable to any court, except to the extent permitted
by the Federal Arbitration Act.
(viii) Use of the courts to assist in the enforcement of the
Arbitrators' decisions and the Arbitrators' Award: It is the intent of the
parties that the arbitration proceeding shall be conducted expeditiously,
without initial recourse to the courts and without interlocutory appeals of the
arbitrators' decisions to the courts. However, if a party refuses to honor its
obligations under this agreement to arbitrate, the other party may obtain
appropriate relief compelling arbitration in any court having jurisdiction over
the parties; the order compelling arbitration shall require that the
arbitration proceedings take place in Houston, Texas, as specified above. The
parties may apply to any court for orders requiring witnesses to obey subpoenas
issued by the arbitrators. Moreover, any and all of the arbitrators' orders
and decisions may be enforced if necessary by any court. The arbitrators'
award may be confirmed in, and judgment upon the award entered by, any federal
or State court having jurisdiction over the parties.
(ix) Confidentiality: To the fullest extent permitted by
law, this arbitration proceeding and the arbitrators award shall be maintained
in confidence by the parties. However, a violation of this covenant shall not
affect the enforceability of this arbitration agreement or of the arbitrators'
award.
(xi) The parties' obligations under this arbitration
provision are enforceable even if the Agreement has terminated or is breached;
severability: A party's breach of this Agreement shall not affect this
agreement to arbitrate. Moreover, the parties' obligations under this
arbitration provision are enforceable even after this Agreement has terminated.
The invalidity or unenforceability of any provision of this arbitration
agreement shall not affect the validity or enforceability of the parties'
obligation to submit their disputes to binding arbitration or the other
provisions of this agreement to arbitrate.
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<PAGE> 33
Section 11.2 ENTIRE AGREEMENT. This Agreement and the
Registration Rights Agreement constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all other prior
agreements and understandings, both written and oral, between the parties with
respect to the subject matter hereof.
Section 11.3 NOTICES. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be deemed to have
been duly given when delivered in person, by facsimile, with confirmation of
receipt, or by registered or certified mail (postage prepaid, return receipt
requested) to the respective parties as follows:
If to the Company:
Costilla Energy, Inc.
400 West Illinois
Suite 1000
Midland, Texas 79701
Fax: 915-686-6080
Attn: Mr. Michael J. Grella
President and Chief Executive Officer
With a copy to:
Cotton, Bledsoe, Tighe & Dawson
500 West Illinois
Suite 300
Midland, Texas 79701-4337
Fax: 915-682-3672
Attn: Richard T. McMillan
If to the Purchasers:
Enron Capital & Trade Resources Corp.
1400 Smith
Houston, Texas 77002
Fax: 713-646-3640
Attn: Timothy J. Detmering
Vice President
With a copy to:
Enron Capital & Trade Resources Corp.
1400 Smith
Houston, Texas 77002
Fax: 713-646-4039
Attn: Donna W. Lowry
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<PAGE> 34
With an additional copy to:
Vinson & Elkins L.L.P.
1001 Fannin Street, 23rd Floor
Houston, Texas 77002-6760
Fax: 713-615-5457
Attn: Ronald T. Astin
Section 11.4 GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws in the State of Texas applicable to
agreements made and wholly performed in the State of Texas.
Section 11.5 SEVERABILITY. Whenever possible, each provision of
this Agreement will be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement unless the consummation of the
Transactions contemplated hereby is materially and adversely affected thereby.
Section 11.6 EXPENSES. Except as otherwise provided herein or in
the Registration Rights Agreement, each party shall bear and pay all costs and
expenses incurred by it or on its behalf in connection with transactions
contemplated hereby, including fees and expenses of its representatives,
provided, however, that the Company shall pay all filing fees associated with
all filings, applications, notifications or requests for consent, approval or
permission that may be required by statute regulation or judicial decrees in
connection with the Transactions and shall also pay all of the Purchasers'
legal fees, professional fees and other transaction costs (collectively, the
"Costs") up to $50,000, and one half of the Costs in excess of $50,000,
incurred in connection with the evaluation, preparation and negotiation of the
Transactions contemplated hereby.
Section 11.7 DESCRIPTIVE HEADINGS. The descriptive headings of
this Agreement are inserted for convenience of reference only and do not
constitute a part of and shall not be utilized in interpreting this Agreement.
Section 11.8 COUNTERPARTS. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which shall constitute one and the same agreement.
Section 11.9 ASSIGNMENT. Except as provided in this Section 11.9,
neither of the Purchasers nor the Company may assign its rights or obligations
hereunder; provided, however, the Purchasers may assign their respective rights
to acquire the Shares to an Affiliate or designee, provided such assignment
shall not relieve the Purchaser of its obligations hereunder.
Section 11.10 AMENDMENTS; WAIVERS. No amendment or waiver of any
provision of this Agreement, nor consent to any departure by the Company or
Purchasers therefrom, shall in any event be effective unless the same shall be
in writing and signed by each Purchaser and the Company in the case of
amendments, and each Purchaser or the Company, as the case may be, in the case
of waivers.
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<PAGE> 35
IN WITNESS WHEREOF, the parties have caused this agreement to be
executed and delivered as of the day and year first set above.
COSTILLA ENERGY, INC.
By: /s/
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
ENRON CAPITAL & TRADE RESOURCES CORP.
By: /s/
-------------------------------------
Name:
----------------------------------------
Title:
-------------------------------------
JOINT ENERGY DEVELOPMENT INVESTMENTS II
LIMITED PARTNERSHIP
By: Enron Capital Management Limited
Partnership, its General Partner
By: Enron Capital II Corp.,
its General Partner
By: /s/
----------------------------
Name:
----------------------------
Title:
----------------------------
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<PAGE> 1
EXHIBIT 10.29
REGISTRATION RIGHTS AGREEMENT
THIS AGREEMENT (this "Registration Rights Agreement") is entered into as
of the 3rd day of June, 1998 between Costilla Energy, Inc., a Delaware
corporation (the "Company"), Enron Capital & Trade Resources Corp., a Delaware
corporation and Joint Energy Development Investments II Limited Partnership
(collectively, the "Purchasers").
W I T N E S S E T H:
WHEREAS, the Company and Purchasers have entered into that certain
Securities Purchase Agreement (the "Agreement") dated as of June 3, 1998,
whereby Purchasers have agreed, for the consideration set forth therein, to
purchase an aggregate of 50,000 shares (the "Shares") of Series A Preferred
Stock, $0.10 par value per share (the "Preferred Stock"), of the Company; and
WHEREAS, in order to induce Purchasers to enter into the Agreement, the
Company has agreed to enter into this Registration Rights Agreement and to grant
the Rights (as hereinafter defined) to Purchasers contained herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
SECTION 1.
CERTAIN DEFINITIONS AND TERMS.
The following terms have the meanings indicated:
"Affiliate" shall have the meaning given to such term in Rule 405 under
the Securities Act.
"Commission" means the Securities and Exchange Commission or any successor
thereof.
"Common Stock" means the common stock, $0.10 par value per share, of the
Company.
"Controlling Person" has the meaning ascribed thereto in Section 4(a) of
this Registration Rights Agreement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"Existing Registration Rights Agreement" means article IV of that certain
Consolidation Agreement dated as of September 13, 1996, as amended October 8,
1996, by and among the
<PAGE> 2
Company, Costilla Energy, L.L.C., CSL Management Corporation, Valley Gathering
Company, Cadell S. Liedtke, Michael J. Grella, Henry G. Musselman and
NationsBanc Capital Corporation.
"Existing Rights Holder" shall have the meaning ascribed thereto in
Section 2(a)(vii) of this Registration Rights Agreement.
"Form S-3" means Form S-3 as promulgated by the Commission on the date
hereof or any successor form or method of registration that provides for the
incorporation by reference of historical information regarding the Company's
business and financial affairs and permits registration of resales of
Registrable Securities for a continuous and indefinite period of time of no less
than two years pursuant to such form or method of registration.
"Holder" means Purchasers and any other Person holding Registrable
Securities; provided, that such Person acquired such Registrable Securities in
accordance with Section 7 of this Registration Rights Agreement.
"Indemnitee" has the meaning ascribed thereto in Section 4(d) of this
Registration Rights Agreement.
"Indemnitor" has the meaning ascribed thereto in Section 4(d) of this
Registration Rights Agreement.
"Initiating Seller" has the meaning ascribed thereto in Section 2(b)(iii)
of this Registration Rights Agreement.
"Majority" shall mean more than 50.00%.
"NBCC" shall mean NationsBanc Capital Corporation.
"Person" means any individual, firm, corporation, trust, association,
partnership, limited partnership, limited liability company, joint venture or
other entity.
"Registrable Securities" means all shares of Common Stock of the Company
issued or issuable to a Holder upon conversion of the Shares or any Common Stock
or other securities issued or issuable as a dividend or other distribution upon
or with respect to such Shares or such Common Stock.
"Register", "registered" and "registration" refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act and the declaration or ordering of effectiveness of such
registration statement.
"Rights" means all rights, remedies, powers, benefits, and privileges
granted to the Holders pursuant to this Registration Rights Agreement.
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<PAGE> 3
"Rule 415" means Rule 415 under the Securities Act as promulgated by the
Commission on the date hereof or any successor rule or method of registration
that permits the registration of resales of Registrable Securities for a
continuous and indefinite period of time of no less than two years pursuant to
such rule or method of registration.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
SECTION 2.
REGISTRATION RIGHTS.
(a) DEMAND REGISTRATION RIGHTS. (i) On any date after the date of I the
earlier of (A) the mailing by any Holder of a notice of conversion of Shares for
Registrable Securities or (B) the issuance of Registrable Securities, any Holder
or Holders possessing in the aggregate a Majority of the Registrable Securities
shall have the right to request, in writing specifying that such request is made
pursuant to this Section 2(a), that the Company file a registration statement
under the Securities Act covering not less than 250,000 Registrable Securities
(unless fewer Registrable Securities are held by the Holders, in which case,
covering all such Registrable Securities). Such request shall set forth the
proposed plan of distribution for the Registrable Securities to be registered.
Within five days of such request, the Company shall give written notice of such
request to all other Holders of Registrable Securities and shall include in the
registration in respect of which notice has been given all Registrable
Securities with respect to which the Company has received written requests from
Holders for inclusion therein within ten days after the Company's notice
regarding such registration has been given as provided in Section 11(a) of this
Registration Rights Agreement. Within 45 days of such request, or, in the event
that Form S-3 under the Securities Act is available to the Company to effect
such registration, within 30 days of such request, the Company shall file a
registration statement to register under the Securities Act all Registrable
Securities subject to such request; provided, however, that the Company may
defer its obligations under this Section 2(a) for a period of no more than 30
days (which 30 days shall be in addition to the 45-day or 30-day period, as
applicable, permitted above) if the Company obtains written advice from the
Company's outside securities counsel (which counsel shall be a nationally
recognized securities law firm or a law firm acceptable to the Holders) that
filing such a registration statement would require public disclosure by the
Company of any material non-public development; provided, further, that if such
written advice is received by the Company, the request for registration may be
withdrawn by the Holder who requested such registration (and shall not be
treated as a registration hereunder for any purpose); and provided further, that
if such request for registration has not been withdrawn, once such information
has been publicly disclosed by the Company, the Company shall promptly proceed
to fulfill its obligations under this Section 2(a).
(ii) Notwithstanding the foregoing, in the event the Company
reasonably expects to file, within 60 days of a request made pursuant to this
Section 2(a), a registration statement pertaining to securities for the account
of the Company (except a registration statement on Form S-4
A - 3
<PAGE> 4
or Form S-8 or with respect to a transaction subject to Rule 145 under the
Securities Act) then such request shall constitute a request made pursuant to
Section 2(b) hereof to include in such registration statement all Registrable
Securities subject to such request and the Company shall not be obligated to
file a separate registration statement for the Registrable Securities subject to
such request; provided that the Company is actively employing in good faith all
reasonable efforts to cause such registration statement to become effective and
that the Company's estimate of the date of filing of such registration statement
is made in good faith.
(iii) Except as provided in Section 2(a)(iv), the Company
shall be obligated to effect only three registrations in the aggregate pursuant
to this Section 2(a) with respect to all Holders (including Purchasers and all
of their direct and indirect transferees pursuant to Section 7 hereof);
provided, however, that a registration requested pursuant to this Section 2(a)
shall not be deemed to be a "registration" for purposes of any provision of this
Section 2(a), (A) if a registration statement with respect thereto has not been
declared effective by the Commission, (B) if after such registration statement
has become effective, such registration is interfered with by any stop order,
injunction or other order or requirement of the Commission or other governmental
agency or court for any reason not the fault of a holder of Registrable
Securities and all of the Registrable Securities covered thereby have not been
sold, (C) if the conditions to closing specified in the selling agreement or
underwriting agreement entered into in connection with such registration are not
satisfied or waived by the parties thereto other than a holder of Registrable
Securities, or (D) if the Holders of Registrable Securities are not able to
register and sell all of the Registrable Securities requested to be included in
such registration by Holders entitled to registration rights pursuant to this
Registration Rights Agreement.
(iv) At any time the Company is eligible to register
Registrable Securities for resale for a continuous and indefinite period of time
of not less than two years on Form S-3 pursuant to Rule 415 or otherwise, at the
election of Holders holding a Majority of the Registrable Securities, the number
of registrations the Company shall be obligated to effect pursuant to this
Section 2(a) shall be reduced to one, if within 30 days of receipt by the
Company of notice from such Holders of such election, the Company files a
registration statement to register under the Securities Act all Registrable
Securities for continuous and indefinite resale for a period of not less than
two years, and such registration is declared effective by the Commission and
remains continuously effective for the lesser of (A) two years from the
effective date of such registration, or (B) the date after which all Registrable
Securities have been sold by the Holders thereof.
(v) Distribution by the Holder or Holders of the Registrable
Securities registered pursuant to this Section 2(a) may be made in any lawful
manner, including underwritten public offerings and non-underwritten "at the
market" distributions. If any such offering is to be an underwritten public
offering, the Holder or Holders of a Majority of such Registrable Securities
shall have the right to select the managing underwriter or underwriters, subject
to the approval of the Company, which approval shall not be unreasonably
withheld.
A - 4
<PAGE> 5
(vi) The Holders shall not make a request to the Company to
effect any registration pursuant to this Section 2(a) during the 180-day period
beginning on the effective date of the first registration of Registrable
Securities made pursuant to this Section 2(a) or during the 90-day period
beginning on the effective date of any registration statement relating to any
registration of Registrable Securities made pursuant to Section 2(b) of this
Registration Rights Agreement.
(vii) (A) Whenever the Company shall effect a registration
pursuant to this Section 2(a), (1) the Company may include securities of the
Company in such registration for sale for its own account, and (2) any Person
other than a Holder who is entitled to a piggy-back registration rights under
the Existing Registration Rights Agreement with respect to a registration
statement filed to effect a registration under this Section 2(a) ("Existing
Rights Holders") may include securities of the Company with respect to which
such rights apply in such registration for sale, in each case in accordance with
the method of disposition specified by the Holders requesting registration of
Registrable Securities unless (if the method of disposition shall be an
underwritten public offering) the lead managing underwriter advises the Holders
that market factors would materially reduce the price received by the Holders if
the securities held by such Existing Rights Holders and the Company are included
therein or would reduce the number of Registrable Securities that could be sold
by Holders participating in such registration if the securities of such Existing
Rights Holders and the Company are included therein.
(B) If the lead managing underwriter for the offering
advises that marketing factors require the inclusion in such registration of
some or all of the Registrable Securities sought to be registered by the Company
or such Existing Rights Holders to be limited or that the number of securities
to be registered at the insistence of the Company and any Existing Rights
Holders plus the number of Registrable Securities sought to be registered by the
Holders should be limited due to marketing factors, the number of Registrable
Securities sought to be registered by the Company and such Existing Rights
Holders shall be reduced as follows: (1) the number of securities to be
registered by the Company shall first be reduced, to the number recommended by
the managing underwriter; (2) if, after all securities sought to be registered
by the Company have been eliminated, the managing underwriter still recommends a
reduction in the number of securities to be offered, the number of securities
sought to be registered by Existing Rights Holders shall be reduced, pro rata,
based on the number of securities sought to be registered by each such Holder,
to the number recommended by the managing underwriter; and in no event shall the
number of securities offered by the Holders be reduced.
(viii) The Company agrees (A) not to effect any public sale or
distribution of its equity securities (other than pursuant to Form S-4, Form S-8
or any successor form thereto and, in the case of any registration under Section
2(b), equity securities being sold for the account of the Company in any
registration which includes Registrable Securities of Holders) during the 14-day
period prior to, and during the 90-day period beginning on, the effective date
of a registration statement filed pursuant to Section 2(a) or 2(b), and (B) to
cause each holder of its privately placed equity securities possessing
registration rights purchased from the Company at any time on or after the date
of this Registration Rights Agreement to agree not to effect any public sale or
distribution
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<PAGE> 6
(including sales pursuant to Rule 144 under the Securities Act) of any such
securities during such period.
(b) PIGGYBACK REGISTRATION RIGHTS. (i) If the Company at any time proposes
to register any of its Common Stock under the Securities Act (other than
registrations on Forms S-4 or S-8 or any successor forms thereto or
registrations of securities in connection with a Rule 145 transaction), whether
of its own accord or at the request of any holder or holders of its securities,
it shall each such time promptly give written notice to all Holders of its
intention to do so.
(ii) Upon the written request of a Holder or Holders delivered
to the Company within 10 business days after receipt of any such notice, the
Company shall use its best efforts (subject to the provisions of this Section
2(b)) to cause all Registrable Securities, the Holders of which shall have so
requested registration thereof, to be registered under the Securities Act, all
to the extent requisite to permit the sale or other disposition by the Holder or
Holders of all of such Registrable Securities; provided, however, the Company
may elect not to file a registration statement pursuant to this Section 2(b) or
may withdraw any registration statement filed pursuant to this Section 2(b) at
any time prior to the effective date thereof.
(iii) If the lead managing underwriter for the respective
offering advises that marketing factors require the exclusion from such
registration of some or all of the Registrable Securities sought to be
registered by the Holders or that the total number of securities to be
registered at the insistence of the Company and any other selling shareholders
plus the number of Registrable Securities sought to be registered by the Holders
should be limited due to marketing factors, the number of Registrable Securities
and other securities sought to be registered by each Holder, the Company and
such other selling shareholders shall be reduced as follows:
(A) if the offering is an offering of securities for the
account of the Company, (1) the number of securities to be registered by selling
Persons other than the Company, NBCC, Purchasers and other Holders shall first
be reduced, prorata, based on the number of securities sought to be registered
by each such other selling Person, to the number recommended by the lead
managing underwriter; (2) if, after all securities sought to be registered by
selling Persons other than the Company, NBCC, Purchasers and other Holders have
been eliminated, the lead managing underwriter still recommends a reduction in
the number of securities to be offered, the number of Registrable Securities
sought to be registered by Holders other than the Purchasers shall be reduced,
prorata, based on the number of Registrable Securities sought to be registered
by each such Holder, to the number recommended by the managing underwriter; (3)
if, after all Registrable Securities sought to be registered by such other
Holders have been eliminated, the lead managing underwriter still recommends a
reduction in the number of securities to be offered, the number of Registrable
Securities sought to be registered by the Purchasers shall be reduced, pro rata,
based on the number of Registrable Securities sought to be registered by each
such Purchaser, to the number recommended by the lead managing underwriter, and
(4) if, after all Registrable Securities sought to be registered by Purchasers
have been eliminated, the lead managing underwriter still recommends a reduction
in the number of securities to be offered, the number of Registrable Securities
sought to
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be registered by NBCC shall be reduced, pro rata, based on the number of
Registrable Securities sought to be registered by NBCC, to the number
recommended by the lead managing underwriter; and in no event shall the number
of securities offered by the Company be reduced;
(B) if the offering is an offering of securities
initiated for the benefit of an Existing Rights Holder other than NBCC, then (1)
up to 50% of the total amount of securities recommended by the lead managing
underwriter to be registered shall be reserved for securities owned, and
requested to be registered, by NBCC and the remainder shall be allocated among
Existing Rights Holders other than NBCC, the Company, Purchasers, Holders and
other selling Persons; (2) the number of securities to be registered by the
Company, Existing Rights Holders other than NBCC, Purchasers, Holders and such
other selling Persons shall first be reduced, pro rata, based on the number of
securities sought to be registered by the Company and each such other selling
Person, to the number recommended by the lead managing underwriter; (3) if,
after all securities sought to be registered by the Company and such other
selling Persons have been eliminated, the lead managing underwriter still
recommends a reduction in the number of securities to be offered, the number of
Registrable Securities sought to be registered by Holders other than the
Purchasers shall be reduced, pro rata, based on the number of Registrable
Securities sought to be registered by each such Holder, to the number
recommended by the lead managing underwriter; (4) if, after all Registrable
Securities sought to be registered by such other Holders have been eliminated,
the lead managing underwriter still recommends a reduction in the number of
securities to be offered, the number of Registrable Securities sought to be
registered by the Purchasers shall be reduced, pro rata, based on the number of
Registrable Securities sought to be registered by each such Purchaser, to the
number recommended by the lead managing underwriter; and (5) if, after all
Registrable Securities sought to be registered by Purchasers have been
eliminated, the lead managing underwriter still recommends a reduction in the
number of securities to be offered, the number of securities sought to be
registered by the Existing Rights Holders other than NBCC shall be reduced, pro
rata, based on the number of securities sought to be registered by each such
Existing Rights Holder other than NBCC, to the number recommended by the lead
managing underwriter; and
(C) if the offering is an offering of securities
initiated for the benefit of selling shareholders other than Holders and other
than as described under (B) above, (1) the number of securities to be registered
by selling Persons (including the Company) other than the selling shareholder(s)
who initiated the registration (the "Initiating Seller") and Holders shall first
be reduced, pro rata, based on the number of securities sought to be registered
by each such other selling Person, to the number recommended by the lead
managing underwriter, (2) if, after all securities sought to be registered by
selling Persons other than the Initiating Seller and Holders have been
eliminated, the lead managing underwriter still recommends a reduction in the
number of securities to be offered, the number of Registrable Securities sought
to be registered by Holders other than the Purchasers shall be reduced, pro
rata, based on the number of Registrable Securities sought to be registered by
each such Holder, to the number recommended by the lead managing underwriter;
and (iii) if, after all securities sought to be registered by selling Persons
other than the Initiating Seller and the Purchasers have been eliminated, the
lead managing underwriter still recommends a reduction in the number of
securities to be offered, the number of Registrable Securities sought to
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be registered by the Purchasers shall be reduced, pro rata, based on the number
of Registrable Securities sought to be registered by each such Purchaser, to the
number recommended by the lead managing underwriter.
(c) REGISTRATION PROCEDURES. If and whenever the Company is
required by the provisions of this Section 2 to effect the registration of any
Registrable Securities under the Securities Act, the Company shall, as
expeditiously as possible,
(i) cooperate with any underwriters for, and the Holders of,
such Registrable Securities, and shall enter into a usual and customary
underwriting agreement with respect thereto and take all such other reasonable
actions as are necessary or advisable to permit, expedite and facilitate the
disposition of such Registrable Securities in the manner contemplated by the
related registration statement, including without limitation, the inclusion in
such registration statement of any information relating to the Company or its
subsidiaries which such Holders or underwriters deem reasonably necessary to
facilitate such disposition, in each case to the same extent as if all the
securities then being offered were for the account of the Company, and the
Company shall provide to any Holder of such Registrable Securities, any
underwriter participating in any distribution thereof pursuant to a registration
statement, and any attorney, accountant or other agent retained by any Holder or
underwriter, reasonable access to appropriate Company officers and employees to
answer questions and to supply information reasonably requested by any such
Holder, underwriter, attorney, accountant or agent in connection with such
registration statement; provided, however, that each such party shall be
required to maintain in confidence and not to disclose to any other person any
information or records reasonably designated by the Company in writing as being
confidential, until such time as (A) such information becomes a matter of public
record (whether by virtue of its inclusion in such registration statement or
otherwise), or (B) such person shall be required so to disclose such information
pursuant to the subpoena or order of any court or other governmental agency or
body having jurisdiction over the matter (subject to the requirements of such
order, and only after such person shall have given the Company prompt prior
written notice of such requirement), or (C) such information is required to be
set forth in such registration statement or the prospectus included therein or
in an amendment to such registration statement or an amendment or supplement to
such prospectus in order that such registration statement, prospectus, amendment
or supplement, as the case may be, does not contain an untrue statement of a
material fact or omit to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing;
(ii) furnish or cause to be furnished to each Holder of the
Registrable Securities covered by such registration statement, on the date that
such Registrable Securities are to be delivered to the underwriters for sale
pursuant to such registration or, if such Registrable Securities are not being
sold through underwriters, on the date the registration statement with respect
to such Registrable Securities becomes effective (A) an opinion, dated such
date, of the outside counsel representing the Company for the purposes of such
registration, addressed to the underwriters, if any, and to the Holders,
stating, among other things, that such registration statement has become
effective under the Securities Act and that (1) to the knowledge of such
counsel, no stop order suspending the
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effectiveness of such registration statement has been instituted or is pending
or contemplated under the Securities Act; and (2) the registration statement,
the related prospectus, and each amendment or supplement thereto, including all
documents incorporated by reference therein, comply as to form in all material
respects with the requirements of the Securities Act and the applicable rules
and regulations of the Commission thereunder (except that such counsel need
express no opinion as to financial statements or other financial or statistical
or reserve data contained or incorporated by reference therein); and such
counsel shall state in customary form that no facts have come to the attention
of such counsel that caused such counsel to believe (with customary
qualifications) that either the registration statement or the prospectus, or any
amendment or supplement thereto, including all documents incorporated by
reference therein, in light of the circumstances under which they were made,
contains any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading (except that such counsel need express no belief as to financial
statements or other financial or statistical or reserve data contained or
incorporated by reference therein or as to any information provided by the
Holders or any underwriter for inclusion therein); and (B) a letter, dated such
date, from the independent certified public accountants of the Company,
addressed to the underwriters, if any, and to the Holders, stating, among other
things, that they are independent certified public accountants within the
meaning of the Securities Act and that in the opinion of such accountants, the
financial statements and other financial data of the Company included in the
registration statement or the prospectus, or any amendment or supplement
thereto, including all documents incorporated by reference therein, comply as to
form in all material respects with the applicable accounting requirements of the
Securities Act. Such letter from the independent certified public accountants
shall additionally cover such other customary financial matters (including
information as to the period ending not more than five business days prior to
the date of such letter) with respect to the registration in respect of which
such letter is being given as such underwriters, if any, or the Holders may
reasonably request;
(iii) prepare and file with the Commission a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become and remain effective for a period
of not more than 90 days (or in the event of (A) a firm underwritten offering
such longer period as may be customary, or (B) the registration described in
Section 2(a)(iv), the period of time specified in such Section 2(a)(iv)), and
prepare and file with the Commission such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective during such period and
to comply with the provisions of the Securities Act with respect to the sale or
other disposition of all securities covered by such registration statement;
provided that no such registration statement or amendment thereto shall be filed
by the Company until the Holders of the Registrable Securities included therein
and their counsel shall have had a reasonable opportunity to review the same, to
exercise their rights under Section 2(c)(i) above with respect thereto and to
approve or disapprove any portion of such registration statement describing or
referring to such Holders;
(iv) furnish to each Holder and to each underwriter, if any,
such numbers of copies of a summary prospectus or other prospectus, including a
preliminary prospectus, in conformity with
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the requirements of the Securities Act, and such other documents, as such Holder
may reasonably request in order to facilitate the public sale or other
disposition of such Holder's Registrable Securities;
(v) notify the selling Holders promptly (A) when a
registration statement, prospectus, offering circular or other offering material
or any supplement or amendment thereto 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 and each applicable state or foreign law, (B)
of any request by the Commission or any other United States or foreign federal
or state governmental authority for amendments or supplements to a registration
statement, or related prospectus (or other legally required offering material)
or for additional information, (C) of the issuance by the Commission or any
other United States or foreign federal or state governmental body or agency of
any action, including without limitation a stop order, suspending or withdrawing
the authorization for the offering or the effectiveness of a registration
statement, or the initiation of any proceedings for that purpose, (D) if at any
time the representations or warranties of the Company contained in any agreement
(including any underwriting, purchase or agency agreement) entered into in
connection with the offering or sale of securities of the Company as
contemplated by this Registration Rights Agreement cease to be true and correct
in any material respect, (E) of the receipt by the Company of any notification
with respect to the suspension of the qualification or exemption from
qualification of any of the Registrable Securities for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose, (F) of the
discovery that, or of the happening of any event as a result of which, the
registration statement, related prospectus, offering circular, other offering
materials or any document incorporated or deemed to be incorporated therein by
reference includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, or that requires the making of any changes in such
registration statement, prospectus, offering circular or other offering
materials 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, offering circular or
other offering materials, 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, or that such document otherwise fails to
comply with applicable laws, and (G) of the Company's reasonable determination
that a post-effective amendment to a registration statement would be
appropriate;
(vi) use its best efforts to register or qualify the
Registrable Securities covered by such registration statement under the state
securities or blue sky laws of such United States jurisdictions as each Holder
shall request, and do any and all other acts and things which may be reasonably
necessary or advisable to enable such Holder to consummate the public sale or
other disposition in such United States jurisdictions of the Registrable
Securities owned by such Holder, except that the Company shall not for any such
purpose be required (A) to qualify to do business as a foreign corporation in
any jurisdiction wherein it is not so qualified, (B) to file therein any general
consent to service, or (C) to subject itself to taxation in any such
jurisdiction;
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(vii) in the event of the issuance of any stop order
suspending the effectiveness of any registration statement or of any order
suspending or preventing the use of any prospectus or suspending the
qualification of such Registrable Securities for sale in any jurisdiction, use
its reasonable efforts promptly to obtain its withdrawal;
(viii) if any event contemplated by Section 2(c)(v)(F) or (G)
above shall occur, as promptly as practicable prepare a supplement or amendment
or post-effective amendment to such registration statement, related prospectus,
offering circular or other offering materials or any document incorporated
therein by reference or promptly file any other required document so that, as
thereafter delivered to the purchasers of the Registrable Securities, the
prospectus, offering circular and other offering materials will not contain an
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
or otherwise will not fail to comply with applicable law.
(ix) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months, beginning with the first fiscal
quarter beginning after the effective date of the registration statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder; and
(x) list such securities on any securities exchange or
consolidated reporting system on which the Common Stock of the Company is then
listed, if the listing of such securities is then permitted under the rules of
such exchange or consolidated reporting system.
(d) HOLDERS' OBLIGATIONS IN PIGGYBACK REGISTRATIONS. In connection with
any offering involving an underwriting of shares being issued by the Company,
the Company shall not be required to include any of the Holders' Registrable
Securities in such underwriting pursuant to Section 2(b) unless the Holders
accept the terms of the underwriting as agreed upon between the Company and the
underwriters; provided, however, that the only representations and warranties
any Holder shall be required to make in connection therewith shall be with
respect to such Holder's ownership of the Registrable Securities to be sold by
it and its ability to convey title thereto free and clear of all liens,
encumbrances or adverse claims and such other customary representations and
warranties reasonably requested by the underwriters; and provided further, that
the only indemnity any Holder shall be required to make in connection therewith
shall be to the effect of Sections 4(b) and 4(c) hereof.
(e) PRICING OF PIGGYBACK REGISTRATIONS. The Registrable Securities
proposed to be registered under any registration statement under Section 2(b)
hereof shall be offered for sale at the same public offering price as the shares
of Common Stock offered for sale by the Company or any other selling shareholder
covered thereby.
(f) PRIOR DEMAND RIGHT. Purchasers and each other Holder or Holders,
acknowledge and agree that their rights under Section 2 are subject to the prior
right of NBCC (i) to require demand
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registrations pursuant to article IV. B. of the Existing Registration Rights
Agreement and (ii) to the extent mandatorily applicable and not specifically
described herein, to certain of the rights to participate in incidental
registrations pursuant to article IV. A. of the Existing Registration Rights
Agreement, in each case of NBCC.
SECTION 3.
EXPENSES OF REGISTRATION.
All expenses incurred in connection with each registration of Registrable
Securities pursuant to Section 2(a) and any registration of Registrable
Securities pursuant to Section 2(b), including without limitation (i) all
Commission and state registration and qualification fees, (ii) all printing,
engineering and accounting fees, (iii) all fees and disbursements of counsel for
the Company, (iv) the fee payable to the National Association of Securities
Dealers, Inc., (v) all fees and disbursements of one law firm selected by the
Holders of a Majority of the Registrable Securities to be registered to
represent all the Holders, shall be borne by the Company, and (vi) all fees and
disbursements of any underwriters (including fees and disbursements of
underwriters' counsel, if applicable); provided, however, that the Company shall
not be required to pay, and the Holders shall pay, any underwriter discounts,
commissions and other underwriter compensation, to the extent such fees,
discounts, commissions and compensation relate to the Registrable Securities.
SECTION 4.
INDEMNIFICATION.
(a) In the event of any registration of Registrable Securities under the
Securities Act pursuant to this Registration Rights Agreement, the Company shall
indemnify and hold harmless the Holder of such Registrable Securities, such
Holder's directors and officers, and each other Person, if any, who controls
such Holder within the meaning of the Securities Act (a "Controlling Person"),
against any losses, claims, damages or liabilities, joint or several, to which
such Holder or any such director, officer or Controlling Person may become
subject under the Securities Act or any other statute or at common law, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any alleged untrue statement of any material
fact contained, on the effective date thereof, in any registration statement
under which such Registrable Securities were registered under the Securities
Act, or in any preliminary prospectus or final prospectus contained therein, or
any amendment or supplement thereto, or (ii) any alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and shall reimburse such Holder or such
director, officer or Controlling Person for any legal or any other expenses
reasonably incurred by such Holder, director, officer or Controlling Person in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage, liability or
action arises out of or is based upon any alleged untrue statement or alleged
omission made in such registration statement, preliminary prospectus,
prospectus, or amendment or supplement in reliance upon and in conformity with
written information furnished to the Company through an instrument duly executed
or provided by such
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Holder or an underwriter specifically for use therein. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of such Holder, director, officer or Controlling Person, and shall
survive the transfer of such Registrable Securities by such Holder.
(b) It shall be a condition to the Company's obligation to register the
Registrable Securities of any Holder that such Holder shall enter into an
agreement to indemnify and hold harmless the Company, its directors and officers
and each other Person, if any, who controls the Company against any losses,
claims, damages or liabilities, joint or several, to which the Company or any
such director or officer or any such Person may become subject under the
Securities Act or any other statute or at common law, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon (i) any alleged untrue statement or omission of any material fact
contained, on the effective date thereof, in any registration statement under
which such Holder's Registrable Securities were registered under the Securities
Act, or in any preliminary prospectus or final prospectus contained therein, or
any amendment or supplement thereto, or (ii) any alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such alleged untrue statement or omission was contained in written
information furnished to the Company through an instrument duly executed or
provided by such Holder specifically for use therein, and to reimburse the
Company or such director, officer or other Person for any legal or any other
expenses reasonably incurred in connection with investigating or defending any
such loss, claim, damage, liability or action.
(c) Indemnification similar to that specified in Section 4(b)(i) and (ii)
above shall be given by the Company and each Holder (with such modifications as
shall be appropriate) to any underwriter with respect to any required
registration or other qualification of any Registrable Securities registered
under this Registration Rights Agreement under any federal or state law or
regulation of governmental authority. The indemnity and expense reimbursements
obligations of the Company and the Holders under Section 4(b)(i) and(ii) above
shall be in addition to any liability the Company and the Holders may otherwise
have.
(d) Each Person (an "Indemnitor") who under the preceding provisions of
this Section 4 agrees to indemnify another Person (an "Indemnitee") shall have
the right, subject to the provisions hereto, to designate counsel (which counsel
shall be a nationally recognized securities law firm or a law firm acceptable to
the Holders) or to defend any case or proceeding against the Indemnitee arising
in respect of any claim of liability for which such indemnification may be
claimed, to the end that duplication of legal expense may be minimized; provided
that, if the Indemnitee notifies the Indemnitor that the former has been advised
by its counsel that any single counsel in such case or proceeding would have a
conflict of interest in representing both the Indemnitor and the Indemnitee, the
Indemnitee may designate one counsel of its own in such case or proceeding and,
to the extent so provided above in this Section 4, shall be entitled to be
reimbursed for its legal expenses reasonably incurred in connection with
defending itself in such case or proceeding.
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(e) The Indemnitee shall give notice to the Indemnitor promptly after such
Indemnitee has actual knowledge of any claim as to which indemnity may be
sought, provided that the failure of any Indemnitee to give notice as provided
herein shall not relieve the Indemnitor of its obligations hereunder except to
the extent that the Indemnitor's defense of such claim is prejudiced thereby.
SECTION 5.
CONTRIBUTION.
(a) In the event the indemnity provisions provided for in Section 4 of
this Registration Rights Agreement are for any reason held to be unenforceable
by the indemnified parties, the Company, the Holders and the underwriters, if
any, shall contribute to the aggregate losses, liabilities, claims, damages and
expenses of the nature contemplated by said indemnity provisions incurred by the
Company, the Holders and the underwriters in proportion to the relative fault of
each such party in connection with the statements or omissions that resulted in
such losses, liabilities, claims, damages and expenses. Relative fault 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 one of the parties and such
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. Notwithstanding the
foregoing, no Holder shall be required to contribute, in the aggregate, any
amount in excess of the amount by which the total price at which the Registrable
Securities sold by it exceeds the amount of any damages that such Holder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission.
(b) Notwithstanding the foregoing provisions of this Section 5, no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the 1933 Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section, each
person, if any, who controls an underwriter within the meaning of Section 15 of
the 1933 Act shall have the same rights to contribution as such underwriter, and
each director of the Company, each officer of the Company who signed such
registration statement and each person, if any, who controls the Company or any
Holder within the meaning of Section 15 of the 1933 Act shall have the same
rights to contribution as the Company or such Holder, as the case may be.
SECTION 6.
SALES PURSUANT TO RULE 144.
Upon written request, the Company shall deliver to any Holder a written
statement as to whether it has complied with all rules and regulations of the
Commission applicable in connection with use of Rule 144 (or any successor
thereto), including the timely filing of all reports required to be filed by the
Company with the Commission. The Company shall cause any restrictive legends to
be removed and any transfer restrictions to be rescinded with respect to any
sale of Registrable Securities which is exempt from registration under the
Securities Act pursuant to Rule 144.
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SECTION 7.
TRANSFER OF REGISTRATION RIGHTS.
The registration rights of Holders under this Registration Rights
Agreement may be assigned or transferred upon written notice to the Company to
any transferee acquiring Registrable Securities, other than in a public offering
pursuant to a registration statement or in a transaction pursuant to Rule 144.
Any transferee must acknowledge in writing its acceptance of all terms,
conditions and obligations of this Registration Rights Agreement.
SECTION 8.
TERMINATION.
The Company shall not be obligated to take any action to effect any
registration, qualification or compliance pursuant to this Registration Rights
Agreement, and this Registration Rights Agreement shall terminate and be of no
force and effect (except any obligations of the Company under Section 6 of this
Registration Rights Agreement) with respect to any Holder (and such Holder only)
who may sell all of such Holder's Registrable Securities in reliance upon Rule
144(k) (or any successor rule) promulgated under the Securities Act.
SECTION 9.
REMEDIES.
The Company recognizes that money damages may be inadequate to compensate
the Holders for a breach by the Company of its obligations under this
Registration Rights Agreement, and the Company agrees that in the event of such
a breach any of the Holders may apply for an injunction of specific performance
or the granting of such other equitable remedies as may be awarded by a court of
competent jurisdiction in order to afford the Holders the benefits of this
Registration Rights Agreement and that the Company shall not object to such
application, entry of such injunction or granting of such other equitable
remedies on the grounds that money damages shall be sufficient to compensate the
Holders.
SECTION 10.
PRIORITY OF REGISTRATION RIGHTS.
The Company shall not grant to any Person while this Registration Rights
Agreement remains in effect the right to request the Company to register any
securities of the Company under the Securities Act which right has priority over
or is inconsistent with the rights granted to the Holders hereby.
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SECTION 11.
MISCELLANEOUS.
(a) NOTICES.
(i) All communications under this Registration Rights Agreement shall
be in writing and shall be sent:
(A) if to any party hereto at its address or facsimile number for
notices specified beneath its name on the signature page hereof, or at such
other address or facsimile number as it may have furnished in writing to each
other party hereto;
(B) if to any other person or entity who is the registered holder
of any Registrable Securities to the address or facsimile number of such holder
as it appears in the stock ledger of the Company.
(ii) Any notice shall be deemed to have been duly given and received
(A) at the time of delivery when delivered by hand, if personally delivered, (B)
if sent by mail, two business days after being deposited in the mail, postage
prepaid, return receipt requested, and (C) when sent by facsimile, with
confirmation of receipt, so long as a duplicate of such notice is deposited in
the mail, first class postage prepaid, on the date such facsimile is sent.
(b) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the permitted successors and assigns of each of the parties
whether so expressed or not.
(c) AMENDMENT AND WAIVER. ETC. This Agreement may be amended, and the
observance of any term of this Registration Rights Agreement may be waived, but
only with the written consent of the Company and the Holders of a Majority of
the Registrable Securities. No failure or delay on the part of the Holders in
exercising any right, power or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. The remedies provided for herein are cumulative
and are not exclusive of any remedies that may be available to the Holders at
law or in equity or otherwise. No waiver of or consent to any departure by the
Company from any provision of this Registration Rights Agreement shall be
effective unless in writing and signed by the Holders of a Majority of the
Registrable Securities.
(d) DUPLICATE ORIGINALS. Two or more duplicate originals of this
Registration Rights Agreement may be signed in counterpart by the parties, each
of which shall be an original but all of which together shall constitute one and
the same instrument.
(e) SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity,
A - 16
<PAGE> 17
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be affected or impaired
thereby.
(f) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the substantive law of Texas without giving effect to the
principles of conflicts of law thereof.
(g) ENTIRE AGREEMENT. This Agreement constitutes and contains the entire
agreement of the parties and supersedes any and all prior negotiations,
correspondence, undertakings and agreements between the parties hereto
respecting the subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Registration Rights Agreement as of the date first above written.
COSTILLA ENERGY, INC.,
a Delaware corporation
400 West Illinois, Suite 1100
Midland, Texas 79701
Facsimile: (915) 686-6080
Attention: President and Chief Executive Officer
By: /s/
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
ENRON CAPITAL & TRADE RESOURCES CORP.,
a Delaware corporation
1400 Smith
Houston, Texas 77002
Facsimile: (713) 646-3640
Attention: Timothy J. Detmering, Vice President
With a copy to:
Donna W. Lowry
Facsimile: (713) 646-4039
By: /s/
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
A - 17
<PAGE> 18
JOINT ENERGY DEVELOPMENT INVESTMENTS II
LIMITED PARTNERSHIP
By: Enron Capital Management Limited Partnership,
its General Partner
By: Enron Capital II Corp.,
its General Partner
By: /s/
------------------------------------------
Name:
----------------------------------------
Title:
--------------------------------------
A - 18
<PAGE> 1
EXHIBIT 10.31
FIFTH AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
This Fifth Amendment to Amended and Restated Credit Agreement
(this "Amendment") dated as of June 30, 1998 is among COSTILLA ENERGY, INC., a
Delaware corporation (the "Borrower"), the banks named on the signature pages
hereto (together with their respective successors and assigns in such capacity,
the "Banks"), BANKERS TRUST COMPANY, as agent for the Banks (together with its
successors and assigns in such capacity, the "Agent") and UNION BANK OF
CALIFORNIA, N.A., as co-agent for the Banks (together with its successors and
assigns in such capacity, the "Co-Agent").
PRELIMINARY STATEMENT
A. The Borrower and the Bank Group have entered into
that certain Amended and Restated Credit Agreement dated as of August 28, 1997
as amended by that certain First Amendment to Amended and Restated Credit
Agreement dated as of December 30, 1997, that certain Second Amendment to
Amended and Restated Credit Agreement dated as of January 14, 1998, that
certain Third Amendment to Amended and Restated Credit Agreement dated as of
February 26, 1998 and that certain Fourth Amendment to Amended and Restated
Credit Agreement dated as of March 24, 1998 (as so amended, the "Credit
Agreement").
B. The Borrower and the Bank Group desire to further
amend the Credit Agreement as set forth herein.
NOW THEREFORE, in consideration of the foregoing and the
mutual agreements set forth herein, the parties agree as follows:
Section 1. Definitions. Unless otherwise defined in this
Amendment, each capitalized term used in this Amendment has the meaning
assigned to such term in the Credit Agreement.
Section 2. Amendments. The Credit Agreement is hereby amended
as follows:
Section 6.04 of the Credit Agreement is hereby amended in its
entirety to read as follows:
"Section 6.04. Interest Coverage Ratio. The
Borrower will not permit the ratio of (a) EBITDA to (b)
Interest Expense, measured as of the last day of any calendar
quarter for the twelve month period then ended, to be less
than (i) 1.75 to 1.00 as of the last day of any calendar
quarter through December 31, 1998, (ii) 2.30 to 1.00 as of the
last day of any calendar quarter ending during 1999, or (iii)
2.50 to 1.00 as of the last day of any calendar quarter after
December 31, 1999."
<PAGE> 2
Section 3. Purchase of Common Stock. The Bank Group hereby
rescinds the restriction on the Borrower's purchase of the Borrower's common
stock set forth in Section 3 of that certain Limited Waiver dated as of May 13,
1998 among the Borrower and the Bank Group and reinstates the Borrower's right
to purchase the Borrower's common stock to the extent (and only to the extent)
allowed under Section 6.09(c) of the Credit Agreement.
Section 4. Ratification. The Borrower hereby ratifies and
confirms all of the Obligations under the Credit Agreement (as amended hereby)
and the other Loan Documents. All references in the Loan Documents to the
"Credit Agreement" shall mean the Credit Agreement as amended hereby and as the
same may be amended, supplemented, restated or otherwise modified and in effect
from time to time in the future.
Section 5. Effectiveness. This Amendment shall become
effective upon the execution of this Amendment by all parties hereto. This
Amendment may be executed in separate counterparts, all of which constitute one
and the same instrument.
Section 6. Representations and Warranties. The Borrower hereby
represents and warrants to the Bank Group that (a) the execution, delivery and
performance of this Amendment has been duly authorized by all requisite
corporate action on the part of the Borrower, (b) each of the Credit Agreement
(as amended hereby) and the other Loan Documents to which it is a party
constitutes a valid and legally binding agreement enforceable against the
Borrower in accordance with its terms except, as such enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or other similar laws relating to or affecting the enforcement of
creditors' rights generally and by general principles of equity, (c) the
representations and warranties by the Borrower contained in the Credit
Agreement as amended hereby and in the other Loan Documents are true and
correct on and as of the date hereof in all material respects as though made as
of the date hereof, (d) no Default or Event of Default exists under the Credit
Agreement (as amended hereby) or any of the other Loan Documents.
Section 7. Choice of Law. This Amendment shall be governed by,
and construed in accordance with, the laws of the State of New York.
Section 8. Final Agreement. THE CREDIT AGREEMENT (AS AMENDED
HEREBY) AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN
THE PARTIES.
-2-
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by its officers thereunto duly authorized as of the
date first above written.
COSTILLA ENERGY, INC.
By: /s/ Bobby W. Page
------------------------------------
Name:
---------------------------------
Title:
--------------------------------
BANKERS TRUST COMPANY,
as Agent and Bank
By: /s/ Marcus M. Tarkington
------------------------------------
Name:
---------------------------------
Title:
--------------------------------
UNION BANK OF CALIFORNIA, N.A.,
as Co-Agent and Bank
By: /s/ Dustin Gaspari
------------------------------------
Name:
---------------------------------
Title:
--------------------------------
By: /s/ Randall Osterberg
------------------------------------
Name:
---------------------------------
Title:
--------------------------------
DEN NORSKE BANK ASA,
as Bank
By: /s/ Charles E. Hall
------------------------------------
Name:
---------------------------------
Title:
--------------------------------
By: /s/ J. Morten Kreutz
------------------------------------
Name:
---------------------------------
Title:
--------------------------------
WELLS FARGO BANK (TEXAS), N.A.,
as Bank
By: /s/ Lester J.N. Keliher
------------------------------------
Name:
---------------------------------
Title:
--------------------------------
-3-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF COSTILLA ENERGY INC. FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001018980
<NAME> COSTILLA ENERGY INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 17,089
<SECURITIES> 0
<RECEIVABLES> 11,035
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,563
<PP&E> 285,708
<DEPRECIATION> 86,242
<TOTAL-ASSETS> 238,258
<CURRENT-LIABILITIES> 25,286
<BONDS> 182,441
5
0
<COMMON> 998
<OTHER-SE> 29,215
<TOTAL-LIABILITY-AND-EQUITY> 238,258
<SALES> 32,015
<TOTAL-REVENUES> 32,712
<CGS> 14,226
<TOTAL-COSTS> 19,454
<OTHER-EXPENSES> 14,364
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,833
<INCOME-PRETAX> (16,009)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,009)
<DISCONTINUED> 0
<EXTRAORDINARY> (299)
<CHANGES> 0
<NET-INCOME> (16,615)
<EPS-PRIMARY> (1.66)
<EPS-DILUTED> (1.66)
</TABLE>
