<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- ------------------------
Commission file number 0-18886
---------------------------------------------------------
HS RESOURCES, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3036864
- ---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Maritime Plaza, Fifteenth Floor
San Francisco, California 94111
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 433-5795
-----------------------------
- -------------------------------------------------------------------------------
(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
--- ---
APPLICABLE ONLY TO ISSUER INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares of Common Stock, $.001 par value, outstanding as of the close
of business on August 6, 1997: 16,978,206 after deducting 160,358 shares in
treasury.
<PAGE> 2
HS RESOURCES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets - June 30, 1997 (Unaudited) and
December 31, 1996..................................................................3
Unaudited Consolidated Statements of Operations - For the Three Months
and Six Months Ended June 30, 1997 and 1996........................................5
Consolidated Statements of Stockholders' Equity - For the
Years Ended December 31, 1996 and 1995 and the Six Months
Ended June 30, 1997 (Unaudited)....................................................6
Unaudited Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 1997 and 1996....................................7
Notes to Unaudited Consolidated Financial Statements...............................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings and Environmental Issues........................................21
Item 2. Changes in Securities.............................................................22
Item 3. Defaults Upon Senior Securities...................................................22
Item 4. Submission of Matters to a Vote of Security Holders...............................22
Item 5. Other Information.................................................................22
Item 6. Exhibits and Reports on Form 8-K..................................................22
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HS RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(Unaudited)
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,578,941 $ 8,764,756
Margin deposits 585,141 575,712
Accounts receivable
Oil and gas sales 19,158,099 22,601,396
Trading and transportation 9,703,632 17,786,206
Trade 2,596,896 2,255,359
Other 6,257,573 5,625,980
Lease and well equipment inventory, at cost 1,500,439 1,724,944
Prepaid expenses and other 966,447 513,471
Oil and gas properties held for resale (Note 3) 24,409,000 --
-------------- --------------
Total current assets 67,756,168 59,847,824
-------------- --------------
OIL AND GAS PROPERTIES, AT COST, USING THE FULL COST METHOD
Undeveloped acreage 63,644,927 54,709,553
Costs subject to depreciation, depletion and amortization 727,222,297 727,411,293
Less accumulated depreciation, depletion and amortization (154,314,535) (129,940,868)
-------------- --------------
Net oil and gas properties 636,552,689 652,179,978
-------------- --------------
GAS GATHERING AND TRANSPORTATION FACILITIES,
at cost, net of accumulated depreciation of $1,176,554 and
$1,032,224 at June 30, 1997 and December 31, 1996, respectively 4,645,582 4,674,075
-------------- --------------
OTHER ASSETS
Deferred charges and other, net 8,548,544 8,954,781
Office and transportation equipment and other property,
net of accumulated depreciation of $4,329,948 and
$3,401,739 at June 30, 1997 and December 31, 1996, respectively 4,551,147 4,708,436
Investment in Oil and Gas Limited Partnership 890,289 920,285
-------------- --------------
Total other assets 13,989,980 14,583,502
-------------- --------------
TOTAL ASSETS $ 722,944,419 $ 731,285,379
============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
HS RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(Unaudited)
----------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
Trade $ 15,541,107 $ 9,124,831
Revenue 15,299,635 8,134,201
Gas purchases 8,138,483 13,878,187
Accrued expenses
Ad valorem and production taxes 8,008,737 7,516,095
Interest 2,785,018 3,179,627
Other 2,823,935 4,235,410
Current portion of long-term debt (Note 3) 24,439,000 30,000
------------ ------------
Total current liabilities 77,035,915 46,098,351
------------ ------------
ACCRUED AD VALOREM TAXES 6,677,170 9,005,922
------------ ------------
LONG-TERM OIL AND GAS PRODUCTION NOTE PAYABLE 734,696 734,696
------------ ------------
LONG-TERM BANK DEBT, NET OF CURRENT PORTION 128,591,000 174,000,000
------------ ------------
9 7/8% SENIOR SUBORDINATED NOTES,
due 2003, net of unamortized discount of
$375,375 and $404,625 at June 30, 1997 and
December 31, 1996, respectively 74,624,625 74,595,375
9 1/4% SENIOR SUBORDINATED NOTES,
due 2006, net of unamortized discount of
$728,437 and $767,287 at June 30, 1997 and
December 31, 1996, respectively 149,271,563 149,232,713
------------ ------------
DEFERRED INCOME TAXES 88,231,217 84,828,612
------------ ------------
COMMITMENTS AND CONTINGENCIES
------------ ------------
MINORITY INTEREST IN OIL AND GAS LIMITED
PARTNERSHIP 7,936 66,149
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock, $.001 par value, 30,000,000
shares authorized; 17,138,564 and
17,127,861 shares issued and outstanding
at June 30, 1997 and December 31, 1996,
respectively 17,139 17,128
Additional paid-in capital 163,140,440 163,114,868
Retained earnings 36,961,516 31,433,399
Deferred compensation (180,250) (171,300)
Treasury stock, at cost, 160,358 and
121,952 shares at June 30, 1997 and
December 31, 1996, respectively (2,168,548) (1,670,534)
------------ ------------
Total stockholders' equity 197,770,297 192,723,561
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $722,944,419 $731,285,379
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
HS RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Oil and gas sales $ 30,097,353 $ 21,282,730 $ 66,121,529 $ 34,962,160
Trading and transportation 23,616,761 4,853,241 56,390,532 4,853,241
Other gas revenues 1,093,645 630,641 2,189,247 1,104,704
Interest income and other 354,228 62,991 622,493 103,782
------------ ------------ ------------ ------------
Total revenues 55,161,987 26,829,603 125,323,801 41,023,887
------------ ------------ ------------ ------------
EXPENSES
Production taxes 2,027,486 1,624,833 4,833,740 2,689,821
Lease operating 5,940,672 3,110,448 12,370,884 5,936,771
Cost of trading and transportation 23,491,736 4,732,728 55,465,131 4,732,728
Depreciation, depletion and amortization 12,850,061 9,084,532 25,315,543 15,191,958
General and administrative 1,304,383 899,501 3,031,426 1,762,293
Interest 7,672,671 4,720,530 15,376,355 7,744,682
------------ ------------ ------------ ------------
Total expenses 53,287,009 24,172,572 116,393,079 38,058,253
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,874,978 2,657,031 8,930,722 2,965,634
PROVISION FOR INCOME TAXES 714,367 1,012,330 3,402,605 1,129,907
------------ ------------ ------------ ------------
NET INCOME $ 1,160,611 $ 1,644,701 $ 5,528,117 $ 1,835,727
------------ ------------ ------------ ------------
EARNINGS PER SHARE
Earnings per common and common
equivalent share $ 0.07 $ 0.14 $ 0.32 $ 0.16
------------ ------------ ------------ ------------
Earnings per common and common
equivalent share assuming full
dilution $ 0.07 $ 0.14 $ 0.32 $ 0.16
------------ ------------ ------------ ------------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Weighted average number of common and
common equivalent shares 17,423,000 12,058,000 17,500,000 11,604,000
------------ ------------ ------------ ------------
Weighted average number of common and
common equivalent shares assuming
full dilution 17,495,000 12,058,000 17,535,000 11,604,000
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
HS RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 1996 AND 1995 AND
THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
------------------- Paid-In Retained Deferred ----------------------
Shares Amount Capital Earnings Compensation Shares Amount
---------- ------- ------------- ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 10,948,680 10,949 $ 97,720,356 $22,210,416 $ -- (40,313) $ (584,109)
Purchase of treasury stock -- -- -- -- -- (63,700) (846,625)
Transfer of treasury stock to 401(k) Plan -- -- 3,328 -- -- 26,536 358,287
Exercise of options by issuance
of treasury stock, including
income tax benefit -- -- (5,776) -- -- 2,400 33,144
Net income -- -- -- 274,156 -- -- --
---------- ------- ------------- ----------- --------- -------- -----------
Balance, December 31, 1995 10,948,680 10,949 97,717,908 22,484,572 -- (75,077) (1,039,303)
Purchase of treasury stock -- -- -- -- -- (113,817) (1,460,490)
Transfer of treasury stock to 401(k) Plan -- -- (53,961) -- -- 20,025 246,708
Issuance of common stock for Tide West
acquisition 6,169,181 6,169 65,231,025 -- -- -- --
Exercise of options by issuance
of treasury stock, including
income tax benefit -- -- 48,606 -- -- 46,917 582,551
Issuance of restricted stock 10,000 10 171,290 -- (171,300) -- --
Net income -- -- -- 8,948,827 -- -- --
---------- ------- ------------- ----------- --------- -------- -----------
Balance, December 31, 1996 17,127,861 17,128 163,114,868 31,433,399 (171,300) (121,952) (1,670,534)
Purchase of treasury stock -- -- -- -- -- (87,047) (1,157,935)
Transfer of treasury stock to 401(k) Plan -- -- (68,011) -- -- 35,894 485,287
Exercise of options by issuance
of treasury stock, including
income tax benefit -- -- (38,811) -- -- 12,747 174,634
Issuance of restricted stock 2,500 3 44,997 -- (45,000) -- --
Amortization of deferred compensation -- -- -- -- 36,050 -- --
Exercise of options by issuance
of common stock, including
income tax benefit 8,203 8 87,397 -- -- -- --
Net income -- -- -- 5,528,117 -- -- --
---------- ------- ------------- ----------- --------- -------- -----------
Balance, June 30, 1997
(Unaudited) 17,138,564 $17,139 $ 163,140,440 $36,961,516 $(180,250) (160,358) $(2,168,548)
========== ======= ============= =========== ========= ======== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE> 7
HS RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
June 30,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,528,117 $ 1,835,727
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 25,315,543 15,191,958
Amortization of deferred charges, debt issue costs and deferred compensation 915,137 403,913
Transfer of treasury stock to the 401(k) Plan 417,276 --
Gain on sale of fixed assets -- (12,175)
Deferred income tax provision 3,402,605 1,125,315
Decrease (increase) in accounts and notes receivable 10,552,741 (49,891,109)
Increase (decrease) in accounts payable and accrued expenses (2,200,276) 15,582,670
Other (196,037) (2,013,353)
------------- -------------
Net cash provided by (used in) operating activities 43,735,106 (17,777,054)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Exploration, development and leasehold costs (41,176,600) (30,615,568)
Purchase of proved and unproved properties -- (129,613,524)
Cash payment for purchase of TideWest, net of cash acquired -- (85,125,084)
Gas gathering and transportation facilities additions (115,837) (185,048)
Other property additions (640,257) (378,368)
Proceeds from the sale of oil and gas properties 8,021,222 --
Proceeds from the sale of fixed assets and other property -- 12,175
Increase in property related payables 6,400,088 9,619,169
------------- -------------
Net cash used in investing activities (27,511,384) (236,286,248)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt 22,000,000 398,593,596
Repayments of debt (43,000,000) (136,758,900)
Debt and equity issuance costs (416,617) --
Tide West acquisition costs -- (2,694,840)
Exercise of options 135,823 132,596
Purchase of treasury stock (1,157,935) (846,931)
Issuance of common stock 87,405 --
Minority interest (58,213) --
------------- -------------
Net cash (used in) provided by financing activities (22,409,537) 258,425,521
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (6,185,815) 4,362,219
Cash and cash equivalents, beginning of the period 8,764,756 116,581
------------- -------------
Cash and cash equivalents, end of the period $ 2,578,941 $ 4,478,800
------------- -------------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid, net of capitalized interest $ 14,689,860 $ 6,486,655
Cash paid for income taxes, net of refund $ (427,231) $ --
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE> 8
HS RESOURCES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. General
HS Resources, Inc., a Delaware Corporation (the "Company") was
organized in January 1987. The Company, directly or through subsidiaries,
acquires, develops and exploits oil and gas properties and markets and trades
oil and gas. The interim financial data are unaudited; however, all adjustments
(which are of a normal and recurring nature) have been made which are, in the
opinion of management, necessary for a fair statement of the financial position
of the Company at June 30, 1997, and its results of operations and cash flows
for the interim periods presented. Because of various factors, results of
operations for these periods are not necessarily indicative of results to be
expected for the full year. For a more complete understanding of the Company's
operations and financial position these statements should be read in
conjunction with audited financial statements and notes thereto included in the
Company's December 31, 1996 Annual Report on Form 10-K previously filed with
the Securities and Exchange Commission.
Note 2. Summary of Significant Accounting Policies
FINANCIAL INSTRUMENTS The Company engages in price and location risk
management activities for both hedging and trading purposes. Activities for
hedging purposes are entered into by the Company to manage its exposure to
price and location risks in the marketing of its oil and gas production and, in
the case of its marketing activities, third party gas. Gains and losses on
hedging positions are deferred and recognized in the period the underlying
physical transactions occur in "oil and gas sales" and "trading and
transportation revenues" (for third party gas). Activities for trading purposes
are accounted for using the mark-to-market method. Under this method, changes
in the market value of outstanding financial instruments are recognized as a
gain or loss in the period of change on a net basis in "trading and
transportation revenues." The market prices used to value these transactions
reflect management's best estimate considering various factors including
closing exchange and over-the-counter quotations, time value and volatility
factors underlying the commitments. The values are adjusted to reflect the
potential impact of liquidating the Company's position in an orderly manner
over a reasonable period of time under present market conditions.
ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET EFFECTIVE Effective
January 1, 1998, the Company will adopt the provisions of the Financial
Accounting Standards Board's Statement 128, ("SFAS 128"), Earnings Per Share.
This statement modifies the earnings per share calculation and presentation in
the financial statements. Adoption of SFAS 128 is not expected to have a
material impact on the Company's financial statements.
Note 3. Subsequent Event
On June 30, 1997, the Company entered into an agreement to sell certain
non-core properties in Oklahoma and New Mexico to Gothic Energy Corporation.
Consideration for the transaction consists of $24.4 million in cash as well as
title to certain other producing properties near the Company's existing Arkoma
Basin assets. The agreement, effective as of July 1, 1997, is expected to close
no later than August 28, 1997. The Company plans to use the proceeds from the
sale to repay bank debt and thus has reclassified such amounts to "current
portion
8
<PAGE> 9
of long-term debt". The subject properties have been classified as "oil and
gas properties held for resale", and appear in "current assets".
Note 4. Summary of Guarantees on 9 1/4% and 9 7/8% Senior Subordinated Notes
In November 1996, the Company issued $150 million of its 9 1/4% senior
subordinated notes due in 2006. The Notes are general, unsecured obligations of
the Company, subordinated in right of payment to all existing and any future
senior indebtedness of the Company. The Notes rank pari passu with existing and
any future senior subordinated indebtedness and senior to any future
subordinated indebtedness of the Company. The Notes are fully and
unconditionally guaranteed, jointly and severally, on an unsecured, senior
subordinated basis by two of the Company's subsidiaries, Orion Acquisition, Inc.
and HSRTW, Inc. (the "Subsidiary Guarantors"). Because of the issuance of the
guaranties in connection with the Notes, under the indenture covering the 9 7/8%
Senior Subordinated Notes due 2003, the Company was required to and has issued
similar guaranties from the Subsidiary Guarantors to the trustee under that
indenture.
Sections 13 and 15 (d) of the Securities Exchange Act of 1934 require
presentation of the following supplemental condensed consolidating financial
statements of the Subsidiary Guarantors. Separate complete financial statements
of the respective Subsidiary Guarantors are not material to investors. There
are no significant contractual restrictions on distributions from each of the
Subsidiary Guarantors to the Company.
Investments in subsidiaries are accounted for by the parent under the equity
method for purposes of the supplemental condensed consolidated financial
statement presentation. Under this method, investments are recorded at cost and
adjusted for the parent company's ownership share of the subsidiaries'
cumulative results of operations. In addition, investments increase to reflect
the amount of contributions to subsidiaries and decrease to reflect the amount
of distributions from subsidiaries. The Company eliminates its investment in
subsidiaries, its equity in the earnings of subsidiaries, intercompany
payables and receivables and other transactions between subsidiaries, including
contributions and distributions.
9
<PAGE> 10
CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 1997
<TABLE>
<CAPTION>
ASSETS
NON-
SUBSIDIARY GUARANTORS GUARANTOR ELIMINATION
HSR HSRTW ORION SUBSIDIARIES ENTRIES CONSOLIDATION
------------ -------------------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 262,484 $ 175,569 $ -- $ 2,140,888 $ -- $ 2,578,941
Intercompany receivables 35,332,530 20,238,884 39,399,544 47,543,596 (142,514,554) --
Other current assets 14,646,890 8,206,394 4,284,224 13,885,715 (254,996) 40,768,227
Oil and gas properties held for resale -- 16,305,000 -- 8,104,000 -- 24,409,000
------------ ------------ ------------ ----------- ------------- ------------
Total current assets 50,241,904 44,925,847 43,683,768 71,674,199 (142,769,550) 67,756,168
------------ ------------ ------------ ----------- ------------- ------------
Oil and gas properties, net 305,826,030 207,528,748 120,470,995 2,726,916 -- 636,552,689
Gas gathering and transportation facilities,
net -- -- -- 4,645,582 -- 4,645,582
Deferred charges and other, net 8,192,770 -- 331,318 24,456 -- 8,548,544
Office and transportation equipment and other
property, net 3,069,697 1,415,520 -- 65,930 -- 4,551,147
Investments in subsidiaries and other
investments 355,872,158 19,214,664 -- 890,289 (375,086,822) 890,289
------------ ------------ ------------ ----------- ------------- ------------
Total assets $723,202,559 $273,084,779 $164,486,081 $80,027,372 $(517,856,372) $722,944,419
============ ============ ============ =========== ============= ============
LIABILITIES, STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
Current liabilities $ 28,681,635 $ 9,298,563 $ 100,880 $14,770,833 $ (254,996) $ 52,596,915
Current portion of long-term debt 24,439,000 -- -- -- -- 24,439,000
Intercompany payables 91,780,764 -- 32,229,786 18,504,004 (142,514,554) --
Long-term bank debt and other debt, net of
current portion 129,325,696 -- -- -- -- 129,325,696
9 7/8% senior subordinated notes, due 2003 74,624,625 -- -- -- -- 74,624,625
9 1/4% senior subordinated notes, due 2006 149,271,563 -- -- -- -- 149,271,563
Other noncurrent liabilities 6,677,170 -- -- -- -- 6,677,170
Deferred income taxes 20,631,809 61,234,793 2,091,836 4,272,779 -- 88,231,217
Minority interest -- -- -- -- 7,936 7,936
Stockholders' equity and partners' capital 197,770,297 202,551,423 130,063,579 42,479,756 (375,094,758) 197,770,297
------------ ------------ ------------ ----------- ------------- ------------
Total liabilities, stockholders' equity
and partners' capital $723,202,559 $273,084,779 $164,486,081 $80,027,372 $(517,856,372) $722,944,419
============ ============ ============ =========== ============= ============
</TABLE>
10
<PAGE> 11
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
NON-
SUBSIDIARY GUARANTORS GUARANTOR ELIMINATION
HSR HSRTW ORION SUBSIDIARIES ENTRIES CONSOLIDATION
------------ ------------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Oil and gas sales $ 24,943,925 $ 17,547,777 $ 5,663,269 $ 17,874,658 $ 91,900 $ 66,121,529
Trading and transportation 3,951,228 -- -- 63,524,614 (11,085,310) 56,390,532
Other revenues 2,483,517 192,065 -- 392,858 (256,700) 2,811,740
------------ ------------ ----------- ------------ ------------ -------------
Total revenues 31,378,670 17,739,842 5,663,269 81,792,130 (11,250,110) 125,323,801
------------ ------------ ----------- ------------ ------------ -------------
Expenses
Production taxes and lease operating 5,256,742 4,204,535 1,952,770 5,790,577 -- 17,204,624
Cost of trading and transportation 3,811,548 -- -- 62,646,995 (10,993,412) 55,465,131
Depreciation, depletion and
amortization 8,827,898 7,475,635 2,106,584 6,905,426 -- 25,315,543
General and administrative 2,011,134 646,378 -- 373,914 -- 3,031,426
Interest expense 15,152,626 282,094 22,909 175,424 (256,698) 15,376,355
------------ ------------ ----------- ------------ ------------ -------------
Total expenses 35,059,948 12,608,642 4,082,263 75,892,336 (11,250,110) 116,393,079
------------ ------------ ----------- ------------ ------------ -------------
Income (loss) before provision for income
taxes (3,681,278) 5,131,200 1,581,006 5,899,794 -- 8,930,722
Benefit (provision) for income taxes 1,402,567 (2,268,999) (602,363) (1,933,810) -- (3,402,605)
------------ ------------ ----------- ------------ ------------ -------------
(2,278,711) 2,862,201 978,643 3,965,984 -- 5,528,117
Equity in earnings of subsidiaries 6,401,306 1,405,522 -- -- (7,806,828) --
------------ ------------ ----------- ------------ ------------ -------------
Net income $ 4,122,595 $ 4,267,723 $ 978,643 $ 3,965,984 $ (7,806,828) $ 5,528,117
============ ============ =========== ============ ============ =============
</TABLE>
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
NON-
SUBSIDIARY GUARANTORS GUARANTOR ELIMINATION
HSR HSRTW ORION SUBSIDIARIES ENTRIES CONSOLIDATION
------------ ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash flow provided by (used in) operating
activities $ 43,881,627 $ (6,064,996) $ (522,549) $ 4,811,497 $ 1,629,527 $ 43,735,106
------------ ------------ ----------- ----------- ----------- ------------
Cash flows from investing activities
Exploration, development and leasehold
costs (28,000,989) (7,818,560) (692,005) (4,665,046) -- (41,176,600)
Contributions to subsidiaries (1,214,554) 2,529,522 -- -- (1,314,968) --
Other 2,818,211 11,075,372 -- (228,367) -- 13,665,216
------------ ------------ ----------- ----------- ----------- ------------
Net cash (used in) provided by
investing activities (26,397,332) 5,786,334 (692,005) (4,893,413) (1,314,968) (27,511,384)
------------ ------------ ----------- ----------- ----------- ------------
Cash flows from financing activities
Proceeds from debt 22,000,000 -- -- -- -- 22,000,000
Repayments of debt (43,000,000) -- -- -- -- (43,000,000)
Contributions from equity holders -- -- 1,214,554 (1,124,000) (90,554) --
Other (1,351,324) -- -- 165,792 (224,005) (1,409,537)
------------ ------------ ----------- ----------- ----------- ------------
Net cash (used in) provided by
financing activities (22,351,324) -- 1,214,554 (958,208) (314,559) (22,409,537)
------------ ------------ ----------- ----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents (4,867,029) (278,662) -- (1,040,124) -- (6,185,815)
Cash and cash equivalents, beginning
of the year 5,129,513 454,230 -- 3,181,013 -- 8,764,756
------------ ------------ ----------- ----------- ----------- ------------
Cash and cash equivalents, end of the
period $ 262,484 $ 175,568 $ -- $ 2,140,889 $ -- $ 2,578,941
============ ============ =========== =========== =========== ============
</TABLE>
Certain non cash transactions have taken place between HSR and its subsidiaries
related to the equity contributions. Accordingly, these transactions are not
reflected in the statements of cash flows.
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL Over the past 12 months, the Company has undertaken several strategic
initiatives that have positioned it for a period of significant growth in
reserves, production, cash flow and earnings. In 1995, the Company articulated a
strategy that included (i) consolidating in its core geographic areas,
particularly the Denver-Julesburg Basin ("D-J Basin"), (ii) diversifying its
asset base outside of the D-J Basin, (iii) capturing more of the value stream by
marketing its production and (iv) maximizing its financial flexibility. By
completing the acquisition of all of the D-J Basin properties owned by Basin
Exploration, Inc. (the "Acquisitions") and the merger with Tide West Oil Company
(the "Merger"), by forming two exploration-focused Gulf Coast joint ventures,
SouthTech and Chenier, and by focusing on the gas marketing, transportation and
trading business through the creation of HS Energy Services, Inc., HSR has taken
the fundamental initial steps to implement its strategy.(1) Management's focus
for the foreseeable future will be to continue to execute this strategy with
particular emphasis on activities that maximize the financial returns from HSR's
expanded asset base.
The Company now operates in four significant core areas, the geologic and
geographic diversity of which combine to create an oil and gas company with
attractive, long-lived reserves, balanced with meaningful exposure to
exploration and technologically-driven upside. The Company's strategically
important and profitable presence in the gas marketing, trading and
transportation business, provides the opportunity to increase its operating
margins on production from both the D-J Basin and Mid-Continent areas. The
Company has begun an oil trading and transportation business to be engaged in
the purchase, sale and transport of crude oil.
The United States oil and gas industry is subject to large variations in
profitability due, in part, to fluctuating commodity prices and related changes
in rates of reinvestment by industry participants. Several factors have led to
a positive fundamental outlook for the oil and gas industry and improved
economics for production in the Company's core geographic areas. These include
(i) low gas storage levels combined with relatively high wellhead capacity
utilization, (ii) increasing overall gas demand, (iii) deregulation of
distribution and marketing channels, particularly for D-J Basin and Rocky
Mountain production, and expansion of pipeline capacity to transfer gas to
markets outside the Colorado Front Range and (iv) successful application of
advanced oil and gas exploration, drilling and production technologies.
GAS PRICE CONSIDERATIONS As of June 30, 1997, approximately 76% of the Company's
proved producing reserves consisted of gas. These reserves are located in the
D-J Basin and Mid-Continent areas. The absolute level and volatility of gas
prices have a material impact on the Company.
During 1995 and early 1996, prices for Rocky Mountain gas were substantially
below prices for gas in markets outside the Rocky Mountain region. This
disparity was caused by low demand for Rocky Mountain gas due to an unusually
warm winter season and above-normal availability of hydro-electric power in the
western United States. This condition resulted in excess gas supply in the
Rocky Mountains which led to downward price pressure in the Colorado Front
- --------
(1) The Company has recently taken steps to assume full management of projects
previously jointly managed under the Chenier joint venture.
12
<PAGE> 13
Range market. However, since the beginning of 1996, the market for the Company's
D-J Basin gas had strengthened substantially due to several factors. First, the
excess supply from Wyoming gas producers has declined as a result of increased
demand from West Coast markets. Second, in October 1995 the Colorado Public
Utilities Commission approved tariff changes that effectively eliminated
transportation costs for D-J Basin gas sold to the Colorado Front Range market,
resulting in a transportation cost advantage for D-J Basin producers of
approximately $0.40 per MMBtu. Third, the supply of D-J Basin gas has declined
over the last two years due to the combination of reduced drilling in the D-J
Basin and natural production declines. The average gas price received by the
Company for its D-J Basin production has increased from $1.28 per Mcf in 1995 to
$1.90 per Mcf in 1996 and to $2.08 per Mcf in the six months ended June 30,
1997. In addition, expansion of pipeline capacity has begun, which will begin
service in the fall of 1997, providing additional transportation outlets for
Wyoming producers to markets other than the Colorado Front Range and providing
Colorado Front Range producers access to other markets. The Company believes
that these developments will further reduce the disparity between D-J Basin
pricing and pricing generally available elsewhere in the United States.
The D-J Basin provides a significant portion of the Company's gas production.
Historically, the price of D-J Basin gas (on a Btu-equivalent basis) has been
linked closely to the Colorado Interstate Gas pipeline ("CIG") Rocky Mountain
Index. However, more recently, as a result of the tariff changes and the
seasonal nature of demand in the Colorado Front Range, the price for D-J Basin
gas tends to reflect the CIG Rocky Mountain Index during the low demand summer
months (generally April through October) and to reflect Mid-Continent indices
during the high demand winter periods (generally November through March). KN
Energy has recently announced plans to construct a natural gas pipeline from
Cheyenne, Wyoming to Denver capable of transporting up to 250 million cubic feet
of natural gas per day. The Company does not know how this will affect the gas
market, but does not believe that it will have a material adverse effect on the
price of gas in the Colorado Front Range.
Gas prices in the Mid-Continent are closely tied to established indices which
are influenced by national supply and demand factors. Average gas prices
received by the Company in the Mid-Continent generally fluctuate with changes
in Mid-Continent posted prices, which for the years 1993 through 1996 averaged
$0.25 per Mcf less than the Henry Hub price. The average gas price received
in the Mid-Continent since the Merger in June 1996 through December 31, 1996,
was $2.24 per Mcf, or $0.29 below the Henry Hub price and the average price
during the six months ended June 30, 1997 was $2.29 or $0.22 below the Henry
Hub price (before hedging).
OIL PRICE CONSIDERATIONS Oil prices are established in a highly liquid
international market. Average oil prices received by the Company in the D-J
Basin and Mid-Continent generally fluctuate with changes in the NYMEX West
Texas Intermediate ("NYMEX-WTI") crude oil closing prices. The Company's
average oil price for 1995 was approximately $1.77 per Bbl below NYMEX-WTI
closing prices. The average oil price for 1996 was approximately $0.45 below
NYMEX-WTI closing prices and the average oil price for the six months ended
June 30, 1997 was approximately $0.85 per Bbl below NYMEX-WTI closing prices.
The changes in the relative value of the Company's oil production during these
periods is a result of renegotiation of several oil sales contracts, as well as
the general fluctuation in the market value of the Company's D-J Basin oil
production relative to NYMEX-WTI.
13
<PAGE> 14
RESULTS OF OPERATIONS During 1997 the Company has continued drilling and
development activity in the D-J Basin and exploitation activities in the
Mid-Continent and the Gulf Coast. At June 30, 1997, the Company owned interests
in more than 3,580 producing wells (of which it operated more than 2,680)
compared to 3,590 wells (of which it operated more than 2,640) at June 30,
1996. The Company's results of operations have been significantly affected by
the Acquisitions and the Merger, which occurred in 1996, by its drilling
program and by fluctuations in oil and gas prices.
COMPARISON OF THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
OIL AND GAS REVENUES For the comparative three month periods, oil production
increased from 471 MBbls to 608 MBbls and gas production increased from 7,092
MMcf to 10,060 MMcf, or 29% and 42%, respectively. Average oil prices realized
decreased by 5% from $20.40 to $19.48 per Bbl and average gas prices realized
increased by 10% from $1.65 to $1.81 per Mcf. The production increases were the
result of additional production from the properties acquired in the
Acquisitions and the Merger and new wells drilled by the Company. The net
effect of these changes resulted in an increase in oil and gas revenues from
$21.3 million to $30.1 million or 41%. During the period, the Company also
recognized $1.1 million in other gas revenues from the sale of tax credits
compared to $630,641 for the comparative prior year period.
For the comparative six month periods, oil production increased from 766 MBbls
to 1,167 MBbls and gas production increased from 12,054 MMcf to 20,031 MMcf, or
52% and 66%, respectively. Average oil prices realized increased by 3% from
$19.78 to $20.37 per Bbl and average gas prices realized increased by 29% from
$1.64 to $2.11 per Mcf. The production increases were the result of additional
production from the properties acquired in the Acquisitions and the Merger and
new wells drilled by the Company. The net effect of these changes resulted in
an increase in oil and gas revenues from $35 million to $66.1 million or 89%.
During the period, the Company also recognized $2.2 million in other gas
revenues from the sale of tax credits compared to $1.1 million for the
comparative prior year period.
The Company, through its gas marketing division and its wholly owned
subsidiary, HS Energy Services, Inc., actively markets a portion of its own gas
production, markets gas to third parties and supplies gas to end-users. Trading
and transportation net margins were $125,025 and $925,401 for the three months
and six months ended June 30, 1997, respectively.
INTEREST INCOME AND OTHER INCOME Interest and other income increased by
$291,237, or 462% for the three month comparative periods and by $518,711, or
500%, for the six month comparative periods. The increase in interest and other
income was mainly due to short term investing of the Company's available funds,
as well as income recorded on the Company's interest in a limited partnership.
PRODUCTION EXPENSES Lease operating expenses increased by $2,830,224, or 91%,
for the three month comparative periods and by $6,434,113, or 108%, for the six
month comparative periods. On a Boe basis, lease operating expenses increased
from $1.88 to $2.60 for the three month
14
<PAGE> 15
comparative periods and from $2.14 to $2.75 for the six month comparative
periods. This increase is primarily the result of a different mix of wells in
the current year, including wells with historically higher operating costs
which were acquired as a result of the Acquisitions, and a significant number of
workovers on producing wells. Production taxes increased by $402,653, or 25%,
for the three month comparative periods and by $2,143,919, or 80%, for the six
month comparative periods, due to increased production and prices.
DEPRECIATION, DEPLETION AND AMORTIZATION Depreciation, depletion and
amortization ("DD&A"), a non-cash expense, increased by $3,765,529, or 41%, for
the three month comparative periods and by $10,123,585, or 67%, for the six
month comparative periods, due to an increase in production and an increase in
the depletion rate. On a Boe basis, the Company's weighted average depletion
rate increased from $5.22 for the six months ended June 30, 1996 to $5.41 for
the six months ended June 30, 1997. The Company adjusts its DD&A rate based on
material changes in its reserves and on an annual basis based on year end
engineering.
GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense reflects
costs incurred net of administrative costs directly attributable to drilling
and well operations, which costs are included in lease operating expenses or
are capitalized. General and administrative expenses increased by $404,882, or
45%, for the three month comparative periods and by $1,269,133, or 72%, for the
six month comparative periods. The increase is primarily attributable to the
Merger and retention of the former Tide West employees. On a Boe basis, general
and administrative expenses increased from $0.54 to $0.57 for the three month
comparative periods and from $0.64 to $0.67 for the six month comparative
periods.
INTEREST EXPENSE Interest expense increased by $2,952,141, or 63%, for the
three month comparative periods and by $7,631,673, or 99%, for the six month
comparative periods, due to increased borrowings on the Company's long-term
bank debt. Also, in November 1996, the Company issued $150 million of its 9
1/4% senior subordinated notes due in 2006.
PROVISION FOR INCOME TAXES The Company follows the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109. Pursuant to SFAS 109, the
Company has recorded a tax provision based on tax rates in effect during the
period. Accordingly, the Company accrued taxes at the rate of 38.1% in 1997 and
1996. Due to incurrance of a significant amount of intangible drilling costs,
which are deductible for tax purposes, substantially all of the Company's tax
provision in both periods is deferred.
LIQUIDITY AND CAPITAL RESOURCES
Financing Sources
The Company is committed to reducing its ratio of debt to total book
capitalization, and is currently implementing numerous programs to do so. Since
December 31, 1996 the Company has reduced its long-term bank debt from $174
million to $153 million with the proceeds from the sale of non-core,
non-strategic properties and the application of excess working capital. In
addition, as discussed in Note 3, the Company plans to further reduce its
long-term debt by $24.4 million in connection with the sale of the Gothic
properties. The Company believes that it will be able to arrange a favorable
combination of financing alternatives to fund its ongoing capital requirements
and reduce its overall financial leverage. Until this debt ratio is reduced, the
Company currently plans to fund capital expenditures attributable to exploration
and
15
<PAGE> 16
drilling activities primarily out of its expected cash flow from operations.
The Company has financed, and expects to continue to finance, its acquisition
activities, if any, with (i) cash flow from operations, (ii) borrowings under
the Chase Facility (defined below), (iii) public offerings of equity and debt,
(iv) divestitures (including asset monetizations) of non-core assets and (v)
the TCW Facility (as defined). Borrowings in connection with acquisitions may
have the effect of increasing the Company's leverage.
On June 14, 1996, the Company amended the terms of its senior bank credit
facility with The Chase Manhattan Bank, as agent (the "Chase Facility"), to
increase the maximum credit amount to $350 million. Under the terms of the Chase
Facility, no principal payments are required until June 14, 2001, assuming the
Company maintains a Borrowing Base sufficient to support the outstanding loan
balance. The Borrowing Base is based on the underlying value of the Company's
oil and gas properties. Upon consummation of the Offering (defined below) and
the application of the estimated net proceeds therefrom, the borrowing base
under the Chase Facility was set at $275 million. As a result of the sale of
properties to Gothic Energy Corporation, effective August 28, 1997, the
borrowing base will be adjusted to $261 million. The Chase Facility bears
interest at the Base Rate plus 0% to 0.5% or LIBOR plus 0.75% to 1.5%.
In November 1996, the Company issued $150 million of its 9 1/4% senior
subordinated notes due in 2006 (the "Notes"). The offering of the Notes (the
"Offering") was undertaken in order to replace a portion of the Company's
outstanding indebtedness under the Chase Facility with fixed rate term debt. On
April 25, 1997, the Company exchanged $150 million of new notes registered
under the Securities Act of 1933 (the "New Notes"), for the Notes which were
offered in a private offering exempt from securities registration. The material
terms of the New Notes are identical to the Notes.
The Company also continues to maintain its arrangement with a Trust Company of
the West-related entity covering a proposed $90 million non-recourse,
volumetric overriding royalty facility (the "TCW Facility") of which
approximately $80 million is available. The proceeds from the TCW Facility may
be used by the Company at its discretion for a variety of corporate purposes,
including acquisitions of new properties, exploration and development drilling
and monetization of existing corporate properties.
The Company anticipates that its available borrowing capacity under the Chase
Facility, combined with its operating cash flow and the TCW Facility, provide
the Company with the financial resources and flexibility to fund current and
ongoing development activities and to meet other financial obligations. Since
the consummation of the Merger and the Acquisitions, the Company has monetized
approximately $45 million of non-strategic properties (of which $24.4 million
is pending at June 30, 1997 as discussed below), using the proceeds to reduce
outstanding borrowings under the Chase Facility. As further discussed in Note 3
to the unaudited Consolidated Financial Statements, the Company entered into an
agreement to sell certain non-core properties. The Company will receive $24.4
million in cash and title to certain other producing properties near the
Company's existing Arkoma Basin assets. The agreement is expected to close no
later than August 28, 1997. The Company plans to use the proceeds from the sale
to repay bank debt and thus has reclassified such amounts to "current portion of
long-term debt". The subject properties have been classified as "oil and gas
properties held for resale", and appear in "current assets". The nature of the
Company's current development strategies and other
16
<PAGE> 17
activities provide the Company with considerable flexibility in terms of the
timing and magnitude of its capital expenditures. If the Company experiences
unforeseen changes in its working capital position or capital resources,
management may revise the capital expenditure program accordingly or
alternatively may supplement the capital position of the Company through, among
other things, the issuance of additional equity or debt securities or by
entering into joint venture arrangements.
Capital Commitments
For the six months ended June 30, 1997, the Company incurred total exploration,
development and leasehold capital expenditures of $41.2 million. The Company
estimates capital expenditures for 1997 will be between $65-$75 million, which
will be allocated in varying amounts primarily to activities in the Company's
four core geographic areas: the D-J Basin, the Northern Rockies, the Anadarko
and Arkoma Basins of the Mid-Continent and the on-shore Gulf Coast region. The
Company continuously evaluates its inventory of drilling opportunities and
adjusts the amount and allocation of its capital program based on a number of
factors, including seismic results, prospect readiness, product prices, service
company availability and rates, acquisitions and capital position.
A major component of the Company's capital expenditure program includes costs
associated with consolidation activities and development drilling in the D-J
Basin, and, to a lesser extent, the development of its other Rocky Mountain
properties. The Company has incurred approximately $18.4 million in capital
expenditures in the six months ended 1997 for drilling and recompleting wells on
the Company's D-J Basin properties.
The second component of the Company's capital expenditure program is the
continued exploitation of the properties acquired as a result of the Merger
with Tide West. For the six months ended June 30, 1997, the Company has
incurred total acquisition, exploitation and development expenditures in the
Mid-Continent area of $9.5 million. The Company is currently evaluating a
variety of opportunities that include increased exploitation, exploration and
density drilling, recompletions and field extensions.
The final component of the Company's capital expenditure program is to develop
exploitation and exploration prospects in the Gulf Coast. As described below,
the Company has entered into two joint ventures. During the six-month period
ended June 30, 1997, the Company incurred total capital expenditures of $10.4
million in the Gulf Coast. This includes approximatley $5.4 million which the
Company spent under the SouthTech joint venture in the six months ended June 30,
1997, for seismic, leasehold, overhead costs and drilling.
In June 1996, the Company entered into an exploration and development agreement
with Chenier Exploration, Inc. ("CEI"), pursuant to which the Company purchased
from CEI and a third party interests in properties in the Gulf Coast for
approximately $1.9 million, of which $1.2 million was paid in cash and the
remaining portion was funded with a promissory note. Under the terms of the
agreements, CEI was responsible for the generation and development of prospects
in the project areas. On June 24, 1997, the Company gave notice of termination
of this venture, and has since assumed management of the venture projects.
Certain disputes have arisen between the Company and CEI concerning their
respective rights and obligations, but the Company believes
17
<PAGE> 18
these disputes will not interfere with development of the projects. For the six
months ended June 30, 1997, the Company spent $5.0 million for seismic,
leasehold, drilling and overhead costs. See - Part II, Item 1 - Legal
Proceedings and Environmental Issues - Litigation.
In 1994, the Company entered into an exploration agreement with Union Pacific
Resources Company covering drilling locations in the D-J Basin, pursuant to
which the Company committed to spend $9.3 million during the two years ended
June 1996 and meet certain other minimum obligations. In 1996, the Company
elected to extend the agreement and committed to spend approximately $2.4
million by June 1997. All such commitments have been met under these
agreements. The Company has also entered into a number of other standard
industry arrangements that require the drilling of wells or other activities.
The Company believes that it will meet its obligations under these
arrangements, which individually and in the aggregate are not material.
Working Capital and Cash Flow
Net cash provided by operating activities for the six months ended June 30,
1997, was $43.7 million, up from the same period in 1996. This is primarily the
result of (i) additional oil and gas production revenues attributable to the
larger number of producing wells resulting from the Company's drilling
activities and the wells acquired in the Acquisitions and the Merger, and (ii)
higher product prices. Future cash flows will be influenced by, among other
factors, the number of producing wells on line, product prices and production
constraints.
Risk Management. The Company uses financial instruments to reduce its exposure
to market fluctuations in the price and transportation cost of oil and gas. The
Company's general strategy is to hedge price and location risk with swap,
collar, floor and ceiling arrangements. When utilizing such instruments, in
order to minimize basis risk the Company hedges its production back to the
wellhead to the maximum extent possible. In addition to hedging activities, the
Company is engaged in using the financial markets to capture trading margins.
The Company has established policies with respect to open positions which limit
its exposure to market risk and requires reporting to management of the
potential financial exposure on a daily basis resulting from both hedging and
trading activities.
Hedging Activities. Activities for hedging purposes are entered into by the
Company to manage its exposure to price and location risks in the marketing of
its oil and gas production and, in the case of its marketing activities, third
party gas. Gains and losses on hedging positions are recognized in the period
the underlying physical transactions occur in "oil and gas sales" and "trading
and transportation revenues" (for third party gas).
The Company has entered into the following forward sales and swap arrangements
with respect to its gas production for the quarters and in total as indicated
below. Note that total average daily gas production for the quarter ended
June 30, 1997 was 110,545 Mcf/day.
18
<PAGE> 19
<TABLE>
<CAPTION>
AVERAGE DAILY VOLUME (MCFD)
-----------------------------------------------------
Counterparty Pays: 1.99 $2.21 $1.67 $1.33 $1.71
Company Pays: NGPL PEPL CIG CIG Wng(Tok)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Period Hedged:
July 1997 10,000 -- 20,000 2,065 710
August 1997 10,000 -- 20,000 2,065 710
September 1997 10,000 20,000 20,000 2,133 710
October 1997 10,000 20,000 10,000 1,989 722
November 1997 -- -- -- 2,056 699
December 1997 -- -- -- 1,989 722
First Quarter 1998 -- -- -- 1,989 711
Second Quarter 1998 -- -- -- 1,890 692
Third Quarter 1998 -- -- -- 1,804 674
Fourth Quarter 1998 -- -- -- 1,696 663
Total Quantity Hedged (Number of 1,230,000 1,220,000 2,150,000 1,050,000 381,000
Days Times Daily Volume Hedged)
</TABLE>
The Company has hedged approximately 25% of its oil production at $20.59 per
Bbl through April 30, 1998. Additionally, with respect to the hedging of third
party gas, the Company has hedged 1.2 Bcf through January 1998 with offsetting
physical positions at settlement prices which are based upon NYMEX future
prices or other published indices.
Trading Activities. The Company engages in the trading of various energy
related financial instruments which require payments to (or receipt of payments
from) counterparties based on the differential between a fixed and variable
price for the commodity, swap or other contractual arrangement. Activities for
trading purposes are accounted for using the mark-to-market method. Under this
method, changes in the market value of outstanding financial instruments are
recognized as a gain or loss in the period of change on a net basis in "trading
and transportation revenues." The market prices used to value these
transactions reflect management's best estimate considering various factors
including closing exchange and over-the-counter quotations, time value and
volatility factors underlying the commitments. The values are adjusted to
reflect the potential impact of liquidating the Company's position in an
orderly manner over a reasonable period of time under present market
conditions.
Company policy requires that financial instrument purchase and sales contracts
be balanced in terms of contract volumes and the timing of performance and
delivery obligations. As of June 30, 1997, all open positions were balanced
with an offsetting position. Gains of $2,300 were recognized in connection with
these activities for the second quarter of 1997 and $26,349 for the six months
ended June 30, 1997. These gains are included in "trading and transportation
revenues".
Credit Risk. While notional amounts are used to express the volume of various
derivative financial instruments, the amounts potentially subject to credit
risk in the event of nonperformance by the third parties are substantially
smaller. Counterparties to the swap, collar, floor and ceiling arrangements
discussed above are investment grade financial institutions. Accordingly, the
Company does not anticipate any material impact to its financial position or
results of operations as a result of nonperformance by the third parties on
financial instruments related to hedging activities or trading activities.
19
<PAGE> 20
Interest Rate Swaps. During the second quarter of 1995, the Company entered
into an interest rate exchange agreement with a financial institution to hedge
its interest rate on $40 million of the Company's borrowings at 7.76% through
May 2002. Under the terms of the agreement, the difference between the
Company's fixed rate of 7.76% and the three month LIBOR rate plus 1.125% is
received or paid by the Company.
The Company, through the Merger, assumed interest rate exchange agreements with
two financial institutions to hedge its interest rate on a total of $40 million
of the Company's borrowings at rates ranging from 6.16% to 7.32% for 1997
through 1999. Under the terms of these agreements, the difference between the
Company's fixed rate and the three month LIBOR rate is received or paid by the
Company.
Contingencies
In May 1995, the Company was named as a respondent by the United States
Environmental Protection Agency (the "EPA") in an administrative order brought
under the Resource Conservation and Recovery Act ("RCRA") by the EPA against
the owner/operator of an oilfield production water evaporation facility. Based
on its evaluation of the above matters, and after consideration of reserves
established, the Company believes the resolution of such matters will not have
a material adverse effect on the Company's financial position or results of
operations.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This 10-Q Report includes statements that are not purely historical and are
"forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), including statements regarding the Company's
expectations, hopes, beliefs, intentions or strategies regarding the future.
All statements other than statements of historical facts included in this 10-Q
Report, including without limitation, statements under "Legal Proceedings and
Environmental Issues" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" regarding reserves and their values;
planned capital expenditures; increases in oil and gas production; trends and
expectations concerning oil and gas prices; the Company's financial position,
business strategy and other plans and objectives for future operations,
divestitures and debt repayment; potential liabilities or the expected absence
thereof; and the potential outcome of environmental matters, litigation or other
proceedings are forward-looking statements. All forward-looking statements
included or incorporated by reference in this 10-Q Report are based on
information available to the Company on the date hereof, and the Company
assumes no obligation to update such forward-looking statements. Although the
Company believes that the assumptions and expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct or that the Company will take any
actions that may presently be planned.
There are numerous uncertainties inherent in estimating quantities of proved
oil and gas reserves and projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
Company. Many factors may affect the Company's expectations and plans. Capital
expenditure and financing plans may change in connection with the success of
drilling activities, the general availability of capital, interest rates, and
cash flow
20
<PAGE> 21
available from operations. Cash flow available from operations may change
depending on costs of materials and services, regulatory burdens and commodity
prices. Oil and gas prices are volatile, and there are several potentially
significant adverse effects to the Company which can result if product prices
decline materially. First, lower product prices will adversely impact the
Company's cash flow and could cause the Company to (i) curtail its capital
program, (ii) borrow additional amounts under its revolving credit agreement,
and/or (iii) issue additional debt or equity securities. Second, lower product
prices could cause the borrowing base under the Company's bank credit agreement
to be reduced and certain covenant tests to be adversely affected. Third, under
rules promulgated by the Securities and Exchange Commission, companies that
follow the full cost accounting method are required to make quarterly "ceiling
test" calculations. Lower product prices adversely impact the ceiling
calculation. Should the Company realize sustained lower product prices, it
could be required to write down its oil and gas properties, resulting in a
non-cash charge against earnings.
Certain additional important factors that could cause actual results to differ
materially from the Company's forward-looking statements are disclosed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this 10-Q Report and in the Company's 8-K Report
filed February 26, 1997. All subsequent written or oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the factors mentioned above.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings and Environmental Issues
Litigation. At this time, the Company is involved in no material litigation,
however, the Company is involved in various claims and lawsuits incidental to
its business.
On July 22, 1997, CEI commenced a lawsuit against the Company in the United
States District Court for the Eastern District of Texas (Civil action No 1:97
CV 399). The action follows the Company's notice of termination of the Chenier
joint venture and the Company's assumption of ongoing management of the venture
projects. The suit claims that the Company is obligated to continue paying
certain general and administrative costs to CEI for up to nine months following
termination, and makes other claims. The Company disputes all of CEI's claims,
intends to vigorously defend the suit, and intends to counterclaim against CEI
for damages for breach of contract and other claims. The Company is also
attempting to enforce the agreement between the parties for arbitration of all
disputes. The amounts in dispute under the suit are not material to the
Company.
Environmental Proceedings. The owner of an oil field waste disposal facility, a
major oil company and the Company were named as respondents by the United
States Environmental Protection Agency ("EPA") in an administrative order
brought by the EPA against Weld County Waste Disposal, Inc. ("WCWDI") under
section 7003 of the Resource Conservation and Recovery Act ("RCRA") on May 11,
1995. WCWDI operated and continues to own two evaporation pits in Colorado for
the disposal of non-hazardous production wastes. The EPA order requires that
work be performed to abate a perceived endangerment to wildlife, the
environment or public welfare. The Company and other non-operator respondents
are working
21
<PAGE> 22
together with the EPA to close the pits and to develop work plans and
characterization studies, and the facility has been permanently closed.
The Company has utilized this facility in past years to dispose of its
production and flowback water. During the period of its use, the Company
believed that the facility was operating in compliance with all applicable
legal requirements and, along with other oil and gas operators, paid a fee to
WCWDI for using this disposal facility. There were a number of other
significant contributors to the facility during the period reviewed by the EPA
(1988 through 1994) and additional contributors during the period from 1977,
when it was constructed, through 1988. The Company and the major oil company
were named because they were deemed the major contributors of waste volumes to
the facility for the period reviewed by the EPA. Certain other contributors are
participating in their share of the reclamation costs.
Based on the Company's current knowledge and its expectation of proportionate
reimbursement from other parties who utilized the facility, the Company does
not believe that its share of the reclamation costs will have a material impact
on its financial condition or results of operations. By agreement with other
contributing parties, the Company is currently paying approximately 50% of the
costs associated with the project, but after recovery from additional liable
parties, the Company's percentage share of overall costs may be reduced to as
low as 40%. The Company has spent approximately $577,000 on its behalf to date
on the project. The Company's share of total costs associated with the project,
at the 50% level of participation, are currently estimated to range from $1 to
$2 million over three years. The Company believes that it has adequately
reserved for the estimated liability.
Item 2. Changes in Securities None.
Item 3. Defaults Upon Senior Securities None.
Item 4. Submission of Matters to a Vote of Security Holders The Company
held its annual meeting of the stockholders on May 22, 1997. In
addition to the election of directors, the following matter was
submitted to a vote of the stockholders:
To approve the HS Resources, Inc. 1997 Performance and Equity
Incentive Plan. 10,876,621 votes were for, 532,252 votes were
against, and 89,161 votes abstained. Broker non-voters in the
amount of 2,936,672 were counted for purposes of obtaining a
quorum, but were not counted in the vote. The matter was,
therefore, approved by the Company's stockholders at the
meeting.
Item 5. Other Information None.
Item 6. Exhibits and Reports on Form 8-K.
a. List of Exhibits.
22
<PAGE> 23
Exhibit
Number Description of Exhibits
3.1 Amended and Restated Certificate of Incorporation of the Company.
(Incorporated herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, No. 33-52774, filed October 2,
1992.)
3.2 Third Amended and Restated Bylaws of the Company adopted December
16, 1996. (Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-4, No 333-19433, filed January 8,
1997.)
4.1 Form of Indenture dated December 1, 1993, entered into between the
Company and the Trustee. (Incorporated by reference to Exhibit 4.7
to Amendment No. 3 to the Company's Registration Statement on Form
S-3, No. 33-70354, filed November 23, 1993.)
4.2 Indenture dated November 27, 1996, among the Company, Orion
Acquisition, Inc., HSRTW, Inc., and Harris Trust and Savings Bank as
Trustee. (Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-4, No 333-19433, filed January 8,
1997.)
4.3 First Supplemental Indenture dated November 25, 1996 among the
Company, Orion Acquisition, Inc., HSRTW, Inc., and Harris Trust and
Savings Bank as Trustee. (Incorporated by reference to Exhibit 4.3
to the Company's Registration Statement on Form S-4, No 333-19433,
filed January 8, 1997.)
10.1 Amended Note and Warrant Purchase Agreement dated January 15, 1991,
among NGP, Resolute Resources, Inc., and the Company. (Incorporated
by reference to Exhibit 4.4.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1990, filed February
14, 1991.)
10.1.1 Amendment No. 1 to Note and Warrant Purchase Agreement dated June
28, 1991, between the Company and NGP. (Incorporated by reference to
Exhibit 4.4.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1991, filed September 30, 1991.)
10.1.2 Second Amendment to Note and Warrant Purchase Agreement dated August
17, 1992, between the Company and NGP. (Incorporated by reference to
Exhibit 4.2.2 to Amendment No. 2 to the Company's Registration
Statement on Form S-1, No. 33-52774, filed November 19, 1992.)
10.1.3 Third Amendment to Note and Warrant Purchase Agreement dated October
21, 1993, between the Company and NGP. (Incorporated by reference to
Exhibit 4.1.3 to Amendment No. 2 to the Company's Registration
Statement on Form S-3, No. 33-70354, filed November 23, 1993.)
10.2 Amended and Restated Warrant Agreement dated January 15, 1991,
between NGP and the Company. (Incorporated by reference to Exhibit
4.5.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1990, filed February 14, 1991.)
23
<PAGE> 24
10.3 Amended Warrant No. W-1, dated January 15, 1991, and issued by the
Company to NGP. (Incorporated by reference to Exhibit 4.6.1 to the
Form 8, Second Amendment to Form 10, filed April 8, 1991.)
10.3.1 Amendment No. 1 to Amended Warrant No. W-1, dated December 30, 1991,
and issued by the Company to NGP. (Incorporated by reference to
Exhibit 4.6.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1991, filed on February 14, 1991.)
10.4 Form of Warrant No. W-10, dated January 28, 1992, and issued by the
Company to NGP. (Incorporated by reference to Exhibit 4.16 to
Amendment No. 1 to the Company's Registration Statement on Form S-1,
No. 33-52774, filed November 9, 1992.)
10.5 1987 Stock Incentive Plan, as amended December 2, 1996. (Incorporated
by reference to Exhibit 10.5 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997, filed May 15, 1997.)
10.6 Common Stock Purchase Warrant dated July 12, 1990 by the Company to
James E. Duffy. (Incorporated by reference to Exhibit 10.5 to the
Form 8, Second Amendment to Form 10, filed April 8, 1991.)
10.7 HS Resources, Inc. Rule 701 Compensatory Benefit Plan. (Incorporated
by reference to Exhibit 10.5.2 to the Form 8, Second Amendment to
Form 10 filed April 8, 1991.)
10.8 1992 Directors' Stock Option Plan. (Incorporated by reference to
Exhibit 10.10 to Amendment No. 1 to the Company's Registration
Statement on Form S-1, No. 33-52774, filed November 9, 1992.)
10.8.1 1993 Directors' Stock Option Plan. (Incorporated by reference to
Exhibit 10.8.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, filed March 31, 1994 (as amended
by Form 10-K/A-1 on April 8, 1994.))
10.9 Form of Indemnification Agreement for Directors of the Company.
(Incorporated by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995,
filed March 25, 1996.)
10.10 Lease Agreement dated October 6, 1993, between the Company and JMB
Group Trust IV and Endowment and Foundation Realty, Ltd. -- JMB III
for the premises at One Maritime Plaza, San Francisco, California.
(Incorporated by reference to Exhibit 10.13 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993,
filed March 31, 1994 (as amended by Form 10-K/A-1 on April 8,
1994.))
10.11 Lease Agreement dated March 28, 1994, between the Company and 1999
Broadway Partnership for the premises at 1999 Broadway, Denver,
Colorado. (Incorporated by reference to Exhibit 10.15 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1994, filed August 12, 1994.)
10.12 Interest exchange agreement between The Chase Manhattan Bank, N.A.
and the Company dated May 9, 1995. (Incorporated by reference to
Exhibit 10.19 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995, filed August 14, 1995.)
10.13 Amended and Restated Agreement and Plan of Merger, dated as of April
29, 1996, among the Company, HSR Acquisition, Inc. and Tide West Oil
Co. (Incorporated by reference as Annex A to Amendment No. 2 to the
Company's Registration Statement on Form S-4, No. 333-01991, filed
on May 2, 1996.)
24
<PAGE> 25
10.14 Agreement for Purchase and Sale of Assets, dated as of February 24,
1996, among the Company, Basin Exploration, Inc. ("Basin") and Orion
Acquisition, Inc. ("Orion"). (Incorporated by reference to Exhibit
2.3 to the Company's Form 8-K, filed March 12, 1996.)
10.15 Agreement for Purchase and Sale of Assets [Wattenberg], dated as of
February 24, 1996, among the Company, Orion and Basin. (Incorporated
by reference to Exhibit A to the Company's Schedule 13D relating to
Basin Exploration, Inc. filed on March 6, 1996.)
10.16 Purchase and Sale Agreement, dated December 1, 1995, between the
Company and Wattenberg Gas Investments, LLC. (Incorporated by
reference to Exhibit 10.26 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995, filed March 25,
1996.)
10.17 Rights Agreement, dated as of February 28, 1996, between the
Company and Harris Trust Company of California as Rights Agent.
(Incorporated by reference to Exhibit 1 to the Company's Form 8-A,
filed March 11, 1996.)
10.18 Purchase and Sale Agreement dated March 25, 1996 between Orion
Acquisition, Inc., the Company and Wattenberg Resources Land,
L.L.C. (Incorporated by reference to Exhibit 10.28 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996,
filed May 15, 1996.)
10.19 Credit Agreement, dated as of June 7, 1996, among the Company and
The Chase Manhattan Bank, N.A. ("Chase"), as agent of the Banks
signatory thereto. (Incorporated by reference to Exhibit 10.20 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, filed August 14, 1996.)
10.20 Amended and Restated Credit Agreement dated as of June 14, 1996,
among the Company, Chase as agent, and the Banks signatory thereto.
(Incorporated by reference to Exhibit 10.21 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
filed August 14, 1996.)
10.21 First Amendment to Amended and Restated Credit Agreement dated as
of June 17, 1996, by and among the Company and Chase in its
individual capacity and as agent for the Lenders. (Incorporated by
reference to Exhibit 10.22 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996, filed August 14,
1996.)
10.22 Second Amendment to Amended and Restated Credit Agreement dated as
of November 27, 1996 among the Company and Chase in its individual
capacity and as agent for the Lenders. (Incorporated by reference
to Exhibit 10.22 to the Company's Registration Statement on Form
S-4, No 333-19433, filed January 8, 1997.)
10.23 Assignment of Liens and Amendment of Amended, Restated and
Consolidated Mortgage, Assignment of Production, Security Agreement
and Financing Statement, dated June 14, 1996, among Chase
(Assignor), Chase (Assignee) and the Company. (Incorporated by
reference to Exhibit 10.23 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996, filed August 14,
1996.)
10.24 Guaranty Agreement by HSR Acquisition, Inc. in favor of Chase, as
Agent, dated June 14, 1996. (Incorporated by reference to Exhibit
10.24 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, filed August 14, 1996.)
25
<PAGE> 26
10.25 Guaranty Agreement by Orion Acquisition, Inc. in favor of Chase, as
Agent, dated June 14, 1996. (Incorporated by reference to Exhibit
10.25 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, filed August 14, 1996.)
10.26 First Amendment to Guaranty Agreement dated as of June 17, 1996, by
and among Orion Acquisition, Inc. and Chase, in its individual
capacity and as agent for the Lenders. (Incorporated by reference to
Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, filed August 14, 1996.)
10.27 First Amendment to Guaranty Agreement dated as of June 17, 1996, by
and among HSRTW, Inc. (formerly HSR Acquisition, Inc.) and Chase,
in its individual capacity and as agent for the Lenders.
(Incorporated by reference to Exhibit 10.27 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
filed August 14, 1996.)
10.28 Third Amendment and Supplement to Amended, Restated and
Consolidated Mortgage, Assignment of Production, Security Agreement
and Financing Statement, dated as of July 15, 1996, by and between
the Company and Chase. (Incorporated by reference to Exhibit 10.28
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, filed August 14, 1996.)
10.29 Hedging Agreement between Chase and the Company dated May 1, 1996.
(Incorporated by reference to Exhibit 10.29 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
filed August 14, 1996.)
10.30 Hedging Agreement between Chase and the Company dated May 1, 1996.
(Incorporated by reference to Exhibit 10.30 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
filed August 14, 1996.)
10.31 Hedging Agreement between Chase and the Company dated June 1, 1996.
(Incorporated by reference to Exhibit 10.31 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
filed August 14, 1996.)
10.32 Purchase and Sale Agreement between the Company and Wattenberg Gas
Investments, LLC dated April 25, 1996. (Incorporated by reference to
Exhibit 10.32 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, filed August 14, 1996.)
10.33 Purchase and Sale Agreement between Wattenberg Resources Land L.L.C.
and Wattenberg Gas Investments, LLC dated May 21, 1996.
(Incorporated by reference to Exhibit 10.33 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
filed August 14, 1996.)
10.34 Purchase and Sale Agreement between Orion Acquisition, Inc. and
Wattenberg Gas Investments, LLC dated June 14, 1996. (Incorporated
by reference to Exhibit 10.34 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996, filed August 14,
1996.)
10.35 Purchase and Sale Agreement between Wattenberg Resources Land
L.L.C. and Wattenberg Gas Investments, LLC dated June 14, 1996.
(Incorporated by reference to Exhibit 10.35 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
filed August 14, 1996.)
26
<PAGE> 27
10.36 Purchase and Sale Agreement between Orion Acquisition, Inc. and
Wattenberg Gas Investments, LLC dated June 14, 1996.
(Incorporated by reference to Exhibit 10.36 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, filed August 14, 1996.)
10.37 Purchase and Sale Agreement between the Company and Wattenberg Gas
Investments, LLC dated June 28, 1996. (Incorporated by reference to
Exhibit 10.37 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, filed August 14, 1996.)
10.38 Purchase and Sale Agreement between HSRTW, Inc. and Westtide
Investments, LLC dated August 9, 1996. (Incorporated by reference
to Exhibit 10.37 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, filed November 7, 1996.)
10.39 Acquisition Agreement between the Company and TCW Portfolio No.
1555 DR V Sub-Custody Partnership, L.P. dated August 30, 1996.
(Incorporated by reference to Exhibit 10.38 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1996, filed November 7, 1996.)
10.40 Purchase Agreement dated November 27, 1996 among the Company, Orion
Acquisition, Inc., HSRTW, Inc., Salomon Brothers Inc., Chase
Securities Inc., Lehman Brothers Inc., and Prudential Securities
Incorporated. (Incorporated by reference to Exhibit 10.40 to the
Company's Registration Statement on Form S-4, No 333-19433, filed
January 8, 1997.)
10.41 Registration Agreement dated November 27, 1996 among the
Company, Orion Acquisition, Inc., HSRTW, Inc. and Salomon
Brothers Inc. in its individual capacity and as agent for Chase
Securities Inc., Lehman Brothers Inc., and Prudential Securities
Incorporated. (Incorporated by reference to Exhibit 10.41 to the
Company's Registration Statement on Form S-4, No 333-19433,
filed January 8, 1997.)
10.42 Employment Agreement between James Piccone and the Company dated
April 21, 1995. (Incorporated by reference to Exhibit 10.42 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, filed March 18, 1997 (as amended by
Form 10-K/A-1 on March 20, 1997.))
10.43* Purchase and Sale Agreement dated June 30, 1997 among HSRTW,
Inc. and Horizon Gas Partners, L.P. as Seller and Gothic Energy
Corporation as Buyer.
10.44* Amendment to Purchase and Sale Agreement dated as of July 16, 1997,
among HSRTW, Inc. and Horizon Gas Partners, L.P. as Seller and
Gothic Energy Corporation as Buyer.
27* Financial Data Schedule
- -------------------------
* Filed herewith
b. Reports on Form 8-K. None.
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, HS
Resources, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HS RESOURCES, INC.
Dated: August 14, 1997 By:/s/ JAMES E. DUFFY
------------------------------------------
James E. Duffy
Vice President and Chief Financial Officer
By:/s/ ANNETTE MONTOYA
------------------------------------------
Annette Montoya
Vice President and Principal Accounting
Officer
28
<PAGE> 29
Index to Exhibits
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
<S> <C> <C>
10.43* Purchase and Sale Agreement dated June 30, 1997 among HSRTW,
Inc. and Horizon Gas Partners, L.P. as Seller and Gothic Energy
Corporation as Buyer.
10.44* Amendment to Purchase and Sale Agreement dated as of July 16, 1997,
among HSRTW, Inc. and Horizon Gas Partners, L.P. as Seller and
Gothic Energy Corporation as Buyer.
27* Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.43
PURCHASE AND SALE AGREEMENT
DATED
JUNE 30, 1997
AMONG
HSRTW, INC.
AND
HORIZON GAS PARTNERS, L.P.
AS SELLER
AND
GOTHIC ENERGY CORPORATION
AS BUYER
<PAGE> 2
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement ("Agreement"), dated June 30, 1997,
is among HSRTW, INC. ("HSRTW"), a Delaware corporation, with an office address
of 1999 Broadway, Suite 3600, Denver, CO 80202, and HORIZON GAS PARTNERS, L.P.
("Horizon"), a Delaware limited partnership, with an office address of 2512-C
East 71st Street, Tulsa, OK 74136-5575 (collectively "Seller"), and GOTHIC
ENERGY CORPORATION ("Buyer"), an Oklahoma corporation, with an office address
of 5727 South Lewis Avenue, Suite 700, Tulsa, Oklahoma 74105-7148.
In consideration of the mutual promises contained herein, the benefits
to be derived by each party hereunder and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Seller and Buyer agree as follows:
1PURCHASE AND SALE
1.1 PURCHASE AND SALE. Seller agrees to sell and convey and Buyer
agrees to pay for and receive the Interests (as defined in
Section 1.2), subject to the terms and conditions of this
Agreement.
1.2 INTERESTS. Subject to the reservations set forth in Section
1.3, all of Seller's right, title and interest in and to the
following shall herein be called the "Interests:"
(a) The oil and gas wells and locations described in
Exhibit "A-1" hereto (collectively the "Wells"),
together with all oil, gas and mineral production
from the Wells to the extent such production occurs
after the Effective Time;
(b) The leasehold estates created by the leases,
licenses, permits and other agreements described in
Exhibit "A-2," which Exhibit shall be provided by
Seller and approved by Buyer by July 15, 1997,
INSOFAR AND ONLY INSOFA, as they cover the land (the
"Land") described in Exhibit "A-2" (the leasehold
estates insofar as they cover the Land are called the
"Leases") together with all overriding royalty
interests, production payments and other payments out
of or measured by the value of oil and gas production
from or attributable to the Leases as to periods
after the Effective Time insofar as the Leases cover
the Lands, unless expressly excluded and reserved by
Seller;
(c) All personal property, fixtures and improvements
appurtenant to the Wells, or the Leases or used
exclusively in connection with the operation of the
Wells, or the Leases or with the production,
treatment, sale or disposal of hydrocarbons or water
produced therefrom or attributable
<PAGE> 3
thereto, including without limitation, pipelines,
gathering systems and compression facilities
appurtenant to or located upon the Leases and cores,
cuttings, geophysical and other geological property
(to the extent transferable) relating exclusively to
the Lands and Wells; excluding, however, tools,
pulling machines, vehicles, mobile equipment, rolling
stock, tubulars or other drilling or production
inventory, or equipment temporarily located on the
Lands; and
(d) All rights, privileges, benefits, and appurtenances
in any way belonging, incidental to, or appertaining
to the property, interests and rights described in
Sections 1.2(a) through 1.2(c) to the extent
necessary or beneficial to the future operation of
such interests, including, to the extent
transferable, all agreements, product purchase and
sale contracts, surface leases, gas gathering
contracts, salt water disposal agreements and wells,
processing agreements, compression agreements,
equipment leases, permits, gathering lines,
rights-of-way, easements, licenses, farmouts and
farmins, options, orders, pooling, spacing or
consolidation agreements and operating agreements and
all other agreements relating thereto;
(e) All lease, land, well, production, engineering,
geological, geophysical, litigation, accounting,
title, division order and tax files, copies of
relevant tax (other than income tax) files, emergency
response and environmental compliance plans,
abstracts, title opinions, logs, maps and all other
books, files, records and data of Seller insofar as
they relate exclusively to the Assets described in
Exhibit "A," but excluding any records or data that
cannot be transferred because of (i) prior legal
restrictions, (ii) are proprietary or confidential,
or (iii) are subject to attorney/client privilege;
(f) All other right, title or interest of Seller in and
to the interests and properties described in Exhibits
"A-1" and "A-2" not expressly reserved by Seller.
(g) All benefit or liability associated with gas
imbalance attributable to the wells prior to the
Effective Time.
1.3 RESERVED INTERESTS. Seller hereby shall reserve and except
from the sale and conveyance of the Interests in favor of
Seller, its successors and assigns, the following:
(a) All accounts receivable attributable to the Interests
that are, in accordance with generally accepted
accounting principles, attributable to the period
prior to the Effective Time;
(b) All claims and rights attributable to periods prior
to the Effective Time, other than claims relating to
underproduction of gas attributable to the Interests
as of the Effective Time, including, without
limitation, the right
2
<PAGE> 4
to initiate, prosecute or participate, at Seller's
sole cost and expense, in all audits, audit claims
and tax claims or proceedings relating to or
including periods prior to the Effective Time,
regardless of when commenced, arising out of or under
applicable law, operating or product sale agreements
or otherwise, and to recover all costs and expenses
claimed or shown by such audits or proceedings as
owing to the owner of the Interests for periods prior
to the Effective Time;
(c) All rights, if any, to recover additional production
or proceeds therefrom attributable to the Interests
for any production month prior to the Effective Time,
resulting from any adjustment to the net revenue
interest attributable to the Interests in the
applicable division orders; and
(d) All rights of access to and use of the Land,
including surface and subsurface rights, in
connection with exploration, drilling, development,
operations or any other purpose related to any right
and/or interest of Seller which has been excepted and
reserved hereunder including, without limitation,
ingress and egress over the Land for the aforesaid
purposes upon properties adjoining the Land.
1.4 EFFECTIVE TIME. The purchase and sale of the Interests shall
be effective as of July 1, 1997, at 7:00 a.m., at the location
of the Interests (the "Effective Time").
2 PURCHASE PRICE
2.1 PURCHASE PRICE. The purchase price to be paid by Buyer for
the Interests shall be $27,500,000 plus the properties
described on Exhibit "G" (the "Purchase Price") (such property
described on Exhibit "G" shall be referred to as "Buyer
Property"), subject to adjustment as set forth in Section and
payable as follows:
(a) an earnest money deposit of $15,000 payable to Seller
plus delivery to HS Resources, Inc. of 1,500,000
shares of Buyer's Common Stock pursuant to the terms
of a Stock Subscription Agreement entered into
concurrently herewith a copy of which is attached as
Exhibit "H" and a Registration Rights Agreement
entered into concurrently herewith a copy of which is
attached hereto as Exhibit "I" (collectively the
"Earnest Money"); and
(b) the Purchase Price, payable at Closing.
2.2 ADJUSTMENTS TO PURCHASE PRICE.
(a) The Purchase Price shall be adjusted upward by the
following:
(i) the value of all oil in storage above the
pipeline connection, being 16" from the tank
bottoms, or in transit as of the Effective
Time and not previously sold by Seller that
is attributable to the
3
<PAGE> 5
Interests, such value to be the market price
in effect as of the Effective Time or the
price set forth in any applicable purchase
contract, less taxes and gravity adjustments
deducted by the purchaser of such oil;
(ii) the amount of all expenditures; rentals and
other charges; ad valorem, property,
production, excise, severance and similar
taxes based upon or measured by the ownership
of property or the production of hydrocarbons
or the receipt of proceeds therefrom;
expenses billed under applicable operating
agreements and, in the absence of an
operating agreement, expenses of the sort
customarily billed under such agreements,
paid by or on behalf of Seller in connection
with the operation of the Interests, in
accordance with generally accepted accounting
principles, to the extent not provided for in
Section 2.2(a)(iii) below, attributable to
the period after the Effective Time; the
amount of overhead under operating agreements
for operations conducted during the period
from the Effective Time through the Closing
Date. On wells where Seller is acting as
operator, including salt water disposal
wells, overhead for the period between the
date of this Agreement and the Closing Date
shall be deemed to be $50,000. It is
expressly agreed that Seller shall retain all
COPAS overhead payments made by third parties
for the period prior to the Effective Time;
(iii) an amount equal to all prepaid expenses
attributable to the Interests that are paid
by or on behalf of Seller that are, in
accordance with generally accepted accounting
principles, attributable to the period after
the Effective Time, including, without
limitation, prepaid utility charges and
prepaid ad valorem, property, production,
severance and similar taxes based upon or
measured by the ownership of property or the
production of hydrocarbons or the receipt of
proceeds therefrom; and
(iv) any other amount agreed upon by Seller and
Buyer.
(b) The Purchase Price shall be adjusted downward by the
following:
(i) proceeds of production received by Seller
attributable to the Interests that are, in
accordance with generally accepted accounting
principles, attributable to the period of
time from and after the Effective Time;
(ii) an amount equal to unpaid ad valorem,
property, production, severance and similar
taxes and assessments based upon or measured
by the ownership of the production
attributable to the
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Interests prior to the Effective Time, which
amounts shall, to the extent not actually
assessed, be computed based on such taxes and
assessments for the preceding tax year (such
amount to be prorated for the period of
Seller's and Buyer's ownership before and
after the Effective Time);
(iii) an amount equal to the sum of all Title
Defect and adjustments for Violations of
Environmental Laws, if any, which have been
agreed upon by the parties;
(iv) an amount equal to all cash in, or
attributable to, suspense accounts relative
to the Interests and held by Seller; and
(v) any other amount agreed upon by Seller and
Buyer.
2.3 ADJUSTMENTS TO PURCHASE PRICE FOR BUYER PROPERTY. Similar
adjustments as set forth in paragraph 2.2 shall be made for
the Buyer Property, except that the overhead for operations on
the Buyer Property shall be deemed to be $12,000 rather than
$50,000.
2.4 ALLOCATION OF PURCHASE PRICE. By July 15, 1997, Buyer shall
modify Exhibit "A-1" and submit such modification to Seller
for approval in order that Exhibit "A-1" sets forth an
allocation of the Purchase Price among Interests and other
designated items that comprise the Interests (the "Allocated
Value"). Seller shall prepare a similar allocation with
respect to the Buyer Property. The allocations will be
provided for the purpose of (a) establishing a basis for
certain taxes, (b) obtaining waivers of or making offers with
respect to any preferential rights to purchase the Interests,
and (c) handling those instances for which the Purchase Price
is adjusted as provided herein. If necessary to determine the
Allocated Value of a portion of any Interest for which an
Allocated Value is set forth on Exhibit "A-1", such allocation
shall be determined on a reasonable engineering basis
consistent with the evaluation implicit in the Allocated
Values shown on Exhibit "A-1."
3 REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF SELLER. Each Seller, as to
its portion of the Interests, represents and warrants to Buyer
as of the date hereof and as of the Closing Date as follows:
(a) Organization. HSRTW is a corporation duly organized,
validly existing and in good standing under the laws
of the state of Delaware, and is duly qualified to
carry on its business in each state where its portion
of the Interests are located. Horizon is a limited
partnership duly organized, validly existing and in
good standing under the laws of the state of
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<PAGE> 7
Delaware and is qualified to carry on its business in
each state where its portion of the Interests are
located.
(b) Power. Each Seller has all requisite corporate, or
partnership, as appropriate, power and authority to
carry on its business as presently conducted, to
enter into this Agreement, and to perform its
obligations under this Agreement. The consummation
of the transactions contemplated by this Agreement
will not violate, or be in conflict with (i) any
provision of HSRTW's Articles of Incorporation or
Bylaws or the Limited Partnership Agreement of
Horizon, as the case may be, or (ii) any provision of
any agreement or instrument to which either Seller is
a party or by which either Seller is bound,
noncompliance with which would have a material effect
upon Buyer's ownership or operation of the Interests,
or upon any of the transactions contemplated by this
Agreement or, to its knowledge, any judgment, decree,
order, statute, rule or regulation applicable to
Seller; except that HSRTW is obligated under its
senior credit facility to obtain the consent of the
majority lenders under that facility (the "Bank
Consent") to consummate the transaction contemplated
by this Agreement, which consent must be obtained on
or before August 1, 1997.
(c) Authorization, Enforceability. This Agreement has
been duly authorized, executed and delivered on
behalf of Seller and constitutes the legal, valid and
binding obligation of Seller, enforceable in
accordance with its terms, subject, however, to the
effects of bankruptcy, insolvency, reorganization and
other laws for the protection of creditors.
(d) Broker. Seller has not incurred any liability,
contingent or otherwise, for brokers or finders fees
relating to the transactions contemplated by this
Agreement for which Buyer shall have any
responsibility whatsoever.
(e) Bankruptcy. There are no bankruptcy, reorganization
or other arrangement proceedings pending, being
contemplated by or, to the knowledge of Seller,
threatened against Seller.
(f) Royalties. To the actual knowledge of Seller, all
royalties, rentals, and other payments due and
payable by Seller under all Leases comprising the
Interests for the period Seller has owned such
Interests ("Seller's Ownership Period") have been
properly and timely paid to the extent that the
failure to so pay would cause a material adverse
effect on the Interests.
(g) Third-Party Waivers. To the actual knowledge of
Seller, all requisite third-party consents to assign
and preferential rights of purchase affecting the
Interests will be listed on Exhibits "B" and "C"
respectively, such Exhibits to be completed by Seller
on or before July 15, 1997.
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<PAGE> 8
(h) Litigation, Proceedings and Claims. There are no
actions, suits or arbitration proceedings to which
Seller is a party pending or, to Seller's actual
knowledge, threatened in writing, before any court or
governmental agency that would result in material
impairment or loss of Seller's title to the Interests
or would otherwise materially adversely affect the
Interests.
(i) Mortgages and Other Instruments. Assuming the timely
receipt of the Bank Consent, neither the performance
of this Agreement, nor the consummation of the
transactions contemplated by this Agreement, will
cause a breach of any of the terms and conditions, or
will result in the creation or imposition of any lien
upon any of the Interests, or the production of oil,
gas or other minerals from the Interests pursuant to
the terms of any agreement or other instrument to
which Seller is a party or by which it is bound.
(j) Sales Contracts. Exhibit "D" will list all material
contracts or agreements to which Seller is a party
for the sale of oil or gas from the Interests which
are not terminable upon 90 days' or less notice, such
Exhibit to be completed by Seller on or before July
15, 1997.
(k) Contracts and Agreements. Except as will be set
forth on Exhibit "E" (the "Disclosure Schedule") or
otherwise identified pursuant to this Agreement,
there are no contracts or agreements to which Seller
is a party which are unusually burdensome and
non-standard and which materially and adversely
affect the value of the Interests, such Exhibit to be
completed by Seller on or before July 15, 1997.
(l) Prepayment or Related Arrangements. Seller has not
entered into any arrangement under which Buyer will
be obligated, by virtue of a prepayment arrangement,
a "take or pay" arrangement, a production payment, or
any other arrangement other than gas balancing
agreements or arrangements, to deliver hydrocarbons
from the Interests at some future time without then
or thereafter receiving full payment therefore, or to
make payment at some future time for hydrocarbons
already produced and sold from the Interests.
(m) Tax Partnership. To Seller's actual knowledge except
as may be disclosed in the Disclosure Schedule, no
portion of the Interest, are subject to any form of
agreement (whether formal or informal, written or
oral) deemed by any state or federal tax statute,
rule or regulation to be or to have created a tax
partnership.
3.2 REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and
warrants to Seller as of the date hereof and as of the Closing
Date as follows:
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<PAGE> 9
(a) Organization. Buyer is a corporation duly organized,
validly existing and in good standing under the laws
of the state of Oklahoma and it is duly qualified to
carry on its business in each state where the
Interests are located.
(b) Power. Buyer has all requisite corporate power and
authority to carry on its business as presently
conducted, to enter into this Agreement, to purchase
the Interests on the terms described in this
Agreement and to perform its other obligations under
this Agreement. The consummation of the transactions
contemplated by this Agreement will not violate, or
be in conflict with (i) any provision of its Articles
of Incorporation or Bylaws; or (ii) any provision of
any agreement or instrument to which it is a party or
by which it is bound, noncompliance with which would
have a material effect upon any of the transactions
contemplated by this Agreement or Buyer's ability to
adhere to and/or perform any obligation hereunder or
in connection herewith, or, to its knowledge, any
judgment, decree, order, statute, rule or regulation
applicable to Buyer.
(c) Authorization, Enforceability. This Agreement has
been duly authorized, executed and delivered on
behalf of Buyer and constitutes the legal, valid and
binding obligation of Buyer, enforceable in
accordance with its terms, subject, however, to the
effects of bankruptcy, insolvency, reorganization and
other laws for the protection of creditors.
(d) Broker. Buyer has incurred no liability, contingent
or otherwise, for brokers or finders fees relating to
the transactions contemplated by this Agreement for
which Seller shall have any responsibility
whatsoever.
(e) Investment Purpose. The Interests to be acquired by
Buyer pursuant to this Agreement are being acquired
by it for its own account for investment purposes and
not for distribution within the meaning of any
securities law. In acquiring the Interests, it is
acting in the conduct of its own business and not
under any specific contractual commitment to any
third party, or any specific nominee agreement with
any third party, to transfer to, or to hold title on
behalf of, such third party, with respect to all or
any part of the Interests.
(f) Bankruptcy. There are no bankruptcy, reorganization
or arrangement proceedings pending, being
contemplated by or, to the knowledge of Buyer,
threatened against Buyer.
(g) Buyer Knowledge. Buyer is experienced and
knowledgeable in the oil and gas business and is
aware of its risks. Buyer has been afforded the
opportunity to examine materials made available to it
by Seller in the Offering Memorandum (and associated
data delivered to Buyer, including mechanical data)
and in the data room in Seller's offices in Tulsa,
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<PAGE> 10
Oklahoma with respect to the Interests (collectively
the "Background Materials"). The Background
Materials are files, or copies thereof, that Seller
has used in its normal course of business and other
information about the Interests that Seller has
compiled or generated. Buyer acknowledges and agrees
that Seller has made no representations or
warranties, express or implied, written or oral, as
to the accuracy or completeness of the Background
Materials or any other information relating to the
Interests furnished by or on behalf of Seller or to
be furnished to Buyer or its representatives. In
entering into this Agreement, Buyer acknowledges and
affirms that it has relied and will rely solely upon
its independent analysis, evaluation and
investigation of, and judgment with respect to, the
business, economic, legal, tax or other consequences
of this transaction including its own estimate and
appraisal of the extent and value of the petroleum,
natural gas and other reserves of the Interests.
Buyer's representatives have visited Seller's office
and have been given opportunities to examine the
books and records Seller has made available relating
to the Interests. Neither Seller nor its affiliates,
agents, representatives or employees shall have any
liability to Buyer or its affiliates, agents,
representatives or employees resulting from any use,
authorized or unauthorized, of the Background
Materials or other information relating to the
Interests provided by or on behalf of Seller or its
agents, representatives or employees.
4 COVENANTS AND AGREEMENTS
4.1 COVENANTS AND AGREEMENTS OF SELLER. Seller covenants and
agrees with Buyer as follows:
(a) Upon execution of this Agreement, Seller will make
available to Buyer for examination at a location
designated by Seller, unless legally prohibited from
doing so or unless certain documents are subject to
attorney/client privilege, such title information,
production information and other information relating
to the Interests in Seller's possession, including
without limitation, accounting files, production
files, land files, lease files, well files, division
order files, contract files and marketing files.
Subject to the consent and cooperation of operators
and other third parties, Seller will cooperate with
Buyer in Buyer's efforts to obtain, at Buyer's sole
expense, such additional information relating to the
Interests as Buyer may reasonably desire, to the
extent in each case that Seller may do so without
violating legal constraints or any obligation of
confidence or unless certain documents are subject to
attorney/client privilege.
(b) During the period beginning on the date of this
Agreement and concluding on the Closing Date, Seller
shall, unless specifically waived by Buyer in
writing:
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<PAGE> 11
(i) subject to the provisions of applicable
operating and other agreements, Seller shall
continue to operate and administer the
Interests in a good and workmanlike manner
consistent with its past practices, and shall
carry on its business with respect to the
Interests in substantially the same manner as
before execution of this Agreement;
(ii) Seller shall, except for emergency action
taken in the face of risk to life, property
or the environment, submit to Buyer for prior
written approval, all requests for operating
or capital expenditures and all proposed
contracts and agreements relating to the
Interests that involve individual commitments
of more than $50,000 net to Seller's
interest;
(iii) Buyer acknowledges that Seller owns an
undivided interest in certain of the
Interests, and Buyer agrees that the acts or
omissions of the other working interest
owners who are not affiliated with Seller
shall not constitute a violation of the
provisions of this Agreement, nor shall any
action required by a vote of working interest
owners constitute such a violation so long as
Seller has voted its interest in a manner
that complies with the provisions of this
Agreement; and
(iv) notwithstanding anything to the contrary in
this Agreement, Seller shall have no
liability to Buyer for the incorrect payment
of delay rentals, royalties, shut-in
royalties or similar payments or for any
failure to make any such payments through
mistake or oversight unless caused by
Seller's gross negligence or willful
misconduct.
4.2 COVENANTS AND AGREEMENTS OF BUYER. Buyer covenants and agrees
with Seller that:
(a) Buyer shall for the period between the date of this
Agreement and Closing maintain its corporate status
and assure that, as of the Closing Date, it will not
be under any material corporate, legal or contractual
restriction that would prohibit or delay the timely
consummation of the transaction contemplated
hereunder.
(b) With respect to Wells operated by Seller included in
the Interests assigned to Buyer at Closing, Buyer
shall, subject to the applicable terms of existing
operating agreements, take over operations as of 7:00
a.m. local time at the wellsite on the day after
Closing. Upon taking over operations, Buyer shall
post all necessary state, federal and local bonds and
shall assist Seller in having Seller's existing bonds
released, or in the alternative, having the Wells
operated by Buyer released from Seller's existing
bond. Seller shall cooperate (without any obligation
to spend funds doing so)
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<PAGE> 12
with Buyer in Buyer's effort to be elected or
appointed operator of any Well for which Seller
currently acts as operator. To the extent that Seller
is unable to have its resignation as operator of any
of the Interests become effective as of Closing,
Buyer's operations of such Interests shall be
considered contract operations on behalf of Seller.
Buyer shall defend, indemnify, save and hold harmless
Seller, its affiliates, and its and their, officers,
directors, employees, and agents against all losses,
damages, claims, demands, costs, expenses,
liabilities, and sanctions of each and every
character, including without limitation, reasonable
attorneys' fees, court costs, and costs of
investigation or arbitration, that arise from or in
connection with Buyer's operation of such Interests
from and after the Closing.
5 TITLE MATTERS
5.1 DEFENSIBLE TITLE.
(a) The term "Defensible Title" shall mean such title,
whether held by Seller or by a third party for the
benefit of Seller, that, except for and subject to
the Permitted Encumbrances (as defined in Section
5.1(b) below):
(i) entitles Seller to receive as to each Well
set forth in Exhibit "A-1," as to the Proved
Producing ("PDP"), Proved Developed
Non-Producing ("PDNP") or Proved Undeveloped
("PUD") formations set forth on Exhibit "A-1"
not less than the "Net Revenue Interest" set
forth in such Exhibit for such wells and
formations;
(ii) obligates Seller to bear costs and expenses
relating to the maintenance, development and
operation of each Well set forth on Exhibit
"A-1", as to the PDP, PDNP, and PUD
formations set forth on Exhibit "A-1," in an
amount not greater than the "Working
Interest" set forth in such Exhibit for such
Wells and formations without a proportionate
increase in the Net Revenue Interest; and
(iii) is free and clear of material liens,
encumbrances and defects.
(b) In the case of federal, Indian, or state leases,
Seller's title may be in the nature of either record
title or federal lease operating rights.
(c) The term "Permitted Encumbrances," as used herein,
shall mean, as follows:
(i) lessors' royalties, overriding royalties,
unitization and pooling designations and
agreements, reversionary interests and
similar burdens to the extent such matters do
not operate to reduce the "Net Revenue
Interest" of a Well as to the PDP, PDNP and
PUD
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<PAGE> 13
formations set forth on Exhibit "A-1" below
the net revenue interest set forth in Exhibit
"A-1" with respect to such wells and
formations;
(ii) required third-party consents to assignments
and similar agreements with respect to which
(A) waivers or consents are obtained from the
appropriate parties, or (B) the appropriate
time period for asserting such rights has
expired without an exercise of such rights,
and all preferential rights to purchase;
(iii) all rights to consent by, required notices
to, filings with, or other actions by
governmental entities in connection with the
sale or conveyance of oil and gas leases or
interests therein if the same are customarily
obtained subsequent to such sale or
conveyance;
(iv) easements, rights-of-way, servitudes,
permits, surface leases and other rights with
respect to surface operations, pipelines,
grazing, logging, canals, ditches, reservoirs
or the like and easements for streets,
alleys, highways, pipelines, telephone lines,
power lines, railways and other easements and
rights-of-way, on, over or in respect of any
of the Interests;
(v) materialmen's, mechanics', repairmen's,
employees', contractors', operators', tax and
other similar liens or charges arising in the
ordinary course of business incidental to
construction, maintenance or operation of any
of the Interests (A) if they have not been
filed pursuant to law, (B) if filed, they
have not yet become due and payable or
payment is being withheld as provided by law,
or (C) if their validity is being contested
in good faith in the ordinary course of
business by appropriate action; and
(vi) any other liens, charges, encumbrances,
contracts, agreements, instruments,
obligations, defects or irregularities of any
kind whatsoever affecting the Interests that
individually or in the aggregate are not such
so as to have a material effect upon and/or
do not prevent Seller from receiving the
proceeds of production, and that do not
operate to (A) reduce the Net Revenue
Interest of Seller in a Well, as to the PDP,
PDNP and PUD formations set forth on Exhibit
"A-1" below the net revenue interest of
Seller set forth on Exhibit "A-1" with
respect to such wells and formations or (B)
increase the Working Interest of Seller in
such Wells and formations above that set
forth on Exhibit "A-1" without a
proportionate increase in the Net Revenue
Interest of Seller.
(vii) such Title Defects that Buyer has waived;
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<PAGE> 14
(viii) rights of reassignment, to the extent any
exist as of the date of this Agreement, upon
the surrender or expiration of any lease;
(ix) the terms and conditions of all division
orders, pooling or unitization orders,
agreements or declarations;
(x) rights reserved to or vested in any
governmental authority to control or regulate
any of the Interests in any manner; and all
applicable laws, rules, regulations and
orders of general applicability in the area;
(xi) liens arising under operating agreements,
unitization and pooling agreements and
production sales contracts securing amounts
not yet due or, if due, being contested in
good faith in the ordinary course of
business;
(xii) all other liens, charges, encumbrances,
contracts, agreements, instruments,
obligations, defects and irregularities
affecting the Interests that will not
materially interfere with or detract from the
ownership, operation, value or use of the
Interests; such defects include, without
limitation
(1) as to producing Leases, those which
have not prevented the receipt of
production proceeds by Seller or its
predecessors in title without
suspense by a production purchaser
and as to which no challenge to
title has been raised on the basis
of such defect, so long as it can
reasonably be concluded either that
such challenge is unlikely or that
such challenge would be unsuccessful
by reason of statutes of limitation,
waiver, estoppel or other defenses,
or
(2) those described by an attorney's
title opinion as advisory or
waivable as a matter of business
judgment, or
(3) those in the nature of customary
defects expected to be encountered
in the area involved and customarily
acceptable to Buyer or other prudent
operators and interest owners in the
area, including, without limitation,
defects that have been cured by
possession under applicable statutes
of limitation, defects in the early
chain of title such as failure to
recite marital status in documents,
omission of heirship or succession
proceedings, lack of survey and
failure to record releases of liens,
production payments or mortgages
that have expired of their own terms
or which through the passage of time
or statute are no longer enforceable
or other defects that either as a
practical matter
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have not resulted or are not likely
to result in claims that will
materially adversely affect Buyer's
title or are considered waivable
under local bar association-approved
title standards or customary title
practices in the area;
(xiii) liens, if any, to be released at Closing in a
form reasonably acceptable to Buyer.
(d) The term "Title Defect" as used herein shall mean any
material encumbrance or defect in Seller's title to a
Well (expressly excluding Permitted Encumbrances),
that renders Seller's title to such Well less than
Defensible Title.
5.2 TITLE DEFECT ADJUSTMENTS.
(a) No adjustment to the Purchase Price for Title Defects
shall be made unless and until, and only to the
extent that, the value of Title Defects exceeds
$10,000 per Well and the aggregate value of all Title
Defects to the extent exceeding the foregoing
deductible exceeds a threshold of $200,000, except
that the foregoing deductible amount shall not apply
to any Title Defect that consists of a certain and
indisputable lesser net revenue interest than is
shown on Exhibit "A-1" (including, but not limited
to, clerical errors in the preparation of Exhibit
"A-1"), and with respect to which Title Defect either
(i) the proceeds of production are not being received
by Seller for its account or (ii) if proceeds are
being received by Seller for its account
notwithstanding the Title Defect, continuation of the
receipt of proceeds of production by Seller would be
unlawful.
(b) Buyer shall give Seller written notice of Title
Defects immediately upon discovering such defects,
but in no event after August 1, 1997. Such notice
shall include:
(i) a description of the Title Defect with
supporting documentation;
(ii) the Allocated Value of the Well affected by
the Title Defect; and
(iii) the amount by which Buyer believes the
Allocated Value of such Well has been reduced
because of such Title Defect.
(c) Buyer shall be conclusively deemed to have waived all
Title Defects of which Seller has not been given
timely notice by Buyer.
(d) Subject to the limitation contained in Section 5.2(a)
and offsets for Interest Additions as provided in
Section 5.5, a Well affected by a Title Defect and
the Leases comprising the production unit or
proration unit for the Well shall be excluded from
the Interests to be purchased by Buyer hereunder
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<PAGE> 16
and the Final Purchase Price shall be reduced and
settled in accordance with Sections 2.2(b)iii and
10.1(a) by an amount equal to the Allocated Value of
such Well unless on or prior to the Closing Date:
(i) the Title Defect has been removed or cured;
(ii) Buyer agrees to waive the relevant Title
Defect and purchase the affected Interests
notwithstanding the defect;
(iii) Seller agrees to indemnify Buyer, to the
extent of the Allocated Value of the affected
Well, against all losses, costs, expenses and
liabilities with respect to such Title Defect
claim asserted in writing by a third party
within two years from the Closing Date (in
which case Buyer shall use, reasonable
diligence and care not to disclose
information or take any action that could
increase the likelihood that a claim
regarding the potential defect would be
asserted); or
(iv) Buyer and Seller agree to an amount by which
the Allocated Value of the Well has been
reduced and the Purchase Price is reduced by
such amount in accordance with Section 2.2.
5.3 PREFERENTIAL RIGHTS AND CONSENTS.
(a) Some of the Leases may be subject to preferential
rights to purchase in favor of third parties or third
party consents to assignment and notices of sale.
The form and content of all solicitations for the
waivers and consents affecting the Interests shall be
determined and prepared by Seller, but shall not be
inconsist with the terms of this Agreement.
(b) In the event a third party exercises an applicable
preferential right to purchase an Interest prior to
the Closing Date, the affected Interest shall not be
treated as a Title Defect, but shall be removed from
this Agreement and the Purchase Price shall be
adjusted by the Allocated Value of that Interest. If
any preferential right to purchase an Interest is
exercised after the Closing Date, such affected
Interest shall not be treated as a Title Defect, and
no adjustment shall be made on account of such
exercise. All Interests that are subject to
preferential rights to purchase that have not been
exercised as of the Closing Date shall be conveyed to
(and paid for by) Buyer at the Closing. If any such
preferential right is exercised after Closing, Buyer
shall convey such affected Interest to the party
exercising such right on the same terms and
conditions under which Seller conveyed such Interest
to Buyer. Buyer shall retain all amounts paid by the
party exercising such preferential right to purchase.
In the event of such exercise, Buyer shall prepare a
form of conveyance of such interests from Buyer to
such exercising party, such conveyance to be in form
and
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<PAGE> 17
substance as provided in this Agreement, except that
such conveyance shall be made free and clear of all
liens, encumbrances, royalty interests, production
payments and other charges or defects created by,
through or under Buyer.
5.4 CASUALTY LOSS. If subsequent to the date of this Agreement,
but prior to the Closing, all or any material portion of an
Interest to be conveyed to Buyer at Closing is destroyed by
fire or other casualty, is taken in condemnation or under the
right of eminent domain or proceedings for such purposes are
pending or threatened, Buyer shall purchase such Interest
notwithstanding any such destruction, taking or pending or
threatened taking and the Purchase Price shall not be
adjusted. Seller shall, at the Closing, pay to Buyer all sums
paid to Seller by third parties by reason of the destruction
or taking of such Interest to be assigned to Buyer, and shall
assign, transfer and set over unto Buyer all of the right,
title and interest of Seller in and to any unpaid awards or
other payments from third parties arising out of the
destruction, taking or pending or threatened taking as to such
Interests to be conveyed to Buyer. Seller shall not
voluntarily compromise, settle or adjust any material amounts
payable by reason of any material destruction, taking or
pending or threatened taking as to the Interests to be
conveyed to Buyer without first obtaining the written consent
of Buyer. Buyer shall maintain in effect insurance covering
the Assets of the general types and limits of coverage as
Seller presently has in effect, such types and limits of
coverage having been previously disclosed to Buyer.
5.5 INTEREST ADDITIONS. If prior to Closing an inaccuracy in
Exhibits "A-1" or "A-2" is discovered that results in an
increase in value of any portion of the Leases or Wells, such
as a net revenue interest that is stated to be lower than
Seller's actual net revenue interest, the amount of the
increased value (a "Credit Adjustment") shall be credited
against any potential reduction in the Purchase Price or
Seller's indemnification obligations under any provision of
this Agreement.
5.6 TITLE MATTERS FOR BUYER PROPERTY. Similar provisions to those
set forth in paragraphs 5.1, 5.2, 5.3, 5.4 and 5.5 shall apply
to Seller for its purchase of the Buyer Property, except that
the deductible and the threshold set forth in 5.2(a) shall be
changed to $1,000 and $10,000 respectively.
6 ENVIRONMENTAL MATTERS
6.1 INSPECTION. Prior to the Closing Date, and subject to any
necessary third-party operator approval, Seller shall permit
Buyer and its representatives at reasonable times and at their
sole risk, cost and expense, to conduct reasonable inspections
of the Leases. Buyer shall not conduct any soil or water
tests on the Lands or relating to the Interests without the
express written consent of Seller. Buyer shall repair any
damage to the Leases resulting from such inspections and Buyer
shall indemnify and hold harmless Seller and its partners,
subsidiaries and affiliates and
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its and their respective officers, directors, employees and
agents from and against any and all losses or causes of action
arising from Buyer's and/or its representatives' inspection of
the Leases, including, without limitation, claims for personal
injuries or death of employees of the Buyer, its contractors,
agents, consultants and representatives, and property damages,
or employees of Seller, its contractors, agents, consultants
and representatives or third parties.
6.2 VIOLATION OF ENVIRONMENTAL LAWS. Buyer shall notify Seller in
writing on or before October 30, 1997, of any environmental
matters disclosed by its inspection that Buyer reasonably
believes in good faith constitutes a Violation of
Environmental Laws (as hereinafter defined) including with
such notice, a detailed description of the specific matter
that is an alleged Violation of Environmental Laws. For
purposes of this Agreement, the term "Environmental Laws"
shall mean all federal, state or local laws, statutes,
ordinances, rules and regulations of any governmental
authority pertaining to protection of the environment in
effect as of the Effective Time and as interpreted by court
decisions or administrative orders as of the Effective Time in
the jurisdiction in which such Interest is located and as
enforced by the applicable authorities. For purposes of this
Agreement, the term "Violation of Environmental Laws" shall
mean the material violation of or failure to meet specific
objective requirements or standards regarding the physical
condition of the Wells and well sites (as opposed to reports,
plans or other matters that may be required by Environmental
Laws) that are clearly applicable to such Interests under
applicable Environmental Laws where such requirements or
standards are in effect as of the Effective Time, and the term
does not include good or desirable operating practices or
standards that may be employed or adopted by other oil or gas
well operators or recommended by a governmental authority.
Seller has heretofore provided to Buyer copies of two
environmental reports prepared for Buyer's predecessor in
connection with the predecessor's acquisition of certain of
the Interests (the "Environmental Reports"). All matters
referred to in the Environmental Reports are hereby expressly
agreed not to constitute Violations of Environmental Laws
under this Agreement.
6.3 REMEDIES FOR VIOLATION OF ENVIRONMENTAL LAW. On or before
December 30, 1997, with respect to each Violation of
Environmental Laws:
(a) Seller and Buyer may agree on an adjustment to the
Purchase Price which adjustment shall reflect the
cost to remedy such Violation of Environmental Law;
(b) At the election of Seller, Seller may agree to
remediate the condition at Seller's cost;
(c) Seller and Buyer may agree that Seller will indemnify
Buyer against all losses, costs, expenses, and
liabilities with respect to such Violation of
Environmental Laws asserted in writing by a third
party within two years from the Closing Date (in
which case Buyer shall use reasonable diligence and
care not to disclose information or take any action
that could increase
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the likelihood that a claim regarding the potential
violation would be asserted); or
(d) Seller and Buyer may agree to remove that portion of
the Interests from the Interests being conveyed
hereunder and adjust the Purchase Price accordingly
based on the Allocated Value of the Well(s)
associated with such Interests.
If the parties cannot agree on a course of action under (a) or
(c), and Seller does not elect to remediate under (b), the
option set forth in subsection 6.3(d) above shall apply. No
remedy for a Violation of Environmental Law shall be
applicable unless and then only to the extent that (i) each
such Violation of Environmental Law exceeds $10,000 and (ii)
the aggregate value of all Violations of Environmental Laws to
the extent exceeding the foregoing deductible exceeds
$150,000. If after Closing an adjustment to the Purchase
Price is made under 6.3(a) Seller shall within 10 days of
agreement regarding such adjustment make the agreed payment to
Buyer. If an Interest or portion thereof is removed from the
Interests being conveyed hereunder pursuant to 6.3(d), Buyer
and Seller shall within 10 days of agreement regarding such
removal prepare the appropriate assignments and make the
appropriate payments or accounting adjustments to each other,
including adjustments for revenues and costs for a Well if
necessary, such that Seller and Buyer are returned to the
position existing prior to this Agreement as if the removed
Interest had not been initially covered by this Agreement.
6.4 ENVIRONMENTAL MATTERS REGARDING BUYER PROPERTY.
Similar provisions as those set forth in paragraphs 6.1, 6.2
and 6.3 shall apply to Seller regarding the purchase of the
Buyer Property, except that the deductibles set forth at the
end of paragraph 6.3 shall be changed to $1,000 and $15,000
respectively.
7 ANTITRUST
7.1 If the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(the "HSR Act") is applicable to this transaction, both
parties shall promptly file with the Federal Trade Commission
and the Department of Justice the required notifications,
reports and supplemental information to comply in all respects
with the requirements of the Act. All filing fees required of
"Acquiring Persons" as determined by the Act shall be paid by
Buyer.
8 CONDITIONS TO CLOSING
8.1 SELLER'S CONDITIONS. The obligations of Seller at the Closing
are subject to the satisfaction at or prior to the Closing of
the following conditions:
(a) All representations and warranties of Buyer contained
in this Agreement shall be true in all material
respects at and as of the Closing as if such
representations and warranties were made at and as of
the Closing Date, and Buyer shall have performed and
satisfied in all material respects all
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agreements required by this Agreement to be performed
and satisfied by Buyer at or prior to the Closing.
(b) No order shall have been entered by any court or
governmental agency having jurisdiction over the
parties or the subject matter of this Agreement that
restrains or prohibits the purchase and sale
contemplated by this Agreement and which remains in
effect at the time of such Closing.
(c) The Closing shall be permitted to occur without
violation of the HSR Act and the rules and
regulations of the Federal Trade Commission and the
Department of Justice thereunder.
8.2 BUYER'S CONDITIONS. The obligations of Buyer at the Closing
are subject to the satisfaction at or prior to the Closing of
the following conditions:
(a) All representations and warranties of Seller
contained in this Agreement shall be true in all
material respects at and as of the Closing Date as if
such representations and warranties were made at and
as of the Closing, and Seller shall have performed
and satisfied in all material respects all agreements
required by this Agreement to be performed and
satisfied by Seller at or prior to the Closing.
(b) No order shall have been entered by any court or
governmental agency having jurisdiction over the
parties or the subject matter of this Agreement that
restrains or prohibits the purchase and sale
contemplated by this Agreement and which remains in
effect at the time of such Closing.
(c) The Closing shall be permitted to occur without
violation of the HSR Act and the rules and
regulations of the Federal Trade Commission and the
Department of Justice thereunder.
9 CLOSING.
9.1 DATE OF CLOSING. Unless the parties agree otherwise in
writing and subject to the conditions stated in this
Agreement, the consummation of the transactions contemplated
hereby (the "Closing") shall be held on August 28, 1997. The
date the Closing actually occurs is called the "Closing Date."
9.2 PLACE OF CLOSING. The Closing shall be held at the offices of
Seller in Denver, Colorado.
9.3 CLOSING OBLIGATIONS. At the Closing, the following events
shall occur, each being a condition precedent to the others
and each being deemed to have occurred simultaneously with the
others:
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(a) Seller and Buyer shall execute, acknowledge and
deliver an Assignment, Bill of Sale and Conveyance
(in sufficient counterparts to facilitate recording)
in substantially the form of Exhibit "F" attached
hereto, conveying to Buyer the Interests without
warranty of title except with respect to defects
created by, through or under Seller. As required,
assignment forms for federal, Indian, or state leases
shall be prepared by Seller and executed. Buyer
shall execute, acknowledge and deliver to Seller an
Assignment, Bill of Sale and Conveyance (in
sufficient counterparts to facilitate recording) in
substantially the form of Exhibit "F" attached hereto
conveying to Seller the Buyer Property without
warranty of title except with respect to defects
created by, through or under Seller.
(b) Seller and Buyer shall execute and deliver a
settlement statement, prepared by Seller in
accordance with this Agreement and generally accepted
accounting principles (the "Preliminary Settlement
Statement") that shall set forth the Preliminary
Purchase Price and each adjustment and the
calculation of such adjustments used to determine
such amount. Seller shall provide Buyer with a draft
of the Preliminary Settlement Statement three days
prior to Closing for Buyer's review and approval.
The term "Preliminary Purchase Price" shall mean the
Purchase Price, adjusted as provided in Section 2.2,
using for such adjustments the best information then
available. The Preliminary Settlement Statement
shall also include similar adjustments regarding the
Buyer Property.
(c) Buyer shall deliver to Seller the Preliminary
Purchase Price in immediately available federal funds
by wire transfer to the account designated by Seller.
(d) Seller and Buyer shall execute, acknowledge and
deliver Transfer Orders or Letters in Lieu thereof,
directing all purchasers of production to make
payment to Buyer of proceeds attributable to
production after the Effective Time from the
Interests assigned to Buyer.
(e) Seller shall prepare such notices to third-party
operators of the change in ownership of the Interests
from Seller to Buyer and such notices of change in
operatorship for those Wells operated by Seller for
which Buyer has taken over operations as are
reasonable and customary in the industry.
(f) Seller and Buyer shall execute, acknowledge and
deliver such other instruments and take such other
action as may be necessary to carry out their
respective obligations under this Agreement,
including such transfer orders, notices and other
instruments relating to the Buyer Property.
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10 OBLIGATIONS AFTER CLOSING
10.1 POST-CLOSING ADJUSTMENT PROCEDURE.
(a) As soon as practicable after the Closing Date, but no
later than 90 days after the Closing Date, Seller
shall prepare and deliver to Buyer, in accordance
with this Agreement and generally accepted accounting
principles, a statement (the "Final Settlement
Statement") setting forth each adjustment or payment
that was not finally determined as of the Closing
Date and showing the calculation of such adjustments.
Within 15 days after receipt of the Final Settlement
Statement, Buyer shall deliver to Seller a written
report containing any changes that Buyer proposes be
made to the Final Settlement Statement. The parties
shall undertake to agree with respect to the amounts
due pursuant to such post-closing adjustment no later
than 15 days after Seller has received Buyer's
proposed changes. The date upon which such agreement
is reached or upon which the "Final Purchase Price"
is established, shall be called the "Final Settlement
Date." If, the Final Purchase Price is more than the
Preliminary Purchase Price, Buyer shall pay in
immediately available federal funds the amount of
such difference to Seller or to Seller's account (as
designated by Seller). If the Final Purchase Price
is less than the Preliminary Purchase Price, Seller
shall pay in immediately available federal funds the
amount of such difference to Buyer or to Buyer's
account (as designated by Buyer). Payment by Buyer
or Seller shall be made within five days after the
Final Settlement Date. The Final Settlement
Statement shall also include the appropriate
adjustments for the Buyer Property.
10.2 FILES AND RECORDS. Within 30 days after the Closing Date,
Seller shall make available to Buyer originals of all of
Seller's files and records relating to the Interests and Buyer
shall make available to Seller originals of all of Buyer's
files and records relating to the Buyer Property, but
excluding any records or data that cannot be transferred
because of (i) prior legal restrictions, (ii) are proprietary
or confidential, or (iii) are subject to attorney/client
privilege. Buyer shall retain and make available to Seller
for seven full calendar years following the year in which
Closing occurs, in Buyer's main corporate office during normal
business hours, files and records relating to the Interests.
Buyer shall include this retention obligation in any
subsequent transfer of an Interest by Buyer.
10.3 FURTHER ASSURANCE. After Closing, Seller and Buyer shall
execute, acknowledge and deliver or cause to be executed,
acknowledged and delivered such instruments, and shall take
such other actions as may be necessary or advisable to carry
out their obligations under this Agreement and under any
document, certificate or other instrument delivered pursuant
hereto and to fully implement the intent of this Agreement.
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10.4 LIMITATIONS. NOTWITHSTANDING ANYTHING TO THE CONTRARY,
ARTICLE 6 SHALL BE THE SOLE AND EXCLUSIVE REMEDY THAT BUYER
SHALL HAVE AGAINST SELLER WITH RESPECT TO ANY MATTER OR
CIRCUMSTANCES RELATING TO ENVIRONMENTAL LAWS, THE RELEASE OF
MATERIALS INTO THE ENVIRONMENT, OR PROTECTION OF THE
ENVIRONMENT OR HEALTH. BUYER HEREBY RELEASES AND DISCHARGES
ANY AND ALL CLAIMS AT LAW OR IN EQUITY, KNOWN OR UNKNOWN,
WHETHER NOW EXISTING OR ARISING IN THE FUTURE, CONTINGENT OR
OTHERWISE, AGAINST SELLER WITH RESPECT TO ANY MATTER OR
CIRCUMSTANCE RELATING TO ENVIRONMENTAL LAWS, THE RELEASE OF
MATERIALS INTO THE ENVIRONMENT OR PROTECTION OF THE
ENVIRONMENT OR HEALTH. BUYER ACKNOWLEDGES THAT SELLER HAS NOT
MADE AND WILL NOT MAKE AND EXPRESSLY DISCLAIMS ANY
REPRESENTATION OR WARRANTY REGARDING ANY MATTER OR
CIRCUMSTANCE RELATING TO ENVIRONMENTAL LAWS, THE RELEASE OF
MATERIALS INTO THE ENVIRONMENT OR PROTECTION OF THE
ENVIRONMENT OR HEALTH. BUYER HEREBY AGREES TO ASSUME THE RISK
THAT THE INTERESTS MAY CONTAIN WASTE MATERIALS, INCLUDING
NATURALLY OCCURRING RADIOACTIVE MATERIALS, OR HAZARDOUS
SUBSTANCES; THAT ADVERSE PHYSICAL CONDITIONS, INCLUDING
SUBSURFACE CONDITIONS MAY EXIST; AND UNKNOWN ABANDONED OIL AND
GAS WELLS, WATER WELLS, SUMPS AND PIPELINES MAY BE PRESENT,
ALL OF WHICH MAY NOT HAVE BEEN REVEALED BY BUYER'S
INVESTIGATION.
10.5 ASSUMPTION OF OBLIGATIONS.
(a) ASSIGNMENT OF THE INTERESTS TO BUYER SHALL CONSTITUTE
AN EXPRESS ASSUMPTION BY BUYER OF, AND BUYER
EXPRESSLYAGREES TO PAY, PERFORM, FULFILL AND
DISCHARGE, ALL CLAIMS, COSTS, EXPENSES, LIABILITIES
AND OBLIGATIONSACCRUING OR RELATING TO THE OWNING,
DEVELOPING, EXPLORING, OPERATING AND MAINTAINING OF
THE INTERESTSCONVEYED TO BUYER AT THE CLOSING,
INCLUDING WITHOUT LIMITATION, ALL VIOLATIONS OF
ENVIRONMENTAL LAW AND ALL OBLIGATIONS ARISING UNDER
OPERATING AGREEMENTS, PRODUCT SALES AGREEMENTS AND
OTHER AGREEMENTS COVERING OR RELATING TO THE
INTERESTS, REGARDLESS OF THE NEGLIGENCE OF SELLER OR
ITS PREDECESSORS, AND REGARDLESS OF WHEN THE EVENTS
OCCURRED GIVING RISE TO SUCH MATTERS
(b) BUYER ACKNOWLEDGES THAT SELLER HAS NOT MADE, AND
SELLER HEREBY EXPRESSLY DISCLAIMS AND NEGATES, ANY
REPRESENTATIONOR WARRANTY, EXPRESS OR IMPLIED,
RELATING TO THE CONDITION OF ANY REAL OR IMMOVABLE
PROPERTY, PERSONAL OR MOVABLE PROPERTY, EQUIPMENT,
INVENTORY, MACHINERY AND FIXTURES CONSTITUTING PART
OF THE ASSETS INCLUDING, WITHOUT LIMITATION, (i) ANY
IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, (ii)
ANY IMPLIEDOR EXPRESS WARRANTY OF FITNESS FOR A
PARTICULAR PURPOSE, (iii) ANY IMPLIED OR EXPRESS
WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF
MATERIALS, (iv) ANY RIGHTS OF BUYER UNDER APPROPRIATE
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STATUTES TO CLAIM DIMINUTION OF CONSIDERATION OR
RETURN OF THE PURCHASE PRICE, (v) ANY IMPLIED OR
EXPRESS WARRANTY OF FREEDOM FROM REEHIBITORY VICES OR
DEFECTS OR OTHER VICES OR DEFECTS, WHETHER KNOWN OR
UNKNOWN, (vi)ANY IMPLIED OR EXPRESS WARRANTY OF
FREEDOM FROM PATENT OR TRADEMARK INFRINGEMENT, (vii)
ANY IMPLIED OR EXPRESSWARRANTY REGARDING
ENVIRONMENTAL LAWS, THE RELEASE OF MATERIALS INTO THE
ENVIRONMENT INCLUDING NATURALLYOCCURRING RADIOACTIVE
MATERIAL, OR PROTECTION OF THE ENVIRONMENT OR HEALTH,
IT BEING THE EXPRESS INTENTIONOF BUYER AND SELLER
THAT THE REAL OR IMMOVABLE PROPERTY, PERSONAL OR
MOVABLE PROPERTY, EQUIPMENT, INVENTOR, MACHINERY AND
FIXTURES SHALL BE CONVEYED TO BUYER AS IS AND IN
THEIR PRESENT CONDITION AND STATE OFREPAIR. BUYER
REPRESENTS TO SELLER THAT BUYER HAS MADE OR CAUSED TO
BE MADE SUCH INSPECTIONS WITH RESPECTTO THE REAL OR
IMMOVABLE PROPERTY, PERSONAL OR MOVABLE PROPERTY,
EQUIPMENT, INVENTORY, MACHINERY AND FIXTURES AS BUYER
DEEMS APPROPRIATE AND BUYER WILL ACCEPT THE REAL OR
IMMOVABLE PROPERTY, PERSONAL OR MOVABLEPROPERTY,
EQUIPMENT, INVENTORY, MACHINERY AND FIXTURES AS IS,
WHERE IS, IN THEIR PRESENT CONDITION AND STATE OF
REPAIR.
(c) SELLER HEREBY EXPRESSLY NEGATES AND DISCLAIMS, AND
BUYER HEREBY WAIVES AND ACKNOWLEDGES THAT SELLER HAS
NOT MAD, ANY REPRESENTATION OR WARRANTY, EXPRESS OR
IMPLIED, RELATING TO (i) THE ACCURACY, COMPLETENESS
OR MATERIALITYOF ANY INFORMATION, DATA OR OTHER
MATERIALS (WRITTEN OR ORAL) FURNISHED TO BUYER BY OR
ON BEHALF OF SELLER; (ii) PRODUCTION RATES,
RECOMPLETION OPPORTUNITIES, DECLINE RATES, GEOLOGICAL
OR GEOPHYSICALDATA OR INTERPRETATIONS, THE QUALITY,
QUANTITY, RECOVERABILITY OR COST OF RECOVERY OF ANY
HYDROCARBONRESERVES, ANY PRODUCT PRICING ASSUMPTIONS,
OR THE ABILITY TO SELL OR MARKET ANY HYDROCARBONS
AFTER CLOSING, OR (iii) ANY OTHER MATTER EXCEPT AS
EXPRESSLY SET FORTH IN THIS AGREEMENT.
(d) THE PARTIES AGREE THAT, TO THE EXTENT REQUIRED BY
APPLICABLE LAW TO BE OPERATIVE, THE DISCLAIMERS OF
WARRANTIES CONTAINED IN THIS SECTION ARE
"CONSPICUOUS" DISCLAIMERS FOR THE PURPOSES OF ANY
APPLICABLE LAW, RULEOR ORDER. Notwithstanding
anything in this Agreement to the contrary, the
Interests are being sold by Seller to Buyer without
recourse, covenant or warranty of any kind,
expressed, implied or statutory except as
specifically set forth in the documents of conveyance
described in Section 9.3.
(e) Buyer shall assume all obligations with respect to
all "suspense accounts" and the beneficial owners
thereof, regardless of when such obligations
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arose. Buyer shall indemnify, defend, and hold
harmless Seller from the claims of any party arising
because of the non-payment or mispayment of such
suspense accounts. Seller shall provide without
warranty or representation its records regarding
payee's names, addresses and applicable amounts.
10.6 INDEMNIFICATION. From and after the Closing Date, Buyer and
Seller shall indemnify the other as follows:
(a) Seller shall defend, indemnify and save and hold
harmless Buyer, its officers, directors, employees
and agents, against all losses, damages, claims,
demands, suits, costs, expenses, liabilities and
sanctions of every kind and character, including,
without limitation, reasonable attorneys' fees, court
costs and costs of investigation or arbitration, that
arise from or in connection with any breach by Seller
of this Agreement.
(b) Buyer shall defend, indemnify and save and hold
harmless Seller, its affiliates, and its and their,
officers, directors, employees, and agents, against
all losses, damages, claims, demands, suits, costs,
expenses, liabilities and sanctions of every kind and
character, including, without limitation, reasonable
attorneys' fees, court costs and costs of
investigation or arbitration, arise from or in
connection with (i) any of the claims, costs,
expenses, liabilities and obligations assumed by
Buyer pursuant to Section 10.5, and/or (ii) any
breach by Buyer of this Agreement.
(c) Seller, on the one hand, and Buyer, on the other,
shall indemnify and hold each other harmless from any
claim or demand for commission or other compensation
by any broker, finder, agent, or similar intermediary
claiming to have been employed by or on behalf of
Seller or Buyer, as the case may be, and shall bear
the cost of legal fees and expenses incurred in
defending against any such claim.
(d) As may otherwise be set forth in this Agreement.
10.7 RECORDING. Buyer shall immediately after Closing send for
filing and recording with all appropriate governmental
entities the necessary originals and counterparts of the
assignments required in Section 9.3(a). Buyer shall promptly
provide Seller copies of the recorded assignment(s) upon
receipt by Buyer. Buyer shall be responsible for all filings
with state, Indian and federal agencies for change of
operator, and shall promptly provide Buyer with the approved
copies of all such filings.
11 TERMINATION OF AGREEMENT
11.1 TERMINATION. This Agreement and the transactions contemplated
herein may be terminated in the following instances:
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(a) By Seller, if any of the conditions set forth in
Section 8.1 are not completely satisfied in all
material respects or waived by Seller as of the
Closing Date;
(b) By Buyer, if any of the conditions set forth in
Section 8.2 are not satisfied in all material
respects or waived by Buyer as of the Closing Date;
and
(c) At any time by the mutual written agreement of Buyer
and Seller.
11.2 LIABILITIES UPON TERMINATION OR BREACH.
(a) In the event of the termination of this Agreement by
Seller in accordance with subsection 11.1(a), Seller
shall have no liability hereunder of any nature
whatsoever to Buyer, including any liability for
damages. If Buyer terminates this Agreement in
accordance with subsection 11.1(b) above, it shall
have no liability hereunder of any nature whatsoever
to the Seller including any liability for damages and
Seller shall return to Buyer the Buyer Common Stock
delivered as part of the Earnest Money pursuant to
Exhibits "H" and "I" attached hereto. If Buyer
terminates or fails to perform this Agreement other
than in accordance with subsection 11.1(b), or, if
Seller terminates this Agreement in accordance with
subsection 11.1(a), Seller shall retain the Earnest
Money and Buyer shall have no further liability
hereunder of any nature whatsoever to the Seller
including any liability for damages.
(b) Except as provided above in this subsection 11.2,
nothing contained herein shall be construed to limit
Seller's or Buyer's legal or equitable remedies in
the event of breach of this Agreement.
12 MISCELLANEOUS
12.1 EXHIBITS. The Exhibits referred to in this Agreement are
hereby incorporated by reference into and constitute a part of
this Agreement.
12.2 RECORDING AND FILING FEES. Buyer shall pay all documentary,
filing, and recording fees required in connection with the
filing and recording of the Assignment required in Section
9.3(a), and all other filings required or requested under this
Agreement, including change of operator forms and other forms
filed with governmental agencies. Except as otherwise
specifically provided for in this Agreement, all fees, costs
and expenses incurred by Buyer or Seller in negotiating this
Agreement or in consummating the transactions contemplated by
this Agreement shall be paid by the party incurring the same,
including, without limitation, legal, accounting and
consulting fees, costs and expenses.
12.3 SALES TAXES. At the Closing, Buyer and Seller may agree on an
amount representing state and local sales or use taxes,
attributable to the transactions
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contemplated herein, and applicable to that portion of the
Interests which is tangible personal property and Buyer shall
pay such amount to Seller at Closing. Seller shall remit any
such amounts received at Closing from Buyer in this regard to
the appropriate taxing authority in accordance with applicable
law. Buyer shall defend, indemnify, save and hold harmless
Seller, its affiliates, and its and their, officers,
directors, employees, and agents against all losses, damages,
claims, demands, costs, expenses, liabilities, and sanctions
of each and every character, including without limitation,
reasonable attorneys' fees, court costs, and costs of
investigation or arbitration, that arise from or in connection
with any sales or use tax assessed against Seller by any
taxing authority for any sales or use of taxes assessed
against Seller by any taxing authority relating to the
Interests sold that is in addition to the amounts paid to
Seller at Closing. Seller shall be responsible for any
penalties, interest and attorney's fees relating to the amount
paid by Buyer to Seller at Closing if Seller does not timely
remit such amount to the appropriate taxing authority. Should
this purchase and sale constitute an isolated or occasional
sale and not be subject to sales or use tax with any of the
taxing authorities having any jurisdiction over the
transaction, no sales or tax will be collected by Seller from
Buyer at Closing. Seller shall cooperate with Buyer in
demonstrating that the requirements for an isolated or
occasional sale or any other sales tax exemption have been
met.
12.4 NOTICES. All notices and communications required or
transmitted under this Agreement shall be in writing and any
communication or delivery hereunder shall be deemed to have
been duly made when personally delivered to the individual
indicated below, or if mailed, when received by the party
charged with such notice and addressed as follows:
IF TO SELLER: HSRTW, INC.
c/o HS Resources, Inc.
1999 Broadway, Suite 3600
Denver, CO 80202
Attention: George H. Solich
Vice President, Acquisitions & Divestitures
WITH A COPY TO:
General Counsel
1999 Broadway, Suite 3600
Denver, CO 80202
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IF TO BUYER: GOTHIC ENERGY CORPORATION
Suite 700
5727 South Lewis Avenue
Tulsa, OK 74105-7148
Attention: Michael Paulk
President
Any party may, by written notice so delivered to the other
party, change the address or individual to which delivery
shall thereafter be made.
12.5 AMENDMENTS. This Agreement may not be amended nor any rights
hereunder waived, except by an instrument in writing signed by
both parties.
12.6 ASSIGNMENT. Neither party may assign all or any portion of
its rights or delegate all or any portion of its duties
hereunder unless it continues to remain liable for the
performance of its obligations hereunder and obtains the prior
written consent of the other party, which consent shall not be
unreasonably withheld. For any assignment of any right or
obligation hereunder to be enforceable, the assignee thereof
shall first have agreed to fully assume such right or
obligation in writing, and such writing shall expressly set
forth that said assignment is subject to the terms and
conditions of this Agreement. Any attempted assignment, which
fails to fully comply with the express terms of this
subsection 12.6 shall be void ab initio.
12.7 ANNOUNCEMENTS. Seller and Buyer shall consult with each other
with regard to all press releases and other announcements
issued after the date of this Agreement and prior to the
Closing Date concerning this Agreement or the transactions
contemplated hereby and, except as may be required by
applicable laws, rules and regulations of any governmental
agency or stock exchange, neither Buyer nor Seller shall issue
any such press release or other publicity without the prior
written consent of the other party, which consent shall not be
unreasonably withheld.
12.8 COUNTERPARTS. This Agreement may be executed by Buyer and
Seller in any number of counterparts, each of which shall be
deemed an original instrument, but all of which together shall
constitute but one and the same instrument.
12.9 GOVERNING LAW. This Agreement and the transactions
contemplated hereby shall be construed in accordance with, and
governed by, the laws of the state of Colorado.
12.10 ENTIRE AGREEMENT. This Agreement (including the Exhibits
hereto) constitutes the entire understanding among the parties
with respect to the subject matter hereof, superseding all
negotiations, prior discussions and prior agreements,
excluding the Confidentiality Agreement dated January 13,
1997, which shall terminate at and as of the Closing.
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12.11 PARTIES IN INTEREST. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto, and
their respective successors and permitted assigns, and nothing
contained in this Agreement, express or implied, is intended
to confer upon any other person or entity any benefits, rights
or remedies.
12.12 SURVIVAL. The representations of Seller set forth in
paragraph 3.1 and covenants of Seller set forth in paragraph
4.1 shall not survive Closing. Otherwise the representations,
warranties, covenants, agreements and indemnities provided for
in this Agreement shall survive Closing in accordance with
their terms. No waiver, release, or forbearance of the
application of a provision of this Agreement in any given
circumstance shall operate as a waiver, release, or
forbearance as to any other circumstance. If the Closing
occurs, all Conditions to Closing shall be deemed to have been
satisfied or waived, and, after Closing, neither party shall
have any liability whatsoever to the other arising out of,
resulting from or attributable to any such Conditions to
Closing, regardless of whether such Conditions to Closing
were, in fact, satisfied or waived.
12.13 ARBITRATION.
(a) All disputes arising out of or in connection with
this Agreement, or any determination required to be
made by Buyer or Seller as to which the parties
disagree, shall be settled by arbitration in Denver,
Colorado. The arbitration shall be conducted in
accordance with the commercial arbitration rules of
the American Arbitration Association. Any award by
the arbitrator(s) shall be final, binding and not
appealable, and judgment may be entered thereon in
any court of competent jurisdiction.
12.14 ACTUAL KNOWLEDGE. The term "actual knowledge of the Seller,"
or any similar phrase, shall mean the actual present knowledge of Seller's
officers and Managers who are directly involved in the negotiation of this
Agreement.
Executed as of the date first above mentioned.
SELLER:
HSRTW, INC.
--------------------------------------
By: George H. Solich
Title: Vice President, Acquisitions &
Divestitures
28
<PAGE> 30
HORIZON GAS PARTNERS, L.P.
BY: HORIZON NATURAL RESOURCES, INC.
GENERAL PARTNER
-----------------------------------
By: R. Shannon Hall
Title: Vice-President
BUYER:
GOTHIC ENERGY CORPORATION
-----------------------------------
By: Michael Paulk
Title: President
29
<PAGE> 1
EXHIBIT 10.44
AMENDMENT TO PURCHASE AND SALE AGREEMENT
This Amendment to Purchase and Sale Agreement ("Amendment") is dated
this 16th day of July, 1997, and is among HSRTW, Inc., a Delaware corporation,
with an office address of 1999 Broadway, Suite 3600, Denver, Colorado 80202 and
Horizon Gas Partners, L.P., a Delaware limited partnership with an office
address of 2512-C East 71st Street, Tulsa, Oklahoma 74136-5575 (collectively
"Seller") and Gothic Energy Corporation, an Oklahoma corporation with an office
address of 5727 South Lewis Avenue, Suite 700, Tulsa, Oklahoma 74105-7148
("Buyer").
Seller and Buyer have entered into a Purchase and Sale Agreement date
June 30, 1997 (the "Agreement") covering certain Interests (as defined in the
Agreement). The parties wish to amend the Agreement as set forth below.
Unless specifically defined in this Amendment, capitalized terms shall have the
meaning set forth in the Agreement.
In consideration of the mutual promises set forth below, and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. The first sentence of Section 5.2(b) shall be amended to read
as follows:
Buyer shall give Seller written notice of Title Defects
immediately upon discovering such Title Defects, but in
no event after August 15, 1997.
2. Seller shall provide Exhibits A-2, B, C, D, and E to Buyer on
or before August 15, 1997.
3. Except as set forth in this Amendment, the terms of the
Agreement remain unchanged and in full force and effect.
SELLER:
HSRTW, INC.
------------------------------------
By: George H. Solich
Title: Vice President, Acquisitions
& Divestitures
<PAGE> 2
HORIZON GAS PARTNERS, L.P.
BY: HORIZON NATURAL RESOURCES, INC.
GENERAL PARTNER
------------------------------------
By: R. Shannon Hall
Title: Vice-President
BUYER:
GOTHIC ENERGY CORPORATION
------------------------------------
By: Michael Paulk
Title: President
2
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,578,941
<SECURITIES> 0
<RECEIVABLES> 37,716,200
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<CURRENT-ASSETS> 67,756,168
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<TOTAL-ASSETS> 722,944,419
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0
0
<COMMON> 17,139
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<EXTRAORDINARY> 0
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<NET-INCOME> 5,528,117
<EPS-PRIMARY> .32
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</TABLE>
