<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
(Amendment No. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant[ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
COSTILLA ENERGY, INC.
(Name of Registrant as Specified in its Charter)
COSTILLA ENERGY, INC.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies.
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on
which the filing fee is calculated and state how it was
determined.):
----------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE> 2
COSTILLA ENERGY, INC.
400 W. Illinois, Suite 1000
Midland, Texas 79701
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
- -------------------------------------------------------------------------------
To Our Stockholders:
The Annual Meeting of Stockholders of Costilla Energy, Inc., a Delaware
corporation (the "Company"), will be held at the Petroleum Club, 501 West Wall
Ave., Midland, Texas on Friday, May 29, 1998, at 11:00 a.m., local time, for the
following purposes:
1. To elect one director for a term of three years in accordance
with the Certificate of Incorporation and bylaws of the
Company.
2. To ratify the appointment of KPMG Peat Marwick LLP as
independent public accountants for the Company for the fiscal
year ending December 31, 1998.
3. To transact such other business as may properly come before
the meeting.
Stockholders of record at the close of business on April 20, 1998 are entitled
to notice of and to vote at the meeting or any adjournments thereof.
Midland, Texas By Order of the Board
April 28, 1998 Bobby W. Page
Secretary
- -------------------------------------------------------------------------------
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN THE PROXY AND
RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
<PAGE> 3
COSTILLA ENERGY, INC.
400 W. Illinois, Suite 1000
Midland, Texas 79701
PROXY STATEMENT
This proxy statement and related proxy are being mailed to stockholders
of Costilla Energy, Inc. (the "Company") on or about April 28, 1998, in
connection with the solicitation by the Company of proxies to be used at the
Annual Meeting of Stockholders of the Company to be held at the Petroleum Club,
501 West Wall Ave., Midland, Texas on Friday, May 29, 1998 at 11:00 a.m., local
time, and at all adjournments thereof.
Any person giving a proxy has the power to revoke it at any time before
it is voted by filing with the Secretary of the Company an instrument revoking
the proxy, by delivering a properly executed proxy of a later date or by
attending the Annual Meeting and voting in person. The Company will bear the
costs of this solicitation of proxies. The Company may also reimburse persons
holding stock in their names or in those of their nominees for their reasonable
expenses in sending proxy material to their principals and obtaining their
proxies. The solicitation is being made by mail and may also be made by
telephone or telecopy by officers, directors and regular employees of the
Company, who will receive no additional compensation therefor. Total expenses of
the solicitation are expected to be nominal.
Stockholders of record at the close of business on April 20, 1998 are
entitled to notice of and to vote at the meeting. At the close of business on
such date, the Company had 9,981,000 shares of Common Stock, $.10 par value per
share (the "Common Stock"), outstanding, each share being entitled to one vote.
Properly executed proxies will be voted in accordance therewith. If no
direction is indicated thereon, a properly executed proxy will be voted (i) in
favor of the nominee for Director named herein, (ii) in favor of ratifying the
appointment of KPMG Peat Marwick LLP as the Company's independent public
accountants, and (iii) in the discretion of the persons appointed as proxies
upon any other business that may properly come before the meeting or any
adjournment thereof. With respect to the election of Directors, a stockholder
may, by properly completing the enclosed proxy, vote in favor of the nominee or
withhold his or her votes as to the nominee. A Director is elected by the
affirmative vote of a plurality of the shares represented at the meeting in
person or by proxy and entitled to vote in the election of Directors. The
Company's Certificate of Incorporation prohibits cumulative voting in the
election of Directors. The ratification of the appointment of independent public
accountants and all other matters properly coming before the meeting will be
decided by the affirmative vote of a majority of the shares represented at the
meeting in person or by proxy and entitled to vote on such matters, except as
otherwise required by law or by the Company's Certificate of Incorporation or
bylaws.
The votes will be counted by one or more inspectors appointed by the
Board of Directors, who will determine, among other things, whether a quorum
(being a majority of the outstanding shares of Common Stock entitled to vote at
the meeting) is present at the meeting in person or by proxy, the number of
votes necessary for the stockholders to take action in accordance with the
foregoing requirements and the votes withheld or cast for and against each
matter. All properly executed proxies and ballots, regardless of the nature of
vote or the absence of a vote indication (but not including broker non-votes),
are counted in determining the number of shares represented at the meeting.
Neither broker non-votes nor abstentions are counted as affirmative votes, in
whole or in part. An abstention arises when a proxy is properly executed and the
"abstain" box is properly marked as to a proposal. A properly executed proxy
with no voting selections made thereon is not an abstention and will be voted as
set forth in the preceding paragraph.
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<PAGE> 4
PROPOSAL NO. 1 ELECTION OF ONE DIRECTOR
The Board of Directors is composed of three classes of members. One
class of Directors is elected each year to hold office for a three-year term and
until successors of such class are duly elected and qualified. At the meeting, a
Class II Director will be elected, and Samuel J. Atkins, III, currently the sole
Class II Director, has been nominated for such position. Except where the
authority to do so has been withheld, it is the intention of the persons named
in the proxy to vote to elect Mr. Atkins as Director for a three-year term. Mr.
Atkins has consented to being named in the proxy statement and to serve, if
elected. If for any unforeseen cause, Mr. Atkins should decline or be unable to
serve, the proxies will be voted to fill any vacancy so arising in accordance
with the discretionary authority of the persons named in the proxy.
Information with respect to the nominee for election and Directors
continuing in office regarding age (as of December 31, 1997), positions with the
Company or other principal occupations for the past five years, other
directorships and the year each was initially elected a Director of the Company
is as follows (there are no family relationships among the following named
persons):
NOMINEE FOR ELECTION TO THE BOARD OF DIRECTORS
FOR THREE-YEAR TERM EXPIRING IN 2001 (CLASS II)
SAMUEL J. ATKINS, III, age 52, is a Director of the Company and a member of the
Compensation and Audit Committees of the Board of Directors. Mr. Atkins became a
Director in April 1997. Prior to his retirement on March 1, 1997, Mr. Atkins was
executive vice president of NationsBank Corporation for in excess of the past
five years. He also served as a director of NationsBank of Texas, N.A. from May
1995 until February 1997. Mr. Atkins is currently a private investor.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ABOVE NAMED NOMINEE.
MEMBERS OF THE BOARD OF DIRECTORS CONTINUING IN OFFICE
TERM EXPIRING IN 2000 (CLASS I)
W. D. KENNEDY, age 77, is a Director of the Company and a member of the
Compensation and Audit Committees of the Board of Directors. Mr. Kennedy has
served as a Director since July 1996. He has been continually involved in the
oil and gas business since 1948. From 1953 until 1980, Mr. Kennedy was an
executive officer and director of C&K Petroleum, Inc., and its predecessor. C&K
Petroleum, Inc. was a publicly held corporation from 1971 until 1980. Mr.
Kennedy remains an active investor in the oil and gas business. Mr. Kennedy is a
member of the All-American Wildcatters Association, a past president of the
Permian Basin Petroleum Association and a former director of the Texas
Mid-Continent Oil and Gas Association.
JERRY J. LANGDON, age 44, is a Director of the Company and a member of the
Compensation and Audit Committees of the Board of Directors. Mr. Langdon has
served as a Director since July 1996. He has previously held positions with HNG
Corporation, Houston Pipeline Company, Texas Oil & Gas Corporation and W. Wilson
Corporation. In 1980, Mr. Langdon formed Texas IntraMark Gas Company, Inc., an
intrastate gas gathering company engaged in the business of constructing and
operating natural gas gathering, treating and processing facilities. In 1984,
Mr. Langdon formed Langdon & Associates, a natural gas consulting group advising
petroleum resource-oriented companies, financial institutions and law firms on
a variety of technical, commercial and regulatory issues. Mr. Langdon served as
a member of the Federal Energy Regulatory Commission ("FERC") from 1988 to June
1993. After leaving the FERC, Mr. Langdon formed Republic Gas Partners, L.L.C.,
which was merged with Midcoast Energy Resources, Inc. in October 1997. Mr.
Langdon is currently a private investor and consultant.
Page 3
<PAGE> 5
MEMBERS OF THE BOARD OF DIRECTORS CONTINUING IN OFFICE
TERM EXPIRING IN 1999 (CLASS III)
CADELL S. LIEDTKE, age 42, is Chairman of the Board and a Director of the
Company, having served in such capacities since the inception of the Company in
July 1996. Prior to April 15, 1997, Mr. Liedtke also served as Chief Executive
Officer of the Company. He is a member of the Audit Committee of the Board of
Directors. Mr. Liedtke entered the oil and gas business in Midland, Texas in
1977 as an independent landman generating oil and gas prospects in the Permian
Basin. He founded the Company's predecessor with Michael J. Grella in 1988. Mr.
Liedtke has served on the Board of Directors of Texas Commerce Bank-Permian
Basin and has been appointed by Texas Governor George W. Bush to the Oil and Gas
Compact Commission. Mr. Liedtke is a member of the All-American Wildcatters
Association, the Permian Basin Petroleum Association, the Permian Basin
Landman's Association and the Independent Producer's Association of America.
MICHAEL J. GRELLA, age 49, is President, Chief Executive Officer and a Director
of the Company. He has served as President and as Director since the inception
of the Company in July 1996 and as Chief Executive Officer since April 15, 1997.
Mr. Grella served as Chief Operating Officer of the Company and its predecessor
entities from 1988 until April 15, 1997. He has invested in the oil and gas
business since 1982. Mr. Grella is a member of the Permian Basin Petroleum
Association, the Independent Producer's Association of America, the Texas
Independent Producers and Royalty Owners Association and the Permian Basin
Landman's Association.
HENRY G. MUSSELMAN, age 44, is Executive Vice President, Chief Operating Officer
and a Director of the Company, having served as Executive Vice President and
Director since the inception of the Company in July 1996 and as Chief Operating
Officer since April 15, 1997. Mr. Musselman began his oil and gas career in 1975
with Musselman Petroleum and Land Company where he served as Vice President and
a Director until forming Musselman, Owen & King in 1982. For the 10 years prior
to merging his company into the Company's predecessor in 1992, Mr. Musselman
developed and acquired oil and gas properties throughout the Permian Basin. Mr.
Musselman is a member and former director of the Independent Producer's
Association of America.
PROPOSAL NO. 2 RATIFICATION OF APPOINTMENT OF INDEPENDENT
PUBLIC ACCOUNTANTS
Upon the recommendation of the Audit Committee of the Board of
Directors, the Board has selected KPMG Peat Marwick LLP as the independent
public accountants of the Company and its subsidiaries for the fiscal year
ending December 31, 1998. KPMG Peat Marwick LLP has been the Company's
independent public accountants since inception and has an office in Midland,
Texas where the Company's principal office is located. The Company has been
advised that a representative of KPMG Peat Marwick LLP will be present at the
Annual Meeting. The representative will have an opportunity to make a statement
at the Meeting and to respond to appropriate questions raised at the meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE
APPOINTMENT OF KPMG PEAT MARWICK LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR THE
COMPANY.
Page 4
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BOARD OF DIRECTORS AND COMMITTEES
As of the date of this Proxy Statement, compensation for non-employee
directors consists of an annual retainer fee of $10,000, plus a $1,000 fee for
each Board meeting attended and a $1,000 fee for attending a committee meeting
held on a day other than the day of a Board meeting. In addition, the
non-employee directors are participants in the Company's Outside Directors Stock
Option Plan (the "Outside Directors Plan").
The Outside Directors Plan provides for the issuance of stock options
to the outside directors of the Company. A total of 100,000 shares of Common
Stock has been authorized and reserved for issuance under the plan, with
adjustments to reflect changes in the Company's capitalization resulting from
stock splits, stock dividends and similar events. Only outside directors are
eligible to participate in the plan. Outside directors are those directors of
the Company who are not executive officers or regular salaried employees of the
Company as of the date an option is granted. Under the plan, an option for 5,000
shares of Common Stock is granted each year on the date immediately following
the Company's annual meeting to each person who qualifies as an outside
director. The exercise price of each option granted under the plan will be the
fair market value (as reported on the Nasdaq Stock Market's National Market) of
the Common Stock at the time the option is granted, and may be paid either in
cash, shares of Common Stock or a broker-assisted cashless transaction. Each
option is exercisable immediately upon grant and will expire ten years from the
date of grant. An option granted under the plan is not transferrable other than
by will or the laws of descent and distribution. In the event a participant in
the plan ceases to be an outside director, other than by reason of death, such
participant may exercise an outstanding option under the plan within six months
after such termination. In the event of the death of a participant under the
plan, such participant's option(s) may be exercised by the heirs or personal
representative of the participant within one year after his death, so long as
the term of the option has not expired. The Company does not receive any
consideration upon the grant of options under the plan. The options should not
be taxable to an optionee until the optionee exercises the option, at which time
the optionee would recognize income on the difference between the exercise price
and the fair market value of the shares on the date of exercise. The grant of
options under the plan is treated as compensation paid by the Company for
purposes of the Company's federal income tax considerations. The Board of
Directors may amend the plan without the approval of the stockholders of the
Company in any respect other than any amendment which requires stockholder
approval by law or the rules of any exchange on which the Common Stock is
listed, and may modify an outstanding option, including the repricing of such
options, with the consent of the option holder. The Company currently has six
directors, three of whom are eligible to participate in the plan. Pursuant to
the terms of the plan, an option for 5,000 shares was granted to each of the
Company's three outside directors on June 17, 1997.
The Board of Directors has two committees. The Compensation Committee
is composed of Messrs. Atkins, Kennedy and Langdon, none of whom are employees
of the Company. The Committee has the responsibilities of establishing the
Company's executive compensation policies, reviewing the performance and setting
the salaries of the officers of the Company, awarding cash bonuses to such
officers and administering the Company's Bonus Incentive Plan and 1996 Stock
Option Plan. The Compensation Committee met two times in 1997.
The Audit Committee is composed of Messrs. Atkins, Liedtke, Kennedy and
Langdon, with Bobby W. Page, the Company's Chief Financial Officer, as an ex
officio member. The Audit Committee met one time in 1997. The Committee
recommended to the Board of Directors the selection of KPMG Peat Marwick LLP as
the Company's independent public accountants. The Committee reviews the annual
financial statements and discusses them with the auditors and financial staff of
the Company; reviews the independence of the independent public accountants
conducting the audit; reviews the services provided by the independent public
accountants; discusses with management and the auditors the Company's accounting
system and related systems of internal control; and consults as it deems
necessary with the independent public accountants and the Company's internal
financial staff.
The Board of Directors met three times in 1997. Each member of the
Board attended no less than seventy-five percent of total number of meetings of
the Board and of any committee of the Board on which such member served.
Page 5
<PAGE> 7
CERTAIN TRANSACTIONS AND RELATIONSHIPS
A&P Meter Sales and Services, Inc. ("A&P"), a corporation in which
Messrs. Liedtke, Grella and Musselman own 60.0% of the outstanding common stock,
supplies meter reading services which measure gas production to the Company, as
well as to unaffiliated oil and gas companies. From time to time, the Company
has advanced funds to A&P for working capital needs. These advances have been
consolidated into two promissory notes. One note was executed December 31, 1994
in the original principal amount of $370,000. The note bears interest at a
floating rate equal to the "prime rate" plus 1.0%. No principal or interest
payments are due until the maturity of the note at December 31, 2004. The note
is secured by a second lien on A&P's accounts receivable, inventory and
equipment. The second note is in the original principal amount of $247,000 and
is dated May 22, 1996. The note bears interest at 6.0% per annum, is unsecured
and is payable upon demand. During the fiscal year ended December 31, 1997, A&P
received $550,000 from the Company for goods and services provided, which
accounted for approximately 94% of A&P's gross revenues. The Company believes
that the goods and services and charges therefor are comparable to those the
Company could have obtained from, or paid to, unaffiliated third parties.
The Company was indebted to NationsBank of Texas, N.A. during 1997 in
varying amounts which were, at times, material to the Company. Mr. Atkins, a
Director of the Company, was a director of NationsBank of Texas, N.A. and an
executive vice president of NationsBank Corporation during a portion of 1997.
Mr. Atkins resigned from his positions with the NationsBank entities in March
1997 and was appointed as a Director of the Company in April 1997. Prior to
April 1997, Mr. Atkins did not have any affiliation with the Company.
Page 6
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INFORMATION CONCERNING SECURITY OWNERSHIP
Under regulations of the Securities and Exchange Commission, persons
who have power to vote or dispose of shares of the Company, either alone or
jointly with others, are deemed to be beneficial owners of such shares. The
following table sets forth certain information regarding the beneficial
ownership of Common Stock as of March 31, 1998, by (i) each person who is the
beneficial owner of 5 percent or more of the outstanding Common Stock (based
upon copies of all Schedule 13Gs and 13Ds provided to the Company through March
31, 1998), (ii) each Director of the Company and each nominee for Director,
(iii) each executive officer named in the Summary Compensation Table herein and
(iv) all Officers and Directors of the Company as a group. Unless otherwise
noted, the persons and entities named below have sole voting and investment
power with respect to the shares listed opposite each of their names.
<TABLE>
<CAPTION>
Name (and address of 5% Amount and Nature of Percent of
or greater owners) Beneficial Ownership Class
- ------------------ -------------------- -----
<S> <C> <C>
Cadell S. Liedtke 2,302,560(1) 23.1%
400 W. Illinois
Midland, Texas 79701
Michael J. Grella 1,674,310(2) 16.8%
400 W. Illinois
Midland, Texas 79701
NationsBanc Capital Corp. 936,000 9.4%
100 North Tryon Street
Charlotte, North Carolina 28255
The Equitable Companies Incorporated (3) 899,800 9.0%
787 Seventh Avenue
New York, New York 10019
Cumberland Associates 732,500 7.3%
1114 Avenue of the Americas
New York, NY 10036
Henry G. Musselman 622,000(4) 6.2%
400 W. Illinois
Midland, Texas 79701
W.D. Kennedy 7,500(5) * (6)
Jerry J. Langdon 5,000(5) * (6)
Samuel J. Atkins, III 5,000(5) * (6)
Bobby W. Page 76,000(7) * (6)
Roger A. Freidline 88,300(8) * (6)
All Officers and Directors 5,175,670(9) 49.1%(6)
as group (14 persons)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
*Less than 1%.
Page 7
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(1) Includes (a) 2,242,560 shares owned directly by Mr. Liedtke
and (b) 60,000 shares owned by the Marion and Cadell S.
Liedtke Family Charitable Foundation over which Mr. Liedtke
holds voting and dispositive power.
(2) Includes (a) 1,624,310 shares owned directly by Mr. Grella and
(b) 50,000 shares owned by the Grella Family Charitable
Foundation over which Mr. Grella holds voting and dispositive
power.
(3) Represents shares owned by Alliance Capital Management L.P., a
subsidiary of the Equitable Companies Incorporated, held on
behalf of clients, as reported in the Schedule 13G filed by
the Equitable Companies Incorporated, as amended through
December 31, 1997.
(4) Includes (a) 599,500 shares owned directly by Mr. Musselman,
(b) 1,500 shares owned by Mr. Musselman's spouse as custodian
for their children under the Texas Uniform Transfers to Minors
Act, and (c) 21,000 shares owned by the Musselman Family
Charitable Foundation over which Mr.
Musselman holds voting and dispositive power.
(5) Includes the right to acquire beneficial ownership of 5,000
shares of Common Stock through presently exercisable options
granted under the Company's Outside Directors Plan.
(6) For purposes of calculating these percentages, the shares
which the named person or persons has or have the right to
acquire within 60 days by exercise of the stock options
described in these footnotes are deemed outstanding shares
with respect to that person's percentage ownership and with
respect to the percentage ownership of all officers and
directors as a group.
(7) Includes the right to acquire beneficial ownership of 75,000
shares of Common Stock through a presently exercisable option
granted under the 1996 Stock Option Plan (the "Option Plan").
(8) Includes the right to acquire beneficial ownership of 85,000
shares of Common Stock through a presently exercisable option
granted under the Option Plan.
(9) Includes all rights of executive officers and directors to
acquire beneficial ownership of 565,000 shares of Common Stock
through presently exercisable options granted under the Option
Plan and the Outside Directors Plan.
Page 8
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EXECUTIVE COMPENSATION
The following table sets forth information regarding the total
compensation for 1995, 1996 and 1997 received by the Company's Chief Executive
Officer and the other executive officers of the Company whose annual
compensation exceeded $100,000 in 1997. Information for 1996 is on an annualized
basis based upon amounts paid to the named individuals after the Corporate
Reorganization (as hereinafter defined).
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
Annual Compensation ----------------
------------------------------------------- Securities
Underlying
Other Annual Options/ All Other
Name and Principal Position Year Salary Bonus Compensation SARs (1) Compensation(2)
- --------------------------- ---- ------ ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cadell S. Liedtke (3) 1997 $300,000 $50,000 -- -- $ 9,417
Chairman of the Board 1996 300,000 -- -- -- 6,738
1995 185,700 -- -- -- --
Michael J. Grella (4) 1997 $300,000 $50,000 -- -- $ 9,417
President and Chief 1996 300,000 -- -- -- 6,352
Executive Officer 1995 261,750 -- -- -- 656,000
Henry G. Musselman (5) 1997 $239,792 $36,000 -- -- $ 3,750
Executive Vice President and 1996 215,000 10,000 -- -- 3,295
Chief Operating Officer 1995 139,800 -- -- -- --
Bobby W. Page (6) 1997 $175,000 $14,583 $18,583(7) -- $ 2,625
Senior Vice President, 1996 150,000 5,208 -- 75,000 --
Treasurer, Secretary and Chief 1995 -- -- -- -- --
Financial Officer
Roger A. Freidline 1997 $ 93,430 $ 7,786 $ 9,292(7) -- $ 78,938
Senior Vice President, 1996 88,981 7,415 -- 85,000 17,785
Exploration 1995 83,160 5,000 -- -- 7,190
</TABLE>
- ----------------------------
(1) The amount shown represents the number of shares subject to
non-qualifying stock options granted pursuant to the Option
Plan as described under "--Aggregate Option Exercises and
Fiscal Year-End Option Values."
(2) The amounts shown include contributions made by the Company
pursuant to the Company's 401(k) plan for the benefit of the
named individuals. The amount shown for Mr. Grella for 1995
represents non-cash compensation deemed to have been accrued
to him in connection with the cancellation of an option held
by a minority interest owner to purchase an additional
interest in the Company. The amounts shown for Mr. Freidline
include payments made to him of $5,111, $15,115 and $76,252 in
1995, 1996 and 1997, respectively, pursuant to an overriding
royalty interest compensation program entered into between the
Company's predecessors and Mr. Freidline. Such compensation
arrangements were discontinued prior to the Company's initial
public offering in October 1996.
(3) Mr. Liedtke beneficially owns 2,302,560 shares of restricted
Common Stock issued to him in connection with the
consolidation of the Company's predecessors in October 1996
(the "Corporate Reorganization"), with a value at December 31,
1997 of $25,040,340.
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<PAGE> 11
(4) Mr. Grella beneficially owns 1,350,440 shares of restricted
Common Stock issued to him in connection with the Corporate
Reorganization, with a value at December 31, 1997 of
$14,686,035.
(5) Mr. Musselman beneficially owns 611,000 shares of restricted
Common Stock issued to him in connection with the Corporate
Reorganization, with a value at December 31, 1997 of
$6,644,625.
(6) Mr. Page joined the Company in June 1996.
(7) Represents the dollar value of an award of shares of Common
Stock and the amount of a cash award equal to the income tax
liability for the stock award, all granted to the named
officers under the Company's Bonus Incentive Plan (the "Bonus
Plan").
EMPLOYMENT AGREEMENTS
Messrs. Liedtke, Grella and Musselman entered into employment
agreements (as the same have been amended, the "Founders Employment Agreements")
with the Company which became effective upon the closing of the Company's
initial public offering in October 1996. The Founders Employment Agreements are
each for three years, commencing in October 1996 and each will automatically
renew for successive one-year periods thereafter unless the employee is notified
to the contrary. The Founders Employment Agreements provide annual base salary
levels for Messrs. Liedtke and Musselman of $300,000 and $250,000, respectively.
Pursuant to an amendment to his employment agreement approved in April 1997, Mr.
Grella's annual base salary is determined by the Compensation Committee as more
fully discussed under "--Compensation Committee Report on Executive
Compensation."
Each of Messrs. Liedtke, Grella and Musselman would receive his salary
for the remaining term of the applicable Founders Employment Agreement if the
Company were to terminate such person's employment other than for cause.
However, if such person were to voluntarily leave his employment with the
Company prior to the second anniversary of the Agreement, no further payments
would be required. If a voluntary termination were to occur subsequent to the
second anniversary of the Agreement, such person would be entitled to one year's
salary from the date of termination. Each Founders Employment Agreement provides
that the covered employee will not compete with the Company for a one year
period following his voluntary cessation of employment or termination of
employment for cause, if such event occurs within the initial three-year term of
the Agreement. Competitive activities are defined as engaging in the oil and gas
business in any area in which the Company is then active.
Bobby W. Page entered into an employment agreement (the "Page
Employment Agreement") with the Company effective June 30, 1996. The Page
Employment Agreement is for a period of three years from June 30, 1996 and will
automatically renew for successive one-year periods thereafter unless Mr. Page
is notified to the contrary by the Company. The Page Employment Agreement
provided a $25,000 bonus (which included Mr. Page's cost of relocation), plus a
base salary of $150,000 until January 1, 1997; $175,000 until January 1, 1998;
and $185,000 thereafter. In addition, Mr. Page received an option to purchase
75,000 shares of Common Stock, and receives certain insurance benefits and other
benefits generally available to the Company's employees. Mr. Page would receive
his salary for the remaining term of the Page Employment Agreement if the
Company were to terminate the Page Employment Agreement other than for cause.
However, if Mr. Page were to voluntarily leave his employment with the Company,
no further payments would be required.
OPTION GRANTS IN LAST FISCAL YEAR
There were no grants of stock options to the executive officers named
in the Summary Compensation Table in the 1997 fiscal year.
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AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table provides information, with respect to the named
executive officers, regarding the exercise of options during fiscal year 1997
and the value of unexercised options held as of the end of fiscal year 1997:
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised
Unexercised Options/ In-the-Money
SARs at Options/SARs at
FY-End (#) FY-End ($)
------------------- --------------------
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized Unexercisable Unexercisable (1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bobby W. Page 0 0 75,000/0 N/A
Roger A. Freidline 0 0 85,000/0 N/A
</TABLE>
(1) The option price of the options set forth above is $12.50 per share.
The closing sales price of the Company's Common Stock on the Nasdaq
National Market on December 31, 1997 was $10.88 per share. Therefore,
the options were not in-the-money at fiscal year end 1997.
The options shown above were granted pursuant to the Option Plan which
provides for the grant of both incentive stock options and non-qualifying stock
options, as well as limited stock appreciation rights and supplemental bonuses,
to the employees of the Company and its subsidiaries, including officers and
directors who are salaried employees. A total of 1,250,000 shares of Common
Stock has been authorized and reserved for issuance under the plan, with
adjustments to reflect changes in the Company's capitalization resulting from
stock splits, stock dividends and similar events. The plan is administered by
the Compensation Committee of the Board of Directors, which has the sole
authority to interpret the plan, to determine the persons to whom options will
be granted, to determine the basis upon which the options will be granted, and
to determine the exercise price, duration and other terms of the options to be
granted under the plan; provided that (a) the exercise price of each option
granted under the plan may not be less than the fair market value of the Common
Stock on the date the option is granted (and for incentive stock options, 110%
of fair market value if the employee is the beneficial owner of 10% or more of
the Company's voting securities), (b) the exercise price must be paid in cash,
by surrendering previously owned shares of Common Stock upon the exercise of the
option or by a promissory note or broker-assisted cashless exercise approved by
the Compensation Committee, (c) the term of the option may not exceed ten years,
and (d) no option is transferrable other than by will, the laws of descent and
distribution or pursuant to a qualified domestic relations order. Upon
termination of an optionee's employment (other than by death or disability), an
incentive stock option may be exercised prior to the expiration date of the
option or within three months after the date of such termination, whichever is
earlier, but only to the extent the optionee had the right to exercise the
option upon the date of such termination. The rights of the holder of a
non-qualifying stock option will be set forth in each option agreement. In the
event of the disability of an optionee, the option may be exercised by such
person or his personal representative at any time within one year of the
termination of such person's employment, but only to the extent the optionee had
the right to exercise the option as of the date of his disability. In the event
of the death of the optionee, the option may be exercised by his personal
representative or successor in interest at any time until the later of the
expiration of the option or one year after the optionee's death, to the extent
the option was exercisable at the time of the optionee's death. Incentive stock
options may not be granted under the plan to any individual if the effect of
such grant would permit that person to have the first opportunity to exercise
such options, in any calendar year, for the purchase of shares having a fair
market value (at the time of grant of the option) in excess of $100,000.
Incentive stock options granted under the plan are intended to have the federal
income tax consequences of a qualified stock option. As a result, the exercise
of an incentive stock option will not be a taxable event; the taxable event
occurs at the time the shares of Common Stock acquired upon exercise of the
option are sold. If the optionee holds such shares for the later of two years
from the date the option was granted or one year from the date of exercise of
the option, the difference between the price paid for the shares at exercise and
the price for which those shares are sold will be treated as capital gains
income. If the optionee does
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<PAGE> 13
not hold the shares for the required holding period, the income would be treated
as ordinary income rather than capital gains income. The non-qualifying stock
options granted under the plan should be taxable when the option is exercised,
at which time the optionee would recognize ordinary income on the difference
between the exercise price and the fair market value of the shares on the date
of exercise. The grant of options under the plan is treated as compensation by
the Company for federal income tax purposes. The Board of Directors may amend
the plan, without stockholder approval, in any respect other than any amendment
that requires stockholder approval by law or the rules of an exchange on which
the Common Stock is listed, and may modify an outstanding option, including the
repricing of non-qualifying options, with the consent of the option holder.
There are currently approximately 135 persons who are eligible to participate
under the plan.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
GENERAL
The Compensation Committee of the Board of Directors is comprised of
three outside directors, Samuel J. Atkins, III, W.D. Kennedy and Jerry J.
Langdon. The Committee is responsible for adopting and implementing executive
compensation policies, in general, and setting the compensation of the Company's
officers and administering the Option Plan and the Bonus Plan, in particular.
The primary objectives of the compensation plans and policies are (i) to attract
and retain highly qualified executive officers, (ii) to reward exceptional
performance by management and (iii) to provide financial incentives for
management to maximize and enhance stockholder value.
The Compensation Committee has adopted a compensation policy focused on
changes in the Company's net asset value and changes in the market value of the
Company's Common Stock as compared with the stock of the Company's peer group.
The Committee believes that such a policy reflects the Company's strategic goals
of economic exploration and development of its existing properties while
recognizing the effect volatile oil and gas prices and other factors can have on
the oil and gas industry as a whole. In addition, the Committee reviews and
considers compensation policies and activities of companies comparable to the
Company in size, industry type and business strategy.
These general policies and objectives are used by the Committee in
establishing the main elements of the Company's executive compensation system:
base salary, short term incentives and long term incentives. The Committee
believes that the use of variable, at risk compensation in the form of short and
long term incentives provides focus on achievement of financial goals and aligns
the interests of the officers with those of the Company's stockholders.
BASE SALARY
The base salaries of Messrs. Liedtke, Musselman and Page are set
pursuant to employment agreements. The 1997 salaries of the other officers of
the Company, including Mr. Grella, were set by the Compensation Committee based
upon salaries for comparable positions in the industry and upon each officer's
performance, experience and length of employment with the Company. At their
December 11, 1997 meetings, the Compensation Committee and the Board of
Directors approved cash bonuses for 1997, and also approved adjustments to
salaries effective January 1, 1998, for all officers of the Company except
Messrs. Liedtke, Musselman and Page, based upon the compensation policy set
forth above. In addition, Mr. Grella's annual salary was and is also subject to
adjustment based upon the performance of the Company as discussed under
"-Compensation of Chief Executive Officer."
SHORT TERM INCENTIVES
The Company adopted the Bonus Plan as a means of awarding its officers
and employees for extraordinary individual and Company performance. Awards under
the Bonus Plan may be granted annually and may be in the form
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<PAGE> 14
of cash or shares of Common Stock or a combination thereof. The form and amount
of an award granted under the Bonus Plan is determined by the Compensation
Committee based upon an assessment and recommendations from the Committee with
respect to the following performance factors for the year under consideration:
(i) increases in the net value of the Company's assets, (ii) increases in the
market value of the Company's Common Stock as compared to the Company's peer
group, (iii) increases in the Company's oil and gas reserves; (iv) increases in
the Company's oil and gas production; (v) increases in earnings and cash flow
(assuming constant product prices); (vi) the performance of the individual in
connection with the Company's success in the foregoing areas; and (vii)
outstanding individual performance in contributing to the achievement of the
Company's long term strategic goals. The performance with respect to such
factors is measured against past performance and against the goals and
objectives established by the Company for the year in question. No specific
weighting is applied to the analysis of these factors. In addition to awards
under the Bonus Plan, the Compensation Committee may authorize additional cash
bonuses for certain or all executive officers in recognition of outstanding
individual performance in the advancement of the Company's long term objectives.
The following awards were granted under the Bonus Plan during 1997
after a review of the 1996 fiscal year by the Compensation Committee. A total of
4,500 shares of Common Stock were granted to all officers, other than Messrs.
Liedtke, Grella and Musselman. Since Messrs. Liedtke and Grella did not receive
either a year end 1996 cash bonus or the Common Stock bonus, they were each paid
a cash bonus in early 1997. Mr. Musselman, who did not receive a Common Stock
bonus and received a 1996 cash bonus which was proportionally smaller than the
1996 cash bonuses paid to other employees, was also paid a cash bonus in early
1997. All such awards and bonuses were granted and paid in recognition of the
growth of the Company during 1996 and the successful completion of the Company's
initial public offering. In addition, the Company paid year-end cash bonuses to
all officers other than Messrs. Liedtke and Grella in December 1997.
Based upon a recent review of the Company's performance in 1997, and
with respect to Mr. Grella the specific factors discussed under "-- Compensation
of Chief Executive Officer," the Compensation Committee also awarded cash
bonuses to Messrs. Liedtke, Grella and Musselman in early 1998 as part of their
compensation related to the 1997 fiscal year.
LONG TERM INCENTIVES
The Company adopted the Option Plan in order to attract and retain
qualified personnel and provide incentives to its officers and employees to
promote Company performance which will enhance the value of the Common Stock.
The Compensation Committee believes that the grant of stock options under the
Option Plan to officers and employees aligns the interests of such officers and
employees with the interests of the Company's stockholders. The size of an
individual option grant is based primarily upon the optionee's responsibilities
and position with the Company, and is determined by the Compensation Committee.
Other factors include the optionee's performance, potential for promotion and
impact on the Company's performance. The Company does not have a policy
concerning the timing and frequency of the grant of stock options under the
Option Plan. No options were granted under the Option Plan during 1997.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
During the first three months of 1997 Mr. Liedtke served as the Chief
Executive Officer of the Company as well as his current position of Chairman of
the Board. In such capacities, Mr. Liedtke's compensation was established
pursuant to his employment agreement. Beginning in April 1997, Mr. Grella has
served as the Chief Executive Officer. The following is a discussion of the
Compensation Committee's determination of and policy for past and future
compensation of Mr. Grella as the Chief Executive Officer (the "CEO").
The general compensation policies for all officers of the Company for
1997 were also applied to the CEO. In addition the CEO's annual compensation
related to the 1997 fiscal year was subject to adjustment based directly
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<PAGE> 15
upon the Company's performance with respect to growth in the Company's oil and
gas reserves and increases in the Company's earnings pursuant to specific CEO
compensation criteria established at the beginning of 1997. Due to the increase
in the volume of the Company's oil and gas reserves during 1997, the CEO's
compensation was increased by an amount equal to approximately $2,500 for each
one percent of the increase in reserves. Such determinations with respect to
reserves were based upon reports prepared at the end of the fiscal year by the
Company and reviewed by independent petroleum engineers, using product prices
equal to the prices used pursuant to the rules of the Securities and Exchange
Commission at the end of 1996. This adjustment to the CEO's compensation for the
1997 fiscal year was made by the award of the above described cash bonus granted
under the Bonus Plan in early 1998.
Future compensation of the CEO will be based primarily on the same
factors applicable to the other officers of the Company as discussed under
"--Short Term Incentives" with particular focus on changes in net asset value
and changes in the market value of the Company's Common Stock as compared to the
Company's peer group. The CEO's compensation may be paid, at the option of the
Compensation Committee, in cash or shares of Common Stock as a bonus, as an
adjustment to the CEO's annual salary, as stock options granted to the CEO under
the Option Plan, or in such combination as the Committee may deem appropriate.
In addition, all or a portion of such amounts may be deferred. The Committee
believes that including shares of Common Stock and stock options in the CEO's
compensation package will enhance the mutuality of interest of the CEO with the
Company's stockholders.
The Committee intends for the CEO's compensation to be substantially
linked to the performance of the Company as it effects the value of the Common
Stock for the benefit of all its stockholders.
SECTION 162 (M) OF THE INTERNAL REVENUE CODE
The Company does not have and does not propose to adopt any policy with
respect to the limits on deductibility of annual executive compensation in
excess of $1 million pursuant to Section 162(m) of the Internal Revenue Code.
The Company has not paid and does not anticipate paying compensation at such
levels in the foreseeable future.
The Compensation Committee believes that it has developed an
appropriate structure within which to reward and motivate its officers as they
build value for the Company's stockholders.
Samuel J. Atkins, III
W.D. Kennedy
Jerry J. Langdon
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Atkins, Kennedy and
Langdon. None of the members of the Committee is, or has ever been, an officer
or employee of the Company.
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<PAGE> 16
COMPARISON OF CUMULATIVE TOTAL SHAREHOLDER RETURN
The Company's Common Stock began trading publicly on October 3, 1996.
Set forth below is a line graph comparing the percentage change in the
cumulative total shareholder return on the Company's Common Stock against the
total return of the Nasdaq Market Index and a peer group for the period from
October 3, 1996 to December 31, 1997. The peer group index is a published index
consisting of approximately 50 oil and natural gas production companies. The
chart indicates the value, on the dates specified, of $100 invested at October
3, 1996, and assumes reinvestment of all dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
COSTILLA ENERGY, INC., NASDAQ MARKET INDEX
AND PEER GROUP INDEX
[graph]
<TABLE>
<CAPTION>
10/03/96 12/31/96 03/31/97 06/30/97 09/30/97 12/31/97
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
COSTILLA ENERGY, INC.................. $100.00 $107.92 $114.85 $101.98 $112.87 $ 86.14
PEER GROUP INDEX...................... $100.00 $110.34 $102.67 $113.72 $112.35 $ 98.71
NASDAQ MARKET INDEX................... $100.00 $104.71 $ 99.38 $117.57 $137.08 $128.44
</TABLE>
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SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company pursuant to the rules and regulations promulgated under
Section 16(a) of the Securities Exchange Act of 1934 during and with respect to
the Company's last fiscal year and upon certain written representations received
by the Company, the Company is not aware of any failure by a reporting person of
the Company to timely file reports required under Section 16(a) other than two
late filings of a Form 4 by Mr. Grella relating to two purchase transactions and
one late filing of a Form 4 by Roger Freidline relating to one purchase
transaction.
RECEIPT OF STOCKHOLDER PROPOSALS
For inclusion in the Company's 1999 proxy statement, all stockholder
proposals for consideration at the Annual Meeting of Stockholders of the Company
to be held in 1999 must be received at the Company's principal executive
offices, 400 W. Illinois, Suite 1000, Midland, Texas 79701, Attention: Bobby W.
Page, by January 28, 1999. Such proposals must also comply with all other
regulations of the Securities and Exchange Commission.
OTHER BUSINESS
The Company knows of no other business to come before the meeting. If
however, other matters properly come before the meeting, it is the intention of
the persons named in the enclosed proxy to vote the shares represented thereby
in accordance with their best judgment.
AVAILABILITY OF ANNUAL REPORT
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1997, WHICH CONTAINS FINANCIAL STATEMENTS AS OF AND FOR THE
PERIOD ENDED DECEMBER 31, 1997, HAS BEEN MAILED TO EACH STOCKHOLDER OF RECORD ON
THE ABOVE-REFERENCED RECORD DATE.
By order of the Board of Directors,
Bobby W. Page
Secretary
Dated: April 28, 1998
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<PAGE> 18
DETACH HERE
PROXY
COSTILLA ENERGY, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS AND MAY BE
REVOKED PRIOR TO ITS EXERCISE
The undersigned hereby appoints Cadell S. Liedtke, Michael J. Grella and
Henry G. Musselman and each of them, with full power of substitution, to act as
attorneys and proxies for the undersigned and to vote all shares of Common
Stock of Costilla Energy, Inc. (the "Company") which the undersigned is
entitled to vote at the Annual Meeting of Stockholders to be held
on May 29, 1998 at 11:00 a.m., local time, and at any adjournments thereof, on
the matters set forth in the Notice of Annual Meeting of Stockholders and Proxy
Statement dated April 28, 1998 (the "Proxy Statement"), as follows on the
reverse side.
- ------------ -------------
SEE REVERSE SEE REVERSE
SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
- ------------ -------------
<PAGE> 19
DETACH HERE
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
PLEASE MARK
VOTES AS
[X] IN THIS EXAMPLE.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, IT WILL BE VOTED FOR THE NOMINEE FOR DIRECTOR
AND IN FAVOR OF THE PROPOSAL SHOWN BELOW. IF ANY OTHER BUSINESS IS PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY
THE PROXY HOLDERS IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE
PRESENTED AT THE MEETING.
1. Election of Director. 2. Ratification of the Appointment FOR AGAINST ABSTAIN
of KPMG Peat Marwick LLP as
NOMINEE: Samuel J. Atkins, III independent public accountants [ ] [ ] [ ]
for the Company for the fiscal
FOR WITHHELD year ending December 31, 1998.
[ ] [ ] MARK HERE IF YOU PLAN TO ATTEND THE MEETING [ ]
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [ ]
PROXIES MUST BE SIGNED AND DATED TO BE VALID
This Proxy should be dated, signed by the Shareholder
exactly as his name appears on this Proxy, and returned
promptly in the enclosed envelope. PERSONS SIGNING IN
A FIDUCIARY CAPACITY SHOULD SO INDICATE, AND JOINT
OWNERS SHOULD EACH SIGN. By signing below, the
undersigned acknowledges receipt from the Company of
the Proxy Statement and a copy of the Company's Annual
Report on Form 10-K for the year ended December 31,
1997.
Signature: Date: Signature: Date:
------------------------------ ----------- ----------------------------- -----------
</TABLE>
