<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ---------------------------
Commission file number 0-18886
----------------------------------------------------------
HS RESOURCES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3036864
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Maritime Plaza, Fifteenth Floor
San Francisco, California 94111
- --------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 433-5795
-----------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUER INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares of Common Stock, $.001 par value, outstanding as of the close
of business on July 31, 1998: 18,929,519 after deducting 191,851 shares in
treasury.
<PAGE> 2
HS RESOURCES, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets - June 30, 1998 (Unaudited) and
December 31, 1997.....................................................................................3
Unaudited Consolidated Statements of Operations - For the Three Months
and Six Months Ended June 30, 1998 and 1997...........................................................5
Consolidated Statements of Stockholders' Equity - For the
Years Ended December 31, 1997 and 1996 and the Six Months
Ended June 30, 1998 (Unaudited).......................................................................6
Unaudited Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 1998 and 1997.......................................................7
Notes to Unaudited Consolidated Financial Statements..................................................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings & Environmental Issues.............................................................29
Item 2. Changes in Securities................................................................................30
Item 3. Defaults Upon Senior Securities......................................................................30
Item 4. Submission of Matters to a Vote of Security Holders..................................................30
Item 5. Other Information....................................................................................30
Item 6. Exhibits and Reports on Form 8-K.....................................................................31
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HS RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,800,232 $ 6,907,708
Margin deposits 172,890 3,996
Accounts receivable
Oil and gas sales 26,311,987 23,052,931
Trading and transportation 11,408,355 14,366,469
Trade 5,910,089 3,579,327
Other 6,101,901 4,711,805
Lease and well equipment inventory, at cost 1,211,853 1,424,301
Prepaid expenses and other 3,007,345 1,341,997
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 60,924,652 55,388,534
- ---------------------------------------------------------------------------------------------------------------------------
OIL AND GAS PROPERTIES, AT COST, USING THE FULL COST METHOD
Undeveloped acreage 207,409,229 189,064,119
Costs subject to depreciation, depletion and amortization 943,256,163 951,678,001
Less accumulated depreciation, depletion and amortization (216,742,612) (181,205,919)
- ---------------------------------------------------------------------------------------------------------------------------
Net oil and gas properties 933,922,780 959,536,201
- ---------------------------------------------------------------------------------------------------------------------------
GAS GATHERING AND TRANSPORTATION FACILITIES,
at cost, net of accumulated depreciation of $1,469,297 and
$1,322,382 at June 30, 1998 and December 31, 1997, respectively 4,420,316 4,540,806
- ---------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Deferred charges and other, net 9,121,251 10,254,796
Office and transportation equipment and other property, net of
accumulated depreciation of $5,759,094 and $5,083,746 at
June 30, 1998 and December 31, 1997, respectively 4,407,523 4,735,106
Notes receivable from officers for exercise of stock options (Note 8) 2,154,484 --
Investment in oil and gas limited partnership 1,370,331 860,288
- ---------------------------------------------------------------------------------------------------------------------------
Total other assets 17,053,589 15,850,190
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,016,321,337 $ 1,035,315,731
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
HS RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
Trade $ 28,812,096 $ 18,888,306
Revenue 22,751,804 17,460,848
Gas purchases 5,656,829 7,854,715
Accrued expenses
Ad valorem and production taxes 8,406,313 8,432,221
Interest 5,327,334 3,691,983
Other 3,941,907 7,359,030
Oil and gas production note payable 734,696 --
Current portion of long-term debt 30,000 30,000
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 75,660,979 63,717,103
- -----------------------------------------------------------------------------------------------------------------------
ACCRUED AD VALOREM TAXES 11,607,567 10,606,402
- -----------------------------------------------------------------------------------------------------------------------
DEFERRED REVENUE 7,366,947 9,872,870
- ------------------------------------------------------------------------------------------------------------------------
LONG-TERM OIL AND GAS PRODUCTION NOTE PAYABLE -- 734,696
- -----------------------------------------------------------------------------------------------------------------------
LONG-TERM BANK DEBT, NET OF CURRENT PORTION 433,000,000 412,000,000
- -----------------------------------------------------------------------------------------------------------------------
9 7/8% SENIOR SUBORDINATED NOTES,
due 2003, net of unamortized discount of $316,875 and
$346,125 at June 30, 1998 and December 31, 1997,
respectively 74,683,125 74,653,875
- -----------------------------------------------------------------------------------------------------------------------
9 1/4% SENIOR SUBORDINATED NOTES,
due 2006, net of unamortized discount of $650,737 and
$689,587 at June 30, 1998 and December 31, 1997,
respectively 149,349,263 149,310,413
- -----------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 70,136,221 90,798,036
- -----------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
- -----------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock, $.001 par value, 50,000,000 shares
authorized; 19,121,370 and 18,654,545 shares issued and
outstanding at June 30, 1998 and December 31, 1997,
respectively 19,121 18,655
Additional paid-in capital 188,150,885 183,191,380
Retained earnings 10,882,583 42,773,142
Deferred compensation (1,838,735) (144,300)
Treasury stock, at cost, 191,851 and 160,358 shares at
June 30, 1998 and December 31, 1997, respectively (2,696,619) (2,216,541)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 194,517,235 223,622,336
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,016,321,337 $ 1,035,315,731
=======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
HS RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- --------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Oil and gas sales $ 38,340,869 $ 30,097,353 $ 83,712,279 $ 66,121,529
Trading and transportation 11,142,333 18,945,988 27,466,349 47,785,606
Other gas revenues 2,275,952 1,093,645 4,145,175 2,189,247
Interest income and other 439,280 354,228 642,976 622,493
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues 52,198,434 50,491,214 115,966,779 116,718,875
- --------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Production taxes 2,758,755 2,027,486 5,756,706 4,833,740
Lease operating 8,168,539 5,940,672 15,314,085 12,370,884
Cost of trading and transportation 10,563,534 18,820,963 26,360,379 46,860,205
Depreciation, depletion and amortization 18,005,367 12,850,061 36,534,749 25,315,543
Impairment of oil and gas properties (Note 9) 59,000,000 -- 59,000,000 --
General and administrative 1,935,421 1,304,383 3,683,259 3,031,426
Interest 8,603,540 7,672,671 20,837,083 15,376,355
- --------------------------------------------------------------------------------------------------------------------------------
Total expenses 109,035,156 48,616,236 167,486,261 107,788,153
- --------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (56,836,722) 1,874,978 (51,519,482) 8,930,722
PROVISION (BENEFIT) FOR INCOME TAXES (21,654,791) 714,367 (19,628,923) 3,402,605
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (35,181,931) $ 1,160,611 $ (31,890,559) $ 5,528,117
================================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE $ (1.89) $ 0.07 $ (1.72) $ 0.33
================================================================================================================================
DILUTED EARNINGS (LOSS) PER SHARE $ (1.89) $ 0.07 $ (1.71) $ 0.32
================================================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 18,590,000 16,978,000 18,531,000 16,998,000
================================================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
ASSUMING DILUTION 18,590,000 17,423,000 18,649,000 17,500,000
================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
HS RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
-------------------- Paid-In Retained Deferred -----------------------
Shares Amount Capital Earnings Compensation Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 10,948,680 $10,949 $ 97,717,908 $ 22,484,572 $ -- (75,077) $(1,039,303)
Purchase of treasury stock -- -- -- -- -- (113,817) (1,460,490)
Transfer of treasury stock to
401(k) Plan -- -- (53,961) -- -- 20,025 246,708
Issuance of common stock for
Tide West Merger 6,169,181 6,169 65,231,025 -- -- -- --
Exercise of options by issuance
of treasury stock, including
income tax benefit -- -- 48,606 -- -- 46,917 582,551
Issuance of restricted stock 10,000 10 171,290 -- (171,300) -- --
Net income -- -- -- 8,948,827 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 17,127,861 17,128 163,114,868 31,433,399 (171,300) (121,952) (1,670,534)
Purchase of treasury stock -- -- -- -- -- (101,247) (1,398,669)
Transfer of treasury stock to
401(k) Plan -- -- (68,011) -- -- 35,894 485,287
Issuance of common stock for
Amoco Acquisition 1,200,000 1,200 19,998,800 -- -- -- --
Exercise of options by issuance
of treasury stock, including
income tax benefit -- -- (34,355) -- -- 26,947 367,375
Issuance of restricted stock 2,500 3 44,997 -- (45,000) -- --
Amortization of deferred
compensation -- -- -- -- 72,000 -- --
Exercise of stock options,
including income tax benefit 12,203 12 135,393 -- -- -- --
Exercise of warrants and options 311,981 312 (312) -- -- -- --
Net income -- -- -- 11,339,743 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 18,654,545 18,655 183,191,380 42,773,142 (144,300) (160,358) (2,216,541)
Purchase of treasury stock -- -- -- -- -- (112,588) (1,604,910)
Transfer of treasury stock
to 401(k) Plan -- -- 7,419 -- -- 39,046 541,568
Exercise of options by issuance
of treasury stock, including
income tax benefit -- -- (115,247) -- -- 42,049 583,264
Issuance of restricted stock 23,570 24 332,508 -- (332,532) -- --
Issuance of performance shares 106,234 106 1,533,913 -- (1,534,019) -- --
Exercise of stock options,
including income tax benefit 337,021 336 3,200,912 -- -- -- --
Amortization of deferred
compensation -- -- -- -- 172,116 -- --
Net loss -- -- -- (31,890,559) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 (Unaudited) 19,121,370 $19,121 $188,150,885 $ 10,882,583 $(1,838,735) (191,851) $(2,696,619)
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE> 7
HS RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
June 30,
-------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(31,890,559) $ 5,528,117
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 36,534,749 25,315,543
Impairment of oil and gas properties 59,000,000 --
Amortization of deferred charges, debt issue costs
and deferred compensation 1,224,820 915,137
Transfer of treasury stock to the 401(k) Plan 548,987 417,276
Deferred income tax provision (benefit) (19,764,972) 3,402,605
Decrease (increase) in accounts and notes receivable (4,021,800) 10,552,741
Increase (decrease) in accounts payable and accrued expenses 264,343 (2,200,276)
Decrease in deferred revenue, net (2,505,923) --
Other (602,922) (196,037)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 38,786,723 43,735,106
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Exploration, development and leasehold costs (67,756,518) (41,176,600)
Purchase of proved and unproved properties (3,498,910) --
Gas gathering and transportation facilities additions (26,425) (115,837)
Other property additions (523,558) (640,257)
Proceeds from the sale of oil and gas properties 1,551,972 8,021,222
Increase in property related payables 11,946,002 6,400,088
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (58,307,437) (27,511,384)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt 39,000,000 22,000,000
Repayments of debt (18,000,000) (43,000,000)
Debt and equity issuance costs -- (416,617)
Exercise of options 630,773 223,228
Purchase of treasury stock (1,604,910) (1,157,935)
Minority interest, net (612,625) (58,213)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 19,413,238 (22,409,537)
- ----------------------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (107,476) (6,185,815)
Cash and cash equivalents, beginning of the period 6,907,708 8,764,756
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the period $ 6,800,232 $ 2,578,941
======================================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid, net of capitalized interest $ 22,586,231 $ 14,689,860
Cash paid for income taxes, net of refund $ 624,259 $ (427,231)
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE> 8
HS RESOURCES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. General
HS Resources, Inc., a Delaware corporation (the "Company" or "HSR") was
organized in January 1987. The Company, directly or through subsidiaries,
acquires, develops and exploits oil and gas properties. The Company, through its
wholly owned subsidiary HS Energy Services, Inc. ("HSES"), markets its own gas
production, markets gas owned by third parties and actively trades both physical
and financial positions in the gas commodities market. The interim financial
data are unaudited; however, all adjustments (which are of a normal and
recurring nature) have been made which are, in the opinion of management,
necessary for a fair statement of the financial position of the Company at June
30, 1998, and its results of operations and cash flows for the interim periods
presented. Because of various factors, results of operations for these periods
are not necessarily indicative of results to be expected for the full year. For
a more complete understanding of the Company's operations and financial position
these statements should be read in conjunction with audited financial statements
and notes thereto included in the Company's December 31, 1997 Annual Report on
Form 10-K previously filed with the Securities and Exchange Commission. Certain
prior period amounts have been reclassified to conform with the current
presentation.
Note 2. Summary of Significant Accounting Policies
FINANCIAL INSTRUMENTS The Company engages in price and location risk management
activities for both hedging and trading purposes. Activities for hedging
purposes are entered into by the Company to manage its exposure to price and
location risks in the marketing of its oil and gas production and, in the case
of its marketing activities, third party gas. Gains and losses on hedging
positions are deferred and recognized in the period the underlying physical
transactions occur in "oil and gas sales" (for company-owned production) and
"trading and transportation revenues" (for third party gas). Activities for
trading purposes are accounted for using the mark-to-market method. Under this
method, changes in the market value of outstanding financial instruments are
recognized as a gain or loss in the period of change on a net basis in "trading
and transportation revenues." The market prices used to value these
transactions reflect management's best estimate considering various factors
including closing exchange and over-the-counter quotations, time value and
volatility factors underlying the commitments. The values are adjusted to
reflect the potential impact of liquidating the Company's position in an
orderly manner over a reasonable period of time under present market
conditions.
EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings Per Share." This statement provides
computation, presentation and disclosure requirements for earnings per share
("EPS"). The standard was adopted by the Company for the fiscal year ended
1997 and all prior periods have been retroactively adjusted. The following
table presents a reconciliation of basic and diluted earnings per share
calculations (in thousands, except per share amounts):
8
<PAGE> 9
<TABLE>
<CAPTION>
For Six Months Ended June 30,
----------------------------------------------------------------------
(Unaudited)
1998 1997
--------------------------------- -------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
--------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income (loss) applicable to
common shares* $ (31,891) 18,531 $ (1.72) $ 5,528 16,998 $ 0.33
EFFECT OF DILUTIVE SECURITIES
Equivalent common shares
from stock options -- 118 -- -- 502 --
-------------------------------- -------------------------------
DILUTED EPS
Net income (loss) applicable to
common shares $ (31,891) 18,649 $ (1.71) $ 5,528 17,500 $ 0.32
================================ ===============================
*1998 net income includes a non-cash charge of $36.5 million, net of taxes, for impairment of oil and gas
properties.
</TABLE>
Note 3. Pro forma Statements
The following table sets forth condensed unaudited pro forma operating results
of the Company for the six months ended June 30, 1998 and 1997. The condensed
pro forma operating results assume that the acquisition of all of Amoco
Production Company's D-J Basin properties (the "Amoco Acquisition") had
occurred on January 1, 1997, instead of December 15, 1997. The condensed pro
forma results are not necessarily indicative of the results of operations had
the acquisition been consummated on January 1, 1997, and may not necessarily be
indicative of future performance. The June 30, 1998 amounts reflect the actual
activity for the six months then ended (in thousands, except per share amounts).
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------
(Unaudited)
1998 1997
----------- ------------
<S> <C> <C>
Revenues $ 115,967 $ 138,980
Net income (loss)* $ (31,891) $ 5,231
Basic earnings (loss) per share $ (1.72) $ 0.29
Diluted earnings (loss) per share $ (1.71) $ 0.28
Weighted average common shares
outstanding 18,531 18,198
Weighted average number of
common shares outstanding
assuming dilution 18,649 18,700
*1998 net income includes a non-cash charge of $36.5 million, net of taxes, for
impairment of oil and gas properties.
</TABLE>
9
<PAGE> 10
Note 4. Issuance of Performance Shares
In May 1998, the Company's stockholders approved the Amended and Restated 1997
Performance and Equity Incentive Plan (the "Plan"). The Plan allows for the
issuance of performance shares to employees, officers and directors. Vesting of
such shares is dependent on the attainment by the Company of defined performance
goals. These shares can vest over one to nine years with full vesting to occur
no earlier than four years. The Company has issued 106,234 performance shares as
of June 30, 1998. In connection with this issuance, the Company recorded
deferred compensation of $1.5 million which is being amortized based on
management's evaluation regarding the attainment of the defined performance
goals.
Note 5. Outstanding Shares
In May 1998, the Company's stockholders also approved an increase in the number
of authorized shares of the Company's Common Stock, from 30 million to 50
million.
Note 6. Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This statement is effective for fiscal
years beginning after June 15, 1999 and establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
The Company has not yet quantified the impacts of adopting SFAS 133 on its
financial statements and has not determined the timing of or method of
adoption. However, SFAS 133 could increase volatility in earnings and other
comprehensive income.
Note 7. Summary of Guarantees on 9 1/4% and 9 7/8% Senior Subordinated Notes
In November 1996, the Company issued $150 million of its 9 1/4% senior
subordinated notes due in 2006. The Notes are general, unsecured obligations of
the Company, subordinated in right of payment to all existing and any future
senior indebtedness of the Company. The Notes rank pari passu with existing and
any future senior subordinated indebtedness and senior to any future
subordinated indebtedness of the Company. The Notes were fully and
unconditionally guaranteed, jointly and severally, on an unsecured, senior
subordinated basis by two of the Company's subsidiaries, Orion Acquisition, Inc.
("Orion") and HSRTW, Inc. (the "Subsidiary Guarantors"). Because of the issuance
of the guarantees in connection with the Notes due 2006, the Company was
required to and has issued similar guarantees from the Subsidiary Guarantors to
the trustee under the indenture for the Company's 9 7/8% senior subordinated
notes due 2003. Effective May 1, 1998, Orion was merged into HSR with HSR
remaining as the surviving corporation. As a result of this merger the foregoing
guarantees of Orion terminated on May 1, 1998. As of June 30, 1998, HSRTW, Inc.
remained a subsidiary of the Company. On July 27, 1998, the Company entered into
an agreement to sell all of the stock of HSRTW, Inc. to a third party. The
closing is expected to occur on September 1, 1998, at which time the guarantees
of HSRTW, Inc. with respect to these two series of notes are expected to be
released.
10
<PAGE> 11
Sections 13 and 15 (d) of the Securities Exchange Act of 1934 require
presentation of the supplemental condensed consolidating financial statements
of HSRTW, Inc. set forth below. Separate complete financial statements of
HSRTW, Inc. are not material to investors. There are no significant contractual
restrictions on distributions from HSRTW, Inc. As a result of the merger of
Orion into the Company on May 1, 1998, Orion ceased its separate corporate
existence and its guarantees were terminated. Therefore, there is no financial
presentation with respect to Orion as a subsidiary guarantor.
Investments in subsidiaries are accounted for by the parent under the equity
method for purposes of the supplemental condensed consolidated financial
statement presentation. Under this method, investments are recorded at cost and
adjusted for the parent company's ownership share of the subsidiaries'
cumulative results of operations. In addition, investments increase in the
amount of contributions to subsidiaries and decrease in the amount of
distributions from subsidiaries. The elimination entries eliminate the equity
method investment in subsidiaries and equity in earnings of subsidiaries,
intercompany payables and receivables and other transactions between
subsidiaries including contributions and distributions.
11
<PAGE> 12
CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 1998
ASSETS
<TABLE>
<CAPTION>
Subsidiary Non-
Guarantor Guarantor Elimination
HSR HSRTW Subsidiaries Entries Consolidated
------------- ------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 2,386,169 $ 162,195 $ 4,251,868 $ -- $ 6,800,232
Intercompany receivables 7,737,589 64,438,690 25,722,483 (97,898,762) --
Other current assets 27,772,325 6,958,901 18,670,941 722,253 54,124,420
------------- ------------- ------------- -------------- ----------------
Total current assets 37,896,083 71,559,786 48,645,292 (97,176,509) 60,924,652
------------- ------------- ------------- -------------- ----------------
Oil and gas properties, net 748,862,290 182,681,404 2,379,086 -- 933,922,780
Gas gathering and transportation
facilities, net -- -- 4,420,316 -- 4,420,316
Deferred charges and other, net 9,118,547 -- 2,704 -- 9,121,251
Office and transportation equipment
and other property, net 3,117,418 1,045,297 244,808 -- 4,407,523
Notes receivable from officers for
exercise of stock options 2,154,484 -- -- -- 2,154,484
Investments in subsidiaries and
other investments 216,175,243 6,717,998 1,370,331 (222,893,241) 1,370,331
------------- ------------- ------------- -------------- ----------------
Total assets $1,017,324,065 $ 262,004,485 $ 57,062,537 $ (320,069,750) $ 1,016,321,337
============= ============= ============= ============== ================
</TABLE>
LIABILITIES, STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Current liabilities $ 58,802,498 $ 7,098,821 $ 10,408,720 $ (1,383,756) $ 74,926,283
Current portion of long-term debt 734,696 -- -- -- 734,696
Intercompany payables 90,161,386 6,631,529 1,105,847 (97,898,762) --
Long-term bank debt and other debt,
net of current portion 433,000,000 -- -- -- 433,000,000
9 7/8% senior subordinated notes,
due 2003 74,683,125 -- -- -- 74,683,125
9 1/4% senior subordinated note
due 2006 149,349,263 -- -- -- 149,349,263
Other noncurrent liabilities 18,974,514 -- -- -- 18,974,514
Deferred income taxes (2,898,652) 62,955,340 10,079,533 -- 70,136,221
Stockholders' equity and partners' capital 194,517,235 185,318,795 35,468,437 (220,787,232) 194,517,235
-------------- ------------ ------------- -------------- ----------------
Total liabilities, stockholders'
equity and partners' capital $1,017,324,065 $262,004,485 $ 57,062,537 $ (320,069,750) $ 1,016,321,337
============== ============ ============= ============== ================
</TABLE>
12
<PAGE> 13
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
Subsidiary Non-
Guarantor Guarantor Elimination
HSR HSRTW Subsidiaries Entries Consolidated
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues
Oil and gas sales $ 42,966,458 $ 15,952,678 $ 23,458,942 $ 1,334,201 $ 83,712,279
Trading and transportation (28,456) -- 73,754,345 (46,259,540) 27,466,349
Other revenues 4,501,445 80,800 205,906 -- 4,788,151
------------- ------------- ------------- ------------- -------------
Total revenues 47,439,447 16,033,478 97,419,193 (44,925,339) 115,966,779
------------- ------------- ------------- ------------- -------------
Expenses
Production taxes and lease operating 11,185,139 3,210,142 6,675,510 -- 21,070,791
Cost of trading and transportation -- -- 71,285,718 (44,925,339) 26,360,379
Depreciation, depletion
and amortization 19,899,588 5,532,948 11,102,213 -- 36,534,749
Impairment of oil and gas properties 59,000,000 -- -- -- 59,000,000
General and administrative 1,695,953 1,288,416 698,890 -- 3,683,259
Interest expense 19,051,370 1,752,262 33,451 -- 20,837,083
------------- ------------- ------------- ------------- -------------
Total expenses 110,832,050 11,783,768 89,795,782 (44,925,339) 167,486,261
------------- ------------- ------------- ------------- -------------
Income (loss) before provision for
income taxes (63,392,603) 4,249,710 7,623,411 -- (51,519,482)
Provision (benefit) for income taxes (24,152,582) 1,723,499 2,800,160 -- (19,628,923)
------------- ------------- ------------- ------------- -------------
(39,240,021) 2,526,211 4,823,251 -- (31,890,559)
Equity in earnings of subsidiaries 5,903,363 1,446,099 -- (7,349,462) --
------------- ------------- ------------- ------------- -------------
Net income $ (33,336,658) $ 3,972,310 $ 4,823,251 $ (7,349,462) $(31,890,559)
============= ============= ============= ============= =============
</TABLE>
13
<PAGE> 14
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
Subsidiary Non-
Guarantor Guarantor Elimination
HSR HSRTW Subsidiaries Entries Consolidated
------------ ------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Cash flows provided by
operating activities $ 18,308,477 $ 4,634,286 $ 14,397,861 $ 1,446,099 $ 38,786,723
------------ ------------- -------------- ------------ ---------------
Cash flows from investing activities
Exploration, development and
leasehold costs (47,638,380) (7,356,888) (12,761,250) -- (67,756,518)
Purchase of proved and
unproved properties (3,319,571) (179,339) -- -- (3,498,910)
Other 11,479,582 1,531,005 (62,596) -- 12,947,991
------------ ------------- -------------- ------------ ---------------
Net cash used in investing
activities (39,478,369) (6,005,222) (12,823,846) -- (58,307,437)
------------ ------------- -------------- ------------ ---------------
Cash flows from financing activities
Proceeds from debt 39,000,000 -- -- -- 39,000,000
Repayments of debt (18,000,000) -- -- -- (18,000,000)
Other (974,137) 1,373,950 (540,476) (1,446,099) (1,586,762)
------------ ------------- -------------- ------------ ---------------
Net cash provided by (used in)
financing activities 20,025,863 1,373,950 (540,476) (1,446,099) 19,413,238
------------ ------------- -------------- ------------ ---------------
Net increase (decrease) in cash and
cash equivalents (1,144,029) 3,014 1,033,539 -- (107,476)
Cash and cash equivalents, beginning of
the year 3,530,198 159,181 3,218,329 -- 6,907,708
------------ ------------- -------------- ------------ ---------------
Cash and cash equivalents,
end of the period $ 2,386,169 $ 162,195 $ 4,251,868 $ -- $ 6,800,232
============ ============= ============== ============ ===============
</TABLE>
14
<PAGE> 15
Note 8. Related Party Transactions
In June 1998, in connection with the exercise of stock options, certain officers
of the Company issued to the Company full recourse notes in the amount of $2.1
million. The notes and accrued interest are due and payable to the Company on or
before June 1, 2000. The interest rate on these notes is Prime plus .25% per
annum (8.75% at June 30, 1998).
Note 9. Impairment of Oil and Gas Properties
The Company employs the full cost method of accounting which requires a write
down of its full cost pool if net capitalized costs of oil and gas properties,
less related deferred income taxes, exceed the present value discounted at 10%
of future net revenues (using current pricing) plus the estimated fair market
value of unproved properties. In the second quarter of 1998 the Company recorded
a non-cash write down of $59 million pretax ($36.5 million after tax). The write
down is attributable to the deterioration of commodity prices, primarily oil
prices.
Note 10. Subsequent Event
On July 28, 1998 the Company announced the sale of its Mid-Continent oil and gas
subsidiary, HSRTW, Inc., to Universal Resources Corp., a subsidiary of Questar
Corp., for $157.5 million in cash. The Company is retaining its ownership of
HSES, its Tulsa-based gas trading and marketing subsidiary.
The transaction is scheduled to close, and be effective, on September 1, 1998,
with net proceeds to be applied to the repayment of bank debt. HSRTW, Inc.
owns interests in approximately one thousand wells located in the Anadarko and
Arkoma basins of Oklahoma and in Texas, with approximately 32 MBoe of proved
reserves as of year-end 1997.
15
<PAGE> 16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
The Company has been pursuing a strategy involving consolidation in the D-J
Basin, coupled with continued exploitation and exploration in all of its core
areas using a technology-oriented approach designed to reduce risk and maximize
efficiencies. The Company's success in consolidating in the D-J Basin
culminated in the December 1997 acquisition of all of Amoco Production Company's
D-J Basin properties. This transaction has also helped reshape the Company's
strategic direction, including in particular, its sale, announced on July 28,
1998, of its wholly-owned subsidiary, HSRTW, Inc. to Universal Resources Corp.,
a subsidiary of Questar Corp., for $157.5 million ("Mid-Continent Sale"). HSRTW,
Inc. holds most of the Company's Mid-Continent assets. The sale is expected to
close September 1, 1998.
The Amoco Acquisition, in combination with the Company's recent exploration
successes in the D-J Basin and the Gulf Coast, have materially increased the
number of low-risk, high-return projects available to the Company. At the same
time, the Amoco Acquisition required the Company to borrow funds, which
increased its leverage ratios significantly. The Company believes that the best
approach to pursuing these opportunities, while moderating potential interest
rate and commodity price risk from its higher debt levels, is to sell the
majority of its Mid-Continent asset base, utilizing the proceeds from the sale
to pay down debt under its senior credit facility. Although the Company's debt
level after the closing of its Mid-Continent Sale will be reduced somewhat, the
Company plans to further enhance its level of liquidity with additional
financial transactions. Therefore, the Company is continuing to pursue the sale
of certain non-core assets in the D-J Basin that have a much higher value to
other operators than to the Company. If such sales are consummated, the Company
will apply the proceeds to repayment of bank debt which will further increase
the Company's financial flexibility. See "Liquidity and Capital
Resources--Financing Sources."
Following the closing of the Mid-Continent Sale, the Company will operate
primarily in three core areas: the D-J Basin, the Gulf Coast and the Northern
Rockies. However, the Company will continue to pursue certain
technology-oriented exploration projects and possibly other activities in other
regions, including the Mid-Continent. The Company will also continue its
strategically important and profitable presence in the gas marketing, trading
and transportation business through its subsidiary, HS Energy Services, Inc.
("HSES"). HSES provides opportunities for the Company to enhance its operating
margins on production from each of its producing areas.
Two other significant items are evident in this Report. Due to certain
regulatory changes implemented by the Colorado Oil and Gas Commission and the
Company's success in refracing and other exploitation activities, the Company
has announced the booking of additional proved reserves of approximately 29
MMBOE. At the same time, due to the application of accounting rules required by
the Securities and Exchange Commission, the Company has recognized a non-cash
after-tax write down of the carrying value of its oil and gas properties of
approximately $36.5 million ($59 million pretax). This results from the
Company's employment of the full cost method of accounting which requires a
periodic comparison of discounted asset value to recorded capital costs
utilizing unescalated current commodity prices. See "Results of
Operations--Impairment of Oil and Gas Properties." Due primarily to currently
low oil prices, and to a lesser extent relatively low mid-summer gas prices, the
Company is required to recognize this impairment in the second quarter of 1998.
Given the relatively strong market for future gas prices, and the Company's
belief that the current weak gas market results from temporary seasonal
conditions, the Company believes that there has not in fact been a reduction in
the underlying value of its assets.
16
<PAGE> 17
OIL AND GAS PRICES The United States oil and gas industry is subject to large
variations in profitability due in part to fluctuating commodity prices and
related changes in rates of reinvestment by industry participants. In recent
years several factors had a positive effect on production economics in the
Company's core geographic areas. These include (i) relatively high wellhead
capacity utilization, (ii) increasing overall gas demand, (iii) deregulation of
distribution and marketing channels, particularly for D-J Basin and Rocky
Mountain production, and expansion of pipeline capacity to transport gas to
markets outside the Colorado Front Range and (iv) successful application of
advanced oil and gas exploration, drilling and production technologies. However,
uncertainty concerning the price of oil and gas remains a dominant and
unpredictable factor in the Company's profitability. Further, as previously
discussed, application of accounting rules during a period of low commodity
prices may result in a required non-cash charge in order to write down the
carrying value of the Company's oil and gas properties.
GAS PRICE CONSIDERATIONS At January 1, 1998, approximately 81% of the Company's
proved producing reserves consist of gas, of which 63% are located in the D-J
Basin. Following the Mid-Continent Sale, 80% of the Company's proved producing
reserves will be gas, of which 79% will be located in the D-J Basin. The
absolute level and volatility of gas prices, particularly in the D-J Basin, have
a material impact on the Company. Historically, the price of D-J Basin gas (on a
Btu-equivalent basis) has been linked closely to the Colorado Interstate Gas
Company ("CIG") pipeline Rocky Mountain Index. More recently, however, as a
result of increased pipeline capacity in the D-J Basin, a transportation cost
advantage for deliveries into the Public Service Company of Colorado ("PSCO")
front range market, and seasonal fluctuations, during the low demand summer
months (generally April through October) the price for D-J Basin gas tends to
reflect the CIG Rocky Mountain Index, whereas during the high demand winter
periods (generally November through March) the price more closely tracks
Mid-Continent indices.
In recent months two applications have been approved to build pipelines between
the Colorado Front Range market area and Wyoming. A subsidiary of K N Energy,
Inc. has been granted authority to build a 250 MMcfd capacity pipeline. PSCO and
CIG, through a jointly owned affiliate, have begun construction of a 270 MMcfd
capacity line. This line will operate independently, not as part of PSCO's local
distribution system. These new lines will eliminate some portion of the
advantage the Company currently has over Wyoming producers for direct sales in
the Colorado Front Range market, as they increase the amount of Wyoming gas that
could be transported to the Colorado Front Range market. However, the
availability of these lines also expands the amount of gas that could be
exported from the D-J Basin to Mid-Continent and West Coast markets through
Wyoming pipeline interconnections. The Company cannot predict what the ultimate
effect on the price of the Company's D-J Basin gas will be until the pipelines
are in service. However, given the narrowing of the spread between CIG and
Mid-Continent indices, the Company does not anticipate any material adverse
changes as a result of the new pipelines.
17
<PAGE> 18
Gas prices in the Mid-Continent are closely tied to established indices which
are influenced by national supply and demand factors. Average gas prices
received by the Company in the Mid-Continent generally fluctuate with changes in
Mid-Continent posted prices, which for the years 1993 through 1997 averaged
$0.24 per MMbtu less than the Henry Hub price. The average gas price received in
the Mid-Continent since the Company's merger with Tide West Oil Company in June
1996 through June 30, 1998, was $2.20 per Mcf, or $0.27 below the Henry Hub
price, before considering the effects of hedging.
In recent months, gas prices nationwide have been relatively low due to large
inventories and modest demand. The Company believes this weakness in gas prices
is a normal seasonal variation and does not necessarily indicate significant
long-term change in overall average gas pricing. However, the Company is unable
to predict the future trends in gas prices.
OIL PRICE CONSIDERATIONS Oil prices are established in a highly liquid
international market. Average oil prices received by the Company in the D-J
Basin and Mid-Continent generally fluctuate with changes in the NYMEX West Texas
Intermediate crude oil closing prices. Weaknesses in the world oil demand have
led to the currently weak oil prices. The Company is unable to predict the
future trends in oil prices.
RESULTS OF OPERATIONS During the second quarter of 1998, the Company increased
its drilling and development activities to exploit the larger number of
development opportunities in the D-J Basin as a result of the Amoco
Acquisition. The Company also continued its exploitation and exploration
activities in the Mid-Continent and the Gulf Coast regions. At June 30, 1998,
the Company owned interests in approximately 5,490 producing wells (of which it
operated more than 3,390) compared to more than 3,580 wells (of which it
operated more than 2,680) at June 30, 1997. The Company's results of operations
have been significantly affected by the Amoco Acquisition, by its drilling
program and by fluctuations in oil and gas prices. Future results will be
significantly affected by the Company's exploration, exploitation and
development activities. The Mid-Continent Sale, which is expected to close
September 1, 1998, will reduce the Company's well inventory by over 1,000
producing (approximately 450 operated) wells.
The United States oil and gas industry is currently experiencing regional
shortages of drilling and completion equipment and skilled workers. This
shortage has resulted in higher costs for the Company's drilling and related
field activities, primarily in its Gulf Coast and Mid-Continent operations. The
Company anticipates this shortage will continue for the foreseeable future.
COMPARISON OF THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
OIL AND GAS REVENUES For the comparative three month periods, oil production
increased from 608 MBbl to 699 MBbl and gas production increased from 10,060
MMcf to 15,363 MMcf, or 15% and 53%, respectively. Average realized oil prices
decreased by 25% from $19.48 to $14.63 per Bbl and average realized gas prices
increased by 1% from $1.81 to $1.83 per Mcf. The production increases were
primarily the result of additional production from the properties acquired in
the Amoco Acquisition and the success of the Company's ongoing exploitation and
development activities. The net effect of these changes resulted in an increase
in oil and gas revenues from $30.1 million to $38.3 million, or 27%. For the
three months ended June 30, 1998
18
<PAGE> 19
the Company also recognized $2.3 million in other gas revenues from the sale of
tax credits compared to $1.1 million for the comparative 1997 period.
For the comparative six month periods, oil production increased from 1,167 MBbl
to 1,390 MBbl and gas production increased from 20,031 MMcf to 29,588 MMcf, or
19% and 48%, respectively. Average realized oil prices decreased by 22% from
$20.37 to $15.79 per Bbl and average realized gas prices decreased by 1% from
$2.11 to $2.09 per Mcf. The production increases were primarily the result of
additional production from the properties acquired in the Amoco Acquisition and
the success of the Company's ongoing exploitation and development activities.
The net effect of these changes resulted in an increase in oil and gas revenues
from $66.1 million to $83.7 million, or 27%. For the six months ended June 30,
1998 the Company also recognized $4.1 million in other gas revenues from the
sale of tax credits compared to $2.2 million for the comparative 1997 period.
Through its wholly owned subsidiary HSES, the Company markets its own gas
production as well as that of third parties. A portion of this gas is sold
directly to end users, while other amounts are used as the equity-gas
foundation for a physical trading business in which gas volumes may be traded
several times at different receipt and delivery points in order to capture the
greatest margin possible. Trading and transportation net margins were $0.6
million for the three months ended June 30, 1998 compared to $0.1 million for
the comparative prior year period and $1.1 million for the six months ended
June 30, 1998 compared to $0.9 million for the comparative prior year period.
PRODUCTION EXPENSES Lease operating expense ("LOE") increased by $2.2 million,
or 38%, for the three month comparative periods and by $2.9 million, or 24%, for
the six month comparative periods due to an increase in the number of producing
wells. On a per Boe basis, LOE decreased from $2.60 to $2.51 for the three month
comparative periods and from $2.75 to $2.42 for the six-month comparative
periods, which is primarily the result of increased efficiencies in combining
the assets acquired in the Amoco Acquisition with the Company's previously
existing asset base. Production taxes increased by $0.7 million, or 36% for the
three-month comparative periods and by $0.9 million, or 19%, for the six-month
comparative periods, due to increased production which was partially offset by
decreased prices.
DEPRECIATION, DEPLETION AND AMORTIZATION Depreciation, depletion and
amortization ("DD&A"), a non-cash expense, increased by $5.2 million, or 40% for
the three-month comparative periods and by $11.2 million, or 44%, for the
six-month comparative periods, due to an increase in production. The Company
adjusted its DD&A rate in the second quarter of 1998 to reflect (i) an increase
in reserves in the D-J Basin as a result of the new field-wide spacing rule
approved by the Colorado Oil and Gas Conservation Commission on April 29, 1998
and (ii) the full cost ceiling test write down of $59 million (discussed below).
For the six months ended June 30, 1998, the Company had a weighted average
depletion rate of $5.62 per Boe compared to $5.41 per Boe for the six months
ended June 30, 1997. The Company annually adjusts its DD&A rate based on year
end engineering and, if material changes in its reserves warrant, on an interim
basis.
19
<PAGE> 20
IMPAIRMENT OF OIL AND GAS PROPERTIES The Company employs the full cost method of
accounting which requires a write down of its full cost pool if net capitalized
costs of oil and gas properties, less related deferred income taxes, exceed the
present value discounted at 10% of future net revenues (using current pricing)
plus the estimated fair market value of unproved properties. In the second
quarter of 1998 the Company recorded a non-cash ceiling test write down of $59
million pretax ($36.5 million after tax). Should oil and gas prices continue to
decline, the Company could be required to record additional write downs.
GENERAL AND ADMINISTRATIVE EXPENSE General and administrative ("G&A") expense
reflects costs incurred, net of administrative costs directly attributable to
drilling and well operations (which costs are included in LOE or are
capitalized). G&A expenses increased by $0.7 million, or 48% for the three-month
comparative periods and by $0.7 million, or 22%, for the six-month comparative
periods. On a per Boe basis, G&A expenses increased from $0.57 to $0.59 for the
three-month comparative periods and decreased from $0.67 to $0.58 for the
six-month comparative periods. The decrease for the six-month comparative
periods is due to efficiencies gained from consolidating the Amoco properties
and the timing of hiring additional personnel to service these properties. The
Company anticipates an increase in G&A expenses through the remainder of 1998;
however, G&A per BOE rates should remain constant or be slightly lower than in
1997.
INTEREST EXPENSE Interest expense increased $0.9 million, or 12% for the
three-month comparative periods and by $5.5 million, or 36%, for the six-month
comparative periods. The increase is due to the overall increase in long-term
debt attributable to amounts borrowed in December 1997 to fund the Amoco
Acquisition. This increase was partially offset in the second quarter of 1998 by
additional capitalized interest recorded during the period.
PROVISION FOR INCOME TAXES The Company follows the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109. Pursuant to SFAS 109, the
Company has recorded a tax provision based on tax rates in effect during the
period. Accordingly, the Company accrued taxes at the rate of 38.1% in 1998 and
1997. Due to significant intangible drilling costs, which are deductible for
income tax purposes, substantially all of the Company's tax provision in both
periods is deferred.
20
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
Financing Sources
At June 30, 1998, the Company's overall debt level was significantly higher than
as of June 30, 1997 as a result of borrowings used to fund the Amoco
Acquisition. Although the Company's debt level following the closing of the
Mid-Continent Sale will be reduced, the Company intends to continue pursuing the
sale of certain of its non-core D-J Basin assets to further reduce its overall
debt level and improve its liquidity and financial flexibility. The Company,
nevertheless, believes that its level of debt and leverage is manageable under
expected production and pricing levels, since its debt is supported by stable,
long-lived reserves and by the Company's hedging programs, with short-term
product prices partially hedged at favorable prices. Cash flow from producing
activities is sufficient to enable the Company to service its debt for the
foreseeable future, absent any major and prolonged period of price declines. The
Company has a large number of low-risk, potentially high-return exploitation
projects which should enhance production and cash flow per share. As part of an
overall financing strategy, the Company is considering a wide range of future
financing alternatives and is not committed to any particular course. In
undertaking any future financing transactions, the Company will seek to achieve
the optimal capital structure needed to support its long-term strategic
objectives. Any such financings will reflect market conditions at the time and
may include the issuance of medium or long-term debt, equity, or equity-linked
securities.
Because of its increased leverage, the Company currently plans to fund capital
expenditures attributable to exploration, exploitation and development
activities primarily out of its expected cash flow from operations. Accordingly,
the level and volatility of oil and gas prices may be expected to affect the
Company's capital expenditure activities.
On December 15, 1997, as a result of the Amoco Acquisition, the Company's
revolving senior bank credit facility with The Chase Manhattan Bank, as Agent
(the "Chase Facility"), was amended to increase the maximum credit amount and
the borrowing base to $450 million and to revise the interest rate payable
thereunder to the Base Rate plus 0% to 0.625% or LIBOR plus 0.75% to 1.625%.
Under the terms of the Chase Facility, no principal payments are required until
December 15, 2002, assuming the Company maintains a borrowing base sufficient to
support the outstanding loan balance. As of June 30, 1998, $433 million was
outstanding under the Chase Facility. The facility consists of a borrowing base
(currently $450 million) and a threshold amount (currently $400 million --
representing what a fully conforming loan borrowing base would be). The
borrowing base is based on the underlying value of the Company's oil and gas
properties as determined by the Banks based on their review of Company reserves
and the Banks' view of future pricing. The borrowing base will remain $450
21
<PAGE> 22
million until September 15, 1998, at which point it may be redetermined. Until
that time, if the Company issues equity or debt securities, or sells or
otherwise disposes of properties (such as the Mid-Continent Sale), net proceeds
of such transactions must be applied to the repayment of debt under the
facility. The outstanding amounts under the facility must be reduced to or below
the threshold amount by September 15, 1998. The net proceeds of the Mid-
Continent Sale will be applied to the Company's bank debt. Following the closing
of this transaction, the Company expects that its borrowing base will be
redetermined as a fully conforming borrowing base. The Chase Facility was
further amended on June 16, 1998 to provide the Company with a $15 million
unsecured standby credit facility. This standby facility will be available to
the Company from July 1, 1998 to September 15, 1998.
In November 1996, in a private offering exempt from securities registration,
the Company issued $150 million of its 9 1/4% senior subordinated notes due in
2006 (the "Notes"). The offering of the Notes was undertaken in order to
replace with fixed rate term debt a portion of the Company's outstanding
indebtedness under the Chase Facility. On April 25, 1997, the Company exchanged
$150 million of new notes registered under the Securities Act of 1933 (the "New
Notes") for the Notes. The material terms of the New Notes are identical to
those of the Notes.
The Company also maintains its arrangement with a Trust Company of the
West-related entity covering a $90 million non-recourse, volumetric overriding
royalty facility (the "TCW Facility") of which approximately $80 million is
available. Proceeds from the TCW Facility may be used by the Company at its
discretion for a variety of corporate purposes, including acquisitions of new
properties, exploration and development drilling and monetization of existing
properties.
The Company anticipates that its borrowing capacity under the Chase Facility,
combined with its operating cash flow, the TCW Facility, the Mid-Continent Sale,
and the potential sale of non-core D-J Basin assets, will provide it with
financial resources and flexibility to fund current and ongoing development
activities, to service its debt and to meet other financial obligations. The
nature of the Company's current development strategies and other activities
provide the Company with considerable flexibility in terms of the timing and
magnitude of its capital expenditures. If the Company experiences unforeseen
changes in its working capital position or capital resources, management may
revise the capital expenditure program accordingly or alternatively may
supplement the capital position of the Company through, among other things, the
issuance of additional equity, equity-linked or debt securities, the sale or
monetization of properties or by entering into joint venture arrangements.
Capital Commitments
The Company continuously evaluates its inventory of drilling opportunities to
develop a growth-oriented portfolio of risk-balanced development, exploitation
and exploration opportunities. On an ongoing basis, the Company adjusts the
amount and allocation of its capital program based on a number of factors,
including seismic results, prospect readiness, product prices, service company
availability and rates, acquisitions and capital position. For the six months
ended June 30, 1998, the Company incurred total exploration, development and
leasehold capital expenditures of $67.8 million. The Company estimates that
capital expenditures for 1998 will be approximately $90-$100 million, assuming
stable product prices for the balance of the year. These capital expenditures
will be allocated in varying amounts primarily to activities in the Company's
core geographic areas.
22
<PAGE> 23
A major component of the Company's capital expenditure program relates to its
development activities in the D-J Basin. The Company incurred approximately
$38.5 million in capital expenditures in the six months ended June 30, 1998 for
drilling, recompleting and refracing the Company's D-J Basin properties, and
anticipates allocating $60-$75 million in the D-J Basin for all of 1998.
Another component of the Company's capital expenditure program has been to
develop exploitation and exploration prospects in the Mid-Continent and the
onshore portion of the Gulf Coast. For the six months ended June 30, 1998 the
Company incurred total capital expenditures for seismic, leasehold, overhead
costs and drilling of $6.9 million in the Mid-Continent and $11.9 million in the
Gulf Coast, including approximately $8.3 million of expenditures under its
SouthTech joint venture and $3.6 million on its other Gulf Coast projects. The
Company anticipates allocating $15 to $20 million to the Gulf Coast projects for
all of 1998.
Activities in the Company's Northern Rockies area are designed to utilize the
Company's extensive acreage position as a vehicle for generating capital
expenditures by third party operators on HSR's acreage. For the six months ended
June 30, 1998 approximately $7.2 million was spent or committed to by others to
test plays and concepts on HSR's acreage, with HSR retaining significant
positions for exploiting successful discoveries.
The Company has also entered into a number of other standard industry
arrangements that require the drilling of wells or other activities. The Company
believes that it will meet its obligations under these arrangements, which
individually and in the aggregate are not material.
Working Capital and Cash Flow
Net cash provided by operating activities for the six months ended June 30,
1998, was $38.8 million, down from $43.7 million for the same period in 1997.
Future cash flows will be influenced by, among other factors, the number of
producing wells on line, product prices and production constraints.
Risk Management
The Company uses financial instruments to reduce its exposure to market
fluctuations in the price and transportation cost of oil and gas. The Company's
general strategy is to hedge price and location risk with swap, collar, floor
and ceiling arrangements. In order to minimize risk, to the maximum extent
possible, the Company hedges certain of its production back to the wellhead. In
addition to hedging activities, the Company is engaged in using the financial
markets to capture trading margins. The Company has established policies with
respect to open positions which limit its
23
<PAGE> 24
exposure to market risk and requires daily reporting to management of the
potential financial exposure resulting from both hedging and trading
activities.
24
<PAGE> 25
Hedging Activities
Activities for hedging purposes are entered into by the Company to manage its
exposure to price and location risks in the marketing of its oil and gas
production and, in the case of its marketing activities, third party gas. Gains
and losses on hedging positions are recognized in the period during which the
underlying physical transactions occur and are booked in "oil and gas sales"
(for company-owned production) and "trading and transportation revenues" (for
third party gas).
The Company's general strategy is to hedge price and location risk with swap,
collar, floor and ceiling arrangements. As a part of its risk management
program, the Company generally enters into hedges for delivery into one of the
two pipelines located near its producing regions, Panhandle Eastern Pipeline
Company ("PEPL") or CIG, or at the New York Mercantile Exchange ("NYMEX")
prices settled at the Henry Hub. With respect to the NYMEX-hedged volumes that
exceed the Company's Gulf Coast volumes, the Company usually hedges basis to
its producing regions. Currently, the Company holds hedge swap positions as
follows:
<TABLE>
<CAPTION>
Average Daily
Volume Settlement Price
Time Period (MMBtu) Location (per MMBtu)
- ------------------ -------------- ---------- -----------
<S> <C> <C> <C>
July - October 1998 69,920 CIG $1.77
July - August 1998 20,000 PEPL $2.03
July - October 1998 1,000 NYMEX $2.21
November 1998 - March 1999 75,000 PEPL $2.23
April - October 1999 50,000 CIG $1.90
</TABLE>
The Company has hedged its expected 1998 oil production as follows:
<TABLE>
<CAPTION>
Time Period Percent Hedged Price
--------------------- ---------------- --------
<C> <S> <S>
July-September 1998 45% 15.83
October-December 1998 12% 19.00
</TABLE>
Additionally, with respect to the hedging of third party gas, the Company has
hedged 10.2 Bcf through June 1999 with offsetting physical positions at
settlement prices which are based upon NYMEX future prices or other published
indices.
The Company routinely buys and sells options or forward contracts as part of its
overall hedging strategy. For the period July through October 1998 the Company
holds a thirty-nine cent option spread on an average daily volume of 10,000
MMBtu between PEPL and CIG. This option spread protects the Company against
widening basis between the Mid-Continent and the Rocky Mountain indexes. For the
period November 1998 to March 1999, the Company owns out-of-the-money call
options, on an average daily volume of 75,000 MMBtu, at an average price of
$2.66. These call options provide exposure to advancing prices as part of its
overall hedging strategy.
25
<PAGE> 26
Trading Activities
The Company engages in the trading of various energy related financial
instruments which require payments to (or receipt of payments from)
counterparties based on the differential between a fixed and a variable price
for the commodity, swap or other contractual arrangement. Activities for
trading purposes are accounted for using the mark-to-market method. Under this
method, changes in the market value of outstanding financial instruments are
recognized in "trading and transportation revenues" as a net gain or loss in
the period of change. The market prices used to value these transactions
reflect management's best estimate considering various factors, including
closing exchange and over-the-counter quotations, time value and volatility
factors underlying the commitments. The values are adjusted to reflect the
potential impact of liquidating the Company's position in an orderly manner
over a reasonable period of time under present market conditions.
Company policy requires that, within defined trading limits, financial
instrument purchase and sales contracts be balanced in terms of contract volumes
and the timing of performance and delivery obligations. As of June 30, 1998, all
material open positions were balanced with an offsetting position. During the
six months ended June 30, 1998, gains of $0.6 million were recognized in
connection with these activities and are included in "trading and transportation
revenues."
Credit Risk
While notional amounts are used to express the volume of various derivative
financial instruments, the amounts potentially subject to credit risk in the
event of nonperformance by the third parties are substantially smaller.
Counterparties to the swap, collar, floor and ceiling arrangements discussed
above are generally investment grade financial institutions. Accordingly, the
Company does not anticipate any material impact to its financial position or
results of operations as a result of nonperformance by the third parties to
financial instruments related to hedging activities or trading activities.
Interest Rate Swaps
During the second quarter of 1995, the Company entered into an interest rate
exchange agreement with a financial institution to hedge its interest rate on
$40 million of the Company's borrowings at 7.76% through May 2002. Under the
terms of the agreement, the difference between the Company's fixed rate of
7.76% and the three month LIBOR rate plus 1.125% is received or paid by the
Company.
The Company also has assumed interest rate exchange agreements with two
financial institutions to hedge its interest rates on a total of $40 million of
the Company's borrowings at rates ranging from 6.16% to 7.32% through 1999.
Under the terms of these agreements, the difference between the Company's fixed
rate and the three month LIBOR rate is received or paid by the Company.
26
<PAGE> 27
Contingencies
In May 1995, the Company was named as a respondent by the United States
Environmental Protection Agency (the "EPA") in an administrative order brought
under the Resource Conservation and Recovery Act ("RCRA") by the EPA against
the owner/operator of an oilfield production water evaporation facility. Based
on its evaluation of the above matters, and after consideration of reserves
established, the Company believes the resolution of such matters will not have
a material adverse effect on the Company's financial condition or results of
operations. See Part II. Other Information, Item 1. Legal Proceedings -
Environmental Proceedings.
Year 2000
The Company utilizes internal software and purchased software to conduct its
business. In 1997, the Company completed a review of all of its software to
determine the extent of the work needed to ensure Year 2000 compliance. As a
result of the review it was determined that the Company's internally developed
software required only minor modifications which will be completed and tested
by December 1998. With respect to the purchased software utilized by the
Company, the majority of the Year 2000 compliance work has already been
completed. While there may be some expenses incurred during the next two years,
the Company believes that these costs will not be material to its results of
operations.
27
<PAGE> 28
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This 10-Q Report includes statements that are not purely historical and are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended,
including statements regarding the Company's expectations, hopes, beliefs,
intentions or strategies regarding the future. All statements other than
statements of historical facts included in this 10-Q Report, including without
limitation, statements under "Legal Proceedings and Environmental Issues,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the "Notes to Consolidated Financial Statements" regarding
reserves and their values, planned capital expenditures, increases in oil and
gas production, trends or expectations concerning oil and gas prices or market
characteristics, the number of and risk and return associated with exploitation
and exploration projects, marketing, hedging and trading risks, and the
Company's financial position, stability of cash flow, debt service capabilities,
capital availability, debt repayment plans, divestiture plans, ability to close
planned sales, business strategy and other plans and objectives for future
operations, potential liabilities or the expected absence thereof, the potential
materiality of year 2000 compliance expenses, and the potential outcome of
environmental matters, litigation or other proceedings, are forward-looking
statements. All forward-looking statements included or incorporated by reference
in this 10-Q Report are based on information available to the Company on the
date hereof, and the Company assumes no obligation to update such
forward-looking statements. Although the Company believes that the assumptions
and expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct or
that the Company will take any actions that may presently be planned.
There are numerous uncertainties inherent in estimating quantities of proved oil
and gas reserves and projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
Company. Many factors may affect the Company's expectations and plans. Capital
expenditure and financing plans may change in connection with the success of
drilling activities, the general availability of capital, interest rates, and
cash flow available from operations. Cash flow available from operations may
change depending on costs of materials and services, regulatory burdens and
commodity prices. Oil and gas prices are volatile, and there are several
potentially significant adverse effects to the Company which can result if
product prices decline materially. First, lower product prices will adversely
affect the Company's cash flow and could cause the Company to (i) curtail its
capital program, (ii) borrow additional amounts under its revolving credit
agreement, or (iii) issue additional debt or equity securities. Second, lower
product prices could cause the borrowing base under the Company's bank credit
agreement to be reduced and certain covenant tests to be adversely affected.
Third, under rules promulgated by the Securities and Exchange Commission,
companies that follow the full cost accounting method are required to make
quarterly "ceiling test" calculations. Lower product prices adversely impact the
ceiling calculation. In the second quarter of 1998 the Company recorded a
non-cash ceiling test write down of $59 million. Should product prices continue
to decline, the Company could be required to record additional write downs in
future periods.
28
<PAGE> 29
Certain additional important factors that could cause actual results to differ
materially from the Company's forward-looking statements are disclosed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this 10-Q Report and in the Company's 8-K Report
filed February 26, 1997. All subsequent written or oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the factors mentioned above or in such
other sections of this 10-Q Report.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS AND ENVIRONMENTAL ISSUES
Litigation. The Company is subject to minor lawsuits incidental to operations
in the oil and gas industry. The Company believes it has meritorious defenses
to all lawsuits in which it is a defendant and will vigorously defend against
them. The resolution of such lawsuits, regardless of the outcome, will not have
a material adverse effect on the Company's results of operations or financial
position.
Environmental Proceedings. The owner of an oil field waste disposal facility, a
major oil company and the Company were named as respondents by the United
States Environmental Protection Agency ("EPA") in an administrative order
brought by the EPA against Weld County Waste Disposal, Inc. ("WCWDI") under
section 7003 of the Resource Conservation and Recovery Act ("RCRA") on May 11,
1995. WCWDI operated and continues to own an evaporation pit in Colorado for
the disposal of non-hazardous production wastes. The EPA order requires that
work be performed to abate a perceived endangerment to wildlife, the
environment or public welfare. The Company and other non-operator respondents
are working together with the EPA to develop plans and characterization
studies, and have caused the facility to be permanently closed.
The Company has utilized this facility in past years to dispose of its
production and flowback water. During the period of its use, the Company
believed that the facility was operating in compliance with all applicable
legal requirements and, along with other oil and gas operators, paid a fee to
WCWDI for using this disposal facility. There were a number of other
significant contributors to the facility during the period reviewed by the EPA
(1988 through 1994) and additional contributors during the period from 1977,
when it was constructed, through 1988. The Company and the major oil company
were named because they were deemed the major contributors of waste volumes to
the facility for the period reviewed by the EPA. Certain other contributors are
participating in their share of the reclamation costs.
Based on the Company's current knowledge and its expectation of proportionate
reimbursement from other parties who utilized the facility, the Company does
not believe that its share of the reclamation costs will have a material impact
on its financial condition or results of operations. By agreement with other
contributing parties, the Company is currently paying approximately 50% of the
costs associated with the project, but after recovery from additional liable
parties, the
29
<PAGE> 30
Company's percentage share of overall costs may be reduced to as low as 40%.
The Company has spent approximately $1 million on its behalf from inception
through the end of the second quarter of 1998 on the project. The Company's
share of total costs associated with the project, at the 50% level of
participation, are currently estimated to range from $1 to $2 million over
three years. The full amount of the Company's estimated liability is reflected
in the June 30, 1998, financial statements.
Recent data regarding site conditions indicate a potentially more significant
contamination problem in one portion of the site which is the apparent result
of disposal of non-oil field wastes by third parties a number of years prior to
the Company's involvement as an oil field waste disposal customer of this
facility. This recent data gives rise to both the possibility of a defense of
non-liability for the divisible harm caused by wastes of third parties and
greater uncertainty regarding the total costs of study and clean-up for which
the Company is potentially liable. For these reasons, the Company is not able
at this time to determine its probable share, if any, of future response costs
for these non-oil field wastes.
Item 2. Changes in Securities None.
Item 3. Defaults Upon Senior Securities None.
Item 4. Submission of Matters to a Vote of Security Holders The Company
held its annual meeting of the stockholders on May 20, 1998. In
addition to the election of directors, the following matters were
submitted to a vote of the stockholders:
To adopt an amendment to Article 4 of the Company's
Certificate of Incorporation to increase the number of
authorized shares of the Company's Common Stock, par value
$.001 per share, from 30 million to 50 million. 15,627,150
votes were for, 307,817 votes were against, and 132,684 votes
abstained. There were no broker non-votes. The matter was,
therefore, approved by the Company's stockholders at the
meeting.
To adopt an amendment to Article 16 of the Company's
Certificate of Incorporation to change the vote required to
amend Article 4 thereof from an affirmative vote of the
holders of two-thirds of the outstanding shares of stock who
are entitled to vote upon the election of directors to an
affirmative vote of the holders of a majority of such shares.
13,335,362 votes were for, 104,197 votes were against, and
101,014 votes abstained. Broker non-voters in the amount of
2,527,078 were counted for purposes of obtaining a quorum, but
were not counted in the vote. The matter was, therefore,
approved by the Company's stockholders at the meeting.
To approve certain amendments to the HS Resources, Inc. 1997
Performance and Equity Incentive Plan. 15,702,856 votes were
for, 257,819 votes were against, and 106,976 votes abstained.
There were no broker non-votes. The matter was, therefore,
approved by the Company's stockholders at the meeting.
Item 5. Other Information None.
30
<PAGE> 31
Item 6. Exhibits and Reports on Form 8-K
a. List of Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
3.1 Amended and Restated Certificate of Incorporation of the Company.
(Incorporated herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, No. 33-52774, filed October 2,
1992.)
3.2 Third Amended and Restated Bylaws of the Company adopted December
16, 1996. (Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-4, No 333-19433, filed January 8,
1997.)
4.1 Form of Indenture dated December 1, 1993, entered into between the
Company and the Trustee. (Incorporated by reference to Exhibit 4.7
to Amendment No. 3 to the Company's Registration Statement on Form
S-3, No. 33-70354, filed November 23, 1993.)
4.2 Indenture dated November 27, 1996, among the Company, Orion
Acquisition, Inc., HSRTW, Inc., and Harris Trust and Savings Bank as
Trustee. (Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-4, No 333-19433, filed January 8,
1997.)
4.3 First Supplemental Indenture dated November 25, 1996 among the
Company, Orion Acquisition, Inc., HSRTW, Inc., and Harris Trust and
Savings Bank as Trustee. (Incorporated by reference to Exhibit 4.3
to the Company's Registration Statement on Form S-4, No 333-19433,
filed January 8, 1997.)
10.1 Common Stock Purchase Warrant dated July 12, 1990 by the Company to
James E. Duffy. (Incorporated by reference to Exhibit 10.5 to the
Form 8, Second Amendment to Form 10, filed April 8, 1991.)
10.2 HS Resources, Inc. Rule 701 Compensatory Benefit Plan. (Incorporated
by reference to Exhibit 10.5.2 to the Form 8, Second Amendment to
Form 10, filed April 8, 1991.)
10.3 1992 Directors' Stock Option Plan. (Incorporated by reference to
Exhibit 10.10 to Amendment No. 1 to the Company's Registration
Statement on Form S-1, No. 33-52774, filed November 9, 1992.)
10.3.1 1993 Directors' Stock Option Plan. (Incorporated by reference to
Exhibit 10.8.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, filed March 31, 1994 (as
amended by Form 10-K/A-1 on April 8, 1994.))
10.4 Form of Indemnification Agreement for Directors of the Company.
(Incorporated by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995,
filed March 25, 1996.)
10.5 Lease Agreement dated October 6, 1993, between the Company and JMB
Group Trust IV and Endowment and Foundation Realty, Ltd. -- JMB III
for the premises at One Maritime Plaza, San Francisco, California.
(Incorporated by reference to Exhibit 10.13 to the
31
<PAGE> 32
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 Amended and Restated Agreement and Plan of Merger, dated as of April
29, 1996, among the Company, HSR Acquisition, Inc. and Tide West Oil
Co. (Incorporated by reference as Annex A to Amendment No. 2 to the
Company's Registration Statement on Form S-4, No. 333-01991, filed
on May 2, 1996.)
10.9 Agreement for Purchase and Sale of Assets, dated as of February 24,
1996, among the Company, Basin Exploration, Inc. ("Basin") and Orion
Acquisition, Inc. ("Orion"). (Incorporated by reference to Exhibit
2.3 to the Company's Form 8-K, filed March 12, 1996.)
10.10 Agreement for Purchase and Sale of Assets [Wattenberg], dated as of
February 24, 1996, among the Company, Orion and Basin. (Incorporated
by reference to Exhibit A to the Company's Schedule 13D relating to
Basin Exploration, Inc., filed on March 6, 1996.)
10.11 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.)
10.12 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.)
10.13 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.)
10.14 Amended and Restated Credit Agreement dated as of June 14, 1996,
among the Company, Chase as agent, and the Banks signatory thereto.
(Incorporated by reference to Exhibit 10.21 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
filed August 14, 1996.)
10.15 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.)
10.16 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
32
<PAGE> 33
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.)
10.17 Guaranty Agreement by HSR Acquisition, Inc. in favor of Chase, as
Agent, dated June 14, 1996. (Incorporated by reference to Exhibit
10.24 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, filed August 14, 1996.)
10.18 First Amendment to Guaranty Agreement dated as of June 17, 1996, by
and among HSRTW, Inc. (formerly HSR Acquisition, Inc.) and Chase,
in its individual capacity and as agent for the Lenders.
(Incorporated by reference to Exhibit 10.27 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
filed August 14, 1996.)
10.19 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.)
10.20 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.)
10.21 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.)
10.22 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.)
10.23 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.)
10.24 Purchase and Sale Agreement between the Company and Wattenberg Gas
Investments, LLC dated June 28, 1996. (Incorporated by reference to
Exhibit 10.37 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, filed August 14, 1996.)
10.25 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.)
10.26 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.)
33
<PAGE> 34
10.27 Purchase Agreement dated November 27, 1996, among the Company,
Orion, HSRTW, Inc., Salomon Brothers Inc., Chase Securities Inc.,
Lehman Brothers Inc., and Prudential Securities Incorporated.
(Incorporated by reference to Exhibit 10.40 to the Company's
Registration Statement on Form S-4, No 333-19433, filed January 8,
1997.)
10.28 Registration Agreement dated November 27, 1996, among the Company,
Orion, HSRTW, Inc. and Salomon Brothers Inc. in its individual
capacity and as agent for Chase Securities Inc., Lehman Brothers
Inc., and Prudential Securities Incorporated. (Incorporated by
reference to Exhibit 10.41 to the Company's Registration Statement
on Form S-4, No 333-19433, filed January 8, 1997.)
10.29 Purchase and Sale Agreement dated June 30, 1997 among HSRTW, Inc.
and Horizon Gas Partners, L.P. as Seller and Gothic Energy
Corporation as Buyer. (Incorporated by reference to Exhibit 10.43 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, filed August 14, 1997.)
10.30 Amended Purchase and Sale Agreement dated as of July 16, 1997, among
HSRTW, Inc. and Horizon Gas Partners, L.P. as Seller and Gothic
Energy Corporation as Buyer. (Incorporated by reference to Exhibit
10.44 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, filed August 14, 1997.)
10.31 1997 Performance and Equity Incentive Plan. (Incorporated by
reference to Exhibit A to the Company's Definitive Proxy Statement
for its Annual Meeting of Stockholders held on May 22, 1997, filed
April 24, 1997.)
10.32 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.)
10.33 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.)
10.34 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.)
10.35 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.)
10.36 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.)
10.37 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.)
34
<PAGE> 35
10.38 Agreement and Plan of Merger between Orion Acquisition, Inc. and HS
Resources, Inc. dated April 20, 1998, but effective May 1, 1998.
(Incorporated by reference to Exhibit 10.38 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998,
filed May 14, 1998.)
10.39 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.)
10.40 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.)
10.41* 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.
10.42 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.)
27* Financial Data Schedule
* Filed herewith
- -------------------------------------
b. Reports on Form 8-K.
Report dated June 2, 1998, filing the June 2, 1998 press
release in connection with the Company's announcement of its
plan to sell its Mid-Continent properties.
Report dated July 27, 1998, filing the Stock Purchase and
Sale Agreement between the Company and Universal Resources
Corporation and the July 28, 1998 press release in connection
therewith.
35
<PAGE> 36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
HS Resources, Inc. has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
HS RESOURCES, INC.
Dated: August 13, 1998 By: /s/JAMES E. DUFFY
------------------------------------------
James E. Duffy
Vice President and Chief Financial Officer
By: /s/ ANNETTE MONTOYA
------------------------------------------
Annette Montoya
Vice President and Principal Accounting
Officer
36
<PAGE> 37
Index to Exhibits
<TABLE>
<CAPTION>
Sequentially
EXHIBIT Numbered
NUMBER DESCRIPTION Page
- ------ ----------- ------------
<S> <C> <C>
10.41* 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.
27* Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.41
FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT
AGREEMENT (this "Amendment") is dated as of June 16, 1998 among: HS RESOURCES,
INC., a corporation formed under the laws of the State of Delaware (the
"Borrower"); each of the lenders that is a signatory hereto; and THE CHASE
MANHATTAN BANK (in its individual capacity, "Chase"), as agent for the Lenders
(in such capacity, together with its successors in such capacity, the "Agent").
RECITALS
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 and the Third Amendment to Amended and Restated Credit
Agreement dated as of December 15, 1997 (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:
"Fourth Amendment" shall mean that certain Fourth Amendment
to Amended and Restated Credit Agreement dated as of June 16, 1998,
among the Borrower, the Lenders and the Agent.
3. Section 9.01 of the Credit Agreement is hereby amended by adding
the following clause (o):
"(o) Debt arising under a credit facility dated as of July 1,
1998 among the Borrower, The Chase Manhattan Bank, as agent and the
lenders party thereto; provided that the principal amount of such Debt
does not exceed $15,000,000
<PAGE> 2
outstanding at any one time, such Debt is
paid in full on or before September 15, 1998 and such Debt is
unsecured."
4. Section 9.15 of the Credit Agreement is hereby amended by adding
the following clause (v):
"and (v) sale of the Properties in Yuma County, Colorado,
described in the letter dated June 16 from the Borrower attached to
the Fourth Amendment."
5. This Amendment shall become binding on the Lenders when, and only
when, the following conditions shall have been satisfied and the Agent shall
have received each of the following, as applicable, in form and substance
satisfactory to the Agent or its counsel:
(a) counterparts of this Amendment executed by the Borrower
and the Majority Lenders;
(b) such other documents as it or its counsel may reasonably
request.
6. The parties hereto hereby acknowledge and agree that, except as
specifically supplemented and amended, changed or modified hereby, the Credit
Agreement shall remain in full force and effect in accordance with its terms.
7. The Borrower hereby reaffirms that as of the date of this
Amendment, the representations and warranties contained in Article VII of the
Credit Agreement are true and correct on the date hereof as though made on and
as of the date of this Amendment, except as such representations and warranties
are expressly limited to an earlier date.
8. THIS AMENDMENT (INCLUDING, BUT NOT LIMITED TO, THE VALIDITY AND
ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK.
9. This Amendment may be executed in two or more counterparts, and it
shall not be necessary that the signatures of all parties hereto be contained
on any one counterpart hereof; each counterpart shall be deemed an original,
but all of which together shall constitute one and the same instrument.
[SIGNATURES BEGIN NEXT PAGE]
<PAGE> 3
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..
BORROWER: HS RESOURCES, INC.
By:
------------------------------
Name:
Title:
LENDER AND AGENT: THE CHASE MANHATTAN BANK
By:
------------------------------
Name:
Title:
LENDERS: CIBC, INC.
By:
------------------------------
Name:
Title:
WELLS FARGO BANK, N.A.
By:
------------------------------
Name:
Title:
S-1
<PAGE> 4
CREDIT LYONNAIS NEW YORK BRANCH
By:
------------------------------
Name:
Title:
UNION BANK OF CALIFORNIA, N.A.
By:
------------------------------
Name:
Title:
ROYAL BANK OF CANADA
By:
------------------------------
Name:
Title:
DEN NORSKE BANK ASA
By:
------------------------------
Name:
Title:
By:
------------------------------
Name:
Title:
MEESPIERSON, N.V.
By:
------------------------------
Name:
Title:
S-2
<PAGE> 5
ABN AMRO BANK N.V.
San Francisco International Branch
By:
------------------------------
Name:
Title:
By:
------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK
By:
------------------------------
Name:
Title:
THE SANWA BANK, LIMITED
By:
------------------------------
Name:
Title:
SOCIETE GENERALE
By:
------------------------------
Name:
Title:
S-3
<PAGE> 6
PARIBAS
By:
------------------------------
Name:
Title:
By:
------------------------------
Name:
Title:
CREDIT AGRICOLE INDOSUEZ
By:
------------------------------
Name:
Title:
By:
------------------------------
Name:
Title:
S-4
<PAGE> 7
RATIFICATION
The undersigned (a "Guarantor") hereby agrees that its liabilities
under its Guaranty Agreement dated as of June 14, 1996, as amended by First
Amendment to Guaranty Agreement dated as of June 17, 1996 (each such Guaranty
Agreement as amended called a "Guaranty"), guaranteeing the indebtedness,
obligations and liabilities under that certain Amended and Restated Credit
Agreement dated June 14, 1996, as amended by First Amendment to Amended and
Restated Credit Agreement dated as of June 17, 1996, Second Amendment to
Amended and Restated Credit Agreement dated as of November 27, 1996, Third
Amendment to Amended and Restated Credit Agreement dated as of December 15,
1997 and the foregoing Fourth Amendment to Amended and Restated Credit
Agreement dated as of June 16, 1998 shall remain enforceable against such
Guarantor in accordance with the terms of its Guaranty and shall not be
reduced, altered, limited, lessened or in any way affected by the execution and
delivery of this Third Amendment to Amended and Restated Credit Agreement. The
Guarantor hereby confirms and ratifies its liabilities under its Guaranty in
all respects.
HSRTW, INC. (formerly known as
HSR Acquisition, Inc.)
By:
------------------------------
Name:
Title:
S-5
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,800,232
<SECURITIES> 0
<RECEIVABLES> 49,732,332
<ALLOWANCES> 0
<INVENTORY> 1,211,853
<CURRENT-ASSETS> 60,924,652
<PP&E> 1,166,721,622
<DEPRECIATION> 223,971,003
<TOTAL-ASSETS> 1,016,321,337
<CURRENT-LIABILITIES> 75,660,979
<BONDS> 657,032,388
0
0
<COMMON> 19,121
<OTHER-SE> 194,498,114
<TOTAL-LIABILITY-AND-EQUITY> 1,016,321,337
<SALES> 111,178,628
<TOTAL-REVENUES> 115,966,779
<CGS> 26,360,379
<TOTAL-COSTS> 61,288,799
<OTHER-EXPENSES> 59,000,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,837,083
<INCOME-PRETAX> (51,519,482)
<INCOME-TAX> (19,628,923)
<INCOME-CONTINUING> (31,890,559)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,890,559)
<EPS-PRIMARY> (1.72)
<EPS-DILUTED> (1.71)
</TABLE>
