<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, 2000
-------------------------------------------------
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 CORPORATE ISSUERS:
Number of shares of Common Stock, $.001 par value, outstanding as of the close
of business on July 31, 2000: 18,304,155 after deducting 1,410,738 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, 2000 (Unaudited) and
December 31, 1999.......................................................................................3
Unaudited Consolidated Statements of Operations -- For the Three Months
and Six Months Ended June 30, 2000 and 1999.............................................................5
Consolidated Statements of Stockholders' Equity -- For
the Years Ended December 31, 1998 and 1999 and the Six Months Ended
June 30, 2000 (Unaudited)...............................................................................6
Unaudited Consolidated Statements of Cash Flows --
For the Six Months Ended June 30, 2000 and 1999.........................................................7
Notes to Unaudited Consolidated Financial Statements....................................................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings and Environmental Issues.............................................................33
Item 2. Changes in Securities..................................................................................33
Item 3. Defaults Upon Senior Securities........................................................................33
Item 4. Submission of Matters to a Vote of Security Holders....................................................34
Item 5. Other Information......................................................................................34
Item 6. Exhibits and Reports on Form 8-K.......................................................................35
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HS RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6,479 $ 518
Margin deposits 1,225 935
Accounts receivable
Oil and gas sales 46,054 31,602
Trading and transportation 28,204 18,518
Trade 5,023 3,089
Ad valorem and severance taxes 13,074 11,845
Other 7,828 4,366
Lease and well equipment inventory, at cost 1,111 1,249
Prepaid expenses and other 5,533 3,966
Notes receivable from officers for exercise of stock options
and issuance of common stock (Note 6) 834 1,574
--------- ---------
Total current assets 115,365 77,662
--------- ---------
OIL AND GAS PROPERTIES, AT COST, USING THE SUCCESSFUL EFFORTS METHOD
Undeveloped acreage 101,272 99,358
Costs subject to depreciation, depletion and amortization 947,870 892,976
Less accumulated depreciation, depletion and amortization (256,137) (227,691)
--------- ---------
Net oil and gas properties 793,005 764,643
--------- ---------
GAS GATHERING AND TRANSPORTATION FACILITIES,
at cost, net of accumulated depreciation of $3,354
and $2,016 at June 30, 2000 and December 31, 1999, respectively 53,086 52,611
--------- ---------
OTHER ASSETS
Deferred charges and other, net 9,575 10,070
Office and transportation equipment and other property,
net of accumulated depreciation of $5,995
and $6,552 at June 30, 2000 and December 31, 1999, respectively 2,783 3,040
Notes receivable from officers for exercise of stock options
and issuance of common stock (Note 6) -- 812
Goodwill, net of accumulated amortization of $1,440
and $1,260 at June 30, 2000 and December 31, 1999, respectively 2,160 2,340
--------- ---------
Total other assets 14,518 16,262
--------- ---------
TOTAL ASSETS $ 975,974 $ 911,178
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
HS RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable
Trade $ 29,272 $ 26,653
Revenue 58,282 36,897
Gas purchases 10,214 9,290
Accrued expenses
Ad valorem and production taxes 13,199 10,624
Interest 4,945 5,233
Other 4,585 5,389
Income taxes payable 1,119 958
Payable to KMI 21,367 19,551
--------- ---------
Total current liabilities 142,983 114,595
--------- ---------
ACCRUED AD VALOREM TAXES AND OTHER 14,591 15,804
--------- ---------
PAYABLE TO KMI, NET OF CURRENT PORTION 16,245 27,556
--------- ---------
LONG-TERM BANK DEBT 244,000 227,000
--------- ---------
9 7/8% SENIOR SUBORDINATED NOTES,
due 2003, net of unamortized discount of $200 and
$229 at June 30, 2000 and December 31, 1999, respectively 74,800 74,771
--------- ---------
9 1/4% SERIES A SENIOR SUBORDINATED NOTES,
due 2006, net of unamortized discount of $495 and
$534 at June 30, 2000 and December 31, 1999, respectively 149,505 149,466
--------- ---------
9 1/4% SERIES B SENIOR SUBORDINATED NOTES,
due 2006, net of unamortized discount of $3,387 and $3,653
at June 30, 2000 and December 31, 1999, respectively 81,613 81,347
--------- ---------
DEFERRED INCOME TAXES 66,171 53,246
--------- ---------
COMMITMENTS AND CONTINGENCIES
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock, $.001 par value, 50,000 shares authorized;
19,715 and 19,528 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively 20 20
Additional paid-in capital 196,425 191,406
Retained earnings (deficit) 7,231 (14,302)
Deferred compensation (4,164) (1,981)
Treasury stock, at cost, 1,411 and 731 shares at June 30, 2000
and December 31, 1999, respectively (13,446) (7,750)
--------- ---------
Total stockholders' equity 186,066 167,393
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 975,974 $ 911,178
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
4
<PAGE> 5
HS RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES
Oil and gas sales $ 63,589 $ 36,720 $121,728 $ 72,808
Trading and transportation 25,181 11,978 43,826 21,278
Gathering and transmission system revenues 3,256 -- 6,364 --
Other gas revenues 2,396 2,518 4,402 5,042
Income from interest in gathering plant 358 -- 722 --
Interest income and other 992 113 1,253 270
-------- -------- -------- --------
Total revenues 95,772 51,329 178,295 99,398
-------- -------- -------- --------
EXPENSES
Production taxes 5,775 2,137 11,243 4,285
Lease operating 8,039 7,470 15,063 14,160
Cost of trading and transportation 24,680 11,464 41,792 20,446
Gathering and transmission system operating expenses 1,364 -- 2,579 --
Depreciation, depletion and amortization 15,166 13,203 30,021 27,402
Exploratory and abandonment 3,860 2,722 6,528 4,739
Geological and geophysical 3,661 1,465 7,211 3,487
Impairment and loss on sales of oil and gas properties 61 1,100 161 1,100
General and administrative 2,030 1,066 4,056 2,475
Interest 12,692 10,510 24,854 20,940
-------- -------- -------- --------
Total expenses 77,328 51,137 143,508 99,034
-------- -------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 18,444 192 34,787 364
PROVISION FOR INCOME TAXES 7,027 73 13,254 139
-------- -------- -------- --------
NET INCOME $ 11,417 $ 119 $ 21,533 $ 225
-------- -------- -------- --------
BASIC EARNINGS PER SHARE $ 0.62 $ 0.01 $ 1.16 $ 0.01
-------- -------- -------- --------
DILUTED EARNINGS PER SHARE $ 0.60 $ 0.01 $ 1.12 $ 0.01
-------- -------- -------- --------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 18,471 18,773 18,642 18,596
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING ASSUMING DILUTION 19,186 18,895 19,173 18,657
======== ======== ======== ========
</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, 1998 AND 1999
AND THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TREASURY STOCK
---------------- PAID-IN EARNINGS DEFERRED --------------------
SHARES AMOUNTS CAPITAL (DEFICIT) COMPENSATION SHARES AMOUNTS
------ ------- ---------- --------- ------------ --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 18,655 $ 19 $ 183,191 $ (7,372) $ (144) (160) $ (2,217)
Purchase of treasury stock -- -- -- -- -- (722) (6,524)
Transfer of treasury stock to 401(k) Plan -- -- 7 -- -- 39 542
Issuance of treasury stock
for exercise of options
including income tax benefit -- -- (115) -- -- 42 583
Issuance of restricted stock 32 -- 428 -- (428) -- --
Amortization of deferred compensation -- -- -- -- 307 -- --
Issuance of performance shares 106 -- 1,534 -- (1,534) -- --
Exercise of stock options, including
income tax benefit 337 -- 3,201 -- -- -- --
Restricted stock forfeited (3) -- (50) -- 50 -- --
Net loss -- -- -- (18,616) -- -- --
------ ------- --------- --------- --------- ------- ---------
BALANCE, DECEMBER 31, 1998 19,127 19 188,196 (25,988) (1,749) (801) (7,616)
Purchase of treasury stock -- -- -- -- -- (128) (2,055)
Transfer of treasury stock to 401(k) Plan -- -- 50 -- -- 75 712
Issuance of treasury stock
for exercise of options
including income tax benefit -- -- 492 -- -- 123 1,209
Issuance of restricted stock 34 -- 301 -- (301) -- --
Amortization of deferred compensation -- -- -- -- 1,067 -- --
Issuance of performance shares 132 1 997 -- (998) -- --
Issuance of common stock 235 -- 1,370 -- -- -- --
Net income -- -- -- 11,686 -- -- --
------ ------- --------- --------- --------- ------- ---------
BALANCE, DECEMBER 31, 1999 19,528 20 191,406 (14,302) (1,981) (731) (7,750)
Purchase of treasury stock -- -- -- -- -- (161) (3,219)
Exercise of warrants 6 -- 40 -- -- -- --
Transfer of treasury stock to 401(k) Plan -- -- 385 -- -- 62 672
Issuance of treasury stock
for exercise of options
including income tax benefit -- -- 745 -- -- 151 1,679
Restricted stock and performance shares
forfeited (9) -- (57) -- 57 -- --
Amortization of deferred compensation -- -- -- -- 737 -- --
Exercise of equity swap -- -- -- -- -- (732) (4,828)
Issuance of restricted stock
and performance shares 125 -- 2,977 -- (2,977) -- --
Exercise of stock options 65 -- 929 -- -- -- --
Net income -- -- -- 21,533 -- -- --
------ ------- --------- --------- --------- ------- ---------
BALANCE, JUNE 30, 2000 (UNAUDITED) 19,715 $ 20 $ 196,425 $ 7,231 $ (4,164) (1,411) $ (13,446)
====== ======= ========= ========= ========= ======= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE> 7
HS RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
------------------------
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 21,533 $ 225
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization 30,021 27,402
Depreciation expense offset against revenue 635 --
Impairment and loss on sales of oil and gas properties 161 1,100
Surrendered and expired acreage 3,087 1,905
Amortization of deferred charges, debt issue costs
and deferred compensation 2,117 2,246
Transfer of treasury stock to 401(k) Plan 1,057 763
Deferred income tax provision 12,925 138
Increase in accounts receivable (30,763) (7,350)
Increase (decrease) in accounts payable and accrued expenses 28,506 (4,084)
Decrease in deferred revenue, net -- (5,480)
Other (717) (7)
--------- ---------
Net cash provided by operating activities 68,562 16,858
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Exploration, development and leasehold costs (52,908) (30,184)
Purchase of proved and unproved properties (7,455) --
Gas gathering and transmission facilities additions (1,812) (177)
Other property additions (231) (233)
Net proceeds from the sale of oil and gas properties 102 (808)
Decrease in property related payables (3,148) (11,545)
--------- ---------
Net cash used in investing activities (65,452) (42,947)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank debt 102,000 40,000
Repayments of bank debt (85,000) (23,000)
Repayment of KMI debt (9,495) --
Issuance of common stock -- 611
Exercise of options and warrants 3,394 6
Purchase of treasury stock and exercise of equity swap (8,048) (34)
--------- ---------
Net cash provided by financing activities 2,851 17,583
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,961 (8,506)
Cash and cash equivalents, beginning of year 518 9,658
--------- ---------
Cash and cash equivalents, end of year $ 6,479 $ 1,152
--------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid, net of capitalized interest $ 23,342 $ 20,565
Cash paid for income taxes, net of reimbursements $ 206 $ 665
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE> 8
HS RESOURCES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL
HS Resources, Inc. (the "Company" or "HSR"), a Delaware corporation, was
organized in January 1987. The Company, directly or through subsidiaries,
acquires, develops, explores for, exploits and produces oil and gas properties.
The Company's primary properties are located in the Denver-Julesburg ("D-J")
Basin, the onshore area of the Texas-Louisiana Gulf Coast, and to a lesser
extent, the Northern Rocky Mountains and the Mid-Continent. Through its
wholly-owned subsidiary, HS Gathering L.L.C., the Company gathers and transports
its own and third party gas. Through its subsidiary, HS Energy Services, Inc.
("HSES"), the Company 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 presented here 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, 2000, 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, 1999 Report on Form 10-K filed with the Securities
and Exchange Commission on March 24, 2000.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUCCESSFUL EFFORTS. The Company utilizes the successful efforts method of
accounting for its oil and gas properties. Consequently, leasehold costs are
capitalized when incurred. Unproved properties are assessed periodically within
specific geographic areas, and impairments in value are charged to expense.
Exploratory costs, geological and geophysical expenses and delay rentals are
charged to expense as incurred. Exploratory drilling costs are initially
capitalized, but charged to expense if and when the well is determined to be
unsuccessful. Costs of developmental dry holes and proved leaseholds are
amortized on the unit-of-production method based on proved reserves on a field
by field basis. The depreciation of capitalized drilling costs is based on the
unit-of-production method using proved developed reserves on a field by field
basis.
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
8
<PAGE> 9
HS RESOURCES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONT'D)
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. In the event energy related financial instruments are
terminated prior to the period of physical delivery of the items being hedged,
the gains or losses on the energy related financial instruments at the time of
the termination remain deferred until the period of physical delivery unless
both the energy related financial instruments and the items being hedged result
in a loss. If this occurs, the loss is recorded immediately.
NOTE 3. PRO FORMA STATEMENTS
On November 26, 1999, the Company acquired certain gas gathering and
transmission assets (the "Wattenberg Gathering and Transmission System") from
Kinder Morgan, Inc. and affiliated entities ("KMI") for an adjusted purchase
price of approximately $48 million plus the future assumption of an operating
lease which had a present value of $19 million.
The Wattenberg Gathering and Transmission System consists of a low pressure
gathering system and a high pressure transmission system. The low pressure
gathering system consists of more than 1,500 miles of pipeline and 3,000
horsepower of compression, located in five northeastern Colorado counties. Gas
is delivered to the inlet of the high pressure transmission system, which
consists of almost 60 miles of high pressure pipeline and almost 40,000
horsepower of compression. The acquisition is being accounted for using the
purchase method of accounting. Along with the system, the Company acquired a
6.9% interest in the BP Amoco Wattenberg Gas Processing Plant, and a right of
first refusal to purchase the remaining interest in the plant.
The following table sets forth condensed unaudited pro forma operating results
of the Company for the six months ended June 30, 1999. The condensed pro forma
operating results assume the acquisition of the gas gathering and transmission
assets from KMI had occurred on January 1, 1999. The condensed pro forma results
are not necessarily indicative of the results of operations had the transaction
been consummated on January 1, 1999,
9
<PAGE> 10
HS RESOURCES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONT'D)
and may not necessarily be indicative of future performance. Amounts in
thousands, except per share amounts.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999
(UNAUDITED)
----------------
<S> <C>
Revenues $108,746
Net income $ 2,933
Diluted earnings per share $ 0.16
Weighted average number of common
shares outstanding assuming dilution 18,657
</TABLE>
NOTE 4. ISSUANCE OF PERFORMANCE SHARES
In May 2000, the Company's stockholders approved the 2000 Performance and Equity
Incentive Plan (the "Plan"). The Plan allows for the issuance of performance
shares to employees, officers and directors. Accelerated vesting of such shares
is dependent on the attainment by the Company of defined performance goals.
These shares have a base vesting schedule over nine years with accelerated
vesting to occur no earlier than one-fourth of the shares in each of the first
four years. In the second quarter of 2000, the Company issued 100,500
performance shares and recorded deferred compensation of approximately $2.5
million, which is being amortized based on management's evaluation regarding the
attainment of the defined performance goals.
NOTE 5. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The
date of this statement was recently amended by SFAS No. 137 extending the
adoption period to fiscal years beginning after June 15, 2000. This statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the statement of operations, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
10
<PAGE> 11
HS RESOURCES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONT'D)
The Company has not yet quantified the impact of adopting SFAS 133 on its
financial statements and has not determined the timing of or method of adoption.
However, SFAS 133 could increase volatility in earnings and other comprehensive
income.
In December 1998, the Emerging Issues Task Force reached consensus on Issue No.
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities" ("EITF Issue 98-10"). EITF Issue 98-10 requires energy trading
contracts to be recorded at fair value on the balance sheet, with changes in
fair value included in earnings. In accordance with EITF Issue 98-10 the Company
records energy trading contracts at fair value on the balance sheet, with the
changes in fair value included in earnings.
NOTE 6. RELATED PARTY TRANSACTIONS
In February 1999, the Company instituted the 1999 Non-Compensatory Stock
Purchase Plan. This plan is designed to enable officers of the Company to
purchase stock at fair market value in transactions exempt from Section 16(b) of
the Securities Exchange Act of 1934. Five hundred thousand shares of common
stock have been allocated to the plan. The plan is administered by the
Compensation Committee of the Board of Directors. As of June 30, 2000, 235,000
shares of common stock had been purchased at prices ranging from $5.625 to
$6.50. In connection with the stock purchases, 76,000 shares were purchased for
cash. The remaining shares were purchased with the officers paying 15% of the
purchase price in cash, and the remainder in the form of full recourse
promissory notes. The notes mature on March 3, 2001 and bear interest at the
annual rate of 8.5%.
In June 1998, in connection with the exercise of stock options, certain officers
of the Company issued to the Company full recourse notes in the amount of $2.1
million. The notes and accrued interest were due and payable to the Company on
or before June 1, 2000. In the third quarter of 1999, principal and accrued
interest in the amount of $823,295 was repaid. All remaining principal and
accrued interest on these notes was repaid on or before June 1, 2000.
NOTE 7. TOTAL RETURN EQUITY SWAPS
In 1999, the Company entered into three total return equity swap agreements with
financial institutions. Under the terms of the first agreement, entered into on
February 25, 1999, the financial institution acquired approximately 732,000
shares of HSR's common stock from another investor at a price of $6.0625. The
Company had the right, but not the obligation, to purchase the stock at a price
of $6.0625 per share at any time through July 1, 2000. On April 20, 2000 the
Company repurchased the shares for approximately $4.5 million and retired them
into treasury stock.
11
<PAGE> 12
HS RESOURCES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONT'D)
On May 24, 1999 the Company entered into a second agreement whereby the
financial institution acquired 100,000 shares of HSR's common stock from another
investor at a price of $11.9875. The Company has the right, but not the
obligation, to purchase the stock at a price of $11.9875 per share at any time
through January 5, 2001.
On December 1, 1999, the Company entered into a third agreement whereby a
financial institution agreed to acquire on the open market approximately 300,000
shares of the Company's common stock at the current market price over a three
month period beginning December 2, 1999. As of March 2000 the financial
institution had acquired 308,100 shares at a weighted average price of $14.55
per share. The Company has the right, but not the obligation, to purchase the
stock at the weighted average price at any time through September 2, 2001.
If the Company decides not to purchase the shares on or before the termination
of the second or third agreement, the Company will receive any increase in the
market value of the shares covered by the agreement above the purchase price of
the shares, or will pay for any loss; however, the Company may cover losses in
most circumstances by issuing common stock to the financial institution if it
chooses to do so. All such amounts will be reflected in stockholders' equity at
the time of settlement. The Company also pays certain commissions and finance
costs. At June 30, 2000 the aggregate fair market value of the Company's common
stock in excess of the underlying option price attributable to such shares,
excluding the shares subject to the first agreement, which have now been
repurchased, was approximately $6.6 million.
12
<PAGE> 13
HS RESOURCES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONT'D)
NOTE 8. BUSINESS SEGMENT INFORMATION
The Company is an independent energy company engaged in the following
activities:
o acquisition, development, exploitation, exploration and
production of oil and gas
o transportation, marketing and trading of oil and gas and oil
and gas financial derivative instruments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
(In thousands) 2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Oil and gas sales D-J Basin $ 51,591 $ 34,702 $ 102,708 $ 71,259
Oil and gas sales Gulf Coast 14,313 4,454 23,290 6,472
Oil and gas sales Mid-Continent and Northern Rockies 81 81 132 119
Gas gathering and transmission facilities 3,614 -- 7,086 --
Trading and transportation 70,252 39,893 124,472 70,012
Intersegment eliminations (45,071) (27,914) (80,646) (48,734)
----------- ----------- ----------- -----------
$ 94,780 $ 51,216 $ 177,042 $ 99,128
=========== =========== =========== ===========
OPERATING INCOME (LOSS):
D-J Basin $ 25,807 $ 12,877 $ 52,312 $ 27,390
Gulf Coast 5,490 (116) 8,063 (2,188)
Mid-Continent and Northern Rockies (1,309) (1,218) (3,314) (1,681)
Gas gathering and transmission facilities 780 -- 1,417 --
Trading and transportation 1,192 1,006 3,285 1,969
Intersegment eliminations (800) (602) (1,469) (1,351)
----------- ----------- ----------- -----------
OPERATING INCOME 31,160 11,947 60,294 24,139
Other income and expense (12,716) (11,755) (25,507) (23,775)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES $ 18,444 $ 192 $ 34,787 $ 364
=========== =========== =========== ===========
IDENTIFIABLE ASSETS (GROSS) (AT JUNE 30):
Oil and gas properties D-J Basin $ 995,819 $ 919,485 $ 995,819 $ 919,485
Oil and gas properties Gulf Coast 45,919 27,855 45,919 27,855
Oil and gas properties Mid-Continent and Northern Rockies 8,320 5,057 8,320 5,057
Gas gathering and transmission facilities 56,439 6,069 56,439 6,069
Trading and transportation 3,862 3,841 3,862 3,841
Corporate 7,600 8,399 7,600 8,399
----------- ----------- ----------- -----------
$ 1,117,959 $ 970,706 $ 1,117,959 $ 970,706
=========== =========== =========== ===========
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE:
Oil and gas properties D-J Basin $ 12,938 $ 12,028 $ 25,820 $ 25,287
Oil and gas properties Gulf Coast 1,640 757 3,001 1,254
Oil and gas properties Mid-Continent and Northern Rockies 23 15 43 15
Gas gathering and transmission facilities 266 -- 542 --
Trading and transportation 109 111 217 216
Corporate 190 292 398 630
----------- ----------- ----------- -----------
$ 15,166 $ 13,203 $ 30,021 $ 27,402
=========== =========== =========== ===========
CAPITAL EXPENDITURES AND ACQUISITIONS:
Oil and gas properties D-J Basin $ 23,308 $ 7,081 $ 43,041 $ 21,284
Oil and gas properties Gulf Coast 6,240 2,684 15,115 7,805
Oil and gas properties Mid-Continent and Northern Rockies 820 530 2,249 1,094
Gas gathering and transmission facilities 1,561 88 1,812 178
Trading and transportation 9 35 13 54
Corporate 114 73 176 179
----------- ----------- ----------- -----------
$ 32,052 $ 10,491 $ 62,406 $ 30,594
=========== =========== =========== ===========
</TABLE>
13
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL. We have pursued a strategy centered around consolidation of assets in
the Denver-Julesburg ("D-J") Basin, coupled with continued exploitation and
exploration in our core areas. We use a technology-oriented approach to
exploitation and exploration designed to reduce risk and maximize efficiencies.
In December 1999 we furthered our consolidation strategy in the D-J Basin by
acquiring certain gas gathering and transmission assets (the "Wattenberg
Gathering and Transmission System") from Kinder Morgan, Inc. ("KMI") for an
adjusted purchase price of approximately $48 million, plus the assumption of an
operating lease which had a net present value of $19 million. As part of this
transaction, we also purchased a 6.9% interest in the BP Amoco Wattenberg Gas
Processing Plant, and a right of first refusal to purchase the remaining
interest in the plant. The transaction is scheduled to close in December 2001.
The Wattenberg Gathering and Transmission System consists of a low pressure
gathering system and a high pressure transmission system. The low pressure
gathering system consists of more than 1,500 miles of pipeline and 3,000
horsepower of compression, located in five northeastern Colorado counties. Gas
is delivered to the inlet of the high pressure transmission system, which
consists of almost 60 miles of high pressure pipeline and almost 40,000
horsepower of compression. The acquisition is recorded in our financial
statements as of December 1, 1999 using the purchase method of accounting. This
purchase has given us operational control over the gathering of a large
percentage of our gas production. By operating the pipeline we are better
positioned to anticipate and alleviate any gathering system bottlenecks that
might adversely affect our D-J Basin exploitation program and the production of
other operators.
We currently operate primarily in three core areas: the D-J Basin, the Gulf
Coast and, to a lesser extent, the Northern Rockies. For the six months ended
June 30, 2000, approximately 86% of our production (on an energy equivalent
basis) came from the D-J Basin and 14% from the Gulf Coast. We intend to
continue to pursue certain technology-oriented exploration projects and other
activities in other regions, including the Mid-Continent. We also intend to
continue our strategically important and historically profitable presence in the
gas marketing, trading and transportation business through our wholly-owned
subsidiary, HS Energy Services, Inc. ("HSES"). HSES provides opportunities for
us to enhance our operating margins on gas production from each of our producing
areas and from production we market on behalf of other oil and gas producers.
OIL AND GAS PRICES. Profitability in the United States oil and gas industry
fluctuates widely due in part to fluctuating commodity prices and related
changes in rates of reinvestment by industry participants. In early 1999, United
States natural gas prices and international crude oil prices were very low,
resulting in significant reductions in the operating and financial margins of
oil and gas producers. Additionally, low oil prices had a depressing effect on
the price of liquids recovered from natural gas during this time
14
<PAGE> 15
period. Thus, the low oil price of early 1999 further diminished the overall
price received for our gas production. In April 1999, both oil and gas prices
began to recover, and have continued to increase in 2000. This resulted in HSR
realizing for the three months ended June 30, 2000 an average price per barrel
of oil ("Bbl"), excluding hedging effects, of $28.05 compared to $16.11 for the
comparable period in 1999. Natural gas prices per thousand cubic feet of gas
("Mcf"), excluding hedging effects, were $3.45 for the three months ended June
30, 2000 compared to $1.94 in the comparable period in 1999.
At December 31, 1999, approximately 82% of our proved producing reserves
consisted of gas, of which 97% were located in the D-J Basin. The absolute level
and volatility of gas prices, particularly in the D-J Basin, have a material
impact on HSR. Historically, the price of D-J Basin gas (on a Btu-equivalent
basis) has been linked closely to the Colorado Interstate Gas Company ("CIG")
pipeline Rocky Mountain Index. This remains the case during the lower demand
summer months (generally April through October). More recently, however, as a
result of increased pipeline capacity into and out of the D-J Basin, a
transportation cost advantage for deliveries into the Public Service Company of
Colorado ("PSCO") Front Range market, and seasonal fluctuations, the price more
closely tracks Mid-Continent indices during the higher demand winter periods
(generally November through March).
Gas and oil prices remain strong as of the date of this report. However, we
cannot predict future trends in gas or oil prices. The uncertainty concerning
the price of oil and gas remains a dominant and unpredictable factor in our
profitability.
RESULTS OF OPERATIONS. During 2000 we continued our drilling and development
activities to exploit our opportunities in the D-J Basin. We also continued our
exploitation and exploration activities in the Gulf Coast region. Future results
will be significantly affected by our exploration, exploitation and development
activities as well as fluctuations in oil and gas prices.
Comparative operating results by business segment, consolidated other income,
expenses and income taxes are presented below. Segment operating revenues, costs
and expenses are before intersegment eliminations.
15
<PAGE> 16
COMPARISON OF THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 2000 AND 1999
D-J BASIN
OIL AND GAS SALES
(IN THOUSANDS EXCEPT AVERAGE PRICES)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Production:
Oil (Bbl) 570 526 1,164 1,083
Gas (Mcf) 14,235 13,291 28,258 26,396
Mcfe 17,655 16,449 35,239 32,895
Boe 2,943 2,742 5,873 5,482
Prices (1):
Average realized oil price ($/Bbl) $ 23.52 $ 13.49 $ 21.13 $ 13.19
Average realized gas price ($/Mcf) $ 2.51 $ 1.89 $ 2.61 $ 1.97
Operating Revenues:
Oil and gas sales $ 49,195 $ 32,184 $ 98,306 $ 66,217
Other gas revenues 2,396 2,518 4,402 5,042
-------- -------- -------- --------
51,591 34,702 102,708 71,259
-------- -------- -------- --------
Operating Costs and Expenses:
Production taxes 4,894 1,872 9,753 3,895
Lease operating 7,689 7,282 14,418 13,851
Depreciation, depletion
and amortization 12,938 12,028 25,820 25,287
Exploratory and abandonment 91 472 138 564
Geological and geophysical 172 2 267 103
Impairment and loss on sales of
oil and gas properties -- 169 -- 169
-------- -------- -------- --------
25,784 21,825 50,396 43,869
-------- -------- -------- --------
Operating Income $ 25,807 $ 12,877 $ 52,312 $ 27,390
======== ======== ======== ========
</TABLE>
(1) Includes effects of hedging activities
16
<PAGE> 17
GENERAL. We have been active in the D-J Basin for almost 20 years. Over the
years we sought to consolidate our position there by acquiring properties and
conducting active exploitation programs. More recent acquisitions include the
June 1996 acquisition of Basin Exploration, Inc.'s D-J Basin properties, the
December 1997 acquisition of Amoco Production Company's D-J Basin assets, the
1999 acquisition of the Wattenberg Gathering and Transmission System and the
2000 acquisition of interests in 60 wells and associated mineral rights for
approximately $7.1 million. For the six months ended June 30, 2000 and 1999
exploitation programs consisted of approximately 230 and 160 separate
activities, respectively.
OIL AND GAS REVENUES. Our D-J Basin oil and gas production and revenues have
increased for the quarter and six months ended June 30, 2000 compared to prior
year periods, primarily as the result of the success of our ongoing exploitation
and development activities and increased product prices. Other gas revenues
related to the sale of tax credits decreased for the quarter and six months
ended June 30, 2000 compared to the prior year periods mainly due to normal
production declines.
PRODUCTION EXPENSES. Total lease operating expense ("LOE") increased for the
quarter and six months ended June 30, 2000 compared to the prior year periods.
However, LOE per Mcfe was relatively unchanged, because the increase in total
LOE was offset by an increase in production. LOE per Mcfe was $0.44 for both
quarters ended June 30, 2000 and 1999. For the six months ended June 30, 2000
and 1999, LOE per Mcfe was $0.41 and $0.42, respectively. The increase in costs
and production was due to a larger number of producing wells. Production taxes
increased for the quarter and six months ended June 30, 2000 compared to the
prior year periods. This increase was due to higher realized product prices for
the quarter and six months ended June 30, 2000 as well as a 1999 second quarter
adjustment to the ad valorem tax accrual rate. During the second quarter of 1999
the ad valorem tax rate was reduced to reflect the actualized rate paid in 1999.
DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and
amortization ("DD&A"), a non-cash expense, increased for the quarter and six
months ended June 30, 2000 compared to the prior year periods due to an increase
in production. The weighted average depletion rate per Mcfe for the D-J Basin
was $0.73 and $0.73 for the three months ended June 30, 2000 and 1999,
respectively. For the six months ended June 30, 2000 and 1999 the weighted
average depletion rate per Mcfe for the D-J Basin was $0.73 and $0.76,
respectively. We annually adjust our DD&A rate based on year-end engineering
and, if material changes in our reserves warrant, on an interim basis.
EXPLORATORY AND ABANDONMENT COSTS. Exploratory and abandonment costs include the
costs of exploratory dry holes, delay rentals, plugging and abandonment ("P&A")
costs, expired acreage and salaries and overhead ("overhead") costs directly
related to exploratory activities. Exploratory and abandonment costs decreased
for the quarter and six months ended June 30, 2000 compared to the prior year
periods mainly due to a decrease in exploratory dry holes and P&A costs.
17
<PAGE> 18
GEOLOGICAL AND GEOPHYSICAL COSTS. Geological and geophysical ("G&G") costs
include costs for seismic activity as well as overhead costs directly
attributable to G&G activity. The increase for the quarter and six months ended
June 30, 2000 compared to the prior year periods relates to an engineering study
on the feasibility of a gas storage facility.
GULF COAST
OIL AND GAS SALES
(IN THOUSANDS EXCEPT AVERAGE PRICES)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Production:
Oil (Bbl) 150 67 267 104
Gas (Mcf) 2,348 1,452 4,344 2,264
Mcfe 3,248 1,854 5,943 2,890
Boe 541 309 990 482
Prices (1):
Average realized oil price ($/Bbl) $ 29.17 $ 16.10 $ 28.88 $ 14.25
Average realized gas price ($/Mcf) $ 4.23 $ 2.32 $ 3.59 $ 2.20
Operating Revenues:
Oil and gas sales $ 14,313 $ 4,454 $ 23,290 $ 6,472
Operating Costs and Expenses:
Production taxes 875 252 1,479 365
Lease operating 274 127 514 196
Depreciation, depletion
and amortization 1,640 757 3,001 1,255
Exploratory and abandonment 3,645 2,129 6,149 3,916
Geological and geophysical 2,381 1,305 3,976 2,928
Impairment and loss on sale
of oil and gas properties 8 -- 108 --
-------- -------- -------- --------
8,823 4,570 15,227 8,660
-------- -------- -------- --------
Operating Income (Loss) $ 5,490 $ (116) $ 8,063 $ (2,188)
======== ======== ======== ========
</TABLE>
(1) There were no hedging activities affecting Gulf Coast production in 2000 or
1999.
18
<PAGE> 19
GENERAL. Over the past several years, the majority of our Gulf Coast activities
focused on acquiring, processing and interpreting 3-D seismic information,
acquiring leasehold interests, and drilling on our project areas. During 2000 we
expect to continue to increase our level of Gulf Coast drilling activities on
prospects that we have identified through our 3-D seismic programs.
OIL AND GAS REVENUES. Oil and gas revenues increased significantly for the
quarter and six months ended June 30, 2000 compared to the prior year periods
due to an increase both in production and in product prices. As of June 30, 2000
the Company had interests in 44 gross (11.68 net) wells compared to 32 gross
(6.8 net) wells as of June 30, 1999. Of the total wells drilled to date, 8 gross
(3.5 net) are currently awaiting pipeline hookup.
PRODUCTION EXPENSES. Aggregate LOE increased for the quarter and six months
ended June 30, 2000 compared to the prior year periods because of the greater
number of producing wells and an increase in workover costs. LOE per Mcfe was
$0.07 compared to $0.08 for the quarter ended June 30, 1999 and 2000. For the
six months ended June 30, 1999 and 2000, LOE per Mcfe was $0.07 compared to
$0.09, respectively. Production taxes increased for the quarter and six months
ended June 30, 2000 compared to the prior year periods as a result of increased
production and higher realized product prices.
DEPRECIATION, DEPLETION AND AMORTIZATION. Total DD&A increased for the quarter
and six months ended June 30, 2000 compared to the prior year periods as a
result of an increase in production and an increase in the DD&A rate. The
weighted average DD&A rate per Mcfe in the Gulf Coast increased from $0.41 to
$0.51 for the three months ended June 30, 1999 and 2000, respectively. For the
six months ended June 30, 1999 and 2000, DD&A per Mcfe increased from $0.43 to
$0.51, respectively.
EXPLORATORY AND ABANDONMENT COSTS. During the quarter and six months ended June
30, 2000 we expensed $1.3 million and $3.0 million for expired acreage, $1.2
million and $1.4 million for exploratory dry holes, $0.5 million and $0.8
million for delay rentals and $0.6 million and $0.9 million for overhead costs.
In the quarter and six months ended June 30, 1999, we expensed $1.1 million and
$1.8 million for expired acreage, $0.2 million and $0.6 million in delay
rentals, $0.6 million and $1.0 million for exploratory dry holes and $0.2
million and $0.5 million for overhead costs directly related to exploratory
activities.
GEOLOGICAL AND GEOPHYSICAL COSTS. Of total G&G costs, we incurred $1.8 million
and $1.0 million for the quarter ended June 30, 2000 and 1999, respectively, for
seismic permits and processing costs in the Gulf Coast. The remaining G&G of
$0.6 million and $0.3 million relates to overhead costs directly attributable to
G&G activity. For the six months ended June 30, 2000 and 1999 we incurred $3.0
million and $2.4 million, respectively for seismic permits and processing costs
in the Gulf Coast. The remaining G&G of $1.0 million and $0.5 million relates to
overhead costs directly attributable to G&G activity.
19
<PAGE> 20
IMPAIRMENT AND LOSS ON SALES OF OIL AND GAS PROPERTIES. For the six months ended
June 30, 2000, we recorded a loss of $108,000 on the sale of one well.
MID-CONTINENT AND NORTHERN ROCKIES
OIL AND GAS SALES
(IN THOUSANDS EXCEPT AVERAGE PRICES)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Production:
Oil (Bbl) 1 1 1 1
Gas (Mcf) 24 38 45 88
Mcfe 27 40 48 90
Boe 4 7 8 15
Prices:
Average realized oil price ($/Bbl) $ 24.87 $ 9.03 $ 25.18 $ 18.86
Average realized gas price ($/Mcf) $ 2.93 $ 2.05 $ 2.66 $ 1.28
Operating Revenues:
Oil and gas sales $ 81 $ 81 $ 132 $ 119
Operating Costs and Expenses:
Production taxes 6 13 11 25
Lease operating 76 61 130 114
Depreciation, depletion
and amortization 23 15 43 15
Exploratory and abandonment 123 121 240 259
Geological and geophysical 1,108 158 2,968 456
Impairment and loss on sales of
oil and gas properties 54 931 54 931
------- ------- ------- -------
1,390 1,299 3,446 1,800
------- ------- ------- -------
Operating Loss $(1,309) $(1,218) $(3,314) $(1,681)
======= ======= ======= =======
</TABLE>
GENERAL. Information for this segment includes activity for both the
Mid-Continent and Northern Rockies areas. Our strategy in the Mid-Continent is
to pursue technology-oriented exploration projects with a focus on high volume,
long-life gas prospects.
20
<PAGE> 21
We have acquired extensive acreage in the Northern Rockies region. Our current
strategy is to utilize our acreage position as a vehicle for generating capital
expenditures by third party operators on our acreage.
OIL AND GAS REVENUES. There were virtually no oil and gas revenues in this
segment because of the earlier Mid-Continent property sale and the sale of
properties in the Northern Rockies region.
EXPLORATORY AND ABANDONMENT COSTS. The majority of exploratory and abandonment
costs for the quarter and six months ended June 30, 2000 and 1999 represent
costs incurred for delay rentals, expired acreage and overhead costs for
projects in the Northern Rockies.
GEOLOGICAL AND GEOPHYSICAL COSTS. The increase in G&G costs for the quarter and
six months ended June 30, 2000 compared to the prior year periods is the result
of an increase in seismic activity in the Mid-Continent project area mainly due
to the acquisition and processing of 3-D seismic data in the Pineridge and West
Rainey project areas in Oklahoma.
TRADING AND TRANSPORTATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Revenues:
Trading and transportation (1) $ 70,252 $ 39,893 $124,472 $ 70,012
Operating Costs and Expenses:
Cost of trading and transportation (1) 68,951 38,776 120,970 67,827
Depreciation and amortization 109 111 217 216
-------- -------- -------- --------
69,060 38,887 121,187 68,043
-------- -------- -------- --------
Operating Income $ 1,192 $ 1,006 $ 3,285 $ 1,969
======== ======== ======== ========
</TABLE>
(1) Intercompany revenues and expenses attributable to our volumes which
are marketed by HSES have been eliminated in our financial statements.
Through our wholly-owned subsidiary, HSES, we market our own gas production as
well as that of third parties. A portion of this gas is sold directly to end
users, while other amounts are used as the equity-gas foundation for a physical
trading business in which gas volumes may be traded several times at different
receipt and delivery points in order to capture the greatest margin possible.
HSES also serves as an intermediary in the execution of financial derivative
instruments for a variety of energy related products and,
21
<PAGE> 22
to a lesser extent, makes speculative trades for its own account in the
commodity and basis markets. Operating margins increased for the quarter and six
months ended June 30, 2000 compared to 1999 primarily as a result of an
increase in the volume of natural gas marketed. For the quarter and six
months ended June 30, 2000, gains of $0.2 million and $1.6 million, respectively
were recognized in connection with financial trading activities compared to
gains of $0.6 million and $1.2 million for the quarter and six months ended June
30, 1999, respectively.
GAS GATHERING AND TRANSMISSION
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating Revenues
Gathering and transmission
system revenues $3,256 $ -- $6,364 $ --
Income from interest in gathering plant 358 -- 722 --
------ ------ ------ ------
3,614 -- 7,086 --
Operating Costs and Expenses
Gathering and transmission system
operating expenses 1,364 -- 2,579 --
Depreciation and amortization 266 -- 542 --
Interest expense 1,204 -- 2,548 --
------ ------ ------ ------
2,834 -- 5,669 --
------ ------ ------ ------
Operating Income $ 780 $ -- $1,417 $ --
====== ====== ====== ======
</TABLE>
GATHERING AND TRANSMISSION SYSTEM REVENUES AND EXPENSES. Effective December 1,
1999 we took over operations of the Wattenberg Gathering and Transmission System
("WGS") from KMI. The revenues and expenses associated with third party gas for
the quarter and six months ended June 30, 2000 are recorded as gathering and
transmission system revenues and expenses.
22
<PAGE> 23
OTHER INCOME AND EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income and other $ 992 $ 113 $ 1,253 $ 270
General and administrative $ 2,030 $ 1,066 $ 4,056 $ 2,475
Interest $11,488 $10,510 $22,306 $20,940
Depreciation $ 190 $ 292 $ 398 $ 630
</TABLE>
INTEREST INCOME AND OTHER INCOME. Interest and other income increased for the
quarter and six months ended June 30, 2000 compared to the prior year periods
due to interest earned on severance tax refunds.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses ("G&A")
reflect costs incurred, net of administrative costs directly attributable to
drilling and well operations (which costs are included in LOE). G&A costs
directly related to geological and geophysical activities and exploratory
activities are included in geological and geophysical costs and exploratory
costs. G&A per Mcfe was $0.10 and $0.06 in the second quarter of 2000 compared
to the second quarter of 1999. For the six months ended June 30, 2000 and 1999,
G&A per Mcfe was $0.10 compared to $0.07. On both an absolute and an Mcfe basis,
G&A increased due to an increase in payroll-related general and administrative
expenses.
INTEREST EXPENSE. Interest expense increased for the quarter and six months
ended June 30, 2000 compared to the prior year periods mainly due to an increase
in the interest rate on our bank debt and interest attributable to the financing
of WGS. For the quarter and six months ended June 30, 2000 we capitalized
interest related to undeveloped acreage of $1.6 million and $3.3 million,
respectively compared to $1.8 million and $3.6 million, for the quarter and six
months ended June 30, 1999, respectively.
23
<PAGE> 24
INCOME TAXES
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Current provision (benefit) $ -- $ -- $ -- $ --
Deferred provision (benefit) 7,027 73 13,254 139
------- ------- ------- -------
Provision (benefit) for taxes $ 7,027 $ 73 $13,254 $ 139
======= ======= ======= =======
Effective tax rate 38.1% 38.1% 38.1% 38.1%
======= ======= ======= =======
</TABLE>
PROVISION FOR INCOME TAXES. We follow the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109. Pursuant to SFAS 109, we have recorded a
tax provision based on tax rates in effect during the period. Accordingly, we
accrued taxes at the rate of 38.1% for the quarter and six months ended June 30,
2000 and 1999. Due primarily to significant intangible drilling costs, which are
deductible for income tax purposes, substantially all of our tax provision is
deferred.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING SOURCES. We believe that our current level of debt is manageable under
expected production and pricing levels because our debt is supported by stable,
long-lived producing reserves and by short-term product prices that are
partially hedged at prices that support our bank and other interest
requirements. We expect cash flows from producing activities to be sufficient to
enable us to service our debt for the foreseeable future, absent any major and
prolonged period of low commodity prices or sustained production interruptions.
We have a large number of low-risk, potentially high-return exploitation
projects which should enhance production and cash flow. As part of an overall
financing strategy, we continually evaluate a wide range of future financing
alternatives and are not committed to any particular course. In undertaking any
future financing transactions, we will seek to achieve the optimal capital
structure needed to support our long-term strategic objectives. Any such
financings will reflect market conditions at the time and may include the
issuance of medium or long-term debt, equity, or equity-linked securities.
We currently plan to fund capital expenditures attributable to exploration,
exploitation and development activities primarily out of our expected cash flow
from operations, subject to periodic variation resulting from the timing of
project activities and short-term product price volatility.
24
<PAGE> 25
The borrowing base under our revolving senior bank credit facility led by The
Chase Manhattan Bank is currently $325.0 million. The interest rate under the
Chase facility is the Base Rate plus 0% to 0.625% or LIBOR plus 0.75% to 1.625%.
The borrowing base is based on the review of our reserves by the lending bank
group and their view of future pricing. Under the terms of the Chase facility,
no principal payments are required until December 15, 2002, assuming we maintain
a borrowing base sufficient to support the outstanding loan balance. As of June
30, 2000, $244.0 million was outstanding under the Chase facility compared to
$227.0 million at December 31, 1999.
We anticipate that our borrowing capacity under the Chase facility and our
operating cash flow will provide us with adequate financial resources and
flexibility to fund current and ongoing activities, to service our debt and to
meet other financial obligations. The nature of our current development
strategies and other activities provide us with considerable flexibility in
terms of the timing and magnitude of our capital expenditures. If we experience
unforeseen changes in our working capital position or capital resources, we may
revise the capital expenditure program accordingly or alternatively may attempt
to supplement our capital position through, among other things, the issuance of
additional equity, equity-linked or debt securities, the sale or monetization of
properties or by entering into joint venture arrangements.
CAPITAL COMMITMENTS. We continuously evaluate our inventory of drilling
opportunities to develop a growth-oriented portfolio of risk-balanced
development, exploitation and exploration opportunities. On an ongoing basis, we
adjust the amount and allocation of our capital expenditures based on a number
of factors, including seismic results, prospect readiness, product prices,
service company availability and rates, acquisitions and capital position. For
the six months ended June 30, 2000, we incurred total costs for exploration,
development, leasehold, exploratory and abandonment and geological and
geophysical activities of $58.3 million, exclusive of acquisitions, capitalized
interest and overhead costs directly related to exploratory and G&G activity. We
estimate that such expenditures for the year 2000 will be approximately $100 to
$110 million, depending on product prices for the full year. These costs will be
allocated in varying amounts primarily to activities in our core geographic
areas. A major component of our capital program relates to our development
activities in the D-J Basin. We incurred approximately $33.8 million for the six
months ended June 30, 2000 for costs to drill, deepen, recomplete and refrac our
D-J Basin properties, and we anticipate allocating approximately $55 to $60
million to the D-J Basin during 2000.
Another component of our capital program has been to develop our exploitation
and exploration prospects in the onshore portion of the Gulf Coast. For the six
months ended June 30, 2000, we incurred total expenditures of $19.8 million for
seismic, leasehold and drilling costs in the Gulf Coast. We anticipate
allocating approximately $25 to $40 million to the Gulf Coast projects during
2000 for exploration and development activities including land and seismic.
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<PAGE> 26
In our Mid-Continent project area we are acquiring and processing 3-D seismic
data and are preparing to initiate drilling activity on several prospects. One
well was spud in the Mid-Continent project area during the quarter. Activity in
this area will focus on high volume, long-life gas prospects. We anticipate
allocating $5 to $6 million to the Mid-Continent project area during 2000.
Activities in the Northern Rockies are planned to manage risk by utilizing our
extensive acreage positions, operational expertise, and geotechnical ideas to
attract risk capital from value-added partners. We believe our projects have
substantial flexibility in terms of timing, as a result of long-term leases and
minimal future capital obligations.
We have also entered into a number of other standard industry arrangements that
require the drilling of wells or other activities. We believe that we will meet
our obligations under these arrangements, which individually and in the
aggregate are not material.
WORKING CAPITAL AND CASH FLOW. The Company aggressively manages its working
capital position including periodic borrowings and repayments under its
revolving credit facility. Of the total working capital deficit of $27.6 million
at June 30, 2000, $21.4 million represents the current portion of the payable to
KMI for the purchase of the Wattenberg Gathering and Transmission System. The
Company intends to use cash provided by monthly gathering and transportation
revenues from existing contractual agreements, including amounts paid by HSR, to
fund the monthly obligations to KMI. The Company believes that the payments made
under the gathering agreements will exceed the payments to KMI assuming no
unforeseen extended operational interruptions of the system.
Net cash provided by operating activities for the six months ended June 30, 2000
was $68.6 million, up from $16.9 million for the same period in 1999 primarily
as a result of an increase in product prices. Future cash flows will be
influenced by, among other factors, the number of producing wells on line,
product prices and production constraints.
RISK MANAGEMENT. We use financial instruments to reduce our exposure to market
fluctuations in the price and transportation cost of oil and gas. Our general
strategy is to hedge price and location risk with swap, collar, floor and
ceiling arrangements. In order to minimize risk, we hedge certain of our
production back to the well head. In addition to hedging activities, we are
engaged in using the financial markets to capture trading margins. We have
established policies with respect to open positions which limit our exposure to
market risk and require daily reporting to management of the potential financial
exposure resulting from both hedging and trading activities.
Recently issued accounting pronouncements can change current and future
accounting and reporting requirements for certain risk management activities.
See Note 5 of the Notes to Unaudited Consolidated Financial Statements.
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<PAGE> 27
HEDGING ACTIVITIES. We enter into transactions for hedging purposes to manage
our exposure to price and location risks in the marketing of our oil and gas
production and, in the case of our marketing activities, third party gas. Gains
and losses on hedging positions are recognized in the period during which the
underlying physical transactions occur and are booked in "oil and gas sales"
(for company-owned production) and "trading and transportation revenues" (for
third party gas). Hedging contracts for our production reduced our oil and gas
sales by $13.8 million and $18.5 million for the quarter and six months ended
June 30, 2000, respectively. For the quarter and six months ended June 30, 1999,
hedging contracts reduced our oil and gas sales by $1.5 million and increased
our oil and gas sales by $4.4 million, respectively. Hedging contracts for third
party gas decreased trading and transportation revenues by approximately
$351,000 and by $275,000 for the quarter and six months ended June 30, 2000,
respectively. For the quarter and six months ended June 30, 1999 hedging
contracts for third party gas decreased trading and transportation revenues by
approximately $219,000 and by $282,000, respectively.
As a part of our risk management program, we generally enter into hedges for
delivery into one of several pipelines located near our producing regions,
Panhandle Eastern Pipeline Company ("PEPL"), Northwest Pipeline Corporation
("NW"), CIG, or at the New York Mercantile Exchange ("NYMEX") prices settled at
the Henry Hub. With respect to the NYMEX-hedged volumes that exceed our Gulf
Coast volumes, it is our practice to hedge our basis (meaning the transportation
differential from our producing regions to the location of delivery for a hedged
volume).
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<PAGE> 28
As of June 30, 2000, we held hedge swap positions as follows:
GAS HEDGES
<TABLE>
<CAPTION>
AVERAGE DAILY FAIR VALUE AT
QUANTITY SETTLEMENT PRICE JUNE 30, 2000
TIME PERIOD (MMBtu) LOCATION (PER MMBtu) GAIN (LOSS)
----------- ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
July 2000 -- October 2000 15,000 NW 2.193 $ (3,124,890)
July 2000 -- October 2000 5,000 NW 2.173 $ (1,046,193)
July 2000 -- October 2000 30,000 NW 2.200 $ (6,175,684)
July 2000 -- October 2000 15,000 NW 2.288 $ (2,949,615)
July 2000 -- October 2000 25,000 NW 2.150 $ (5,338,838)
July 2000 -- October 2000 10,000 NW 2.148 $ (2,123,110)
July 2000 -- October 2000 10,000 NW 2.065 $ (2,224,585)
July 2000 -- October 2000 30,000 NW 2.053 $ (6,766,380)
November 2000 -- March 2001 10,000 NW 2.395 $ (2,484,620)
November 2000 -- March 2001 10,000 NW 2.400 $ (2,477,070)
November 2000 -- March 2001 65,000 NW 2.478 $(15,340,293)
November 2000 -- March 2001 15,000 NW 2.483 $ (3,528,667)
April 2001 -- October 2001 10,000 NW 2.040 $ (2,187,800)
April 2001 -- October 2001 20,000 NW 2.060 $ (4,290,000)
April 2001 -- October 2001 50,000 NW 2.300 $ (8,157,000)
April 2001 -- October 2001 5,000 NW 2.350 $ (708,700)
April 2001 -- October 2001 20,000 NW 2.200 $ (3,690,800)
November 2001 -- December 2001 20,000 NW 2.100 $ (1,398,380)
January 2002 -- March 2002 15,000 NW 1.850 $ (1,314,150)
January 2002 -- March 2002 5,000 NW 2.200 $ (463,465)
April 2002 -- October 2002 40,000 NW 2.310 $ (2,812,240)
April 2002 -- October 2002 25,000 NW 2.300 $ (1,811,150)
April 2002 -- October 2002 5,000 NW 2.360 $ (298,030)
April 2002 -- October 2002 10,000 NW 2.380 $ (553,260)
April 2002 -- October 2002 10,000 NW 2.390 $ (531,860)
April 2002 -- October 2002 20,000 NW 2.400 $ (1,020,920)
</TABLE>
GAS BASIS HEDGES (1)
<TABLE>
<CAPTION>
AVERAGE DAILY BASIS FAIR VALUE AT
QUANTITY SETTLEMENT DIFFERENTIAL JUNE 30, 2000
TIME PERIOD (MMBtu) LOCATION (PER MMBtu) GAIN (LOSS)
----------- ------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
April 2002 -- October 2002 5,000 NW (0.310) $ 2,675
November 2002 -- December 2002 15,000 NW (0.300) $(27,450)
</TABLE>
(1) Basis is the differential between the NYMEX contract price and the
regional index. The Company has locked in basis differential but has
not locked in the fixed portion of the risk.
28
<PAGE> 29
WRITTEN GAS CALLS
<TABLE>
<CAPTION>
AVERAGE DAILY FAIR VALUE AT
QUANTITY SETTLEMENT PRICE JUNE 30, 2000
TIME PERIOD (MMBtu) LOCATION (PER MMBtu) GAIN (LOSS)
----------- ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
July 2000 -- December 2000 20,000 NYMEX 3.100 $(5,262,400)
January 2001 -- December 2001 20,000 NYMEX 3.000 $(6,716,000)
</TABLE>
As of June 30, 2000, we had hedged our expected oil production as follows:
WRITTEN CRUDE HEDGES
<TABLE>
<CAPTION>
AVERAGE MONTHLY FAIR VALUE AT
QUANTITY SETTLEMENT PRICE JUNE 30, 2000
TIME PERIOD (BBL) LOCATION (PER BBL) GAIN (LOSS)
----------- -------------- ---------- --------- -------------
<S> <C> <C> <C> <C>
July 2000 -- December 2000 61,333 WTI 21.400 $(3,267,840)
January 2001 -- December 2001 60,833 WTI 20.400 $(4,401,900)
</TABLE>
Additionally, with respect to the hedging of third party gas, we have hedged
17.9 Bcf from July 2000 through December 2003 with offsetting physical positions
at settlement prices which are based upon NYMEX future prices or other published
indices. The fair market value of these hedges at June 30, 2000 was a loss of
$7,357.
We routinely buy and sell options or forward contracts as part of our overall
hedging strategy. As of June 30, 2000, we had written crude oil and natural gas
calls through December 2001. These calls are hedged by future production. The
counterparties to these call transactions require the maintenance of specified
margin balances. Fluctuations in the mark-to-market value of these instruments
could result in additional margin requirements over the term of the underlying
contracts.
TRADING ACTIVITIES. We engage in the trading of various energy related financial
instruments which require payments to or receipt of payments from counterparties
based on the differential between a fixed and a variable price for the
commodity, swap or other contractual arrangement. Activities for trading
purposes are accounted for using the
29
<PAGE> 30
mark-to-market method. Under this method, changes in the market value of
outstanding financial instruments are recognized in "trading and transportation
revenues" as a net gain or loss in the period of change. The market prices used
to value these transactions reflect management's best estimate considering
various factors, including closing exchange and over-the-counter quotations,
time value and volatility factors underlying the commitments. The values are
adjusted to reflect the potential impact of liquidating our position in an
orderly manner over a reasonable period of time under present market conditions.
Our policy requires that, within defined trading limits, financial instrument
purchase and sales contracts be balanced in terms of contract volumes and the
timing of performance and delivery obligations. For the six months ended June
30, 2000 and 1999, net gains of $1.6 million and $1.2 million, respectively,
were recognized in connection with financial trading activities and are included
in "trading and transportation revenues."
CREDIT RISK. While notional amounts are used to express the volume of various
derivative financial instruments, the amounts potentially subject to credit risk
in the event of nonperformance by the third parties are substantially smaller.
Counterparties to the swap, collar, floor and ceiling arrangements discussed
above are generally investment grade institutions. Accordingly, we do not
anticipate any material impact to our financial position or results of
operations as a result of nonperformance by the third parties to financial
instruments related to hedging activities or trading activities.
INTEREST RATE SWAPS. In the first quarter of 1999, we entered into an interest
rate exchange agreement with a financial institution to hedge $50 million of our
borrowings at 5.66% through March 31, 2004. During the fourth quarter of 1998,
we entered into an interest rate exchange agreement with a financial institution
to hedge the interest rate on $80 million of our borrowings at 5.86% through
December 15, 2006. Under the terms of the agreements, the difference between the
fixed rate and the one-month LIBOR rate is received or paid by us. As part of
the $80 million hedging agreement, we cancelled or offset our pre-1999 interest
rate hedging agreements. The mark-to-market value of our interest rate swaps as
of June 30, 2000 was $7.2 million. Market risk related to borrowings from a one
percent change in interest rates would result in an approximate $1.1 million
impact on pre-tax income, based on the quarter end borrowing level and the
amount of such borrowings which are not subject to interest rate swaps.
TOTAL RETURN EQUITY SWAPS. In 1999 we entered into three total return equity
swap agreements with financial institutions. Under the terms of the first
agreement, entered into on February 25, 1999, the financial institution acquired
approximately 732,000 shares of HSR's common stock from another investor at a
price of $6.0625. We had the right, but not the obligation, to purchase the
stock at a price of $6.0625 per share at any time through July 1, 2000.
Effective April 20, 2000 we repurchased the 732,000 shares of our common stock.
Those shares were retired into the treasury, and, as a result, the $4.5 million
transaction reduced our outstanding common stock by approximately 4%.
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<PAGE> 31
On May 24, 1999 we entered into a second agreement whereby the financial
institution acquired 100,000 shares of HSR's common stock from another investor
at a price of $11.9875. We have the right, but not the obligation, to purchase
the stock at a price of $11.9875 per share at any time through January 5, 2001.
On December 1, 1999 we entered into a third agreement whereby a financial
institution agreed to acquire on the open market approximately 300,000 shares of
our stock at the current market price over a three month period beginning
December 2, 1999. As of March 2000 the financial institution had acquired
308,100 shares at a weighted average price of $14.55 per share. We have the
right, but not the obligation to purchase the stock at the weighted average
price at any time through September 2, 2001.
If we decide not to purchase the shares on or before the termination of the
second or third agreement, we will receive any increase in the market value of
the shares covered by the agreement above the purchase price of the shares, or
will pay for any loss; however, we may cover losses in most circumstances by
issuing common stock to the financial institution if we choose to do so. All
such amounts will be reflected in stockholders' equity at the time of
settlement. We also pay certain commissions and finance costs. At June 30, 2000
the aggregate fair market value of HSR's common stock in excess of the
underlying option price attributable to such shares, excluding those under the
first agreement, which have now been repurchased, was approximately $6.6
million.
CONTINGENCIES. We have resolved the alleged Clean Water Act Section 404
(wetlands) violations in Louisiana. The consent decree resolving the matter has
been lodged with the federal court in Louisiana and should become effective by
the end of September 2000. The settlement will not have a material adverse
effect on us. In 1999 we accrued an amount in our financial statements that is
sufficient to cover the estimated settlement. See "Legal Proceedings and
Environmental Issues."
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<PAGE> 32
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q includes statements that are not purely historical and are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended,
including statements regarding our expectations, hopes, beliefs, intentions or
strategies regarding the future. All statements other than statements of
historical facts included in this Form 10-Q are forward-looking statements,
including without limitation, statements under "Legal Proceedings and
Environmental Issues," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Notes to Unaudited Consolidated
Financial Statements." These statements may concern, among other things:
o planned capital expenditures and expected funding of capital
expenditures from cash flow;
o increases in oil and gas production;
o production economics;
o expected capital expenditures;
o utilization of third party capital for Northern Rockies
activities;
o trends or expectations concerning oil and gas prices or market
characteristics;
o marketing, hedging and trading risks, strategies, policies,
procedures and profitability;
o credit risk on trading and hedging activities;
o our financial position, stability of cash flow, debt service
capabilities and capital availability;
o the ability to manage risk through hedging and similar
activities;
o business strategy and other plans and objectives for future
operations;
o potential liabilities or the expected absence thereof;
o the potential outcome of environmental matters, litigation or
other proceedings; and
o ability to anticipate and alleviate gathering system
bottlenecks.
All forward-looking statements included in this Form 10-Q are based on
information available to us on the date hereof, and we assume no obligation to
update such forward-looking
32
<PAGE> 33
statements. Although we believe the forward-looking statements are based on
reasonable assumptions, we can give no assurance that our expectations will
prove to have been correct or that we will take any actions that may presently
be planned. Actual results may differ materially from any forward-looking
statements made by us depending on a variety of factors, including, among
others, the factors discussed in "Certain Considerations" described in our
report on Form 10-K filed March 24, 2000.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings and Environmental Issues
ENVIRONMENTAL PROCEEDINGS. In May 1995, we were named by the Environmental
Protection Agency ("EPA") pursuant to a Resource Conservation and Recovery Act
administrative order as one of two respondents in addition to the owner/operator
of an oilfield production water evaporation facility. The order requires that
work be performed to abate a perceived endangerment to wildlife, the environment
or public welfare. We and other non-operator respondents have worked together
with the EPA to develop characterization studies of the site, and have caused
the facility to be permanently closed. HSR and other non-operator respondents
have completed substantially all work at the site. We have incurred
approximately $1.3 million as of June 30, 2000 for our portion of the costs.
This amount has been recorded in our financial statements as of June 30, 2000
and we believe that no substantial liability remains.
Additionally, in March of 1999 we became subject to an enforcement action now
being handled by the EPA and the Department of Justice for alleged violations of
Section 404 of the Clean Water Act concerning wetlands. The consent decree
resolving the matter has been lodged with the federal court in Louisiana and
should become effective by the end of September 2000. The settlement will not
have a material adverse effect on us. In 1999 we accrued an amount in our
financial statements that is sufficient to cover the estimated settlement.
Finally, the gathering and transmission properties we are acquiring from KMI
contain numerous areas of polluted soil and ground water. These conditions have
been reported to the appropriate jurisdictional agencies. HSR expects the costs
associated with cleanup of these environmental problems will be borne by KMI
under the indemnification provisions of our agreement with KMI.
We are subject to minor lawsuits incidental to operations in the oil and gas
industry. We believe we have meritorious defenses to all lawsuits in which we
are a defendant and will vigorously defend against them. We do not believe that
the resolution of such lawsuits will have a material adverse effect on our
financial position or results of operations.
Item 2. Changes in Securities None.
Item 3. Defaults Upon Senior Securities None.
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<PAGE> 34
Item 4. Submission of Matters to a Vote of Security Holders
We held our annual meeting of the stockholders on May 16, 2000. In addition to
the election of directors, the following matter was submitted to a vote of the
stockholders:
To approve the HS Resources, Inc. 2000 Performance and Equity Incentive
Plan. 11,442,761 votes were for, 1,425,888 votes were against and
30,499 votes abstained. Broker non-votes were not included in the vote.
The matter, was, therefore, approved by the Company's stockholders at
the meeting.
Item 5. Other Information None.
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<PAGE> 35
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.
Exhibit
Number Description
3.1 Amended and Restated Certificate of Incorporation of the Company.
(Incorporated herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, No. 33-52774,
filed October 2, 1992.)
3.2 Certificate of Amendment of Certificate of Incorporation filed November
30, 1998. (Incorporated by reference to Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999,
filed May 14, 1999.)
3.3 Third Amended and Restated Bylaws of the Company adopted December 16,
1996. (Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-4, No 333-19433, filed January 8,
1997.)
4.1 Form of Indenture dated December 1, 1993, entered into between the
Company and the Trustee. (Incorporated by reference to Exhibit 4.7 to
Amendment No. 3 to the Company's Registration Statement on Form S-3,
No. 33-70354, filed November 23, 1993.)
4.2 Indenture dated November 27, 1996, among the Company, Orion
Acquisition, Inc., HSRTW, Inc., and Harris Trust and Savings Bank as
Trustee. (Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-4, No 333-19433, filed January 8,
1997.)
4.3 First Supplemental Indenture dated November 25, 1996 among the Company,
Orion Acquisition, Inc., HSRTW, Inc., and Harris Trust and Savings Bank
as Trustee. (Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-4, No 333-19433, filed January 8,
1997.)
10.1 Common Stock Purchase Warrant dated July 12, 1990 by the Company to
James E. Duffy. (Incorporated by reference to Exhibit 10.5 to the Form
8, Second Amendment to Form 10, filed April 8, 1991.)
10.2 HS Resources, Inc. Rule 701 Compensatory Benefit Plan. (Incorporated by
reference to Exhibit 10.5.2 to the Form 8, Second Amendment to Form 10,
filed April 8, 1991.)
10.3 1992 Directors' Stock Option Plan. (Incorporated by reference to
Exhibit 10.10 to Amendment No. 1 to the Company's Registration
Statement on Form S-1, No. 33-52774, filed November 9, 1992.)
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<PAGE> 36
10.4 Form of Indemnification Agreement for Directors of the Company.
(Incorporated by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995, filed
March 25, 1996.)
10.5 Lease Agreement dated October 6, 1993, between the Company and JMB
Group Trust IV and Endowment and Foundation Realty, Ltd. -- JMB III for
the premises at One Maritime Plaza, San Francisco, California.
(Incorporated by reference to Exhibit 10.13 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993, filed
March 31, 1994 (as amended by Form 10-K/A-1 on April 8, 1994.))
10.6 Lease Agreement dated March 28, 1994, between the Company and 1999
Broadway Partnership for the premises at 1999 Broadway, Denver,
Colorado. (Incorporated by reference to Exhibit 10.15 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994,
filed August 12, 1994.)
10.7 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.)
10.8 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.)
10.9 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.)
10.10 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.)
10.11 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.)
10.12 Second Amendment to Amended and Restated Credit Agreement dated as of
November 27, 1996 among the Company and Chase in its individual
capacity and as agent for the Lenders. (Incorporated by reference to
Exhibit 10.22 to the
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<PAGE> 37
Company's Registration Statement on Form S-4, No 333-19433, filed
January 8, 1997.)
10.13 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.)
10.14 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.)
10.15 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.)
10.16 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.)
10.17 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.)
10.18 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.)
10.19 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.)
10.20 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.)
10.21 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.)
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<PAGE> 38
10.22 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.)
10.23 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.)
10.24 Fifth Amendment and Supplement to Amended, Restated and Consolidated
Mortgage, Assignment of Production, Security Agreement and Financing
Statement between HS Resources (Mortgagor) and The Chase Manhattan
Bank, as agent for the Lenders, effective as of December 15, 1997.
(Incorporated by reference to Exhibit 10.37 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998, filed May 14,
1998.)
10.25 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.)
10.26 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.)
10.27 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.)
10.28 Fourth Amendment to Amended and Restated Credit Agreement dated as of
June 16, 1998, among the Company and The Chase Manhattan Bank in its
individual capacity and as agent for the Lenders. (Incorporated by
reference to Exhibit 10.41 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, filed August 14, 1998.)
10.29 Stock Purchase and Sale Agreement between the Company and Universal
Resources Corporation dated July 27, 1998. (Incorporated by reference
to Exhibit 10.1 to the Company's Form 8-K, filed August 6, 1998.)
10.30 Fifth Amendment to Amended and Restated Credit Agreement dated as of
September 1, 1998, among the Company and The Chase Manhattan Bank in
its individual capacity and as agent for the lenders. (Incorporated by
reference to
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<PAGE> 39
Exhibit 10.37 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, filed November 16, 1998.)
10.31 Sixth Amendment and Supplement to Amended, Restated and Consolidated
Mortgage, Assignment of Production, Security Agreement and Financing
Statement dated as of July 22, 1998, among the Company and The Chase
Manhattan Bank in its individual capacity and as agent for the Lenders.
(Incorporated by reference to Exhibit 10.38 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998, filed
November 16, 1998.)
10.32 Sixth Amendment to Amended and Restated Credit Agreement dated as of
December 10, 1998, among the Company and The Chase Manhattan Bank in
its individual capacity and as agent for the Lenders. (Incorporated by
reference to Exhibit 10.40 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998, filed March 31, 1999.)
10.33 Seventh Amendment to Amended and Restated Credit Agreement dated as of
December 31, 1998, among the Company and The Chase Manhattan Bank in
its individual capacity and as agent for the Lenders. (Incorporated by
reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998, filed March 31, 1999.)
10.34 1999 Non-Compensatory Stock Purchase Plan. (Incorporated by reference
as Exhibit 4.1 to Form S-8 filed January 25, 1999.)
10.35 Supplemental Indenture dated as of March 1, 1999, among the Company and
Harris Trust and Savings Bank as Trustee, amending Indenture dated as
of December 1, 1993, concerning 9-7/8% Senior Subordinated Notes due
2003. (Incorporated by reference to Exhibit 10.43 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998,
filed March 31, 1999.)
10.36 Supplemental Indenture dated as of March 1, 1999, among the Company and
Harris Trust and Savings Bank as Trustee, amending Indenture dated as
of November 27, 1996, concerning 9-1/4% Series A Senior Subordinated
Notes due 2006. (Incorporated by reference to Exhibit 10.44 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998, filed March 31, 1999.)
10.37 Supplemental Indenture dated as of March 1, 1999, among the Company and
Harris Trust and Savings Bank as Trustee, amending Indenture dated as
of December 11, 1998, concerning 9-1/4% Series B Senior Subordinated
Notes due 2006. (Incorporated by reference to Exhibit 10.45 to the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1998, filed March 31, 1999.)
39
<PAGE> 40
10.38 Seventh Amendment and Supplement to Amended, Restated and Consolidated
Mortgage, Assignment of Production, Security Agreement and Financing
Statement dated as of September 1, 1999 among: The Company and The
Chase Manhattan Bank in its individual capacity, and as agent to the
Lenders. (Incorporated by reference to Exhibit 10.41 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999,
filed November 15, 1999).
10.39 Eighth Amendment to Amended and Restated Credit Agreement dated as of
August 27, 1999 among: The Company and The Chase Manhattan Bank in its
individual capacity, and as agent for the Lenders. (Incorporated by
reference to Exhibit 10.42 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999, filed November 15,
1999).
10.40 Exchange Agreement dated August 27, 1999 between HS Resources, Inc. and
Patina Oil & Gas Corporation. (Incorporated by reference to Exhibit
10.43 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999, filed November 15, 1999).
10.41 Ninth Amendment to Amended and Restated Credit Agreement dated as of
October 28, 1999 among: The Company and The Chase Manhattan Bank in its
individual capacity, and as agent for the Lenders. (Incorporated by
reference to Exhibit 10.43 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, filed March 24, 2000.)
10.42* Tenth Amendment to Amended and Restated Credit Agreement dated as of
May 16, 2000 among: The Company and The Chase Manhattan Bank in its
individual capacity, and as agent for the Lenders.
27* Financial Data Schedule
* Filed herewith
b. Reports on Form 8-K.
Form 8-K dated May 25, 2000 filing the April 27, 2000 press release in
connection with the Company's first quarter earnings release. Item 5.
40
<PAGE> 41
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 11, 2000 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
<PAGE> 42
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
10.42 Tenth Amendment to Amended and Restated Credit Agreement dated as
of May 16, 2000 among: The Company and The Chase Manhattan Bank
in its individual capacity, and as agent for the Lenders.
27 Financial Data Schedule
</TABLE>
