<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
--------------------------------------------------
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
incorporation or organization) Identification No.)
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, 1999: 18,797,814 after deducting 729,990 shares in
treasury.
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HS RESOURCES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets - September 30, 1999 (Unaudited) and
December 31, 1998........................................................................................3
Unaudited Consolidated Statements of Operations - For the Three Months
and Nine Months Ended September 30, 1999 and 1998........................................................5
Consolidated Statements of Stockholders' Equity - For the Years Ended
December 31, 1998 and 1997 and the Nine Months Ended
September 30, 1999 (Unaudited)...........................................................................6
Unaudited Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 1999 and 1998....................................................7
Notes to Unaudited Consolidated Financial Statements.....................................................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings & Environmental Issues................................................................34
Item 2. Changes in Securities...................................................................................35
Item 3. Defaults Upon Senior Securities.........................................................................35
Item 4. Submission of Matters to a Vote of Security Holders.....................................................35
Item 5. Other Information.......................................................................................35
Item 6. Exhibits and Reports on Form 8-K........................................................................36
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HS Resources, Inc.
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(Unaudited) 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,943,280 $ 9,658,697
Margin deposits 3,246,104 621,765
Accounts receivable
Oil and gas sales 30,219,095 20,528,042
Trading and transportation 21,007,991 14,011,992
Trade 4,620,992 4,079,887
Other 10,220,560 8,276,930
Lease and well equipment inventory, at cost 874,047 709,985
Prepaid expenses and other 1,877,042 2,378,092
Notes receivable from officers for exercise of stock options (Note 6) 1,543,534 --
------------- -------------
Total current assets 77,552,645 60,265,390
------------- -------------
OIL AND GAS PROPERTIES, AT COST, USING THE SUCCESSFUL EFFORTS METHOD
Undeveloped acreage 108,145,495 108,029,622
Costs subject to depreciation, depletion and amortization 859,797,727 816,633,609
Less accumulated depreciation, depletion and amortization (214,298,144) (175,729,105)
------------- -------------
Net oil and gas properties 753,645,078 748,934,126
------------- -------------
GAS GATHERING AND TRANSPORTATION FACILITIES,
at cost, net of accumulated depreciation of $1,844,552
and $1,616,576 at September 30, 1999 and December 31, 1998, respectively 4,506,529 4,274,544
------------- -------------
WORKOVER RIGS AND OTHER EQUIPMENT,
at cost, net of accumulated depreciation of $21,392
at September 30, 1999 840,821 --
------------- -------------
OTHER ASSETS
Deferred charges and other, net 9,511,381 11,001,725
Office and transportation equipment and other property,
net of accumulated depreciation of $6,300,598 and $5,883,372
at September 30, 1999 and December 31, 1998, respectively 2,379,506 3,017,825
Notes receivable from officers for exercise of stock options and issuance
of common stock (Note 6) 796,511 2,245,813
Goodwill, net of accumulated amortization of $1,170,000 and $900,000
at September 30, 1999 and December 31, 1998, respectively 2,430,000 2,700,000
------------- -------------
Total other assets 15,117,398 18,965,363
------------- -------------
TOTAL ASSETS $ 851,662,471 $ 832,439,423
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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HS Resources, Inc.
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(Unaudited) 1998
------------- -------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable
Trade $ 16,987,525 $ 21,408,518
Revenue 37,093,248 20,915,255
Gas purchases 7,412,050 7,237,935
Accrued expenses
Ad valorem and production taxes 10,440,289 12,027,297
Interest 12,605,989 6,665,508
Other 4,493,586 7,381,932
Income taxes payable 37,809 2,792,929
Oil and gas production note payable -- 734,696
------------- -------------
Total current liabilities 89,070,496 79,164,070
------------- -------------
Accrued Ad Valorem Taxes 11,675,346 12,450,721
------------- -------------
Deferred Revenue 1,472,554 8,908,363
------------- -------------
Long-Term Bank Debt 234,000,000 230,000,000
------------- -------------
9 7/8% Senior Subordinated Notes,
due 2003, net of unamortized discount of $243,750 and $287,625
at September 30, 1999 and December 31, 1998, respectively 74,756,250 74,712,375
------------- -------------
9 1/4% Series A Senior Subordinated Notes,
due 2006, net of unamortized discount of $553,612 and $611,887
at September 30, 1999 and December 31, 1998, respectively 149,446,388 149,388,113
------------- -------------
9 1/4% Series B Senior Subordinated Notes,
due 2006, net of unamortized discount of $3,785,156 and $4,183,594
at September 30, 1999 and December 31, 1998, respectively 81,214,844 80,816,406
------------- -------------
Deferred Income Taxes 49,275,703 44,137,897
------------- -------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock -- --
Common stock, $.001 par value, 50,000,000 shares authorized;
19,527,804 and 19,126,820 shares issued and outstanding
at September 30, 1999 and December 31, 1998, respectively 19,528 19,127
Additional paid-in capital 191,121,160 188,195,831
Retained deficit (20,954,414) (25,988,247)
Deferred compensation (2,200,461) (1,749,256)
Treasury stock, at cost, 729,356 and 801,200 shares at September 30, 1999
and December 31, 1998, respectively (7,234,923) (7,615,977)
------------- -------------
Total stockholders' equity 160,750,890 152,861,478
------------- -------------
Total Liabilities and Stockholders' Equity $ 851,662,471 $ 832,439,423
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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HS Resources, Inc.
Consolidated Statements of Operations
For the Three Months and Nine Months Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Oil and gas sales $ 43,473,195 $ 32,886,639 $ 116,280,737 $ 116,598,918
Trading and transportation 11,595,814 13,831,014 32,873,914 41,297,363
Other gas revenues 2,280,765 2,068,422 7,322,747 6,213,597
Interest income and other 141,025 504,203 410,867 1,147,179
------------- ------------- ------------- -------------
Total revenues 57,490,799 49,290,278 156,888,265 165,257,057
------------- ------------- ------------- -------------
EXPENSES
Production taxes 3,371,829 2,068,382 7,656,472 7,825,088
Lease operating 6,775,850 7,798,458 20,936,348 23,112,543
Cost of trading and transportation 10,996,241 12,549,802 31,441,918 38,910,181
Depreciation, depletion and amortization 13,069,971 15,387,360 40,471,725 47,319,976
Exploratory and abandonment 4,358,552 1,335,325 9,097,872 3,008,098
Geological and geophysical 1,293,161 3,411,793 4,780,200 11,241,214
Impairment and (gain)/loss on
sales of oil and gas properties (2,327,765) 6,742,393 (1,227,652) 6,669,722
General and administrative 1,467,233 2,247,918 3,942,160 6,238,365
Interest 10,717,362 10,888,574 31,657,020 32,740,649
------------- ------------- ------------- -------------
Total expenses 49,722,434 62,430,005 148,756,063 177,065,836
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 7,768,365 (13,139,727) 8,132,202 (11,808,779)
PROVISION (BENEFIT) FOR INCOME TAXES 2,959,747 (5,006,236) 3,098,369 (4,499,145)
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ 4,808,618 $ (8,133,491) $ 5,033,833 $ (7,309,634)
============= ============= ============= =============
BASIC EARNINGS (LOSS) PER SHARE $ 0.26 $ (0.43) $ 0.27 $ (0.39)
============= ============= ============= =============
DILUTED EARNINGS (LOSS) PER SHARE $ 0.25 $ (0.43) $ 0.27 $ (0.39)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 18,798,000 18,796,000 18,664,000 18,619,000
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING ASSUMING DILUTION 19,131,000 18,796,000 18,815,000 18,619,000
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 6
HS Resources, Inc.
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1998 and 1997
and the Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Common Stock Additional Retained Treasury Stock
------------------- Paid-In Earnings Deferred ----------------------
Shares Amount Capital (Deficit) Compensation Shares Amount
---------- ------- ------------ ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 17,127,861 $17,128 $163,114,868 $ 8,133,368 $ (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 -- -- -- --
Issuance of treasury stock for
exercise of options 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 -- --
Issuance of common stock 12,203 12 135,393 -- -- -- --
Exercise of warrants and options 311,981 312 (312) -- -- -- --
Net loss -- -- -- (15,505,158) -- -- --
---------- ------- ------------ ------------ ----------- -------- -----------
Balance, December 31, 1997 18,654,545 18,655 183,191,380 (7,371,790) (144,300) (160,358) (2,216,541)
Purchase of treasury stock -- -- -- -- -- (721,937) (6,524,268)
Transfer of treasury stock
to 401(k) Plan -- -- 7,419 -- -- 39,046 541,568
Issuance of treasury stock for
exercise of options including
income tax benefit -- -- (115,247) -- -- 42,049 583,264
Issuance of restricted stock 32,126 33 427,685 -- (427,718) -- --
Amortization of deferred
compensation -- -- -- -- 306,547 -- --
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 -- -- -- --
Restricted stock forfeited (3,106) (3) (50,231) -- 50,234 -- --
Net loss -- -- -- (18,616,457) -- -- --
---------- ------- ------------ ------------ ----------- -------- -----------
Balance, December 31, 1998 19,126,820 19,127 188,195,831 (25,988,247) (1,749,256) (801,200) (7,615,977)
Transfer of treasury stock
to 401(k) Plan -- -- 50,737 -- -- 74,889 712,194
Issuance of common stock 235,000 235 1,369,765 -- -- -- --
Amortization of deferred
compensation -- -- -- -- 848,493 -- --
Issuance of performance shares 132,000 132 997,788 -- (997,920) -- --
Issuance of restricted stock 33,984 34 301,744 -- (301,778) -- --
Purchase of treasury stock -- -- -- -- -- (48,660) (766,515)
Issuance of treasury stock for
exercise of options including
income tax benefit -- -- 205,295 -- -- 45,615 435,375
Net income -- -- -- 5,033,833 -- -- --
---------- ------- ------------ ------------ ----------- -------- -----------
Balance, September 30, 1999 (Unaudited) 19,527,804 $19,528 $191,121,160 $(20,954,414) $(2,200,461) (729,356) $(7,234,923)
========== ======= ============ ============ =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE> 7
HS Resources, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
September 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 5,033,833 $ (7,309,634)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 40,471,725 47,319,976
Impairment and (gain)/loss on sales
of oil and gas properties (1,227,652) 6,669,722
Surrendered and expired acreage 2,959,862 --
Amortization of deferred charges, debt issue costs
and deferred compensation 3,307,635 1,848,398
Transfer of treasury stock to 401(k) Plan 762,931 548,987
Gain on sale of fixed assets -- (239,349)
Deferred income tax provision (benefit) 3,037,806 (4,635,194)
(Increase) decrease in accounts and notes receivable (19,171,787) 3,907,934
Increase in accounts payable
and accrued expenses 17,458,355 3,740,815
Decrease in deferred revenue, net (7,435,809) (4,378,936)
Other (2,913,713) 26,434
------------- -------------
Net cash provided by operating activities 42,283,186 47,499,153
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Exploration, development and leasehold costs (48,855,904) (79,761,623)
Purchase of unproved and proved properties -- (4,636,960)
Purchase of workover rigs and equipment (862,213) --
Gas gathering and transportation facilities additions (459,961) (27,932)
Other property additions (285,483) (519,063)
Net proceeds from the sale of oil and gas properties 3,384,187 152,524,727
Proceeds from the sale of fixed assets and other property -- 1,231,447
(Decrease) increase in property related payables (6,227,304) 6,633,012
------------- -------------
Net cash (used in) provided by investing activities (53,306,678) 75,443,608
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt 52,000,000 55,000,000
Repayments of debt (48,000,000) (174,000,000)
Issuance of common stock 610,625 --
Exercise of options 640,670 468,338
Purchase of treasury stock (766,515) (4,506,135)
Payment of officer note and interest 823,295 --
------------- -------------
Net cash provided by (used in) financing activities 5,308,075 (123,037,797)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,715,417) (95,036)
Cash and cash equivalents, beginning of period 9,658,697 6,907,708
------------- -------------
Cash and cash equivalents, end of period $ 3,943,280 $ 6,812,672
============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid, net of capitalized interest $ 23,215,839 $ 22,104,251
Cash paid for income taxes, net of reimbursements $ 729,384 $ 611,758
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE> 8
HS RESOURCES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. General
HS Resources, Inc. (the "Company" or "HSR"), a Delaware corporation,
was organized in January 1987. The Company, directly or through subsidiaries,
acquires, develops and exploits oil and gas properties. The Company's properties
are primarily located in the Denver-Julesburg ("D-J") Basin, the onshore area of
the Texas-Louisiana Gulf Coast and to a lesser extent the Northern Rocky
Mountains. 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, 1999, 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, 1998 Report on Form 10-K filed with the Securities
and Exchange Commission on March 31, 1999.
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 as "oil and gas sales" (for company-owned
production) and "trading and transportation revenues" (for third party gas) in
the period during which the underlying physical transactions occur. 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. In the
event energy related financial instruments are terminated prior to the period of
physical delivery of the items being hedged, the gains or losses on the energy
related financial instruments at the time of the termination
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<PAGE> 9
remain deferred until the period of physical delivery unless both the energy
related financial instruments and the items being hedged result in a loss. If
this occurs, the loss is recorded immediately.
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. In the quarter and nine months ended
September 30, 1999, the dilutive impact was 333,000 and 151,000 shares,
respectively. There was no dilutive impact to weighted average shares for the
quarter and nine months ended September 30, 1998.
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, 1999 and 1998. The
condensed pro forma operating results assume the divestiture of the Company's
Mid-Continent oil and gas subsidiary, HSRTW, Inc., to Universal Resources Corp.,
occurred on January 1, 1998. The condensed pro forma results are not necessarily
indicative of the results of operations had the divestiture been consummated on
January 1, 1998, and may not necessarily be indicative of future performance.
The September 30, 1999 amounts reflect the actual activity for the nine months
then ended. Amounts in thousands, except per share amounts.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
(Unaudited)
1999 1998
-------- --------
<S> <C> <C>
Revenues $156,888 $147,614
Net income $ 5,034 $ 823
Basic earnings per share $ 0.27 $ 0.04
Diluted earnings per share $ 0.27 $ 0.04
Weighted average number of
common shares outstanding 18,664 18,619
Weighted average number of
common shares outstanding
assuming dilution 18,815 18,706
</TABLE>
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Note 4. Issuance of Performance Shares
In May 1998, the Company's stockholders approved amendments to 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 have a base vesting
schedule over nine years with accelerated vesting to occur no earlier than
one-fourth of the shares in each of the first four years. In 1998, the Company
issued 106,234 performance shares. 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. In April 1999, following the Company's change to successful efforts
accounting, the earnings measure for determining return on equity as originally
stated in the 1998 amendments to the Plan was changed to allow that value
measure to operate as originally intended. Following that change, the Board of
Directors determined that the 1998 value measures applicable to the performance
shares issued in 1998 were fully met. As a result, one fourth of these
performance shares have now vested. Additional amortization expense of
approximately $200,000 was recorded in the first quarter of 1999 related to the
vesting of these shares. In the second quarter of 1999, the Company issued
132,000 performance shares and recorded deferred compensation of approximately
$1.0 million.
Through the first nine months of 1999, the Company has amortized deferred
compensation for all performance shares issued assuming achievement of defined
performance goals.
Note 5. Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The
date of this statement was recently extended and is now effective for fiscal
years beginning after June 15, 2000. This statement 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 statement of operations, 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 impact 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.
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<PAGE> 11
In December 1998, the Emerging Issues Task Force reached consensus on Issue No.
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities" ("EITF Issue 98-10"). In accordance with EITF Issue 98-10 the
Company records energy trading contracts at fair value on the balance sheet,
with the changes in fair value included in earnings.
Note 6. Related Party Transactions
In February 1999, the Company instituted the 1999 Non-Compensatory Stock
Purchase Plan. This plan is designed to enable officers of the Company to
purchase stock at fair market value in transactions exempt from Section 16(b) of
the Securities Exchange Act of 1934. Five hundred thousand shares of common
stock have been allocated to the plan. The plan is administered by the
Compensation Committee of the Board of Directors. As of September 30, 1999,
235,000 shares of common stock had been purchased at prices ranging from $5.625
to $6.50. In connection with the stock purchases, 76,000 shares were purchased
for cash. The remaining shares were purchased with the officers paying 15% of
the purchase price in cash, and the remainder in the form of full recourse
promissory notes maturing in two years from the date of issuance.
The notes bear interest at the annual rate of 8.5%.
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. The prime rate as of September 30, 1999 was 8.25%. In the third quarter
of 1999, principal and accrued interest in the amount of $823,295 was repaid.
Note 7. Total Return Equity Swap
In 1999 the Company entered into two total return equity swap agreements with a
financial institution. Under the terms of the first agreement, entered into on
February 25, 1999, the financial institution acquired approximately 730,000
shares of HSR's common stock from another investor at a price of $6.0625. The
Company has the right, but not the obligation, to purchase the stock at a price
of $6.0625 per share at any time through July 1, 2000.
On May 24, 1999 the Company entered into a second agreement whereby the
financial institution acquired 100,000 shares of HSR's common stock at a price
of $11.9875. The Company has the right, but not the obligation, to purchase the
stock at a price of $11.9875 per share at any time through January 5, 2001.
If the Company decides not to purchase the shares on or before the termination
of either agreement, the Company will receive any increase in the market value
of the shares covered by that agreement above the purchase price of the shares,
or will pay for any loss; however, the Company may cover any losses by issuing
common stock to the financial
11
<PAGE> 12
institution if it chooses to do so. All such amounts will be reflected in
stockholders' equity at the time of settlement. The Company will also pay
certain commissions and finance costs. At September 30, 1999 the aggregate fair
market value of the Company's common stock in excess of the underlying option
price attributable to such shares was approximately $8.0 million.
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Note 8. Business Segment Information (in thousands)
The Company is an independent energy company engaged in the following
activities:
o acquisition, development, exploitation, exploration and production of
oil and gas
o marketing of oil and gas
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Oil and gas sales D-J Basin $ 39,423 $ 30,900 $ 110,682 $ 103,686
Oil and gas sales Gulf Coast 6,282 286 12,754 1,471
Oil and gas sales Mid-Continent and other 49 3,769 167 17,655
Trading and transportation 47,800 35,297 117,812 109,155
Intersegment eliminations (36,205) (21,466) (84,938) (67,857)
--------- --------- --------- ---------
$ 57,349 $ 48,786 $ 156,477 $ 164,110
========= ========= ========= =========
OPERATING INCOME (LOSS):
D-J Basin $ 17,938 $ 9,784 $ 45,329 $ 40,101
Gulf Coast (204) (3,718) (2,392) (10,654)
Mid-Continent and other 1,826 (7,379) 145 (4,306)
Trading and transportation 1,138 1,689 3,107 3,945
Intersegment eliminations (647) (507) (1,999) (1,859)
--------- --------- --------- ---------
OPERATING INCOME 20,051 (131) 44,190 27,227
Other income and expense (12,283) (13,009) (36,058) (39,036)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES $ 7,768 $ (13,140) $ 8,132 $ (11,809)
========= ========= ========= =========
IDENTIFIABLE ASSETS (AT SEPTEMBER 30):
Oil and gas properties D-J Basin $ 939,412 $ 891,323 $ 939,412 $ 891,323
Oil and gas properties Gulf Coast 30,333 23,595 30,333 23,595
Oil and gas properties Mid-Continent and other 5,411 11,261 5,411 11,261
Trading and transportation 3,843 3,735 3,843 3,735
Corporate 8,438 8,427 8,438 8,427
--------- --------- --------- ---------
$ 987,437 $ 938,341 $ 987,437 $ 938,341
========= ========= ========= =========
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE:
Oil and gas properties D-J Basin $ 11,835 $ 12,875 $ 37,121 $ 37,559
Oil and gas properties Gulf Coast 879 68 2,134 324
Oil and gas properties Mid-Continent and other 8 1,969 23 7,931
Trading and transportation 108 100 324 302
Corporate 240 376 870 1,204
--------- --------- --------- ---------
$ 13,070 $ 15,388 $ 40,472 $ 47,320
========= ========= ========= =========
CAPITAL EXPENDITURES AND ACQUISITIONS:
Oil and gas properties D-J Basin $ 15,778 $ 16,021 $ 37,240 $ 58,724
Oil and gas properties Gulf Coast 3,409 3,994 11,214 10,134
Oil and gas properties Mid-Continent and other 630 3,956 1,724 15,569
Trading and transportation 2 -- 56 --
Corporate 50 (5) 229 519
--------- --------- --------- ---------
$ 19,869 $ 23,966 $ 50,463 $ 84,946
========= ========= ========= =========
</TABLE>
13
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL We have pursued a strategy centered around consolidation in the
Denver-Julesburg ("D-J") Basin, coupled with continued exploitation and
exploration in our core areas. We use a technology-oriented approach to
exploitation and exploration designed to reduce risk and maximize efficiencies.
Our 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 our strategic direction, including in
particular, the September 1998 sale of our wholly-owned subsidiary, HSRTW, Inc.,
to Universal Resources Corp., a subsidiary of Questar Corp., for $157.5 million.
HSRTW, Inc. held the majority of our Mid-Continent assets.
Through the Amoco acquisition and related consolidation in the D-J Basin,
coupled with our exploration successes in the Gulf Coast, we have materially
increased our available low-risk, high-return projects. However, to complete the
Amoco acquisition we were required to borrow funds, which significantly
increased our leverage ratios. To partially reduce this increase in debt we sold
the majority of our Mid-Continent asset base and utilized the proceeds to pay
down debt under our senior credit facility. See "Liquidity and Capital Resources
- -- Financing Sources."
Following the Mid-Continent sale, we now operate primarily in three core areas:
the D-J Basin, the Gulf Coast and, to a lesser extent, the Northern Rockies. As
of September 30, 1999, approximately 91% of our production (on an energy
equivalent basis) came from the D-J Basin and 9% from the Gulf Coast. We will
continue to pursue certain technology-oriented exploration projects and other
activities in other regions, including the Mid-Continent. We will also continue
our strategically important and profitable presence in the gas marketing,
trading and transportation business through our wholly-owned subsidiary, HS
Energy Services, Inc. ("HSES"). HSES provides opportunities for us to enhance
our operating margins on gas production from each of our producing areas and
from production we market on behalf of other oil and gas producers.
OIL AND GAS PRICES Profitability in the United States oil and gas industry
fluctuates widely due in part to fluctuating commodity prices and related
changes in rates of reinvestment by industry participants. In 1998 and early
1999, United States natural gas prices and international crude oil prices were
very low, resulting in significant reductions in the operating and financial
margins of oil and gas producers. The downturn in oil prices was attributable to
a global oversupply of crude oil resulting from the economic difficulties in
Asia, Russia and elsewhere, high levels of production by certain OPEC and
non-OPEC producers and warm weather in the United States. Gas prices were also
low primarily due to above-normal winter temperatures in both 1997 and 1998,
resulting in excess supplies of gas in winter storage. Additionally, low oil
prices have had a depressing effect on the price of liquids recovered from
natural gas. Thus, the early 1999 low oil price environment further diminished
the overall price received for our gas production. As a result of
14
<PAGE> 15
these factors, the weighted average price we realized per barrel of oil,
excluding hedging benefits, for the three months ended March 31, 1999 was $11.43
compared to $14.77 for the comparable period in 1998. Natural gas prices per
Mcf, excluding hedging benefits, were $1.68 for the three months ended March
31,1999, compared to $2.16 in the comparable period in 1998. In April 1999, both
oil and gas prices began to recover, particularly compared to the prior year
when prices were declining, resulting in HSR realizing an average price per
barrel of oil, excluding hedging effects, for the three months ended September
30, 1999 of $20.14 compared to $12.29 for the comparable period in 1998. Natural
gas prices per Mcf, excluding hedging benefits, were $2.42 for the three months
ended September 30, 1999 compared to $1.64 in the comparable period in 1998.
At December 31, 1998, approximately 82% of our proved producing reserves
consisted of gas, of which 98% were 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 HSR. 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, which remains the case during the lower demand
summer months (generally April through October). 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, the price more closely tracks
Mid-Continent indices during the higher demand winter periods (generally
November through March).
PSCO and CIG, through a jointly owned affiliate, recently began operating a
newly expanded 270 MMcfd capacity line between the Colorado Front Range market
area and Wyoming. This line operates independently and not as part of PSCO's
local distribution system. Additionally, a subsidiary of KN Energy, Inc. (now
Kinder Morgan, Inc.) ("KN") has been granted authority to build a 250 MMcfd
capacity pipeline. Construction has not commenced on the KN line, and it is
uncertain whether this line will be built in the near future. The PSCO line is
expected to eliminate some portion of the advantage HSR currently has over
Wyoming producers for direct sales in the Colorado Front Range market, as it
increases 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.
To date, the increased export capacity from the D-J Basin on the PSCO line,
combined with increased demand from and transportation to West Coast markets out
of Wyoming, have strengthened the overall market for D-J Basin gas compared to
several years ago. Given the narrowing of the spread between CIG and
Mid-Continent indices, we do not anticipate any material adverse changes to D-J
Basin gas prices as a result of the new pipelines.
In recent months, gas prices both in the D-J Basin and nationwide have generally
recovered from the lows experienced this past winter. However, we cannot predict
15
<PAGE> 16
future trends in gas prices. The uncertainty concerning the price of oil and gas
remains a dominant and unpredictable factor in our profitability.
RESULTS OF OPERATIONS During 1999 we continued our drilling and development
activities to exploit the larger number of development opportunities in the D-J
Basin resulting from the Amoco acquisition. We also continued our exploitation
and exploration activities in the Gulf Coast region. At September 30, 1999 we
owned interests in more than 3,890 producing wells (of which we operated more
than 2,820) compared to approximately 4,400 wells (of which we operated more
than 2,880) at September 30, 1998. The decline in well count results primarily
from our sale of properties to Southwestern Eagle and our property trade with
Patina. Our results of operations have been significantly affected by the Amoco
acquisition, by our drilling program and by fluctuations in oil and gas prices.
Future results will be significantly affected by our exploration, exploitation
and development activities.
Comparative operating results by business segment, consolidated other income,
expenses and income taxes are presented below. Segment operating revenues, costs
and expenses are before intersegment eliminations.
16
<PAGE> 17
COMPARISON OF THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
D-J BASIN
OIL AND GAS SALES (IN THOUSANDS EXCEPT AVERAGE PRICES)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Production:
Oil (Bbl) 513 588 1,596 1,804
Gas (Mcf) 13,072 12,444 39,468 35,776
Mcfe 16,149 15,969 49,044 46,602
Boe 2,692 2,661 8,174 7,767
Prices:
Average realized oil price ($/Bbl) $ 20.02 $ 13.46 $ 15.39 $ 15.19
Average realized gas price ($/Mcf) $ 2.06 $ 1.67 $ 2.00 $ 1.96
Operating Revenues:
Oil and gas sales $ 37,142 $ 28,694 $ 103,359 $ 97,380
Other gas revenues 2,281 2,206 7,323 6,306
--------- --------- --------- ---------
39,423 30,900 110,682 103,686
--------- --------- --------- ---------
Operating Costs and Expenses:
Production taxes 3,004 1,796 6,899 6,531
Lease operating 6,531 6,659 20,382 18,853
Depreciation, depletion
and amortization 11,835 12,875 37,121 37,559
Exploratory and abandonment 92 490 657 828
Geological and geophysical 119 642 222 1,233
Impairment and (gain)/loss
on sales of oil and gas properties (96) (1,346) 72 (1,419)
--------- --------- --------- ---------
21,485 21,116 65,353 63,585
--------- --------- --------- ---------
Operating Income $ 17,938 $ 9,784 $ 45,329 $ 40,101
========= ========= ========= =========
</TABLE>
17
<PAGE> 18
GENERAL We have been active in the D-J Basin for more than 17 years. Over the
past several years we have further consolidated our position as a result of the
acquisition in June 1996 of all of the D-J Basin properties of Basin
Exploration, Inc. and the December 1997 Amoco acquisition. During 1998 a
substantial exploitation program was undertaken consisting of more than 450
separate activities including refracs, recompletions, deepenings and new wells.
During the nine months ended September 30, 1999 we continued the exploitation
program by completing approximately 250 additional activities.
OIL AND GAS REVENUES D-J Basin revenues increased by 28% for the three months
ended September 30, 1999 and by 7% for the nine months ended September 30, 1999
compared to the comparable prior year periods. The increase in revenues for the
three month period ended September 30, 1999 as compared to the same period in
1998 was due primarily to a higher realized weighted average price. The increase
in revenues for the nine month period ended September 30, 1999 was due to a
higher realized weighted average price in 1999 as well as an increase in
production. Other gas revenues from the sale of tax credits fluctuate with
changes in our production. As a result, other gas revenues remained relatively
flat for the three month period ended September 30, 1999 and increased for the
nine month period ended September 30, 1999 compared to the comparable prior year
periods.
PRODUCTION EXPENSES Lease operating expense ("LOE") decreased both on an
absolute and an Mcfe basis for the quarter ended September 30, 1999 and
increased for the nine months ended September 30, 1999 compared to the
comparable prior year periods. LOE per Mcfe was $0.40 and $0.42 ($2.43 and $2.50
per Boe) for the quarters ended September 30, 1999 and 1998, respectively. For
the nine months ended September 30, 1999 and 1998, LOE per Mcfe was $0.42 and
$0.40 ($2.49 and $2.43 per Boe), respectively. The decrease for the quarter
ended September 30, 1999 is mainly due to a decrease in workover costs in 1999
which was partially offset by an increase in COPAS charges. The increase for the
nine month period ended September 30, 1999 is due to an increase in COPAS
charges and workover costs. The increase in COPAS charges is due to an increase
in the COPAS escalation factor as of April 1, 1999 in accordance with COPAS
guidelines. Production taxes increased for the quarter and nine months ended
September 30, 1999 compared to the comparable prior year periods. The increase
for the quarter ended September 30, 1999 is due to higher realized prices. The
increase for the nine months ended September 30, 1999 is due to higher realized
gas prices which were partially offset by an adjustment we recorded in the
second quarter to reduce the ad valorem tax accrual rate for 1998 and 1999 to
the rate actually paid in 1999.
DEPRECIATION, DEPLETION AND AMORTIZATION Depreciation, depletion and
amortization ("DD&A"), a non-cash expense, decreased on an Mcfe basis for the
quarter and nine months ended September 30, 1999 compared to the comparable
prior year periods. We adjusted our DD&A rate in the second quarter of 1999 to
reflect mid-year reserve revisions. The weighted average depletion rate for the
D-J Basin was $0.73 compared to $0.80 per Mcfe, ($4.36 compared to $4.81 per
Boe) for the quarters ended September 30, 1999 and 1998, respectively. For the
nine months ended September 30, 1999 and 1998
18
<PAGE> 19
the weighted average depletion rate for the D-J Basin was $0.75 compared to
$0.80 per Mcfe ($4.51 compared to $4.81 per Boe), respectively.
EXPLORATORY AND ABANDONMENT COSTS Exploratory and abandonment costs include the
costs of exploratory dry holes, delay rentals, plugging and abandonment ("P&A")
costs, expired acreage and certain salaries and related overhead costs
("overhead") directly related to exploratory activities. Exploratory and
abandonment costs decreased by $398,000 and $171,000 for the quarter and nine
months ended September 30, 1999, respectively, compared to the comparable prior
year periods mainly due to a decrease in exploratory dry hole costs.
GEOLOGICAL AND GEOPHYSICAL COSTS Geological and geophysical ("G&G") costs
include costs for seismic activity as well as certain overhead costs directly
attributable to G&G activity. G&G costs decreased for the quarter and nine
months ended September 30, 1999 compared to the comparable prior year periods
due to a reduced level of seismic activity in the Greater D-J project area.
19
<PAGE> 20
GULF COAST
OIL AND GAS SALES (IN THOUSANDS EXCEPT AVERAGE PRICES)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Production:
Oil (Bbl) 69 7 173 17
Gas (Mcf) 1,740 100 4,005 559
Mcfe 2,153 142 5,043 659
Boe 359 24 841 110
Prices:
Average realized oil price ($/Bbl) $ 20.21 $ 11.92 $ 16.62 $ 11.60
Average realized gas price ($/Mcf) $ 2.81 $ 2.03 $ 2.47 $ 2.29
Operating Revenues:
Oil and gas sales $ 6,282 $ 286 $ 12,754 $ 1,471
Other gas revenues -- -- -- --
-------- -------- -------- --------
6,282 286 12,754 1,471
-------- -------- -------- --------
Operating Costs and Expenses:
Production taxes 349 19 714 93
Lease operating 201 23 396 73
Depreciation, depletion
and amortization 879 68 2,134 324
Exploratory and abandonment 4,079 630 7,995 1,834
Geological and geophysical 978 2,203 3,907 8,740
Impairment and loss on sales
of oil and gas properties -- 1,061 -- 1,061
-------- -------- -------- --------
6,486 4,004 15,146 12,125
-------- -------- -------- --------
Operating Loss $ (204) $ (3,718) $ (2,392) $(10,654)
======== ======== ======== ========
</TABLE>
GENERAL Over the past three years, the majority of our Gulf Coast activities
have focused on the acquisition, processing and interpretation of 3-D seismic
information and the acquisition of leasehold interests. During 1999 and
thereafter we expect to materially increase our level of Gulf Coast drilling
activities on prospects which we have identified through our extensive 3-D
seismic programs.
OIL AND GAS REVENUES Oil and gas revenues increased significantly for the
quarter and nine months ended September 30, 1999 as compared to the comparable
prior year periods as a result of an increase in production and prices. We
drilled 18 gross (9.7 net) wells in the nine months ended September 30, 1999 of
which 10 gross (4.8 net) were successful. Of the total wells drilled to date,
six gross (2.4 net) wells are currently awaiting pipeline hookup.
EXPLORATORY AND ABANDONMENT COSTS Exploratory and abandonment costs increased
for the quarter and nine months ended September 30, 1999 compared to the
comparable
20
<PAGE> 21
prior year periods as a result of an increase in our exploratory drilling
activity. In 1999 we expensed five dry holes in the third quarter and eight dry
holes for the nine month period. Only one dry hole was expensed during the nine
months ended September 30, 1998. We also expensed $0.9 million and $2.8 million
of expired acreage costs in the quarter and nine months ended September 30,
1999, respectively.
GEOLOGICAL AND GEOPHYSICAL COSTS G&G costs decreased for the quarter and nine
months ended September 30, 1999 compared to the comparable prior year periods.
The reduction in G&G costs is attributable to the progression from G&G
evaluation of project areas to drilling activity in those areas.
21
<PAGE> 22
MID-CONTINENT AND OTHER
OIL AND GAS SALES (IN THOUSANDS EXCEPT AVERAGE PRICES)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Production:
Oil (Bbl) 1 59 1 222
Gas (Mcf) 23 1,835 111 7,631
Mcfe 25 2,189 115 8,965
Boe 4 365 19 1,494
Prices:
Average realized oil price ($/Bbl) $ 17.90 $ 9.27 $ 18.40 $ 13.00
Average realized gas price ($/Mcf) $ 1.87 $ 1.83 $ 1.40 $ 1.95
Operating Revenues:
Oil and gas sales $ 49 $ 3,752 $ 167 $ 17,593
Other gas revenues -- 17 -- 62
-------- -------- -------- --------
49 3,769 167 17,655
-------- -------- -------- --------
Operating Costs and Expenses:
Production taxes 19 254 44 1,202
Lease operating 44 1,116 157 4,187
Depreciation, depletion
and amortization 8 1,969 23 7,931
Exploratory and abandonment 187 216 446 346
Geological and geophysical 196 566 652 1,268
Impairment and (gain)/loss on
sales of oil and gas properties (2,231) 7,027 (1,300) 7,027
-------- -------- -------- --------
(1,777) 11,148 22 21,961
-------- -------- -------- --------
Operating Income (Loss) $ 1,826 $ (7,379) $ 145 $ (4,306)
======== ======== ======== ========
</TABLE>
GENERAL Information for this segment includes activity for both the
Mid-Continent and Northern Rockies areas. Activity in the Mid-Continent began on
June 17, 1996 as a result of the merger with Tide West Oil Company. Effective
September 1, 1998, we sold the majority of our Mid-Continent assets and used the
proceeds from the sale to pay down a portion of debt under our senior credit
facility. Our current strategy in the Mid-Continent is to pursue
technology-oriented exploration projects.
Over the past six years we have acquired extensive acreage in the Northern
Rockies region. Our current strategy is to utilize our acreage position as a
vehicle for generating capital expenditures on our acreage by third party
operators.
Due to the Mid-Continent sale effective September 1, 1998, there were virtually
no oil and gas revenues in this segment for the quarter and nine months ended
September 30,
22
<PAGE> 23
1999. However, in the second and third quarters of 1999 we
recorded additional expenses of $2.4 million related to the 1998 sale of the
Mid-Continent properties and income from the sale of the Blue Forest Unit and
other properties of $3.7 million for a net gain of $1.3 million.
TRADING AND TRANSPORTATION (IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Revenues:
Trading and transportation $ 47,800 $ 35,297 $117,812 $109,155
Operating Costs and Expenses:
Cost of trading and transportation 46,554 33,508 114,381 104,908
Depreciation and amortization 108 100 324 302
-------- -------- -------- --------
46,662 33,608 114,705 105,210
-------- -------- -------- --------
Operating Income $ 1,138 $ 1,689 $ 3,107 $ 3,945
======== ======== ======== ========
</TABLE>
Through our wholly-owned subsidiary, HSES, we market our own gas production as
well as that of third parties. A portion of this gas is sold directly to end
users, while other 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.
HSES also serves as an intermediary in the execution of financial derivative
instruments for a variety of energy related products and, to a lesser extent,
makes speculative trades for its own account in the commodity and basis markets.
Operating income decreased in the quarter and nine months ended September 30,
1999 compared to the comparable prior year periods primarily as a result of a
decrease in derivative transaction gains. HSES experienced better opportunities
at attractive risk profiles during the first nine months of 1998 versus the
comparable period in 1999. This was particularly noticeable during the third
quarter of 1999.
OTHER INCOME AND EXPENSES (IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income and other $ 141 $ 504 $ 411 $ 1,147
General and administrative $ 1,467 $ 2,248 $ 3,942 $ 6,238
Interest $10,717 $10,889 $31,657 $32,741
Depreciation $ 240 $ 376 $ 870 $ 1,204
</TABLE>
INTEREST INCOME AND OTHER INCOME Interest and other income decreased for the
quarter and nine months ended September 30, 1999 compared to comparable prior
year periods. As a result of the Mid-Continent sale we no longer record income
on an interest in a limited partnership.
23
<PAGE> 24
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses ("G&A")
reflect costs incurred, net of administrative costs directly attributable to
drilling and well operations (which costs are included in LOE). Certain G&A
costs directly related to geological and geophysical activities and exploratory
activities are included in geological and geophysical costs and exploratory
costs. G&A per Mcfe was $0.08 and $0.12 ($0.48 and $0.74 per Boe), for the
quarters ended September 30, 1999 and 1998, respectively. For the nine months
ended September 30, 1999 and 1998, G&A per Mcfe was $0.07 and $0.11 ($0.44 and
$0.67 per Boe), respectively. On both an absolute and an Mcfe basis, G&A
decreased for the quarter and nine months ended September 30, 1999 compared to
the comparable prior year periods, due primarily to discontinued G&A
attributable to the 1998 sale of the Mid-Continent properties and the
efficiencies associated with our consolidation program in the D-J Basin.
INTEREST EXPENSE Interest expense decreased for the quarter and nine months
ended September 30, 1999 compared to the comparable prior year periods due to
the decrease in long-term debt attributable to the repayment of $152 million of
bank debt from the proceeds of the Mid-Continent sale. The decrease in interest
expense was partially offset by the decrease in capitalized interest on our
undeveloped properties.
INCOME TAXES (IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Current provision (benefit) $ -- $ -- $ -- $ --
Deferred provision (benefit) 2,960 (5,006) 3,098 (4,499)
------- ------- ------- -------
Provision (benefit) for taxes $ 2,960 $(5,006) $ 3,098 $(4,499)
======= ======= ======= =======
Effective tax rate 38.1% 38.1% 38.1% 38.1%
======= ======= ======= =======
</TABLE>
PROVISION FOR INCOME TAXES We follow the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109. Pursuant to SFAS 109, we have recorded a
tax provision based on tax rates in effect during the period. Accordingly, we
accrued taxes at the rate of 38.1% as of September 30, 1999 and 1998. Due
primarily to significant intangible drilling costs, which are deductible for
income tax purposes, all of our tax provision in 1999 and 1998 is deferred.
24
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
Financing Sources
We believe that our current level of debt and leverage is manageable under
expected production and pricing levels, since our debt is supported by stable,
long-lived producing reserves and by our hedging programs, with short-term
product prices partially hedged at prices that support our bank and other
interest requirements. We expect cash flows from producing activities to be
sufficient to enable us to service our debt for the foreseeable future, absent
any major and prolonged period of low commodity prices. We have a large number
of low-risk, potentially high-return exploitation projects which should enhance
production and cash flow. As part of an overall financing strategy, we
continually evaluate a wide range of future financing alternatives and are not
committed to any particular course. In undertaking any future financing
transactions, we intend to seek to achieve the optimal capital structure needed
to support our 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.
We currently plan to fund capital expenditures attributable to exploration,
exploitation and development activities primarily out of our expected cash flow
from operations, subject to periodic variation resulting from the timing of
project activities and short-term product price volatility.
The borrowing base under our revolving senior bank credit facility with The
Chase Manhattan Bank is currently $280 million. The interest rate under the
Chase facility is the Base Rate plus 0% to 0.625% or LIBOR plus 0.75% to 1.625%.
The borrowing base is based on the Banks' review of our reserves and the Banks'
view of future pricing. Under the terms of the Chase facility, no principal
payments are required until December 15, 2002, assuming we maintain a borrowing
base sufficient to support the outstanding loan balance. As of September 30,
1999, $234 million was outstanding under the Chase facility compared to $230
million at December 31, 1998.
We anticipate that our borrowing capacity under the Chase facility and our
operating cash flow will provide us with adequate financial resources and
flexibility to fund current and ongoing activities, to service our debt and to
meet other financial obligations. The nature of our current development
strategies and other activities provide us with considerable flexibility in
terms of the timing and magnitude of our capital expenditures. If we experience
unforeseen changes in our working capital position or capital resources, we may
revise the capital expenditure program accordingly or alternatively may attempt
to supplement our capital position 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.
25
<PAGE> 26
Capital Commitments
We continuously evaluate our inventory of drilling opportunities to develop a
growth-oriented portfolio of risk-balanced development, exploitation and
exploration opportunities. On an ongoing basis, we adjust the amount and
allocation of our capital expenditures 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, 1999, we incurred total costs for exploration, development,
leasehold, exploratory and abandonment and geological and geophysical activities
of $52.0 million, exclusive of capitalized interest and overhead costs directly
related to exploratory and G&G activity. We estimate that such expenditures for
the full year 1999 will be approximately $75 to $85 million, depending on
product prices for the full year. These costs will be allocated in varying
amounts primarily to activities in our core geographic areas.
A major component of our capital program relates to our development activities
in the D-J Basin. We incurred approximately $32.2 million for the nine months
ended September 30, 1999 for costs to drill, deepen, recomplete and refrac our
D-J Basin properties, and anticipate allocating $45 to $50 million to the D-J
Basin for all of 1999.
Another component of our capital program has been to develop our exploitation
and exploration prospects in the onshore portion of the Gulf Coast. For the nine
months ended September 30, 1999, we incurred total expenditures of $18.0 million
for seismic, leasehold and drilling costs in the Gulf Coast. We anticipate
allocating $30 to $35 million to the Gulf Coast projects for all of 1999 for
exploration and development activities including land and seismic.
Activities in our Northern Rockies area are planned to utilize our extensive
acreage position as a vehicle for generating capital expenditures by third party
operators on our acreage. In the third quarter of 1999 much of our effort has
been directed toward consolidating operations on our Greater Green River Basin
gas projects. We continue to seek value-added partners to test new plays and
technologies on our acreage.
We have also entered into a number of other standard industry arrangements that
require the drilling of wells or other activities. We believe that we will meet
our 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, 1999 was $42.3 million, down from $47.5 million for the same period in 1998
primarily as a result of a reduction in our working capital deficit. Future cash
flows will be influenced by, among other factors, the number of producing wells
on line, product prices and production constraints.
26
<PAGE> 27
Risk Management
We use financial instruments to reduce our exposure to market fluctuations in
the price and transportation cost of oil and gas. Our 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 we hedge certain of
our production back to the wellhead. In addition to hedging activities, we are
engaged in using the financial markets to capture trading margins. We have
established policies with respect to open positions which limit our exposure to
market risk and require daily reporting to management of the potential financial
exposure resulting from both hedging and trading activities.
Recently issued accounting pronouncements change current and future accounting
and reporting requirements for certain risk management activities. See Note 2 of
the Notes to Unaudited Consolidated Financial Statements.
Hedging Activities
We enter into transactions for hedging purposes to manage our exposure to price
and location risks in the marketing of our oil and gas production and, in the
case of our 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).
Our general strategy is to hedge price and location risk with swap, collar,
floor and ceiling arrangements. As a part of our risk management program, we
generally enter into hedges for delivery into one of several pipelines located
near our producing regions, Panhandle Eastern Pipeline Company ("PEPL"),
Northwest Pipeline Corporation ("NW"), CIG, or at the New York Mercantile
Exchange ("NYMEX") prices settled at the Henry Hub. With respect to the
NYMEX-hedged volumes that exceed our Gulf Coast volumes, it is our practice to
hedge basis to our producing regions.
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<PAGE> 28
As of September 30, 1999, we held hedge swap positions as follows:
<TABLE>
<CAPTION>
GAS HEDGES Average Daily
Quantity Settlement Price
Time Period (Mmbtu) Location (per Mmbtu)
- -------------------------- --------------- ---------- ----------
<S> <C> <C> <C>
October 1999 50,000 CIG $ 1.900
October 1999 50,000 NW $ 1.735
October 1999 5,000 NW $ 2.100
October 1999 15,000 NW $ 2.130
November 1999-March 2000 10,000 PEPL $ 2.490
November 1999-March 2000 5,000 PEPL $ 2.520
November 1999-March 2000 20,000 PEPL $ 2.700
November 1999-March 2000 10,000 NW $ 2.175
April 2000-October 2000 15,000 NW $ 2.200
April 2000-October 2000 5,000 NW $ 2.200
April 2000-October 2000 10,000 NW $ 2.250
</TABLE>
<TABLE>
<CAPTION>
WRITTEN GAS CALLS Average Daily
Quantity Settlement Price
Time Period (Mmbtu) Location (per Mmbtu)
- -------------------------- --------------- ---------- ----------
<S> <C> <C> <C>
January 2000-December 2000 20,000 NYMEX $ 3.100
January 2001-December 2001 20,000 NYMEX $ 3.000
</TABLE>
As of September 30, 1999 we had hedged our expected oil production as follows:
<TABLE>
<CAPTION>
CRUDE HEDGES Average Monthly
Quantity Settlement Price
Time Period (Bbl) Location (per Bbl)
- -------------------------- --------------- ---------- ----------
<S> <C> <C> <C>
October 1999-December 1999 60,800 WTI $ 15.950
October 1999-December 1999 30,400 WTI $ 16.400
October 1999-December 1999 30,667 WTI $ 14.020
October 1999-March 2000 30,556 WTI $ 13.300
</TABLE>
<TABLE>
<CAPTION>
WRITTEN CRUDE CALLS Average Monthly
Quantity Settlement Price
Time Period (Bbl) Location (per Bbl)
- -------------------------- --------------- ---------- ----------
<S> <C> <C> <C>
January 2000-December 2000 61,000 WTI $ 21.400
January 2001-December 2001 60,833 WTI $ 20.400
</TABLE>
Additionally, with respect to the hedging of third party gas, we have hedged 4.1
Bcf from July 1999 through October 2000 with offsetting physical positions at
settlement prices which are based upon NYMEX future prices or other published
indices.
We routinely buy and sell options or forward contracts as part of our overall
hedging strategy. As of September 30, 1999, we had written crude and natural gas
calls through December 2001. These calls are hedged by future production. The
counterparties to these call transactions require the maintenance of specified
margin balances. Fluctuations in the mark-to-market value of these instruments
could result in additional margin requirements over the term of the underlying
contracts.
28
<PAGE> 29
Trading Activities
We engage 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 our position in an orderly manner over a reasonable period of time
under present market conditions.
Our policy requires that, within defined trading limits, financial instrument
purchase and sales contracts be balanced on a daily basis in terms of contract
volumes and the timing of performance and delivery obligations. During the nine
months ended September 30, 1999, gains of $1.6 million were recognized in
connection with these activities and are included in "trading and transportation
revenues." As of September 30, 1999 we had written call options for which there
are no offsetting positions. These options represent 60,000 mmbtu/day and are
for the month of October 1999. In connection with these call options we
collected a premium of $75,950 which has been 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, we do not
anticipate any material impact to our 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
In the first quarter of 1999, we entered into an interest rate exchange
agreement with a financial institution to hedge $50 million of our borrowings at
5.66% through March 31, 2004. During the fourth quarter of 1998, we entered into
an interest rate exchange agreement with a financial institution to hedge the
interest rate on $80 million of our borrowings at 5.86% through December 15,
2006. Under the terms of the agreements, the difference between the fixed rate
and the one-month LIBOR rate is received or paid by us. As part of the $80
million hedging agreement, we cancelled or offset our previous hedging
agreements. Market risk related to borrowings from a one percent change in
29
<PAGE> 30
interest rates would result in an approximate $1.0 million annual impact on
pre-tax income, based on the quarter end borrowing level and the amount of such
borrowings which are not subject to interest rate swaps.
Total Return Equity Swap
In 1999 we entered into two total return equity swap agreements with a financial
institution. Under the terms of the first agreement, entered into on February
25, 1999, the financial institution acquired approximately 730,000 shares of
HSR's common stock from another investor at a price of $6.0625. We have the
right, but not the obligation, to purchase the stock at a price of $6.0625 per
share at any time through July 1, 2000.
On May 24, 1999 we entered into a second agreement whereby the financial
institution acquired 100,000 shares of HSR's common stock at a price of
$11.9875. We have the right, but not the obligation, to purchase the stock at a
price of $11.9875 per share at any time through January 5, 2001.
If we decide not to purchase the shares on or before the termination of either
agreement, we will receive any increase in the market value of the shares
covered by that agreement above the purchase price of the shares, or will pay
for any loss; however, we may cover any losses by issuing common stock to the
financial institution if we choose to do so. All such amounts will be reflected
in stockholders' equity at the time of settlement. We will also pay certain
commissions and finance costs. At September 30, 1999 the aggregate fair market
value of HSR's common stock in excess of the underlying option price
attributable to such shares was approximately $8.0 million.
Contingencies
In May 1995, we, along with a major oil company, were named as respondents by
the EPA in an administrative order brought under RCRA by the EPA against the
owner/operator of an oilfield production water evaporation facility. Based on
our evaluation of this matter, and after consideration of reserves established,
we believe the resolution of this matter will not have a material adverse effect
on our financial condition or results of operations. See Part II. Other
Information -- Item 1. "Legal Proceedings and Environmental Issues."
Year 2000
We have undertaken and are continuing our 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. These programs are unable to distinguish between years in
different centuries, eg. 1910 and 2010 appear to be the same year. Therefore,
our 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
30
<PAGE> 31
and/or office operations, as well as disruptions in the business operations of
our vendors and customers.
In addressing the problem, we have considered both our information technology
("IT") systems and non-IT systems. IT systems include computer hardware and
software systems as well as telephone and other communications systems. Non-IT
systems include fax machines, copiers, monitors for field operations, and 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 our assessment and corrective efforts to date, we believe that most
of our IT systems are currently Year 2000 compliant. Only a few non-critical
systems remain uncorrected or untested. These systems generally require only
upgrading or installation of software correction packages which have been
identified and which are available. We currently expect to have these remaining
IT systems in compliance by November 30, 1999.
Virtually all of our non-IT systems are provided by third parties. We have
reviewed our critical path non-IT systems in the D-J Basin. The primary
mechanisms of concern to us were the well control units that electronically
control production from each of the wells. Many of these contain embedded chip
technology. Based on written representations of the manufacturers, however, we
believe that these systems are Year 2000 compliant. Our assessment of non-IT
office systems, such as fax machines and copiers has been completed. We have
contacted the third-party providers or manufacturers of these non-IT office
systems and have obtained representations that such systems are Year 2000
compliant.
Since late in 1998 we have been in the process of identifying our most
significant third-party vendors and service providers to determine their state
of readiness regarding the Year 2000 problem as it relates to us. Our key
third-party providers include gatherers, processors and pipelines, oil and gas
purchasers, our banks, the New York Stock Exchange, our transfer agent, the
property managers of our leased office space, equipment suppliers, major joint
venture partners and others. We have been contacting third-party providers
either verbally or in writing and reviewing their public disclosures concerning
the Year 2000 problem in an effort to determine whether we are vulnerable to the
Year 2000 problems of these third parties.
We have determined that our most reasonably likely worst case scenario would be
a failure of third-party systems necessary to move gas from our wells in the D-J
Basin to the market. In order to assess and mitigate risks in this regard, we
have organized a group of appropriate personnel from companies that are
interdependent for purposes of producing, gathering, compressing, transporting
and processing gas in the D-J Basin along the KN and Duke gathering systems.
Meetings have been held with key producers, and the pipeline and gas plant
operators.
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<PAGE> 32
Based on the discussions held with these parties, we believe all of the relevant
equipment is either compliant or expected to be compliant by the end of 1999,
and that any failures can be manually overridden. However, the system appears to
be vulnerable to either a failure of utility power for the processing plants or
a failure of the pipeline owned by BP/Amoco that transports plant liquids from
BP/Amoco's Wattenberg gas plant. The plant representatives stated that they have
been given a high degree of assurance that utility systems necessary to run the
plants are year 2000 ready.
We expect to use our existing staff to address our Year 2000 readiness. Labor
costs attributable to our Year 2000 effort are expected to be less than $100,000
and we anticipate that expenditures for remedial software and replacement of IT
systems will be less than $50,000. We estimate that costs associated with
remediation or replacement of non-IT systems (being primarily office equipment
such as fax machines and copiers) will be less than $50,000.
We have considered other potential worst case scenarios including our inability
to execute financial transactions with our banks or other third parties whose
systems fail or malfunction and the inability to properly account for hedging
and trading transactions due to the inability to properly track pricing indices.
We currently have no reason to believe that any of these scenarios are likely to
occur or that our principal vendors, customers, and business partners will not
be Year 2000 compliant. We are not able to develop reasonable contingency plans
for dealing with these other worst case scenarios, but we do not believe they
are likely to occur. However, the extended failure of certain key third-party
systems could potentially have a material adverse effect on us.
32
<PAGE> 33
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q 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 our expectations, hopes, beliefs, intentions or
strategies regarding the future. All statements other than statements of
historical facts included in this Form 10-Q are forward-looking statements,
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:
o the allocation of planned capital expenditures and the source of and
limits on such expenditures;
o expected drilling opportunities;
o trends or expectations concerning oil and gas prices or market
characteristics;
o expected effect on D-J Basin gas prices from new pipelines;
o our financial position, stability of cash flow, debt service
capabilities and capital availability;
o marketing, hedging and trading risks and benefits and our policy of
attempting to balance open positions;
o credit risks associated with trading and marketing;
o the ability to manage risk through hedging and similar activities and
the expectation that we will continue to undertake such activities;
o business strategy and other plans and objectives for future
operations;
o potential liabilities or the expected absence thereof;
o 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;
o the potential outcome of environmental matters, litigation or other
proceedings.
All forward-looking statements included in this Form 10-Q are based on
information available to us on the date hereof, and we assume no obligation to
update such forward-looking statements. Although we believe the forward-
33
<PAGE> 34
looking statements are based on reasonable assumptions, we can give no assurance
that our expectations will prove to have been correct or that we will take any
actions that may presently be planned. Actual results may differ materially from
any forward-looking statements made by us depending on a variety of factors,
including, among others, the Risk Factors described in our report on Form 10-K
filed March 31, 1999.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings and Environmental Issues
Litigation. We are subject to minor lawsuits incidental to operations in the oil
and gas industry. We believe we have meritorious defenses to all lawsuits in
which we are a defendant and will vigorously defend against them. The resolution
of these lawsuits, regardless of the outcome, will not have a material adverse
effect on our results of operations or financial position.
On July 28, 1998, JW Resources, Inc. brought suit against HSR and HSRTW, Inc. in
the United States District Court for the Northern District of Texas, Amarillo
Division (JW Resources, Inc. v. HS Resources, Inc. and HSRTW, Inc., Civil Action
No. 2:98-CV-275). HSRTW, Inc. is now Questar Exploration and Production Company,
and is a subsidiary of Questar Corp. This case, which was discussed in our
report on Form 10-Q filed May 14, 1999, has now been settled and dismissed with
prejudice by the court and all significant costs are reflected in the September
30, 1999 financial statements.
Environmental Proceedings. The owner of an oil field waste disposal facility, a
major oil company and HSR were named as respondents by the 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 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. We and other non-operators are working together with the EPA
to complete characterization and closure of the facility.
We utilized this facility in past years to dispose of our production and
flowback water. During the period of its use, we 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.
HSR 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.
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<PAGE> 35
Based on our current knowledge and our expectation of proportionate
reimbursement from other parties who utilized the facility, we do not believe
that our share of the reclamation costs will have a material impact on our
financial condition or results of operations. By agreement with other
contributing parties, we are currently paying approximately 50% of the costs
associated with the project, but after recovery from additional liable parties,
our percentage share of overall costs may be reduced to as low as 40%. We have
spent approximately $1.2 million on our behalf to date on the project. Our share
of total costs associated with the project are currently estimated to be
approximately $1.3 million. The remaining estimated liability has been accrued
at September 30, 1999.
On March 25, 1999, we voluntarily reported to the United States Corps of
Engineers the likely violation of Section 404 of the Clean Water Act in
connection with several of the HSR operated drillsites in southern Louisiana.
Operations on several drillsites have disturbed wetlands areas without the
required advance permitting. We agreed to promptly conduct wetlands delineations
on all suspect sites and to submit such data to the Corps for after-the-fact
permitting. This effort is now complete. The Corps issued a routine cease and
desist order to HSR prohibiting any further unpermitted wetlands disturbance on
the violation sites. This order does not interfere with continuation of
production on producing wells, but is delaying the hookup of two wells. This
order does not affect our operations on new wells. Responsibility for
disposition of this matter has now been transferred to Region 6 of the
Environmental Protection Agency. The EPA has requested, and we are currently
producing documents to the EPA in connection with their investigation of the
matter. We are unable at this time to predict the outcome of this investigation,
although we expect the EPA (or the U.S. Department of Justice, if the matter is
transferred) may seek to impose a fine or fines, as well as require mitigation
action. The nature of such fines or mitigation cannot be predicted at this time.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Disclosure Regarding Forward-Looking Statements."
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.
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<PAGE> 36
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
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 Certificate of Amendment of Certificate of Incorporation filed November
30, 1998. (Incorporated by reference to Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999,
filed May 14, 1999.)
3.3 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.)
</TABLE>
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<PAGE> 37
<TABLE>
<S> <C>
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 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 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.)
10.9 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.)
10.10 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.)
10.11 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.)
</TABLE>
37
<PAGE> 38
<TABLE>
<S> <C>
10.12 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.)
10.13 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.)
10.14 Purchase and Sale Agreement between the Company and Wattenberg Gas
Investments, LLC dated April 25, 1996. (Incorporated by reference to
Exhibit 10.32 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, filed August 14, 1996.)
10.15 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.)
10.16 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.)
10.17 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.)
10.18 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.)
10.19 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.)
</TABLE>
38
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<TABLE>
<S> <C>
10.20 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.)
10.21 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.)
10.22 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.)
10.23 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.)
10.24 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.)
10.25 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.)
10.26 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.)
10.27 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.)
10.28 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.)
</TABLE>
39
<PAGE> 40
<TABLE>
<S> <C>
10.29 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.)
10.30 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.)
10.31 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.)
10.32 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.)
10.33 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. (Incorporated by
reference to Exhibit 10.37 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998, filed November 16,
1998.)
10.34 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.
(Incorporated by reference to Exhibit 10.38 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998, filed
November 16, 1998.)
10.35 Sixth Amendment to Amended and Restated Credit Agreement dated as of
December 10, 1998, among the Company and The Chase Manhattan Bank in
its individual capacity and as agent for the Lenders. (Incorporated by
reference to Exhibit 10.40 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998, filed March 31, 1999.)
10.36 Seventh Amendment to Amended and Restated Credit Agreement dated as of
December 31, 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 Annual Report on Form 10-K
for the fiscal year ended December 31, 1998, filed March 31, 1999.)
</TABLE>
40
<PAGE> 41
<TABLE>
<S> <C>
10.37 1999 Non-Compensatory Stock Purchase Plan. (Incorporated by reference
as Exhibit 4.1 to Form S-8 filed January 25, 1999.)
10.38 Supplemental Indenture dated as of March 1, 1999, among the Company and
Harris Trust and Savings Bank as Trustee, amending Indenture dated as
of December 1, 1993, concerning 9-7/8% Senior Subordinated Notes due
2003. (Incorporated by reference to Exhibit 10.43 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998,
filed March 31, 1999.)
10.39 Supplemental Indenture dated as of March 1, 1999, among the Company and
Harris Trust and Savings Bank as Trustee, amending Indenture dated as
of November 27, 1996, concerning 9-1/4% Series A Senior Subordinated
Notes due 2006. (Incorporated by reference to Exhibit 10.44 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998, filed March 31, 1999.)
10.40 Supplemental Indenture dated as of March 1, 1999, among the Company and
Harris Trust and Savings Bank as Trustee, amending Indenture dated as
of December 11, 1998, concerning 9-1/4% Series B Senior Subordinated
Notes due 2006. (Incorporated by reference to Exhibit 10.45 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998, filed March 31, 1999.)
10.41* Seventh Amendment and Supplement to Amended, Restated and Consolidated
Mortgage, Assignment of Production, Security Agreement and Financing
Statement dated as of September 1, 1999 among: The Company and The
Chase Manhattan Bank in its individual capacity, and as agent to the
Lenders.
10.42* Eighth Amendment to Amended and Restated Credit Agreement dated as of
August 27, 1999 among: The Company and The Chase Manhattan Bank in its
individual capacity, and as agent for the Lenders.
10.43* Exchange Agreement dated August 27, 1999 between HS Resources, Inc. and
Patina Oil & Gas Corporation.
27* Financial Data Schedule
</TABLE>
* Filed herewith
b. Reports on Form 8-K.
Report dated August 5, 1999, filing the July 27, 1999 press release in
connection with the Company's second quarter earnings release. Item 5.
41
<PAGE> 42
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 12, 1999 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
42
<PAGE> 43
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.41 Seventh Amendment and Supplement to Amended, Restated and Consolidated
Mortgage, Assignment of Production, Security Agreement and Financing
Statement dated as of September 1, 1999 among: The Company and The
Chase Manhattan Bank in its individual capacity, and as agent to the
Lenders.
10.42 Eighth Amendment to Amended and Restated Credit Agreement dated as of
August 27, 1999 among: The Company and The Chase Manhattan Bank in its
individual capacity, and as agent for the Lenders.
10.43 Exchange Agreement dated August 27, 1999 between HS Resources, Inc. and
Patina Oil & Gas Corporation.
27 Financial Data Schedule
</TABLE>
43
<PAGE> 1
EXHIBIT 10.41
SEVENTH AMENDMENT AND SUPPLEMENT TO
AMENDED, RESTATED AND CONSOLIDATED MORTGAGE, ASSIGNMENT
OF PRODUCTION, SECURITY AGREEMENT AND FINANCING STATEMENT
THIS SEVENTH 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").
R E C I T A L S
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, among
other counties in the State of Colorado, Adams County on August 4, 1993 in Book
4123, Film 621 and in Weld County on August 4, 1993 in Book 1395, Reception No.
2344624, 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, among other counties in the
State of Colorado, Adams County on August 5, 1994 in Book 4369, Page 567 and in
Weld County on August 4, 1994 in Book 1453, Page 1743, Reception No. 2401066.
<PAGE> 2
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 (which instrument, together with all amendments, assignments
and supplements thereto, is called the "MORTGAGE") which was recorded in, among
other counties in the State of Colorado, Adams County on September 14, 1995 in
Book 4588, Page 745 and in Weld County on September 13, 1995 in Book 1511, Page
203, Reception No. 2455532, 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 (the "FIRST
AMENDMENT TO MORTGAGE") 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 (such Amended and Restated Credit Agreement
as amended from time to time called 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, among other
counties in the State of Colorado, Adams County on July 12, 1996 in Book 4794,
Page 174 and in Weld County on June 27, 1996 in Book 1554, Page 151.
H. 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, among other counties in the State of
Colorado, Adams County on September 3, 1996 in Book 4828, Page 624 and in Weld
County on September 3, 1996 in Book 1564, Page 729, 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, among other counties in the State of
Colorado, Adams County on January 30, 1997 in Book 4928, Page 37 and in Weld
County on January 23, 1997 in Book 1588, Page 394, Fifth Amendment to Amended,
Restated and Consolidated Mortgage, Assignment of Production, Security Agreement
and Financing Statement dated as of December 15, 1997 (the "FIFTH AMENDMENT TO
MORTGAGE"), which was duly recorded in, among other counties in the State of
Colorado, Adams County on December 24, 1997 in Book 5193, Page 156 and in Weld
County on December 24, 1997 in Book 1638, Page 1725 and Sixth Amendment to
Amended, Restated and Consolidated Mortgage, Assignment of Production, Security
Agreement and Financing Statement dated as of July 22, 1998 (the "SIXTH
AMENDMENT TO Mortgage"), which was duly
-2-
<PAGE> 3
recorded in, among other counties in the State of Colorado, Adams County on July
23, 1998 in Book 5406 at Page 641 and in Weld County on July 23, 1998 as
Reception No. 2628057.
I. The Mortgage, the First Amendment to Mortgage, the Second Amendment
to Mortgage, the Third Amendment to Mortgage, the Fourth Amendment to Mortgage,
the Fifth Amendment to Mortgage and the Sixth Amendment
to Mortgage are herein collectively called the "MORTGAGE".
J. 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 in 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 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
-3-
<PAGE> 4
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 ____ day of __________________, 1999 (the "EFFECTIVE
DATE").
MORTGAGOR:
HS RESOURCES, INC.
Attest:
By:
--------------------------------
By: Name:
---------------------------------- Title:
Name: James M. Piccone
Title: Secretary
MORTGAGEE:
THE CHASE MANHATTAN BANK (formerly
known as The Chase Manhattan Bank,
N.A.), AS AGENT
By:
--------------------------------
Name:
Title:
-4-
<PAGE> 5
STATE OF COLORADO }
}
COUNTY OF DENVER }
The foregoing instrument was acknowledged before me on ________________
____, 1999 by ______________________, __________________________ of HS
RESOURCES, INC., a Delaware corporation, on behalf of such corporation.
Seal: Notary Public in and for the
State of Colorado
STATE OF NEW YORK }
}
COUNTY OF NEW YORK }
The foregoing instrument was acknowledged before me on
___________________, 1999 by _______________________________________,
___________________________ of THE CHASE MANHATTAN BANK, state banking
corporation, on behalf of such corporation.
Seal: Notary Public in and for the
State of New York
-5-
<PAGE> 1
EXHIBIT 10.42
EIGHTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
THIS EIGHTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"Amendment") is dated as of August 27, 1999 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, the Fourth Amendment to Amended and Restated
Credit Agreement dated as of June 16, 1998, the Fifth Amendment to Amended and
Restated Credit Agreement dated as of September 1, 1998, the Sixth Amendment to
Amended and Restated Credit Agreement dated as of December 10, 1998 and the
Seventh Amendment to Amended and Restated Credit Agreement dated as of December
31, 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:
"Eighth Amendment" shall mean that certain Eighth Amendment to
Amended and Restated Credit Agreement dated as of August 27, 1999,
among the Borrower, the Lenders and the Agent.
<PAGE> 2
3. Section 9.15 of the Credit Agreement is hereby amended by adding the
following clause (vi):
"and (vi) the exchange of the Properties described in the
letter dated August 19, 1999 from the Borrower attached to the Eighth
Amendment."
4. 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 Majority Lenders; and
(b) the completion of the exchange of Properties as described
in the letter dated August 19, 1999 from the Borrower attached to the
Eighth Amendment.
5. 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.
6. 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.
7. 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.
8. 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.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date set forth in the opening paragraph of this Amendment.
[SIGNATURES OMITTED]
-2-
<PAGE> 1
EXHIBIT 10.43
EXCHANGE AGREEMENT
THIS AGREEMENT ("Agreement") is entered into this _____ day of August,
1999 between HS RESOURCES, INC., a Delaware Corporation ("HSR"), with offices at
1999 Broadway, Suite 3600, Denver, Colorado 80202, and PATINA OIL & GAS
CORPORATION, a Delaware corporation, ("Patina") with offices at 1625 Broadway,
Suite 2000, Denver, Colorado 80202. "Assignor" shall mean the party hereto which
is to assign its rights in the Properties as of the Effective Time: namely, HSR
is the Assignor with regard to Patina Purchase Properties and Patina is the
Assignor with regard to the HSR Purchase Properties. "Assignee" shall mean the
party hereto which is to own the Properties after the Effective Time: namely,
HSR is the Assignee with regard to HSR Purchase Properties, and Patina is the
Assignee with regard to Patina Purchase Properties. The term "Properties" shall
be used throughout this Agreement and shall generally refer to either the HSR
Purchase Properties or the Patina Purchase Properties, as the context requires.
1. HSR Purchase Properties. "HSR Purchase Properties" shall mean those
properties that HSR is to receive from Patina as follows:
(a) All of Patina's interest in the Wells described on Exhibit "A-1"
to this Agreement and all of Patina's right, title and interest in
and to the leasehold estate as to all depths associated with the
spacing unit for each Well as described on Exhibit "A-1
Leasehold"; excluding, however, the wellbore of all existing
producing wells located in the same spacing unit that are not
described on Exhibit "A-1";
(b) All of Patina's interest in the Wells described on Exhibit "A-2"
to this Agreement and all of Patina's right, title and interest in
and to the leasehold estate (limited to depths from the surface of
the Earth to the base of the J Sand) associated with the spacing
unit for each Well as described on Exhibit "A-2 Leasehold"
excluding, however, the wellbore of all existing producing wells
located in the same spacing unit that are not described on Exhibit
"A-2"; (collectively, the Wells described on Exhibits "A-1" and
"A-2" and described in subparagraphs (a) and (b) immediately above
shall be referred to as the "HSR Purchase Wells" and the Leases
described on Exhibits "A-1 Leasehold" and "A-2 Leasehold" shall be
referred to as the "HSR Purchase Leases");
(c) Certain personal property and fixtures used in connection with the
operation of the HSR Purchase Wells, including, but not limited
to, all lease equipment, wells, tanks and all other equipment;
(d) The rights and obligations existing under certain contracts and
agreements that benefit or burden the HSR Purchase Wells and HSR
Purchase Leases, including, but not limited to, operating
agreements, marketing agreements, pooling agreements, unit
agreements, segregation agreements, farmout agreements, rights of
way, easements,
1
<PAGE> 2
surface agreements, assignments, purchase and sale agreements, gas
sale contracts, or gas processing contracts;
(e) The oil, gas, casinghead gas, condensate, distillate, liquid
hydrocarbons, gaseous hydrocarbons, products refined and
manufactured therefrom, other minerals, and the accounts and
proceeds from the sale of all of the foregoing to the extent such
production is produced from the HSR Purchase Wells and HSR
Purchase Leases after the Effective Time and is attributable to
Patina; and
(f) Copies of the files, records, data, and other documentary
information, excluding any seismic, geological or geophysical
information and data that are interpretive in nature, ("Data")
maintained by Patina pertaining to the HSR Purchase Wells
described in sub-paragraph 1(a) above.
2. Patina Purchase Properties. "Patina Purchase Properties," shall mean those
properties that Patina is to receive from HSR as follows:
(a) All of HSR's interest in the Wells described on Exhibit "B-1" to
this Agreement and all of HSR's right, title and interest in and
to the leasehold estate (limited from the surface of the Earth to
the base of the J Sand; except for the Ben Houston #1 well and the
Acord Chadburn well which shall include a wellbore interest in the
Dakota formation) associated with 160 acre governmental quarter
section surrounding each J Sand Well listed on the Exhibit "B-1",
which leasehold includes the 15 Wells listed on Exhibit "B-1" and
shown as producing from the Codell formation, all as described on
Exhibit "B-1 Leasehold". In addition, Exhibit "B-1 Leasehold"
includes leases covering interests from the surface of the Earth
to the base of the J Sand Formation for five 160 acres parcels on
which no producing J Sand wells are identified on Exhibit "B-1".
These five parcels are the NE/4 of Section 14, T3N, R66W; the SW/4
of Section 33, T3N, R67W; the NE/4 of Section 34, T3N, R67W; the
SW/4 of Section 9, T3N, R65W; and the SW/4 of Section 32, T4N,
R65W. As to the J Sand formation in the Strong Gas Unit #1 Well
(this well for purposes of this Agreement is considered as a J
Sand well on Exhibit "B-1"), the working interest and net revenue
interest of HSR in such formation is at least equal to the working
interest and net revenue interest set forth in Exhibit "B-1" for
the Codell/Niobrara formations;
(b) All of HSR's interest in the Wells described on Exhibit "B-2" to
this Agreement and all of HSR's right, title and interest in and
to the leasehold estate (limited from the surface of the Earth to
the base of the Codell formation) associated with the spacing unit
for each Well as described on Exhibit "B-2 Leasehold", such
interest to specifically exclude any wells not listed on Exhibit
"B-2" that are located on the same lands and leases but that
produce from the J Sand;
(c) All of HSR's interest in the Wells described on Exhibit "B-3" to
this Agreement and all of HSR's right, title and interest in and
to the leasehold estate (limited to those formations, as described
on Exhibti "B-3 Leasehold", from the surface to the base of
2
<PAGE> 3
the J Sand in which HSR's only working interest ownership is a 1%
working interest acquired from Amoco) associated with the spacing
unit for each Well as described on Exhibit "B-3 Leasehold"
(collectively, the Wells described on Exhibits "B-1", "B-2", and
"B-3" and described immediately above in subparagraphs (a), (b),
and (c) shall be referred to as the "Patina Purchase Wells" and
the Leases described on Exhibits "B-1 Leasehold", "B-2 Leasehold",
and "B-3 Leasehold" and described immediately above in
subparagraphs (a), (b), and (c) shall be referred to as the
"Patina Purchase Leases");
(d) Certain personal property and fixtures used in connection with the
operation of the Patina Purchase Wells, including, but not limited
to, all lease equipment, wells, tanks and all other equipment;
(e) The rights and obligations existing under certain contracts and
agreements that benefit or burden the Patina Purchase Wells and
the Patina Purchase Leases, including, but not limited to,
operating agreements, marketing agreements, pooling agreements,
unit agreements, segregation agreements, farmout agreements,
rights of way, easements, surface agreements, assignments,
purchase and sale agreements, gas sale contracts, or gas
processing contracts;
(f) The oil, gas, casinghead gas, condensate, distillate, liquid
hydrocarbons, gaseous hydrocarbons, products refined and
manufactured therefrom, other minerals, and the accounts and
proceeds from the sale of all of the foregoing to the extent such
production is produced after the Effective Time from the Patina
Purchase Wells under the Patina Purchase Leases and is
attributable to HSR; and
(g) Copies of the Data maintained by HSR pertaining to the Patina
Purchase Wells described in sub-paragraph 2(a) above.
3. Exchange of Properties. In consideration of the covenants and
conditions contained in this Agreement and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged:
(a) Subject to the provisions of this Agreement, on the Closing
Date HSR shall exchange with and assign to Patina the Patina
Purchase Properties as of the Effective Time;
(b) Subject to the provisions of this Agreement, on the Closing
Date Patina shall exchange with and assign to HSR the HSR
Purchase Properties as of the Effective Time; and
(c) The parties recognize that certain formations included in
certain of the Properties are subject to tax credit agreements
relating to production from such formations and, although
these tax credit agreements will be terminated prior to
Closing, the interests that were subject to the tax credit
agreements may not be utilized in a
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like kind exchange. To the extent necessary, the portion of
the Properties that were subject to tax credit agreements
shall be deemed to be exchanged in a separate agreement
identical to this Agreement, in order that the remaining
Properties and formations are exchanged under section 1031 of
the Internal Revenue Code of 1986, as amended. It is the
parties intent that these remaining interests be exchanged on
accordance with section 1031 of the Code.
4. Reserved Interests. Assignor shall reserve and except from the
exchange of the Properties in favor of itself, its successors and
assigns all accounts receivable attributable to the Properties
being assigned that are, in accordance with generally accepted
accounting principles, attributable to the period prior to the
Effective Time.
5. Adjustments on Closing Date. The parties have agreed for purposes
of making certain adjustments that the Wells shall be allocated a
value of $10,000,000 (but Patina may also include in its
allocation a value for the five 160 acre parcels described above
in subparagraph 2(a) relating to the Patina Purchase Wells) for
the interests that the Assignee will be receiving in the exchange.
The allocated values shall be used solely for the adjustments that
may be necessary for title and environmental matters, and other
matters for which adjustment is typically made as set forth
herein, that are discovered by the parties prior to Closing. The
allocated values shall have no other purpose and each party is
otherwise free to value the properties for its own internal
purposes or tax purposes in any manner it so chooses. For sales
tax purposes, the parties have each allocated a value of $30,000
to the personal property that is part of the Properties being
exchanged. The allocated value of the HSR Purchase Properties, as
allocated by HSR, is set forth on a Property-by-Property basis on
Exhibit A- 1 and A-2 ("HSR Allocated Value"). The Allocated Value
of the Patina Purchase Properties, as allocated by Patina, is set
forth on a Property-by-Property basis on Exhibit B-1, B-2, and B-3
("Patina Allocated Value"; as the context requires, the HSR
Allocated Value and the Patina Allocated Value may for a
particular Property be referred to as simply the "Allocated Value"
for that Property).
6. Preliminary Settlement Statement. At Closing, HSR and Patina shall
execute and deliver a settlement statement, prepared in accordance
with this Agreement and generally accepted accounting principles
(the "Preliminary Settlement Statement") that shall set forth the
payments to be made to each other as set forth in this Agreement
and the calculation used to determine such amount. Assignor shall
provide Assignee with the Preliminary Settlement Statement for the
Properties being assigned three days prior to Closing for
Assignee's review and approval.
7. Adjustments. The Preliminary Settlement Statement shall include a
credit adjustment for the Assignor for expenses attributable to
its Properties since the Effective Time which have been paid by
Assignor prior to the Closing Date. The Preliminary Settlement
Statement shall include a debit adjustment for the Assignor for
all revenues from production from its Properties since the
Effective Time which have been received by the Assignor prior to
the Closing Date.
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8. Conveyance. Subject to the conditions set forth below, in HSR's
Denver office, Assignor shall convey to Assignee all of Assignor's
right, title, and interest in the appropriate Properties by
delivering on August 31, 1999 (the "Closing Date") an executed,
acknowledged, and recordable blanket Assignment, Bill of Sale and
Conveyance, substantially in the form attached hereto as Exhibit
"E" (for the HSR Purchase Properties) and Exhibit "F" (for the
Patina Purchase Properties). If necessary, certain Wells may be
exchanged on separate assignment forms in order to include
specific reservations or exceptions to the conveyances resulting
from the need to execute segregation agreements pertaining to that
Well and existing wells in the same spacing unit. Title to certain
of the HSR Purchase Properties is held in SOCO Wattenberg
Corporation, a wholly owned subsidiary of Patina. SOCO Wattenberg
will be made a party to the conveyance document for these
interests.
9. Delivery of Data. Assignor shall deliver copies of the Data to
Assignee within fourteen (14) days after the Closing Date. The
Data provided to Assignee shall not include any confidential
correspondence, and shall not include any information which, if
disclosed, would cause Assignor to breach any contract or
agreement. Assignor shall retain originals of the Data. Assignor
makes no representations or warranties as to the accuracy or
completeness of the Data. Assignor shall not allow Assignee access
to geophysical or seismic records if by so doing it would be in
breach of any contract or agreement. If Assignee, in its
reasonable opinion, desires to review or copy information
maintained by Assignor for a Property that is not described in
sub-paragraphs 1(a) or 2(a) above, excluding any seismic or
geological or geophysical information and data that is
interpretive in nature, and Assignor is not precluded under
obligations of confidence from disclosing such information, upon
request to Assignor and reasonable advance notice, Assignee may
review such information in the office of Assignor during normal
business hours or make a copy of such information at the consent
of Assignor.
10. Effective Time. The ownership of the Properties shall be
transferred from Assignor to Assignee on the Closing Date,
effective as of 7:00 a.m. at the location of the Properties on
July 1, 1999 (the "Effective Time"), except for tax credits on
production for which the Effective Time shall be deemed to be
September 1, 1999 at 7:00 a.m. Assignor shall be entitled to all
amounts realized from, and accruing to, the Properties prior to
the Effective Time, including the right to all production in
storage, processing and inventory, and shall be responsible for
all expenses for the development and operation of the Properties
prior to the Effective Time. Assignee shall be entitled to any
amounts realized from, and accruing to, the Properties subsequent
to the Effective Time and shall be responsible for all expenses
for the development and operation of the Properties subsequent to
the Effective Time. The Preliminary Settlement Statement and the
Final Settlement Statement shall include payments between the
parties as appropriate consistent with the above allocation of
expenses and revenues.
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<PAGE> 6
11. Covenants and Agreements of Assignor. During the period from the
date of this Agreement to the Closing Date, Assignor agrees,
unless specifically waived by Assignee in writing, as follows:
(1) Subject to the provisions of applicable operating and
other agreements, Assignor shall continue to operate and
administer the Properties to be assigned by Assignor in a good
and workmanlike manner consistent with its past practices, and
shall carry on its business with respect to such Properties in
substantially the same manner as before execution of this
Agreement.
(2) Assignor shall, except for emergency action taken in the
face of risk to life, property or the environment, submit to
Assignee for prior written approval, all requests for
operating or capital expenditures and all proposed contracts
and agreements relating to the Properties to be assigned by
Assignor that involve individual commitments of more than
$10,000 net to Assignor's interest.
(3) Assignor shall nominate on behalf of Assignee natural gas
production for the month of September, 1999 consistent with
its current practices.
12. Covenants and Agreements of Assignee. Assignee shall, subject to
the applicable terms of existing operating agreements, take over
operations as of 7:00 a.m. local time at the wellsites on the day
after Closing Date, with respect to Assignor-operated Wells
included in the Properties assigned to Assignee at the Closing.
Assignor shall use its best efforts (without expending money or
extraordinary amounts to time) to recommend to the other working
interest owners that Assignee succeed Assignor as operator, but
Assignor has no obligation to assure that Assignee will succeed
Assignor as operator. Upon taking over operations, Assignee will
post all necessary state, federal and local bonds and shall assist
Assignor in having Assignor's existing bonds released, or in the
alternative, having the wells operated by Assignee released from
Assignor's existing bond.
13. Assumption of Liabilities and Indemnity. If Closing occurs, and
except for title matters which are governed exclusively under
paragraphs 18 and 19 and gas balancing matters which are covered
under paragraph 23:
(A) AS TO PROPERTIES BEING ASSIGNED TO ASSIGNEE FOR WHICH
ASSIGNEE IS THE OPERATOR PRIOR TO CLOSING,
ASSIGNEE SHALL BE RESPONSIBLE FOR AND SHALL PAY AND BEAR
ALL COSTS, RISKS, LIABILITIES, AND OBLIGATIONS ATTRIBUTABLE
TO SUCH PROPERTIES THAT ARISE BEFORE OR AFTER THE EFFECTIVE
TIME, EXCEPT TO THE EXTENT ALLOCATED TO ASSIGNOR UNDER THIS
AGREEMENT (THE "ASSIGNEE OBLIGATIONS"). ASSIGNEE SHALL
DEFEND, INDEMNIFY AND SAVE AND HOLD HARMLESS ASSIGNOR, ITS
OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS AGAINST ALL
LOSSES, DAMAGES, CLAIMS, DEMANDS, SUITS, COSTS, EXPENSES,
LIABILITIES AND SANCTIONS OF EVERY KIND AND CHARACTER,
INCLUDING
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<PAGE> 7
WITHOUT LIMITATION REASONABLE ATTORNEYS' FEES, COURT COSTS
AND COSTS OF INVESTIGATION, WHICH ARISE FROM OR IN
CONNECTION WITH ANY ASSIGNEE OBLIGATIONS.
(B) AS TO PROPERTIES BEING ASSIGNED TO ASSIGNEE FOR WHICH
ASSIGNEE IS NOT THE OPERATOR PRIOR TO CLOSING,
ASSIGNOR SHALL DEFEND, INDEMNIFY AND SAVE AND HOLD HARMLESS
ASSIGNEE, ITS OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS,
AGAINST ALL LOSSES, DAMAGES, CLAIMS, DEMANDS, SUITS, COSTS,
EXPENSES, LIABILITIES AND SANCTIONS OF EVERY KIND AND
CHARACTER, INCLUDING WITHOUT LIMITATION REASONABLE
ATTORNEYS' FEES, COURT COSTS AND COSTS OF INVESTIGATION,
WHICH ARISE FROM OR IN CONNECTION WITH ANY CLAIMS (I) THAT
HAVE BEEN ASSERTED BY A THIRD PARTY IN WRITING TO ASSIGNOR
ON OR BEFORE THE CLOSING DATE OR (II) THAT ARE ASSERTED BY
A THIRD PARTY ARISING FROM OR IN CONNECTION WITH THE
OWNERSHIP OF SUCH PROPERTIES BY ASSIGNOR PRIOR TO THE
EFFECTIVE TIME IF SUCH CLAIMS ARE ASSERTED IN WRITING TO
EITHER ASSIGNOR OR ASSIGNEE WITHIN ONE YEAR FROM THE
CLOSING DATE AND ONLY TO THE EXTENT THAT THE AGGREGATE OF
ALL LOSSES, DAMAGES, COSTS, LIABILITIES, OBLIGATIONS AND
EXPENSES SUFFERED BY ASSIGNEE AS A RESULT OF SUCH CLAIMS
EXCEEDS A DEDUCTIBLE OF $150,000. Regarding environmental
matters, the indemnity set forth above shall apply to and
cover third party claims only to the extent that the
aggregate of all losses, damages, costs, liabilities,
obligations and expenses suffered by Assignee as a result
of each such claim exceeds $5,000 and only if, when taken
in conjunction with any qualifying environmental defects
for which Assignee notified Assignor pursuant to paragraph
18 below, the aggregate of all losses, damages, costs,
liabilities, obligations and expenses suffered by Assignee
as a result thereof exceed a deductible of $150,000. If
such aggregate amount exceeds the $150,000 deductible,
Assignee shall be entitled to indemnification from Assignor
for all such excess amounts.
(C) Patina entered into a Letter Agreement with Damson
Investment Group, Inc. dated March 5, 1999 covering some of
the HSR Purchase Wells. In addition to the indemnities set
forth above, Patina shall defend, indemnify and save and
hold harmless HSR and its officers, directors, employees
and agents, against all losses, damages, claims, demands,
suits, costs, expenses, liabilities, and sanctions of every
kind and character, including without limitation reasonable
attorney's fees, court costs and costs of investigation,
which arise from or in connection with the transaction with
Damson covered by the above referenced Letter Agreement. If
HSR receives a claim for which it is entitled to
indemnification under this paragraph C, HSR shall promptly
forward such claim to Patina and Patina shall assume the
defense thereof. In such event, Patina shall have the sole
and exclusive authority to settle such claim, as long
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as the settlement does not effect the ownership of the
affected property now held by HSR.
(D) The indemnities set forth in paragraphs (A) and (B)
above do not cover claims for improper payment of
production proceeds where the party seeking indemnification
was distirbuted such proceeds (from the indemnifying party)
and has improperly further disbursed such proceeds to third
parties and such third parties assert a claim regarding the
improper disbursement. Such claims will be the
responsibility of the party that improperly distributed the
proceeds to third parties.
14. Contracts. Assignee shall assume and agree to perform under the
contracts and agreements that benefit and burden the Properties as
of the Effective Time.
15. Warranties. The assignment from Assignor to Assignee shall be made
without warranty of title to the Properties, either express or
implied, except that the Properties shall be conveyed to Assignee
free and clear of all liens and encumbrances created by, through,
and under Assignor. Assignee assumes the risk of condition of the
Properties, including compliance with all laws, rules, orders and
regulations affecting the environment, whether existing before or
after the Closing Date, except as otherwise set forth in this
Agreement. The Assignment and Bill of Sale from Assignor to
Assignee shall disclaim any warranty of merchantability or fitness
for particular purpose as to the Equipment, and Assignee shall
accept the Equipment "As Is," in its present location and
condition.
16. Representation of Assignor. There is no action, suit, or
proceeding (including, without limitation, takings under
condemnation or eminent domain) pending, or to the knowledge of
Assignor threatened, against the Properties. There is no claim or
demand (including, without limitation, takings under condemnation
or eminent domain) pending, or to the knowledge of Seller
threatened, against the Properties which would have a material
adverse affect on the value, operation or Assignor's ownership of
the affected Property (measured individually and in the
aggregate).
17. Representation of Assignee. Assignee is experienced and
knowledgeable in the oil and gas business and is aware of its
risks. It acknowledges that Assignor has made no representations
or warranties whatever, express or implied, as to the reserves
attributable to the Properties or the value thereof, as to the
condition or state of repair of any of the Properties or as to the
legal, tax or other consequences of the transaction contemplated
by this Agreement. In entering into this Agreement, Assignee has
relied solely upon its independent investigation of, and judgment
with respect to, such matters. It acknowledges and accepts the
risks and absence of liquidity inherent in ownership of the
Properties.
18. Review Period. Upon execution of this Agreement, Assignee shall
have the right, at reasonable times during normal business hours,
to conduct its investigation into the status of the title and
environmental condition of the Properties. All information
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regarding the Properties furnished by Assignor to Assignee is
furnished to Assignee solely as a courtesy, and Assignor makes no
representation or warranties concerning its accuracy or
completeness, and assumes no liability for any use by Assignee
whatsoever. Assignee agrees that any inspection it makes of the
Properties is at its sole cost and risk and agrees to hold
harmless and indemnify Assignor for any damages or injury of any
kind incurred by any party as the result of such inspection. If,
in the course of conducting such investigation, Assignee discovers
environmental or title defects materially affecting the
Properties, Assignee may, no later than 5 days prior to the
Closing Date, notify Assignor in writing specifying such defects,
the Properties affected thereby, and Assignee's estimate of the
net reduction in Allocated Value of the Properties affected by
such defects. If Assignee fails to notify Assignor no later than 5
days prior to the Closing Date of any such defects, the defects
will be deemed waived. Assignor shall be released from any
liability therefor, the parties shall proceed with closing,
Assignor shall be under no obligation to correct the defects, and
Assignee shall assume the risks, liability and obligations
associated with such defects. No adjustment for title or
environmental defects shall be made unless and until, and only to
the extent that the individual value of each title or
environmental defect exceeds $5,000 per Well and the aggregate
value of all such defects exceeds a deductible of $150,000. No
adjustments shall be made for the first $150,000 of such defects.
19. Defect Remedies. Subject to the limitations contained in
Paragraph 18, for each Well for which Assignee provided written
notice to Assignor of a title or environmental defect as provided
in paragraph 18, prior to the Closing Date Assignor and Assignee
shall agree that (i) the title or environmental defect has been
removed by Assignor, (ii) Assignee agrees to waive the relevant
title or environmental defect and purchase the affected Lease
notwithstanding the defect, (iii) Assignor agrees to indemnify
Assignee against all losses, costs, expenses and liabilities with
respect to such title or environmental defect, provided that
Assignee agrees to such indemnification, which will not be
unreasonably withheld, (iv) Assignee and Assignor agree to an
amount by which the Allocated Value of the affected Well has been
reduced and such amount shall be included in the Preliminary
Settlement Statement. Assignee shall have no remedy for any title
or environmental defect after the Closing Date, except as to third
party claims covered under paragraph 13 regarding environmental
claims.
20. Casualty Loss. If subsequent to the date of this Agreement and,
prior to the Closing, all or any material portion of the
Properties to be conveyed to Assignee at the Closing is destroyed
by fire or other casualty, is taken in condemnation or under the
right of eminent domain or proceedings for such purposes are
pending or threatened, Assignee shall receive such interest
notwithstanding any such destruction, taking or pending or
threatened taking. Assignor shall, at the Closing, pay to Assignee
all sums paid to Assignor by third parties by reason of the
destruction or taking of such Properties to be assigned to
Assignee, and shall assign, transfer and set over unto Assignee
all of the right, title and interest of Assignor in and to any
unpaid awards or other payment from third parties arising out of
the destruction, taking or pending or threatened
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<PAGE> 10
taking as to such interest to be conveyed to Assignee. In
addition, Assignor shall pay to Assignee the amount of Assignor's
deductible under the applicable insurance policy or policies.
Assignor shall not voluntarily compromise, settle or adjust any
material amount payable by reason of any material destruction,
taking or pending or threatened taking as to the interest to be
conveyed to Assignee without first obtaining the written consent
of Assignee.
21. Taxes. Severance, conservation and other production taxes
attributable to the production from the Properties shall be the
obligation of the party entitled to such production. Each party
will be responsible for the filing and collection of any severance
tax refunds attributable to the production for which they were
entitled.
Ad valorem and personal property taxes attributable to the
Properties shall be prorated between Assignee and Assignor as of
the Effective Time as described below. Both parties understand and
agree that the payment of ad valorem and personal property taxes
is generally the obligation of the operator. The operator
typically withholds or collects such taxes from other interest
owners and remits full payment to the proper taxing authority.
Based on this understanding, (i) Patina will be responsible for
the payment of ad valorem taxes attributable to the Properties
described on Exhibits A-1, B-2 and B-3 for the 1999 tax assessment
year, which are based on the value of 1998 production and payable
in 2000, (ii) Patina will be responsible for the payment of ad
valorem taxes attributable to the Properties described on exhibits
B-1, B-2 and B-3 for the 2000 tax assessment year, which are based
on the value of 1999 production and payable in 2001, (iii) Patina
will receive credit on the Preliminary Settlement Statement for
estimated ad valorem taxes attributable to the Properties
described on Exhibit B-1 for the portion of the 2000 tax
assessment year related to production from January 1, 1999 through
June 30, 1999, (iv) HSR will be responsible for the payment of ad
valorem taxes attributable to the Properties described on Exhibits
A-2 and B-1 for the 1999 tax assessment year, which are based on
the value of 1998 production and payable in 2000, (v) HSR will be
responsible for the payment of ad valorem taxes attributable to
the Properties described on Exhibit A-1 and A-2 for the 2000 tax
assessment year, which are based on the value of 1999 production
and payable in 2001, and (vi) HSR will receive credit on the
Preliminary Settlement Statement for estimated ad valorem taxes
attributable to the Properties described on Exhibit A-1 for the
portion of the 2000 tax assessment year related to production from
January 1, 1999 through June 30, 1999. The estimated ad valorem
taxes described in (iii) and (vi) above will be based on the value
of production attributable to the Properties for such period and
the most recent published mill levies available for the applicable
counties. These estimates will be adjusted, if necessary on the
Final Settlement Statement at which time they will be final with
no further adjustments being made for actual ad valorem taxes
paid. Notwithstanding the foregoing, Patina and HSR agree that if
certain third party purchasers of oil and gas have remitted ad
valorem tax withholding to either Patina or HSR as non-operator of
the Properties, Patina or HSR will remit the funds to the operator
through the Preliminary Settlement Statement.
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Personal property taxes have not yet been assessed for 1999 and
thus have not been billed to non-operated working interests.
Personal property taxes assessed against the personal property and
fixtures associated with the HSR Purchase Wells for the 1999 tax
assessment year will be paid by HSR, and such taxes assessed
against the personal property and fixtures associated with the
Patina Purchase Wells for the 1999 tax assessment year will be
paid by Patina. On the Preliminary Settlement Statement, HSR will
be entitled to receive a credit for 50% of the estimated personal
property taxes attributable to the HSR Purchase Wells and Patina
will be entitled to receive a credit for 50% of the estimated
personal property taxes attributable to the Patina Purchase Wells.
Both parties using the best valuation and mill levy data available
will estimate the amount of such taxes. The estimates will be
included in the Preliminary Settlement Statement at Closing. These
estimates will be adjusted, if necessary, on the Final Settlement
Statement at which time they will be final with no further
adjustments being made for actual personal property taxes paid.
22. Post Closing Accounting. An accounting shall be held no later than
90 days after the Closing Date. At that time Assignor shall
furnish to Assignee a complete account as to all invoices paid and
all revenues received attributable to all operations on, and
production from, the Properties assigned to Assignee during the
period from the Effective Time to the Closing Date. Such account
shall be settled between the parties by the payment of cash, as
appropriate, pursuant to a Final Settlement Statement, to be
prepared by Assignor and approved by both parties. Assignor shall
not charge the Assignee COPAS or other general and administrative
overhead for the Properties being assigned to Assignee for the
period between the Effective Time and the Closing Date.
23. Gas Balancing. The estimated volume of such underproduction or
overproduction attributable to the HSR Purchase Properties is set
forth on a Property-by-Property basis on Exhibit C hereto. The
estimated volume of such underproduction or overproduction
attributable to the Patina Purchase Properties is set forth on a
Property-by-Property basis on Exhibit D hereto. Prior to the
completion of the Final Settlement Statement, the Parties will use
their best efforts to update (to the Effective Time) the volume
amounts listed on Exhibits C and D. The Final Settlement Statement
shall include an adjustment for the value of the underproduction
or overproduction of gas attributable to the Assignor's interest
in the Properties as of the Effective Time, such adjustment to be
based on a value of $1.00 per MCF. If Assignor and a third party
operator (other than Assignee) disagree as to the amount of any
imbalance, Assignee and Assignor shall mutually agree to an amount
for purposes of this paragraph. After the completion of the Final
Settlement Statement, there shall be no further adjustment made as
to gas imbalance on any of the Properties and the Assignee shall
be responsible for and administer all gas imbalance matters
affecting the Properties received in the exchange by Assignee.
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24. Peltier Well. HSR and Patina agree that the gas imbalance account
for the Peltier 1-15 well located in the NW/4 of Section 15, T1S,
R69W as of the Effective Time shall be considered to be in balance
(ie the gas imbalance for the well shall be reduced to zero).
25. Operations Liability. Upon Closing Assignee will comply with all
laws and governmental regulations with respect to all operations
associated with the Wells assigned to it hereunder, including
abandonment of wells, the compliance with laws or rules regarding
the environment, and regarding inactive or unplugged wells,
including bonding requirements, and surface work as specified in
the applicable oil and gas leases or applicable law or regulation.
26. Post Closing Administrative Accounting Responsibilities. To the
extent Assignor is presently involved in the administration of the
Properties, Assignor shall retain the obligation and
responsibility for the administration of the Properties for the
period ending on the Closing Date. However, Assignor and Assignee
recognize that Assignee's obligation to immediately assume
administrative accounting responsibilities for the Properties upon
Closing may be impractical and will present certain difficulties
for both Assignor and Assignee in regards to transfer of such
administrative responsibilities, timely and proper revenue
distributions, payment of expenses, joint interest billings and
the rendition of post-closing settlement statements.
Therefore, to facilitate a convenient and proper transfer of the
administrative accounting responsibilities relating to the
Properties, Assignor and Assignee agree the administrative duties
will be transferred from the Assignor to the Assignee in the
following manner:
(a) Revenue Distributions:
(1) Assignor shall retain the responsibility for
distribution of revenues attributable to production through
the end of the month of Closing. Such distribution shall be
conducted by Assignor for revenues received through Assignor's
sales cut-off during the second month following the month of
Closing.
(2) In the event Assignor should receive revenues
subsequent to the Assignor's cutoff for its last revenue
distribution, as described above, unless such revenues are for
production prior to the Effective Time, Assignor shall remit
such revenues to Assignee within five (5) business days, and
Assignee shall be responsible for distributing all such
amounts, including distributions to royalty owners.
(3) In the event Assignee should receive revenues for
production from the Properties for the production period prior
to Effective Time, Assignee shall remit such revenues, net of
severance taxes and royalties, to Assignor within five (5)
business days.
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(4) It is understood that Assignor will not undertake
to change its distribution master files for purposes of the
above discussed revenue distributions subsequent to the
Closing Date, and any information on the Properties received
by Assignor related to master file changes subsequent to the
Closing Date will be remitted to the Assignee as soon as is
practical.
(b) Payment of Expenses and Joint Interest Billings:
(1) Assignor shall retain, subject to the terms
hereof, the responsibility for the payment of all invoices,
expenses and joint interest billings for such expenses, for
invoices received and vouchered attributable to production
through the end of the month of Closing, excepting COPAS or
other general and administrative expenses that the Assignor
has agreed hereunder shall not be charged to Assignee.
(2) In the event Assignor should receive invoices,
expenses and joint interest billings subsequent to the Closing
Date that are not administered under sub-paragraph (1)
immediately above, unless such matters are for periods prior
to the Effective Time (which shall be paid by Assignor),
Assignor shall remit such invoices, expenses and joint
interest billings to Assignee within five (5) business days,
and Assignee shall be responsible for payment thereof.
(3) Assignor acknowledges and agrees that it shall
retain the responsibility for paying and shall pay invoices,
expenses and joint interest billings attributable to the
period prior to the Effective Time, except to the extent such
expenses pertain to claims made by third parties that are
covered by the Assignee indemnity set forth in paragraph 13.
In the event Assignee should receive such invoices, expenses
and joint interest billings attributable to the period prior
to Effective Time, Assignee shall remit such invoices,
expenses and joint interest billings to Assignor within five
(5) business days and Assignor shall be responsible for
payment thereof.
28. LIABILITY AND JURY WAIVERS.
(a) LIMITATION ON LIABILITY. NO PARTY SHALL BE REQUIRED TO PAY OR
BE LIABLE FOR INCIDENTAL, CONSEQUENTIAL, EXEMPLARY, PUNITIVE, OR
INDIRECT DAMAGES (WHETHER OR NOT ARISING FROM ITS NEGLIGENCE) TO
ANY OTHER PARTY REGARDING ANY DISPUTE ARISING OUT OF THIS
AGREEMENT OR A CLAIM OF BREACH HEREOF. THIS PROVISION SHALL NOT
DIMINISH OR AFFECT IN ANY WAY THE PARTIES' RIGHTS OR OBLIGATIONS
UNDER ANY INDEMNITIES PROVIDED FOR IN THIS AGREEMENT.
(b) WAIVER OF JURY TRIAL. EACH PARTY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE
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TO A TRIAL BY JURY IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING
RELATING TO THIS AGREEMENT.
29. Termination Period. If the closing has not occurred on or before
the Closing Date, this Agreement shall automatically terminate
unless HSR and Patina agree in writing to an extension.
30. Further Assurances. After Closing, HSR and Patina shall execute,
acknowledge and deliver or cause to be executed, acknowledged and
delivered such instruments, and shall take such other action as
may be necessary or advisable to carry out their obligations under
this Agreement and under any document, certificate or other
instrument delivered pursuant hereto. Certain of the Properties
may be subject to the terms of a Farmout Agreement dated March 18,
1992, as amended, between Amoco Production Company and SOCO
Wattenberg Corporation ("SOCO Wattenberg"). In general, if the
Farmout is in effect and if SOCO Wattenberg conducts operations in
compliance with the terms of the Farmout, SOCO Wattenberg has the
right to earn a 99% working interest in certain formations and
lands with HSR retaining a 1% working interest. If it is
determined after Closing that the Farmout remains in effect and
SOCO Wattenberg conducts operations such that it may earn a 99%
interest in a formation under the Farmout, HSR agrees to assign to
SOCO Wattenberg its retained 1% interest in that formation as to
the lands earned pursuant to the Farmout.
31. Tax Credits. The parties agree to cooperate with one another and
coordinate the unwinding or transfer prior to Closing of the
monetization of section 29 tax credits pertaining to the
Properties being assigned by Assignor hereunder. As set forth in
paragraph 10 above, the Effective Time for such tax credits shall
be deemed to be September 1, 1999 at 7:00 a.m.
32. Correction Assignment. HSR previously assigned to Patina certain
1% working interests held by HSR in numerous properties, some of
which are included in the exchange contemplated by this Agreement.
The parties have disagreed as to the interpretation of that
assignment as it relates to certain formations in the leases
assigned. HSR and Patina agree prior to Closing that a corrective
assignment will be made and recorded as part of the closing
documents hereunder which clarifies that the Dakota formation and
other formations in some instances were not intended to be covered
by the original assignment and that any rights held by HSR in
these formation are reconveyed to HSR. The original assignment was
intended to convey a wellbore interest in the described wells in
certain formations in which HSR's working interest was limited to
a 1% working interest acquired from Amoco. The corrective
assignment shall correct the original assignment to reflect this
intent. To the extent that HSR after Closing would still own a 1%
working interest in the leasehold associated with the wells
included in either the original or corrective assignments and such
leasehold is not included in the exchange contemplated by this
Agreement, HSR will promptly and in good faith assign and convey
to Patina all of HSR's right, title and interest in and to the oil
and gas leases covered and included in the original
14
<PAGE> 15
assignment covering the formations in which HSR owns only a 1%
working interest as of the Closing Date.
33. TCW Interest. TCW DR II Royalty Partnership, a California limited
partnership, holds an overriding royalty interest in certain of
the Patina Purchase Wells. An assignment of this interest as to
some of such Properties is not recorded in the county records.
Prior to Closing, HSR will execute and record a corrective
assignment that properly evidences of record the interest of TCW
in the Patina Purchase Properties. The interest conveyed to TCW
will not reduce or diminish the net revenue interest of Patina in
the affected Patina Purchase Well as such interest is set forth on
Exhibits B-1, B-2, or B-3, as appropriate.
34. Amendment. This Agreement may be amended only by written
instrument executed by both HSR and Patina.
35. Brokers. Each party hereto indemnifies the other against any
liability or expense for brokerage fees, finder's fees, agent's
commissions or other similar forms of compensation incurred by the
indemnifying party in connection with this Agreement or any
transaction contemplated hereby.
36. Expenses. Each party shall be solely responsible for expenses
incurred in connection with this Agreement and shall not be
entitled to reimbursement by the other party.
37. Survival. The terms of this Agreement shall survive closing and
will not merge with any conveyance. The covenants, conditions, and
other provisions of those paragraphs shall endure and, as to the
Wells, shall run with the Land. They shall not be extinguished by
the doctrine of merger by deed or any similar doctrine and no
waiver, release, or forbearance of the application of the
provisions of those paragraphs in any given circumstance shall
operate as a waiver, release, or forbearance of the provisions of
the paragraphs as to any other circumstance.
38. Notices. All notices which are required or may be given pursuant
to this Agreement shall be given in writing and delivered
personally or by registered or certified mail, postage prepaid to
the addresses of the parties first set forth above. All notices
shall be deemed to have been given as of the date of receipt.
39. Entire Agreement. This Agreement constitutes the entire Agreement
between the parties hereto and supersedes all prior agreements,
negotiations, and understandings.
40. Governing Law. This Agreement shall be interpreted in accordance
with the laws of the state of Colorado.
41. Press Release. Prior to Closing and for a period of thirty (30)
days following Closing, neither party shall make any press
release or other announcement in connection with this Agreement
without first consulting with the other party. Following such
15
<PAGE> 16
consultation and good faith attempt to make reasonable
accommodations, for press releases or other announcements made
after Closing, if the parties are unable in good faith to agree on
the content of the press release or announcement, either party may
make any announcement or press release that it so desires. This
provision shall not apply to any filing with any governmental body
or stock exchange required by law, rule or regulation.
HS RESOURCES, INC.
- -----------------------------------
Dale E. Cantwell
Vice President
PATINA OIL & GAS CORPORATION
- -----------------------------------
Brian J. Cree
Executive Vice President
16
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