<PAGE>
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 September 30, 1998
--------------------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission file number 0-18886
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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 October 31, 1998: 18,596,319 after deducting 525,051 shares in
treasury.
<PAGE>
HS RESOURCES, INC.
INDEX
-----
<TABLE>
<CAPTION>
<S> <C>
Page
----
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets - September 30, 1998 (Unaudited)
and December 31, 1997............................................3
Unaudited Consolidated Statements of Operations - For the Three
Months and Nine Months Ended September 30, 1998 and 1997.........5
Consolidated Statements of Stockholders' Equity - For
the Years Ended December 31, 1997 and 1996 and the Nine
Months Ended September 30, 1998 (Unaudited)......................6
Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 1998 and 1997............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 & Environmental Issues........................25
Item 2. Changes in Securities...........................................26
Item 3. Defaults Upon Senior Securities.................................26
Item 4. Submission of Matters to a Vote of Security Holders.............26
Item 5. Other Information...............................................26
Item 6. Exhibits and Reports on Form 8-K................................27
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
HS RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
September 30, December 31,
1998 1997
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,812,672 $ 6,907,708
Margin deposits 801,323 3,996
Accounts receivable
Oil and gas sales 18,961,837 23,052,931
Trading and transportation 10,262,484 14,366,469
Trade 5,321,860 3,579,327
Other 7,256,417 4,711,805
Lease and well equipment inventory, at cost 608,866 1,424,301
Prepaid expenses and other 1,197,471 1,341,997
- ----------------------------------------------------------------------------------------------------------------------------
Total current assets 51,222,930 55,388,534
- ----------------------------------------------------------------------------------------------------------------------------
OIL AND GAS PROPERTIES, AT COST, USING THE FULL COST METHOD
Undeveloped acreage 188,010,333 189,064,119
Costs subject to depreciation, depletion and amortization 843,119,286 951,678,001
Less accumulated depreciation, depletion and amortization (233,456,221) (181,205,919)
- ----------------------------------------------------------------------------------------------------------------------------
Net oil and gas properties 797,673,398 959,536,201
- ----------------------------------------------------------------------------------------------------------------------------
GAS GATHERING AND TRANSPORTATION FACILITIES,
at cost, net of accumulated depreciation of $1,542,927 and
$1,322,382 at September 30, 1998 and December 31, 1997, respectively 4,348,193 4,540,806
- ----------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Deferred charges and other, net 8,816,329 10,254,796
Office and transportation equipment and other property, net of
accumulated depreciation of $5,534,986 and $5,083,746 at
September 30, 1998 and December 31, 1997, respectively 3,025,561 4,735,106
Notes receivable from officers for exercise of stock options (Note 8) 2,203,400 --
Investment in oil and gas limited partnership -- 860,288
- ----------------------------------------------------------------------------------------------------------------------------
Total other assets 14,045,290 15,850,190
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 867,289,811 $ 1,035,315,731
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
HS RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
September 30, December 31,
1998 1997
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
Trade $ 19,810,782 $ 18,888,306
Revenue 18,499,197 17,460,848
Gas purchases 4,814,197 7,854,715
Accrued expenses
Ad valorem and production taxes 11,061,415 8,432,221
Interest 12,462,581 3,691,983
Other 6,814,928 7,359,030
Income taxes payable 8,304,000 ---
Oil and gas production note payable 734,696 ---
Current portion of long-term debt 30,000 30,000
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 82,531,796 63,717,103
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ACCRUED AD VALOREM TAXES 11,204,232 10,606,402
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DEFERRED REVENUE 5,493,934 9,872,870
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LONG-TERM OIL AND GAS PRODUCTION NOTE PAYABLE --- 734,696
- ---------------------------------------------------------------------------------------------------------------------
LONG-TERM BANK DEBT, NET OF CURRENT PORTION 293,000,000 412,000,000
- ---------------------------------------------------------------------------------------------------------------------
9 7/8% SENIOR SUBORDINATED NOTES,
due 2003, net of unamortized discount of $302,250 and
$346,125 at September 30, 1998 and December 31, 1997,
respectively 74,697,750 74,653,875
- ---------------------------------------------------------------------------------------------------------------------
9 1/4% SENIOR SUBORDINATED NOTES,
due 2006, net of unamortized discount of $631,312 and
$689,587 at September 30, 1998 and December 31, 1997,
respectively 149,368,688 149,310,413
- ---------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 60,944,299 90,798,036
- ---------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
- ---------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock --- ---
Common stock, $.001 par value, 50,000,000 shares
authorized; 19,121,370 and 18,654,545 shares issued and
outstanding at September 30, 1998 and December 31, 1997,
respectively 19,121 18,655
Additional paid-in capital 188,150,885 183,191,380
Retained earnings 9,440,000 42,773,142
Deferred compensation (1,800,615) (144,300)
Treasury stock, at cost, 525,051 and 160,358 shares at
September 30, 1998 and December 31, 1997, respectively (5,760,279) (2,216,541)
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 190,049,112 223,622,336
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 867,289,811 $ 1,035,315,731
- ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
HS RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------- -----------------------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Oil and gas sales $ 32,886,639 $ 31,656,583 $ 116,598,918 $ 97,778,112
Trading and transportation 13,831,014 16,575,475 41,297,363 64,361,081
Other gas revenues 2,068,422 1,017,017 6,213,597 3,206,264
Interest income and other 504,203 271,372 1,147,179 893,865
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 49,290,278 49,520,447 165,257,057 166,239,322
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Production taxes 2,068,382 2,059,599 7,825,088 6,893,339
Lease operating 7,798,458 5,901,703 23,112,543 18,272,587
Cost of trading and transportation 12,549,802 16,504,842 38,910,181 63,365,047
Depreciation, depletion and amortization 17,172,608 13,120,515 53,707,357 38,436,058
Impairment of oil and gas properties
(Note 9) -- -- 59,000,000 --
General and administrative 1,995,934 1,841,004 5,679,193 4,872,430
Interest 10,035,599 7,568,278 30,872,682 22,944,633
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 51,620,783 46,995,941 219,107,044 154,784,094
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES (2,330,505) 2,524,506 (53,849,987) 11,455,228
PROVISION (BENEFIT) FOR INCOME TAXES (887,922) 961,837 (20,516,845) 4,364,442
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (1,442,583) $ 1,562,669 $ (33,333,142) $ 7,090,786
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE $ (0.08) $ 0.09 $ (1.79) $ 0.42
- ------------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE $ (0.08) $ 0.09 $ (1.78) $ 0.40
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 18,796,000 16,978,000 18,619,000 16,991,000
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
ASSUMING DILUTION 18,818,000 17,561,000 18,706,000 17,520,000
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
HS RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998
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, 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 Merger 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 --- --- --- --- --- (101,247) (1,398,669)
Transfer of treasury stock to
401(k) Plan --- --- (68,011) --- --- 35,894 485,287
Issuance of common stock for
Amoco Acquisition 1,200,000 1,200 19,998,800 --- --- --- ---
Exercise of options by issuance
of treasury stock, including
income tax benefit --- --- (34,355) --- --- 26,947 367,375
Issuance of restricted stock 2,500 3 44,997 --- (45,000) --- ---
Amortization of deferred
compensation --- --- --- --- 72,000 --- ---
Exercise of stock options,
including income tax benefit 12,203 12 135,393 --- --- --- ---
Exercise of warrants and options 311,981 312 (312) --- --- --- ---
Net income --- --- --- 11,339,743 --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 18,654,545 18,655 183,191,380 42,773,142 (144,300) (160,358) (2,216,541)
Purchase of treasury stock --- --- --- --- --- (445,788) (4,668,570)
Transfer of treasury stock
to 401(k) Plan --- --- 7,419 --- --- 39,046 541,568
Exercise of options by issuance
of treasury stock, including
income tax benefit --- --- (115,247) --- --- 42,049 583,264
Issuance of restricted stock 23,570 24 332,508 --- (332,532) --- ---
Issuance of performance shares 106,234 106 1,533,913 --- (1,534,019) --- ---
Exercise of stock options,
including income tax benefit 337,021 336 3,200,912 --- --- --- ---
Amortization of deferred
compensation --- --- --- --- 210,236 --- ---
Net income (loss) --- --- --- (33,333,142) --- --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 (Unaudited) 19,121,370 $ 19,121 $188,150,885 $ 9,440,000 $(1,800,615) (525,051) $(5,760,279)
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
HS RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
September 30,
-------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (33,333,142) $ 7,090,786
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 53,707,357 38,436,058
Impairment of oil and gas properties 59,000,000 ---
Amortization of deferred charges, debt issue costs
and deferred compensation 1,848,398 1,369,616
Transfer of treasury stock to the 401(k) Plan 548,987 417,276
Gain on sale of fixed assets (239,349) ---
Deferred income tax provision (benefit) (20,652,894) 4,280,950
Decrease in accounts and notes receivable 3,907,934 8,454,496
Increase in accounts payable and accrued expenses 3,740,815 5,341,429
Decrease in deferred revenue, net (4,378,936) ---
Other 26,434 364,996
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 64,175,604 65,755,607
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Exploration, development and leasehold costs (96,438,074) (54,744,725)
Purchase of proved and unproved properties (4,636,960) ---
Gas gathering and transportation facilities additions (27,932) (121,222)
Other property additions (519,063) (1,241,022)
Proceeds from the sale of oil and gas properties 152,524,727 33,984,212
Proceeds from the sale of fixed assets 1,231,447 ---
Increase in property related payables 6,633,012 3,344,941
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 58,767,157 (18,777,816)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt 55,000,000 29,000,000
Repayments of debt (174,000,000) (79,000,000)
Debt and equity issuance costs --- (438,048)
Exercise of options 468,338 223,228
Purchase of treasury stock (4,506,135) (1,157,935)
Minority interest, net --- 9,825
- --------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (123,037,797) (51,362,930)
- --------------------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (95,036) (4,385,139)
Cash and cash equivalents, beginning of the period 6,907,708 8,764,756
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the period $ 6,812,672 $ 4,379,617
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid, net of capitalized interest $ 20,236,284 $ 16,373,468
Cash paid for income taxes, net of refund $ 611,758 $ (413,076)
- --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
7
<PAGE>
HS RESOURCES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. General
HS Resources, Inc., a Delaware corporation (the "Company" or "HSR") was
organized in January 1987. The Company, directly or through subsidiaries,
acquires, develops and exploits oil and gas properties. The Company, through its
wholly owned subsidiary, HS Energy Services, Inc. ("HSES"), markets its own gas
production, markets gas owned by third parties and actively trades both physical
and financial positions in the gas commodities market. 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
September 30, 1998, 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,
1997 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" (for company-owned production) 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.
EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings Per Share." This statement provides computation,
presentation and disclosure requirements for earnings per share ("EPS"). The new
standard was adopted by the Company for the fiscal year ended 1997 and all prior
periods have been retroactively adjusted. The following table presents a
reconciliation of basic and diluted earnings per share calculations (in
thousands, except per share amounts):
8
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------------------------
(Unaudited)
1998 1997
-------------------------------- -------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
-------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income (loss) applicable to
common shares* $ (33,333) 18,619 $ (1.79) $ 7,091 16,991 $ 0.42
-------------------------------- -------------------------------
EFFECT OF DILUTIVE SECURITIES
Equivalent common shares
from stock options -- 87 -- -- 529 --
-------------------------------- -------------------------------
DILUTED EPS
Net income (loss) applicable to
common shares $ (33,333) 18,706 $ (1.78) $ 7,091 17,520 $ 0.40
================================ ===============================
</TABLE>
* 1998 net income includes a non-cash charge of $36.5 million, net of taxes, for
impairment of oil and gas properties
Note 3. Pro forma Statements
The following table sets forth condensed unaudited pro forma operating results
of the Company for the nine months ended September 30, 1998 and 1997 (in
thousands, except per share amounts). The condensed pro forma operating results
assume that the acquisition of all of Amoco Production Company's D-J Basin
properties (the "Amoco Acquisition") and the divestiture of the Company's Mid-
Continent oil and gas subsidiary, HSRTW, Inc., to Universal Resources Corp.,
occurred on January 1, 1997. The condensed pro forma results are not necessarily
indicative of the results of operations had the acquisition and the divestiture
been consummated on January 1, 1997, and may not necessarily be indicative of
future performance.
Nine Months Ended September 30,
----------------------------------
(Unaudited)
1998 1997
------------ -----------
Revenues $ 142,837 $ 181,751
Net income (loss)* $ (32,876) $ 6,922
Basic earnings (loss) per share $ (1.77) $ 0.37
Diluted earnings (loss) per share $ (1.76) $ 0.37
Weighted average common shares
outstanding 18,619,000 18,667,000
Weighted average number of
common shares outstanding
assuming dilution 18,706,000 18,727,000
* 1998 net income includes a non-cash charge of $36.5 million, net of taxes, for
impairment of oil and gas properties
9
<PAGE>
Note 4. Issuance of Performance Shares
In May 1998, the Company's stockholders approved the Amended and Restated 1997
Performance and Equity Incentive Plan (the "Plan"). The Plan allows for the
issuance of performance shares to employees, officers and directors. Accelerated
vesting of such shares is dependent on the attainment by the Company of defined
performance goals. These shares can vest over nine years with vesting to occur
no earlier than one-fourth of the shares in each of the first four years. The
Company has issued 106,234 performance shares as of September 30, 1998. In
connection with this issuance, the Company recorded deferred compensation of
$1.5 million which is being amortized based on management's evaluation regarding
the attainment of the defined performance goals.
Note 5. Outstanding Shares
In May 1998, the Company's stockholders also approved an increase in the number
of authorized shares of the Company's Common Stock, from 30 million to 50
million.
Note 6. Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This statement is effective for fiscal
years beginning after June 15, 1999 and establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
The Company has not yet quantified the impacts of adopting SFAS 133 on its
financial statements and has not determined the timing of or method of adoption.
However, SFAS 133 could increase volatility in earnings and other comprehensive
income.
Note 7. 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 were fully and
unconditionally guaranteed, jointly and severally, on an unsecured, senior
subordinated basis by two of the Company's subsidiaries, Orion Acquisition, Inc.
("Orion") and HSRTW, Inc. (the "Subsidiary Guarantors"). Because of the issuance
of the guarantees in connection with the Notes due 2006, the Company was
required to and issued similar guarantees from the Subsidiary Guarantors to the
trustee under that indenture for the Company's 9 7/8% senior subordinated notes
due 2003.
10
<PAGE>
Effective May 1, 1998, Orion was merged into HSR with HSR remaining as the
surviving corporation. As a result of this merger the foregoing guarantees of
Orion terminated on May 1, 1998. On July 27, 1998, the Company entered into an
agreement to sell all of the stock of HSRTW, Inc. to a third party. The closing
occurred on September 1, 1998, at which time the guarantees of HSRTW, Inc. with
respect to these two series of notes were released.
Note 8. Related Party Transactions
In June 1998, in connection with the exercise of stock options, certain officers
of the Company issued to the Company full recourse notes in the amount of $2.1
million. The notes and accrued interest are due and payable to the Company on or
before June 1, 2000. The interest rate on these notes is Prime plus 0.25% per
annum.
Note 9. Impairment of Oil and Gas Properties
The Company employs the full cost method of accounting which requires a write
down of its full cost pool if net capitalized costs of oil and gas properties
less related deferred income taxes, exceed the present value of future net
revenues (using current pricing and discounted at 10%) plus the estimated fair
market value of unproved properties. In the second quarter of 1998 the Company
recorded a non-cash write down of $59 million pretax ($36.5 million after tax).
The write down was attributable to the deterioration of commodity prices,
primarily oil prices.
Note 10. Sale of HSRTW, Inc.
On July 28, 1998 the Company announced the sale of its Mid-Continent oil and gas
subsidiary, HSRTW, Inc., to Universal Resources Corp., a subsidiary of Questar
Corp., for $157.5 million in cash. HSRTW, Inc. owns interests in approximately
one thousand wells located in the Anadarko and Arkoma basins of Oklahoma and in
Texas, with approximately 32 MMBoe of proved reserves as of year-end 1997. The
transaction closed and was effective on September 1, 1998, with net proceeds
applied to the repayment of bank debt. The Company retained its ownership of
HSES, its Tulsa-based gas trading and marketing subsidiary.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL The Company has been pursuing a strategy involving consolidation in the
D-J Basin, coupled with continued exploitation and exploration in all of its
core areas using a technology-oriented approach designed to reduce risk and
maximize efficiencies. The Company's success in consolidating in the D-J Basin
culminated in the December 1997 acquisition of all of Amoco Production Company's
D-J Basin properties. This transaction has also helped reshape the Company's
strategic direction, including in particular, the sale of its wholly-owned
subsidiary, HSRTW, Inc. to Universal Resources Corp., a subsidiary of Questar
Corp., for $157.5 million ("Mid-Continent Sale"). HSRTW, Inc. held most of the
Company's Mid-Continent assets. That sale closed on September 1, 1998.
The Amoco Acquisition, in combination with the Company's recent exploration
successes in the D-J Basin and the Gulf Coast, have materially increased the
number of low-risk, high-return projects available to the Company. At the same
time, the Amoco Acquisition required the Company to borrow funds, which
increased its leverage ratios significantly. In order to pursue these
opportunities, while at the same time moderating potential interest rate and
commodity price risk resulting from its higher debt levels, the Company sold the
majority of its Mid-Continent asset base, utilizing the proceeds from the sale
to pay down debt under its senior credit facility. See "Liquidity and Capital
Resources -- Financing Sources."
As a result of the closing of the Mid-Continent Sale, the Company now operates
primarily in three core areas: the D-J Basin, the Gulf Coast and the Northern
Rockies. However, the Company will continue to pursue certain technology-
oriented exploration projects and possibly other activities in other regions,
including the Mid-Continent. The Company will also continue its strategically
important and profitable presence in the gas marketing, trading and
transportation business through its subsidiary, HSES. HSES provides
opportunities for the Company to enhance its operating margins on production
from each of its producing areas. The Company estimates that the impact to
production as a result of the Amoco Acquisition, the success of the Company's
activity in the D-J Basin and the sale of the Mid-Continent properties is a net
increase on a quarterly basis of 700,000 Boe.
In its June 30, 1998 Report on Form 10-Q, the Company reported two other
significant items. Due to certain regulatory changes implemented by the Colorado
Oil and Gas Commission and the Company's success in refracing and other
exploitation activities, the Company announced the booking of additional proved
reserves of approximately 29 million barrels of oil equivalent ("MMBoe"). At the
same time, due to the application of accounting rules required by the Securities
and Exchange Commission, the Company recognized a non-cash write down of the
carrying value of its oil and gas properties of approximately $59 million pretax
($36.5 million after tax). This results from the Company's employment of the
full cost method of accounting which requires a periodic comparison of
discounted asset value to recorded capital costs utilizing unescalated current
commodity prices. See "Results of Operations--Impairment of Oil and Gas
Properties." Due primarily to low oil prices, and to a lesser extent relatively
lower gas prices, the Company was required to recognize this impairment in the
second quarter of 1998. Given the relatively strong market for future gas
prices, the Company believes that there has not in fact been a reduction in the
underlying value of its assets.
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OIL AND GAS PRICES 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. In recent
years several factors had a positive effect on production economics in the
Company's core geographic areas. These include (i) 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 the expansion of pipeline capacity to transport gas to
markets outside the Colorado Front Range and (iv) successful application of
advanced oil and gas exploration, drilling and production technologies.
However, uncertainty concerning the price of oil and gas remains a dominant and
unpredictable factor in the Company's profitability. Further, as previously
discussed, application of accounting rules during a period of low commodity
prices may result in a required non-cash charge in order to write down the
carrying value of the Company's oil and gas properties.
GAS PRICE CONSIDERATIONS At January 1, 1998, approximately 81% of the Company's
proved producing reserves consisted of gas, of which 63% were located in the D-J
Basin. Following the Mid-Continent Sale, 80% of the Company's proved producing
reserves are gas, of which 79% are located in the D-J Basin. The absolute level
and volatility of gas prices, particularly in the D-J Basin, have a material
impact on the Company. Historically, the price of D-J Basin gas (on a Btu-
equivalent basis) has been linked closely to the Colorado Interstate Gas Company
("CIG") pipeline Rocky Mountain Index. More recently, however, as a result of
increased pipeline capacity in the D-J Basin, a transportation cost advantage
for deliveries into the Public Service Company of Colorado ("PSCO") front range
market, and seasonal fluctuations, during the low demand summer months
(generally April through October) the price for D-J Basin gas tends to reflect
the CIG Rocky Mountain Index, whereas during the high demand winter periods
(generally November through March) the price more closely tracks Mid-Continent
indices.
In recent months two applications have been approved to build pipelines between
the Colorado Front Range market area and Wyoming. A subsidiary of K N Energy,
Inc. has been granted authority to build a 250 MMcfd capacity pipeline. PSCO and
CIG, through a jointly owned affiliate, recently began operating a newly
expanded 270 MMcfd capacity line. This line operates independently, not as part
of PSCO's local distribution system. Construction has not commenced on the KN
line. The PSCO line will eliminate some portion of the advantage the Company
currently has over Wyoming producers for direct sales in the Colorado Front
Range market, as they increase the amount of Wyoming gas that could be
transported to the Colorado Front Range market. However, the availability of one
or both of these lines also expands the amount of gas that could be exported
from the D-J Basin to Mid-Continent and West Coast markets through Wyoming
pipeline interconnections. The Company cannot currently predict what the
ultimate effect on the price of the Company's D-J Basin gas will be as a result
of the construction of these pipelines. However, given the narrowing of the
spread between CIG and Mid-Continent indices, the Company does not anticipate
any material adverse changes to D-J Basin gas prices as a result of the new
pipelines.
In recent months, gas prices nationwide have been relatively low due to large
inventories and modest demand. The Company believes this weakness in gas prices
is a normal seasonal
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variation and does not necessarily indicate significant long-term change in
overall average gas pricing. However, the Company is unable to predict the
future trends in gas prices.
RESULTS OF OPERATIONS During the third quarter of 1998, the Company increased
its drilling and development activities to exploit the larger number of
development opportunities in the D-J Basin as a result of the Amoco Acquisition.
The Company also continued its exploitation and exploration activities in the
Gulf Coast region. At September 30, 1998, after giving effect to the Mid-
Continent Sale, the Company owned interests in approximately 4,400 producing
wells (of which it operated more than 2,880) compared to more than 3,410 wells
(of which it operated more than 2,580) at September 30, 1997. The Company's
results of operations have been significantly affected by the Amoco Acquisition,
by its drilling program and by fluctuations in oil and gas prices. Future
results will be significantly affected by the Company's exploration,
exploitation and development activities. The Mid-Continent Sale, which closed on
September 1, 1998, reduced the Company's well inventory by over 1,000 producing
(approximately 450 operated) wells.
COMPARISON OF THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
OIL AND GAS REVENUES For the comparative three month periods, oil production
increased from 619 MBbl to 653 MBbl and gas production increased from 10,276
MMcf to 14,378 MMcf, or 6% and 40%, respectively. Average realized oil prices
decreased by 32% from $19.14 to $13.07 per Bbl and average realized gas prices
decreased by 12% from $1.93 to $1.69 per Mcf. The production increases were
primarily the result of additional production from the properties acquired in
the Amoco Acquisition and the success of the Company's ongoing exploitation and
development activities. The net effect of these changes resulted in an increase
in oil and gas revenues from $31.7 million to $32.9 million, or 4%. For the
three months ended September 30, 1998 the Company also recognized $2.1 million
in other gas revenues from the sale of tax credits compared to $1.0 million for
the comparative 1997 period.
For the comparative nine month periods, oil production increased from 1,785 MBbl
to 2,043 MBbl and gas production increased from 30,307 MMcf to 43,966 MMcf, or
14% and 45%, respectively. Average realized oil prices decreased by 25% from
$19.94 to $14.92 per Bbl and average realized gas prices decreased by 4% from
$2.05 to $1.96 per Mcf. The production increases were primarily the result of
additional production from the properties acquired in the Amoco Acquisition and
the success of the Company's ongoing exploitation and development activities.
The net effect of these changes resulted in an increase in oil and gas revenues
from $97.8 million to $116.6 million, or 19%. For the nine months ended
September 30, 1998 the Company also recognized $6.2 million in other gas
revenues from the sale of tax credits compared to $3.2 million for the
comparative 1997 period.
Through its wholly owned subsidiary HSES, the Company markets its own gas
production as well as that of third parties. A portion of this gas is sold
directly to end users, while other
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amounts are used as the equity-gas foundation for a physical trading business in
which gas volumes may be traded several times at different receipt and delivery
points in order to capture the greatest margin possible. Trading and
transportation net margins were $1.3 million for the three months ended
September 30, 1998 compared to $70,633 for the comparative prior year period and
$2.4 million for the nine months ended September 30, 1998 compared to $1.0
million for the comparative prior year period.
PRODUCTION EXPENSES Lease operating expense ("LOE") increased by $1.9 million,
or 32%, for the three-month comparative periods and by $4.8 million, or 26% for
the nine-month comparative periods due to a net increase in the number of
producing wells. On a per Boe basis, LOE increased from $2.53 to $2.56 for the
three-month comparative periods due to an increase in workover costs in the
current quarter. LOE decreased for the nine-month comparative periods from $2.67
to $2.47 due to increased efficiencies in combining the assets acquired in the
Amoco Acquisition with the Company's previously existing asset base. Production
taxes remained flat for the three-month comparative periods and increased by
$0.9 million, or 14%, for the nine-month comparative periods, due to increased
production which was offset by decreased prices.
DEPRECIATION, DEPLETION AND AMORTIZATION Depreciation, depletion and
amortization ("DD&A"), a non-cash expense, increased $4.1 million, or 31% for
the three-month comparative periods and by $15.3 million, or 40%, for the nine-
month comparative periods, due to an increase in production and an increase in
the DD&A rate in the third quarter. The Company decreased its DD&A rate in the
second quarter of 1998 to reflect (i) an increase in reserves in the D-J Basin
as a result of the new field-wide spacing rule approved by the Colorado Oil and
Gas Conservation Commission on April 29, 1998 and (ii) the full cost ceiling
test write down of $59 million (discussed below). In the third quarter of 1998
the Company increased its DD&A rate as a result of the Mid-Continent Sale. For
the nine months ended September 30, 1998, the Company had a weighted average
depletion rate of $5.58 per Boe compared to $5.41 per Boe for the nine months
ended September 30, 1997. The Company annually adjusts its DD&A rate based on
year end engineering and, if material changes in its reserves warrant, on an
interim basis.
IMPAIRMENT OF OIL AND GAS PROPERTIES The Company employs the full cost method of
accounting which requires a write down of its full cost pool if net capitalized
costs of oil and gas properties, less related deferred income taxes, exceed the
present value of future net revenues (using current pricing and discounted at
10%) plus the estimated fair market value of unproved properties. In the second
quarter of 1998 the Company recorded a non-cash ceiling test write down of $59
million pretax ($36.5 million after tax). Should oil and gas prices decline
further, the Company could be required to record additional write downs.
GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense ("G&A")
reflects costs incurred, net of administrative costs directly attributable to
drilling and well operations (which costs are included in LOE or are
capitalized). G&A expenses increased by $0.2 million, or 8% for the three-month
comparative periods and by $0.8 million, or 17%, for the nine-month comparative
periods. On a per Boe basis, G&A expenses decreased from $0.79 to $0.65 for the
three-month comparative periods and from $0.71 to $0.61 for the nine-month
comparative periods. The decrease for the nine-month comparative periods is due
to efficiencies gained from consolidating the Amoco properties and the timing of
hiring additional personnel to service these
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properties. The Company anticipates an increase in G&A expenses during 1998;
however, G&A per BOE rates should remain constant or be slightly lower than in
1997.
INTEREST EXPENSE Interest expense increased $2.5 million, or 33% for the three-
month comparative periods and by $7.9 million, or 35%, for the nine-month
comparative periods. The increase is due to the overall increase in long-term
debt attributable to amounts borrowed in December 1997 to fund the Amoco
Acquisition.
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 1998 and
1997. Due to significant intangible drilling costs, which are deductible for
income tax purposes, substantially all of the Company's 1997 tax provision is
deferred. Due to the Mid-Continent Sale, the Company recorded a current tax
provision of approximately $8.3 million in 1998.
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LIQUIDITY AND CAPITAL RESOURCES
Financing Sources
At September 30, 1998, the Company's overall debt level was significantly higher
than as of September 30, 1997 as a result of borrowings used to fund the Amoco
Acquisition. Although the Company's debt level was reduced following the closing
of the Mid-Continent Sale, the Company intends to continue pursuing financial
and other transactions to further improve its liquidity and financial
flexibility. The Company believes, however, that its current level of debt and
leverage is manageable under expected production and pricing levels, since its
debt is supported by stable, long-lived reserves and by the Company's hedging
programs, with short-term product prices partially hedged at favorable prices.
Cash flow from producing activities is sufficient to enable the Company to
service its debt for the forseeable future, absent any major and prolonged
period of significant price declines. The Company has a large number of low-
risk, potentially high-return exploitation projects which should enhance
production and cash flow per share. As part of an overall financing strategy,
the Company is considering a wide range of future financing alternatives and is
not committed to any particular course. In undertaking any future financing
transactions, the Company will seek to achieve the optimal capital structure
needed to support its long-term strategic objectives. Any such financings will
reflect market conditions at the time and may include the issuance of medium or
long-term debt, equity, or equity-linked securities.
Because of its increased leverage, the Company currently plans to fund capital
expenditures attributable to exploration, exploitation and development
activities primarily out of its expected cash flow from operations, subject to
periodic variation resulting from the timing of project activities and short
term product price volatility.
On December 15, 1997, as a result of the Amoco Acquisition, the Company's
revolving senior bank credit facility with The Chase Manhattan Bank, as Agent
(the "Chase Facility"), was amended to increase the maximum credit amount and
the borrowing base to $450 million and to revise the interest rate payable
thereunder to the Base Rate plus 0% to 0.625% or LIBOR plus 0.75% to 1.625%. The
borrowing base is based on the underlying value of the Company's oil and gas
properties as determined by the Banks as a result of their review of Company
reserves and the Bank's view of future pricing. Following the Mid-Continent
Sale, the Company's borrowing base was adjusted to $325 million. Under the terms
of the Chase Facility, no principal payments are required until December 15,
2002, assuming the Company maintains a borrowing base sufficient to support the
outstanding loan balance. As of September 30, 1998, $293 million was outstanding
under the Chase Facility.
In November 1996, in a private offering exempt from securities registration, the
Company issued $150 million of its 9 1/4% senior subordinated notes due in 2006
(the "Notes"). The offering of the Notes was undertaken in order to replace
with fixed rate term debt a portion of the Company's outstanding indebtedness
under the Chase Facility. 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. The material terms of the New Notes are identical to those of the
Notes.
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The Company also maintains its arrangement with a Trust Company of the West-
related entity covering a $90 million non-recourse, volumetric overriding
royalty facility (the "TCW Facility") of which approximately $80 million is
available. 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
properties.
The Company anticipates that its borrowing capacity under the Chase Facility,
combined with its operating cash flow, and the TCW Facility will provide it with
financial resources and flexibility to fund current and ongoing development
activities, to service its debt and to meet other financial obligations. The
nature of the Company's current development strategies and other 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, equity-linked or debt securities, the sale or
monetization of properties or by entering into joint venture arrangements.
Capital Commitments
The Company continuously evaluates its inventory of drilling opportunities to
develop a growth-oriented portfolio of risk-balanced development, exploitation
and exploration opportunities. On an ongoing basis, the Company 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. For the nine months
ended September 30, 1998, the Company incurred total exploration, development
and leasehold capital expenditures of $81.3 million, exclusive of capitalized
interest and G & A. Capital expenditures for the period include $9 million on
the Mid-Continent properties. The Company estimates that capital expenditures
attributable to exploration, development and leasehold for 1998 will be
approximately $90 to $100 million, assuming stable product prices for the
balance of the year. These capital expenditures will be allocated in varying
amounts primarily to activities in the Company's core geographic areas.
A major component of the Company's capital expenditure program relates to its
development activities in the D-J Basin. The Company incurred approximately
$53.6 million in capital expenditures in the nine months ended September 30,
1998 for drilling, recompleting and refracing the Company's D-J Basin
properties, and anticipates allocating $60-$75 million in the D-J Basin for all
of 1998.
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Another component of the Company's capital expenditure program has been to
develop exploitation and exploration prospects in the Mid-Continent and the
onshore portion of the Gulf Coast. For the nine months ended September 30, 1998
the Company incurred total capital expenditures for seismic, leasehold, overhead
costs and drilling of $9.0 million in the Mid-Continent and $17.6 million in the
Gulf Coast, including approximately $13.5 million of expenditures under its
SouthTech joint venture and $4.1 million on its other Gulf Coast projects. The
Company anticipates allocating up to $20 million to the Gulf Coast projects for
all of 1998.
Activities in the Company's Northern Rockies area are designed to utilize the
Company's extensive acreage position as a vehicle for generating capital
expenditures by third party operators on HSR's acreage. For the nine months
ended September 30, 1998 approximately $7.5 million was spent or committed to by
others to test plays and concepts on HSR's acreage, with HSR retaining
significant positions for exploiting successful discoveries.
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 nine months ended September
30, 1998, was $64.2 million, down from $65.8 million for the same period in
1997. 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. In order to minimize risk, to the maximum extent
possible, the Company hedges certain of its production back to the wellhead. 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
daily reporting to management of the potential financial exposure resulting from
both hedging and trading activities.
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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 during which the
underlying physical transactions occur and are booked in "oil and gas sales"
(for company-owned production) and "trading and transportation revenues" (for
third party gas).
The Company's general strategy is to hedge price and location risk with swap,
collar, floor and ceiling arrangements. As a part of its risk management
program, the Company generally enters into hedges for delivery into one of the
two pipelines located near its producing regions, Panhandle Eastern Pipeline
Company ("PEPL") or CIG, or at the New York Mercantile Exchange ("NYMEX") prices
settled at the Henry Hub. With respect to the NYMEX-hedged volumes that exceed
the Company's Gulf Coast volumes, the Company usually hedges basis to its
producing regions. As of September 30, 1998, the Company holds hedge swap
positions as follows:
Average Daily
Volume Settlement Price
Time Period (MMBtu) Location (per MMBtu)
- -------------------------- ------------- ---------- -----------
October 1998 80,000 CIG $ 1.78
November 1998 - March 1999 75,000 PEPL $ 2.43
October 1998 15,503 NYMEX $ 1.97
April 1999 - October 1999 50,000 CIG $ 1.90
The Company has hedged its expected oil production as follows:
Monthly Hedged Settlement Price
Time Period Volume Location (per Bbl)
--------------------- ------------- ---------- -----------
October-December 1998 121,600 NYMEX $ 16.12
January-December 1999 91,200 NYMEX $ 16.12
Additionally, with respect to the hedging of third party gas, the Company has
hedged 5.08 Bcf from October 1, 1998 through June 1999 with offsetting physical
positions at settlement prices which are based upon NYMEX future prices or other
published indices.
The Company routinely buys and sells options or forward contracts as part of its
overall hedging strategy. Currently, the Company has no open contracts.
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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 a 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 in "trading and transportation revenues" as a net gain or loss in the
period of change. 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, within defined trading limits, financial
instrument purchase and sales contracts be balanced in terms of contract volumes
and the timing of performance and delivery obligations. As of September 30,
1998, all material open positions were balanced with an offsetting position.
During the nine months ended September 30, 1998, gains of $0.6 million were
recognized in connection with these activities and 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 generally investment grade 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 to financial
instruments related to hedging activities or trading activities.
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 also has assumed interest rate exchange agreements with two
financial institutions to hedge its interest rates on a total of $40 million of
the Company's borrowings at rates ranging from 6.16% to 7.32% 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.
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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 condition or results of
operations. See Part II. Other Information, Item 1. Legal Proceedings -
Environmental Proceedings.
YEAR 2000 ISSUES
The Company has undertaken and is continuing its analysis and corrective
measures to address the Year 2000 problem. The Year 2000 problem results from
computer programs that were written utilizing two digits rather than four to
define an applicable year. Such programs are unable to distinguish between
years in different centuries, eg 1910 and 2010 appear to be the same year.
Therefore the Company's computer equipment, software, and devices with embedded
technology could encounter problems beginning on January 1, 2000. This could
result in a system failure or miscalculations causing disruptions of field
and/or office operations, as well as disruptions in the business operations of
the Company's vendors and customers.
In addressing the problem, the Company has considered both its information
technology ("IT") systems and its non-IT systems. IT systems include computer
hardware and software systems as well as telephone and other communications
systems. Those items considered non-IT systems include fax machines, copiers,
monitors for field operations, or other miscellaneous systems. Both IT and non-
IT systems may contain embedded technology, which is also subject to the Year
2000 problem. However, correcting problems in non-IT systems poses the greatest
challenge.
Based upon its assessment and corrective efforts to date, the Company
believes that most of its IT systems are currently Year 2000 compliant. Those
systems that remain non-compliant generally require only upgrading or
installation of software correction packages which have been identified and
which are available. Few, if any, of the Company's IT systems will require
replacement.
Virtually all of the Company's non-IT systems are provided by third parties.
Therefore, the Company has not yet been able to adequately assess its critical,
non-IT systems, such as fax machines and copiers, and possibly field equipment
concerning Year 2000 problems. The Company cannot by itself assess Year 2000
problems in these systems. In conjunction with its efforts described below to
contact vendors and suppliers to ascertain their own state of readiness, the
Company will contact the third-party providers or manufacturers of its non-IT
systems to determine if any of these require remediation or replacement.
The Company is in the process of identifying its most significant third-
party vendors and service providers to determine their state of readiness
regarding the Year 2000 problem as it relates to the Company. The Company's key
third-party providers include gatherers and pipelines, oil and gas purchasers,
the Company's banks, the New York Stock Exchange, Harris Trust & Savings Bank
(the Company's transfer agent), the property managers of the Company's leased
office space, equipment suppliers, major joint venture partners and many others.
The Company will contact third-party providers either verbally or in writing and
will review their public disclosures concerning the Year 2000 problem in an
effort to determine whether the Company is vulnerable to the Year 2000 problems
of these third parties. The Company expects to begin making these contacts in
the fourth quarter of 1998 and to continue assessing risks associated with the
Company's third-party providers throughout 1999.
The Company expects to use its existing staff to address its Year 2000
efforts. The labor costs attributable to the Company's Year 2000 effort, are
expected to be less than $100,000. The Company anticipates that its
expenditures for remedial software and replacement of IT systems will be less
than $50,000. The Company does not yet have an estimate of potential
expenditures related to remediation or replacement of non-IT systems.
The Company has not yet begun a comprehensive analysis of the operational
problems and costs that would be reasonably likely to result from the failure of
the Company and/or significant third parties to complete efforts necessary to
achieve Year 2000 compliance on a timely basis. Among the potential "worst case"
impacts could be impairment of the Company's ability to deliver its production
to, or receive payment from, third parties gathering and/or purchasing the
Company's production, improper functioning of pumping, storage, separation or
other field equipment impairment of the ability of third-party vendors to
provide needed materials or services (such as drilling, workovers or fracture
services) to the Company's planned or ongoing operations, thereby necessitating
deferral or shut-in of exploration, development or production operations, and
the inability of the Company to execute financial transactions with its banks or
other third parties whose systems fail or misfunction and the inability to
properly account for hedging and trading transactions due to the inability to
properly track pricing indices. The Company currently has no reason to believe
that any of these contingencies will occur or that its principal vendors,
customers, and business partners will not be Year 2000 compliant. A contingency
plan has not been developed for dealing with the most reasonably likely worst
case scenario, and such scenario has not yet been fully or clearly identified.
The Company plans to complete such analysis and contingency planning by June 30,
1999. However, given the interdependence of the Company on third-party
information and planning, the Company cannot be certain that such analysis and
planning can be fully accomplished by that date.
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The Company presently does not expect to incur significant operational
problems due to the Year 2000 issue. However, there can be no assurance that
the Company will be able to identify and correct all problems or implement a
satisfactory contingency plan. Therefore, there can be no assurance that the
Year 2000 issue will not materially impact the Company's results of operations
or adversely affect its relationships with customers, vendors, and others.
Additionally, there can be no assurance that the Year 2000 issues of other
entities will not have a material impact on the Company's systems 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,
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,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the "Notes to Consolidated Financial Statements" regarding
reserves and their values, planned capital expenditures, increases in oil and
gas production, trends or expectations concerning oil and gas prices or market
characteristics, marketing, hedging and trading risks, and the Company's
financial position, stability of cash flow, debt service capabilities, capital
availability, business strategy and other plans and objectives for future
operations, potential liabilities or the expected absence thereof, the potential
materiality and amount of year 2000 compliance expenses or the remoteness of
the possibility of material losses associated with the year 2000 problem
generally, 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 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
23
<PAGE>
result if product prices decline materially. First, lower product prices will
adversely affect 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, 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. Using September prices the
Company would have a ceiling write down. However, the SEC guidelines allow for
the recomputation of the ceiling if increased prices between the period end date
and the filing date are significant and are more than sufficient to cover
capitalized costs. November prices in the ceiling calculation result in a
cushion and therefore the Company has not reported a charge against earnings for
the period. If product prices remain low or decline further and cannot be offset
by additional reserves, the Company could be required to write down its oil and
gas properties in a future period.
24
<PAGE>
Certain additional important factors that could cause actual results to differ
materially from the Company's forward-looking statements are disclosed in
"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 or in such
other sections of this 10-Q Report.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS AND ENVIRONMENTAL ISSUES
------------------------------------------
Litigation. The Company is subject to minor lawsuits incidental to operations
in the oil and gas industry. The Company believes it has meritorious defenses
to all lawsuits in which it is a defendant and will vigorously defend against
them. The resolution of such lawsuits, regardless of the outcome, will not have
a material adverse effect on the Company's results of operations or financial
position.
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 an evaporation pit 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 together
with the EPA to develop plans and characterization studies, and have caused the
facility to be 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
25
<PAGE>
Company's percentage share of overall costs may be reduced to as low as 40%.
The Company has spent approximately $1.1 million on its behalf from inception
through the end of the third quarter of 1998 on the project. The Company's
share of total remaining costs associated with the project, at the 50% level of
participation, are currently estimated to range from $250,000 to $500,000 over
one to two years. The Company's estimated liability is reflected in the
September 30, 1998, financial statements.
Recent data regarding site conditions indicate a more significant contamination
problem in one portion of the site which is the apparent result of disposal of
non-oil field wastes by third parties a number of years prior to the Company's
involvement as an oil field waste disposal customer of this facility. To date,
the EPA has assumed responsibility for assessing and remediating these wastes
and is investigating the generators and potentially responsible parties
associated with the wastes. The EPA has also indicated informally that it does
not currently believe that the Company is responsible for these wastes.
Additionally, the Company believes it would have a strong defense of non-
liability for the divisible harm caused by these wastes of third parties.
However, there can be no assurance that the EPA will not attempt to assess some
responsibility for these non-oilfield wastes on the Company. Therefore, the
Company cannot be assured it will have no liability for future response costs
associated with these non-oilfield wastes.
Item 2. Changes in Securities None.
Item 3. Defaults Upon Senior Securities None.
Item 4. Submission of Matters to a Vote of Security Holders None.
Item 5. Other Information None.
26
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. List of Exhibits.
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 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.)
10.2 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.)
10.3 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.)
10.3.1 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.))
10.4 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.)
10.5 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
27
<PAGE>
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.))
10.6 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.)
10.7 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.)
10.8 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.)
10.9 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.)
10.10 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.)
10.11 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.)
10.12 Purchase and Sale Agreement dated March 25, 1996, between Orion, 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.)
10.13 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.)
10.14 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.)
10.15 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.)
10.16 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
28
<PAGE>
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, filed
August 14, 1996.)
10.17 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.)
10.18 Purchase and Sale Agreement between Orion 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.)
10.19 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.)
10.20 Purchase and Sale Agreement between Orion 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.)
10.21 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.)
10.22 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.)
10.23 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.)
10.24 Purchase Agreement dated November 27, 1996, among the Company, Orion,
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.)
10.25 Registration Agreement dated November 27, 1996, among the Company,
Orion, 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.)
10.26 Purchase and Sale Agreement between the Company and Amoco Production
Company dated November 25, 1997. (Incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K, filed December 23,
1997.)
29
<PAGE>
10.27 Side Letter Agreement between the Company and Amoco Production Company
dated November 25, 1997. (Incorporated by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K, filed December 23, 1997.)
10.28 Closing Side Agreement between the Company and Amoco Production Company
dated December 15, 1997. (Incorporated by reference to Exhibit 10.3 to
the Company's Current Report on Form 8-K, filed December 23, 1997.)
10.28 Third Amendment to Amended and Restated Credit Agreement dated as of
December 15, 1997, among the Company and The Chase Manhattan Bank as agent
for the Lenders signatory thereto. (Incorporated by reference to Exhibit
10.4 to the Company's Current Report on Form 8-K, filed December 23,
1997.)
10.29 Purchase and Sale Agreement dated December 15, 1997, by and between HS
Resources, Inc. as Seller and WestTide Investments, LLC as Buyer.
(Incorporated by reference to Exhibit 10.46 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997, filed March 31,
1998.)
10.30 Fifth Amendment and Supplement to Amended, Restated and Consolidated
Mortgage, Assignment of Production, Security Agreement and Financing
Statement between HS Resources (Mortgagor) and The Chase Manhattan Bank,
as agent for the Lenders, effective as of December 15, 1997.
(Incorporated by reference to Exhibit 10.37 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, filed May 14,
1998.)
10.31 Agreement and Plan of Merger between Orion Acquisition, Inc. and HS
Resources, Inc. dated April 20, 1998, but effective May 1, 1998.
(Incorporated by reference to Exhibit 10.38 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, filed May 14,
1998.)
10.32 First Amendment to Agreement of Lease between 1999 Broadway Partnership
(Landlord) and HS Resources, Inc. (Tenant), dated March 21, 1997.
(Incorporated by reference to Exhibit 10.39 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, filed May 14,
1998.)
10.33 HS Resources, Inc. Form of Key Employee Severance Agreement (March 27,
1998). (Incorporated by reference to Exhibit 10.40 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, filed
May 14, 1998.)
10.34 Fourth Amendment to Amended and Restated Credit Agreement dated as of
June 16, 1998, among the Company and The Chase Manhattan Bank in its
individual capacity and as agent for the Lenders. (Incorporated by
reference to Exhibit 10.41 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, filed August 14, 1998.
10.35 Stock Purchase and Sale Agreement between the Company and Universal
Resources Corporation dated July 27, 1998. (Incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K, filed August 6, 1998.)
10.36 Amended and Restated 1997 Performance and Equity Incentive Plan.
(Incorporated by reference to Exhibit A to the Company's Definitive Proxy
Statement for its Annual Meeting of Stockholders held on May 20, 1998,
filed April 24, 1998.)
30
<PAGE>
10.37* Fifth Amendment to Amended and Restated Credit Agreement dated as of
September 1, 1998, among the Company and The Chase Manhattan Bank in its
individual capacity and as agent for the lenders.
10.38* Sixth Amendment and Supplement to Amended, Restated and Consolidated
Mortgage, Assignment of Production, Security Agreement and Financing
Statement dated as of July 22, 1998, among the Company and The Chase
Manhattan Bank in its individual capacity and as agent for the Lenders.
27* Financial Data Schedule
* Filed herewith
_____________________________________
b. Reports on Form 8-K.
Report dated August 13, 1998, filing the August 13, 1998 press
release in connection with the Company's second quarter earnings
release. Item 5.
------
Report dated September 1, 1998, filing the September 1, 1998 press
release in connection with the closing of the sale by the Company of
its wholly owned subsidiary, HSRTW, Inc., to Universal Resources
Corporation. Item 2.
------
Amendment to report dated September 1, 1998, filing the pro forma
financial information for the sale by the Company of its wholly owned
subsidiary, HSRTW, Inc., to Universal Resources Corporation.
Item 7 (A).
----------
31
<PAGE>
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: November 13, 1998 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
32
<PAGE>
Index to Exhibits
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ------------
10.37* Fifth Amendment to Amended and Restated Credit Agreement dated as of
September 1, 1998, among the Company and The Chase Manhattan Bank in its
individual capacity and as agent for the Lenders.
10.38* Sixth Amendment and Supplement to Amended, Restated and Consolidated
Mortgage, Assignment of Production, Security Agreement and Financing
Statement dated as of July 22, 1998, among the Company and The Chase
Manhattan Bank in its individual capacity and as agent for the Lenders.
27* Financial Data Schedule
33
<PAGE>
EXHIBIT 10.37
FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"Amendment") is dated as of September 1, 1998 among: HS RESOURCES, INC., a
- ----------
corporation formed under the laws of the State of Delaware (the "Borrower");
--------
each of the lenders that is a signatory hereto; and THE CHASE MANHATTAN BANK (in
its individual capacity, "Chase"), as agent for the Lenders (in such capacity,
-----
together with its successors in such capacity, the "Agent").
-----
R E C I T A L S
---------------
A. The Borrower, the Agent, and the Lenders (as defined in the Credit
Agreement as hereafter defined) have entered into that certain Amended and
Restated Credit Agreement dated as of June 14, 1996, as amended by the First
Amendment to Amended and Restated Credit Agreement dated as of June 17, 1996,
the Second Amendment to Amended and Restated Credit Agreement dated as of
November 27, 1996, the Third Amendment to Amended and Restated Credit Agreement
dated as of December 15, 1997 and the Fourth Amendment to Amended and Restated
Credit Agreement dated as of June 16, 1998 (as amended, the "Credit Agreement"),
----------------
pursuant to which the Lenders have agreed to make certain loans and extensions
of credit to the Borrower upon the terms and conditions as provided therein; and
B. The Borrower, the Agent, and the Lenders now desire to make certain
amendments to the Credit Agreement.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration and the mutual benefits, covenants and agreements herein
expressed, the parties hereto now agree as follows:
1. All capitalized terms used in this Amendment and not otherwise defined
herein shall have the meanings ascribed to such terms in the Credit Agreement.
2. Section 1.02 of the Credit Agreement is hereby supplemented, where
alphabetically appropriate, with the addition of the following definitions:
"Fifth Amendment" shall mean that certain Fifth Amendment to Amended
---------------
and Restated Credit Agreement dated as of September 1, 1998, among the
Borrower, the Lenders and the Agent.
3. The Lenders and the Borrower agree that the Initial Period shall end on
the date this Amendment becomes effective in accordance with Section 5 of this
Amendment or such earlier date, if any, as set forth in the definition of
Initial Period.
<PAGE>
4. The Borrower has entered into a Stock Purchase and Sale Agreement with
Universal Resources Corporation ("Buyer") dated July 27, 1998 ("Sales Ageement")
----- --------------
in which the Borrower has agreed to sell HSRTW, Inc. ("HSRTW") and certain
-----
Subsidiaries of HSRTW for a purchase price of $157,539,511 in immediately
available funds ("HSRTW Stock Sale"). The Lenders consent to the HSR Stock Sale
----------------
on the conditions that effective as of the date of the HSRTW Stock Sale the
Borrowing Base shall be reduced to $325,000,000 and that a portion of the
proceeds of the HSRTW Stock Sale shall be applied on that date as a prepayment
of the Loans to reduce the outstanding Loans to an aggregate amount not to
exceed the Borrowing Base established by this sentence. If the Borrower
complies with the conditions of the preceding sentence, HSRTW shall be
automatically released from its Guaranty Agreement without the need for further
documentation
5. This Amendment shall become binding on the Lenders when, and only when,
the following conditions shall have been satisfied and the Agent shall have
received each of the following, as applicable, in form and substance
satisfactory to the Agent or its counsel:
(a) counterparts of this Amendment executed by the Borrower and the
Lenders;
(b) satisfaction of the conditions set forth in Section 4 of this
Amendment: and
(c) such other documents as it or its counsel may reasonably request.
6. The parties hereto hereby acknowledge and agree that, except as
specifically supplemented and amended, changed or modified hereby, the Credit
Agreement shall remain in full force and effect in accordance with its terms.
7. The Borrower hereby reaffirms that as of the date of this Amendment,
the representations and warranties contained in Article VII of the Credit
Agreement are true and correct on the date hereof as though made on and as of
the date of this Amendment, except as such representations and warranties are
expressly limited to an earlier date.
8. THIS AMENDMENT (INCLUDING, BUT NOT LIMITED TO, THE VALIDITY AND
ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK.
9. This Amendment may be executed in two or more counterparts, and it
shall not be necessary that the signatures of all parties hereto be contained on
any one counterpart hereof; each counterpart shall be deemed an original, but
all of which together shall constitute one and the same instrument. Delivery of
an executed signature page of this Amendment by facsimile transmission shall be
effective as delivery of a manually executed counterpart hereof.
[SIGNATURES NOT INCLUDED]
<PAGE>
EXHIBIT 10.38
SIXTH AMENDMENT AND SUPPLEMENT TO
AMENDED, RESTATED AND CONSOLIDATED MORTGAGE, ASSIGNMENT
OF PRODUCTION. SECURITY AGREEMENT AND FINANCING STATEMENT
THIS SIXTH AMENDMENT AND SUPPLEMENT TO AMENDED, RESTATED AND CONSOLIDATED
MORTGAGE, ASSIGNMENT OF PRODUCTION, SECURITY AGREEMENT AND FINANCING STATEMENT
(this "Amendment") is entered into as of the effective time and date hereinafter
stated (the "EFFECTIVE DATE") by and between HS RESOURCES, INC., a Delaware
corporation with an address for notice hereunder of One Maritime Plaza, 15th
Floor, San Francisco, California 94111 ("MORTGAGOR") and THE CHASE MANHATTAN
BANK, N.A., a national banking association with offices and banking quarters at
One Chase Manhattan Plaza, New York, New York 10005, as agent for the lenders
which are or become parties to the Credit Agreement referred to below
(collectively called the "LENDERS") (in such capacity as agent, together with
its successors in such capacity, the "MORTGAGEE").
RECITALS
A. Mortgagor, the Agent and certain lenders entered into a Credit Agreement
dated as of July 15, 1994 (as amended, the "1994 CREDIT AGREEMENT") which
amended and restated that certain Credit Agreement dated as of March 11, 1993,
as amended.
B. The 1994 Credit Agreement was secured by, among other things, that
certain Amended, Restated and Consolidated Mortgage, Assignment of Production,
Security, Agreement and Financing Statement dated March 11, 1993 from Mortgagor
to the Mortgagee, duly recorded on March 12,1993 in Book 1373, Film 1766 of the
Real Estate Records of Weld County, Colorado with Reception No. 02324792, as
amended by First Amendment to Amended, Restated and Consolidated Mortgage,
Assignment of Production, Security Agreement and Financing Statement dated May
19, 1993 and duly recorded on August 30, 1993 in Book 1399, Film 1243 of the
Real Estate Records of Weld County, Colorado with Reception No. 02348251, Second
Amendment to Amended, Restated and Consolidated Mortgage, Assignment of
Production, Security Agreement and Financing Statement dated December 10, 1993
and duly recorded on December 20, 1993 in Book 1417, Film 1622 of the Real
Estate Records of Weld County, Colorado with Reception No. 02364884 and Third
Amendment to Amended, Restated and Consolidated Mortgage, Assignment of
Production, Security Agreement and Financing Statement dated as of July 15, 1994
and duly recorded on August 4, 1994 in Book 1453 at Film 1745 of the Real Estate
Records of Weld County, Colorado with Reception No. 2401068 (collectively, the
"HSR MORTGAGE").
C. The 1994 Credit Agreement was also secured by that certain Mortgage,
Assignment of Production, Security Agreement and Financing Statement dated as of
as of July 30, 1993 from Energy Minerals Corporation and recorded in various
counties in the State of Colorado as follows:
<PAGE>
Date
County Filed/Recorded Recording Data
- --------------------------------------------------------------------------------
Adams August 4, 1993 Book 4123, Film 621,
Reception No. 01163316
Arapahoe August 4, 1993 Book 7064, Film 262
Baca August 4, 1993 Book 554, Film 471,
Reception No. 379179
Elbert August 4, 1993 Book 475, Film 742,
Reception No. 311772
Logan August 3, 1993 Book 872, Film 259,
Reception No. 605307
Morgan August 4, 1993 Book 957, Film 582,
Reception No. 737381
Weld August 4, 1993 Book 1395,
Reception No. 2344624
Yuma August 3, 1993 Book 720, Film 233,
Reception No. 469207;
as amended by First Amendment to Mortgage, Assignment of Production, Security
Agreement and Financing Statement dated as of July 15, 1994 (collectively, the
"EMC MORTGAGE") and recorded in various counties in the State of Colorado as
follows:
Date
County Filed/Recorded Recording Data
- --------------------------------------------------------------------------------
Adams August 5, 1994 Book 4369, Page 567,
Reception No. C0006364
Arapahoe August 8, 1994 Book 7660, Page 545,
Reception No. 112791
Baca August 10, 1994 Book 558, Page 622,
Reception No. 381282
Elbert August 4, 1994 Book 500, Page 607
Logan August 4, 1994 Book 883, Page 462
Morgan August 4, 1994 Book 971, Page 170
Weld August 4, 1994 Book 1453, Page 1743,
Reception No. 2401066
Yuma August 4, 1994 Book 735, Page 99,
Reception No. 473320
D. To evidence the merger of Energy Minerals Corporation into Mortgagor,
Mortgagor and Mortgagee amended, restated and consolidated the HSR Mortgage and
the EMC Mortgage by Amended, Restated and Consolidated Mortgage, Assignment of
Production, Security Agreement and Financing Statement dated as of September 1,
1995
<PAGE>
(which instrument, together with all amendments, assignments and supplements
thereto, is called the "MORTGAGE") which was recorded in various counties in the
State of Colorado as follows:
Date
County Filed/Recorded Recording Data
- --------------------------------------------------------------------------------
Adams September 14, 1995 Book 4588, Page 745,
Reception No. CO107105
Arapahoe September 15, 1995 Book 8109, Page 405,
Reception No. 96553
Baca September 13, 1995 Book 563, Page 714,
Reception No. 383819
Elbert September 13, 1995 Book 526, Page 722
Logan September 13, 1995 Book 894, Page 370
Morgan September 15, 1995 Book 985, Page 428
Weld September 13, 1995 Book 1511, Page 203,
Reception No. 2455532
Yuma September 13, 1995 Book 752, Page 227,
Reception No. 478288,
as amended by First Amendment and Supplement to Amended, Restated and
Consolidated Mortgage, Assignment of Production, Security Agreement and
Financing Statement dated as of December 14, 1995 between Mortgagor and
Mortgagee and duly recorded on December 20, 1995 in Weld County, Colorado in
Book 1523, Page 665, Reception No. 2468477.
E. Mortgagor, Mortgagee and certain lenders refinanced the debt under the
1994 Credit Agreement by entering into that certain Credit Agreement dated as of
June 7, 1996 (the "JUNE 7 CREDIT AGREEMENT").
F. Mortgagor, Mortgagee and certain lenders (the "LENDERS") amended and
restated the June 7 Credit Agreement by that certain Amended and Restated Credit
Agreement dated as of June 14, 1996 (the "JUNE 14 CREDIT AGREEMENT").
G. The Mortgage was assigned and amended by Assignment of Liens and
Amendment of Amended, Restated and Consolidated Mortgage, Assignment of
Production, Security Agreement and Financing Statement dated as of June 14,1996
(the "SECOND AMENDMENT TO MORTGAGE"), which was duly recorded in the State of
Colorado as follows:
Date
County Filed/Recorded Recording Data
- --------------------------------------------------------------------------------
Adams 7/12/96 Book 4794, Page 174
Arapahoe 8/22/96 Reception No. A6109953
Baca 6/28/96 Book 567, Page 414
<PAGE>
Elbert 6/27/96 Book 548, Page 116
Logan 6/28/96 Book 903, Page 330
Morgan 7/3/96 Book 996, Page 959
Weld 6/27/96 Book 1554, Page 151
Yuma 6/28/96 Book 764, Page 214
H. The June 14 Credit Agreement was amended by First Amendment to Amended
and Restated Credit Agreement dated as of June 17, 1996 and Second Amendment to
Amended and Restated Credit Agreement dated as of November 27, 1996 (the June 14
Credit Agreement as amended is herein called the "NEW CREDIT AGREEMENT").
I. The Mortgage has been further amended by Third Amendment of Amended,
Restated and Consolidated Mortgage, Assignment of Production, Security Agreement
and Financing Statement dated as of July 25, 1996 (the "THIRD AMENDMENT TO
MORTGAGE"), which was duly recorded in the State of Colorado as follows:
Date
County Filed/Recorded Recording Data
- --------------------------------------------------------------------------------
Adams 9/3/96 Book 4828, Page 624
Reception #C0208849
Arapahoe 8/30/96 Reception #A61113550
Baca 8/30/96 Book 568, Page 205
Elbert 9/9/96 Book 554, Page 231
Logan 8/30/96 Book 905, Page 617
Morgan 8/30/96 Book 999, Page 634
Weld 9/3/96 Book 1564, Page 729
Yuma 8/30/96 Book 766, Page 548,
Reception #482433
and by Fourth Amendment of Amended, Restated and Consolidated Mortgage,
Assignment of Production, Security Agreement and Financing Statement dated as of
January 1, 1997 (the "FOURTH AMENDMENT TO MORTGAGE"), which was duly recorded in
the State of Colorado as follows:
Date
County Filed/Recorded Recording Data
- --------------------------------------------------------------------------------
Adams 1/30/97 Bk. 4928, Pg. 37
Arapahoe 1/23/97 A7008017
Baca 1/24/97 Bk. 569, Pg. 842
Elbert 1/23/97 Bk. 561, Pg. 768
Logan 1/24/97 Bk. 909, Pg. 869
Morgan 1/24/97 Bk. 1005, Pg. 488
Weld 1/23/97 Bk. 1588, Pg. 394
<PAGE>
Yuma 1/24/97 Bk. 772, Pg. 342
J. The Mortgage, the First Amendment to Mortgage, the Second Amendment to
Mortgage, the Third Amendment to Mortgage and the Fourth Amendment to Mortgage
are herein collectively called the "MORTGAGE".
K. Mortgagor and Mortgagee desire to supplement the Mortgage to subject to
the lien and security interest of the Mortgage the additional properties
described on Exhibits A-1 and A-2 attached hereto.
NOW, THEREFORE, in view of the foregoing and for valuable consideration,
the receipt of which is hereby acknowledged, Mortgagor and Mortgagee do hereby
agree as follows:
1. All capitalized terms used but not defined herein shall have the
meanings assigned to such terms in the Mortgage.
2. All references in the Mortgage to "this Mortgage", as defined in the
opening paragraph of the Mortgage shall mean the Mortgage, as amended and as
supplemented hereby and as the same may from time to time be further amended or
supplemented.
3. All references in the Mortgage to "Exhibit A" shall mean Exhibit A to
the Mortgage, as supplemented by Exhibits A-1 and A-2 attached to this
Amendment, and as the same may FROM TIME TO TIME BE further amended or
supplemented and "Hydrocarbon Property", as defined Section I(a) of the
Mortgage, shall be deemed to also include those oil and gas leases and/or oil,
gas and other mineral leases and other interests and estates and the lands and
premises covered or affected thereby which are described on Exhibits A-1 and A-2
attached to this Amendment.
4. Mortgagor hereby confirms that it has heretofore granted, bargained,
sold, assigned, mortgaged, warranted, transferred and conveyed, and granted a
security interest to Mortgagee in, the Mortgaged Property, and Mortgagor further
grants, bargains, sells, assigns, mortgages, warrants, transfers and conveys,
and grants a security interest to Mortgagee in, the Mortgaged Property, as
supplemented by Exhibits A-1 and A-2 attached hereto, to Mortgagee on behalf of
the Lenders to secure the payment and performance of the Indebtedness as such
definition is amended herein.
5. Mortgagor hereby confirms that it has heretofore absolutely and
unconditionally assigned, transferred and conveyed and does hereby absolutely
and unconditionally assign, transfer and convey to Mortgagee, its successors and
assigns, in accordance with the Mortgage as amended hereby, all of the
Hydrocarbons and all products obtained or processed therefrom attributable to
the Hydrocarbon Property, and the revenues
<PAGE>
and proceeds now and hereafter attributable to the Hydrocarbons and said
products and all payments in lieu of the Hydrocarbons such as "take or pay"
payments or settlements.
6. The parties hereto hereby acknowledge and agree that except as
specifically amended, changed or modified hereby, the Mortgage, as amended,
shall remain in full force and effect in accordance with its terms. None of the
rights, titles and interests existing and to exist under the Mortgage, as
amended, are hereby released, diminished or impaired, and Mortgagor hereby
reaffirms all covenants, representations and warranties made in the Mortgage, as
amended.
7. This Amendment may be executed in two or more counterparts, and it shall
not be necessary that the signatures of all parties hereto be contained on any
one counterpart hereof.
EXECUTED as of the 22nd day of July, 1998 (the "Effective Date").
MORTGAGOR:
HS RESOURCES, INC.
Attest:
By:____________________________
By:___________________________ Name: P. Michael Highum
Name: James M. Piccone Title: President
Title: Secretary
MORTGAGEE:
THE CHASE MANHATTAN BANK (formerly known
as The Chase Manhattan Bank, N.A.), AS
AGENT
By:____________________________
Name: Peter M. Ling
Title: Vice President
<PAGE>
STATE OF COLORADO (S)
(S)
COUNTY OF DENVER (S)
The foregoing instrument was acknowledged before me on July 22nd, 1998 by
P. Michael Highum, President of HS RESOURCES, INC., a Delaware corporation, on
behalf of such corporation.
Seal: LYNDA K. HENDRIX ______________________________
NOTARY PUBLIC Notary Public in and for the
STATE OF COLORADO State of Colorado
My Commission Expires 3/10/2002
STATE OF NEW YORK (S)
(S)
COUNTY OF NEW YORK (S)
The foregoing instrument was acknowledged before me on July 21st, 1998 by
Peter Ling, Vice President of THE CHASE MANHATTAN BANK, state banking
corporation, on behalf of such corporation.
Seal:
______________________________
Notary Public in and for the
State of New York
RENEE R. GOLDSTEIN
Notary Public, State of New York
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