<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1997
REGISTRATION NO. 333-17269
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
----------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
EDGE PETROLEUM CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
76-0511037
DELAWARE 1311 (I.R.S. EMPLOYER
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL IDENTIFICATION NO.)
JURISDICTION OF CLASSIFICATION CODE NUMBER)
INCORPORATION OR
ORGANIZATION)
TEXACO HERITAGE PLAZA, 1111 BAGBY, SUITE 2100, HOUSTON, TEXAS 77002; (713)
654-8960
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JAMES D. CALAWAY
PRESIDENT
EDGE PETROLEUM CORPORATION
TEXACO HERITAGE PLAZA
1111 BAGBY, SUITE 2100
HOUSTON, TEXAS 77002
(713) 654-8960
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
GENE J. OSHMAN J. MICHAEL GOTTESMAN
BAKER & BOTTS, L.L.P. 477 MADISON AVENUE
3000 ONE SHELL PLAZA NEW YORK, NEW YORK 10022
HOUSTON, TEXAS 77002-4995 (212) 308-2320
(713) 229-1234
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
EDGE PETROLEUM CORPORATION
TEXACO HERITAGE PLAZA
1111 BAGBY, SUITE 2100
HOUSTON, TEXAS 77002
(713) 654-8960
, 1997
Dear Shareholder:
You are cordially invited to attend a Special Meeting of shareholders of
Edge Petroleum Corporation, a Texas corporation ("Old Edge"), which will be
held at , Houston, Texas on , 1997 at a.m., Houston time. A
notice of the special meeting, a proxy card and a Joint Proxy and Consent
Solicitation Statement/Prospectus containing important information about the
matters to be acted upon at the Special Meeting are enclosed.
At the Special Meeting, you will be asked to approve and adopt an Amended
and Restated Combination Agreement (the "Combination Agreement") that provides
for the acquisition, directly or indirectly, by Edge Petroleum Corporation, a
recently formed Delaware corporation (the "Company"), of substantially all of
the interests in Edge Joint Venture II (the "Joint Venture"), through which
Old Edge conducts substantially all of its exploration and production
operations. Consummation of the Combination Agreement is conditioned on the
simultaneous closing of an initial public offering of the common stock of the
Company.
If the Combination Agreement is approved and adopted and the transactions
contemplated thereby (whereby the Company proposes to acquire the direct and
indirect interests in the Joint Venture in exchange for shares of common stock
of the Company) are consummated, (i) each outstanding share of common stock of
Old Edge will be converted into the right to receive 22.307862 shares of
common stock of the Company, (ii) Old Edge will be merged with Edge Mergeco,
Inc. and will become a wholly owned subsidiary of the Company, (iii) the
Company will succeed to the ownership, directly or indirectly, of
substantially all of the interests in the Joint Venture and (iv) the Company
will become an independent, publicly held company.
Your Board of Directors believes that the proposed Combination Agreement and
the plan of merger included therein are in the best interests of Old Edge and
its shareholders and recommends that you vote FOR approval and adoption of
this matter.
You are urged to read carefully the Joint Proxy and Consent Solicitation
Statement/Prospectus and the appendices thereto in their entirety for a
complete description of the transactions. Whether or not you plan to attend
the Special Meeting, please be sure to date, sign and return the proxy card in
the enclosed postage paid envelope as promptly as possible so that your shares
may be represented at the meeting and voted in accordance with your wishes.
Sincerely,
/s/ JOHN E. CALAWAY
John E. Calaway
Chairman of the Board
<PAGE>
EDGE PETROLEUM CORPORATION
TEXACO HERITAGE PLAZA
1111 BAGBY, SUITE 2100
HOUSTON, TEXAS 77002
(713) 654-8960
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1997
TO OUR SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders (together with
any adjournment or postponement thereof, the "Special Meeting") of Edge
Petroleum Corporation, a Texas corporation ("Old Edge"), will be held at
, Houston, Texas on , , 1997 at a.m., Houston time, for
the following purposes:
1. To consider and vote upon a proposal to approve and adopt an Amended
and Restated Combination Agreement (the "Combination Agreement") dated as
of January 13, 1997 among Old Edge, Edge Group II Limited Partnership, a
Connecticut limited partnership, Edge Group Partnership, a Connecticut
general partnership, Gulfedge Limited Partnership, a Texas limited
partnership, Edge Mergeco, Inc., a Texas corporation that is a wholly owned
subsidiary of the Company ("Mergeco"), and Edge Petroleum Corporation, a
Delaware corporation (the "Company"), and the plan of merger (the "Plan of
Merger") included therein, pursuant to which Mergeco will merge with and
into Old Edge. Pursuant to the Combination Agreement, among other things,
(i) each issued and outstanding share of common stock of Old Edge would be
converted into 22.307862 shares of common stock of the Company, (ii)
Mergeco would merge with and into Old Edge and (iii) Old Edge would become
a wholly owned subsidiary of the Company. The terms of the Combination
Agreement are described in detail in the attached Joint Proxy and Consent
Solicitation Statement/Prospectus, and the full text of the Combination
Agreement is included as Appendix A thereto.
2. To transact such other business as may properly come before the
Special Meeting.
Holders of record of shares of common stock of Old Edge at the close of
business on , 1997, the record date for the Special Meeting, are
entitled to notice of and to vote at the Special Meeting. The affirmative vote
of the holders of record of at least two-thirds of the outstanding shares of
common stock of Old Edge entitled to vote at the Special Meeting is necessary
to approve and to adopt the Combination Agreement and the Plan of Merger
included therein.
To assure that your interests will be represented at the Special Meeting,
regardless of whether you plan to attend in person, please complete, date and
sign the enclosed proxy card and return it promptly in the enclosed return
envelope, which requires no postage if mailed in the United States. This
action will not limit your right to vote in person if you wish to attend the
Special Meeting and vote personally.
By Order of the Board of Directors
/s/ RICHARD S. DALE
Richard S. Dale
Controller, Treasurer and Secretary
Houston, Texas
, 1997
PLEASE EXECUTE AND RETURN THE ENCLOSED PROXY PROMPTLY, WHETHER OR NOT
YOU INTEND TO BE PRESENT AT THE SPECIAL MEETING.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY JOINT PROXY AND CONSENT SOLICITATION STATEMENT/PROSPECTUS
SUBJECT TO COMPLETION, DATED JANUARY 28, 1997
-----------
PROXY STATEMENT OF EDGE PETROLEUM CORPORATION,
A TEXAS CORPORATION
-----------
CONSENT SOLICITATION STATEMENT OF EDGE GROUP II LIMITED PARTNERSHIP,
A CONNECTICUT LIMITED PARTNERSHIP
-----------
PROSPECTUS OF EDGE PETROLEUM CORPORATION,
A DELAWARE CORPORATION
-----------
This Joint Proxy and Consent Solicitation Statement/Prospectus is being
furnished to (i) shareholders of Edge Petroleum Corporation, a Texas
corporation ("Old Edge"), (ii) the general and limited partners of Edge Group
II Limited Partnership, a Connecticut limited partnership ("Edge Group II"),
(iii) the limited partners of Gulfedge Limited Partnership, a Texas limited
partnership ("Gulfedge"), and (iv) Edge Group Partnership, a Connecticut
general partnership ("Edge Group"). This Joint Proxy and Consent Solicitation
Statement/Prospectus relates to the proposed acquisition, directly or
indirectly, by Edge Petroleum Corporation, a recently formed Delaware
corporation (the "Company"), of substantially all the interests in Edge Joint
Venture II, a Texas general partnership (the "Joint Venture"), pursuant to the
terms of the Amended and Restated Combination Agreement dated as of January 13,
1997 (the "Combination Agreement") by and among the Company, Old Edge, Edge
Group II, Gulfedge and Edge Group. The Combination Agreement provides for (i) a
merger (the "Merger") of Edge Mergeco, Inc., a Texas corporation that is a
wholly owned subsidiary of the Company organized for this purpose ("Mergeco"),
with and into Old Edge, (ii) an exchange offer (the "Edge Group II Exchange
Offer") to the general and limited partners of Edge Group II, (iii) an exchange
offer (the "Gulfedge Exchange Offer") to the limited partners of Gulfedge and
(iv) a purchase offer (the "Edge Group Purchase Offer") to Edge Group. The
Merger, the Edge Group II Exchange Offer, the Gulfedge Exchange Offer and the
Edge Group Purchase Offer are collectively referred to herein as the
"Combination Agreement Transactions." See "The Combination Agreement."
Contemporaneously with the consummation of the Combination Agreement
Transactions, the Company intends to complete an initial public offering (the
"Offering") of shares of its common stock, par value $0.01 per share (the
"Common Stock").
SEE "RISK FACTORS" BEGINNING ON PAGE 21 OF THIS JOINT PROXY AND CONSENT
SOLICITATION STATEMENT/PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH THE COMBINATION AGREEMENT TRANSACTIONS.
This Joint Proxy and Consent Solicitation Statement/Prospectus serves as the
Proxy Statement of Old Edge for the special meeting of shareholders of Old Edge
to be held on , 1997 (the "Special Meeting"). At the Special Meeting, the
shareholders of Old Edge will be asked to approve and adopt the Combination
Agreement and the Plan of Merger included therein. If the Combination
Agreement, including the Plan of Merger, is approved and adopted and the Merger
becomes effective, each outstanding share of common stock, par value $0.01 per
share, of Old Edge ("Old Edge Common Stock") will be converted into 22.307862
shares of Common Stock of the Company, and Old Edge will become a wholly owned
subsidiary of the Company. In the Merger, the shareholders of Old Edge will be
entitled to receive in the aggregate 2,334,085 shares of Common Stock (subject
to adjustment to eliminate fractional shares) of the Company in exchange for
all the issued and outstanding shares of Old Edge Common Stock. See "The Merger
and the Special Meeting." This Joint Proxy and Consent Solicitation
Statement/Prospectus, together with the accompanying form of proxy, is first
being mailed to shareholders of Old Edge on or about , 1997.
Under the terms of the Edge Group II Exchange Offer, the limited and general
partners will be entitled to receive in the aggregate 2,209,306 shares of
Common Stock (subject to adjustment to eliminate fractional shares) in exchange
for all the outstanding limited and general partner interests in Edge Group II.
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the Edge Group II Letter of
(continued on following page)
-----------
THE SECURITIES TO WHICH THIS JOINT PROXY AND CONSENT SOLICITATION STATEMENT/
PROSPECTUS RELATES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT PROXY AND CONSENT SOLICITATION
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy and Consent Solicitation Statement/Prospectus is
, 1997.
<PAGE>
Acceptance furnished herewith to the general and limited partners of Edge
Group II, to exchange for all of the general partner interests in Edge Group
II a number of shares of Common Stock equal to the whole number nearest to the
sum of (i) the GP's Before Payout Shares (which shares are attributable to the
general partners' 1% interest in distributions before Edge Group II
distributes to its partners $20,188,636 (the "Payout Amount")), (ii) the GP's
Management Fee Shares (which shares are attributable to the general partners'
accrued but unpaid and future cash flow-based management fees), and (iii) the
GP's After Payout Shares (which shares are attributable to the general
partners' 25% interest in distributions after Edge Group II distributes to its
partners the Payout Amount) (such shares are collectively referred to herein
as the "GP Exchange Shares"). The "GP's Before Payout Shares" are a number of
shares of Common Stock equal to the quotient of (i) $201,886 (which equals 1%
of the Payout Amount) divided by (ii) the initial public offering price in the
Offering per share of Common Stock (the "IPO price"). The "GP's Management Fee
Shares" are a number of shares of Common Stock equal to the quotient of (i)
the sum of (A) $1,332,450 (which equals the general partners' accrued but
unpaid management fees) plus (B) 3% multiplied by 2,209,306 (which equals the
total number of shares of Common Stock being offered for all limited and
general partner interests in Edge Group II) multiplied by the IPO price (which
product in (B) is attributable to the general partners' future cash flow-based
management fees) (such sum in (i) is referred to herein as the "Management Fee
Amount") divided by (ii) the IPO price. The "GP's After Payout Shares" are a
number of shares of Common Stock equal to the quotient of (i) 25% of the
difference between (A) the product of the IPO price multiplied by 2,209,306
and (B) the sum of (1) the Payout Amount plus (2) the Management Fee Amount
divided by (ii) the IPO price. The Company hereby offers, upon the terms and
subject to the conditions set forth herein and in the Edge Group II Letter of
Acceptance furnished herewith to the general and limited partners of Edge
Group II, to exchange for each unit that represents a limited partner interest
attributable to an original capital contribution of $70,500 in Edge Group II
(each, an "Edge Group II Unit"), a number of shares of Common Stock equal to
the whole number nearest to the quotient of (i) the difference between (A)
2,209,306 (the aggregate number of shares of Common Stock being offered in
exchange for all limited and general partner interests in Edge Group II) and
(B) the aggregate number of the GP Exchange Shares, divided by (ii) 189 (the
total number of Edge Group II Units outstanding). The number of shares being
offered respectively for the limited and general partner interests in Edge
Group II, which will vary depending on the IPO price, is more fully described
elsewhere in this Joint Proxy and Consent Solicitation Statement/Prospectus
under "The Combination Transactions--Background of and Reasons for the
Combination Transactions." Assuming an IPO price of $16.00 per share of Common
Stock, the limited partners of Edge Group II would be entitled to receive in
the aggregate 1,847,641 shares of Common Stock (9,776 shares for each Edge
Group II Unit tendered), and the general partners of Edge Group II would be
entitled to receive in the aggregate 361,665 shares of Common Stock, in
exchange for all of the outstanding interests in Edge Group II.
This Joint Proxy and Consent Solicitation Statement/Prospectus serves as the
Consent Solicitation Statement of Edge Group II in connection with the
solicitation by the general partners of Edge Group II of written consents from
partners of Edge Group II approving the transfer of the general partner
interests in Edge Group II to the Company or its permitted assigns and the
withdrawal of the current general partners as general partners of Edge Group
II (the "Change of Edge Group II General Partners"). A partner's tender of his
or her interests in Edge Group II will not be accepted unless he or she also
consents to the Change of Edge Group II General Partners unless such
requirement with respect to a specific partner's tender is waived by the
Company, which waiver will only be given if other partners of Edge Group II
whose aggregate contributions to capital of Edge Group II represent at least
60% of the aggregate contributions to capital of all partners of Edge Group II
have consented to the Change of Edge Group II General Partners. See "The Edge
Group II Exchange Offer and Consent Solicitation--The Consent Solicitation."
Those limited partners of Edge Group II who tender their respective Edge Group
II Units in exchange for shares of Common Stock will by so tendering have
consented to, approved and ratified the terms of the Edge Group II Exchange
Offer and the other Combination Transactions, including the number of shares
of Common Stock that will be issued to the general partners of Edge Group II.
Accordingly, by tendering Edge Group II Units, limited partners of Edge Group
II will approve the overall terms and structure of the Edge Group II Exchange
Offer and will give up any right to challenge any aspect of the general
partners' and their affiliates' (including Old Edge and its management)
actions regarding the Combination Transactions (as defined below under "The
Combination Transactions"), including, without limitation, the allocation of
shares among any parties receiving shares in the Combination Transactions and
further specifically including any decisions regarding the shares of Common
Stock being offered by the Company for the general partner interests in Edge
Group II. See "Risk Factors--Risks Associated with the Combination
Transactions--Effect of the Edge
ii
<PAGE>
Group II Exchange Offer on Exchanging Limited Partners of Edge Group II" and
"The Edge Group II Exchange Offer and Consent Solicitation--Description."
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the Gulfedge Letter of Acceptance furnished herewith to
the limited partners of Gulfedge, to exchange for each unit that represents a
limited partner interest attributable to an original capital contribution of
$64,500 in Gulfedge (each, a "Gulfedge Unit") 10,617 shares of Common Stock,
which number is equal to the whole number nearest to the quotient of (i)
74,317 (the aggregate number of shares of Common Stock (subject to adjustment
to eliminate fractional shares) being offered hereby in exchange for all the
outstanding Gulfedge Units) divided by (ii) 7 (the total number of Gulfedge
Units outstanding). Old Edge will continue as the general partner of Gulfedge.
Those limited partners of Gulfedge who tender their respective Gulfedge Units
in exchange for shares of Common Stock will by so tendering have consented to,
approved and ratified the terms of the Gulfedge Exchange Offer and the other
Combination Transactions. Accordingly, by tendering Gulfedge Units, limited
partners of Gulfedge will approve the overall terms and structure of the
Gulfedge Exchange Offer and will give up any right to challenge any aspect of
Old Edge's and its officers', directors' and other affiliates' actions
regarding the Combination Transactions, including, without limitation, the
allocation of shares among any parties receiving shares in the Combination
Transactions. See "Risk Factors--Risks Associated with the Combination
Transactions--Effect of the Gulfedge Exchange Offer on Exchanging Limited
Partners of Gulfedge" and "The Gulfedge Exchange Offer."
The Company hereby offers, upon the terms and conditions set forth herein
and in the Edge Group Letter of Acceptance furnished herewith to Edge Group,
to purchase all of Edge Group's general partner interest in the Joint Venture
("Edge Group's Joint Venture Interest") for consideration consisting of an
aggregate of 42,896 shares of Common Stock. See "The Edge Group Purchase
Offer."
Consummation of the Combination Agreement Transactions is subject to certain
conditions, including, among other things: (i) the approval of the Plan of
Merger by the shareholders of Old Edge, (ii) the acceptance of the Edge Group
II Exchange Offer by the general partners and by limited partners holding at
least 70% of the outstanding Edge Group II Units (which will thereby include
the requisite approval of the Change of Edge Group II General Partners by
partners of Edge Group II whose aggregate contributions to capital of Edge
Group II represent at least 60% of the aggregate contributions to capital of
all partners of Edge Group II) and (iii) the closing of the Offering at an IPO
price of at least $14.50 per share. See "The Combination Agreement--
Conditions." Assuming that the foregoing conditions are satisfied and that all
parties accept shares of Common Stock in the Combination Agreement
Transactions, upon consummation of the Combination Agreement Transactions and
the Offering, (i) the Company will become an independent, publicly held
company, (ii) holders of Old Edge Common Stock will become stockholders of the
Company rather than shareholders of Old Edge, (iii) the partners of Edge Group
II and Gulfedge who exchange their interests for shares of Common Stock will
become stockholders of the Company rather than partners of Edge Group II and
Gulfedge, respectively, (iv) the Company will become the general partner of
and own all of the partner interests in Edge Group II, (v) the Company will
own all of the limited partner interests in Gulfedge, (vi) Edge Group will
become a stockholder of the Company and (vii) direct and indirect ownership of
all of the interests in the Joint Venture will be combined in the Company.
This Joint Proxy and Consent Solicitation Statement/Prospectus constitutes a
prospectus of the Company with respect to the shares of Common Stock to be
issued in the Combination Agreement Transactions.
----------------
iii
<PAGE>
No persons have been authorized to give any information or to make any
representation other than those contained or incorporated by reference in this
Joint Proxy and Consent Solicitation Statement/Prospectus in connection with
the solicitation of proxies and consents or the offering of the securities
made hereby and, if given or made, such information or representation should
not be relied upon as having been authorized by the Company, Old Edge or Edge
Group II. This Joint Proxy and Consent Solicitation Statement/Prospectus does
not constitute an offer to sell, or a solicitation of an offer to purchase,
any securities, or the solicitation of a proxy or consent, in any jurisdiction
in which, or to any person to whom, it is unlawful to make such offer or
solicitation of an offer or proxy or consent solicitation. Neither the
delivery of this Joint Proxy and Consent Solicitation Statement/Prospectus nor
any distribution of the securities offered hereby shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company, Old Edge or Edge Group II since the date hereof or
that the information set forth or incorporated by reference herein is correct
as of any time subsequent to its date.
Until , 1997 (25 days after the date of this Joint Proxy and Consent
Solicitation Statement/Prospectus), all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may
be required to deliver a Joint Proxy and Consent Solicitation
Statement/Prospectus. This is in addition to the obligation of dealers to
deliver a Joint Proxy and Consent Solicitation Statement/Prospectus when
acting as soliciting dealers.
iv
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary................................................................... 1
The Companies........................................................... 1
The Combination Transactions............................................ 2
Background of and Reasons for the Combination Transactions.............. 3
Recommendation of Old Edge's Board of Directors......................... 5
Recommendation of the General Partners of Edge Group II................. 5
Recommendation of the General Partner of Gulfedge....................... 5
Risk Factors............................................................ 5
The Merger and the Special Meeting of Old Edge.......................... 9
The Edge Group II Exchange Offer and Consent Solicitation............... 10
The Gulfedge Exchange Offer............................................. 11
The Edge Group Purchase Offer........................................... 12
Accounting Treatment.................................................... 12
Material Federal Income Tax Consequences................................ 12
Interests of Certain Persons and Affiliates in the Combination
Transactions........................................................... 13
Summary Historical Supplementally Combined and Pro Forma Financial and
Operating Data of the Company.......................................... 15
Summary Oil and Natural Gas Reserve Data of the Company................. 17
Ownership of the Joint Venture; Current Structure....................... 18
Ownership of the Company; Post-Combination.............................. 19
Ownership of the Joint Venture; Post-Combination........................ 20
Risk Factors.............................................................. 21
Risks Associated with the Combination Transactions...................... 21
Risks Associated with the Business of the Company....................... 25
Dividend Policy........................................................... 30
The Combination Transactions.............................................. 30
General................................................................. 30
Background of and Reasons for the Combination Transactions.............. 30
Effects of the Combination Transactions................................. 34
Consequences of the Dissolution of the Joint Venture if the Combination
Transactions Are Not Consummated....................................... 36
Conflicts of Interest; Interests of Certain Persons and Affiliates in
the Combination Transactions........................................... 36
Accounting Treatment.................................................... 40
Dissenters' Rights...................................................... 40
Inclusion on Nasdaq National Market..................................... 43
Restrictions on Resale by Affiliates.................................... 43
Expenses................................................................ 43
The Combination Agreement................................................. 44
General................................................................. 44
Effective Time of the Combination Agreement Transactions................ 44
Representations and Warranties.......................................... 44
Conditions.............................................................. 44
Conduct of Business Prior to the Combination............................ 45
Termination or Amendment of the Combination Agreement................... 45
Indemnification......................................................... 45
The Merger and the Special Meeting........................................ 46
General................................................................. 46
Recommendation of the Board of Directors................................ 46
Record Date; Quorum..................................................... 46
Vote Required........................................................... 47
Counting of Votes....................................................... 47
Proxies................................................................. 47
Other Matters to be Considered.......................................... 47
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Solicitation of Proxies................................................. 47
Procedure to Exchange Certificates in the Merger........................ 48
The Edge Group II Exchange Offer and Consent Solicitation................. 49
Description............................................................. 49
The Consent Solicitation................................................ 50
Recommendation of the General Partners of Edge Group II................. 50
Procedure for Tendering Interests; Consent Procedure.................... 51
Acceptance of Tenders; Delivery of Shares............................... 51
Revocation of Tenders and Consents...................................... 51
Representations and Covenants........................................... 51
Expiration Date, Amendments, Etc........................................ 52
Validity of Tenders..................................................... 52
Solicitation of Letters of Acceptance................................... 52
The Gulfedge Exchange Offer............................................... 53
General................................................................. 53
Recommendation of the General Partner of Gulfedge....................... 53
Procedure for Tendering Interests....................................... 54
Acceptance of Tenders; Delivery of Shares............................... 54
Revocation of Tenders................................................... 54
Representations and Covenants........................................... 54
Expiration Date, Amendments, Etc........................................ 54
Validity of Tenders..................................................... 55
Solicitation of Letters of Acceptance................................... 55
The Edge Group Purchase Offer............................................. 56
General................................................................. 56
Procedure for Acceptance................................................ 56
Purchase; Delivery of Shares............................................ 56
Revocation of Acceptance................................................ 56
Representations and Covenants........................................... 56
Expiration Date, Amendments, Etc........................................ 57
Validity of Acceptance.................................................. 57
Solicitation of Letter of Acceptance.................................... 57
Capitalization............................................................ 58
Certain Comparative Data.................................................. 59
Selected Historical Financial and Operating Data.......................... 60
The Company............................................................. 60
The Joint Venture....................................................... 62
Old Edge................................................................ 63
Edge Group II........................................................... 64
Gulfedge................................................................ 65
Edge Group's Joint Venture Interest..................................... 66
Management's Discussion and Analysis of Financial Condition and Results of
Operation................................................................ 67
The Company............................................................. 67
Old Edge................................................................ 74
The Joint Venture, Edge Group II, Gulfedge and Edge Group............... 78
Business of the Company................................................... 86
Management................................................................ 107
Information Concerning the Joint Venture.................................. 116
Information Concerning Old Edge........................................... 119
Information Concerning Edge Group II...................................... 120
Information Concerning Gulfedge........................................... 120
Security Ownership of Certain Beneficial Owners and Management............ 121
The Company............................................................. 121
Old Edge................................................................ 123
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Edge Group II........................................................... 125
Gulfedge................................................................ 126
Certain Transactions...................................................... 127
Material Federal Income Tax Consequences.................................. 131
Introduction............................................................ 131
Holders of Interests in Edge Group II................................... 131
Holders of Gulfedge Units............................................... 134
Edge Group.............................................................. 136
Holders of Old Edge Common Stock........................................ 138
The Company............................................................. 139
Foreign Exchanging Holders.............................................. 139
Other Taxation.......................................................... 140
Comparison of Securityholder Rights....................................... 140
Introduction............................................................ 140
Federal Income Taxation................................................. 140
Management.............................................................. 141
Voting Rights........................................................... 143
Special Meetings........................................................ 144
Amendments to Organizational Documents.................................. 144
Mergers and Other Fundamental Transactions.............................. 144
Dividends and Distributions............................................. 145
Liquidation Rights...................................................... 146
Limited Liability....................................................... 146
Continuity of Existence................................................. 147
Financial Reporting..................................................... 147
Redemption.............................................................. 147
Conversion Rights....................................................... 147
Right to Compel Dissolution............................................. 147
Liquidity, Marketability and Restrictions on Transfer................... 147
Certain Legal Rights of Securityholders and Limitations on Liability of
Management............................................................. 148
Right to List of Holders; Inspection of Books and Records............... 150
Dissenters' Rights of Appraisal......................................... 150
Description of Capital Stock of the Company............................... 152
Plan of Distribution...................................................... 155
Legal Matters............................................................. 156
Experts................................................................... 157
Available Information..................................................... 157
Glossary of Certain Industry Terms........................................ 158
Financial Statements...................................................... F-1
The Company............................................................. F-3
The Joint Venture....................................................... F-32
Old Edge................................................................ F-46
Edge Group II........................................................... F-59
Gulfedge................................................................ F-73
Appendices
The Amended and Restated Combination Agreement.......................... A
Ryder Scott Report...................................................... B
Rights of Dissenting Shareholders, Articles 5.11, 5.12 and 5.13 of the
Texas Business Corporation Act......................................... C
</TABLE>
vii
<PAGE>
SUMMARY
The following summary is a summary of certain information contained elsewhere
in this Joint Proxy and Consent Solicitation Statement/Prospectus. This summary
is qualified in its entirety by the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this Joint
Proxy and Consent Solicitation Statement/Prospectus and the appendices hereto.
Offerees are urged to carefully read this Joint Proxy and Consent Solicitation
Statement/Prospectus and the appendices hereto in their entirety. Unless
otherwise indicated, the information in this Joint Proxy and Consent
Solicitation Statement/Prospectus relating to the Company (i) gives effect to
the Combination Transactions (as defined below under "--The Combination
Transactions") and assumes that all interests that are the subject of those
transactions are acquired by the Company in exchange for the issuance of
approximately 4,700,000 shares of Common Stock, and (ii) assumes that the over-
allotment option of the underwriters for the Offering will not be exercised.
Unless otherwise indicated by the context, references herein to the "Company"
mean Edge Petroleum Corporation, a Delaware corporation that is the issuer of
the Common Stock offered hereby, and its corporate and partnership subsidiaries
and predecessors. Certain terms used herein relating to the oil and natural gas
industry are defined in the Glossary of Certain Industry Terms included
elsewhere in this Joint Proxy and Consent Solicitation Statement/Prospectus.
THE COMPANIES
The Joint Venture. The Joint Venture is a Texas general partnership that
engages in oil and gas exploration and production operations primarily along
the onshore United States Gulf Coast. The general partners of the Joint Venture
are Old Edge, Edge Group II, Gulfedge and Edge Group. The initial sharing
ratio, which determines the allocation of net income and other items, as well
as the allocation of distributable cash, is approximately 29.1%, 67.3%, 2.3%
and 1.3%, respectively. This sharing ratio is subject to adjustment when the
value of cash and carried interests and other property distributed to each
venturer reaches certain levels. See "--Ownership of the Joint Venture; Current
Structure." The mailing address and telephone number of the Joint Venture's
executive offices are c/o Edge Petroleum Corporation, Texaco Heritage Plaza,
1111 Bagby, Suite 2100, Houston, Texas 77002, (713) 654-8960.
Old Edge. Old Edge is a Texas corporation and, as managing venturer of the
Joint Venture, generally directs and exercises control over all activities of
the Joint Venture. Immediately following consummation of the Merger, Old Edge
will change its name to "Edge Petroleum Corporation of Texas." The mailing
address and telephone number of Old Edge's executive offices are Texaco
Heritage Plaza, 1111 Bagby, Suite 2100, Houston, Texas 77002, (713) 654-8960.
Edge Group II. Edge Group II is a Connecticut limited partnership whose
assets consist solely of its interest in the Joint Venture. Edge Group II's
consent is required prior to certain actions of the Joint Venture, including
its acquisition of leases, purchase of capital, incurrence of debt and adoption
of budgets. The general partners of Edge Group II are Mr. John Sfondrini and
Napamco, Ltd. ("Napamco"), a company wholly owned by Mr. Sfondrini. The mailing
address and telephone number of Edge Group II's executive offices are 36
Catoonah Street, Unit #16, P.O. Box 1248, Ridgefield, Connecticut 06875, (203)
894-8244.
Gulfedge. Gulfedge is a Texas limited partnership whose assets consist solely
of its interest in the Joint Venture. Old Edge is the general partner of
Gulfedge. There are two limited partners of Gulfedge. The mailing address and
telephone number of Gulfedge's executive offices are Texaco Heritage Plaza,
1111 Bagby, Suite 2100, Houston, Texas 77002, (713) 654-8960.
Edge Group. Edge Group is a Connecticut general partnership whose assets
include, among other things, an interest in the Joint Venture. The three
partners of Edge Group are partnerships of which Mr. Sfondrini and
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Napamco are the general partners. The mailing address and telephone number of
Edge Group's executive offices are 36 Catoonah Street, Unit #16, P.O. Box 1248,
Ridgefield, Connecticut 06875, (203) 894-8244.
The Company. The Company is a Delaware corporation formed in August 1996 that
has not conducted any significant activities to date other than those incident
to its formation, its activities in connection with the Offering, its execution
of the Combination Agreement and of the Purchase Agreement (as defined below
under "--The Combination Transactions") and its participation in the
preparation of this Joint Proxy and Consent Solicitation Statement/Prospectus.
As a result of the Combination Transactions, Old Edge will become a wholly
owned subsidiary of the Company and the ownership of substantially all the
interests in the Joint Venture will, directly or indirectly, be combined in the
Company. Initially, the business of the Company will be substantially the same
business currently conducted by Old Edge and the Joint Venture, and the
description of the business and the operations of the Company in this Joint
Proxy and Consent Solicitation Statement/Prospectus includes the business and
operations of the Joint Venture and Old Edge that are directly and indirectly
being acquired in the Combination Transactions. The mailing address and
telephone number of the Company's executive offices are Texaco Heritage Plaza,
1111 Bagby, Suite 2100, Houston, Texas 77002, (713) 654-8960.
Mergeco. Mergeco, a recently formed Texas corporation, is a wholly owned
subsidiary of the Company that was formed solely to effect the Merger. The
mailing address and telephone number of Mergeco's executive offices are Texaco
Heritage Plaza, 1111 Bagby, Suite 2100, Houston, Texas 77002, (713) 654-8960.
THE COMBINATION TRANSACTIONS
General. In the Combination Transactions, the Company plans to complete (i)
the Merger, (ii) the Edge Group II Exchange Offer, (iii) the Gulfedge Exchange
Offer, (iv) the Edge Group Purchase Offer and (v) the James C. Calaway Exchange
(as defined below). Upon consummation of the Combination Transactions, the
Company expects to acquire directly or indirectly substantially all of the
interests in the Joint Venture. See "--Ownership of the Joint Venture; Post-
Combination." The Company does not expect to seek to consummate any of the
Combination Transactions unless the Merger, the Edge Group II Exchange Offer
(with at least a 70% acceptance level) and the Offering are each closed. The
number of shares of Common Stock to be issued in the Combination Transactions
will depend on (i) the number of shareholders of Old Edge who exercise
dissenters' rights in connection with the Merger, (ii) the number of partners
who elect to retain their current interests in Gulfedge and Edge Group II in
lieu of receiving Common Stock, (iii) whether Edge Group accepts the Edge Group
Purchase Offer and (iv) the number of shares issued in the James C. Calaway
Exchange.
Conditions. Consummation of the Combination Transactions is subject to
certain conditions, including, among other things: (i) the approval of the Plan
of Merger by the shareholders of Old Edge, (ii) the acceptance of the Edge
Group II Exchange Offer by the general partners and by limited partners holding
at least 70% of the outstanding Edge Group II Units (which will thereby include
the requisite approval of the Change of Edge Group II General Partners by
partners of Edge Group II whose aggregate contributions to capital of Edge
Group II represent at least 60% of the aggregate contributions to capital of
all partners of Edge Group II) and (iii) the closing of the Offering at an IPO
price to the public of at least $14.50 per share. See "The Combination
Agreement--Conditions."
The James C. Calaway Exchange. Mr. James C. Calaway acquired a 1%
reversionary working interest and a .2% overriding royalty interest
(collectively, the "J.C. Calaway Interests") in certain undrilled prospects and
subsequently acquired properties of the Joint Venture effective December 20,
1994. In connection with the Combination Agreement Transactions and the
Company's proposed acquisition of substantially all the interests in the Joint
Venture, the Company and Mr. James C. Calaway entered into a Purchase Agreement
dated December 2, 1996 (the "Purchase Agreement") pursuant to which Mr. James
C. Calaway agreed to exchange (the "James C. Calaway Exchange") certain of the
J.C. Calaway Interests for that number of shares of Common Stock equal to the
whole number nearest to the higher of (i) the quotient of (a) $346,697 (which
is the
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estimated future net revenues as of September 30, 1996 attributable to the J.C.
Calaway Interests being exchanged as determined by Ryder Scott Company) divided
by (b) the IPO price (such quotient in (i) is referred to herein as the "1996
Valuation Shares") and (ii) the quotient of (a) the estimated future net
reserves attributable to the J.C. Calaway Interests being exchanged as
determined by Ryder Scott Company in a reserve report as of a date subsequent
to September 30, 1996 but prior to the closing of the Purchase Agreement (such
date is hereinafter referred to as the "1997 Determination Date") and for which
the results of such reserve report are included in the final prospectus for the
Offering and (b) the IPO price (such quotient in (ii) is referred to herein as
the "1997 Valuation Shares"). According to a reserve report prepared by Ryder
Scott Company (the "December 31, 1996 Reserve Report"), the estimated future
net revenues as of December 31, 1996 attributable to the J.C. Calaway Interests
were $672,245. Assuming an IPO price of $16.00 per share and that the results
of the December 31, 1996 Reserve Report are included in the final prospectus
for the Offering, Mr. James C. Calaway would be entitled to receive 42,015
shares of Common Stock pursuant to the Purchase Agreement. The shares of Common
Stock to be purchased by Mr. James C. Calaway pursuant to the Purchase
Agreement are not registered under the Registration Statement of which this
Joint Proxy and Consent Solicitation Statement/ Prospectus is a part, but will
be "restricted securities," as that term is defined in Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"). Mr. James C. Calaway
has also agreed to pay the Company the dollar amount of any revenues
attributable to the J.C. Calaway Interests received by him for income for
production after either September 30, 1996 (if the 1996 Valuation Shares are
higher in number) or the 1997 Determination Date (if the 1997 Valuation Shares
are higher in number) and prior to the closing of the Purchase Agreement.
Closing of the Purchase Agreement is conditioned upon the closing of both the
Offering and the Combination Agreement Transactions. See "The Combination
Agreement--Conditions." The James C. Calaway Exchange and the Combination
Agreement Transactions are collectively referred to as the "Combination
Transactions." In addition to the shares of Common Stock that are issuable
pursuant to the James C. Calaway Exchange, Mr. James C. Calaway is entitled to
receive a portion of the shares of Common Stock received by the general
partners of Edge Group II pursuant to the Edge Group II Exchange Offer, as
described under "Plan of Distribution."
Shares to be Issued. The following table sets forth the number of shares to
be issued in the Combination Transactions and the Offering, assuming all
parties accept Common Stock in the Combination Transactions (excluding any
restricted stock and stock options and assuming that the over-allotment option
of the underwriters for the Offering is not exercised) and the percentages of
shares issued prior to and after giving effect to the Offering (subject to
adjustment to eliminate fractional shares):
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
SHARES TO BE SHARES TO BE
NUMBER OF ISSUED PRIOR TO ISSUED AFTER
SHARES TO GIVING EFFECT GIVING EFFECT
TRANSACTION BE ISSUED TO THE OFFERING TO THE OFFERING
----------- --------- --------------- ---------------
<S> <C> <C> <C>
Shares to be issued in the Merger.... 2,334,085 49.6% 34.8%
Shares to be issued in the Edge Group
II Exchange Offer................... 2,209,306 47.0 33.0
Shares to be issued in the Gulfedge
Exchange Offer...................... 74,317 1.6 1.1
Shares to be issued in the Edge Group
Purchase Offer...................... 42,896 0.9 0.7
Shares to be issued in the James C.
Calaway Exchange (1)................ 42,015 0.9 0.6
Shares to be issued in the Offering.. 2,000,000 -- 29.8
--------- ---- ----
Total................................ 6,702,619 100% 100%
========= ==== ====
</TABLE>
- --------
(1) Calculated based on the December 31, 1996 Reserve Report and assuming an
IPO price of $16.00 per share.
BACKGROUND OF AND REASONS FOR THE COMBINATION TRANSACTIONS
Background of the Joint Venture. The Joint Venture was formed on April 8,
1991 by Old Edge, Edge Group II, Gulfedge and Edge Group. Old Edge is managing
venturer of the Joint Venture. The sharing ratios for the participants in the
Joint Venture are described in "--Ownership of the Joint Venture; Current
Structure" and
3
<PAGE>
"Information Concerning the Joint Venture." The term of the Joint Venture
originally was to have expired on April 8, 1996. For information concerning the
rights of the venturers upon the dissolution of the Joint Venture under its
original terms, see "The Combination Transactions--Background of and Reasons
for the Combination Transactions." At the time of its formation, the Joint
Venture was primarily involved in the generation of drilling
prospects for major, large independent and other energy participants.
Determination to Postpone the Dissolution of the Joint Venture. By 1992, as a
result of the decrease in drilling risks made possible by certain technological
advances, the Joint Venture began to acquire or retain working interests in the
prospects generated by Old Edge on behalf of the Joint Venture and to drill for
the account of the Joint Venture, while de-emphasizing the prospect generation
portion of its business. During 1995, the venturers began to consider the
approaching dissolution date of the Joint Venture in April 1996. The venturers
recognized that, given the change in the nature of the Joint Venture's
operations, both the proposed dissolution date and the terms of the dissolution
of the Joint Venture were no longer appropriate. See "The Combination
Transactions--Background of and Reasons for the Combination Transactions."
During the fourth quarter of 1995, the venturers agreed that the Joint Venture
would dissolve on December 31, 1996 and began discussions regarding the
modification of certain provisions in the Joint Venture Agreement, primarily
regarding distributions and the parties' post-dissolution rights. These changes
were formalized in the Extension Agreement dated as of April 8, 1996. For a
description of the amended dissolution provisions, see "Information Concerning
the Joint Venture."
The Combination Transactions. In early 1996, the venturers began to discuss
the structure of a transaction in which they would each have the opportunity to
participate in the future potential of Old Edge's business through the
formation of a combined company, while giving an option to the partnership
investors of electing not to participate in the transaction and thereby
retaining, indirectly, the right to a proportionate interest in distributions
upon the dissolution of the Joint Venture. At this time, management of Old Edge
was also considering the feasibility of an initial public offering involving
the combined company. The parties recognized that the increased asset base that
would be achieved by retaining the assets of the Joint Venture under common
ownership would increase the chances of a successful initial public offering
and assure continuity in the exploitation of prospects that Old Edge believed
had significant potential.
The predominant issue in connection with the discussions regarding the
formation of the combined company was the percentage interest in the combined
company that would be allocated to the investors in each of the venturers.
Although Old Edge's initial sharing ratio in the Joint Venture was 29.1%, the
parties recognized that Old Edge should be allocated a higher percentage
because of (i) Old Edge's claimed rights under the original and amended terms
of the Joint Venture Agreement to retain certain of the Joint Venture's
prospects and the Joint Venture's regional data base and technology, including
seismic data, (ii) the "going concern value" of Old Edge's business, in
particular its position within the industry and the expertise of its management
and technical team and (iii) the fact that the parties projected that a sharing
ratio shift would take place prior to the end of the wind-down period of the
Joint Venture. Based on these factors the parties concluded that the
appropriate percentage interest in the combined company that would be allocated
to the investors in each of the venturers would be as follows: Old Edge--50%,
Edge Group II--47.5%, Gulfedge--1.6% and Edge Group--0.9%. As among Edge Group
II, Gulfedge and Edge Group, the allocation of the remaining 50% of the
combined company was based upon relative sharing ratios under the Joint Venture
Agreement. As a result of a subsequent adjustment relating to the assumption by
the combined company of certain payables of Edge Group II, the final relative
percentage interest in the combined company among the venturers is: Old Edge--
50.1%, Edge Group II--47.4%, Gulfedge--1.6%, and Edge Group--0.9%.
Following the initial determination of shares allocable to the venturers, Old
Edge met with its legal and accounting advisers to determine the structure of
the transaction. See "The Combination Transactions--Background of and Reasons
for the Combination Transactions" for a description of the factors that were
considered in determining the relative number of shares to be issued to the
general partners and limited partners of Edge Group II.
Beginning in July 1996, the venturers finalized the terms of the Combination
Agreement Transactions and began to prepare definitive documentation. At this
time, management of Old Edge also began preparations for
4
<PAGE>
the initial public offering of the Company. On December 3, 1996, the
Combination Agreement was agreed to by the venturers. Certain provisions of the
Combination Agreement were amended as of January 13, 1997. See "The Combination
Transactions--Background of and Reasons for the Combination Transactions."
RECOMMENDATION OF OLD EDGE'S BOARD OF DIRECTORS. THE BOARD OF DIRECTORS OF
OLD EDGE HAS DETERMINED THAT THE COMBINATION AGREEMENT AND THE PLAN OF MERGER
INCLUDED THEREIN ARE ADVISABLE AND IN THE BEST INTERESTS OF SHAREHOLDERS OF OLD
EDGE AND RECOMMENDS THAT THE SHAREHOLDERS OF OLD EDGE VOTE FOR THE PROPOSAL TO
APPROVE AND TO ADOPT THE COMBINATION AGREEMENT AND THE PLAN OF MERGER INCLUDED
THEREIN. THE BOARD OF DIRECTORS' RECOMMENDATION IS BASED UPON A NUMBER OF
FACTORS DISCUSSED IN THIS JOINT PROXY AND CONSENT SOLICITATION
STATEMENT/PROSPECTUS. SEE "THE COMBINATION TRANSACTIONS--BACKGROUND OF AND
REASONS FOR THE COMBINATION TRANSACTIONS" AND "THE MERGER AND THE SPECIAL
MEETING-- RECOMMENDATION OF THE BOARD OF DIRECTORS."
RECOMMENDATION OF THE GENERAL PARTNERS OF EDGE GROUP II. THE GENERAL PARTNERS
OF EDGE GROUP II HAVE DETERMINED THAT ACCEPTANCE OF THE EDGE GROUP II EXCHANGE
OFFER IS ADVISABLE AND IN THE BEST INTERESTS OF THE PARTNERS OF EDGE GROUP II
AND RECOMMENDS THAT THE PARTNERS OF EDGE GROUP II ACCEPT THE EDGE GROUP II
EXCHANGE OFFER AND GIVE THE RELATED APPROVALS CONCERNING THE COMBINATION
TRANSACTIONS INCLUDING THOSE RELATING TO THE CHANGE OF EDGE GROUP II GENERAL
PARTNERS AND THOSE RELATING TO APPROVAL OF THE NUMBER OF SHARES BEING OFFERED
TO ALL PARTIES IN THE COMBINATION TRANSACTIONS INCLUDING THE GENERAL PARTNERS
OF EDGE GROUP II AND THEIR AFFILIATES. THE GENERAL PARTNERS' RECOMMENDATION IS
BASED UPON A NUMBER OF FACTORS DISCUSSED IN THIS JOINT PROXY AND CONSENT
SOLICITATION STATEMENT/PROSPECTUS. SEE "THE COMBINATION TRANSACTIONS--
BACKGROUND OF AND REASONS FOR THE COMBINATION TRANSACTIONS" AND "THE EDGE GROUP
II EXCHANGE OFFER AND CONSENT SOLICITATION-- RECOMMENDATION OF THE GENERAL
PARTNERS OF EDGE GROUP II."
RECOMMENDATION OF THE GENERAL PARTNER OF GULFEDGE. OLD EDGE, IN ITS CAPACITY
AS GENERAL PARTNER OF GULFEDGE, HAS DETERMINED THAT ACCEPTANCE OF THE GULFEDGE
EXCHANGE OFFER IS ADVISABLE AND IN THE BEST INTEREST OF THE LIMITED PARTNERS OF
GULFEDGE AND RECOMMENDS THAT THE LIMITED PARTNERS OF GULFEDGE ACCEPT THE
GULFEDGE EXCHANGE OFFER AND GIVE THE RELATED APPROVAL CONCERNING THE
COMBINATION TRANSACTIONS. OLD EDGE'S RECOMMENDATION IS BASED UPON A NUMBER OF
FACTORS DISCUSSED IN THIS JOINT PROXY AND CONSENT SOLICITATION
STATEMENT/PROSPECTUS. SEE "THE COMBINATION TRANSACTIONS--BACKGROUND OF AND
REASONS FOR THE COMBINATION TRANSACTIONS" AND "THE GULFEDGE EXCHANGE OFFER--
RECOMMENDATION OF THE GENERAL PARTNER OF GULFEDGE."
RISK FACTORS
Risks Associated with the Combination Transactions
Conflicts of Interest. Management of Old Edge and the general partners of
Edge Group II had inherent conflicts of interest in structuring and approving
the terms of the Combination Transactions and in recommending acceptance of
such transactions. See "The Combination Transactions--Conflicts of Interest;
Interests of Certain Persons and Affiliates in the Combination Transactions."
Certain members of management of Old Edge negotiated the terms of the
Combination Transactions on behalf of Old Edge. Mr. Sfondrini negotiated the
terms of the Combination Agreement Transactions on behalf of Edge Group II and
Edge Group. Old Edge did not negotiate on behalf of Gulfedge, because it
recognized that once an agreement had been reached with Edge Group II and Edge
Group, Gulfedge would participate in the Combination Agreement Transactions in
the same manner as Edge Group II and Edge Group, but on the basis of its
relative sharing ratio. Old Edge viewed these procedures as appropriate because
it believes Gulfedge is in a similar position to Edge Group II and Edge Group
under the Joint Venture Agreement. In negotiating and approving the Combination
Agreement Transactions,
5
<PAGE>
management of Old Edge had conflicting duties to the shareholders of Old Edge
and the limited partners of Gulfedge, and Mr. Sfondrini, as a director of Old
Edge, a general partner of Edge Group II and as general partner of each of the
three partners of Edge Group, had conflicting duties to the shareholders of Old
Edge, the limited partners of Edge Group II and the partners of Edge Group. The
allocation in the Combination Transactions of shares of Common Stock among the
equity holders of the venturers involved inherent conflicts of interest.
Because the number of shares of Common Stock being offered in exchange for all
of the partner interests in Edge Group II was initially determined based on a
percentage of the aggregate number of shares of Common Stock being offered in
connection with the Combination Agreement Transactions, the issuance of shares
of Common Stock in exchange for the general partner interests in Edge Group II
reduced the number of shares of Common Stock being offered in exchange for the
limited partner interests in Edge Group II.
Benefits of the Combination Transactions to Certain Persons. Management of
Old Edge, the general partners of Edge Group II and their affiliates and family
members will receive substantial benefits if the Combination Transactions and
the Offering are consummated, including (assuming an initial public offering
price of $16.00 per share) the issuance of an aggregate of 2,525,531 shares of
Common Stock and the granting of 250,585 restricted shares of Common Stock and
of options to purchase an aggregate of 431,648 shares of Common Stock, the
liquidity for their respective investments through the creation of a public
market for the Common Stock pursuant to the Offering, and, in certain cases,
new employment and compensation arrangements with the Company. See "--Interests
of Certain Persons and Affiliates in the Combination Transactions";
"Management--Director Compensation"; "--Employment Agreements" and "--Incentive
Plans."
No Independent Representation of Unaffiliated Parties. The terms of the
Combination Transactions were determined through negotiations between
affiliated parties. No attempt was made to solicit offers for any of the
respective interests in the Joint Venture or other entities being acquired in
the Combination Transactions and no independent representative or counsel has
acted on behalf of Edge Group, the unaffiliated shareholders of Old Edge and
the unaffiliated limited partners of Edge Group II or Gulfedge. There is a
possibility that, if such representatives or unaffiliated shareholders or
limited partners had taken part in such determination or negotiations, the
terms of the Combination Transactions might have been different and, perhaps,
more favorable to the unaffiliated shareholders or limited partners.
No Fairness Opinion Obtained. Neither the board of directors of Old Edge nor
the general partners of Edge Group II obtained an opinion as to the fairness of
the terms of the Combination Agreement Transactions from a financial point of
view to the shareholders of Old Edge, to the limited partners of Edge Group II
or Gulfedge or to Edge Group. If such a fairness opinion had been sought and
obtained, the management of Old Edge and Mr. Sfondrini would have received an
independent judgement as to whether or not the transactions were fair to their
respective parties; if such a fairness opinion had been sought and not
obtained, the terms of the Combination Agreement Transactions might have been
renegotiated.
Change in Nature of Investment. If the Combination Agreement Transactions are
consummated, investors who elect to receive shares of Common Stock will
experience a change in the nature of their investment. An investment in shares
of Common Stock would constitute a fundamental change in the nature of the
investment of the limited partners of Edge Group II and Gulfedge and of Edge
Group, including the change from an investment in a partnership with limited
duration to an investment in a corporation with perpetual duration and
including changes relating to marketability of securities, voting rights and
other equityholder rights. See "Comparison of Securityholder Rights."
Effect of the Combination Agreement Transactions on Nonexchanging Limited
Partners. Upon consummation of the Combination Agreement Transactions,
conflicts of interest may arise between the stockholders of the Company and
nonexchanging partners as a result of the Company's position as the general
partner of Edge Group II and Old Edge's position as the managing venturer of
the Joint Venture, including conflicts relating to the dissolution and
liquidation of the Joint Venture, the distribution of assets from the Joint
Venture during and/or following its two-year windup period, which began January
1, 1997, the distribution of
6
<PAGE>
assets received from the Joint Venture by Edge Group II and Gulfedge, elections
to be made in respect of assets to be held outside the Joint Venture and
continuing decisions regarding oil and gas operations. Nonexchanging limited
partners will generally not participate in new prospects or operations
unrelated to the Joint Venture's current operations.
Effect of the Edge Group II Exchange Offer on Exchanging Limited Partners of
Edge Group II. Those limited partners of Edge Group II who tender their
respective Edge Group II Units in exchange for shares of Common Stock will by
so tendering have consented to, approved and ratified the terms of the Edge
Group II Exchange Offer and the other Combination Transactions, including the
number of shares of Common Stock that will be issued to the general partners of
Edge Group II. Accordingly, by tendering Edge Group II Units, limited partners
of Edge Group II will approve the overall terms and structure of the Edge Group
II Exchange Offer and will give up any right to challenge any aspect of the
general partners' and their affiliates' (including Old Edge and its management)
actions regarding the Combination Transactions, including without limitation,
the allocation of shares among any parties receiving shares in the Combination
Transactions and further specifically including any decisions regarding the
shares of Common Stock being offered by the Company for the general partner
interests in Edge Group II. See "The Edge Group II Exchange Offer and Consent
Solicitation--Description."
Effect of the Gulfedge Exchange Offer on Exchanging Limited Partners of
Gulfedge. Those limited partners of Gulfedge who tender their respective
Gulfedge Units in exchange for shares of Common Stock will by so tendering have
consented to, approved and ratified the terms of the Gulfedge Exchange Offer
and the other Combination Transactions. Accordingly, by tendering Gulfedge
Units, limited partners of Gulfedge will approve the overall terms and
structure of the Gulfedge Exchange Offer and will give up any right to
challenge any aspect of Old Edge's and its officers', directors' and other
affiliates' actions regarding the Combination Transactions, including, without
limitation the allocation of shares among any parties receiving shares in the
Combination Transactions. See "The Gulfedge Exchange Offer."
No Assurance as to Offering Price. Although the Combination Agreement
provides for the sale by the Company of shares in the Offering at a $14.50
minimum public offering price per share of Common Stock as a condition to
closing, there can be no assurance as to what price will be achieved in the
public offering or as to what price the Common Stock will trade thereafter.
Restrictions on Resale. The holders of all of the shares of Common Stock
issued in the Combination Transactions will be restricted from disposing of any
shares of Common Stock for a period of 180 days from the date of the final
prospectus relating to the Offering without the prior consent of the
representatives of the underwriters for the Offering and the Company. Following
such 180-day period, substantially all of the shares of Common Stock issued in
the Combination Agreement Transactions will be eligible for resale without
restriction other than pursuant to Rules 144 and 145, which place certain
restrictions on the resale of Common Stock received in the Combination
Transactions by persons who are "affiliates" of Old Edge or the Company.
Risks Associated with the Business of the Company
Dependence on Exploratory Drilling Activities. The success of the Company
will be materially dependent upon the continued success of its exploratory
drilling program, which involves numerous risks.
Volatility of Natural Gas and Oil Prices. The Company's revenues,
profitability, future growth and ability to borrow funds to obtain additional
capital, as well as the carrying value of its properties, are substantially
dependent on prevailing prices of natural gas and oil. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--The
Company" and "Business of the Company--Marketing."
Reserve Replacement Risk. In general, the volume of production from natural
gas and oil properties declines as reserves are depleted, with the rate of
decline depending on reservoir characteristics. Except to the extent the
7
<PAGE>
Company acquires properties containing proved reserves or conducts successful
exploration and development activities, or both, the proved reserves of the
Company will decline as reserves are produced.
Operating Risks of Natural Gas and Oil Operations. The natural gas and oil
business involves certain operating hazards, any of which could result in
substantial losses to the Company. See "Business of the Company--Operating
Hazards and Insurance."
Dependence on Key Personnel. The Company depends to a large extent on the
services of certain key management personnel and on its ability to employ and
retain skilled technical personnel. See "Business of the Company--Exploration
Technology."
Reliance on Technological Development and Possible Technological
Obsolescence. The Company's business is dependent upon utilization of changing
technology. As a result, the Company's ability to adapt to evolving
technologies, obtain new products and maintain technological advantages will be
important to its future success. See "Business of the Company--Exploration
Technology."
Significant Capital Requirements. Due to its active exploration and
development and technology development programs, the Company has experienced
and expects to continue to experience substantial working capital needs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- The Company--Liquidity and Capital Resources."
Government Regulation and Environmental Matters. Oil and natural gas
operations are subject to various federal, state and local government
regulations which may be changed from time to time in response to economic or
political conditions. See "Business of the Company--Regulation."
Ability to Manage Growth and Achieve Business Strategy. The Company's ability
to continue its growth will depend on a number of factors, including its
ability to continue to retain and attract skilled personnel, the results of its
drilling program, hydrocarbon prices, access to capital and other factors.
Competition. The Company encounters competition from other oil and natural
gas companies in all areas of its operations, including the acquisition of
exploratory prospects and proven properties. The Company's ability to explore
for oil and natural gas prospects and to acquire additional properties in the
future will be dependent upon its ability to conduct its operations, to
evaluate and select suitable properties and to consummate transactions in this
highly competitive environment. See "Business of the Company--Competition."
Uncertainty of Reserve Information and Future Net Revenue Estimates. There
are numerous uncertainties inherent in estimating natural gas and oil reserves
and their estimated values, including many factors beyond the control of the
producer. The reserve data set forth in this Joint Proxy and Consent
Solicitation Statement/Prospectus are only estimates. See "Business of the
Company--Oil and Natural Gas Reserves."
Acquisition Risks. The Company generally seeks to explore for oil and natural
gas rather than to purchase producing properties. There can be no assurances
that any acquisition of property interests by the Company will be successful
and, if unsuccessful, that such failure will not have an adverse effect on the
Company's future results of operations and financial condition.
Absence of Dividends on Common Stock. The Company currently intends to retain
any earnings for the future operation and development of its business and does
not currently anticipate paying any dividends in the foreseeable future. Any
future dividends also may be restricted by the Company's then-existing loan
agreements. See "Dividend Policy," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--The Company--Liquidity and
Capital Resources" and Note 3 to the Company's Combined Financial Statements.
8
<PAGE>
Recent Losses. The Company has incurred net losses in three of the last five
years of its operations. There can be no assurance that the Company will be
profitable in the future. See "Selected Historical and Pro Forma Combined
Financial and Operating Information--The Company."
THE MERGER AND THE SPECIAL MEETING OF OLD EDGE
The Special Meeting; Time, Date, Place and Purpose. The Special Meeting will
be held on , , 1997 at a.m., Houston time, at , Houston,
Texas. At the Special Meeting, holders of shares of Old Edge Common Stock will
be asked to consider and to vote upon a proposal to approve and to adopt the
Combination Agreement and the Plan of Merger included therein. See "The Merger
and the Special Meeting."
Record Date and Vote Required. Only holders of record of Old Edge Common
Stock at the close of business on , 1997 (the "Record Date") are entitled
to notice of, and to vote at, the Special Meeting. As of the Record Date, there
were 104,630.6 shares of Old Edge Common Stock outstanding held by 27 holders
of record. Holders of record on the Record Date are entitled to one vote per
share on any matter which may properly come before the Special Meeting.
Approval of the proposal to approve and adopt the Combination Agreement and the
Plan of Merger included therein requires the affirmative vote of two-thirds of
the shares of Old Edge Common Stock outstanding on the Record Date. As of the
Record Date, Old Edge's executive officers and directors and their affiliates
(as a group) had, with respect to such proposal, the right to vote an aggregate
of approximately 85,100 shares of Old Edge Common Stock, representing
approximately 81% of the shares of Old Edge Common Stock then outstanding and
have indicated that they expect to vote in favor of the proposal and, subject
to their fiduciary duties as directors of Old Edge, that they will use their
reasonable efforts to cause the Combination Agreement Transactions to be
consummated.
Description of the Merger; Merger Consideration. If the Merger is
consummated, Mergeco will be merged with and into Old Edge, the separate
corporate existence of Mergeco will cease and Old Edge, as the surviving
corporation in the Merger, will continue its corporate existence under the name
"Edge Petroleum Corporation of Texas." Upon consummation of the Merger, each
outstanding share of Old Edge Common Stock (other than shares owned by Old Edge
as treasury stock, all of which shares will be canceled, and other than shares
held by shareholders who perfect their appraisal rights under Texas law) will
be converted into the right to receive 22.307862 shares of Common Stock of the
Company. No fractional shares of Common Stock will be issued in the Merger.
Each shareholder of Old Edge otherwise entitled to a fractional share will
receive a whole share of Common Stock in lieu thereof.
Effective Time of the Merger. The Merger will become effective upon the
issuance of a Certificate of Merger by the Secretary of State of the State of
Texas (the "Effective Time"). It is presently contemplated that such issuance
will occur following the Special Meeting and at the time of the closing of the
Offering. See "The Merger and the Special Meeting."
Exchange of Old Edge Stock Certificates. Assuming the Merger is consummated,
a letter of transmittal will be sent to all current holders of Old Edge Common
Stock, who will then be deemed to be holders of Common Stock of the Company,
with instructions for surrendering their certificates evidencing shares of Old
Edge Common Stock in exchange for certificates representing the applicable
number of shares of Common Stock of the Company. HOLDERS OF CERTIFICATES FOR
SHARES OF OLD EDGE COMMON STOCK SHOULD NOT SUBMIT THOSE CERTIFICATES FOR
EXCHANGE UNTIL THEY HAVE RECEIVED SUCH INSTRUCTIONS AND LETTER OF TRANSMITTAL.
Appraisal Rights. In accordance with the Texas Business Corporation Act, as
amended (the "TBCA"), dissenting shareholders of Old Edge will be entitled to
appraisal rights in connection with the Merger. See "The Combination
Transactions--Dissenters' Rights."
9
<PAGE>
THE EDGE GROUP II EXCHANGE OFFER AND CONSENT SOLICITATION
General. The Company hereby offers, upon the terms and subject to the
conditions set forth herein and in the Edge Group II Letter of Acceptance
furnished herewith to the general and the approximately 160 limited partners of
Edge Group II, to exchange for all of the general partner interests in Edge
Group II the GP Exchange Shares, which are a number of shares of Common Stock
equal to the whole number nearest to the sum of (i) the GP's Before Payout
Shares (which shares are attributable to the general partners' 1% interest in
distributions before Edge Group II distributes to its partners the Payout
Amount, which equals $20,188,636), (ii) the GP's Management Fee Shares (which
shares are attributable to the general partners' accrued but unpaid and future
cash flow-based management fees) and (iii) the GP's After Payout Shares (which
shares are attributable to the general partners' 25% interest in distributions
after Edge Group II distributes to its partners the Payout Amount). The GP's
Before Payout Shares are a number of shares of Common Stock equal to the
quotient of (i) $201,886 (which equals 1% of the Payout Amount) divided by (ii)
the IPO price. The GP's Management Fee Shares are a number of shares of Common
Stock equal to the quotient of (i) the Management Fee Amount, which is equal to
the sum of (A) $1,332,450 (which equals the general partners' accrued but
unpaid management fees) plus (B) 3% multiplied by 2,209,306 (which equals the
total number of shares of Common Stock being offered for all limited and
general partner interests in Edge Group II) multiplied by the IPO price (which
product in (B) is attributable to the general partners' future cash flow-based
management fees), divided by (ii) the IPO price. The GP's After Payout Shares
are a number of shares of Common Stock equal to the quotient of (i) 25% of the
difference between (A) the product of the IPO price multiplied by 2,209,306 and
(B) the sum of (1) the Payout Amount plus (2) the Management Fee Amount divided
by (ii) the IPO price. The Company is offering hereby to exchange for each Edge
Group II Unit a number of shares of Common Stock equal to the whole number
nearest to the quotient of (i) the difference between (A) 2,209,306 and (B) the
aggregate number of the GP Exchange Shares divided by (ii) 189 (the total
number of Edge Group II Units outstanding). The limited and general partners of
Edge Group II will be entitled to receive in the aggregate 2,209,306 shares of
Common Stock in exchange for all of the outstanding interests in Edge Group II.
See "The Combination Transactions--Background of and Reasons for the
Combination Transactions." Assuming an IPO price of $16.00 per share of Common
Stock, the limited partners of Edge Group II would be entitled to receive in
the aggregate 1,847,641 shares of Common Stock (9,776 shares for each Edge
Group II Unit tendered), and the general partners of Edge Group II would be
entitled to receive in the aggregate 361,665 shares of Common Stock, in
exchange for all the outstanding interests in Edge Group II. If the IPO price
is greater than $16.00 per share, the limited partners of Edge Group II would
be entitled to receive fewer than such number of shares of Common Stock, and
the general partners would be entitled to receive more than such number of
shares of Common Stock, in exchange for their respective interests in Edge
Group II. If the IPO price is less than $16.00 per share, the limited partners
of Edge Group II would be entitled to receive more than such number of shares
of Common Stock, and the general partner of Edge Group II would be entitled to
receive fewer than such number of shares of Common Stock, in exchange for their
respective interests in Edge Group II. Assuming an IPO price of $14.50 per
share (the IPO price at which the Offering must be completed in order for the
related condition to the consummation of the Combination Agreement to be
satisfied), the number of shares of Common Stock offered in exchange for all of
the outstanding Edge Group II Units would be 1,872,507 and for each Edge Group
II Unit would be 9,907 and the number of shares of Common Stock offered in
exchange for all of the general partner interests in Edge Group II would be
336,799. See "The Edge Group II Exchange Offer and Consent Solicitation--
Description."
Exchanging Limited Partners. Those limited partners of Edge Group II who
tender their respective Edge Group II Units in exchange for shares of Common
Stock will by so tendering have consented to, approved and ratified the terms
of the Edge Group II Exchange Offer and the other Combination Transactions,
including the number of shares of Common Stock that will be issued to the
general partners of Edge Group II. Accordingly, by tendering Edge Group II
Units, limited partners of Edge Group II will approve the overall terms and
structure of the Edge Group II Exchange Offer and will give up any right to
challenge any aspect of the general partners' and their affiliates' (including
Old Edge and its management) actions regarding the Combination Transactions,
including, without limitation, the allocation of shares among any parties
receiving shares in the Combination Transactions and further specifically
including any decisions regarding the shares of Common Stock being
10
<PAGE>
offered by the Company for the general partner interests in Edge Group II. See
"The Edge Group II Exchange Offer and Consent Solicitation--Description" and
"Risk Factors--Risks Associated with the Combination Transactions--Effect of
the Edge Group II Exchange Offer on Exchanging Limited Partners of Edge Group
II."
Nonexchanging Limited Partners. A limited partner may decline to exchange his
or her interest in Edge Group II for shares of Common Stock. Under such
circumstances neither the Edge Group II Partnership Agreement nor Connecticut
law provides for appraisal or similar rights for such nonexchanging partners.
See "The Combination Transactions--Dissenters' Rights" and "Risk Factors--Risks
Associated with the Combination Transactions--Effect of the Combination
Agreement Transactions on Nonexchanging Limited Partners of Edge Group II or
Gulfedge."
Consent Solicitation. This Joint Proxy and Consent Solicitation
Statement/Prospectus is also being furnished to the partners of Edge Group II
in connection with the solicitation by the general partners of Edge Group II of
written consents approving the Change of Edge Group II General Partners. A
partner's tender of his or her interest in Edge Group II will not be accepted
unless he or she also consents to the Change of Edge Group II General Partners
unless such requirement with respect to a specific partner's tender is waived
by the Company, which waiver will only be given if other partners of Edge Group
II whose aggregate contributions to capital of Edge Group II represent at least
60% of the aggregate contributions to capital of all partners of Edge Group II
have consented to the Change of Edge Group II General Partners. Receipt of the
consent to the Change of Edge Group II General Partners is a condition to the
consummation of the Edge Group II Exchange Offer. See "The Combination
Agreement--Conditions" and "The Edge Group II Exchange Offer and Consent
Solicitation--The Consent Solicitation."
Expiration Date; Amendments. The Edge Group II Exchange Offer and the
solicitation of consent to the Change of General Partner will be held open for
days (20 business days) from the date of this Joint Proxy and Consent
Solicitation Statement/Prospectus and will expire at 12:00 midnight, New York
City time on , 1997, unless extended by the Company. The Company
expressly reserves the right to delay, terminate or amend the Edge Group II
Exchange Offer at any time or from time to time as described in "The Edge Group
II Exchange Offer and Consent Solicitation--Expiration Date, Amendments, Etc."
THE GULFEDGE EXCHANGE OFFER
General. The Company is offering hereby, upon the terms and subject to the
conditions set forth herein and in the Gulfedge Letter of Acceptance furnished
to the two limited partners of Gulfedge, to exchange for each Gulfedge Unit
10,617 shares of Common Stock, which number is equal to the whole number
nearest the quotient of (i) 74,317 (the aggregate number of shares of Common
Stock (subject to adjustment to eliminate fractional shares) being offered
hereby in exchange for all the outstanding Gulfedge Units) divided by (ii) 7
(the total number of Gulfedge Units outstanding). Old Edge will continue as the
general partner of Gulfedge.
Exchanging Limited Partners. Those limited partners of Gulfedge who tender
their respective Gulfedge Units in exchange for shares of Common Stock will by
so tendering have consented to, approved and ratified the terms of the Gulfedge
Exchange Offer and the other Combination Transactions. Accordingly, by
tendering Gulfedge Units, limited partners of Gulfedge will approve the overall
terms and structure of the Gulfedge Exchange Offer and will give up any right
to challenge any aspect of Old Edge's and its officers', directors' and other
affiliates' actions regarding the Combination Transactions, including, without
limitation, the allocation of shares among any parties receiving shares in the
Combination Transactions. See "The Gulfedge Exchange Offer" and "Risk Factors--
Risks Associated with the Combination Transactions--Effect of the Gulfedge
Exchange Offer on Exchanging Limited Partners of Gulfedge."
Nonexchanging Limited Partners. A limited partner may decline to exchange his
or her interest in Gulfedge for shares of Common Stock. Under such
circumstances neither the Gulfedge Partnership Agreement nor Texas law provides
for appraisal or similar rights for such nonexchanging partners. See "The
Combination Transactions--Dissenters' Rights" and "Risk Factors--Risks
Associated with the Combination Transactions--Effect of the Combination
Agreement Transactions on Nonexchanging Limited Partners of Edge Group II or
Gulfedge."
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<PAGE>
Expiration Date; Amendments. The Gulfedge Exchange Offer will be held open
for days (20 business days) from the date of this Joint Proxy and Consent
Solicitation Statement/Prospectus and will expire at 12:00 midnight, New York
City time on , 1997, unless extended by the Company. The Company
expressly reserves the right to delay, terminate or amend the Gulfedge Exchange
Offer at any time or from time to time as described in "The Gulfedge Exchange
Offer--Expiration Date, Amendments, Etc."
THE EDGE GROUP PURCHASE OFFER
General. The Company is offering hereby, upon the terms and subject to the
conditions set forth herein and in the Edge Group Letter of Acceptance
furnished to Edge Group, to purchase Edge Group's Joint Venture Interest for
consideration consisting of an aggregate of 42,896 shares of Common Stock. Edge
Group is the sole offeree of the Edge Group Purchase Offer.
Expiration Date; Amendments. The Edge Group Purchase Offer will be held open
for days (20 business days) from the date of this Joint Proxy and Consent
Solicitation Statement/Prospectus and will expire at 12:00 midnight, New York
City time on , 1997, unless extended by the Company. The Company
expressly reserves the right to delay, terminate or amend the Edge Group
Purchase Offer at any time or from time to time as described in "The Edge Group
Purchase Offer--Expiration Date, Amendments, Etc."
ACCOUNTING TREATMENT
Management of the Company believes the Combination Transactions will be
accounted for as a reorganization of entities under common control because of
the high degree of common ownership of the stockholders of the Company and by
virtue of their direct ownership of the entities and interests exchanged.
Accordingly, management expects that the net assets acquired in the Combination
Transactions will be recorded at the historical cost basis of the affiliated
predecessor owners.
However, if less than 90% of the general and limited partner interests of
Edge Group II or Gulfedge are exchanged in their respective exchange offers,
then such exchange offer would not be considered a reorganization under common
control and purchase accounting would be applied. Under purchase accounting,
the net assets acquired in the Combination Transactions would be recorded at
the fair market value of the interests exchanged.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary of the material federal income tax consequences of the
Combination Agreement Transactions is based upon the opinion of Baker & Botts,
L.L.P.:
The Edge Group II Exchange Offer. Holders of limited partner interests in
Edge Group II who receive shares of Common Stock pursuant to the Edge Group II
Exchange Offer will not recognize any gain or loss in connection with such
exchange, subject to the assumptions and exceptions described under "Material
Federal Income Tax Consequences." Any losses previously allocated to an
exchanging holder of Edge Group II Units that such holder has not been able to
use because of the at-risk limitation or the basis limitation will disappear,
and any loss previously allocated to such holder that he or she has not been
able to use because of the passive loss limitation may be used upon the sale of
all of his or her shares of Common Stock to an unrelated person in an arm's
length transaction in which all realized gain or loss is otherwise recognized.
The Gulfedge Exchange Offer. Holders of Gulfedge Units who receive shares of
Common Stock pursuant to the Gulfedge Exchange Offer will not recognize any
gain or loss in connection with such exchange, subject to the assumptions and
exceptions described under "Material Federal Income Tax Consequences." Any
losses previously allocated to an exchanging holder of Gulfedge Units that such
holder has not been able to use because of the at-risk limitation or the basis
limitation will disappear, and any loss previously allocated to such holder
that he or she has not been able to use because of the passive loss limitation
may be used upon the sale of all of his or her shares of Common Stock to an
unrelated person in an arm's length transaction in which all realized gain or
loss is otherwise recognized.
The Edge Group Purchase Offer. Edge Group will not recognize any gain or loss
in connection with its receipt of shares of Common Stock pursuant to the Edge
Group Purchase Offer, subject to the assumptions and
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<PAGE>
exceptions described under "Material Federal Income Tax Consequences." If Edge
Group participates in the Edge Group Purchase Offer, any losses previously
allocated to an individual holder of an indirect interest in Edge Group that
such holder has not been able to use because of the at-risk limitation or the
basis limitation will disappear, and any loss previously allocated to such
holder that he or she has not been able to use because of the passive loss
limitation may be used upon the sale by Edge Group of all of its shares of
Common Stock, or upon the sale by the individual holder of all of his or her
indirect interest in Edge Group, to an unrelated person in an arm's length
transaction in which all realized gain or loss is otherwise recognized.
The Merger. No gain or loss will be recognized by Old Edge, the Company, or
the holders of Old Edge who receive shares of Common Stock pursuant to the
Merger, subject to the assumptions and exceptions described under "Material
Federal Income Tax Consequences."
The Company. The Company will not recognize any gain or loss pursuant to the
Combination Transactions. After the Combination Transactions, the Company will
be subject to tax on any net taxable income subsequently derived. Shareholders
of the Company will realize taxable income from the ownership of stock in the
Company to the extent the Company makes distributions to shareholders that are
out of the Company's current or accumulated earnings and profits or that are in
excess of the shareholders' basis in their stock. See "Material Federal Income
Tax Consequences."
INTERESTS OF CERTAIN PERSONS AND AFFILIATES IN THE COMBINATION TRANSACTIONS
Interests in Transfer of Edge Group II General Partner Interests. In exchange
for the general partner interests in Edge Group II, Mr. Sfondrini and Napamco
will receive the GP Exchange Shares, which are partially attributable to (i)
$1,332,450 of management fees that have been deferred to date because no cash
was available for payment and (ii) the estimated value of future management
fees (equal to 3% of Edge Group II's cash flow) that have not been earned to
date. The allocation of Common Stock attributable to those management fees
reduces the amount otherwise allocable to the limited partners of Edge Group
II. Notwithstanding the value of Edge Group II's interest in the Joint Venture,
it is unlikely Edge Group II would receive cash distributions from the Joint
Venture that would, in the near term, have allowed it to pay any of the accrued
management fees or distributions. Similarly, because of the uncertainty of the
level of future distributions from the Joint Venture, there can also be no
assurance as to what amount of such future management fees that the general
partners would have ever become entitled to receive. Pursuant to loan
agreements and prior assignments by Mr. Sfondrini and Napamco of a portion of
their rights to distributions and management fees from Edge Group II, certain
persons, including Mr. James C. Calaway and Ms. Marlin Geiger (the parents of
Mr. John E. Calaway, the Chief Executive Officer of the Company, and Mr. James
D. Calaway, the President of the Company) and Mr. David Benedict, a director of
the Company, will receive a portion of the GP Exchange Shares and will receive
repayment of borrowings under those agreements with the proceeds of a margin
loan to be entered into between Mr. Sfondrini and a representative of the
underwriters for the Offering. See "The Combination Transactions--Conflicts of
Interest, Interests of Certain Persons and Affiliates in the Combination
Transactions" and "Plan of Distribution."
As a general partner of Edge Group II, Mr. Sfondrini is personally liable for
its obligations. If the Change of the Edge Group II Partners is approved and
consummated, Mr. Sfondrini will not be liable for any future obligations of
Edge Group II. Upon becoming the general partner of Edge Group II, the Company
will succeed to the general partners' rights to accrued, but unpaid prior
management fees and receive future management fees and distributions, as
provided for in the Edge Group II Partnership Agreement.
Interests With Respect to Certain Employee Benefit Matters. In connection
with Combination Transactions and the Offering, the Company will enter into
employment agreements with each of Mr. James D. Calaway and Mr. John E. Calaway
and will adopt an incentive plan. Each executive officer and director of the
Company will receive compensation under one or more of those plans. The
Company's Certificate of Incorporation limits the
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<PAGE>
liability of directors to the Company and its stockholders and the Company
anticipates entering into indemnification agreements with the directors and
officers of the Company and purchasing directors' and officers' liability
insurance. See "Management--Director Compensation"; "--Officer and Director
Indemnification"; "--Employment Agreements" and "--Incentive Plans."
Registration Rights. Mr. Sfondrini and Napamco are the general partners of
Edge Holding Company Limited Partnership ("Edge Holding Company"), which owns
approximately 36.8% of the outstanding shares of Old Edge Common Stock. In
connection with the Offering and the Combination Transactions, the Company will
enter into a registration rights agreement which will provide for the
registration of shares of Common Stock acquired by Edge Holding Company
pursuant to the Merger for the purpose of distributing those shares to its
partners.
Interests of Mr. James C. Calaway. Upon consummation of the Offering, Mr.
James C. Calaway will receive shares of Common Stock pursuant to the James C.
Calaway Exchange. The Company intends to loan a portion of the proceeds from
the Offering to the Joint Venture, which will retire a $1.3 million loan to the
Joint Venture from Mr. James C. Calaway. Until such repayment occurs, Mr. James
C. Calaway will continue to accrue interests in the Joint Venture's prospects.
Following the date of repayment, he will accrue interests in wells drilled by
the Company in certain specified areas of mutual interest. Additionally, Mr.
James C. Calaway has retained certain of the J.C. Calaway Interests accrued to
date in many of the Joint Venture's existing exploratory projects. As a result,
Mr. James C. Calaway will benefit from the Company's continuing development of
these projects.
Interests in Obtaining Publicly Traded Stock. The consummation of the
Offering and the Combination Transactions will result in the creation of a
public market for the Common Stock. Directors and executive officers of Old
Edge and the Company, including John Sfondrini, who serves as a general partner
of Edge Group II and of each of the partners of Edge Group, will benefit from
the increased liquidity (including marginability) of their investment, with
respect to their holdings of Old Edge Common Stock and interests in Edge Group
II and Edge Group that are exchanged for Common Stock pursuant to the
Combination Agreement Transactions as will current holders of options to
purchase Old Edge Stock.
Indemnification. The Combination Agreement provides that the Company will
indemnify the general partners of the partners of Edge Group, the general
partners of Edge Group II and Gulfedge and the directors and officers of Old
Edge and will hold each of them harmless from and against certain losses,
damages, liabilities, claims, demands, deficiencies, judgments and settlements
resulting from or arising out of the Combination Agreement Transactions, and
expressly provides for such indemnification regardless of any acts of
negligence or gross negligence on the part of any of the parties indemnified
thereby.
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SUMMARY HISTORICAL SUPPLEMENTALLY COMBINED AND PRO FORMA FINANCIAL AND
OPERATING DATA OF THE COMPANY
The following table sets forth summary historical supplementally combined and
pro forma financial information of the Company as of September 30, 1996 , for
the five years ended December 31, 1995 and for the nine months ended September
30, 1995 (unaudited) and 1996. The financial information presented below, as of
September 30, 1996 and for the nine months ended September 30, 1995 and 1996,
reflects all adjustments, consisting of normal and recurring adjustments, that
in the opinion of management are necessary for a fair presentation of the
Company's combined results of operations and financial position for such
periods. The information shown for the nine-month periods is not necessarily
indicative of full-year results. The following table also sets forth unaudited
pro forma financial information of the Company for the Combination Transactions
as of September 30, 1996 and the nine months then ended and for the year ended
December 31, 1995. The unaudited pro forma combined financial information is
not necessarily indicative of the results of future operations of the Company.
The following financial information should be read in conjunction with
"Capitalization," "Selected Historical Supplementally Combined Financial and
Operating Data--The Company," "Selected Pro Forma Combined Financial and
Operating Data--The Company," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--The Company," the unaudited Pro
Forma Combined Financial Statements of the Company and the related notes
thereto and the Supplementally Combined Financial Statements of the Company and
the related notes thereto included elsewhere in this Joint Proxy and Consent
Solicitation Statement/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- ------------------------------
HISTORICAL HISTORICAL
------------------------------------------ -------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(1) 1995 1996 1996(1)
------- ------- ------- ------ ------- --------- ----------- ------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Oil and natural gas
revenue............... $ 423 $ 572 $ 1,455 $1,994 $ 2,040 $ 2,040 $ 1,377 $ 5,105 $ 5,105
------- ------- ------- ------ ------- ------- ------- ------- -------
Costs and expenses:
Oil and natural gas
operating expenses.. 52 76 167 305 686 686 502 711 711
Depreciation,
depletion and
amortization........ 325 467 441 593 813 813 525 1,213 1,213
General and
administrative...... 1,577 2,228 1,734 2,026 2,484 2,484 2,070 2,155 2,155
------- ------- ------- ------ ------- ------- ------- ------- -------
Total operating
expenses.......... 1,954 2,771 2,342 2,924 3,983 3,983 3,097 4,079 4,079
------- ------- ------- ------ ------- ------- ------- ------- -------
Operating income
(loss)................ (1,531) (2,199) (887) (930) (1,943) (1,943) (1,720) 1,026 1,026
Interest expense....... (448) (679) (635) (385) (315) (315) (195) (657) (657)
Gain on sale of oil
and gas property...... 115 -- 247 2,284 3,337 3,337 3,134 -- --
------- ------- ------- ------ ------- ------- ------- ------- -------
Net income (loss)...... (1,864) (2,878) (1,275) 969 1,079 1,079 1,219 369 369
Income tax expense..... (292) (397) (422) (141)
Minority interest...... 1,090 1,868 721 (543) (576) (623) (123)
------- ------- ------- ------ ------- ------- ------- ------- -------
Net income (loss)...... $ (774) $(1,010) $ (554) $ 134 $ 106 $ 1,079 $ 174 $ 105 $ 369
======= ======= ======= ====== ======= ======= ======= ======= =======
Pro forma net income
(loss) per share
(unaudited) (2)....... $ (0.16) $ (0.21) $ (0.12) $ 0.03 $ 0.02 $ 0.23 $ 0.04 $ 0.02 $ 0.08
======= ======= ======= ====== ======= ======= ======= ======= =======
Pro forma weighted
average shares
outstanding
(unaudited) (2)....... 4,700 4,700 4,700 4,700 4,700 4,700 4,700 4,700 4,700
STATEMENT OF CASH FLOW
DATA:
Net cash (used)
provided by operating
activities ........... (743) (2,035) (1,046) (604) (927) (927) (124) 2,822 2,822
Net cash (used)
provided by investing
activities ........... (2,184) (149) (272) 291 (1,154) (1,154) 1,266 (5,651) (5,651)
Net cash (used)
provided by financing
activities ........... 5,304 230 1,421 (425) 1,932 1,932 (1,281) 3,559 3,559
OTHER OPERATING DATA:
EBITDA (3)(5).......... $ (1) $ 136 $ 522 $1,404 $ 1,631 $ 2,207 $ 1,316 $ 2,116 $ 2,239
Operating cash flow
(4)(5)................ (1,654) (2,411) (1,080) (722) (1,445) (1,445) (1,390) 1,611 1,611
Capital expenditures... 6,597 3,811 3,660 6,809 8,512 8,512 5,407 7,881 7,881
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------
ACTUAL AS ADJUSTED(6)
------------ ----------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................ $ (1,630) $ 18,764
Property and equipment, net.................... 12,384 12,384
Total assets................................... 18,435 36,496
Long-term debt, including current maturities... 10,449 499
Equity......................................... (570) 30,977
</TABLE>
15
<PAGE>
- --------
(1) Gives effect to the Combination Transactions reflecting the elimination of
minority interest and pro forma income taxes as if such transactions had
been consummated as of January 1, 1995. Assuming full acceptance of the
respective exchanges and purchase transactions and reorganization
accounting. Refer to Note 3 to the unaudited Pro Forma Combined Financial
Statements for the effects of varying levels of possible acceptance of the
exchange offers.
(2) Pro forma net income (loss) per share has been completed assuming for all
periods presented the estimated 4,700,000 shares of Common Stock which may
be issued in connection with the Combination Transactions were outstanding.
(3) EBITDA represents earnings before interest expense, income taxes,
depreciation, depletion and amortization.
(4) Operating cash flow represents cash flows from operating activities prior
to changes in assets and liabilities.
(5) Management of the Company believes that EBITDA and operating cash flow may
provide additional information about the Company's ability to meet its
future requirements for debt service, capital expenditures and working
capital. EBITDA and operating cash flow are financial measures commonly
used for the Company's industry and should not be considered in isolation
or as a substitute for net income, operating income, cash flows from
operating activities or any other measure of financial performance
presented in accordance with generally accepted accounting principles or as
a measure of a company's profitability or liquidity. Because EBITDA
excludes some, but not all, items that affect net income and operating cash
flow excludes changes in assets and liabilities and these measures may vary
among companies, the EBITDA and operating cash flow data presented above
may not be comparable to similarly titled measures of other companies.
(6) Assumes the issuance in the Offering of 2,000,000 shares of Common Stock at
$16.00 per share and the application of the net proceeds therefrom.
SUMMARY SUPPLEMENTALLY COMBINED OPERATING DATA OF THE COMPANY
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PRODUCTION VOLUMES:
Oil and condensate
(MBbls)................ 5 5 26 61 64 47 81
Natural gas (MMcf)...... 189 273 457 588 513 337 1,557
Natural gas equivalent
(MMcfe)................ 219 301 611 952 897 616 2,043
AVERAGE SALES PRICES:
Oil and condensate ($
per Bbls).............. $18.75 $19.52 $17.52 $17.66 $15.88 $ 16.61 $ 19.00
Natural gas ($ per Mcf). 1.69 1.77 2.20 1.57 2.16 1.79 2.29
Natural gas equivalent
($ per Mcfe)........... 1.95 1.90 2.38 2.09 2.28 2.23 2.50
AVERAGE COSTS ($ PER
MCFE):
Oil and natural gas
operating expenses..... $ 0.24 $ 0.25 $ 0.27 $ 0.32 $ 0.72 $ 0.81 $ 0.35
Depreciation, depletion
and amortization....... 0.00 0.16 0.24 0.42 0.62 0.39 0.47
Oil and natural gas
operating profit....... 1.71 1.49 1.87 1.35 1.04 1.03 1.63
NUMBER OF WELLS DRILLED:
Gross................... -- 6 12 13 35 19 35
Net(1).................. -- 0.54 0.27 0.42 13.51 4.61 14.67
</TABLE>
- --------
(1) Wells in which the Company holds an after payout working interest are not
included because such interests had not been earned at the time of
drilling. The percentage of the Company's wells in which it holds solely an
after payout working interest has substantially decreased in the last two
years.
16
<PAGE>
SUMMARY OIL AND NATURAL GAS RESERVE DATA OF THE COMPANY
The following table sets forth summary data with respect to the Company's
estimated historical proved oil and natural gas reserves as of the dates
indicated and the estimated future net cash flows attributable thereto. Such
estimates are prepared on a pro forma basis after giving effect to the
Combination Transactions. See "The Combination Transactions." All information
in this Joint Proxy and Consent Solicitation Statement/Prospectus relating to
estimated net proved oil and natural gas reserves and the estimated future net
revenues attributable thereto is based upon the reserve report (the "Ryder
Scott Report") prepared by Ryder Scott Company, independent petroleum engineers
("Ryder Scott"). A summary of the Ryder Scott Report as of September 30, 1996
is included as Appendix B to this Joint Proxy and Consent Solicitation
Statement/Prospectus. All calculations of estimated net proved reserves have
been made in accordance with the rules and regulations of the Securities and
Exchange Commission (the "Commission") and, except as otherwise indicated, give
no effect to federal or state income taxes otherwise attributable to estimated
future net revenues from the sale of oil and natural gas. There are numerous
uncertainties inherent in estimating quantities of proved reserves and in
projecting future rates of production and timing of development expenditures,
including many factors beyond the control of the Company. See "Risk Factors--
Risks Associated with the Business of the Company--Uncertainty of Reserve
Information and Future Net Revenue Estimates" and "Business of the Company--Oil
and Natural Gas Reserves."
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
AS OF
SEPTEMBER 30,
1993 1994 1995 1996(1)
------ ------- ------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
NET PROVED RESERVES:
Oil (MBbls)............................. 170 368 709 831
Natural gas (MMcf)...................... 2,550 3,673 8,821 13,564
Total (MMcfe)........................... 3,570 5,881 13,075 18,550
NET PROVED DEVELOPED RESERVES:
Oil (MBbls)............................. 170 261 653 789
Natural gas (MMcf)...................... 2,550 3,548 6,992 10,985
Total (MMcfe)........................... 3,570 5,114 10,910 15,719
Estimated future net revenues before
income taxes............................. $7,018 $10,561 $24,463 $35,281
Present value of estimated future net
revenues before income taxes(2).......... $5,778 $ 7,946 $17,443 $25,656
Standardized measure of discounted future
net cash flows(3)........................ $5,266 $ 6,872 $13,946 $19,984
</TABLE>
- --------
(1)The prices used as of September 30, 1996 averaged $21.17 per Bbl of oil and
$2.01 per Mcf of natural gas.
(2) The present value of estimated future net revenues attributable to the
Company's reserves was prepared using constant prices as of the calculation
date, discounted at 10% per annum on a pre-tax basis.
(3) The standardized measure of discounted future net cash flows represents the
present value of estimated future net revenues after income taxes
discounted at 10% per annum.
For financial and operating data concerning the Joint Venture, Old Edge, Edge
Group II, Gulfedge and Edge Group's Joint Venture Interest, see "Selected
Historical Financial and Operating Data--The Joint Venture"; "--Old Edge"; "--
Edge Group II"; and "--Edge Group's Joint Venture Interest."
17
<PAGE>
OWNERSHIP OF THE JOINT VENTURE; CURRENT STRUCTURE*
[Description of Diagram]
Diagram depicting organizational structure and percentage
interests owned in the Joint Venture setting forth the
following information.
<TABLE>
<CAPTION>
PERCENTAGE INTEREST HELD BY
------------------- -------
<C> <S>
2.3% Gulfedge, which is owned by limited partners and Old
Edge as its general partner
29.1% Old Edge, which is owned by Old Edge Shareholders
67.3% Edge Group II, which is owned by general partners and
limited partners
1.3% Edge Group, which is owned by general partners
</TABLE>
- --------
* This illustration shows the initial sharing ratio of the Joint Venture, which
determines the allocation of net income and other items, as well as the
allocation of distributable cash. Such sharing ratio is applicable until the
value of cash and carried interests and other property distributed by the
Joint Venture to Old Edge, Edge Group II, Gulfedge and Edge Group is equal to
$5,750,000, $13,324,500, $451,500 and $258,000, respectively (the "Sharing
Ratio Shift A Amounts"), which has not yet occurred. At such time, the
sharing ratio shifts to 50%, 47.5%, 1.6% and 0.9%, respectively, which
continues until the value of cash and carried interests and other property
distributed by the Joint Venture to each venturer is six times the Sharing
Ratio Shift A Amounts (the "Sharing Ratio Shift B Amounts"). If the Sharing
Ratio Shift B Amounts were to be met, the applicable sharing ratio for the
duration of the Joint Venture would be 55%, 42.7%, 1.5% and 0.8%,
respectively.
18
<PAGE>
OWNERSHIP OF THE COMPANY; POST-COMBINATION*
[Description of Diagram]
Diagram depicting percentage interests owned in the
Company and setting forth the following information.
<TABLE>
<CAPTION>
PERCENTAGE INTEREST HELD BY
------------------- -------
<C> <S>
1.1% Former Gulfedge Partners
35.1% Former Old Edge Shareholders
30.0% Public
32.5% Former Edge Group II Partners
0.7% Edge Group
0.6% J.C. Calaway
</TABLE>
- --------
* This illustration assumes that 2,000,000 shares of Common Stock are issued in
the Offering, that 98% of the Edge Group II partners accept the Edge Group II
Exchange Offer and that all of the other offerees accept their respective
offers. The 98% acceptance level is shown only to illustrate a post-
Combination Transactions structure in which the Company does not acquire all
the limited partner interests in Edge Group II. If all offerees accept their
respective offers, the percentage ownership in the Company will be as
follows: Former Old Edge Shareholders: 34.8%; Former Edge Group II Partners:
33.0%; Former Gulfedge Partners: 1.1%; Edge Group 0.7%; J.C. Calaway: 0.6%
(based on the December 31, 1996 Reserve Report and assuming an IPO price of
$16.00 per share); and Public: 29.8%.
19
<PAGE>
OWNERSHIP OF THE JOINT VENTURE; POST-COMBINATION*
[Description of Diagram]
Diagram depicting organizational structure and percentage
interests owned in the Joint Venture setting forth the
following information.
<TABLE>
<CAPTION>
PERCENTAGE INTEREST HELD BY
------------------- -------
<C> <S>
29.1% Old Edge
2.3% Gulfedge, which is owned 1% by Old Edge and 99% by
the Company
1.3% Company
67.3% Edge Group II, which is owned 2% by non-exchanging
limited partners and 98% by the Company
</TABLE>
- --------
* This illustration shows the initial sharing ratio of the Joint Venture and
assumes that 98% of the Edge Group II partners accept the Edge Group II
Exchange Offer and that all of the other offerees accept their respective
offers. The 98% acceptance level is shown only to illustrate a post-
Combination Transaction structure in which the Company does not acquire all
the limited partner interests in Edge Group II.
20
<PAGE>
RISK FACTORS
The risk factors set forth below, as well as the other information contained
in this Joint Proxy and Consent Solicitation Statement/Prospectus, should be
considered carefully in evaluating whether to (i) vote for or against approval
of the Merger by shareholders of Old Edge, (ii) accept or reject the Edge
Group II Exchange Offer by the limited partners of Edge Group II, (iii) accept
or reject the Gulfedge Exchange Offer by the limited partners of Gulfedge and
(iv) accept or reject the Edge Group Purchase Offer by Edge Group. This Joint
Proxy and Consent Solicitation Statement/Prospectus contains certain forward-
looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of any number of
factors, including the risk factors set forth below.
RISKS ASSOCIATED WITH THE COMBINATION TRANSACTIONS
Conflicts of Interest
Management of Old Edge and the general partners of Edge Group II had
inherent conflicts of interest in structuring and approving the terms of the
Combination Transactions and in recommending acceptance of such transactions.
These are generally described in "The Combination Transactions--Conflicts of
Interest; Interests of Certain Persons and Affiliates in the Combination
Transactions."
The exchange in the Combination Agreement Transactions of shares of Common
Stock among the four venturers and their equityholders involved inherent
conflicts of interest, as any increase in the number of shares of Common Stock
allocated to one group of investors proportionally decreased the number of
shares allocated to the other groups of investors. Moreover, because the
number of shares of Common Stock being offered in exchange for all of the
partner interests in Edge Group II was initially determined based on a
percentage of the aggregate number of shares of Common Stock being offered in
connection with the Combination Agreement Transactions, the exchange of shares
of Common Stock for the general partner interests in Edge Group II reduced the
number of shares of Common Stock being offered in exchange for the limited
partner interests in Edge Group II. The Combination Agreement Transactions
will allow the general partners of Edge Group II to receive Common Stock in
respect of both management fees that have been deferred to date because no
cash was available for payment, as well as the estimated value of future
management fees that have not been earned to date. The exchange of Common
Stock in respect of such management fees reduces the amount otherwise
allocable to the limited partners of Edge Group II. Notwithstanding the value
of Edge Group II's interest in the Joint Venture, it is unlikely Edge Group II
would receive cash distributions from the Joint Venture that would, in the
near term, have allowed it to pay any of the accrued management fees or
distributions. Similarly, because of the uncertainty of the level of future
distributions from the Joint Venture, there can also be no assurance as to
what amount of such future management fees that the general partners would
have ever become entitled to receive.
Benefits of the Combination Transactions to Certain Persons
Management of Old Edge, the general partners of Edge Group II and their
affiliates and family members will receive substantial benefits if the
Combination Transactions are consummated, which benefits are described in "The
Combination Transactions--Conflicts of Interest; Interests of Certain Persons
and Affiliates in the Combination Transactions." The members of management of
Old Edge that negotiated on its behalf will also benefit from the Combination
Transactions as a result of their positions as executive officers and
directors of the Company. Mr. Sfondrini will also benefit from the Combination
Transactions as a result of his position as a director of the Company. See "--
No Independent Representation of Unaffiliated Parties," "The Combination
Transactions--Background of and Reasons for the Combination Transactions" and
"The Combination Transactions--Conflicts of Interest; Interests of Certain
Persons and Affiliates in the Combination Transactions."
No Independent Representation of Unaffiliated Parties
The terms of the Combination Agreement Transactions were determined through
negotiations between management of Old Edge and Mr. Sfondrini. As a result of
the affiliated relationship among the parties, such
21
<PAGE>
negotiations may not be viewed as arm's-length negotiations. No attempt was
made to solicit offers for any of the respective interests in the Joint
Venture or other entities being acquired in the Combination Transactions. No
independent representative or counsel has acted on behalf of Edge Group, the
unaffiliated shareholders of Old Edge and the unaffiliated limited partners of
Edge Group II or Gulfedge in connection with determining the terms of the
Combination Agreement Transactions, nor did management of Old Edge or Mr.
Sfondrini negotiate the terms of the Combination Transactions with any such
unaffiliated shareholders or limited partners. Gulfedge was not represented in
the negotiations. The shareholders of Old Edge on the one hand and Edge Group
and the limited partners of Edge Group II on the other hand are therefore
relying on management of Old Edge and Mr. Sfondrini, respectively, to fairly
establish the terms of the Combination Transactions. There is a possibility
that, if such representatives or unaffiliated shareholders or limited partners
had taken part in such determination or negotiation, the terms of the
Combination Transactions might have been different and, perhaps, more
favorable to the unaffiliated shareholders or limited partners. See "--
Conflicts of Interest," "The Combination Transactions--Background of and
Reasons for the Combination Transactions" and "The Combination Transactions--
Conflicts of Interest; Interests of Certain Persons and Affiliates in the
Combination Transactions."
No Fairness Opinion Obtained
Although management of Old Edge and Mr. Sfondrini had inherent conflicts of
interest in structuring the terms of the Combination Agreement Transactions,
neither the board of directors of Old Edge nor the general partners of Edge
Group II obtained an opinion as to the fairness of the terms of the
Combination Agreement Transactions from a financial point of view to the
shareholders of Old Edge, to the limited partners of Edge Group II or Gulfedge
or to Edge Group. Management of Old Edge and Mr. Sfondrini decided not to
obtain a fairness opinion because of their belief that the transactions were
fair to their respective parties and because of the costs associated with
obtaining a fairness opinion. If such a fairness opinion had been sought and
obtained, the management of Old Edge and Mr. Sfondrini would have received an
independent judgement as to whether or not the transactions were fair to their
respective parties; if such a fairness opinion had been sought and not
obtained, the terms of the Combination Transactions might have been
renegotiated. See "--Conflicts of Interest," "--No Independent Representation
of Unaffiliated Parties," "The Combination Transactions--Background of and
Reasons for the Combination Transactions," "The Merger and the Special
Meeting--Recommendation of the Board of Directors," "The Edge Group II
Exchange Offer and Consent Solicitation--Recommendation of the General
Partners of Edge Group II" and "The Gulfedge Exchange Offer--Recommendation of
the General Partner of Gulfedge."
Change in Nature of Investment; Certain Anti-Takeover Provisions; No Prior
Public Market
If the Combination Agreement Transactions are consummated, investors who
elect to receive shares of Common Stock will experience a change in the nature
of their investment. An investment in shares of Common Stock would constitute
a fundamental change in the nature of the investment of the limited partners
of Edge Group II and Gulfedge and of Edge Group, including the change from an
investment in a partnership with a limited duration to an investment in a
corporation with perpetual duration. These changes also include significant
modifications to the rights of the limited partners of Edge Group II and
Gulfedge and of Edge Group with respect to voting, meetings of holders,
dissolution and liquidation and access to investor lists and other books and
records. Also, for each entity, there will be changes with respect to the
management, taxation of the entity and its investors and marketability and
transferability of the equity interests. If the Combination Agreement
Transactions are consummated, shareholders of Old Edge, which is a Texas
corporation, would become stockholders of the Company, which is a Delaware
corporation, and would therefore experience a change in their rights from
those of shareholders of a Texas corporation to those of stockholders of a
Delaware corporation. In addition, the Company's Certificate of Incorporation
and Bylaws and the Delaware General Corporation Law differ from those of Old
Edge, including provisions that may have the effect of delaying, deferring or
preventing a change of control of the Company. These provisions, among other
things, provide for a classified board of directors with staggered terms,
restrict the ability of stockholders to take action by written consent,
authorize the
22
<PAGE>
board of directors to set the terms of preferred stock and impose restrictions
on business combinations with certain interested parties. See "Comparison of
Securityholder Rights."
Although stockholders of the Company are entitled to vote on more matters
than limited partners of Edge Group II and Gulfedge, upon completion of the
Offering and the Combination Transactions, members of the Company's board of
directors and their affiliates will own approximately 39% (38% if the
Underwriters' over-allotment option in connection with the Offering is
exercised in full) of the outstanding shares of Common Stock (assuming an
initial public offering price of $16.00 per share). As a result, those
stockholders will be able to significantly influence and possibly control the
outcome of certain matters requiring a stockholder vote, including the
election of directors. Such ownership of Common Stock may have the effect of
delaying, deferring or preventing a change of control of the Company and may
adversely affect the voting and other rights of other stockholders. See
"Security Ownership of Certain Beneficial Owners and Management."
Prior to the Offering, there has been no public market for the shares of
Common Stock to be issued in the Combination Transactions. The completion of
the Offering provides no assurance that an active trading market for the
Common Stock will develop or, if developed, that it will be sustained. The
market price of the Common Stock could also be subject to significant
fluctuation and may be influenced by many factors, including variations in
results of operations, variations in natural gas and oil prices, investor
perceptions of the Company and its industry and general economic and other
conditions.
Effect of the Combination Agreement Transactions on Nonexchanging Limited
Partners of Edge Group II or Gulfedge
Upon consummation of the Combination Agreement Transactions, the Company, as
general partner of Edge Group II, and Old Edge, as general partner of
Gulfedge, will owe fiduciary duties to any limited partners of Edge Group II
or Gulfedge, respectively, that do not elect to exchange their limited partner
interests for shares of Common Stock (such nonexchanging limited partners are
collectively referred to as the "Nonexchanging Partners"). If the Edge Group
Purchase Offer is not consummated, Old Edge, as managing venturer of the Joint
Venture, will owe fiduciary duties to Edge Group, as well as to Gulfedge and
Edge Group II. Management of the Company will also owe fiduciary duties to the
stockholders of the Company and will themselves be stockholders and/or option
holders of the Company. Conflicts of interest may arise between the Company
and its stockholders on one hand and such nonexchanging partners on the other
hand.
Nonexchanging Partners will continue as limited partners of Edge Group II or
Gulfedge, as applicable. In such event, both entities would continue in
existence following the Combination Agreement Transactions and would retain
their interest in the Joint Venture. If Edge Group rejects the Edge Group
Purchase Offer, it will retain its interest in the Joint Venture. Certain
aspects of the expected distribution of assets of the Joint Venture during the
two-year windup period, which began December 31, 1996, are described in "The
Combination Transactions--Effect of the Combination Transactions" and
"Information Concerning the Joint Venture."
The Company and Old Edge as the general partner of Edge Group II and
Gulfedge, respectively, and Mr. Sfondrini as the general partner of each of
the partners of Edge Group, will have conflicts of interest with respect to
decisions regarding oil and gas operations of the Joint Venture, including
whether to participate in certain opportunities. See "The Combination
Transactions--Conflicts of Interest; Interests of Certain Persons and
Affiliates in the Combination Transactions--Conflicts of Interest With Respect
to the Future Operation and Liquidation of the Joint Venture." The Company and
Old Edge currently contemplate that Edge Group II and Gulfedge, and Mr.
Sfondrini currently contemplates that Edge Group, would retain any non-cash
assets distributed by the Joint Venture, and only distribute any cash received
that is in excess of operating and development expenses. However, Edge Group
II, Gulfedge or Edge Group could determine to distribute such non-cash assets,
including working interests in oil and gas properties. Limited partners to
whom working interests in oil and gas properties are distributed will lose
their limited liability status with respect to such interests, and operation
of such properties may involve substantial risks, including the risk of
incurring costs of reimbursement to operators of general and administrative
costs that may represent a proportionately greater share of the revenues
23
<PAGE>
attributable to such properties than the general and administrative expenses
reimbursed by the Joint Venture prior to its dissolution. The Company will
receive its proportionate interest in any such distribution as general partner
and limited partner with respect to all partner interests exchanged for shares
of Common Stock pursuant to the Combination Agreement Transactions.
The Company expects that it will generally continue to develop the Joint
Venture's existing properties and identified prospects of the Joint Venture.
New projects in new areas will generally be conducted in Old Edge or another
wholly owned subsidiary of the Company, and not through the Joint Venture. To
the extent they do not exchange in the Combination Agreement Transactions,
limited partners and Edge Group generally will not participate in new
prospects or operations unrelated to the Joint Venture's operations as of
December 31, 1996, except as provided for in the provisions of the Joint
Venture Agreement, as amended, with respect to 150 square miles in the Belco
Project Area (the "Belco Right") and another 50 square miles of 3-D seismic
data to be selected following dissolution (the "Fifty Square Mile Right"). See
"Information Concerning the Joint Venture."
Effect of the Edge Group II Exchange Offer on Exchanging Limited Partners of
Edge Group II
Those limited partners of Edge Group II who tender their respective Edge
Group II Units in exchange for shares of Common Stock will by so tendering
have consented to, approved and ratified the terms of the Edge Group II
Exchange Offer and the other Combination Transactions, including the number of
shares of Common Stock that will be issued to the general partners of Edge
Group II. Accordingly, by tendering Edge Group II Units, limited partners of
Edge Group II will approve the overall terms and structure of the Edge Group
II Exchange Offer and will give up any right to challenge any aspect of the
general partners' and their affiliates' (including Old Edge and its
management) actions regarding the Combination Transactions, including without
limitation, the allocation of shares among any parties receiving shares in the
Combination Transactions and further specifically including any decisions
regarding the shares of Common Stock being offered by the Company for the
general partner interest in Edge Group II. See "The Edge Group II Exchange
Offer and Consent Solicitation--Description."
Effect of the Gulfedge Exchange Offer on Exchanging Limited Partners of
Gulfedge
Those limited partners of Gulfedge who tender their respective Gulfedge
Units in exchange for shares of Common Stock will by so tendering have
consented to, approved and ratified the terms of the Gulfedge Exchange Offer
and the other Combination Transactions. Accordingly, by tendering Gulfedge
Units, limited partners of Gulfedge will approve the overall terms and
structure of the Gulfedge Exchange Offer and will give up any right to
challenge any aspect of Old Edge's and it's officers', directors' and other
affiliates' actions regarding the Combination Transactions, including, without
limitation the allocation of shares among any parties receiving shares in the
Combination Transactions. See "The Gulfedge Exchange Offer."
No Assurance as to Offering Price
Although the Combination Agreement provides for the sale by the Company of
shares in the Offering at a $14.50 minimum public offering price per share of
Common Stock as a condition to closing, there can be no assurance as to what
price will be achieved in the public offering or as to what price the Common
Stock will trade thereafter. As of the date of this Joint Proxy and Consent
Solicitation Statement/Prospectus, the Company has not entered into any
agreement with the underwriters for the Offering and the price achieved in the
Offering will be dependent upon market conditions and other factors beyond the
control of the Company.
Restrictions on Resale; Shares Eligible for Future Sale
The holders of all of the shares of Common Stock issued in the Combination
Transactions will be restricted from disposing any shares of Common Stock for
a period of 180 days from the date of the final prospectus relating to the
Offering without the prior consent of the representatives of the underwriters
for the Offering and
24
<PAGE>
the Company. In addition, Rule 145 under the Securities Act places certain
restrictions on the resale of Common Stock received in the Merger by persons
who are "affiliates" of Old Edge or the Company. An affiliate of a party is
any person who controls, is controlled by or is under common control with such
party. These restrictions on resale prohibit any party or affiliate from
reselling stock except in accordance with the volume restrictions of Rule 144.
The volume restrictions of Rule 144 permit a person to sell, during any three-
month period, no more than the greater of one percent of the outstanding class
of securities or the average weekly trading volume of such class of security
for four weeks prior to the sale. Additionally, there are restrictions on the
manner of sale, which generally require the securities be sold in open market
transactions without prior solicitations of buyers or payment of consideration
other than customary brokerage commissions. These restrictions terminate for
sales made two years or more after the effective date of the Merger with
respect to parties and affiliates who are not also affiliated with the Company
(and have not been affiliated with the Company for three months preceding any
such sale). All persons who are affiliates of parties to the Merger will
receive shares of Common Stock bearing a restrictive legend against sales that
are not in compliance with Rule 145. Affiliates of the Company that receive
Common Stock in the other Combination Transactions will also generally be
restricted from resales other than in accordance with the volume, manner of
sale and notice provisions of Rule 144.
Following the 180-day period referred to in the preceding paragraph,
substantially all of the shares of Common Stock issued in the Combination
Agreement Transactions will be eligible for resale without restriction other
than pursuant to Rules 144 and 145. The representatives of the underwriters
for the Offering may also give their consent to sales prior to the end of such
180-day period at any time and without public notice. In addition, 97,844
shares of Common Stock may be issued pursuant to currently outstanding options
that will be assumed by the Company from a predecessor at a weighted average
exercise price of $3.06 per share, 350,000 shares of Common Stock may be
issued pursuant to options that will be issued in connection with the
Combination Transactions at an exercise price equal to the IPO price and
250,585 shares of Common Stock will be issued pursuant to restricted stock
awards granted in connection with the Combination Transactions. There has
previously been no source of liquidity for the investments in respect of which
shares are being issued in the Combination Transactions. Future sales of
substantial amounts of Common Stock in the public market following the
Offering could adversely affect the market price of the Common Stock.
RISKS ASSOCIATED WITH THE BUSINESS OF THE COMPANY
Dependence on Exploratory Drilling Activities
The success of the Company will be materially dependent upon the continued
success of its exploratory drilling program, which will be funded in part with
the proceeds of the Offering. Exploratory drilling involves numerous risks,
including the risk that no commercially productive natural gas or oil
reservoirs will be encountered. The cost of drilling, completing and operating
wells is often uncertain, and drilling operations may be curtailed, delayed or
cancelled as a result of a variety of factors, including unexpected drilling
conditions, pressure or irregularities in formations, equipment failures or
accidents, adverse weather conditions, compliance with governmental
requirements and shortages or delays in the availability of drilling rigs and
the delivery of equipment. Although the Company believes that its use of 3-D
seismic data and other advanced technology should increase the probability of
success of its exploratory wells and should reduce average finding costs
through elimination of prospects that might otherwise be drilled solely on the
basis of 2-D seismic data and other traditional methods, exploratory drilling
remains a speculative activity. Even when fully utilized and properly
interpreted, 3-D seismic data and visualization techniques only assist
geoscientists in identifying subsurface structures and do not allow the
interpreter to know if hydrocarbons will in fact be present in such structures
if they are drilled. In addition, the use of 3-D seismic data and such
technologies requires greater predrilling expenditures than traditional
drilling strategies and the Company could incur losses as a result of such
expenditures. The Company's future drilling activities may not be successful
and, if unsuccessful, such failure will have an adverse effect on the
Company's future results of operations and financial condition. Prospects may
initially be identified through a number of methods, some of which do not
include interpretation of 3-D or other seismic data, and in which prospects
the Company may not have any option or lease rights. Although the Company has
identified numerous drilling prospects, there can be no assurance that such
prospects will be drilled
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or that natural gas or oil will be produced from any such identified prospects
or any other prospects. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--The Company."
Volatility of Natural Gas and Oil Prices
The Company's revenues, profitability, future growth and ability to borrow
funds or obtain additional capital, as well as the carrying value of its
properties, are substantially dependent upon prevailing prices of natural gas
and oil. Historically, the markets for natural gas and oil have been volatile,
and such markets are likely to continue to be volatile in the future. Prices
for natural gas and oil are subject to wide fluctuation in response to
relatively minor changes in the supply of and demand for natural gas and oil,
market uncertainty and a variety of additional factors that are beyond the
control of the Company. These factors include the level of consumer product
demand, weather conditions, domestic and foreign governmental regulations, the
price and availability of alternative fuels, political conditions in the
Middle East, the foreign supply of natural gas and oil, the price of foreign
imports and overall economic conditions. It is impossible to predict future
natural gas and oil price movements with certainty. Declines in natural gas
and oil prices may materially adversely affect the Company's financial
condition, liquidity, ability to finance planned capital expenditures and
results of operations. Lower natural gas and oil prices also may reduce the
amount of natural gas and oil that the Company can produce economically. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--The Company" and "Business of the Company--Marketing."
The Company periodically reviews the carrying value of its oil and natural
gas properties under the full cost accounting rules of the Commission. Under
these rules, capitalized costs of proved oil and natural gas properties may
not exceed the present value of estimated future net revenues from proved
reserves, discounted at 10%. Application of this "ceiling" test generally
requires pricing future revenue at the unescalated prices in effect as of the
end of each fiscal quarter and requires a write down for accounting purposes
if the ceiling is exceeded, even if prices declined for only a short period of
time. The Company may be required to write down the carrying value of its oil
and natural gas properties when oil and natural gas prices are depressed or
unusually volatile. If a write down is required, it would result in a charge
to earnings and would not impact cash flow from operating activities.
In order to reduce its exposure to short-term fluctuations in the price of
natural gas, the Company periodically enters into hedging arrangements. The
Company's hedging arrangements apply to only a portion of its production and
provide only partial price protection against declines in natural gas prices.
Such hedging arrangements may expose the Company to risk of financial loss in
certain circumstances, including instances where production is less than
expected, the Company's customers fail to purchase contracted quantities of
oil or natural gas or a sudden, unexpected event materially impacts oil or
natural gas prices. In addition, the Company's hedging arrangements limit the
benefit to the Company of increases in the price of natural gas. Total Mcfs of
natural gas purchased and sold under swap arrangements during the nine month
period ended September 30, 1996 and the year ended December 31, 1995 were
182,000 Mcfs and 122,000 Mcfs, respectively. Gains and losses realized by the
Joint Venture under such swap arrangements were $5,270 and $(15,720) for the
nine month period ended September 30, 1996 and the year ended December 31,
1995, respectively. There was no hedging activity in 1994 or 1993. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--The Company--General" and "Business of the Company--Marketing."
Reserve Replacement Risk
In general, the volume of production from natural gas and oil properties
declines as reserves are depleted, with the rate of decline depending on
reservoir characteristics. Except to the extent the Company acquires
properties containing proved reserves or conducts successful exploration and
development activities, or both, the proved reserves of the Company will
decline as reserves are produced. The Company's future natural gas and oil
production is, therefore, highly dependent upon its level of success in
finding or acquiring additional reserves. The business of exploring for,
developing or acquiring reserves is capital-intensive. To the extent cash flow
from operations is reduced and external sources of capital become limited or
unavailable, the Company's ability to make the necessary capital investment to
maintain or expand its asset base of natural gas and oil reserves would
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be impaired. As of September 30, 1996, the Company had participated in a
substantial percentage of its wells as non-operator pursuant to various
agreements. The failure of an operator of the Company's wells to adequately
perform operations, or such operator's breach of the applicable agreements,
could adversely impact the Company. In addition, there can be no assurance
that the Company's future exploration, development and acquisition activities
will result in additional proved reserves or that the Company will be able to
drill productive wells at acceptable costs. See "Management's Discussion of
Analysis and Financial Condition and Results of Operation--The Company."
Operating Risks of Natural Gas and Oil Operations
The natural gas and oil business involves certain operating hazards such as
well blowouts, craterings, explosions, uncontrollable flows of oil, natural
gas or well fluids, fires, formations with abnormal pressures, pollution,
releases of toxic gas and other environmental hazards and risks, any of which
could result in substantial losses to the Company. The availability of a ready
market for the Company's natural gas and oil production also depends on the
proximity of reserves to, and the capacity of, natural gas and oil gathering
systems, pipelines and trucking or terminal facilities. In addition, the
Company may be liable for environmental damages caused by previous owners of
property purchased and leased by the Company. As a result, substantial
liabilities to third parties or governmental entities may be incurred, the
payment of which could reduce or eliminate the funds available for
exploration, development or acquisitions or result in the loss of the
Company's properties. In accordance with customary industry practices, the
Company maintains insurance against some, but not all, of such risks and
losses. The Company does not carry business interruption insurance. The
occurrence of an event not fully covered by insurance could have a material
adverse effect on the financial condition and results of operations of the
Company. See "Business of the Company--Operating Hazards and Insurance."
Dependence on Key Personnel
The Company depends to a large extent on the services of certain key
management personnel, the loss of any of which could have a material adverse
effect on the Company's operations. The Company will enter into employment
agreements with each of Mr. John S. Calaway (the Company's Chief Executive
Officer and Chairman of the Board), Mr. James D. Calaway (the Company's
President) and Mr. Michael G. Long (the Company's Chief Financial Officer)
described herein under "Management--Employment Agreements" prior to completion
of the Offering. The Company does not maintain key-man life insurance with
respect to any of its employees. The Company believes that its success is also
dependent upon its ability to continue to employ and retain skilled technical
personnel. See "Business of the Company--Exploration Technology."
Reliance on Technological Development and Possible Technological Obsolescence
The Company's business is dependent upon utilization of changing technology.
As a result, the Company's ability to adapt to evolving technologies, obtain
new products and maintain technological advantages will be important to its
future success. The Company believes that its ability to utilize state of the
art technologies currently gives it an advantage over many of its competitors.
This advantage, however, is based in part upon technologies developed by
others, and the Company may not be able to maintain this advantage. As new
technologies develop, the Company may be placed at a competitive disadvantage,
and competitive pressures may force the Company to implement such new
technologies at substantial cost. There can be no assurance that the Company
will be able to successfully utilize, or expend the financial resources
necessary to acquire, new technology, that others will not either achieve
technological expertise comparable to or exceeding that of the Company or that
others will not implement new technologies before the Company. One or more of
the technologies currently utilized by the Company or implemented in the
future may become obsolete. In such case, the Company's business, financial
condition and results of operations could be materially adversely affected. If
the Company is unable to utilize the most advanced commercially available
technology, the Company's business, financial condition and results of
operations could be materially and adversely affected. See "Business of the
Company--Exploration Technology."
Significant Capital Requirements
Due to its active exploration and development and technology development
programs, the Company has experienced and expects to continue to experience
substantial working capital needs. While the Company
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believes that the net proceeds from the Offering, cash flow from operations
and its existing credit arrangements should allow the Company to successfully
implement its present business strategy, additional financing may be required
in the future to fund the Company's growth and developmental and exploratory
drilling and continued technological development. No assurances can be given
as to the availability or terms of any such additional financing that may be
required or that financing will continue to be available under the existing or
new credit facilities. In the event such capital resources are not available
to the Company, its drilling and other activities may be curtailed. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--The Company--Liquidity and Capital Resources."
Government Regulation and Environmental Matters
Oil and natural gas operations are subject to various federal, state and
local government regulations which may be changed from time to time in
response to economic or political conditions. Matters subject to regulation
include discharge permits for drilling operations, drilling bonds, reports
concerning operations, the spacing of wells, unitization and pooling of
properties and taxation. From time to time, regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow
of oil and natural gas wells below actual production capacity in order to
conserve supplies of oil and natural gas. In addition, the development,
production, handling, storage, transportation and disposal of oil and natural
gas, by-products thereof and other substances and materials produced or used
in connection with oil and natural gas operations are subject to regulation
under federal, state and local laws and regulations primarily relating to
protection of human health and the environment. The Company is also subject to
changing and extensive tax laws, the effects of which cannot be predicted. The
Company believes that it is in substantial compliance with applicable
regulations, although there can be no assurance that this is or will remain
the case. The implementation of new, or the modification of existing, laws or
regulations could have a material adverse effect on the Company. See "Business
of the Company--Regulation."
Ability to Manage Growth and Achieve Business Strategy
The Company has experienced significant growth in the recent past through
the expansion of its drilling program. The Company's rapid growth has placed,
and is expected to continue to place, a significant strain on the Company's
financial, technical, operational and administrative resources. As the Company
enlarges the number of projects it is evaluating or in which it is
participating, there will be additional demands on the Company's financial,
technical and administrative resources. The Company's ability to continue its
growth will depend upon a number of factors, including its ability to identify
and acquire new exploratory sites, its ability to develop existing sites, its
ability to continue to retain and attract skilled personnel, the results of
its drilling program, hydrocarbon prices, access to capital and other factors.
There can be no assurance that the Company will be successful in achieving
growth or any other aspect of its business strategy.
Competition
The Company encounters competition from other oil and natural gas companies
in all areas of its operations, including the acquisition of exploratory
prospects and proven properties. The Company's competitors include major
integrated oil and natural gas companies and numerous independent oil and
natural gas companies, individuals and drilling and income programs. Many of
its competitors are large, well-established companies with substantially
larger operating staffs and greater capital resources than the Company's and
which, in many instances, have been engaged in the oil and natural gas
business for a much longer time than the Company. Such companies may be able
to pay more for exploratory prospects and productive natural gas and oil
properties and may be able to define, evaluate, bid for and purchase a greater
number of properties and prospects than the Company's financial or human
resources permit. In addition, such companies may be able to expend greater
resources on the existing and changing technologies that the Company believes
are and will be increasingly important to the current and future success of
oil and natural gas companies. The Company's ability to explore for oil and
natural gas prospects and to acquire additional properties in the future will
be dependent upon its ability to conduct its operations, to evaluate and
select suitable properties and to consummate transactions in this highly
competitive environment. See "Business of the Company--Competition."
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Uncertainty of Reserve Information and Future Net Revenue Estimates
There are numerous uncertainties inherent in estimating natural gas and oil
reserves and their estimated values, including many factors beyond the control
of the producer. The reserve data set forth in this Prospectus represent only
estimates. Reservoir engineering is a subjective process of estimating
underground accumulations of natural gas and oil that cannot be measured in an
exact manner. Estimates of economically recoverable natural gas and oil
reserves and of future net cash flows necessarily depend upon a number of
variable factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed effects of
regulations by governmental agencies and assumptions concerning future natural
gas and oil prices, future operating costs, severance and excise taxes,
development costs and workover and remedial costs, all of which may in fact
vary considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of natural gas and oil attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery, and estimates of the future net cash flows expected therefrom
prepared by different engineers or by the same engineers but at different
times may vary substantially and such reserve estimates may be subject to
downward or upward adjustment based upon such factors. Actual production,
revenues and expenditures with respect to the Company's reserves will likely
vary from estimates, and such variances may be material. In addition, the 10%
discount factor, which is required by the Commission to be used in calculating
discounted future net cash flows for reporting purposes, is not necessarily
the most appropriate discount factor based on interest rates in effect from
time to time and risks associated with the Company or the oil and natural gas
industry in general. See "Business of the Company--Oil and Natural Gas
Reserves."
Acquisition Risks
The Company generally seeks to explore for oil and natural gas rather than
to purchase producing properties. As a result, the Company's experience in the
acquisition of such properties is limited. The successful acquisition of
producing properties requires an assessment of recoverable reserves, future
oil and natural gas prices, operating costs, potential environmental and other
liabilities and other factors. Such assessments are necessarily inexact and
their accuracy inherently uncertain. In connection with such an assessment,
the Company performs a review of the subject properties that it believes to be
generally consistent with industry practices, which generally includes on-site
inspections and the review of reports filed with various regulatory entities.
Such a review, however, will not reveal all existing or potential problems nor
will it permit a buyer to become sufficiently familiar with the properties to
fully assess their deficiencies and capabilities. Inspections may not always
be performed on every well, and structural and environmental problems are not
necessarily observable even when an inspection is undertaken. Even when
problems are identified, the seller may be unwilling or unable to provide
effective contractual protection against all or part of such problems. There
can be no assurances that any acquisition of property interests by the Company
will be successful and, if unsuccessful, that such failure will not have an
adverse effect on the Company's future results of operations and financial
condition.
Absence of Dividends on Common Stock
The Company currently intends to retain any earnings for the future
operation and development of its business and does not currently anticipate
paying any dividends in the foreseeable future. Any future dividends also may
be restricted by the Company's then-existing loan agreements. See "Dividend
Policy," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--The Company--Liquidity and Capital Resources" and Note
3 to the Company's Combined Financial Statements.
Recent Losses
The Company has incurred net losses in three of the last five years of its
operations. There can be no assurance that the Company will be profitable in
the future. See "Selected Historical Combined Financial and Operating Data of
the Company."
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DIVIDEND POLICY
The Company has not paid any dividends in the past and does not intend to
pay cash dividends on its Common Stock in the foreseeable future. The Company
currently intends to retain any earnings for the future operation and
development of its business, including exploration, development and
acquisition activities. Any future dividends also may be restricted by the
Company's then-existing loan agreements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--The Company--
Liquidity and Capital Resources."
THE COMBINATION TRANSACTIONS
GENERAL
In the Combination Transactions, the Company plans to complete (i) the
Merger, (ii) the Edge Group II Exchange Offer, (iii) the Gulfedge Exchange
Offer, (iv) the Edge Group Purchase Offer and (v) the James C. Calaway
Exchange. Upon consummation of the Combination Transactions, the Company
expects to acquire directly or indirectly substantially all of the interests
in the Joint Venture. See "Summary--Ownership of the Joint Venture; Post-
Combination." The Company does not expect to seek to consummate any of the
Combination Transactions unless the Merger, the Edge Group II Exchange Offer
(with at least a 70% acceptance level) and the Offering are each closed.
BACKGROUND OF AND REASONS FOR THE COMBINATION TRANSACTIONS
Background of the Joint Venture. The Joint Venture was formed on April 8,
1991 by Old Edge, Edge Group II, Gulfedge and Edge Group. On that date the
Joint Venture purchased substantially all of the assets and assumed
substantially all of the liabilities of a related entity, Edge Group Joint
Venture, which had been engaged in oil and gas exploration and production
operations since 1987. Old Edge and its predecessors had acted as managing
venturers of Edge Group Joint Venture since its formation and had been engaged
in oil and gas exploration and production operations since 1983. Edge Group II
and Gulfedge were each created in connection with the formation of the Joint
Venture to enable certain investors to invest in the Joint Venture. Edge Group
was formed in July 1987 in connection with the formation of Edge Group Joint
Venture and was a party to such joint venture. In connection with the
formation of the Joint Venture, Edge Group contributed to the Joint Venture a
portion of the funds it received from the sale of the assets and liabilities
of Edge Group Joint Venture. In addition to its interest in the Joint Venture,
Edge Group holds certain properties that were distributed to it as a result of
the dissolution of Edge Group Joint Venture.
As managing venturer of the Joint Venture, Old Edge through its management,
staff of geologists, geophysicists and engineers generally directs and
exercises control over all activities of the Joint Venture. However, under the
terms of the Joint Venture Agreement, Old Edge must obtain the consent of Edge
Group II to make lease acquisitions, to make capital purchases, to approve the
Joint Venture's budget, to incur debt or mortgages and to sell all or
substantially all of the Joint Venture's assets.
The initial sharing ratio for the participants in the Joint Venture, which
determines the allocation of net income and other items, as well as the
distribution of allocable cash, was approximately 29.1%, 67.3%, 2.3% and 1.3%,
respectively (the "Initial Sharing Ratio"), for Old Edge, Edge Group II,
Gulfedge and Edge Group. Such sharing ratio is applicable until the value of
cash and carried interests and other property distributed to each venturer is
equal to the initial contributions of the venturers (the "Sharing Ratio Shift
A Amounts"). At such time, the sharing ratio shifts to 50.0%, 47.5%, 1.6% and
0.9% (the "Shift A Sharing Ratio"), respectively, which continues until the
value of cash and carried interests and other property distributed to each
venturer is six times the Sharing Ratio Shift A Amounts (the "Sharing Ratio
Shift B Amounts"). When the Sharing Ratio Shift B Amounts are met, the
applicable sharing ratio for the duration of the Joint Venture is 55%, 42.7%,
1.5% and 0.8%, respectively. The Joint Venture has followed a strategy of
retaining assets, and to date there have been no
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distributions to the venturers. As a result, there has been no valuation under
the Joint Venture Agreement to determine whether the value of the Joint
Venture's assets, if distributed, would cause a shift from the Initial Sharing
Ratio. If (i) all the shares of Common Stock to be received by the partners in
the Joint Venture (i.e., 4,660,604 shares) were received by and attributable
solely to the net assets of the Joint Venture (which would give no value to
any assets of Old Edge other than its Joint Venture interest), (ii) those
shares were instead sold at an assumed IPO price of $16.00 per share and (iii)
the proceeds (i.e., $74,569,664) were distributed under the Joint Venture
Agreement, then the allocation of the proceeds would have been in the
following percentages: Old Edge--44.4%, Edge Group II--52.8%, Gulfedge--1.8%
and Edge Group--1%. The foregoing is presented solely by way of illustration
and no such distribution is available to the venturers.
The term of the Joint Venture originally was to have expired on April 8,
1996. Under the original terms of the Joint Venture Agreement, upon the
dissolution of the Joint Venture, Old Edge was entitled to purchase prospects
on which less than 50% of the lease acreage had been acquired by the Joint
Venture by paying an amount equal to the costs incurred in connection with
such prospect. For prospects on which 50% or more of the lease acreage had
been acquired, Old Edge was required for a two-year period to use its best
efforts to sell the prospect, and thereafter also had the right to purchase
such prospects on a costs-incurred basis. Old Edge was also entitled to
receive all non-proprietary seismic data (generally, seismic data obtained
from third parties which the Joint Venture was not entitled to sell to others)
and to receive all other components of the Joint Venture's regional
information database without payment to the other venturers. Old Edge was
required to attempt to license all proprietary seismic data (generally,
seismic data obtained from third parties which the Joint Venture was entitled
to sell to others), but was entitled to use all such data and was entitled to
refrain from licensing any data by making a payment to the Joint Venture equal
to the fair value of such data. These provisions did not apply to a situation
in which seismic data was to be conveyed incidental to a transaction where the
seismic data was not the sole or principal item sold or licensed. Carried
Interests (generally defined to be interests in leases, reversionary
interests, reserves and other interests in oil and gas properties) were to be
distributed to the venturers in accordance with the sharing ratio. All other
assets were to be sold, with the proceeds being distributed to the venturers
in accordance with the sharing ratio.
Determination to Postpone the Dissolution of the Joint Venture. When the
Joint Venture was formed in April 1991, it was primarily involved in the
generation of drilling prospects for major, large independent and other energy
industry participants. At that time, given the uncertainties of drilling based
on 2-D seismic information and because of the substantial drilling costs of
the projects, the Joint Venture's limited financial resources and the less
favorable risk/reward ratio for exploratory drilling at the time, the Joint
Venture generally sold prospects for cash while retaining a reversionary
working interest. By 1992, management of Old Edge perceived a shift in the
economics of oil and gas drilling as a result of the advent of economic
onshore 3-D seismic surveys and the improvement and increased affordability of
data interpretation technologies. As a result of the decrease in drilling
risks made possible by these technological advances, the Joint Venture began
to acquire or retain working interests in the prospects generated by Old Edge
on behalf of the Joint Venture and to drill for the account of the Joint
Venture, while de-emphasizing the prospect generation portion of its business.
During 1995, the venturers began to consider the approaching dissolution
date of the Joint Venture in April 1996. The venturers recognized that, given
the change in the nature of the Joint Venture's operations, both the proposed
dissolution date and the terms of the dissolution of the Joint Venture were no
longer appropriate. When the Joint Venture was formed, the venturers
contemplated that upon its dissolution the primary assets would be (i)
reversionary interests that would be distributed to the venturers, and (ii)
prospects that upon sale to a third party or to Old Edge would result in a
distribution of proceeds to the venturers. The venturers recognized that a
substantial amount of the value of the Joint Venture was, by 1995,
attributable to the large 3-D project areas that Old Edge on behalf of the
Joint Venture had identified and intended to develop. By the second half of
1995, all of the venturers agreed that a dissolution in April 1996 should be
postponed because of (i) the then-recent expansion in the Joint Venture's
drilling program and the intermediate stage of development of various projects
of the Joint Venture, (ii) concern that a dissolution would impair the value
of the Joint Venture's operations by diverting the attention of management
from normal operations and by disrupting the then-recently achieved
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growth and momentum of the Joint Venture's operations, (iii) the recognition
that by extending the term of the Joint Venture, all of the venturers would be
given the opportunity to benefit from additional development of the Joint
Venture's assets and (iv) the belief that maintaining assets and cash flow in
the Joint Venture was important in such development. Although Old Edge took
the position that under the dissolution provisions of the Joint Venture
Agreement it was entitled both to obtain many of the Joint Venture's most
valuable prospects by paying the accumulated costs incurred by the Joint
Venture and to utilize the Joint Venture's seismic data, it nevertheless
concurred in the decision to extend the Joint Venture because of the factors
discussed above and because Old Edge also desired to avoid any disputes among
the venturers that might have arisen had it attempted to exercise the rights
it claimed under the original provisions of the Joint Venture Agreement.
Because of these factors, during the fourth quarter of 1995, the venturers
agreed that the Joint Venture would dissolve on December 31, 1996 and began
discussions regarding the modification of certain provisions of the Joint
Venture Agreement, primarily regarding distributions and the parties' post-
dissolution rights. Subsequently, the parties to the Joint Venture entered
into a definitive agreement modifying the Joint Venture Agreement. Under the
terms of the Joint Venture Agreement as amended, beginning January 1, 1997,
the Joint Venture entered into a windup period that will generally last for up
to two years. It is currently expected that during this time, most of the
existing oil and gas properties of the Joint Venture will continue to be held
by the Joint Venture. The Joint Venture's primary activities will involve the
development of (i) projects in existence as of December 31, 1996 and (ii)
subsequent projects that are based on 3-D seismic work firmly committed as of
December 31, 1996 (the projects referred to in (i) and (ii) being hereafter
referred to as the "Existing JV Projects"). By the end of the windup period,
the Joint Venture will distribute substantially all of the assets of the Joint
Venture, including working interests, in accordance with the applicable
sharing ratios or, in accordance with specified ratios in the case of
interests acquired in leases or other interests in all prospects within the
areas subject to (a) the Belco Right, (b) the Fifty Square Mile Right and (c)
the areas described herein under "Business of the Company--Significant Project
Areas--Everest Project" and "--Cameron Project," that are acquired after
December 31, 1996 (the "Western Assets"). Effective upon dissolution, the
Western Assets were owned and the related costs of development are borne, 50%
by Old Edge and 50% by the other venturers (in accordance with their relative
sharing ratios) (the "Western Allocation"). Pursuant to the Joint Venture
Agreement, Old Edge generally owns all 3-D seismic data owned by the Joint
Venture at the date of dissolution, provided that the other venturers have the
right to access and use such data. If such data is later sold, Old Edge will
pay a portion of the proceeds to the other venturers. All or a portion of each
of the areas subject to the Western Assets, the Belco Right and the Fifty
Square Mile Right will be developed outside of the Joint Venture. The
venturers will have certain rights to participate, pursuant to the Belco Right
and the Fifty Square Mile Right, on a limited basis in interests developed
within 150 and 50 square miles, respectively, of post-dissolution 3-D seismic
data shot by Old Edge. With respect to the Existing JV Projects, the amended
Joint Venture Agreement provides for the creation of areas of mutual interest
("AMIs"), which will allow each venturer to acquire a portion of any interest
acquired subsequent to the dissolution of the Joint Venture by any other
venturer in such AMI. For a description of the amended dissolution provisions,
see "Information Concerning the Joint Venture." The amendment of the Joint
Venture Agreement was not conditioned upon any agreement upon the Combination
Agreement Transactions or the Offering, as the venturers determined that such
amendment was appropriate without regard to any other transaction.
The Combination Transactions. In early 1996, the venturers began to discuss
the structure of a transaction in which they would each have the opportunity
to participate in the future potential of Old Edge's business through the
formation of a combined company, while giving an option to the partnership
investors of electing not to participate in the transaction and thereby
retaining, indirectly, the right to a proportionate distribution upon the
dissolution of the Joint Venture. At this time, management of Old Edge was
also considering the feasibility of an initial public offering involving the
combined company. The parties recognized that the increased asset base that
would be achieved by retaining the assets of the Joint Venture under common
ownership would increase the chances of a successful initial public offering
and assure continuity in the exploitation of prospects that Old Edge believed
had significant potential.
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The discussions regarding a combination involved a transaction in which Old
Edge, and either Edge Group II, Gulfedge and Edge Group or those partners of
the partnerships that desired to participate, would contribute their interests
to form a combined company which would simultaneously raise capital from the
public. During these discussions, Mr. John Sfondrini, as a general partner of
Edge Group II and each of the partners of Edge Group, negotiated on behalf of
those entities. Mr. John E. Calaway, Chief Executive Officer of Old Edge, and
Mr. James D. Calaway, director of Old Edge, negotiated on behalf of Old Edge.
Old Edge did not negotiate on behalf of Gulfedge, because it recognized that
once an agreement had been reached with Edge Group II and Edge Group, Gulfedge
would participate in the Combination Agreement Transactions in the same manner
as Edge Group II and Edge Group, but on the basis of its relative sharing
ratio. Old Edge viewed these procedures as appropriate because it believes
Gulfedge is in a similar position to Edge Group II and Edge Group under the
Joint Venture Agreement.
The predominant issue in connection with the discussions regarding the
formation of the combined company was the percentage interest in the combined
company that would be allocated to the investors in each of the venturers. As
described above, Old Edge's share of revenues under the Joint Venture
Agreement is currently, and was at the time of these discussions, 29.1%. Old
Edge was unwilling to accept an allocation based on such a sharing ratio
because of (i) Old Edge's claimed rights under the original and amended terms
of the Joint Venture Agreement to retain certain of the Joint Venture's
prospects and the Joint Venture's regional data base and technology, including
seismic data, (ii) the "going concern value" of Old Edge's business, in
particular its position within the industry and the expertise of its
management and technical team and (iii) the fact that the parties projected
that a sharing ratio shift would take place prior to the end of the wind-down
period of the Joint Venture. The parties estimated that by the end of 1997
this sharing ratio shift would have resulted in an equity allocation of
approximately 40% to Old Edge and approximately 60% allocated to the other
venturers, based upon (a) proven properties being valued according to their
estimated future net revenues as of June 30, 1996, (b) properties under
development being valued according to their estimated future net revenues as
of June 30, 1996 on a risk adjusted basis and (c) the Joint Venture not
undertaking any new projects beyond those already planned in the spring of
1996. Although the venturers recognized these factors warranted Old Edge's
being allocated a greater percentage of the combined company than 29.1%, the
parties initially disagreed as to the exact allocation. Negotiations as to the
appropriate allocations continued throughout the first half of 1996. In June
1996, the parties concluded that the appropriate percentage interest in the
combined company that would be allocated to the investors in each of the
venturers would be as follows: Old Edge--50%; Edge Group II--47.5%; Gulfedge--
1.6%; and Edge Group--0.9%. As among Edge Group II, Gulfedge and Edge Group,
the allocation of the remaining 50% of the combined company was based upon
relative sharing ratios under the Joint Venture Agreement. Subsequently, the
number of shares that would otherwise have been allocable to Edge Group II was
reduced by 6,063 shares to take into account $97,000 in payables of Edge Group
II that will become payables of the Company following the completion of the
Combination Agreement Transactions.
Following this determination, Old Edge met with its legal and accounting
advisors to determine the structure of the transaction. At this time,
management of Old Edge was also continuing its discussions with investment
banking firms regarding an initial public offering of the combined company.
After a series of discussions, management made the determination to structure
the transaction as a merger of Old Edge into a subsidiary of the Company that
would close simultaneously with separate exchange offers to the partners of
Edge Group II and Gulfedge in which such partners would have the opportunity
to exchange their interests for shares of Common Stock and the purchase of
Edge Group's interest in the Joint Venture in exchange for shares of Common
Stock. Such structure was chosen (i) to allow for a transaction in which
participants would receive Common Stock on a tax-free basis, (ii) to allow
Edge Group and the limited partners of Edge Group II and Gulfedge the option
of whether to participate in the combined company or continue their current
investment and (iii) to comply with regulatory requirements in a manner so as
to achieve the timing goals of the venturers.
As a result of the determination to structure the transaction to include an
exchange offer to the partners of Edge Group II, the parties were required to
determine the appropriate percentage of shares of Common Stock which had
previously been decided would be allocated to Edge Group II (47.5% prior to
taking into account a
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subsequent adjustment) that would be issued to the general partners of Edge
Group II. Under the Edge Group II Partnership Agreement, its general partners
(John Sfondrini and Napamco, a corporation of which Mr. Sfondrini is the sole
shareholder) are entitled to receive 1% of the distributions of Edge Group II
until distributions to the limited partners equal 150% of their initial
contributions, at which time the general partners are entitled to receive 25%
of subsequent distributions. Mr. Sfondrini informed the Company that in
determining the aggregate number of shares of Common Stock that he would
accept in exchange for the general partner interests in Edge Group II, he
employed the following methodology: the market value of the aggregate number
of shares of Common Stock offered to the partners of Edge Group II in exchange
for their partner interests should be calculated and a determination should be
made as to the percentage interest to which the general partners would be
entitled if such shares were distributed to the partners of Edge Group II. In
addition, Mr. Sfondrini informed the Company that the general partners of Edge
Group II were entitled to (i) deferred and accumulated annual management fees
of $1,332,450 by Edge Group II, attributable to an annual management fee of 2%
of the aggregate capital commitments of the limited partners for five years;
plus (ii) an amount attributable to the general partner management fee
commencing after the fifth year (i.e., beginning in April 1996) equal to 3% of
cash flow of Edge Group II (which amount was based on estimated future cash
flow rather than on any cash flow to date and was deemed to be equal to the
assumed value of the Common Stock attributable to Edge Group II in the
Combination Agreement Transactions). See "The Edge Group II Exchange Offer and
Consent Solicitation--Description." Using this methodology, Mr. Sfondrini
informed the Company that, assuming an IPO price of $16.00 per share of Common
Stock and an aggregate of 2,209,306 shares of Common Stock offered to the
partners of Edge Group II in exchange for their partner interests, the number
of shares of Common Stock that he would accept in exchange for the general
partner interests in Edge Group II would be 361,665, or 16.4% of the aggregate
number of shares of Common Stock offered to the partners of Edge Group II in
exchange for their partner interests. If the IPO price is greater than $16.00
per share, the limited partners of Edge Group II would be entitled to receive
fewer than such number of shares of Common Stock, and the general partners
would be entitled to receive more than such number of shares of Common Stock,
in exchange for their respective interests in Edge Group II. If the IPO price
is less than $16.00 per share, the limited partners of Edge Group II would be
entitled to receive more than such number of shares of Common Stock, and the
general partners of Edge Group II would be entitled to receive fewer than such
number of shares of Common Stock, in exchange for their respective interests
in Edge Group II.
Beginning in July 1996, the venturers began to prepare definitive
documentation relating to the Combination Transactions. At this time,
management of Old Edge also began preparations for the initial public offering
of the Company. On December 3, 1996, the original version of the Combination
Agreement was executed by the venturers, presented for consideration by the
board of directors of each of Old Edge and the Company and approved by each
such board. The Combination Agreement was amended as of January 13, 1997 to
extend the termination date of registration rights to be granted to Edge
Holding Company to December 31, 1998 (formerly one year following the closing
of the Combination Agreement Transactions) and to change conditions to the
closing of the Combination Agreement Transactions to provide that (i) no more
than 10% (formerly 15%) of the shareholders of Old Edge will have exercised
their dissenters' rights and (ii) the Company shall have consummated the
Offering at an IPO price of $14.50 (formerly $15.00) per share.
EFFECTS OF THE COMBINATION TRANSACTIONS
Assuming that all parties accept shares of Common Stock in the Combination
Transactions, upon consummation of the Combination Transactions and the
Offering (i) the Company will become an independent, publicly held company,
(ii) holders of Old Edge Common Stock will become stockholders of the Company
rather than shareholders of Old Edge, (iii) the partners of Edge Group II and
Gulfedge who exchange their interests for shares of Common Stock will become
stockholders of the Company rather than partners of Edge Group II and
Gulfedge, respectively, (iv) the Company will become the general partner of
and own all of the partner interests in Edge Group II, (v) the Company will
own all of the limited partner interests in Gulfedge, (vi) Edge Group will
become a stockholder of the Company and (vii) direct and indirect ownership of
all of the interests in the Joint Venture will be combined in the Company. In
the event that any limited partner of Edge Group II or Gulfedge does not
exchange his or her interests in Edge Group II or Gulfedge, such limited
partner and the Company will continue as the limited partners of such
partnership. In the event that the Edge Group Purchase Offer is not
consummated, Edge Group will continue as a general partner of the Joint
Venture.
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The Joint Venture will continue in existence following consummation of the
Combination Agreement Transactions and the Offering. Under the terms of the
amended Joint Venture Agreement, after its December 1996 dissolution, the
Joint Venture entered a windup period that will generally last for up to two
years. It is currently expected that during this time, most of the existing
oil and gas properties of the Joint Venture will continue to be held by the
Joint Venture. All or a portion of each of the areas subject to the Western
Assets, the Belco Right and the Fifty Square Mile Right will be developed
outside of the Joint Venture. By the end of the windup period, the Joint
Venture will distribute substantially all of the assets of the Joint Venture.
Pursuant to the Joint Venture Agreement, Old Edge owns all 3-D seismic data
owned by the Joint Venture at the date of dissolution, provided that the other
venturers have the right to access and use such data. With respect to the
Existing JV Projects, AMIs were created pursuant to the amended Joint Venture
Agreement, which will allow each venturer to acquire a portion of any interest
acquired by any other venturer in such AMI. For a description of the amended
dissolution provisions, see "Information Concerning the Joint Venture."
The Company expects to continue to develop existing properties and
identified prospects of the Joint Venture. New projects in new areas will
generally be conducted in Old Edge or another wholly owned subsidiary of the
Company, and not through the Joint Venture. To the extent they do not exchange
in the Combination Agreement Transactions, limited partners and Edge Group
generally will not participate in new prospects or operations unrelated to the
Joint Venture's operations as of December 31, 1996, except as provided for by
the Belco Right and the Fifty Square Mile Right. See "Information Concerning
the Joint Venture."
The Company and Old Edge will owe fiduciary duties to any limited partners
of Edge Group II or Gulfedge, respectively, that do not elect to exchange
their limited partner interests for shares of Common Stock. Management of the
Company will also owe fiduciary duties to the stockholders of the Company and
will themselves be stockholders and/or option holders of the Company.
Conflicts of interest may arise between the stockholders of the Company and
such non-exchanging limited partners. Although Mr. Sfondrini, as a general
partner of Edge Group II and sole shareholder of Napamco, a general partner of
Edge Group II, is currently presented with conflicts of interest because he is
also a director of Old Edge, the conflicts of interest that will arise as a
result of the Company's becoming the general partner of Edge Group II will be
more direct.
The Company and Old Edge as the general partner of Edge Group II and
Gulfedge, respectively, following the Combination Agreement Transactions, will
be entitled to determine whether or not to distribute any assets received by
Edge Group II and Gulfedge pursuant to the dissolution of the Joint Venture or
otherwise to the partners of Edge Group II and Gulfedge in accordance with the
terms of their respective partnership agreements. As general partner of each
of the partners of Edge Group, Mr. Sfondrini will be entitled to determine
whether or not to distribute any assets received by Edge Group pursuant to the
dissolution of the Joint Venture or otherwise to the partners of Edge Group in
accordance with the terms of the Edge Group Partnership Agreement.
As a result of the distribution of certain working interests to, the terms
of certain AMIs relating to, and the treatment of the Specially Allocated
Assets, and certain other future exploration prospects, the venturers of the
Joint Venture, Edge Group II, Gulfedge and Edge Group will each be required to
make decisions regarding oil and gas operations, including whether to
participate in certain opportunities. The Company and Old Edge as the general
partner of Edge Group II and Gulfedge, respectively, and Mr. Sfondrini as
general partner of each of the three partners of Edge Group, will have
conflicts of interest with respect to such decisions. The Company and Old Edge
currently contemplate that Edge Group II and Gulfedge, and Mr. Sfondrini
currently contemplates that Edge Group, would retain any non-cash assets
distributed by the Joint Venture, and only distribute any cash received that
is in excess of operating and development expenses. However, Edge Group II,
Gulfedge or Edge Group could determine to distribute such non-cash assets,
including working interests in oil and gas properties. Limited partners to
whom working interests in oil and gas properties are distributed will lose
their limited liability status with respect to such interests, and operation
of such properties may involve substantial risks, including the risk of
incurring costs of reimbursement to operators of general and administrative
costs that may represent a proportionately greater share of the revenues
attributable to such properties than the general and administrative expenses
reimbursed by the Joint Venture prior to its dissolution. The Company will
receive its
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proportionate interest in any such distribution as general partner and limited
partner with respect to all partner interests exchanged for shares of Common
Stock pursuant to the Combination Agreement Transactions. See "Risk Factors--
Risks Associated with the Combination Transactions--Conflicts of Interest" and
"--Conflicts of Interest; Interests of Certain Persons and Affiliates in the
Combination Transactions--Conflicts of Interest with Respect to the Future
Operation and Liquidation of the Joint Venture."
CONSEQUENCES OF THE DISSOLUTION OF THE JOINT VENTURE IF THE COMBINATION
TRANSACTIONS ARE NOT CONSUMMATED
The Joint Venture dissolved in accordance with its terms on December 31,
1996 and began a two-year windup period during which the Existing JV Projects
will continue to be developed until their distribution to the venturers during
and at the end of such period. As a result of the dissolution, Old Edge is
entitled to and expects to conduct operations independently of the Joint
Venture. Initially, substantially all of Old Edge's (and if the Combination
Agreement Transactions are consummated, the Company's) operations will consist
of such continued operations and will be conducted either through the Joint
Venture or outside the Joint Venture, or with the partners in the Joint
Venture pursuant to the provisions of the Joint Venture Agreement as amended.
Old Edge (and if the Combination Agreement Transactions are consummated, the
Company) expects that it will initiate new operations outside the Joint
Venture as it begins operations other than Existing JV Projects. Edge Group
II, Gulfedge and Edge Group will not be entitled to participate in any of
these new operations that are unrelated to the Joint Venture's operations at
December 31, 1996 other than pursuant to the Belco Right and the Fifty Square
Mile Right. See "Information Concerning the Joint Venture." No other
transaction is currently being considered by the venturers as an alternative
to the Combination Transactions, although the venturers could explore other
alternatives. However, there can be no assurance that, if the Combination
Transactions are not consummated, any alternative transaction will occur.
CONFLICTS OF INTEREST; INTERESTS OF CERTAIN PERSONS AND AFFILIATES IN THE
COMBINATION TRANSACTIONS
Conflicts of Interest in the Negotiation of the Combination Agreement. As a
result of certain relationships, management of Old Edge and the general
partners of Edge Group II had inherent conflicts of interest in structuring
and approving the terms of the Combination Agreement Transactions and in
recommending acceptance of such transactions. The management of Old Edge and
the management of the Company are largely the same. Members of the board of
directors and executive officers of the Company have beneficial ownership of
approximately 100% of the Old Edge Common Stock, in part because of certain
voting agreements which have been waived with respect to the shareholders'
vote on the Merger. Old Edge is the general partner of Gulfedge. Mr. John
Sfondrini, a director of each of Old Edge and the Company and a general
partner, along with Napamco, of Edge Holding Company, which is a 36.8%
shareholder of Old Edge, is also a general partner, along with Napamco, of
Edge Group II, and serves as managing partner of Edge Group (whose three
general partners are all limited partnerships of which Mr. Sfondrini is a
general partner). In addition to his general partner interest in Edge Group
II, Mr. Sfondrini owns one Edge Group II Unit (representing approximately a
.5% limited partner interest in Edge Group II). Other members of the board of
directors of Old Edge and the Company may also be deemed to have beneficial
ownership of limited partner interests in Edge Group II as follows: six Edge
Group II Units with respect to Mr. Raphael, approximately 1.48 Edge Group II
Units with respect to Mr. Andrews, 1.5 Edge Group II Units with respect to Mr.
Peterson and 3.5 Edge Group II Units with respect to Mr. Benedict. Mr.
Benedict also has rights to receive certain proceeds in respect of Mr.
Sfondrini's general partner interest in Edge Group II as described below. See
"Security Ownership of Certain Beneficial Owners and Management."
Management of Old Edge owes fiduciary duties to the shareholders of Old
Edge, and Old Edge, as general partner of Gulfedge, owes fiduciary duties to
the limited partners of Gulfedge. Mr. Sfondrini, as a director of Old Edge,
owes fiduciary duties to the shareholders of Old Edge, and Mr. Sfondrini and
Napamco, as general partners of Edge Group II, owe fiduciary duties to the
limited partners of Edge Group II, and Mr. Sfondrini, as a general partner of
each of the three partners of Edge Group, owes fiduciary duties to the general
partners of Edge Group, and Mr. Sfondrini and Napamco, as general partners of
Edge Holding Company, owe fiduciary duties to the limited partners of such
partnership. Certain members of management of Old Edge negotiated the
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terms of the Combination Transactions on behalf of Old Edge. Mr. Sfondrini
negotiated the terms of the Combination Agreement Transactions on behalf of
Edge Group II and Edge Group. No party acted on behalf of Gulfedge in these
negotiations. Accordingly, each of the parties responsible for negotiating and
approving the Combination Agreement Transactions had conflicting duties.
As part of the negotiation process for the Combination Transactions, the
parties used a reserve report audited by Ryder Scott as an objective measure
of value in assessing the value of the relevant assets of the parties to such
transactions for purposes of determining the number of shares of Common Stock
to be issued in the Combination Transactions. However, the negotiation process
also involved assumptions as to future outcomes and subjective judgments
(e.g., the "going concern" value to be attributed to Old Edge's business), for
which no objective criteria were available. Additionally, no degree of
reliance on objective criteria can eliminate the inherent conflict of
interests.
The allocation in the Combination Agreement Transactions of shares of Common
Stock among the shareholders of Old Edge, on the one hand, and the general and
limited partners of Edge Group II, the limited partners of Gulfedge and Edge
Group, on the other hand, involved inherent conflicts of interest, as any
increase in the number of shares of Common Stock allocated to one group of
investors proportionally decreased the number of shares allocated to the other
groups of investors. Moreover, because the number of shares of Common Stock
being offered in exchange for all of the partner interests in Edge Group II
was initially determined based on a percentage of the aggregate number of
shares of Common Stock being offered in connection with the Combination
Agreement Transactions, the issuance of shares of Common Stock in exchange for
the general partner interests in Edge Group II reduced the number of shares of
Common Stock being offered in exchange for the limited partner interests in
Edge Group II.
The terms of the Combination Agreement were determined through negotiations
between the management of Old Edge and Mr. Sfondrini. As a result of the
affiliated relationship among the parties, such negotiations may not be viewed
as arm's-length negotiations. No attempt was made to solicit offers for the
respective interests in the Joint Venture. No independent representative or
counsel has acted on behalf of Edge Group, the unaffiliated shareholders of
Old Edge and the unaffiliated limited partners of Edge Group II or Gulfedge in
connection with determining the terms of the Combination Agreement
Transactions, nor did management of Old Edge or the general partners of Edge
Group II negotiate the terms of the Combination Agreement Transactions with
any such unaffiliated shareholders or limited partners. Gulfedge was not
represented in the negotiations. The shareholders of Old Edge, on the one
hand, and Edge Group and the limited partners of Edge Group II, on the other
hand, are therefore relying on management of Old Edge and Mr. Sfondrini,
respectively, to fairly establish the terms of the Combination Agreement
Transactions. There is a possibility that, if such representatives or
unaffiliated shareholders or limited partners had taken part in such
determination or negotiation, the terms of the Combination Agreement
Transactions might have been different and, perhaps, more favorable to the
unaffiliated shareholders or limited partners. See "Risk Factors--Risks
Associated with the Combination Transactions--Conflicts of Interest" and "The
Combination Transactions--Background of and Reasons for the Combination
Transactions."
Transfer of Edge Group II General Partner Interests. The closing of the
Combination Transactions is conditioned on, among other things, the approval
of the transfer to the Company of the general partner interests of Mr.
Sfondrini and Napamco by holders of 60% of the limited partner interests in
Edge Group II. In exchange for such general partner interests, Mr. Sfondrini
will receive the GP Exchange Shares. Neither Edge Group II nor any of its
limited partners will share in the proceeds of such exchange. The Combination
Agreement Transactions will allow the general partners of Edge Group II to
receive Common Stock in respect of both management fees that have been
deferred to date because no cash was available for payment, as well as the
estimated value of future management fees that have not been earned to date.
The allocation of Common Stock in respect of such management fees reduces the
amount otherwise allocable to the limited partners of Edge Group II and there
can be no assurance that the general partners would have ever become entitled
to receive the amount of such future management fees. Pursuant to certain
prior loan agreements, Mr. Sfondrini and Napamco assigned a portion of their
management fee with respect to Edge Group II and the right to a percentage of
their
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distributions as its general partners, to, among others, Mr. James C. Calaway
and Ms. Marlin Geiger (the parents of Mr. John E. Calaway, the Chief Executive
Officer of the Company, and Mr. James D. Calaway, the President of the
Company) and to Mr. David Benedict, who is a director of the Company. As a
result, assuming an IPO price of $16.00 per share, Mr. James C. Calaway will
receive 12,830 (including 6,992 shares to be received by entities owned by
him) of the GP Exchange Shares, an entity controlled by Ms. Geiger will
receive 995 of the GP Exchange Shares and Mr. Benedict will receive 2,122 of
the GP Exchange Shares. See "Plan of Distribution." In the absence of the
Combination Agreement Transactions and the Offering, notwithstanding the value
of Edge Group II's interest in the Joint Venture, it is unlikely Edge Group II
would receive cash distributions from the Joint Venture that would, in the
near term, have allowed it to pay any of the accrued management fees or
distributions. Similarly, because of the uncertainty of the level of future
distributions from Joint Venture, there can also be no assurance as to what
amount of such future management fees that the general partners would have
ever become entitled to receive.
Following the consummation of the Offering, Mr. Sfondrini expects to enter
into a margin loan arrangement with a representative of the underwriters for
the Offering. Under this arrangement, Mr. Sfondrini expects to make borrowings
in an approximate amount of at least $500,000 at an interest rate equal to a
bank's prime rate. The loan will be secured by Common Stock with an initial
market value of $1.2 million. Mr. Sfondrini expects to use a portion of the
proceeds of such borrowings to repay the indebtedness under the above
described loan agreements.
As general partner of Edge Group II, Mr. Sfondrini is personally liable for
its obligations. If the transfer of such general partner interest is approved
and consummated, Mr. Sfondrini will not be liable for any future obligations
of Edge Group II.
Upon becoming the general partner of Edge Group II, the Company will succeed
to the general partners' rights to accrued, but unpaid prior management fees,
receive a management fee equal to 3% of Edge Group II's cash flow, receive 1%
of distributions until limited partners have received distributions equivalent
to 150% of their initial capital contributions and thereafter receive 25% of
the distributions of Edge Group II, as provided for in the Edge Group II
Partnership Agreement. See "Information Concerning Edge Group II."
Conflicts of Interest With Respect to the Future Operation and Liquidation
of the Joint Venture. Upon consummation of the Combination Transactions, Old
Edge will become a wholly owned subsidiary of the Company and will continue as
managing venturer of the Joint Venture, and the Company will become the
general partner of Edge Group II. The Company and Old Edge will owe fiduciary
duties to any limited partners of Edge Group II or Gulfedge, respectively,
that do not elect to exchange their limited partner interests for shares of
Common Stock. If the Edge Group Purchase Offer is not consummated, Old Edge,
as managing venturer of the Joint Venture will owe fiduciary duties to Edge
Group, as well as to Gulfedge and Edge Group II as participants in the Joint
Venture. Management of the Company will also owe fiduciary duties to the
stockholders of the Company and will themselves be stockholders and/or option
holders of the Company. Conflicts of interest may arise between the
stockholders of the Company and such non-exchanging limited partners.
The Company currently expects to use a portion of the proceeds of the
Offering to make a loan to the Joint Venture that will allow the Joint Venture
to repay its currently outstanding indebtedness under the Revolving Credit
Facility and the J.C. Calaway Loan. See "--Certain Interests of Mr. James C.
Calaway" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--The Company--Liquidity and Capital Resources." The
Company currently expects that the terms of such loan to the Joint Venture
will be substantially the same as those available to the Company after the
Offering. There will be conflicts of interest in the Company's role as a
lender to the Joint Venture including those related to determining the actual
terms of such loan, the timing of any repayments and decisions regarding
security interests and covenants relating to such loan.
The Company expects to continue to develop the Existing JV Projects through
the Joint Venture. The description of the plan for the Joint Venture is
described elsewhere under "Information Concerning the Joint
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Venture." New projects in new areas will generally be conducted in Old Edge or
another wholly owned subsidiary of the Company, and not through the Joint
Venture. To the extent they do not exchange in the Combination Agreement
Transactions, limited partners and Edge Group generally will not participate
in new prospects or operations unrelated to the Existing JV Projects as of
December 31, 1996, except as provided for by the Belco Right and the Fifty
Square Mile Right. See "Information Concerning the Joint Venture."
The Joint Venture will continue in existence following the Combination
Agreement Transactions following which most of the Joint Venture's assets will
be retained for a two-year windup period ending in December 1998. Because Old
Edge will act as liquidating agent pursuant to the terms of the Joint Venture
Agreement, the Company may encounter conflicts of interest in administering
such windup, including conflicts relating to the allocation of management and
other Company resources, the allocation of costs, the determination of the
timing of operations and the distribution of assets.
The Company and Old Edge as the general partner of Edge Group II and
Gulfedge, respectively, following the Combination Agreement Transactions, will
be entitled to determine whether or not to distribute any assets received by
Edge Group II and Gulfedge pursuant to the dissolution of the Joint Venture or
otherwise to the partners of Edge Group II and Gulfedge in accordance with the
terms of their respective partnership agreements. As a general partner of each
of the partners of Edge Group, Mr. Sfondrini will be entitled to determine
whether or not to distribute any assets received by Edge Group pursuant to the
dissolution of the Joint Venture or otherwise to the partners of Edge Group in
accordance with the terms of the Edge Group Partnership Agreement.
As a result of the distribution of certain working interests to the
venturers, the terms of AMIs created pursuant to the Joint Venture Agreement,
the Belco Right, the Fifty Square Mile Right and certain other future
exploration prospects, the venturers will be required to make decisions
regarding oil and gas operations, including whether to participate in certain
opportunities. The Company and Old Edge as the general partner of Edge Group
II and Gulfedge, respectively, and Mr. Sfondrini as a general partner of the
partners of Edge Group, will have conflicts of interest with respect to such
decisions. See "Risk Factors--Risks Associated With the Combination
Transactions--Effect of the Combination Agreement Transactions on
Nonexchanging Limited Partners of Edge Group II or Gulfedge."
Interests With Respect to Certain Employee Benefit Matters. In connection
with Combination Agreement Transactions and the Offering, the Company will
enter into employment agreements with each of Mr. James D. Calaway and Mr.
John E. Calaway. These agreements are described in "Management--Employment
Agreements." Subject to the occurrence of the Public Offering, the Company has
approved an incentive plan, which includes provision for nonemployee director
stock options. Each executive officer and director of the Company will receive
compensation with respect to one or more of such plans. See "Management--
Director Compensation" and "--Executive Compensation."
For a discussion of the limitation of directors' liability to the Company
and its stockholders, indemnification agreements with the directors and
officers of the Company, and the purchase of directors' and officers'
liability insurance policies that will take effect at closing, see
"Management--Officer and Director Indemnification."
At the Effective Time, each outstanding option to purchase shares of Old
Edge Common Stock (each, an "Old Edge Stock Option") granted pursuant to the
Edge Petroleum Corporation 1994 Stock Option Plan (the "Old Edge Plan"), will
be assumed by the Company. Messrs. James D. Calaway and Richard Dale, officers
of the Company, each have an Old Edge Stock Option for the purchase of 2,193
shares of Old Edge Common Stock. Each such Old Edge Stock Option will be
deemed to constitute an option to acquire, on the same terms and conditions as
were applicable under such Old Edge Stock Option, the number of shares of
Common Stock equal to the number of shares of Old Edge Common Stock
purchasable pursuant to such Old Edge Stock Option, multiplied by the Merger
Exchange Ratio, at a price per share equal to (i) the per share exercise price
for the shares of Old Edge Common Stock subject to such stock option divided
by (ii) the Merger Exchange Ratio. The creation of a public market for Common
Stock as a result of the Public Offering would likely result in an increase in
the total unrealized value of Old Edge Stock Options. Following the Merger,
Messrs. J.D. Calaway and Dale
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<PAGE>
will each hold options for the purchase of 48,922 shares of Common Stock, at a
per share exercise price of $4.09 and $2.04, respectively. Assuming an IPO
price of $16.00 per share, the aggregate unrealized value of such options
would be $582,661.02 and $682,951.12, respectively.
Certain Interests of Mr. James C. Calaway. The Company intends to loan a
portion of the proceeds from the Offering to the Joint Venture, which will
retire a $1.3 million loan to the Joint Venture from Mr. James C. Calaway. See
"Certain Transactions--James C. Calaway Loan Agreement." Until such repayment
occurs, Mr. James C. Calaway will continue to accrue new J. C. Calaway
Interests in the Joint Venture's prospects. Following the date of repayment,
Mr. James C. Calaway will accrue interests in wells drilled by the Company in
certain specified areas of mutual interest. Additionally, Mr. James C. Calaway
has retained certain of the J.C. Calaway Interests accrued to date in many of
the Joint Venture's existing exploratory prospects. As a result, Mr. James C.
Calaway will benefit from the Company's continuing development of these
prospects. See "Certain Transactions--James C. Calaway Loan Agreement."
Interests in Obtaining Publicly Traded Stock. The consummation of the
Offering, which is conditioned upon the consummation of certain aspects of the
Combination Agreement Transactions, will result in the creation of a public
market for the Common Stock. Directors and executive officers of Old Edge (who
hold the same positions with the Company) including John Sfondrini, who serves
as a general partner of Edge Group II and Edge Group, will benefit from the
increased liquidity (including marginability) of their investment, with
respect to their holdings of Old Edge Common Stock and interests in Edge Group
II and Edge Group that are exchanged for Common Stock pursuant to the
Combination Agreement Transactions as will current holders of options to
purchase Old Edge Stock.
Registration Rights. Mr. Sfondrini and Napamco are the general partners of
Edge Holding Company, which owns 38,500 shares of Old Edge Common Stock, which
will, pursuant to the Merger, be converted into 858,853 shares of Common Stock
(the "Registrable Shares"). At the Effective Time, the Company will enter into
a registration rights agreement with Edge Holding Company which will provide
for the registration of the Registrable Securities for the purpose of
distributing such shares to the partners of Edge Holding Company. This demand
registration right may be exercised only once by Edge Holding Company. See
"Certain Transactions--Registration Rights Agreement of Edge Holding Company
Limited Partnership."
Indemnification. The Combination Agreement provides that the Company will
indemnify the general partners of the partners of Edge Group and the general
partners of Edge Group II and Gulfedge and the directors and officers of Old
Edge and will hold each of them harmless from and against certain losses,
damages, liabilities, claims, demands, deficiencies, judgments and settlements
resulting from or arising out of the Combination Agreement Transactions, and
expressly provides for such indemnification regardless of any acts of
negligence or gross negligence on the part of any of the parties indemnified
thereby.
ACCOUNTING TREATMENT
Management of the Company believes the Combination Transactions will be
accounted for as a reorganization of entities under common control because of
the high degree of common ownership of the stockholders of the Company and by
virtue of their direct ownership of the entities and interests exchanged.
Accordingly, management expects that the net assets acquired in the
Combination Transactions will be recorded at the historical cost basis of the
affiliated predecessor owners.
However, if less than 90% of the general and limited interests of Edge Group
II or Gulfedge are exchanged in their respective exchange offers, then such
exchange offer would not be considered a reorganization under common control
and purchase accounting would be applied. Under purchase accounting, the net
assets acquired in the Combination Transactions would be recorded at the fair
market value of the interests exchanged.
DISSENTERS' RIGHTS
Old Edge Shareholders. Any shareholder of record of Old Edge may exercise
dissenters' rights in connection with the Merger by properly complying with
the requirements of Articles 5.11, 5.12 and 5.13 of the Texas Business
Corporation Act ("TBCA"). By exercising dissenters' rights, any such
shareholder would have the "fair value" of his shares of Old Edge Common Stock
determined by a court and paid to him in cash, instead of receiving shares of
Common Stock.
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The following is a summary of the statutory procedures that a shareholder of
a Texas corporation must follow in order to exercise his dissenters' rights
under Texas law. This summary is not complete and is qualified in its entirety
by reference to Articles 5.11, 5.12 and 5.13 of the TBCA, the text of which is
set forth in full in Appendix C to this Joint Proxy and Consent Solicitation
Statement/Prospectus.
Any shareholder of a Texas corporation who objects to a merger of the
corporation may exercise the rights and remedies of a dissenting shareholder
under Articles 5.11, 5.12 and 5.13 of the TBCA. Article 5.11 of the TBCA
provides that each shareholder of a Texas corporation has the right to dissent
from certain mergers. Any shareholder desiring to exercise his right of
dissent to a merger must (i) file a written objection to the merger with the
corporation, prior to the date of the meeting of shareholders called to
consider the merger, and (ii) not vote his shares in favor of the adoption of
the merger. Neither a proxy nor a vote against the merger is sufficient to
constitute a written objection as required under the statute. Failure to vote
against approval of the merger (i.e., abstention from voting) will not
constitute a waiver of a shareholder's dissenters' rights.
The written objection must state that the shareholder's right to dissent
will be exercised if the merger becomes effective and give the address to
which notice of the effectiveness of the merger should be delivered or mailed.
Any written communications that may be required to be given with respect to
the exercise by a shareholder of dissenters' rights should be addressed to the
principal executive offices of the corporation marked to the attention of the
corporation's secretary.
The corporation surviving the merger must deliver or mail notice of the
effectiveness of the merger to each dissenting shareholder that has not voted
in favor of the merger within ten days of the effectiveness of the merger. Any
dissenting shareholder that has not voted in favor of the merger may then make
a written demand on the surviving corporation for the payment of the fair
value of his shares within ten days of the delivery or mailing of the notice
by the surviving corporation. Such demand must state the number and class of
the shares of stock owned by the dissenting shareholder and the dissenting
shareholder's estimate of the fair value of his shares. Any shareholder
failing to make such a demand within the ten-day period will lose the right to
dissent and will be bound by the terms of the merger. In order to preserve his
dissenters' rights, a dissenting shareholder must also submit his stock
certificates to the surviving corporation for the appropriate notation within
twenty days of making a demand for payment. Failure of a dissenting
shareholder to submit such stock certificates will, at the option of the
surviving corporation, terminate such shareholder's rights under Article 5.12
unless a court of competent jurisdiction, for good and sufficient cause shown,
otherwise directs.
Any shareholder who has properly demanded payment for his shares of stock
will not have any rights as a shareholder, except the right to receive payment
for his shares and the right to claim that the merger and the related
transactions were fraudulent, and the respective shares for which payment has
been demanded shall not thereafter be considered outstanding for the purposes
of any subsequent vote of the shareholders.
Within twenty days of receipt of the demand for payment, the surviving
corporation must deliver or mail to the dissenting shareholder written notice
that either (i) agrees to pay the amount of the shareholder's demand within 90
days after the effectiveness of the merger upon receipt of the dissenting
shareholder's duly endorsed share certificates or (ii) offers to pay the
surviving corporation's estimate of the fair value of the shares within ninety
days after the effectiveness of the merger upon both the receipt of notice
from the shareholder within sixty days after the effectiveness of the merger
that the shareholder agrees to accept that amount and the receipt of the
dissenting shareholder's duly endorsed share certificates. If the dissenting
shareholder and the surviving corporation agree upon the value of the
dissenting shareholder's shares within sixty days after effectiveness of the
merger, the surviving corporation shall pay the amount of the agreed value to
the dissenting shareholder upon receipt of the dissenting shareholder's duly
endorsed share certificates within ninety days of the effectiveness of the
merger. Upon payment of the agreed value, the dissenting shareholder will
cease to have any interest in such shares.
If the dissenting shareholder and the surviving corporation do not agree
upon the value of the dissenting shareholder's shares within sixty days after
the effectiveness of the merger, then either the dissenting shareholder
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or the surviving corporation may, within sixty days thereafter, file a claim
in a court of competent jurisdiction in the county of Texas in which the
principal office of the corporation is located, seeking a determination of the
fair value of the shares. The surviving corporation shall file with the court
a list of all shareholders who have demanded payment for their shares with
whom an agreement as to value has not been reached upon receipt of such a
claim filed by a dissenting shareholder or upon the filing of such a claim by
the surviving corporation. The clerk of the court will give notice of the
hearing of any such claim to the surviving corporation and to all of the
dissenting shareholders on the list provided by the surviving corporation. The
surviving corporation and all dissenting shareholders notified in this manner
will be bound by the final judgment of the court.
After the hearing of the claim, the court will determine which of the
dissenting shareholders have complied with the provisions of the TBCA and are
entitled to the payment of the fair value of their shares and will appoint one
or more qualified appraisers to assist in the determination of the fair value
of the shares upon such investigation as the appraisers consider proper. The
appraisers will also allow the dissenting shareholders and the surviving
corporation to submit to them pertinent evidence as to the fair value of the
shares.
Upon receipt of the appraisers' report, the court will determine the fair
value of the shares of the dissenting shareholders and will direct the payment
by the surviving corporation to the dissenting shareholders of the amount of
the fair value of their shares, with interest thereon, beginning 91 days after
the effectiveness of the merger to the date of the judgment, upon receipt of
the dissenting shareholders' share certificates. Upon payment of the judgment,
the dissenting shareholders will cease to have any interest in the surviving
corporation. The court will allow the appraisers a reasonable fee as court
costs, and all court costs will be allotted between the parties in such manner
as the court determines to be fair and equitable.
Under Texas law, "fair value" of shares for purposes of the exercise of
dissenters' rights is defined as the value of the shares as of the day
immediately preceding the day the vote is taken authorizing the merger,
excluding any increase or decrease in value of the shares in anticipation of
the proposed merger. Such "fair value" is determined in the first instance by
appraisers appointed by the court, who are directed to make such determination
"upon such investigation as to them may seem proper." Any valuation techniques
or methods may be employed which are generally acceptable to the financial
community.
Any dissenting shareholder may withdraw his demand at any time before
receiving payment for his shares or before a claim has been filed seeking
determination of the fair value of his shares. No such dissenting shareholder
may withdraw his demand after payment has been made or where a claim has been
filed, unless the surviving corporation consents to the withdrawal.
If neither the dissenting shareholder nor the corporation files a claim with
an appropriate court within the permitted period of time, the dissenting
shareholder will be bound by the terms of the merger.
Shareholders of Old Edge considering appraisal rights should consider that
the payment which they eventually receive in exchange for their shares in a
dissenters' rights proceeding under Texas law could be less than, equal to or
greater than the eventual market value of the consideration they would receive
in the Merger.
An Old Edge shareholder who exercises his appraisal rights and receives cash
in exchange for his shares of Old Edge Common Stock will recognize taxable
gain or loss in an amount equal to the difference between (i) the sum of such
cash received and (ii) the basis of the shares of Old Edge Common Stock so
exchanged. Any such gain or loss recognized would be long-term capital gain or
loss if the shares of Old Edge Common Stock constitute capital assets in the
hands of the dissenting Old Edge shareholder and have been held by such
shareholder for more than one year at the Effective Time.
SHAREHOLDERS WHO ARE CONSIDERING DISSENTING FROM THE MERGER ARE URGED TO
CONSULT THEIR OWN LEGAL COUNSEL.
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Edge Group II Exchange Offer, Gulfedge Exchange Offer and Edge Group
Purchase Offer. Pursuant to the Edge Group II Exchange Offer, a partner of
Edge Group II may decline to exchange such partner's interest in Edge Group II
for shares of Common Stock. Under such circumstances, neither the Edge Group
II Partnership Agreement nor Connecticut law provides for appraisal or similar
rights for such non-exchanging partners. Pursuant to the Gulfedge Exchange
Offer, a partner of Gulfedge may decline to exchange such partner's interest
in Gulfedge for shares of Common Stock. Under such circumstances, neither the
Gulfedge Partnership Agreement nor Texas law provides for appraisal or similar
rights for such nonexchanging partners. Pursuant to the Edge Group Purchase
Offer, Edge Group may decline to exchange the Edge Group Joint Venture
Interest for shares of Common Stock. Under such circumstances, neither the
Joint Venture Agreement nor Texas law provides for appraisal or similar
rights.
INCLUSION ON NASDAQ NATIONAL MARKET
The Common Stock has been approved for inclusion on the Nasdaq National
Market under the symbol "EPEX."
RESTRICTIONS ON RESALE BY AFFILIATES
Rule 145 under the Securities Act places certain restrictions on the resale
of Common Stock received in the Merger by persons who are "affiliates" of Old
Edge or the Company. An affiliate of a party is any person who controls, is
controlled by or is under common control with such party. These restrictions
on resale prohibit any party or affiliate from reselling stock except in
accordance with the volume restrictions of Rule 144. The volume restrictions
of Rule 144 permit a person to sell, during any three-month period, no more
than the greater of one percent of the outstanding class of securities or the
average weekly trading volume of such class of security for four weeks prior
to the sale. Additionally, there are restrictions on the manner of sale, which
generally require the securities be sold in open market transactions without
prior solicitations of buyers or payment of consideration other than customary
brokerage commissions. These restrictions terminate for sales made two years
or more after the effective date of the Merger with respect to parties and
affiliates who are not also affiliated with the Company (and have not been
affiliated with the Company for three months preceding any such sale). All
persons who are affiliates of parties to the Merger will receive shares of
Common Stock bearing a restrictive legend against sales that are not in
compliance with Rule 145. Affiliates of the Company that receive Common Stock
in the other Combination Agreement Transactions will also generally be
restricted from resales other than in accordance with the volume, manner of
sale and notice provisions of Rule 144.
EXPENSES
The Joint Venture will initially pay all of the expenses incurred in the
Offering and the Combination Transactions. If the Combination Transactions are
not consummated, Old Edge shall pay 20% of any and all such expenses paid by
the Joint Venture to Edge Group II, Gulfedge and Edge Group in proportion to
their relative sharing ratios under the Joint Venture Agreement. If the
Offering and the Combination Transactions are consummated, the Company shall
reimburse the Joint Venture for any such expenses previously paid by it.
It is estimated that the expenses of the Offering and the Combination
Agreement Transactions (assuming 100% acceptance) will be as set forth below:
<TABLE>
<S> <C>
Filing fees................................................... $ 12,682
Legal fees and expenses....................................... 625,000
Accounting fees and expenses.................................. 450,000
Engineering fees and expenses................................. 35,000
Printing costs................................................ 310,000
Nasdaq listing fee............................................ 34,823
Blue Sky Fees and Expenses.................................... 10,000
NASD Filing Fee............................................... 4,410
Transfer Agent and Registrar Fees............................. 2,000
Miscellaneous expenses........................................ 16,085
----------
Total....................................................... $1,500,000
</TABLE>
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THE COMBINATION AGREEMENT
GENERAL
The Combination Agreement provides for (i) the Merger, (ii) the Edge Group
II Exchange Offer, (iii) the Gulfedge Exchange Offer and (iv) the Edge Group
Purchase Offer. The detailed terms and conditions relating to the consummation
of the Combination Agreement Transactions are contained in the Combination
Agreement, which is attached hereto as Appendix A and incorporated herein by
reference. The following discussion sets forth a description of certain
material terms and conditions of the Combination Agreement. The description in
this Joint Proxy and Consent Solicitation Statement/Prospectus of the terms
and conditions of the Combination Agreement Transactions is qualified in its
entirety by reference to the Combination Agreement.
EFFECTIVE TIME OF THE COMBINATION AGREEMENT TRANSACTIONS
The Combination Agreement provides that the Merger will become effective at
the time (the "Effective Time") when the Secretary of State of the State of
Texas has issued a certificate of merger in respect of the Merger. It is
anticipated that, if the Combination Agreement and the Plan of Merger are
approved and adopted at the Special Meeting and all other conditions to the
Combination have been satisfied or waived, such issuance will occur following
the Special Meeting and at the time of the closing of the Offering.
REPRESENTATIONS AND WARRANTIES
In the Combination Agreement, the Company, Old Edge, Edge Group II, Gulfedge
and Edge Group have made various representations and warranties relating to,
among other things, their respective ownership interests in the Joint Venture,
their respective capitalization, the satisfaction of certain legal
requirements for the Combination, the existence of certain litigation matters
and compliance of information provided in connection with this Joint Proxy and
Consent Solicitation Statement/Prospectus with the requirements of the
Securities Act, and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations thereunder. The representations
and warranties of each of the parties to the Combination Agreement will expire
at the Effective Time.
CONDITIONS
The respective obligations of the Company, Old Edge, Edge Group II, Gulfedge
and Edge Group to consummate the Combination Agreement Transactions are
subject to the satisfaction of the following conditions:
(i) the Company shall have consummated the Offering and the IPO price
will have been at least $14.50 per share of Common Stock;
(ii) the Combination Agreement and the Plan of Merger shall have been
approved and adopted by the holders of at least two-thirds of the
outstanding shares of Old Edge Common Stock entitled to vote at the Special
Meeting and no more than 10% of the shareholders of Old Edge shall have
exercised their dissenters' rights with respect to the Merger;
(iii) the general partners of Edge Group II and the limited partners of
Edge Group II holding at least 70% of the outstanding Edge Group II Units
shall have tendered their partnership interests in Edge Group II to the
Company pursuant to the Edge Group II Exchange Offer;
(iv) the partners of Edge Group II whose aggregate capital contributions
represent at least 60% of the aggregate capital contributions of all the
partners of Edge Group II shall have consented to the Change of Edge Group
II General Partners;
(v) the Merger, the Edge Group II Exchange Offer and the Offering shall
close simultaneously;
(vi) each party to the Combination Agreement shall have performed in all
material respects its respective agreements thereunder required to be
performed at or prior to the Effective Time and the
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representations and warranties of each party shall be true as of the
Closing Date or such earlier date as appropriate; and
(vii) no order restraining, prohibiting or delaying consummation of the
transactions by the Combination Agreement shall be issued and in effect.
CONDUCT OF BUSINESS PRIOR TO THE COMBINATION
Pursuant to the Combination Agreement, the Company, Old Edge, Edge Group II,
Gulfedge and Edge Group (solely with respect to its interest in the Joint
Venture, as applicable) have agreed that prior to the Effective Time, and
except as otherwise contemplated by the Combination Agreement or consented to
in writing by the other parties, each shall (i) conduct its business in the
ordinary course and shall use reasonable efforts to preserve intact its
present business organization, maintain the services of its present officers
and employees and preserve the relations with its customers, suppliers and
others having business relations with it; (ii) except as explicitly provided
in the Combination Agreement, not pay or declare dividends or other
distributions, split, combine or otherwise reclassify its capital stock or
partnership interest or directly or indirectly repurchase or otherwise acquire
shares of its capital stock; (iii) not issue any capital stock, partnership
interest or debt securities having voting rights for directors or any rights,
options, securities convertible or exchangeable therefor, except under
existing employee stock option plans or presently outstanding convertible or
exchangeable securities; and (iv) not amend or modify its certificates or
articles of incorporation, by-laws, partnership agreements or other governing
documents.
TERMINATION OR AMENDMENT OF THE COMBINATION AGREEMENT
The Combination Agreement provides that it may be terminated at any time
prior to the Effective Time, whether before or after approval of the Plan of
Merger by the shareholders of Old Edge or approval of any other matter by any
equityholder of the parties thereto, as follows:
(i) by the mutual consent of the Company, Old Edge, Edge Group II,
Gulfedge and Edge Group;
(ii) by either the Company, Old Edge, Edge Group II, Gulfedge or Edge
Group, (a) if the Effective Time has not occurred by July 30, 1997 unless
the Effective Time has not occurred due to the failure of the party seeking
termination to perform its agreements and covenants under the Combination
Agreement required to be performed by it at or prior to the Effective Time
or (b) if a court of competent jurisdiction or governmental, regulatory or
administrative agency or commission shall have issued an order, decree or
ruling or taken any other action, in each case permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by the
Combination Agreement; or
(iii) by the Company, if the Company determines that there is a
reasonable probability that the Offering will not be completed at an IPO
price of at least $14.50 per share of Common Stock, which determination
must be based upon written advice of the underwriters for the Offering to
all the venturers.
The Combination Agreement provides that at any time before or after approval
of the Merger by the shareholders of Old Edge, or approval of any other matter
by any equityholder of the parties to the Combination Agreement, such parties
may modify or amend the Combination Agreement.
INDEMNIFICATION
The Company has agreed to indemnify the general partners of the partners of
Edge Group, the general partners of Edge Group II and Gulfedge, and the
directors and officers of Old Edge for certain liabilities incurred in
connection with the Combination Agreement Transactions.
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THE MERGER AND THE SPECIAL MEETING
GENERAL
The Special Meeting will be held at , Houston, Texas on , 1997
at a.m., Houston time, to consider and to vote upon a proposal to approve
and adopt the Combination Agreement and the Plan of Merger included therein.
At the Effective Time, (i) each share of Old Edge Common Stock outstanding
immediately prior to the Effective Time (other than the shares referred to in
(iii) below and shares held by holders who exercise their dissenters' rights)
will be converted into the right to receive 22.307862 (the "Old Edge Exchange
Ratio") shares of Common Stock (the "Merger Consideration") from the Company,
(ii) each share of common stock of Mergeco outstanding immediately prior to
the Effective Time will be converted into and become 100 shares of common
stock of the Surviving Corporation and shall constitute the only outstanding
shares of capital stock of the Surviving Corporation, (iii) each share of Old
Edge Common Stock that is held by Old Edge or any subsidiary thereof as
treasury stock immediately prior to the Effective Time will be canceled, and
no payment shall be made with respect thereto, (iv) each share of Common Stock
of the Company outstanding immediately prior to the Effective Time (all of
which shares are owned by Old Edge) will be canceled, and no payment shall be
made with respect thereto, and (v) each unexpired option to purchase Old Edge
Common Stock that is outstanding at the Effective Time, whether or not
exercisable, will automatically and without any action on the part of the
holder thereof be converted into an option to purchase a number of shares of
Common Stock equal to the number of shares of Old Edge Common Stock that could
be purchased under such option multiplied by the Old Edge Exchange Ratio at a
price per share of Common Stock equal to the per share exercise price of such
option divided by the Old Edge Exchange Ratio.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF OLD EDGE HAS APPROVED THE COMBINATION AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY AND HAS DETERMINED THAT SUCH
TRANSACTIONS ARE IN THE BEST INTERESTS OF OLD EDGE AND ITS SHAREHOLDERS. THE
BOARD OF DIRECTORS OF OLD EDGE RECOMMENDS THAT THE SHAREHOLDERS OF OLD EDGE
VOTE FOR APPROVAL AND ADOPTION OF THE COMBINATION AGREEMENT, INCLUDING THE
PLAN OF MERGER.
In reaching the conclusion that the Merger is in the best interests of Old
Edge and its shareholders, the Board of Directors of Old Edge considered a
number of factors, including the following: (i) the shares of Common Stock
issued in the Merger will be quoted on the Nasdaq National Market, as
contrasted with their shares of Old Edge Common Stock for which no public
market exists, (ii) the Merger will entitle shareholders of Old Edge to
receive Common Stock in a tax-free transaction, (iii) consummation of the
Combination Agreement Transactions will enable shareholders of Old Edge to
participate in the continued development of the Joint Venture's projects, as
well as new projects developed by the Company, (iv) the Merger will allow Old
Edge shareholders to participate in an entity with a larger asset base than
that of Old Edge alone, (v) the failure to approve the Merger could result in
a distribution of most of the Joint Venture's assets to parties other than Old
Edge both during and after the Joint Venture's windup period, thereby
diverting the attention of Old Edge management from normal operations and
disrupting the growth and momentum of such operations and (vi) the Merger and
the other Combination Transactions will facilitate the Offering, which will
provide the new entity with a significant source of liquidity. The
consequences of the Merger will differ for each shareholder of Old Edge,
however, and the Board of Directors of Old Edge urges each shareholder to
review carefully the information in this Joint Proxy and Consent Solicitation
Statement/Prospectus to evaluate the Merger in the context of his or her
personal financial and tax position and to consult with her or her own
business and tax advisors. See "The Combination Transactions--Restrictions on
Resale by Affiliates."
RECORD DATE; QUORUM
Only shareholders of record of Old Edge at the close of business on the
Record Date, , 1997, will be entitled to notice of, and to vote at, the
Special Meeting. On the Record Date, there were 104,630.6 shares
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of Old Edge Common Stock outstanding and entitled to vote at the Special
Meeting. Each holder of shares of Old Edge Common Stock on the Record Date is
entitled to one vote for each such share of Old Edge Common Stock so held,
exercisable in person or by properly executed and delivered proxy, at the
Special Meeting. The presence of the holders of at least a majority of the
shares of Old Edge Common Stock entitled to vote, whether present in person or
by properly executed and delivered proxy, will constitute a quorum for
purposes of the Special Meeting.
VOTE REQUIRED
The affirmative vote of the holders of record of at least two-thirds of the
outstanding shares of Old Edge Common Stock entitled to vote at the Special
Meeting is necessary to approve and to adopt the Combination Agreement,
including the Plan of Merger. As of the Record Date, Old Edge's executive
officers and directors and their affiliates (as a group) had, with respect to
the Merger, the right to vote an aggregate of 85,100 shares of Old Edge Common
Stock, representing approximately 81% of the shares of Old Edge Common Stock
then outstanding and have indicated that they expect to vote for approval and
adoption of the Combination Agreement, including the Plan of Merger.
COUNTING OF VOTES
All matters that are to be voted on at the Special Meeting will be by
written ballot. An inspector of election, who may be an employee of Old Edge,
will be appointed, among other things, to determine the number of shares
outstanding and the voting power of each, the shares represented at the
Special Meeting, the existence of a quorum and the authenticity, validity and
effect of proxies, to receive votes or ballots, to hear and determine all
challenges and questions in any way arising in connection with the right to
vote, to count and tabulate all votes and to determine the result. Abstentions
will be included for purposes of establishing a quorum, will be tallied as
votes having been made, will not be treated as affirmative votes and will
therefore have the effect of a vote cast against the proposal to approve and
adopt the Combination Agreement, including the Plan of Merger.
PROXIES
OLD EDGE'S SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING FORM OF PROXY AND RETURN IT PROMPTLY TO OLD EDGE IN THE ENCLOSED
POSTAGE-PAID ENVELOPE. When the accompanying form of proxy is returned
properly executed, the shares of Old Edge Common Stock represented thereby
will be voted at the Special Meeting in accordance with the instructions
contained therein. If a proxy is executed and returned without an indication
as to how the shares of Old Edge Common Stock represented thereby are to be
voted, such shares will be voted to approve and to adopt the Combination
Agreement, including the Plan of Merger.
Any shareholder of Old Edge giving a proxy pursuant to this solicitation has
the power to revoke it at any time before it is voted at the Special Meeting.
A later-dated proxy or written notice of revocation given prior to the vote at
the Special Meeting to the Secretary of Old Edge will serve to revoke such
proxy. By attending the Special Meeting in person, a shareholder of Old Edge
may, if he or she wishes, vote by ballot at the Special Meeting, thereby
canceling any proxy previously given. Mere presence at the Special Meeting
will not revoke any proxy previously given.
OTHER MATTERS TO BE CONSIDERED
The Board of Directors of Old Edge is not aware of any other matter which
will be brought before the Special Meeting. If, however, other matters are
presented, proxies will be voted in accordance with the discretion of the
holders of such proxies.
SOLICITATION OF PROXIES
The cost of soliciting proxies from holders of Old Edge will initially be
borne by the Joint Venture and Old Edge as described under "The Combination
Transactions--Expenses." Upon the consummation of the
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Combination Agreement Transactions and the Offering, the Company will
reimburse the Joint Venture for any such expenses previously paid by it. In
addition to the use of the mails, proxies may be solicited by persons
regularly employed by Old Edge by personal interview, telephone and telegraph.
Such persons will receive no additional compensation for such services, but
will be reimbursed by Old Edge for any out-of-pocket expenses incurred by them
in connection with such services.
PROCEDURE TO EXCHANGE CERTIFICATES IN THE MERGER
Promptly after the Effective Time, the Surviving Corporation will send to
each record holder of shares of Old Edge Common Stock immediately prior to the
Effective Time, other than holders who exercise their dissenters' rights, (i)
a letter of transmittal for use in exchanging certificates representing shares
of Old Edge Common Stock for the Merger Consideration and (ii) instructions
for use in effecting the surrender of the certificates representing shares of
Old Edge Common Stock in exchange for certificates representing shares of
Common Stock. From and after the Effective Time, there shall be no further
registration of transfers on the books of Old Edge of shares of Old Edge
Common Stock that were outstanding immediately prior to the Effective Time.
SHARE CERTIFICATES SHOULD NOT BE SURRENDERED FOR EXCHANGE BY SHAREHOLDERS OF
OLD EDGE PRIOR TO THE RECEIPT OF A LETTER OF TRANSMITTAL.
No fractional shares of Common Stock will be issued in the Merger. Each
shareholder of Old Edge otherwise entitled to a fractional share will receive
a whole share of Common Stock in lieu of any fractional share interest to
which such holder would otherwise be entitled. For purposes of determining the
number of shares of Common Stock to be issued in the Merger, Old Edge Common
Stock held by one person in multiple accounts will be aggregated.
Until such time as a shareholder of Old Edge submits the letter of
transmittal and his or her outstanding share certificate, each certificate for
shares of Old Edge Common Stock will after the Effective Time represent for
all purposes only the right to receive the Merger Consideration. Until so
surrendered, no dividends or other distributions payable to the holders of
Common Stock, as to any time on or after the Effective Time, will be paid to
the holders of such outstanding certificates. Upon surrender of certificates
for Old Edge Common Stock for cancellation to the Surviving Corporation,
together with a duly executed letter of transmittal and such other documents
as the Surviving Corporation reasonably requires, the holder of such
certificates will be entitled to receive in exchange therefor a certificate
representing that number of whole shares of Common Stock into which the shares
of Old Edge Common Stock theretofore represented by the certificates for Old
Edge Common Stock so surrendered have been converted.
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THE EDGE GROUP II EXCHANGE OFFER AND CONSENT SOLICITATION
DESCRIPTION
General Partner Interests. The Company hereby offers, upon the terms and
subject to the conditions set forth herein and in the Edge Group II Letter of
Acceptance furnished herewith to the general and limited partners of Edge
Group II, to exchange for all of the general partner interests in Edge Group
II the GP Exchange Shares, which are a number of shares of Common Stock equal
to the whole number nearest to the sum of (i) the GP's Before Payout Shares
(which shares are attributable to the general partners' 1% interest in
distributions before Edge Group II distributes to its partners the Payout
Amount (which equals $20,188,636)), (ii) the GP's Management Fee Shares (which
shares are attributable to the general partners' accrued but unpaid and future
cash flow-based management fees) and (iii) the GP's After Payout Shares (which
shares are attributable to the general partners' 25% interest in distributions
after Edge Group II distributes to its partners the Payout Amount). The GP's
Before Payout Shares are a number of shares of Common Stock equal to the
quotient of (i) $201,886 (which equals 1% of the Payout Amount) divided by
(ii) the IPO price. The GP's Management Fee Shares are a number of shares of
Common Stock equal to the quotient of (i) the Management Fee Amount, which is
equal to the sum of (A) $1,332,450 (which equals the general partners' accrued
but unpaid management fees) plus (B) 3% multiplied by 2,209,306 (which equals
the total number of shares of Common Stock being offered for all limited and
general partner interests in Edge Group II) multiplied by the IPO price (which
product in (B) is attributable to the general partners' future cash flow-based
management fees), divided by (ii) the IPO price. The GP's After Payout Shares
are a number of shares of Common Stock equal to the quotient of (i) 25% of the
difference between (A) the product of the IPO price multiplied by 2,209,306
and (B) the sum of (1) the Payout Amount plus (2) the Management Fee Amount
divided by (ii) the IPO price. Assuming an IPO price of $16.00 per share, the
number of shares of Common Stock offered in exchange for all of the general
partner interests in Edge Group II would be 361,665. Assuming an IPO price of
$14.50 per share (the IPO price at which the Offering must be completed in
order for the related condition to the consummation of the Combination
Agreement to be satisfied), the number of shares of Common Stock offered in
exchange for all of the general partner interests in Edge Group II would be
336,799. The general partners of Edge Group II must jointly tender all of
their general partner interests if they tender any of their general partner
interests. The aggregate number of shares of Common Stock to be offered in
exchange for the general partner interests in Edge Group II has been
determined as set forth under "The Combination Transactions--Background of and
Reasons for the Combination Transactions."
Limited Partner Interests. The Company hereby offers, upon the terms and
subject to the conditions set forth herein and in the Edge Group II Letter of
Acceptance furnished herewith to the general and limited partners of Edge
Group II, to exchange for each Edge Group II Unit, which represent limited
partner interests in Edge Group II, the number of shares of Common Stock equal
to the whole number nearest to the quotient of (i) difference between (A)
2,209,306 (the aggregate number of shares of Common Stock offered in exchange
for all outstanding limited and general partner interests in Edge Group II)
and (B) the aggregate number of GP Exchange Shares, divided by (ii) 189 (the
total number of Edge Group II Units outstanding). Assuming an IPO price of
$16.00 per share, the number of shares of Common Stock offered in exchange for
all of the outstanding Edge Group II Units would be 1,847,641 and for each
Edge Group II Unit would be 9,776. Assuming an IPO price of $14.50 per share
(the IPO price at which the Offering must be completed in order for the
satisfaction of the related condition to the parties' obligations to
consummate the Combination Agreement), the number of shares of Common Stock
offered in exchange for all of the outstanding Edge Group II Units would be
1,872,507 and for each Edge Group II Unit would be 9,907.
Each limited partner of Edge Group II must tender all of his or her Edge
Group II Units if he or she tenders any of his or her Edge Group Units. The
aggregate number of shares of Common Stock offered in exchange for the Edge
Group II Units has been determined as set forth under "The Combination
Transactions--Background of and Reasons for the Combination Transactions."
Pursuant to the Combination Agreement, the general partners of Edge Group II
have consented to the transfer of the Edge Group II Units pursuant to the Edge
Group II Exchange Offer. Those limited partners of Edge Group II who tender
their respective Edge Group II Units in
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exchange for shares of Common Stock will by so tendering have consented to,
approved and ratified the terms of the Edge Group II Exchange Offer and the
other Combination Transactions, including the number of shares of Common Stock
that will be issued to the general partners of Edge Group II. Accordingly, by
tendering Edge Group II Units, limited partners of Edge Group II will approve
the overall terms and structure of the Edge Group II Exchange Offer and will
give up any right to challenge any aspect of the general partners' and their
affiliates' (including Old Edge and its management) actions regarding the
Combination Transactions, including without limitation, the allocation of
shares among any parties receiving shares in the Combination Transactions and
further specifically including any decisions regarding the shares of Common
Stock being offered by the Company for the general partner interest in Edge
Group II. See "Risk Factors--Effect of the Edge Group II Exchange Offer on
Exchanging Limited Partners of Edge Group II."
No fractional shares of Common Stock will be issued. Instead, the number of
shares of Common Stock to be issued to each limited partner of Edge Group II
in exchange for his or her Edge Group II Units will be rounded to the nearest
whole number of shares of Common Stock.
THE CONSENT SOLICITATION
General. This Joint Proxy and Consent Solicitation Statement/Prospectus is
also being furnished to partners of Edge Group II in connection with the
solicitation by the general partners of Edge Group II of written consents
approving the transfer of the general partner interest in Edge Group II to the
Company or its permitted assigns and the withdrawal of the current general
partners as general partners of Edge Group II (the "Change of Edge Group II
General Partners"). A partner's tender of his or her interest in Edge Group II
will not be accepted unless he or she consents to the Change of Edge Group II
General Partners unless such requirement with respect to a specific partner's
tender is waived by the Company, which waiver will only be given if other
partners of Edge Group II whose aggregate contributions to capital of Edge
Group II represent at least 60% of the aggregate contributions to capital of
all partners of Edge Group have consented to the Change of Edge Group II
General Partners.
Consent Required. The consent of partners of Edge Group II whose aggregate
contributions of capital to Edge Group II represent at least 60% of the
aggregate contributions of all partners of Edge Group II is necessary for the
consent to the Change of Edge Group II General Partners. As of the date of
this Joint Proxy and Consent Solicitation Statement/Prospectus, the Company's
executive officers and directors and their affiliates, including the general
partners of Edge Group II (as a group), held partner interests in Edge Group
II with respect to which contributions of capital to Edge Group II represented
approximately 6.6% of the aggregate contributions of all partners of Edge
Group II. All of such parties have indicated to the Company that they intend
to consent to the Change of Edge Group II General Partners, including the
general partners of Edge Group II who have agreed to consent to the Change of
Edge Group II Partners pursuant to the Combination Agreement. Only partners of
record on the date of this Joint Proxy and Consent Solicitation
Statement/Prospectus may give or withhold consent to the Change of Edge Group
II General Partners, and assignees of interest who are not partners on that
date have no voting rights. Receipt of the consent to the Change of Edge Group
II General Partners is a condition to consummation of the Edge Group II
Exchange Offer. See "The Combination Agreement--Conditions."
RECOMMENDATION OF THE GENERAL PARTNERS OF EDGE GROUP II
NAPAMCO, LTD. AND MR. JOHN SFONDRINI, AS THE GENERAL PARTNERS OF EDGE GROUP
II, ARE OF THE VIEW THAT ACCEPTANCE OF THE EDGE GROUP II EXCHANGE OFFER AND
CONSENT TO THE CHANGE OF EDGE GROUP II GENERAL PARTNERS IS ADVISABLE AND IN
THE BEST INTERESTS OF THE PARTNERS OF EDGE GROUP II AND RECOMMEND THAT THE
PARTNERS OF EDGE GROUP II ACCEPT THE EDGE GROUP II EXCHANGE OFFER AND GIVE THE
RELATED APPROVALS CONCERNING THE COMBINATION TRANSACTIONS INCLUDING THOSE
RELATING TO THE CHANGE OF EDGE GROUP II GENERAL PARTNERS AND THOSE RELATING TO
APPROVAL OF THE NUMBER OF SHARES BEING OFFERED TO ALL PARTIES IN THE
COMBINATION TRANSACTIONS INCLUDING THE GENERAL PARTNERS OF EDGE GROUP II AND
THEIR AFFILIATES.
In reaching the conclusion that the Edge Group II Exchange Offer was in the
best interest of the limited partners, Napamco, Ltd. and Mr. John Sfondrini
considered a number of factors including the following: The
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shares of Common Stock issued in the Edge Group II Exchange Offer will be
publicly traded as contrasted with the limited partner interests of the
limited partners for which no public market exists, the Edge Group II Exchange
Offer will entitle the limited partners to receive Common Stock in a tax-free
transaction, consummation of the Combination Transactions will enable the
limited partners to participate not only in pending Joint Venture projects,
but also in continued operations of the Company, the Edge Group II Exchange
Offer will allow the limited partners to participate in an entity with a
larger asset base than Edge Group II, failure to effectuate the Edge Group II
Exchange Offer would result in the limited partners' not participating in the
Company's going concern value and technological competence and/or any future
growth of the Company.
PROCEDURE FOR TENDERING INTERESTS; CONSENT PROCEDURE
Partners of Edge Group II may tender their interests and consent to the
Change of Edge Group II General Partners by properly completing and executing
the Letter of Acceptance accompanying this Joint Proxy and Solicitation
Statement/Prospectus in accordance with the instructions contained therein,
and delivering it, together with any requisite supporting documents indicated
in the Letter of Acceptance, prior to the Expiration Date to the Company at
the following address:
Edge Petroleum Corporation
Texaco Heritage Plaza
1111 Bagby, Suite 2100
Houston, Texas 77002
Delivery of a Letter of Acceptance is at the risk of the partner of Edge
Group II. To ensure receipt of the Letter of Acceptance and any other required
documents when sent by U.S. Mail, it is suggested that partners use certified
or registered mail with a return receipt requested.
Interests in Edge Group II will not be validly tendered unless the Letter of
Acceptance has been completely and fully executed in accordance with the
instructions thereto and accompanied by all other required documents in form
and substance satisfactory to the Company. If a Letter of Acceptance is
returned without an indication as to whether the partner of Edge Group II
consents to the Change of Edge Group II General Partners or withholds such
consent, such partner will be deemed to have consented to the Change of Edge
Group II General Partners. All questions concerning the validity, form and
eligibility (including time of receipt of tenders) will be determined by the
Company, whose determination will be final and binding. See "--Validity of
Tenders" below.
ACCEPTANCE OF TENDERS; DELIVERY OF SHARES
On the Closing Date, subject to satisfaction or waiver of the conditions to
the Edge Group II Exchange Offer, including the receipt of the consent to the
Change of Edge Group II General Partners, the Company will accept all
interests properly tendered pursuant to the Edge Group II Exchange Offer. See
"The Combination Agreement--Conditions." The closing of the Edge Group II
Offer will be concurrent with that of the Offering. Such closing date is
currently not expected to occur prior to February 28, 1997, although it may
occur as early as the Expiration Date. The Company will cause delivery of the
shares of Common Stock of the Company issuable in exchange for the interests
in Edge Group II to be made as soon as practicable after the Closing Date.
REVOCATION OF TENDERS AND CONSENTS
Tenders of partner interests in Edge Group II and consents to the Change of
Edge Group II General Partners may be revoked at any time prior to , 1997
by sending notice of revocation to the Company, which notice will be effective
upon receipt by the Company. This notice should identify the partner and
indicate an intention to revoke a prior tender and withhold consent to the
Change of Edge Group II General Partners.
REPRESENTATIONS AND COVENANTS
Each partner represents in the Letter of Acceptance that he or she has and,
as of the Closing Date, will have, the right and authority to transfer his or
her partner interests in Edge Group II, and that his or her partner interests
in Edge Group II are free and clear of all liens, encumbrances and adverse
claims. The Letter of Acceptance also contains a covenant by the partner to
execute any additional documents and instruments that
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may reasonably be required to more effectively transfer to and vest in the
Company the tendered partner interests in Edge Group II and a power of
attorney to the Company to permit the Company, as general partner of Edge
Group II, to execute on his or her behalf any additional documents necessary
to consummate the Edge Group II Exchange Offer.
EXPIRATION DATE, AMENDMENTS, ETC.
The Edge Group II Exchange Offer and the solicitation of consent to the
Change of Edge Group II General Partners will be held open for days (20
business days) from the date of this Joint Proxy and Consent Solicitation
Statement/Prospectus and will expire at p.m., 12:00 midnight, New York
City time, on the Expiration Date. The Expiration Date will be , 1997,
unless extended by the Company. Notice of extension of the Expiration Date, if
made, will be given by press release or other public announcement and may be
given by mail to each partner of Edge Group II. An extension will be effective
upon notice to the general partners of Edge Group II.
The Company expressly reserves the right, in its sole discretion at any time
or from time to time by oral or written notice to the general partners of Edge
Group II, (i) to delay acceptance for exchange of or, regardless of whether
such partner interests in Edge Group II were theretofore accepted for
exchange, exchange of any partner interests in Edge Group II pursuant to the
Edge Group II Exchange Offer, (ii) to terminate the Edge Group II Exchange
Offer and not accept for exchange any partner interests in Edge Group II not
theretofore accepted for exchange upon the non-satisfaction or non-waiver of
any of the conditions referred to under "The Combination Agreement--
Conditions," (iii) to waive any condition to its obligations to accept partner
interests for exchange and (iv) at any time and from time to time, to amend
the terms of the Edge Group II Exchange Offer in any respect. Upon any such
delay, termination or amendment, the partners of Edge Group II will be so
notified promptly.
VALIDITY OF TENDERS
All questions concerning the validity, form, eligibility (including time of
receipt) and acceptance of tendered partner interests in Edge Group II will be
determined by the Company, whose determination will be final and binding. The
interpretation by the Company of the terms and conditions of the Edge Group II
Exchange Offer (including the instructions to the Letter of Acceptance) will
also be final and binding. The Company reserves the right to waive any
irregularities or conditions regarding the manner of tender. Any
irregularities in connection with tenders must be cured within such time as
the Company determines unless waived by it.
Tenders will be deemed not to have been made until any irregularities have
been cured or waived. Any Letter of Acceptance not properly completed and
executed will be returned by the Company to the tendering partner as soon as
practicable unless the irregularities are cured or waived. The Company is not
under any duty to give notification of defects in tenders and will not incur
any liability for failure to give notification. Delivery of the Letter of
Acceptance is at the risk of the partner. A tender will be effective only when
the Letter of Acceptance is actually received by the Company. See "--Procedure
for Tendering Interests; Consent Procedure."
SOLICITATION OF LETTERS OF ACCEPTANCE
The cost of soliciting Letters of Acceptance (including consents to the
Change of Edge Group II General Partners) from partners of Edge Group II will
initially be paid as described under "The Combination Transactions--Expenses."
Upon the consummation of the Combination Agreement Transactions and the
Offering, the Company will reimburse the Joint Venture for any such expenses
previously paid by it. In addition to the use of the mails, consents may be
solicited by persons regularly employed by the Company by personal interview,
telephone and telegraph. Such persons will receive no additional compensation
for such services, but will be reimbursed by the Company for any out-of-pocket
expenses incurred by them in connection with such services.
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THE GULFEDGE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the Gulfedge Letter of Acceptance, to exchange an
aggregate of 74,317 shares of Common Stock for all of the outstanding Gulfedge
Units. Each limited partner of Gulfedge must tender all of his or her Gulfedge
Units if he or she tenders any of his or her Gulfedge Units. The aggregate
number of shares of Common Stock offered in exchange for the Gulfedge Units
has been determined as set forth under "The Combination Transactions--
Background of and Reasons for the Combination Transactions." Pursuant to the
Combination Agreement, the general partner of Gulfedge has consented to the
transfer of limited partner interests pursuant to the Gulfedge Exchange Offer.
Those limited partners of Gulfedge who tender their respective Gulfedge Units
in exchange for shares of Common Stock will by so tendering have consented to,
approved and ratified the terms of the Gulfedge Exchange Offer and the other
Combination Transactions. Accordingly, by tendering Gulfedge Units, limited
partners of Gulfedge will approve the overall terms and structure of the
Gulfedge Exchange Offer and will give up any right to challenge any aspect of
Old Edge's and its officers', directors' and other affiliates' actions
regarding the Combination Transactions, including, without limitation the
allocation of shares among any parties receiving shares in the Combination
Transactions. See "Risk Factors--Risks Associated with the Combination
Transactions--Effect of the Gulfedge Exchange Offer on Exchanging Limited
Partners of Gulfedge."
The number of shares of Common Stock to be issued in exchange for each
Gulfedge Unit will be determined by dividing 74,317 (the aggregate number of
shares of Common Stock offered in exchange for the Gulfedge Units) by 7 (the
total number of Gulfedge Units outstanding), which would result in the
issuance of 10,617 shares of Common Stock for each tendered Gulfedge Unit. No
fractional shares of Common Stock will be issued. Instead, the number of
shares of Common Stock issued to each limited partner of Gulfedge in exchange
for his or her Gulfedge Units will be rounded to the nearest whole number of
shares of Common Stock.
RECOMMENDATION OF THE GENERAL PARTNER OF GULFEDGE
OLD EDGE, AS GENERAL PARTNER OF GULFEDGE, HAS DETERMINED THAT ACCEPTANCE OF
THE GULFEDGE EXCHANGE OFFER IS ADVISABLE AND IN THE BEST INTERESTS OF THE
LIMITED PARTNERS OF GULFEDGE AND RECOMMENDS THAT THE LIMITED PARTNERS OF
GULFEDGE ACCEPT THE GULFEDGE EXCHANGE OFFER AND GIVE THE RELATED APPROVAL
CONCERNING THE COMBINATION TRANSACTIONS.
In reaching the conclusion that acceptance of the Gulfedge Exchange Offer is
in the best interests of the limited partners of Gulfedge, Old Edge considered
a number of factors, including the following: (i) the shares of Common Stock
issued in exchange for the Gulfedge Units will be quoted on the Nasdaq
National Market, as contrasted with their Gulfedge Units for which no public
market exists, (ii) the Gulfedge Exchange Offer will entitle limited partners
of Gulfedge to receive Common Stock in a tax-free transaction, (iii) the
consummation of the Gulfedge Exchange Offer will enable limited partners of
Gulfedge to participate in the continued development of the Joint Venture's
projects, as well as new projects developed by the Company, (iv) the Gulfedge
Exchange Offer will allow limited partners of Gulfedge to participate in an
entity with a larger asset base than that of Gulfedge alone and (v) the
Gulfedge Exchange Offer and the other Combination Transactions will facilitate
the Offering, which will provide the new entity with a significant source of
liquidity. See "Comparison of Securityholder Rights." The consequences of the
Gulfedge Exchange Offer will differ for each limited partner, however, and Old
Edge urges each limited partner to review carefully the information in this
Joint Proxy and Solicitation Statement/Prospectus to evaluate the Gulfedge
Exchange Offer in the context of his or her personal financial and tax
position and to consult with his or her own business and tax advisors. See
"The Combination Transactions--Conflicts of Interests; Interests of Certain
Persons and Affiliates in the Combination Transactions" and "The Combination
Transactions--Restrictions on Resale by Affiliates."
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PROCEDURE FOR TENDERING INTERESTS
Limited partners of Gulfedge may tender their Gulfedge Units by properly
completing and executing the Letter of Acceptance accompanying this Joint
Proxy and Solicitation Statement/Prospectus in accordance with the instruction
contained therein, and delivering it, together with any requisite supporting
documents indicated in the Letter of Acceptance, prior to the Expiration Date
to the Company at the following address:
Edge Petroleum Corporation
Texaco Heritage Plaza
1111 Bagby, Suite 2100
Houston, Texas 77002
Delivery of a Letter of Acceptance is at the risk of the limited partner of
Gulfedge. To ensure receipt of the Letter of Acceptance and any other required
documents when sent by U.S. Mail, it is suggested that limited partners use
certified or registered mail with a return receipt requested.
Gulfedge Units will not be validly tendered unless the Letter of Acceptance
has been completely and fully executed in accordance with the instructions
thereto and accompanied by all other required documents in form and substance
satisfactory to the Company. All questions concerning the validity, form and
eligibility (including time of receipt of tenders) will be determined by the
Company, whose determination will be final and binding. See "--Validity of
Tenders" below.
ACCEPTANCE OF TENDERS; DELIVERY OF SHARES
On the Closing Date, subject to satisfaction or waiver of the conditions to
the Gulfedge Exchange Offer, the Company will accept all Gulfedge Units
properly tendered pursuant to the Gulfedge Exchange Offer. See "The
Combination Agreement--Conditions." The Company will cause delivery of the
shares of Common Stock of the Company issuable in exchange for the Gulfedge
Units to be made as soon as practicable after the Closing Date.
REVOCATION OF TENDERS
Tenders of Gulfedge Units may be revoked at any time prior to , 1997 by
sending notice of revocation to the Company, which notice will be effective
upon receipt by the Company. This notice should identify the limited partner
and indicate an intention to revoke a prior tender.
REPRESENTATIONS AND COVENANTS
Each limited partner represents in the Letter of Acceptance that he or she
has and, as of the Closing Date, will have, the right and authority to
transfer his or her Gulfedge Units, and that his or her Gulfedge Units are
free and clear of all liens, encumbrances and adverse claims. The Letter of
Acceptance also contains a covenant by the limited partner to execute any
additional documents and instruments that may reasonably be required to more
effectively transfer to and vest in the Company the tendered Gulfedge Units
and a power of attorney to Old Edge to permit Old Edge, as general partner of
Gulfedge, to execute on his or her behalf any additional documents necessary
to consummate the Gulfedge Exchange Offer.
EXPIRATION DATE, AMENDMENTS, ETC.
The Gulfedge Exchange Offer will be held open for days (20 business
days) from the date of this Joint Proxy and Solicitation Statement/Prospectus
and will expire at 12:00 midnight, New York City Time on the Expiration Date.
The Expiration Date will be , 1997 unless extended by the Company. Notice
of extension of the Expiration Date, if made, will be given by press release
or other public announcement and may be given by mail to each limited partner.
An extension will be effective upon the giving of notice.
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The Company expressly reserves the right, in its sole discretion at any time
or from time to time by oral or written notice to the limited partners of
Gulfedge, (i) to delay acceptance for exchange of or, regardless of whether
such Gulfedge Units were theretofore accepted for exchange, exchange of any
Gulfedge Units pursuant to the Gulfedge Exchange Offer, (ii) to terminate the
Gulfedge Exchange Offer and not accept for exchange any Gulfedge Units not
theretofore accepted for exchange upon the non-satisfaction or non-waiver of
any of the conditions referred to under "The Combination Agreement--
Conditions," (iii) to waive any condition to its obligations to accept
Gulfedge Units for exchange and (iv) at any time and from time to time, to
amend the terms of the Gulfedge Exchange Offer in any respect. Upon any such
delay, termination or amendment, the limited partners of Gulfedge will be so
notified promptly.
VALIDITY OF TENDERS
All questions concerning the validity, form, eligibility (including time of
receipt) and acceptance of tendered Gulfedge Units will be determined by the
Company, whose determination will be final and binding. The interpretation by
the Company of the terms and conditions of the Gulfedge Exchange Offer
(including the instructions to the Letter of Acceptance) will also be final
and binding. The Company reserves the right to waive any irregularities or
conditions regarding the manner of tender. Any irregularities in connection
with tenders must be cured within such time as the Company determines unless
waived by it.
Tenders will be deemed not to have been made until any irregularities have
been cured or waived. Any Letter of Acceptance not properly completed and
executed will be returned by the Company to the tendering partner as soon as
practicable unless the irregularities are cured or waived. The Company is not
under any duty to give notification of defects in tenders and will not incur
any liability for failure to give notification. Delivery of the Letter of
Acceptance is at the risk of the limited partner. A tender will be effective
only when the Letter of Acceptance is actually received by the Company. See
"--Procedure for Tendering Interests."
SOLICITATION OF LETTERS OF ACCEPTANCE
The cost of soliciting Letters of Acceptance from limited partners of
Gulfedge will initially be paid as described under "The Combination
Transactions--Expenses." Upon the consummation of the Combination Agreement
Transactions and the Offering, the Company will reimburse the Joint Venture
for any such expenses previously paid by it. In addition to the use of the
mails, letters of transmittal may be solicited by persons regularly employed
by the Company by personal interview, telephone and telegraph. Such persons
will receive no additional compensation for such services, but will be
reimbursed by the Company for any out-of-pocket expenses incurred by them in
connection with such services.
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THE EDGE GROUP PURCHASE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the Edge Group Letter of Acceptance, to purchase Edge
Group's Joint Venture Interest for consideration consisting of an aggregate of
42,896 shares of Common Stock. Edge Group must sell all of its Joint Venture
Interest if it sells any of its Joint Venture Interest. The number of shares
of Common Stock offered as consideration for Edge Group's Joint Venture
Interest has been determined as set forth under "The Combination
Transactions--Background of and Reasons for the Combination Transactions."
Pursuant to the Combination Agreement, the other general partners of the Joint
Venture have consented to the transfer of Edge Group's Joint Venture Interest
pursuant to the Edge Group Purchase Offer. In transferring its Joint Venture
Interest, Edge Group must similarly transfer any rights or assets distributed
to it or relating to its interest as a venturer in the Joint Venture.
PROCEDURE FOR ACCEPTANCE
Edge Group may accept the Edge Group Purchase Offer by properly completing
and executing the Letter of Acceptance accompanying this Joint Proxy and
Solicitation Statement/Prospectus in accordance with the instructions
contained therein, and delivering it, together with any requisite supporting
documents indicated in the Letter of Acceptance, prior to the Expiration Date
to the Company at the following address:
Edge Petroleum Corporation
Texaco Heritage Plaza
1111 Bagby, Suite 2100
Houston, Texas 77002
Delivery of a Letter of Acceptance is at the risk of Edge Group. To ensure
receipt of the Letter of Acceptance and any other required documents when sent
by U.S. Mail, it is suggested that Edge Group use certified or registered mail
with a return receipt requested.
The Edge Group Purchase Offer will not be validly accepted unless the Letter
of Acceptance has been completely and fully executed in accordance with the
instructions thereto and accompanied by all other required documents in form
and substance satisfactory to the Company. All questions concerning the
validity, form and eligibility (including time of receipt of such acceptance)
will be determined by the Company, whose determination will be final and
binding. See "--Validity of Acceptance" below.
PURCHASE; DELIVERY OF SHARES
On the Closing Date, subject to satisfaction or waiver of the conditions to
the Edge Group Purchase Offer, the Company will purchase Edge Group's Joint
Venture Interest if Edge Group has properly accepted the Edge Group Purchase
Offer. See "The Combination Agreement--Conditions." The Company will cause
delivery of the shares of Common Stock of the Company issuable as payment for
the Edge Group Joint Venture Interest to be made as soon as practicable after
the Closing Date.
REVOCATION OF ACCEPTANCE
Edge Group's acceptance of the Edge Group Purchase Offer may be revoked at
any time prior to , 1997 by sending notice of revocation to the Company.
This notice should identify Edge Group and indicate an intention to revoke
such acceptance.
REPRESENTATIONS AND COVENANTS
Edge Group represents in the Letter of Acceptance that it has and, as of the
Closing Date, will have, the right and authority to sell and transfer its
Joint Venture Interest, and that Edge Group's Joint Venture Interest is
56
<PAGE>
free and clear of all liens, encumbrances and adverse claims. The Letter of
Acceptance also contains a covenant by Edge Group to execute any additional
documents and instruments that may reasonably be required to more effectively
transfer to and vest in the Company the purchased Joint Venture Interest and a
power of attorney to the Company to permit the Company, as a general partner
of the Joint Venture, to execute on its behalf any additional documents
necessary to consummate the Edge Group Purchase Offer.
EXPIRATION DATE, AMENDMENTS, ETC.
The Edge Group Purchase Offer will be held open for days (20 business
days) from the date of this Joint Proxy and Solicitation Statement/Prospectus
and will expire at 12:00 midnight, New York City Time on the Expiration Date.
The Expiration Date will be , 1997 unless extended by the Company. Notice
of extension of the Expiration Date, if made, will be given by press release
or other public announcement and may be given by mail to each partner of Edge
Group. An extension will be effective upon the giving of notice.
The Company expressly reserves the right, in its sole discretion at any time
or from time to time by oral or written notice to the partners of Edge Group,
(i) to delay acceptance for purchase of or, regardless of whether Edge Group's
Joint Venture Interest was theretofore accepted for purchase, purchase of Edge
Group's Joint Venture Interest pursuant to the Edge Group Purchase Offer, (ii)
to terminate the Edge Group Purchase Offer and not accept for purchase Edge
Group's Joint Venture Interest upon the non-satisfaction or non-waiver of any
of the conditions referred to under "The Combination Agreement--Conditions",
(iii) to waive any condition to its obligations to accept Edge Group's Joint
Venture Interest for purchase and (iv) at any time and from time to time to
amend the terms of the Edge Group Purchase Offer in any respect. Upon any such
delay, termination or amendment, the partners of Edge Group will be so
notified promptly.
VALIDITY OF ACCEPTANCE
All questions concerning the validity, form and eligibility (including time
of receipt) of Edge Group's acceptance of the Edge Group Purchase Offer will
be determined by the Company, whose determination will be final and binding.
The interpretation by the Company of the terms and conditions of the Edge
Group Purchase Offer (including the instructions to the Letter of Acceptance)
will also be final and binding. The Company reserves the right to waive any
irregularities or conditions regarding the manner of acceptance. Any
irregularities in connection with acceptance of the Edge Group Purchase Offer
must be cured within such time as the Company determines unless waived by it.
Acceptance of the Edge Group Purchase Offer by Edge Group will be deemed not
to have been made until any irregularities have been cured or waived. Any
Letter of Acceptance not properly completed and executed will be returned by
the Company to Edge Group as soon as practicable unless the irregularities are
cured or waived. The Company is not under any duty to give notification of any
such defects and will not incur any liability for failure to give
notification. Delivery of the Letter of Acceptance is at the risk of Edge
Group. Acceptance of the Edge Group Purchase Offer by Edge Group will be
effective only when the Letter of Acceptance is actually received by the
Company. See "Procedure for Acceptance."
SOLICITATION OF LETTER OF ACCEPTANCE
The cost of soliciting the Letter of Acceptance from Edge Group will
initially be paid as described under "The Combination Transactions--Expenses."
Upon the consummation of the Combination Agreement Transactions and the
Offering, the Company will reimburse the Joint Venture for any such expenses
previously paid by it. In addition to the use of the mails, the Letter of
Acceptance may be solicited by persons regularly employed by the Company by
personal interview, telephone and telegraph. Such persons will receive no
additional compensation for such services, but will be reimbursed by the
Company for any out-of-pocket expenses incurred by them in connection with
such services.
57
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical supplementally combined
capitalization of the Company as of September 30, 1996, (ii) the pro forma
capitalization of the Company as of September 30, 1996 after giving effect to
the issuance of approximately 4,700,000 shares of Common Stock in connection
with the Combination Transactions and (iii) the pro forma capitalization of
the Company as of September 30, 1996 as adjusted to give effect to the sale of
2,000,000 shares of Common Stock in the Offering at an assumed IPO price of
$16.00 per share and the application of the estimated net proceeds therefrom.
This table should be read in conjunction with the Supplementally Combined
Financial Statements of the Company and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--The
Company" included elsewhere in this Joint Proxy and Consent Solicitation
Statement/Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------------------
OLD EDGE PRO FORMA
SUPPLEMENTALLY FOR PRO FORMA
COMBINED COMBINATION AS ADJUSTED
-------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents............... $ 931 $ 932 $19,742
======= ======= =======
Current portion of long-term debt....... $ 316 $ 316 $ 316
======= ======= =======
Long-term debt.......................... $10,133 $10,133 $ 183
Minority interest....................... 1,792
Stockholders' equity(1):
Preferred stock, $0.01 par value,
10,000,000
shares authorized; none outstanding.. -- -- --
Common stock, $0.01 par value,
40,000,000
shares authorized; 4,700,000 shares
issued
and outstanding pro forma; 6,700,000
shares issued and outstanding pro
forma as adjusted.................... -- 47 67
Additional paid in capital............ -- 2,670 30,910
Retained earnings..................... -- -- --
Supplementally combined equity
(deficit)............................ (570) -- --
------- ------- -------
Total stockholders' equity.............. (570) 2,717 30,977
------- ------- -------
Total capitalization.................... $11,335 $12,850 $31,160
======= ======= =======
</TABLE>
- --------
(1) Does not include (i) 250,585 shares of Common Stock that will be issued
pursuant to restricted stock awards that will be granted to officers of
the Company upon completion of the Offering, (ii) approximately 350,000
shares of Common Stock issuable pursuant to options at an exercise price
per share equal to the IPO price in the Offering that will be granted to
directors, officers and employees of the Company upon completion of the
Offering and (iii) 97,844 shares of Common Stock that may be issued
pursuant to outstanding options that will be assumed by the Company from
Old Edge at a weighted average exercise price of $3.06 per share.
58
<PAGE>
CERTAIN COMPARATIVE DATA
The following table presents net income per share and book value per common
share: (i) on an historical basis for Edge Petroleum Corporation
Supplementally Combined, Old Edge, Edge Group II and Gulfedge, and (ii) on a
pro forma basis, giving effect to the Combination Transactions (assuming the
Combination Transactions had occurred on January 1, 1995 for purposes of
computing net income amounts and September 30, 1996 for purposes of computing
book value amounts). Pro forma per share amounts are based on the respective
affiliated entities' pro rata share of its common stock issued to acquire
their respective interests in the combined net assets of Edge Petroleum
Corporation .
NET INCOME:
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED
SEPTEMBER 30, YEAR ENDED
EDGE PETROLEUM CORPORATION SUPPLEMENTALLY 1996 DECEMBER 31, 1995
COMBINED ------------- ------------------
<S> <C> <C>
Historical net income per share............... $ 0.03 $ 0.02
Pro forma for the combination net income per
share........................................ $ 0.08 $ 0.23
Pro forma weighted average shares outstanding. 4,700,000 4,700,000
OLD EDGE
Historical net income per share............... $ 1.31 $ 3.61
Historical weighted average shares outstand-
ing.......................................... 105,263 105,263
Pro forma net income per share................ 0.06 0.16
Pro forma weighted average shares outstanding. 2,334,000 2,334,000
Exchange ratio per share...................... 22.31 to 1 22.31 to 1
EDGE GROUP II
Historical net income per unit................ $ 540.21 $3,290.05
Historical weighted average units outstanding. 189 189
Pro forma net income per share................ $ 0.28 $ 0.05
Pro forma weighted average shares outstanding. 2,209,000 2,209,000
Exchange ratio per unit....................... 9,776 to 1 9,776 to 1
GULFEDGE
Historical net income per unit................ $ 875.16 $ 581.57
Historical weighted average units outstanding. 7 7
Pro forma net income per share................ $ 0.38 $ 0.08
Pro forma weighted average shares outstanding. 74,000 74,000
Exchange ratio per unit....................... 10,617 to 1 10,617 to 1
BOOK VALUE:
<CAPTION>
EDGE PETROLEUM CORPORATION SUPPLEMENTALLY SEPTEMBER 30, 1996
COMBINED ------------------
<S> <C> <C>
Historical book value per share............... $ (5.41)
Pro forma for the combination book value per
share........................................ $ 0.58
OLD EDGE
Historical Book value per share............... $ 8.20
Pro forma Book value per share................ $ 0.37
EDGE GROUP II
Historical Book value per unit................ $ 1,422.81
Pro forma Book value per share................ $ 0.12
GULF EDGE
Historical Book value per unit................ $ 8,234.57
Pro forma Book value per share................ $ 0.78
</TABLE>
59
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
THE COMPANY
The following table sets forth selected historical supplementally combined
financial information of the Company as of September 30, 1996, for the five
years ended December 31, 1995 and for the nine months ended September 30, 1995
(unaudited) and 1996. The financial information presented below, as of
September 30, 1996 and for the nine months ended September 30, 1995 and 1996,
reflects all adjustments, consisting of normal and recurring adjustments, that
in the opinion of management are necessary for a fair presentation of the
Company's combined results of operations and financial position for such
periods. The information shown for the nine-month periods is not necessarily
indicative of full-year results. The following table also sets forth pro forma
net income (loss) per share for the Combination Transactions. The following
financial information should be read in conjunction with "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--The Company" and the audited Supplementally Combined Financial
Statements of the Company and the related notes thereto included elsewhere in
this Joint Proxy and Consent Solicitation Statement/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------ ------- ----------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Oil and natural gas
revenue............... $ 423 $ 572 $ 1,455 $1,994 $ 2,040 $ 1,377 $ 5,105
------- ------- ------- ------ ------- ------- -------
Costs and expenses:
Oil and natural gas
operating expenses.. 52 76 167 305 686 502 711
Depreciation,
depletion and
amortization........ 325 467 441 593 813 525 1,213
General and
administrative...... 1,577 2,228 1,734 2,026 2,484 2,070 2,155
------- ------- ------- ------ ------- ------- -------
Total operating
expenses.......... 1,954 2,771 2,342 2,924 3,983 3,097 4,079
------- ------- ------- ------ ------- ------- -------
Operating income
(loss)................ (1,531) (2,199) (887) (930) (1,943) (1,720) 1,026
Interest expense....... (448) (679) (635) (385) (315) (195) (657)
Gain on sale of oil
and gas property...... 115 -- 247 2,284 3,337 3,134 --
------- ------- ------- ------ ------- ------- -------
Net income (loss)
before taxes.......... (1,864) (2,878) (1,275) 969 1,079 1,219 369
Income tax expense..... (292) (397) (422) (141)
Minority interest...... 1,090 1,868 721 (543) (576) (623) (124)
------- ------- ------- ------ ------- ------- -------
Net income (loss)...... (774) (1,010) (554) 134 106 174 105
======= ======= ======= ====== ======= ======= =======
Pro forma net income
(loss) per share
(unaudited) (1)....... $ (0.16) $ (0.21) $ (0.12) $ 0.03 $ 0.02 $ 0.04 $ 0.02
======= ======= ======= ====== ======= ======= =======
Pro forma weighted
average shares
outstanding
(unaudited)........... 4,700 4,700 4,700 4,700 4,700 4,700 4,700
STATEMENTS OF CASH FLOWS
DATA:
Net cash (used)
provided by operating
activities............ $ (734) $(2,035) $(1,046) $ (604) $ (927) $ (124) $ 2,822
Net cash (used)
provided by investing
activities............ (2,184) (149) (272) 291 (1,154) 1,266 (5,651)
Net cash (used)
provided by financing
activities............ 5,304 230 1,421 (425) 1,933 (1,281) 3,559
OTHER OPERATING DATA:
EBITDA (2)(4).......... $ (1) $ 136 $ 522 $1,404 $ 1,631 $ 1,316 $ 2,116
Operating cash flow
(3)(4)................ (1,654) (2,411) (1,080) (722) (1,445) (1,390) 1,582
Capital expenditures... 6,597 3,811 3,660 6,809 8,512 5,407 7,881
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------
AS OF
SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......... $4,592 $1,699 $ (168) $ (973) $ (947) $ (1,630)
Property and equipment,
net..................... 2,724 2,475 2,622 4,136 7,911 12,384
Total assets............. 9,666 6,388 5,190 6,128 9,858 18,435
Long-term debt, including
current maturities...... 4,597 4,627 4,240 4,177 6,124 10,449
Equity (deficit)......... 693 (317) (871) (749) (658) (570)
</TABLE>
- --------
(1) Pro forma net income (loss) per share has been computed assuming the
estimated 4,700,000 shares of Common Stock which may be issued in
connection with the Combination Transactions were outstanding since the
beginning of each period presented.
(2) EBITDA represents earnings before interest expense, income taxes,
depreciation, depletion and amortization.
(3) Operating cash flow represents cash flows from operating activities prior
to changes in assets and liabilities.
(4) Management of the Company believes that EBITDA and operating cash flow may
provide additional information about the Company's ability to meet its
future requirements for debt service, capital expenditures and working
capital. EBITDA and operating cash flow are a financial measures commonly
used for the Company's industry and should not be considered in isolation
or as a substitute for net income, operating income, cash flows from
operating activities or any other measure of financial performance
presented in accordance with generally accepted accounting principles or
as a measure of a company's profitability or liquidity. Because EBITDA
excludes some, but not all, items that affect net income and because
operating cash flow excludes changes in assets and liabilities and these
measures may vary among companies, the EBITDA and operating cash flow data
presented above may not be comparable to similarly titled measures of
other companies.
60
<PAGE>
The following table sets forth summary unaudited pro forma combined
financial information of the Company as of September 30, 1996, for the three
years ended December 31, 1995 and for the nine months ended September 30,
1996. The information shown for the nine-month period is not necessarily
indicative of full-year results. The following financial information should be
read in conjunction with "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--The Company," the
unaudited Pro Forma Combined Financial Statements of the Company and the
related notes thereto, and the audited Supplementally Combined Financial
Statements of the Company and the related notes thereto included elsewhere in
this Joint Proxy and Consent Solicitation Statement/Prospectus.
Pro forma data are based on assumptions and include adjustments as explained
in the notes to unaudited Pro Forma Combined Financial Statements. The
unaudited Pro Forma Combined Balance Sheet as of September 30, 1996 and the
unaudited Pro Forma Combined Statements of Operations for the nine month
period ended September 30, 1996 and each of the three years in the period
ended December 31, 1995 of the Company were prepared utilizing the historical
supplementally combined financial statements of Old Edge. The unaudited Pro
Forma Combined Financial Statements are not necessarily indicative of the
results of future operations of the Company and should be read in conjunction
with the historical supplementally combined financial statements of Old Edge
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- ------- ------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Oil and natural gas
revenue................. $ 1,455 $ 1,994 $ 2,040 $ 5,105
------- ------- ------- -------
Costs and expenses:
Oil and natural gas
operating expenses.... 167 305 686 711
Depreciation, depletion
and amortization...... 441 593 813 1,213
General and
administrative........ 1,734 2,026 2,484 2,155
------- ------- ------- -------
Total operating
expenses............ 2,342 2,924 3,983 4,079
------- ------- ------- -------
Operating income
(loss).................. (887) (930) (1,943) 1,026
Interest expense......... (635) (385) (315) (657)
Gain on sale of oil and
gas property............ 247 2,284 3,337 --
------- ------- ------- -------
Net income (loss)........ (1,275) 969 1,079 369
Income tax expense....... -- -- -- --
------- ------- ------- -------
Net income (loss).........$(1,275).$ 969 $ 1,079 $ 369
======= ======= ======= =======
Net income (loss) per
share(1)................ $ (0.27) $ 0.21 $ 0.23 $ 0.08
======= ======= ======= =======
Weighted average shares
outstanding(1).......... 4,700 4,700 4,700 4,700
STATEMENT OF CASH FLOW
DATA:
Net cash (used) provided
by operating activities
........................ $(1,046) $ (604) $ (927) $ 2,822
Net cash (used) provided
by investing activities
........................ (272) 291 (1,154) (5,651)
Net cash (used) provided
by financing activities
........................ 1,421 (425) 1,932 3,559
OTHER OPERATING DATA:
EBITDA (2) (5)........... $ (199) $ 1,947 $ 2,207 $ 2,239
Operating cash flow (3)
(5)..................... (1,081) (722) (1,445) 1,582
Capital expenditures..... 6,597 6,809 8,512 7,811
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------
ACTUAL AS ADJUSTED(4)
------------ ----------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................ $ (1,630) $ 18,764
Property and equipment, net.................... 12,384 12,384
Total assets................................... 18,435 36,486
Long-term debt, including current maturities... 10,449 499
Equity......................................... (570) 30,977
</TABLE>
- --------
(1) Net income (loss) per share has been computed assuming the estimated
4,700,000 shares of Common Stock which may be issued in connection with
the Combination Transactions were outstanding since January 1, 1993.
(2) EBITDA represents earnings before, interest expense, income taxes,
depreciation, depletion and amortization.
(3) Operating cash flow represents cash flows from operating activities prior
to changes in assets and liabilities.
(4) Assumes the issuance in the Offering of 2,000,000 shares of Common Stock
at $16.00 per share and the application of the net proceeds therefrom.
(5) Management of the Company believes that EBITDA and operating cash flow may
provide additional information about the Company's ability to meet its
future requirements for debt service, capital expenditures and working
capital. EBITDA and operating cash flow are a financial measures commonly
used for the Company's industry and should not be considered in isolation
or as a substitute for net income, operating income, cash flows from
operating activities or any other measure of financial performance
presented in accordance with generally accepted accounting principles or
as a measure of a company's profitability or liquidity. Because EBITDA
excludes some, but not all, items that affect net income and because
operating cash flow excludes changes in assets and liabilities and these
measures may vary among companies, the EBITDA and operating cash flow data
presented above may not be comparable to similarly titled measures of
other companies.
61
<PAGE>
THE JOINT VENTURE
The following table sets forth selected historical financial information of
the Joint Venture as of September 30, 1996, for the five years ended December
31, 1995 and for the nine months ended September 30, 1995 (unaudited) and
1996. The financial information presented below, as of September 30, 1996 and
for the nine months ended September 30, 1995 and 1996, reflects all
adjustments, consisting of normal and recurring adjustments that in the
opinion of management are necessary for a fair presentation of the Joint
Venture's results of operations and financial position for such periods. The
information shown for the nine month periods is not necessarily indicative of
full-year results. The following financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations--The Joint Venture, Edge Group II, Gulfedge and Edge
Group" and the audited financial statements and the related notes thereto
included elsewhere in this Joint Proxy and Consent Solicitation
Statement/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------ ------- ----------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Oil and natural gas
revenue............... $ 408 $ 559 $ 1,438 $1,977 $ 2,016 $ 1,363 $ 5,084
------- ------- ------- ------ ------- ------- -------
Costs and expenses:
Oil and natural gas
operating expenses.. 52 94 164 300 683 500 710
Depreciation,
depletion and
amortization........ 292 426 402 557 792 517 1,207
General and
administrative...... 1,272 1,972 1,498 1,827 2,312 1,934 2,234
------- ------- ------- ------ ------- ------- -------
Total operating
expenses.......... 1,616 2,492 2,064 2,684 3,787 2,951 4,151
------- ------- ------- ------ ------- ------- -------
Operating income
(loss)................ (1,208) (1,933) (626) (707) (1,771) (1,588) 933
Interest expense....... (444) (700) (637) (400) (317) (196) (665)
Gain on sale of oil
and gas property...... 115 -- 247 2,284 3,337 3,134 --
------- ------- ------- ------ ------- ------- -------
Net income (loss)...... $(1,537) $(2,633) $(1,016) $1,177 $ 1,249 $ 1,350 $ 268
======= ======= ======= ====== ======= ======= =======
STATEMENTS OF CASH FLOWS
DATA:
Net cash (used)
provided by operating
activities............ $ (911) $(1,535) $(1,148) $ (613) $(1,038) $ (153) $ 2,412
Net cash (used)
provided by investing
activities............ (1,669) (145) (268) 297 (1,138) 1,278 (5,650)
Net cash (used)
provided by financing
activities............ 4,891 230 1,572 (413) 1,946 (1,267) 3,575
OTHER OPERATING DATA:
EBITDA (1) (3)......... $ (801) $(1,507) $ 23 $2,134 $ 2,358 $ 2,063 $ 2,140
Operating cash flow
(2) (3)............... (1,360) (2,207) (861) (550) (1,296) (1,267) 1,475
Capital expenditures... 6,582 3,805 3,656 6,804 8,496 5,545 7,880
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------
AS OF
SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............. $2,998 $2,332 $1,066 $ 17 $ 253 $ (485)
Property and equipment, net. 2,601 2,388 2,571 4,115 7,895 12,374
Total assets................ 8,965 6,273 4,986 5,896 9,513 16,384
Long-term debt, including
current maturities......... 4,597 4,627 4,240 4,177 6,124 10,449
Equity (deficit)............ 3,480 848 (168) 1,009 2,257 2,526
</TABLE>
- --------
(1) EBITDA represents earnings before interest expense, income taxes,
depreciation, depletion and amortization.
(2) Operating cash flow represents cash flows from operating activities prior
to changes in assets and liabilities.
(3) Management of the Company believes that EBITDA and operating cash flow may
provide additional information about the Joint Venture's ability to meet
its future requirements for debt service, capital expenditures and working
capital. EBITDA and operating cash flow are financial measures commonly
used for the Company's industry and should not be considered in isolation
or as a substitute for net income, operating income, cash flows from
operating activities or any other measure of financial performance
presented in accordance with generally accepted accounting principles or
as a measure of a company's profitability or liquidity. Because EBITDA
excludes some, but not all, items that affect net income and because
operating cash flow excludes changes in assets and liabilities and these
measures may vary among companies, the EBITDA and operating cash flow data
presented above may not be comparable to similarly titled measures of
other companies.
62
<PAGE>
OLD EDGE
The following table sets forth selected historical financial information of
Old Edge as of September 30, 1996, for the five years ended December 31, 1995
and for the nine months ended September 30, 1995 (unaudited) and 1996. The
financial information presented below, as of September 30, 1996 and for the
nine months ended September 30, 1995 and 1996, reflects all adjustments,
consisting of normal and recurring adjustments that in the opinion of
management are necessary for a fair presentation of Old Edge's results of
operations and financial position for such periods. The information shown for
the nine month periods is not necessarily indicative of full-year results. The
following financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Old Edge" and the audited financial statements and the related
notes thereto included elsewhere in this Joint Proxy and Consent Solicitation
Statement/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ---- ---- ------------ --------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Oil and natural gas
revenue............... $ 15 $ 13 $ 18 $ 17 $ 24 $ 13 $ 21
Representation fees.... 5 25 23 24 24 18 23
Management fees........ 37 60 80 120 90 150
----- ----- ----- ---- ---- -------- --------
Total revenue........ 20 75 101 121 168 121 194
----- ----- ----- ---- ---- -------- --------
Costs and expenses:
Oil and natural gas
operating expenses.. 3 3 4 3 2 2
Depreciation,
depletion and
amortization........ 33 41 39 37 21 9 6
General and
administrative...... 28 17 39 25 41 37 59
----- ----- ----- ---- ---- -------- --------
Total operating
expenses.......... 61 61 81 66 65 48 67
----- ----- ----- ---- ---- -------- --------
Operating income
(loss)................ (41) 14 20 55 103 73 127
Interest income
(expense), net........ (24) 18 (1) 15 1 1 8
Income (loss) from
Joint Venture
Investment............ (447) (765) (295) 342 363 392 78
----- ----- ----- ---- ---- -------- --------
Net income (loss)--
before income taxes... (512) (733) (276) 412 467 466 213
Income tax expense--
deferred.............. (87) (87) (74)
----- ----- ----- ---- ---- -------- --------
Net income (loss)...... $(512) $(733) $(276) $412 $380 $ 379 $ 139
===== ===== ===== ==== ==== ======== ========
STATEMENTS OF CASH FLOWS
DATA:
Net cash (used)
provided by operating
activities............ $ 168 $ 16 $ (7) $ 12 $111 $ 29 $ 409
Net cash (used)
provided by investing
activities............ (515) (4) (4) (6) (16) (12) --
Net cash (used)
provided by financing
activities............ 413 -- -- (12) (14) (14) (16)
OTHER OPERATING DATA:
EBITDA (1) (3)......... $(455) $(710) $(236) $434 $487 $ 474 $ 211
Operating cash flow
(2) (3)............... (32) 73 58 107 125 83 141
Capital expenditures... 15 6 4 6 16 12 0
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------
AS OF
SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------ ---- ---- ---- ----- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................. $ (151) $(96) $(16) $129 $ 193 $ 283
Property and equipment, net...... 158 117 77 21 16 10
Total assets..................... 1,145 487 228 596 1,050 3,530
Long-term debt, including current
maturities...................... 33 26 47 78 46 11
Equity (deficit)................. 982 250 (26) 374 741 863
</TABLE>
- --------
(1) EBITDA represents earnings before interest income (expense), net, income
taxes, depreciation, depletion and amortization.
(2) Operating cash flow represents cash flows from operating activities prior
to changes in assets and liabilities.
(3) Management of the Company believes that EBITDA and operating cash flows
may provide additional information about the Old Edge's ability to meet
its future requirements for debt service, capital expenditures and working
capital. EBITDA and operating cash flows are financial measures commonly
used for the Company's industry and should not be considered in isolation
or as a substitute for net income, operating income, cash flows from
operating activities or any other measure of financial performance
presented in accordance with generally accepted accounting principles or
as a measure of a company's profitability or liquidity. Because EBITDA
excludes some, but not all, items that affect net income and because
operating cash flow excludes changes in assets and liabilities and these
measures may vary among companies, the EBITDA and operating cash flow data
presented above may not be comparable to similarly titled measures of
other companies.
63
<PAGE>
EDGE GROUP II
The following table sets forth selected historical financial information of
Edge Group II as of September 30, 1996 for the five years ended December 31,
1995 and for the nine months ended September 30, 1995 (unaudited) and 1996. The
financial information presented below, as of September 30, 1996 and for the
nine months ended September 30, 1995 and 1996, reflects all adjustments,
consisting of normal and recurring adjustments that in the opinion of
management are necessary for a fair presentation of Edge Group II's results of
operations and financial position for such periods. The information shown for
the nine month periods is not necessarily indicative of full-year results. The
following financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--The Joint Venture, Edge Group II, Gulfedge, and Edge Group" and the
audited financial statements and the related notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------ ------- ----------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Oil and natural gas
revenue............... $ 275 $ 377 $ 968 $1,331 $ 1,358 $ 918 $ 3,424
------- ------- ------- ------ ------- ------- -------
Costs and expenses:
Oil and natural gas
operating expenses.. 35 63 111 202 460 337 478
Depreciation,
depletion and
amortization........ 197 287 271 375 534 348 813
General and
administrative...... 875 1,348 1,027 1,248 1,504 1,312 1,516
Management fees...... 266 266 266 266 266 200 67
------- ------- ------- ------ ------- ------- -------
Total operating
expenses.......... 1,373 1,964 1,675 2,091 2,764 2,197 2,874
------- ------- ------- ------ ------- ------- -------
Operating income
(loss)................ (1,098) (1,587) (707) (760) (1,406) (1,279) 550
Interest expense....... (280) (469) (427) (269) (213) (132) (448)
Gain on sale of oil
and gas property...... 77 167 1,538 2,247 2,111
------- ------- ------- ------ ------- ------- -------
Income (loss) before
income taxes.......... $(1,301) $(2,056) $ (967) $ 509 $ 628 $ 700 $ 102
======= ======= ======= ====== ======= ======= =======
STATEMENTS OF CASH FLOWS
DATA:
Net cash (used)
provided by operating
activities............ $ (614) $(1,034) $(1,296) $ (416) $ (699) $ (103) $ 1,625
Net cash (used)
provided by investing
activities............ (1,124) (98) (180) 200 (766) 861 (3,806)
Net cash (used)
provided by financing
activities............ 3,856 (360) 1,539 (278) 1,311 (853) 2,408
OTHER OPERATING DATA:
EBITDA (1)(3).......... $ (824) $(1,300) $ (269) $1,153 $ 1,375 $ 1,180 $ 1,363
Operating cash flow
(2)(3)................ (1,181) (1,769) (863) (654) (1,085) (1,063) 915
Capital expenditures... 4,433 2,563 2,462 4,583 5,823 3,735 5,308
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------
AS OF
SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------ ------ ------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........ $3,117 $ 996 $ (408) $(1,127) $(1,181) $(1,756)
Property and equipment,
net................... 373 665 955 2,771 5,317 8,334
Total assets........... 7,146 4,770 3,380 3,970 6,407 11,035
Long-term debt,
including current
maturities............ 3,058 3,116 2,856 2,814 4,124 7,038
Equity (deficit)....... 2,053 541 (971) (462) 166 269
</TABLE>
- --------
(1) EBITDA represents earnings before interest expense, income taxes,
depreciation, depletion and amortization.
(2) Operating cash flow represents cash flows from operating activities prior
to changes in assets and liabilities.
(3) Management of the Company believes that EBITDA and operating cash flow may
provide additional information about the Edge Group II's ability to meet
its future requirements for debt service, capital expenditures and working
capital. EBITDA and operating cash flow are financial measures commonly
used for the Company's industry and should not be considered in isolation
or as a substitute for net income, operating income, cash flows from
operating activities or any other measure of financial performance
presented in accordance with generally accepted accounting principles or as
a measure of a company's profitability or liquidity. Because EBITDA
excludes some, but not all, items that affect net income and because
operating cash flow excludes changes in assets and liabilities and these
measures may vary among companies, the EBITDA and operating cash flow data
presented above may not be comparable to similarly titled measures of other
companies.
64
<PAGE>
GULFEDGE
The following table sets forth selected historical financial information of
Gulfedge as of September 30, 1996, for the five years ended December 31, 1995
and for the nine months ended September 30, 1995 (unaudited) and 1996. The
financial information presented below, as of September 30, 1996 and for the
nine months ended September 30, 1995 and 1996, reflects all adjustments,
consisting of normal and recurring adjustments that in the opinion of
management are necessary for a fair presentation of Gulfedge's results of
operations and financial position for such periods. The information shown for
the nine month periods is not necessarily indicative of full-year results. The
following financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--The Joint Venture, Edge Group II, Gulfedge and Edge Group" and the
audited financial statements and the related notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ----------- ----
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Oil and natural gas revenue... $ 9 $ 13 $ 33 $ 45 $ 46 $ 31 $116
---- ---- ---- ---- ---- ---- ----
Oil and natural gas
operating expenses......... 1 2 4 7 16 11 16
Depreciation, depletion and
amortization............... 7 10 9 12 18 12 28
General and administrative.. 29 45 34 42 53 44 51
---- ---- ---- ---- ---- ---- ----
Total operating expenses.. 37 57 47 61 87 67 95
---- ---- ---- ---- ---- ---- ----
Operating income (loss)....... (28) (44) (15) (16) (41) (36) 21
Interest expense.............. (10) (16) (15) (9) (7) (4) (15)
Gain on sale of oil and gas
property..................... 3 -- 7 52 76 71 --
---- ---- ---- ---- ---- ---- ----
Income (loss) before income
taxes........................ $(35) $(60) $(23) $ 27 $ 28 $ 31 $ 6
==== ==== ==== ==== ==== ==== ====
STATEMENT OF CASH FLOWS DATA:
Net cash (used) provided by
operating activities......... $(21) $(35) $(26) $(14) $(24) $ (3) $ 55
Net cash (used) provided by
investing activities......... (31) (3) (6) 7 (26) 29 (129)
Net cash (used) provided by
financing activities......... 112 5 36 (9) 44 (29) 82
OTHER OPERATING DATA:
EBITDA (1)(3)................. $(18) $(34) $ 2 $ 48 $ 53 $ 47 $ 49
Operating cash flow (2)(3).... (31) (50) (20) (13) (30) (28) 34
Capital expenditures.......... 150 83 83 155 194 127 180
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
AS OF
SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................... $ 68 $ 53 $ 24 $ -- $ 6 $ (11)
Property and equipment, net....... 59 54 59 94 180 282
Total assets...................... 205 143 114 135 217 374
Long-term debt, including current
maturities....................... 105 106 97 95 140 238
Equity............................ 79 19 (4) 23 52 58
</TABLE>
- --------
(1) EBITDA represents earnings before interest expense income taxes,
depreciation, depletion and amortization.
(2) Operating cash flow represents cash flows from operating activities prior
to changes in assets and liabilities.
(3) Management of the Company believes that EBITDA and operating cash flow may
provide additional information about Gulfedge's ability to meet its future
requirements for debt service, capital expenditures and working capital.
EBITDA and operating cash flow are financial measures commonly used for
the Company's industry and should not be considered in isolation or as a
substitute for net income, operating income, cash flows from operating
activities or any other measure of financial performance presented in
accordance with generally accepted accounting principles or as a measure
of a company's profitability or liquidity. Because EBITDA excludes some,
but not all, items that affect net income and because operating cash flow
excludes change in assets and liabilities and these measures may vary
among companies, the EBITDA and operating cash flow data presented above
may not be comparable to similarly titled measures of other companies.
65
<PAGE>
EDGE GROUP'S JOINT VENTURE INTEREST
The following table sets forth selected historical financial information of
the Edge Group's interest in the joint venture as of September 30, 1996, for
the five years ended December 31, 1995 and for the nine months ended September
30, 1995 (unaudited) and 1996. The financial information presented below, as
of September 30, 1996 and for the nine months ended September 30, 1995 and
1996, reflects all adjustments, consisting of normal and recurring adjustments
that in the opinion of management are necessary for a fair presentation of the
results of operations and financial position for such periods. The information
shown for the nine month periods is not necessarily indicative of full-year
results. The following financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations--The Joint Venture, Edge Group II, Gulfedge and Edge Group" and
the audited financial statements and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ------------ --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Oil and natural gas
revenue................. $ 5 $ 7 $ 19 $26 $ 26 $ 18 $ 66
---- ---- ---- --- ---- --------- --------
Costs and expenses:
Oil and natural gas
operating expenses.... 1 1 2 4 9 7 9
Depreciation, depletion
and amortization...... 4 6 5 7 10 7 16
General and
administrative........ 17 25 20 24 30 25 29
---- ---- ---- --- ---- --------- --------
Total operating
expenses............ 22 32 27 35 49 39 54
---- ---- ---- --- ---- --------- --------
Operating income (loss).. (17) (25) (8) (9) (23) (21) 12
Interest expense......... (6) (9) (8) (5) (4) (3) (9)
Gain on sale of oil and
gas property............ 2 -- 3 30 44 41 --
---- ---- ---- --- ---- --------- --------
Net income (loss)........ $(21) $(34) $(13) $16 $ 17 $ 17 $ 3
==== ==== ==== === ==== ========= ========
STATEMENTS OF CASH FLOWS
DATA:
Net cash (used) provided
by operating
activities.............. $ (9) $(16) $(11) $(6) $(10) $ (2) $ 28
Net cash (used) provided
by investing
activities.............. (18) (1) (3) 3 (12) 13 (58)
Net cash (used) provided
by financing
activities.............. 50 2 16 (4) 20 (13) 34
OTHER OPERATING DATA:
EBITDA (1)(3)............ $(11) $(19) $ -- $28 $ 31 $ 27 $ 28
Operating cash flow
(2)(3).................. (19) (28) (11) (7) (17) (17) 19
Capital expenditures..... 68 37 48 70 88 57 81
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
AS OF
SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $31 $24 $ 7 $ -- $ 3 $ 9
Property and equipment, net............ 27 25 27 43 82 128
Total assets........................... 93 65 52 61 98 169
Long-term debt, including current
maturities............................ 48 48 44 43 63 108
Equity (deficit)....................... 36 9 (2) 10 23 26
</TABLE>
- --------
(1) EBITDA represents earnings before interest expense, income taxes,
depreciation, depletion and amortization.
(2) Operating cash flow represents cash flows from operating activities prior
to changes in assets and liabilities.
(3) Management of the Company believes that EBITDA and operating cash flow may
provide additional information about Edge Group's ability to meet its
future requirements for debt service, capital expenditures and working
capital. EBITDA and operating cash flow are financial measures commonly
used for the Company's industry and should not be considered in isolation
or as a substitute for net income, operating income, cash flows from
operating activities or any other measure of financial performance
presented in accordance with generally accepted accounting principles or
as a measure of a company's profitability or liquidity. Because EBITDA
excludes some, but not all, items that affect net income and because
operating cash flow excludes changes in assets and liabilities and these
measures may vary among companies, the EBITDA and operating cash flow data
presented above may not be comparable to similarly titled measures of
other companies.
66
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
THE COMPANY
GENERAL OVERVIEW
The Company began operations in 1983 and until 1992 generated exploratory
drilling prospects based on 2-D seismic data for sale to other exploration and
production companies. During 1992, as a result of the advent of economic
onshore 3-D seismic surveys and the improvement and increased affordability of
data interpretation technologies, the Company changed its exploration strategy
to emphasize the acquisition of 3-D seismic data covering certain of its
existing 2-D based project areas. From 1992 to 1995, the Company reduced its
inventory of 2-D based prospects, began limited drilling for its own account of
certain existing 2-D based prospects and began developing prospects based on 3-
D seismic data. Since early 1995, the Company has almost exclusively drilled
prospects generated from 3-D seismic data, while accelerating its drilling
activity and increasing its working interests in new project areas. This shift
in the Company's business strategy is reflected in a number of changes in the
Company's financial results. A majority of the income in 1994 and 1995 was
attributable to gains on sales of unproved oil and gas properties. The Company
expects in the future to retain and develop a majority of its oil and gas
properties. Similarly, the Company expects depreciation, depletion and
amortization and oil and gas operating expenses will continue to increase. The
Company expects to continue retaining all or the majority of its interests in
prospects with normally pressured and generally shallow reservoirs and selling
a portion of its interests in deeper over-pressured 3-D seismic prospects,
which generally require greater capital expenditures, to industry participants
in order to fund the capital expenditures for the interests it retains.
The Company uses the full-cost method of accounting for its oil and gas
properties. Under this method, all acquisition, exploration and development
costs, including certain general and administrative costs that are directly
attributable to the Company's acquisition, exploration and development
activities, are capitalized in a "full-cost pool" as incurred. The Company
records depletion of its full-cost pool using the unit of production method. To
the extent that such capitalized costs in the full cost pool (net of
depreciation, depletion and amortization and related deferred taxes) exceed the
present value (using a 10% discount rate) of estimated future net after-tax
cash flows from proved oil and gas reserves, such excess costs are charged to
operations. Once incurred, a write-down of oil and gas properties is not
reversible at a later date.
During 1991, the Joint Venture was formed by Old Edge, Edge Group II,
Gulfedge and Edge Group to conduct the business of a predecessor partnership.
The Joint Venture purchased approximately $5.2 million in net assets (on a
historical financial statement basis) and assumed substantially all of the
liabilities of the predecessor, which had been engaged in oil and gas
exploration and production operations since 1983. A substantial portion of the
annual cash flows generated by the predecessor partnership had been distributed
to its partners resulting in a low level of equity accumulation prior to the
formation of the Joint Venture.
The Company's revenues, profitability, future growth and ability to borrow
funds or obtain additional capital, and the carrying value of its properties,
are substantially dependent on prevailing prices of natural gas and oil. It is
impossible to predict future natural gas and oil price movements with
certainty. Declines in prices received for natural gas and oil may have an
adverse affect on the Company's financial condition, liquidity, ability to
finance capital expenditures and results of operations. Lower prices may also
impact the amount of reserves that can be produced economically by the Company.
Due to the instability of oil and natural gas prices, in 1995 the Company
began utilizing, from time to time, certain hedging instruments (e.g., swaps)
for a portion of its gas production to achieve a more predictable cash flow, as
well as to reduce the exposure to price fluctuations. However, hedging
arrangements, when utilized, limit the benefit to the Company of increases in
the price of natural gas. The Company's hedging arrangements apply to only a
portion of its production and provide only partial price protection against
declines in natural gas prices and limits potential gains from future increases
in modest prices. Such hedging arrangements may expose the Company to risk of
financial loss in certain circumstances, including instances where production
is less than
67
<PAGE>
expected, the Company's customers fail to purchase contracted quantities of
oil or natural gas or a sudden, unexpected event materially impacts oil or
natural gas prices. The Company accounts for all these transactions as hedging
activities and, accordingly, gains and losses are included in oil and gas
revenues during the period the hedged transactions occur. Total Mcfs of
Natural Gas purchased and sold under swap arrangements during the nine month
period ended September 30, 1996 and the year ended December 31, 1995 were
182,000 Mcfs and 122,000 Mcfs respectively. Gains and losses realized by the
Joint Venture under such swap arrangements were $5,270 and $(15,720) for the
nine month period ended September 30, 1996 and the year ended December 31,
1995 respectively. There was no hedging activity in 1994 or 1993. The Company
expects that the amount of hedges that it has in place will vary from time to
time. Outstanding hedges at December 31, 1995 were not material and the
Company had no existing hedging positions as of September 30, 1996.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Oil and natural gas revenues for the nine months ended September 30, 1996
increased 271% from $1.4 million to $5.1 million as compared to the same
period in 1995. Production volumes for oil increased 74% from 47 MBbls in the
1995 period to 81 MBbls in the 1996 period. The increase in oil production
increased revenues $573,000. In addition, a 14% increase in average oil prices
increased revenue by $233,000. Production volumes for natural gas increased
362% from 337 MMcf in 1995 to 1,557 MMcf in 1996. The increase in natural gas
production increased revenues by $2.2 million. In addition, a 28% increase in
average gas prices increased revenues by $732,000. The increase in oil and
natural gas production was due to new wells being successfully drilled and
completed during 1996, which was partially offset by normal production
declines from existing wells. Increases in average oil and gas prices were
directly attributable to the general improved market conditions.
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
nine months ended September 30, 1995 and 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED 1996 PERIOD COMPARED
SEPTEMBER 30, TO 1995 PERIOD
----------------- ---------------------
INCREASE % INCREASE
1995 1996 (DECREASE) (DECREASE)
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
PRODUCTION VOLUMES:
Oil and condensate (MBbls)............ 47 81 34 74%
Natural gas (MMcf).................... 337 1,557 1,220 362%
AVERAGE SALES PRICES:
Oil and condensate ($ per Bbl)........ $ 16.61 $ 19.00 $ 2.39 14%
Natural gas ($ per Mcf)............... 1.79 2.29 0.50 28%
OPERATING REVENUES:
Oil and condensate (in thousands)..... $ 773 $ 1,582 $ 809 105%
Natural gas (in thousands)............ 604 3,523 2,919 484%
-------- -------- ------
Total (in thousands)................ $ 1,377 $ 5,105 $3,728 271%
======== ======== ======
</TABLE>
Oil and natural gas operating expenses for the nine months ended September
30, 1996 increased 42% from $502,000 to $711,000 as compared to the same
period in 1995. Oil and natural gas operating expenses increased due to
increased production generated from new oil and gas wells drilled and
completed since September 30, 1995.
Depreciation, depletion and amortization ("DD&A") expense for the nine
months ended September 30, 1996 increased 131% from $525,000 to $1.2 million
as compared to the same period in 1995. This increase was due to the increase
in oil and gas production as well as a 31% increase in the depletion rate. The
increased DD&A rate was primarily caused by the amortization of increased
exploration costs attributable to new wells drilled and completed since
September 30, 1995. Exploration costs increased due to the Company's retaining
68
<PAGE>
larger working interests in its 3-D prospects, as the Company increasingly
drilled for its own account. Prior to September 30, 1995, a significant
portion of the Company's well costs were carried by other owners, resulting in
a lower historical DD&A rate.
General and administrative expense for the nine months ended September 30,
1996 remained constant at $2.1 million as compared to the same period in 1995.
An increase in salary expense of $187,000 due to the addition of new employees
was primarily offset by a $133,000 decrease in Edge Group II's General Partner
management fees further offset by decreases in various other direct expenses.
Interest expense for the nine months ended September 30, 1996 increased 237%
from $195,000 to $657,000 as compared to the same period in 1995. The weighted
average debt was $8.1 million for the nine month period ended September 30,
1996 as compared to $2.4 million for the comparable period in 1995. This
increase was primarily due to the establishment in July 1995 of, and
borrowings under, the Revolving Credit Facility and the repayment of a
promissory note in March 1995, which was offset slightly by a lower average
interest rate.
There were no gains on the sale of oil and gas property for the nine months
ended September 30, 1996 as compared to a gain of $3.1 million in 1995. The
majority of the gain recorded in 1995 was attributable to the sale of a
property for $3.4 million that resulted in a gain of $2.8 million.
Minority interest for the nine months ended September 30, 1996 decreased
from $622,612 to $123,783 as compared to the same period in 1995. The decrease
is attributable to the decrease in operations of the Joint Venture.
Net income for the nine months ended September 30, 1996 was $104,000 as
compared to $174,000 for the 1995 period, as a result of the factors described
above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Oil and natural gas revenues remained relatively unchanged at approximately
$2.0 million in both 1994 and 1995. Production volumes for oil increased 5%
from 61 MBbls in 1994 to 64 MBbls in 1995. Increased production was partially
offset by a 10% decrease in average oil prices. Production volumes for natural
gas decreased 13% from 588 MMcf in 1994 to 513 MMcf in 1995. The decrease in
natural gas production was offset by an 27% increase in average natural gas
prices. Oil and natural gas revenues were impacted by the addition of four new
wells, the sale of a property and declining production experienced at South
Mermentau and one other property caused by workovers that required the wells
to be shut in for a portion of the year.
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
years ended December 31, 1994 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995 COMPARED TO 1994
------------- ---------------------
INCREASE % INCREASE
1994 1995 (DECREASE) (DECREASE)
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
PRODUCTION VOLUMES:
Oil and condensate (MBbls)................ 61 64 3 5%
Natural gas (MMcf)........................ 588 513 (75) (13%)
AVERAGE SALES PRICES:
Oil and condensate ($ per Bbl)............ $17.66 $15.88 $(1.78) (10%)
Natural gas ($ per Mcf)................... 1.57 1.99 0.42 27%
OPERATING REVENUES:
Oil and condensate (in thousands)......... $1,071 $1,079 $ 8 1%
Natural gas (in thousands)................ 923 961 38 4%
------ ------ ------
Total (in thousands).................... $1,994 $2,040 $ 46 2%
====== ====== ======
</TABLE>
Oil and gas operating expenses increased 125% from $305,000 in 1994 to
$686,000 in 1995. The increase was primarily attributable to increased
operating expenses of approximately $223,000 on a property that was acquired
during November 1994 and nonrecurring expenses of approximately $120,000 on
another property. The
69
<PAGE>
remaining net increase experienced in 1995 was caused by increased production
from new wells which was offset by the sale of a property in March 1995.
DD&A expense increased 37% from $593,000 in 1994 to $813,000 in 1995, as a
result of increased production and a higher depletion rate. The higher
depletion rate was primarily due to costs relating to a prospect that resulted
in a dry hole. These increases were offset by a decrease in amortization of
regional seismic costs of approximately $149,000 in 1995, compared to 1994,
due to certain regional seismic costs that became fully amortized in 1995.
General and administrative expense increased 23% from $2.0 million in 1994
to $2.5 million in 1995. Approximately $241,000 of the increase was
attributable to the hiring of additional geologist and land department
employees as well as salary increases for existing employees. The remaining
increase was due to other general expenses that were directly attributable to
increased 3-D prospect generation and drilling activity.
Interest expense decreased 18% from $385,000 in 1994 to $315,000 in 1995.
This decrease in 1995 was due to a lower weighted average outstanding debt
balance and a lower effective interest rate. The weighted average outstanding
debt balance decreased from approximately $4.0 million in 1994 to
approximately $2.7 million in 1995. The decrease in the weighted average
outstanding debt balance and effective interest rate was due to the repayment
of $3.3 million of promissory notes during March 1995 which bore interest at a
rate of 10%. The Company subsequently entered into the Revolving Credit
Facility in July 1995 which had an effective interest rate of 9.25% at
December 31, 1995.
The gains on sales of oil and gas properties in 1995 and 1994 represented
sales of unproved properties and proved properties. The majority of the gains
recorded in 1995 was the result of the sale of a property for approximately
$3.4 million, resulting in a gain of approximately $2.8 million. A majority of
income recorded in 1994 was attributable to the sale of a property for
approximately $1.5 million, resulting in a gain of approximately $1.3 million.
Minority interest for 1995 was $576,000 as compared to $543,000 in 1994. The
increase is attributable to the increase in operations of the Joint Venture.
Net income in 1995 was approximately $106,000 million, compared to $134,000
in 1994, as a result of the factors described above.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Oil and natural gas revenues increased 37% from $1.5 million in 1993 to $2.0
million in 1994. Production volumes for oil increased 136% from 26 MBbls in
1993 to 61 MBbls in 1994. The increase in oil production increased revenues by
$612,000 which were further increased slightly due to a 1% increase in average
oil prices. Production volumes for natural gas increased 29% from 457 MMcf in
1993 to 588 MMcf in 1994. This increase in natural gas production contributed
$288,000 to revenues which was offset by a 29% decrease in average natural gas
prices which decreased revenues by $371,000. A portion of the overall increase
in oil and natural gas production in 1994 was due to certain prospects in
which the Company had a reversionary interest reaching payout during the year
and two other prospects in which the Company had a reversionary interest that
reached payout in 1993 but did not contribute a full year of production in
that year. These two prospects contributed an additional $451,000 in revenues
in 1994. Additionally, the Company successfully drilled and completed several
new natural gas wells in the fourth quarter of 1994, which contributed
approximately $272,000 in revenues. The increases were offset by the shutting
in of a well on the South Maurice Field during 1993 and normal declining
production on various properties.
70
<PAGE>
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
years ended December 31, 1993 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994 COMPARED TO 1993
------------- ---------------------
INCREASE % INCREASE
1993 1994 (DECREASE) (DECREASE)
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
PRODUCTION VOLUMES:
Oil and condensate (MBbls)................ 26 61 35 136%
Natural gas (MMcf)........................ 457 588 131 29%
AVERAGE SALES PRICE:
Oil and condensate ($ per Bbl)............ $17.52 $17.66 $ 0.14 1%
Natural gas ($ per Mcf)................... 2.20 1.57 (0.63) (29%)
OPERATING REVENUES:
Oil and condensate (in thousands)......... $ 450 $1,071 $ 621 138%
Natural gas (in thousands)................ 1,005 923 (82) (8%)
------ ------ ------
Total (in thousands).................... $1,455 $1,994 $ 539 37%
====== ====== ======
</TABLE>
Oil and natural gas operating expenses increased 83% from $167,000 in 1993 to
$305,000 in 1994. The increase was primarily attributable to increased oil and
gas production and a higher average severance tax rate in 1994 as well as
higher working interests on new wells drilled in 1994.
DD&A expense increased 34% from $442,000 in 1993 to $593,000 in 1994, largely
as a result of increased production. Additionally, amortization of seismic
costs increased approximately $126,000 in 1994 from 1993 as a result of the
purchase of regional seismic data in 1994.
General and administrative expense increased 17% from $1.7 million in 1993 to
$2.0 million in 1994. Approximately $291,000 of the increase was attributable
to hiring additional geologists and land department employees during 1994 as
well as salary increases for existing employees.
Interest expense decreased 39% from $636,000 in 1993 to $385,000 in 1994 due
to a lower effective interest rate and a lower weighted average outstanding
debt balance in 1994. The weighted average outstanding debt balance decreased
from approximately $4.5 million in 1993 to approximately $4.0 million in 1994
due to scheduled debt payments on a promissory note.
The gain on sale of oil and gas property in 1994 primarily represented the
sale of an unproved property for $1.5 million that resulted in a gain of $1.3
million. There was no such significant sale of unevaluated properties during
1993.
Minority interest for 1994 was $548,000 as compared to $(468,677) for 1993.
The increase is attributable to the increase in operations of the Joint
Venture.
Net income increased from a net loss of $554,000 in 1993 to a net income of
$134,000 in 1994, as a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have included funds generated by
operations, the sale of prospects and producing properties, equity capital from
private sources and borrowings, primarily at the Joint Venture level under the
Revolving Credit Facility and a subordinated secured loan (the "Subordinated
Loan") from Mr. James C. Calaway, the father of both the Company's Chief
Executive Officer and its President. A portion of the proceeds from the
Offering will be loaned to the Joint Venture to repay the amounts outstanding
under both the Revolving Credit Facility and the Subordinated Loan. The
Revolving Credit Facility will remain outstanding for future borrowings and the
Subordinated Loan will be terminated. The Joint Venture is required to comply
with various operating and financial covenants under the Revolving Credit
Facility. The continued
71
<PAGE>
availability to the Joint Venture of funds borrowed under the Revolving Credit
Facility is subject to continued compliance with such covenants.
Cash flows provided (used) by operations were ($1.0 million), ($604,000),
($927,000) and $2.8 million for the years ended December 31, 1993, 1994, 1995
and the nine month period ended September 30, 1996, respectively. The increase
in operating cash flows for the nine month period ended September 30, 1996 was
primarily attributable to increased drilling activity and resulting increases
in accounts payable. This increase was primarily due to Old Edge becoming an
oil and gas well operator in late 1995 and a significant increase in drilling
activities during the nine month period ended September 30, 1996. Due to the
same factors discussed above, accounts receivable increased which somewhat
offset the increase in accounts payable. Accrued liabilities increased by
$182,000 for the nine months ended September 30, 1996 due to deferred offering
costs accrued but not yet paid. The increase in cash flows used in 1995 as
compared to 1994 was due primarily to the increase in operating loss, which was
offset by various changes in balance sheet accounts. Accounts receivable,
working interest owners increased by $213,000 in 1995 due to increased drilling
activity in which Old Edge was the operator. Accounts payable, trade and
accounts payable to related parties increased by $420,000 and $266,000,
respectively. These increases were caused by increased drilling activity for
its own account as well as an increase in Edge Group II General Partner
management fees which have accumulated but have not yet been paid. The decrease
in cash used from operations from 1993 to 1994 was due to decreases in various
working capital accounts. Accounts receivable trade and accounts payable trade
increased $269,000 and $145,000, respectively during 1994 primarily due to the
increased oil and gas production and drilling activities in 1994 primarily
attributable to higher working interests on new wells drilled in 1994. Accounts
payable to related partners increased by $258,000 primarily due to an increase
of $266,000 for Edge Group II's General Partner managers fees as referred to
above.
The Company expects capital expenditures in 1997 to be at least $20 million.
A substantial portion of capital expenditures will be invested in the Company's
portfolio of 3-D prospects to fund drilling activities and expand its reserve
base. In addition, the Company will continue to expand and improve its
technological and 3-D seismic interpretation capabilities. Based on its
existing business plan, the Company expects to drill 50 gross (21.4 net) wells
in 1996 and has budgeted for 120 gross (46.3 net) wells in 1997. The actual
number of wells drilled may differ significantly from such estimate. See
"Business of the Company--Significant Project Areas." In addition to its
existing leased acreage prospects, the Company has acquired various 3-D seismic
options which will allow it to lease approximately 59,562 gross (29,781 net)
undeveloped acres.
During the first nine months of 1996, the Company continued to reinvest a
substantial portion of its cash flows into increasing its 3-D prospect
portfolio, improving its 3-D seismic interpretation technology and funding its
drilling program. As a result the Company used $5.7 million in cash in investor
activities during the nine months ended September 30, 1996. Capital
expenditures during the first nine months of 1996 were $7.9 million. The
Company expects to incur additional capital expenditures of $3.3 million in the
fourth quarter of 1996 for the drilling of approximately 16 new wells.
Investing activities used $1.2 million in cash in 1995 compared to providing
$.3 million in cash in 1994. This change was directly attributable to an
increase in capital expenditures. Capital expenditures were $3.7 million, $6.8
million and $8.5 million in 1993, 1994 and 1995, respectively. The Company's
drilling efforts resulted in the successful completion of four wells in 1993,
nine wells in 1994 and 22 wells in 1995 that increased pretax present value of
reserves by $2.5 million, $1.6 million and $10.2 million, respectively. In 1995
the Company sold one of its proved producing properties and received total cash
proceeds from such sale of $3.4 million. These proceeds were used to pay down
debt and fund general working capital and corporate needs. The Company also
sold several undeveloped oil and gas properties receiving cash proceeds of $3.4
million, $7.1 million and $4.0 million in 1993, 1994 and 1995, respectively.
Cash flows from financing activities for the nine months ended September 30,
1996 were $3.6 million. These cash flows were primarily a result of drawdowns
on the Revolving Credit Facility, which were partially offset by deferred
offering costs. Cash flows from financing activities were $1.9 million for the
year ended December 31, 1995 compared to a use of cash flows of $.4 million for
the previous year. The increase in cash
72
<PAGE>
flows from financing activities in 1995 was due to the proceeds from the
Revolving Credit Facility, somewhat offset by the repayment of the RIMCO Note.
Due to the Company's active exploration and development and technology
enhancement programs, the Company has experienced and expects to continue to
experience substantial working capital requirements. While the Company believes
that the net proceeds from the Offering, cash flow from operations and
borrowings by the Joint Venture under the Revolving Credit Facility should
allow the Company to successfully implement its present business strategy,
additional financing may be required in the future to fund the Company's
growth, development and exploration drilling and continued technological
enhancement. In the event such capital resources are not available to the
Company, its drilling and other activities may be curtailed.
REVOLVING CREDIT FACILITY
In July 1995, the Joint Venture entered into the two year Revolving Credit
Facility with Compass Bank-Houston ("Compass"), which provides a maximum loan
amount of $20 million, subject to borrowing base limitations. Under the
Revolving Credit Facility, principal outstanding is due and payable upon
maturity in June 1998 with interest due monthly. At November 30, 1996, the
borrowing base was $11.5 million and borrowings outstanding under the Revolving
Credit Facility were $8.7 million. Beginning on December 1, 1996 and on the
first day of each month thereafter, the borrowing base is required to be
reduced by $325,000. The Revolving Credit Facility is without recourse to Old
Edge and the other participants in the Joint Venture. The Company will loan a
portion of the proceeds of the Offering to the Joint Venture for the purpose of
repaying all outstanding indebtedness under the Revolving Credit Facility. See
"Certain Transactions--The Combination Transactions--Description of Joint
Venture." However, the Revolving Credit Facility will be available for future
borrowings by the Joint Venture during its wind-down period. The Joint Venture
may seek to adjust the terms and availability of the Revolving Credit Facility
in the future.
Semi-annually, Compass makes, in its sole discretion, the borrowing base
determination based upon the Joint Venture's proved oil and gas properties
determined in accordance with Compass' normal and customary procedures for
evaluating oil and gas reserves and other related assets. The Joint Venture may
request two additional borrowing base redeterminations per annum, provided that
Compass will not be obligated to perform a redetermination more than one time
per quarter, including quarters that contain a scheduled redetermination.
The interest rate for borrowings is either the Base Rate plus 0.5% or LIBOR
plus 2.5%. The Base Rate is the higher of (i) the Federal Funds Rate plus 0.5%
or (ii) the prime rate. The Joint Venture also pays a quarterly commitment fee
of 0.5% per annum for the unused portion of the borrowing base and a fee of
$5,000 for each regularly scheduled and borrower requested borrowing base
redetermination.
The Joint Venture is subject to certain covenants under the terms of the
Revolving Credit Facility, including, but not limited to (i) tangible
venturer's capital (total assets exclusive of certain intangibles minus total
liabilities) must be at least equal to $2.0 million plus 50% of positive net
income and 100% of equity raised for all quarterly periods subsequent to June
30, 1996; (ii) the ratio at the end of any quarter of cash flow (net income
plus depreciation, depletion, amortization and other non-cash expenses less
non-cash net income for such quarter) to debt service coverage (cash payments
made for principal on debt or capital leases for such quarter) must be at least
1.25 to 1.00; and (iii) the dividends and distributions to the venturers, among
other things, may not exceed 50% of the cash flow in excess of the cash flow
required to maintain the ratio referred to in (ii) above. The Revolving Credit
Facility also places restrictions on additional indebtedness, liens, sales of
properties, amendment of the Joint Venture Agreement and other matters. The
Joint Venture's obligations under the Revolving Credit Facility are secured by
substantially all of the oil and gas properties of the Joint Venture.
SUBORDINATED LOAN
In December 1994, the Joint Venture entered into an agreement providing for
the Subordinated Loan ("The Subordinated Loan Agreement"). Such agreement
provides for a $1 million term loan and a $1 million line of
73
<PAGE>
credit. Drawdowns under the line of credit require 30 days' notice. At
September 30, 1996, the aggregate amount outstanding under the Subordinated
Loan was $1.3 million, including $300,000 outstanding under the line of credit.
The principal is due, unless earlier retired by the Joint Venture, upon the
earlier of April 8, 1998 or the conclusion of the Joint Venture's wind up
period. Interest at 10% per annum is due monthly. The Subordinated Loan is
secured by certain oil and gas properties, equipment and other assets of the
Joint Venture, but is subordinate to the Revolving Credit Facility. The
mortgage and security agreement restricts the transfer of properties, creation
of liens and other matters. The Subordinated Loan is without recourse to the
participants in the Joint Venture. Under the Subordinated Loan Agreement, Mr.
James C. Calaway has a right to receive specified reversionary and overriding
royalty interests on prospects of the Joint Venture and certain rights to
convert such interests into shares of Common Stock, which shares are expected
to be issued in connection with the Combination Transactions. See "Summary--The
Combination Transactions--The James C. Calaway Exchange." A portion of the
proceeds from the Offering will retire the Subordinated Loan.
In addition to the financing arrangements referred to above, the Company has
historically had other subordinate credit arrangements with certain
shareholders and related parties. Following the Offering these credit
arrangements will not be available.
EFFECTS OF INFLATION AND CHANGES IN PRICE
The Company's results of operations and cash flows are affected by changing
oil and gas prices. If the price of oil and gas increases (decreases), there
could be a corresponding increase (decrease) in the operating cost that the
Company is required to bear for operations, as well as an increase (decrease)
in revenues. Inflation has had a minimal effect on the Company.
OTHER
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121") regarding accounting
for the impairment of long-lived assets. The Company adopted SFAS No. 121
effective January 1, 1996. However, its provisions are not applicable to the
Company's oil and gas properties as they are accounted for under the full cost
method of accounting. The effect of adopting SFAS No. 121 was not material for
any period presented.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"). SFAS No. 123 is a new
standard of accounting for stock-based compensation and establishes a fair
value method of accounting for awards granted after December 31, 1995 under
stock compensation plans. SFAS No. 123 encourages, but does not require,
companies to adopt the fair value method of accounting in place of the existing
method of accounting for stock-based compensation whereupon compensation costs
are recognized only in situations where stock compensation plans award
intrinsic value to recipients at the date of grant.
The Company has elected not to adopt the fair value accounting of SFAS No.
123 and continues to account for these plans under APB Opinion No. 25, under
which no compensation costs have been recognized.
OLD EDGE
GENERAL OVERVIEW
During 1991, Old Edge was formed and became the managing venturer of the
newly formed Joint Venture. The Joint Venture was formed for the purpose of
conducting the business of a predecessor partnership, the assets of which were
transferred to the Joint Venture at their historical costs. A substantial
portion of the annual cash flows generated by the predecessor partnership were
distributed to its partners resulting in a low level of equity accumulation
prior to the formation of the Joint Venture. The interest of Old Edge in the
Joint Venture represents substantially all of its assets. Substantially all of
Old Edge's operations consist of its activities as managing
74
<PAGE>
venturer of the Joint Venture. Old Edge anticipates (i) continuing its oil and
gas operations in the Joint Venture with respect to the Existing JV Projects
and (ii) conducting new exploration and production activities (similar to those
it has managed on behalf of the Joint Venture) through Old Edge or a
subsidiary. See "Information Concerning Old Edge." Old Edge records the income
or losses of the Joint Venture using the equity method of accounting. For
financial statement purposes, Old Edge reflects an initial ownership interest
of approximately 29.064% of the Joint Venture.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Income from investment in the Joint Venture for the nine months ended
September 30, 1996 decreased from $392,457 to $78,026, compared to the same
period in 1995. This decrease is primarily attributable to an unusually large
gain recognized by the Joint Venture in March 1995, of approximately $814,000
net to Old Edge's interest, from the sale of a proved oil and gas property
which was partially offset by an increase in operating expenses. There was no
such gain recorded during the nine months ended September 30, 1996. The
following information (other than net income (loss)) relates to Old Edge's
operations conducted outside of the Joint Venture.
Oil and natural gas revenues for the nine months ended September 30, 1996
increased 57% from $13,400 to $20,999 as compared to the same period in 1995.
Production volumes for oil decreased 26% from 453 Bbls in the 1995 period to
333 Bbls in the 1996 period. The decrease in oil production decreased revenues
$1,993 which were further increased by a 14% increase in average oil price
which increased revenue by $959. Production volumes for natural gas increased
95% from 3,282 Mcf in the 1995 period to 6,406 Mcf in the 1996 period. The
increase in natural gas production increased revenues by $5,592. In addition a
28% increase in average gas prices increased revenues by $3,011. Increases in
average oil and gas prices were directly attributable to the general improved
market conditions.
The following table summarizes production volumes, average sales prices and
operating revenues for Old Edge's oil and natural gas operations for the nine
months ended September 30, 1995 and 1996.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
30, 1996 COMPARED TO 1995
--------------- ---------------------
INCREASE % INCREASE
1995 1996 (DECREASE) (DECREASE)
------- ------- ---------- ----------
<S> <C> <C> <C> <C>
PRODUCTION VOLUME:
Oil and condensate (Bbls)............... 453 333 (120) (26%)
Natural gas (MMcfs)..................... 3,282 6,406 3,124 95%
AVERAGE SALES PRICE:
Oil and condensate ($ per MBbls)........ 16.61 19.00 2.39 14%
Natural gas ($ per MMcfs)............... $ 1.79 $ 2.29 $ 0.50 28%
OPERATING REVENUES:
Oil and condensate...................... 7,526 6,521 (1,003) (13%)
Natural gas............................. $ 5,874 $14,478 $8,604 146%
------- ------- ------ ---
Total................................. $13,400 $20,999 $7,601 57%
</TABLE>
Representation fees for the nine months ended September 30, 1996 increased
25.0% from $18,000 to $22,500, compared to the same period in 1995. The
increase was due to increase in the number of wells that are being managed for
outside owners.
Management fees and other increased for the nine months ended September 30,
1996 from $90,000 to $150,118 as compared to the same period in 1995. The
increase was attributable to well maintenance fees of $60,118 that is billed to
joint interest owners by Old Edge as an operator. Old Edge did not operate any
wells in 1995.
75
<PAGE>
Oil and natural gas operating expenses for the nine months ended September
30, 1996 decreased 13% from $1,952, in the 1995 period to $1,695 in the 1996
period.
General and administrative expense for the nine months ended September 30,
1996 increased 59% from $37,365 to $59,429, compared to the same period in
1995. This increase was attributable an increase in accounting fees and to the
general growth of Old Edge.
Depreciation expense for the nine months ended September 30, 1996 decreased
28% from $8,525 to $6,171, compared to the same period in 1995. This decrease
was primarily due to certain office equipment becoming fully depreciated in
1996.
Net income (loss) decreased from $380,075, for the 1995 period to $137,949,
for the 1996 period as a result of the factors discussed above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Income from the Company's investment in the Joint Venture increased from
$342,068 in 1994 to $362,957 in 1995. This increase was primarily attributable
to a large gain recognized by the Joint Venture in March 1995, approximately
$814,000 net to Old Edge's interest, from the sale of a proved oil and gas
property which was partially offset by an increase in operating expenses. There
was also a significant amount of gain, approximately $664,000 net to Old Edge's
interest, recorded in 1994 from the sale of undeveloped oil and gas properties
but there was no one gain as significant as that recorded in 1995. The
following information (other than net income (loss)) relates to Old Edge's
operations conducted outside of the Joint Venture.
Oil and natural gas revenues increased 46% from $16,554 in 1994 to $24,216 in
1995. Production volumes for oil increased 51% from 503 Bbls in 1994 to 758
Bbls in 1995. The increase in oil production increased revenues $4,503 which
was decreased by a 10% decrease in average oil prices which decreased revenue
by $576. Production volumes for natural gas increased 25% from 4,884 Mcf in
1994 to 6,087 Mcf in 1995. The increase in natural gas production increased
revenue by $1,889 which was further increased by an 27% increase in average gas
prices which increased sales by $1,826.
The following table summarizes production volumes, average sales prices and
operating revenues for Old Edge's oil and natural gas operations for the years
ended December 30, 1994 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 30, 1995 COMPARED TO 1994
--------------- ---------------------
INCREASE % INCREASE
1994 1995 (DECREASE) (DECREASE)
------- ------- ---------- ----------
<S> <C> <C> <C> <C>
PRODUCTION VOLUME:
Oil and condensate (Bbl)................ 503 758 255 51%
Natural gas (Mcf)....................... 4,884 6,087 1,203 25%
AVERAGE SALES PRICE:
Oil and condensate ($ per Bbls)......... 17.66 15.88 (1.78) (10%)
Natural gas ($ per Mcf)................. $ 1.57 $ 1.99 $ 0.42 27%
OPERATING REVENUES:
Oil and condensate...................... 8,887 12,813 3,926 44%
Natural gas............................. $ 7,667 $11,403 $3,736 49%
------- ------- ------ ---
Total................................. $16,554 $24,216 $7,662 46%
</TABLE>
Representation fees remained constant for 1995 as compared to 1994.
Management fees increased 50% from $80,000 in 1994 to $120,000 in 1995. The
increase in management fees was due to an escalation clause in the management
fee agreements with the Essex Joint Ventures. The fee
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<PAGE>
to be assessed in the future will remain constant at $30,000 for both of the
Essex Joint Ventures, in the aggregate, for each quarter in which Old Edge acts
as manager.
Oil and natural gas operating expenses decreased 25.1% from $4,169 in 1994 to
$3,123 in 1995. The decrease was primarily attributable to lower operating
expense on certain wells.
General and administrative expense increased 67.3% from $24,520 in 1994 to
$41,014 in 1995. This increase was attributable to an increase of $22,555 in
the consulting fees that were incurred by Old Edge that were not allocable to
the Joint Venture.
<TABLE>
<S> <C>
</TABLE>
Depreciation expense decreased by 42.7% from $36,500 in 1994 to $20,927 in
1995. This decrease was attributable to certain office equipment becoming fully
depreciated in 1995.
Net income decreased from $412,414 in 1994 to $380,485 in 1995 because of the
factors discussed above.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Income (loss) from investment in the Joint Venture increased from a loss of
$295,426 in 1993 to income of $342,068 in 1994. The significant increase was
partially attributable to a large gain recorded by the Joint Venture on a sale
of an undeveloped oil and gas property in 1994, resulting in a net gain of
approximately $374,000, net to Old Edge's interest, as well a significant
increase in gain recorded on other undeveloped oil and gas property sales in
the fourth quarter of 1994. There was no significant gain recorded in 1993 as
compared to 1994. The following information (other than net income (loss))
relates to Old Edge's operations conducted outside of the Joint Venture.
Oil and natural gas revenues decreased 6% from $17,601 in 1993 to $16,554 in
1994. Production volumes for oil increased 62% from 310 Bbls in 1993 to 503
Bbls in 1996. The increase in oil production increased revenues $3,381 which
were further increased by a 1% increase in average oil prices which increased
revenue by $70. Production volumes for natural gas decreased 12% from 5,528 Mcf
in 1993 to 4,884 Mcf in 1994. The decrease in natural gas production decreased
revenue by $1,417 which was further decreased by a 29% decrease in average gas
prices which decreased sales by $3,077. Fluctuations in average oil and gas
price were directly attributable to conditions experienced in the overall oil
and gas market.
The following table summarizes production volumes, average sales prices and
operating revenues for Old Edge's oil and natural gas for operations for the
years ended December 31, 1993 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 30, 1994 COMPARED TO 1993
--------------- ---------------------
INCREASE % INCREASE
1993 1994 (DECREASE) (DECREASE)
------- ------- ---------- ----------
<S> <C> <C> <C> <C>
PRODUCTION VOLUME:
Oil and condensate (Bbls)............... 310 503 193 62%
Natural gas (Mcfs)...................... 5,528 4,884 (644) (12%)
AVERAGE SALES PRICE:
Oil and condensate ($ per Bbls)......... $ 17.52 $ 17.66 $ 0.14 1%
Natural gas ($ per Mcfs)................ 2.20 1.57 (0.63) (29%)
OPERATING REVENUES:
Oil and condensate ..................... $ 5,439 $ 8,887 $ 3,448 63%
Natural gas............................. 12,162 7,667 (4,495) (37%)
------- ------- ------- ---
Total................................. $17,601 $16,554 $(1,047) (6%)
</TABLE>
Oil and natural gas operating expenses increased 56% from $2,677 in 1993 to
$4,169 in 1994. The increase was primarily attributable to higher expenses
being incurred on certain wells in 1994.
77
<PAGE>
General and administrative expense decreased 38% from $39,432 in 1993 to
$24,520 in 1994. The decrease was attributable certain direct expenses incurred
that were not reimbursable by the Joint Venture in 1993.
Depreciation expense decreased 7% from $39,386 in 1993 to $36,500 in 1994.
The decrease was due to certain equipment that became fully depreciated in
1994.
Other income increased during 1994 to $13,749 due to a tax refund that was
received in 1994. There was no other income in 1993.
Net income increased from a net loss of $276,460 in 1993 to net income of
$412,414 in 1994 as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Old Edge's primary sources of liquidity has been reimbursements of expenses
allocated to the Joint Venture and the assessment of certain representation and
maintenance fees. Old Edge's future operations are largely dependent on the
financial stability of the Joint Venture.
EFFECTS OF INFLATION AND CHANGES IN PRICE
Old Edge's results of operations and cash flows are affected by changing oil
and gas prices. If the price of oil and gas increases (decreases), there could
be a corresponding increase (decrease) in the operating cost that Old Edge is
required to bear for operations, as well as an increase (decrease) in revenues.
Inflation has had a minimal effect on Old Edge.
OTHER
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"). SFAS No. 123 is a new
standard of accounting for stock-based compensation and establishes a fair
value method of accounting for awards granted after December 31, 1995 under
stock compensation plans. SFAS No. 123 encourages, but does not require,
companies to adopt the fair value method of accounting in place of the existing
method of accounting for stock-based compensation whereupon compensation costs
are recognized only in situations where stock compensation plans award
intrinsic value to recipients at the date of grant.
Old Edge has elected not to adopt the fair value accounting of SFAS No. 123
and continues to account for these plans under APB Opinion No. 25, under which
no compensation costs have been recognized.
THE JOINT VENTURE, EDGE GROUP II, GULFEDGE AND EDGE GROUP
GENERAL OVERVIEW
During 1991, the Joint Venture was formed by Old Edge, Edge Group II,
Gulfedge and Edge Group to conduct the business of a predecessor partnership.
The Joint Venture purchased approximately $5.2 million in net assets (on a
historical financial statement basis) and assumed substantially all of the
liabilities of such predecessor, which had been engaged in oil and gas
exploration and production operation since 1983. A substantial portion of the
annual cash flows generated by the predecessor partnership had been distributed
to its partners resulting in a low level of equity accumulation prior to the
formation of the Joint Venture.
The Joint Venture began operations in 1991, and until 1992 generated
exploratory drilling prospects based on 2-D seismic data for sale to other
exploration and production companies. During 1992, as a result of the advent of
economic onshore 3-D seismic surveys and the improvement and increased
affordability of data interpretation technologies, the Joint Venture changed
its exploration strategy to emphasize the acquisition of
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3-D seismic data covering certain of its existing 2-D based project areas. From
1992 to 1995, the Joint Venture reduced its inventory of 2-D based prospects,
began limited drilling for its own account of certain existing 2-D based
prospects and began developing prospects based on 3-D seismic data. Since early
1995, the Joint Venture has almost exclusively drilled prospects generated from
3-D seismic data, while accelerating its drilling activity and increasing its
working interest in new project areas. This shift in the Joint Venture's
business strategy is reflected in a number of changes in the Joint Venture's
financial results. A majority of the Joint Venture's revenues in 1994 and 1995
were attributable to the sales of undeveloped oil and gas properties. As the
Joint Venture continues to retain and develop working interests, revenue
attributable to oil and gas sales are expected to increase. Similarly, the
Joint Venture expects depreciation, depletion and amortization and oil and gas
operating expenses to continue to increase. The Joint Venture expects to
continue retaining all or the majority of its interests in prospects with
normally pressured and generally shallow reservoirs and selling a portion of
its interests in deeper over-pressured 3-D seismic prospects, which generally
require greater capital expenditures, to industry participants in order to fund
the capital expenditures for the interests it retains. The Joint Venture
dissolved on December 31, 1996 and entered into a windup period that will
generally last two years during which its activities will primarily involve the
Existing JV Projects. See "Information Concerning the Joint Venture."
The Joint Venture uses the full-cost method of accounting for its oil and gas
properties. Under this method, all acquisition, exploration and development
costs, including certain general and administrative costs that are directly
attributable to the Joint Venture's acquisition, exploration and development
activities, are capitalized in a "full-cost pool" as incurred. The Joint
Venture records depletion of its full-cost pool using the unit of production
method. To the extent that such capitalized costs in the full-cost pool (net of
depreciation, depletion and amortization and related deferred taxes) exceed the
present value (using a 10% discount rate) of estimated future net after-tax
cash flows from proved oil and gas reserves, such excess costs are charged to
operations. Once incurred, a write-down of oil and gas properties is not
reversible at a later date.
The Joint Venture, Edge Group II, Gulfedge and Edge Group were not required
to pay federal income taxes due to their status as partnerships, which are
"pass-through" entities that are not subject to federal income taxation.
Instead, taxes relating to the Joint Venture interests for such periods were
paid by the partners of such entities.
The Joint Venture's revenues, profitability, future growth and ability to
borrow funds or obtain additional capital, and the carrying value of its
properties, are substantially dependent on prevailing prices of natural gas and
oil. It is impossible to predict future natural gas and oil price movements
with certainty. Declines in prices received for natural gas and oil may have an
adverse affect on the Joint Venture's financial condition, liquidity, ability
to finance capital expenditures and results of operations. Lower prices may
also impact the amount of reserves that can be produced economically by the
Joint Venture.
Due to the instability of oil and natural gas prices, in 1995 the Joint
Venture began utilizing, from time to time, certain hedging instruments (e.g.
swaps) for a portion of its gas production to achieve a more predictable cash
flow, as well as to reduce the exposure to price fluctuations. However, hedging
arrangements, when utilized, limit the benefit to the Company of increases in
the price of natural gas. The Company's hedging arrangements apply to only a
portion of its production and provide only partial price protection against
declines in natural gas prices and limits potential gains from future increases
in market prices. Such hedging arrangements may expose the Company to risk of
financial loss in certain circumstances, including instances where production
is less than expected, the Joint Venture's customers fail to purchase
contracted quantities of oil or natural gas or a sudden, unexpected event
materially impacts oil or natural gas prices. The Joint Venture accounts for
all these transactions as hedging activities and, accordingly, gains and losses
are included in oil and gas revenues during the period the hedged transactions
occur. Historically, gains and losses have not been material. The Joint Venture
expects that the amount of hedges that it has in place will vary from time to
time. Outstanding hedges at December 31, 1995 were not material and the Joint
Venture had no existing hedging positions as of September 30, 1996.
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Edge Group II, Gulfedge and Edge Group are general partners in the Joint
Venture with initial sharing ratios of 67.3%, 2.3% and 1.3%, respectively. Edge
Group II and Gulfedge account for their general partnership interests using the
proportionate consolidation method of accounting. Edge Group has other
operations in addition to its direct 1.3% Joint Venture interest and has not
separately included financial statements attributable to such interest in this
Joint Proxy and Consent Solicitation Statement/Prospectus because the financial
statements of the Joint Venture are included herein. The discussion in this
section relating to the results of operations of the Joint Venture is
applicable to each of Edge Group II, Gulfedge and Edge Group on a proportionate
basis equal to such entities' respective proportionate share in the Joint
Venture. Additionally, Edge Group II was subject to a management fee of 2% of
capital contributions (approximately $266,000 per year) through April 1996
which is included in its general and administrative expense (and, therefore, in
determining its net income (loss) as well). None of such fees have been paid to
date and at September 30, 1996, such unpaid management fees aggregated
approximately $1.3 million.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995
Oil and natural gas revenues for the nine months ended September 30, 1996
increased 273% from $1.4 million to $5.1 million as compared to the same period
in 1995. Production volumes for oil increased 75% from 46 MBbls in the 1995
period to 81 MBbls in the 1996 period. The increase in oil production increased
revenues $575,000. In addition, a 14% increase in average oil prices increased
revenue by $232,000. Production volumes for gas increased 364% from 334 MMcf in
1995 to 1,551 MMcf in 1996. The increase in natural gas production increased
revenues by $2.2 million. In addition, a 28% increase in average gas prices
increased revenues by $729,000. The increase in oil and natural gas production
was due to new wells being successfully drilled and completed during 1996,
which was partially offset by normal production declines from existing wells.
Increases in average oil and gas prices were directly attributable to the
general improved market conditions.
The following table summarizes production volumes average sales prices and
operating revenues for the Joint Venture's oil and natural gas operations for
the nine months ended September 30, 1995 and 1996 (in thousands except sales
price amounts).
<TABLE>
<CAPTION>
NINE MONTHS ENDED 1996 PERIOD COMPARED
SEPTEMBER 30, TO 1995 PERIOD
----------------- ---------------------
INCREASE % INCREASE
1995 1996 (DECREASE) (DECREASE)
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
PRODUCTION VOLUME:
Oil and condensate (Mbbls)............ 46 81 35 75%
Natural gas (MMcfs) .................. 334 1,551 1,217 364%
AVERAGE SALES PRICE:
Oil and condensate ($ per MMbls)...... 16.61 19.00 2.39 14%
Natural gas ($ per MMcfs)............. $ 1.79 $ 2.29 $ 0.50 28%
OPERATING REVENUES:
Oil and condensate.................... 766 1,579 813 106%
Natural gas........................... $ 598 $ 3,505 $2,907 486%
-------- -------- ------
Total............................... $1,364 $5,084 $3,720 273%
======== ======== ======
</TABLE>
Oil and natural gas operating expenses for the nine months ended September
30, 1996 increased 42% from $500,000 to $710,000 as compared to the same period
in 1995. Oil and natural gas operating expenses increased due to increased
production generated from new oil and gas wells drilled and completed since
September 30, 1995. As a percentage of oil and gas revenues, operating expenses
were 14% and 37% for the nine months ended September 30, 1996 and 1995,
respectively. This decrease is primarily attributable to a non-recurring
expense of $120,000 in 1995 on proved oil and gas property which accounts for
57% of the overall decrease.
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DD&A expense for the nine months ended September 30, 1996 increased 134% from
$517,000 to $1.2 million as compared to the same period in 1995. This increase
was primarily due to the increase in oil and gas production which increased
DD&A by $426,000, further increased by a 31% increase in the overall oil and
gas DD&A rate. The increased DD&A rate was primarily caused by the amortization
of increased exploration costs attributable to several new wells drilled and
completed since September 30, 1995. Exploration costs increased due to the
Joint Venture's retaining larger working interests in its 3-D prospects, as the
Joint Venture increasingly drilled for its own account. Prior to September 30,
1995, a significant portion of the Joint Venture's well costs were carried by
other owners, resulting in a lower historical DD&A rate. The remaining increase
is due to the depreciation of newly purchased computer equipment in 1995 and
1996.
General and administrative expense for the nine months ended September 30,
1996 increased 15% from $1.9 million to $2.2 million, compared to the same
period in 1995. This increase was attributable to the hiring of additional
geologist and land department employees to support the Joint Venture's
increased drilling activities. General and administrative expense are expected
to continue increasing as more wells are drilled and the Joint Venture
increases the number of wells that it operates.
Interest expense for the nine months ended September 30, 1996 increased 238%
from $196,000 to $665,000 as compared to the same period in 1995. The weighted
average outstanding debt balance was $8.1 million for the nine month period
ended September 30, 1996 as compared to $2.4 million for the comparable period
in 1995. This increase was primarily due to the establishment in July 1995 of,
and borrowings under, the Revolving Credit Facility and the repayment of a
promissory note in March 1995, which was offset slightly by a lower average
interest rate.
There were no gains on the sale of oil and gas property for the nine months
ended September 30, 1996 as compared to a gain of $3.1 million in 1995. The
majority of the gain recorded in 1995 was attributable to the sale of a
property for $3.4 million that resulted in a gain of $2.8 million.
Net income for the nine months ended September 30, 1996 was $268,000 as
compared to $1.4 million for the 1995 period, as a result of the factors
described above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Oil and natural gas revenues remained relatively unchanged at approximately
$2.0 million in both 1994 and 1995. Production volumes for oil increased 5%
from 60 MBbls in 1994 to 63 MBbls in 1995. Increased production was partially
offset by a 10% decrease in average oil prices. Production volumes for natural
gas decreased 4% from 583 MMcf in 1994 to 507 MMcf in 1995. The decrease in
natural gas production was offset by an 27% increase in average natural gas
price. Oil and natural gas revenues were impacted by the addition of four new
wells, the sale of a property and declining production experienced at South
Mermentau and one other property caused by workovers that required the wells to
be shut in for a portion of the year.
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The following table summarizes production volumes, average sales prices and
operating revenues for the Joint Venture's oil and natural gas operations for
the years ended December 31, 1994 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 30, 1995 COMPARED TO 1994
------------- ---------------------
INCREASE % INCREASE
1994 1995 (DECREASE) (DECREASE)
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
PRODUCTION VOLUME:
Oil and condensate (MBbl)................. 60 63 3 5%
Natural gas (MMcf)........................ 583 507 (76) (13%)
AVERAGE SALES PRICE:
Oil and condensate ($ per MBbls).......... $17.66 $15.88 $(1.78) (10%)
Natural gas ($ per MMcfs)................. 1.57 1.99 0.42 27%
OPERATING REVENUES:
Oil and condensate (in thousands)......... $1,061 $1,067 $ 6 1%
Natural gas (in thousands)................ 916 949 33 4%
------ ------ ------
Total (in thousands).................... $1,977 $2,016 $ 39 2%
</TABLE>
Oil and gas operating expenses increased 128% from $300,000 in 1994 to
$683,000 in 1995. The increase was primarily attributable to increased
operating expenses of approximately $216,000 on a property that was acquired
during November 1994 and nonrecurring expenses of approximately $120,000 on
another property. The remaining net increase experienced in 1995 was caused by
increased production from new wells that was offset by the sale of a property
in March 1995.
DD&A expense increased 42% from $557,000 in 1994 to $792,000 in 1995, as a
result of increased production and a higher depletion rate. The higher
depletion rate was primarily due to costs relating to a prospect which resulted
in a dry hole. These increases were offset by a decrease in amortization of
regional seismic costs of approximately $149,000 in 1995, compared to 1994, due
to certain regional seismic costs that became fully amortized in 1995.
General and administrative expense increased 27% from $1.8 million in 1994 to
$2.3 million in 1995. Approximately $241,000 of the increase was attributable
to the hiring of additional geologist and land department employees as well as
salary increases for existing employees. The remaining increase was due to
other general expenses that were directly attributable to increased 3-D
prospect generation and drilling activity.
Interest expense decreased 21% from $400,000 in 1994 to $317,000 in 1995.
This decrease in 1995 was due to a lower weighted average outstanding debt
balance and a lower effective interest rate. The weighted average outstanding
debt balance decreased from approximately $4.0 million in 1994 to approximately
$2.7 million in 1995. The decrease in weighted average outstanding debt balance
and effective interest rate was due to the repayment of $3.4 million of
promissory notes during March 1995 which bore interest at a rate of 10%. The
Joint Venture subsequently entered into a Revolving Credit Facility in July
1995 which had an effective interest rate of 9.25% at December 31, 1995.
The gains on sale of oil and gas properties increased from $2.3 million in
1994 to $3.4 million in 1995. The majority of the gains recorded in 1995 was
the result of the sale of a property for approximately $3.4 million resulting
in a gain of approximately $2.8 million. A majority of income recorded in 1994
was attributable to the sale of a property for approximately $1.5 million
resulting in a gain of approximately $1.3 million.
Net income in 1995 was $1.2 million, compared to $1.2 in 1994, as a result of
the factors described above.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Oil and natural gas revenues increased 38% from $1.4 million in 1993 to $2.0
million in 1994. Production volumes for oil increased 137% from 26 MBbls in
1993 to 60 MBbls in 1994. The increase in oil production
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increased revenues by $609,000 which were further increased slightly due to a
1% increase in average oil prices. Production volumes for natural gas increased
29% from 452 MMcf in 1993 to 583 MMcf in 1994. This increase in natural gas
production contributed $290,000 to revenues which was offset by a 29% decrease
in average natural gas prices which decreased revenues by $367,000. A portion
of the overall increase in oil and natural gas production in 1994 was due to
certain prospects in which the Joint Venture had a reversionary interest
reaching payout during the year and two other prospects in which the Joint
Venture had a reversionary interest reaching payout in 1993 but did not
contribute a full year of production in that year. These two prospects
contributed an additional $451,000 in revenues in 1994. Additionally, the Joint
Venture successfully drilled and completed several new natural gas wells in the
fourth quarter of 1994 which contributed approximately $272,000 in revenues.
The increases were offset by the shutting in of a well on the South Maurice
Field during 1993 and normal declining production on various properties.
The following table summarizes production volumes, average sales prices and
operating revenues for the Joint Venture's oil and natural gas operations for
the years ended December 31, 1993 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 30, 1994 COMPARED TO 1993
------------- ---------------------
INCREASE % INCREASE
1993 1994 (DECREASE) (DECREASE)
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
PRODUCTION VOLUME:
Oil and condensate (MBbl)................. 25 60 35 137%
Natural gas (MMcf)........................ 452 583 132 29%
AVERAGE SALES PRICE:
Oil and condensate ($ per Bbls)........... 17.52 17.66 0.14 1%
Natural gas ($ per MMcf).................. $ 2.20 $ 1.57 $(0.63) (29%)
OPERATING REVENUES:
Oil and condensate (in thousands)......... 444 1,061 617 139%
Natural gas (in thousands)................ $ 994 $ 916 $ (78) (8%)
------ ------ ------
Total (in thousands).................... $1,438 $1,977 $ 539 38%
</TABLE>
Oil and natural gas operating expenses increased 83% from $164,000 in 1993 to
$300,000 in 1994. Lease operating expense increased 50% from approximately
$94,000 in 1993 to $141,000 in 1994 due to increased oil and gas production in
1994 as well as higher working interests on new wells drilled in 1994.
Production taxes increased approximately 102% from $71,000 in 1993 to $143,000
in 1994, primarily attributable to an increase in oil sales in 1994 which had a
higher average severance tax rate.
DD&A expense increased 39% from $402,000 in 1993 to $557,000 in 1994, largely
as a result of increased production. Additionally amortization of seismic cost
increased approximately $126,000 in 1994 from 1993 as a result of a large
purchase of regional seismic data in 1994.
General and administrative expense increased 22% from $1.5 million in 1993 to
$1.8 million in 1994. Approximately $280,000 of the increase was attributable
to hiring additional geologists and land department employees during 1994 as
well as salary increases for existing employees.
Interest expense decreased 37% from $637,000 in 1993 to $400,000 in 1994 due
a lower effective interest rate and a lower weighted average outstanding debt
balance in 1994. The decrease in the effective interest rate was primarily
attributable to the Joint Venture's October 1993 renegotiation of the interest
rate on the RIMCO note from 15.5% to 10% in exchange for a .4% after payout
royalty interest on all prospects sold through September 1995. The weighted
average outstanding debt balance decreased from approximately $4.5 million in
1993 to approximately $4.0 million in 1994 due to scheduled debt payments on
the RIMCO note.
The gain on sale of oil and gas property increased from $247,000 in 1993 to
$2.3 million in 1994. The majority of the gain in 1994 was the result of the
sale of a unproved property for $1.5 million, that resulted in a gain of $1.3
million. There was no such significant sale of unevaluated properties in 1993.
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Net income increased from a net loss of $1 million in 1993 to a net income of
$1.2 million in 1994 because of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Joint Venture's primary sources of liquidity have included funds
generated by operations, the sale of prospects and producing properties, equity
capital from private sources, and borrowings, primarily at the Joint Venture
level under the Revolving Credit Facility and the Subordinated Loan. A portion
of the proceeds from the Offering will be loaned to the Joint Venture to repay
the amounts outstanding under both the Revolving Credit Facility and the
Subordinated Loan. In such event, the Revolving Credit Facility will remain
outstanding for future borrowings and the Subordinated Loan will be terminated.
The Joint Venture is required to comply with various operating and financial
covenants under the Revolving Credit Facility. The continued availability to
the Joint Venture of funds borrowed under the Revolving Credit Facility is
subject to continued compliance with such covenants. For a description of the
Revolving Credit Facility and the Subordinated Loan, see ("--The Company--
Liquidity and Capital Resources").
Edge Group II and Gulfedge were formed to manage their respective investments
in the Joint Venture and currently have no readily available liquidity as
capital resources. Edge Group II's and Gulfedge's future operations are largely
dependent on the financial stability of the Joint Venture.
Cash flows (used) provided by operations were ($1.1 million), ($613,000) and
($1.0) million and $2.4 million for the years ended December 31, 1993, 1994,
1995 and the nine month period ended September 30, 1996, respectively. The
increase in operating cash flows for the nine month period ended September 30,
1996 was primarily attributable to increased drilling activity and resulting
increases in accounts payable. This increase was primarily due to a significant
increase in drilling activities during the nine month period ended September
30, 1996. Accounts payable, trade and accounts payable, working interest owners
increased by $1.3 million and $697,000, respectively, due to factors discussed
above. Accrued liabilities increased by $250,000 for the nine month period
ended September 30, 1996 due to deferred offering costs accrued but not yet
paid. The increase in cash flows used in 1995 as compared to 1994 was due
primarily to the increase in gains on sales of oil and gas property, which was
further offset by various changes in balance sheet accounts. Accounts
receivable, working interest owners increased by $213,000 due to increased
drilling activity in which Old Edge was the operator. Accounts payable, trade
increased by $431,000 due to increased drilling activity for its own account.
The decrease in cash flows used from operations from 1993 to 1994 was due to an
increase in gains on the sale of oil and gas properties in 1994, offset by
changes in various working capital accounts. Accounts receivable, trade and
accounts payable, trade increased by $268,000 and $138,000, respectively,
during 1994 primarily due to the increased oil and gas production and drilling
activities attributable to higher working interests on new wells drilled in
1994.
The Joint Venture expects capital expenditures in 1997 to be at least $20
million. A substantial portion of capital expenditures will be invested in the
Joint Venture's portfolio of 3-D prospects to Fund drilling activities and
expand its reserve base. In addition, the Joint Venture will continue to expand
and improve its technological and 3-D seismic interpretation capabilities.
Based on its existing business plan, the Joint Venture expects to drill 50
gross (21.4 net) wells in 1996 and has budgeted for 124 gross (50.3 net) wells
in 1997. The actual number of wells drilled may differ significantly from such
estimate. In addition to its existing prospects, the Joint Venture has acquired
various 3-D seismic options which will allow it to lease approximately 59,562
gross (29,781 net) undeveloped acres.
Cash flows from financing activities for the nine months ended September 30,
1996 were $3.6 million. These cash flows were primarily a result of drawdowns
on the Revolving Credit Facility, which were partially offset by deferred
offering costs.
Cash flows from financing activities was $1.9 million for the year ended
December 31, 1995 compared to a use of cash flows of $.4 million for the
previous year. The increase in cash flows from financing activities in
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1995 is due to the proceeds from the Revolving Credit Facility, somewhat offset
by the payment of the RIMCO Note.
During the first nine months of 1996, the Joint Venture continued to reinvest
a substantial portion of its cash flows into increasing its 3-D prospect
portfolio, improving its 3-D seismic interpretation technology and funding its
drilling program. Capital expenditures during the first nine months of 1996
were $7.9 million. The Joint Venture expects to incur additional capital
expenditures of $3.4 million in the fourth quarter of 1996 for the drilling of
approximately 16 new wells. Capital expenditures were $3.7 million, $6.8
million and $8.5 million in 1993, 1994 and 1995, respectively. The Joint
Venture's drilling efforts resulted in the successful completion of four wells
in 1993, nine wells in 1994 and 22 wells in 1995 that increased pretax present
value of reserves by $2.5 million, $1.6 million and $9.8 million, respectively.
In 1995 the Joint Venture sold one of its proved producing properties and
received total cash proceeds from such sale of $3.4 million. These proceeds
were used to pay down debt and fund general working capital and corporate
needs. The Joint Venture also sold several undeveloped oil and gas properties
receiving cash proceeds of $3.4 million, $7.1 million and $4.0 million in 1993,
1994 and 1995, respectively.
Due to the Joint Venture's active exploration and development and technology
enhancement programs, the Joint Venture has experienced and expects to continue
to experience substantial working capital requirements. While the Joint Venture
believes that the net proceeds from the offering, cash flow from operations and
borrowings by the Joint Venture under the Revolving Credit Facility should
allow the Joint Venture to successfully implement its present business
strategy, additional financing may be required in the future to fund the Joint
Venture's growth, development and exploration drilling and continued
technological enhancement. In the event such capital resources are not
available to the Joint Venture, its drilling and other activities may be
curtailed.
EFFECTS OF INFLATION AND CHANGES IN PRICE
The Joint Venture's results of operations and cash flows are affected by
changing oil and gas prices. If the price of oil and gas increases (decreases),
there could be a corresponding increase (decrease) in the operating cost that
the Company is required to bear for operations, as well as an increase
(decrease) in revenues. Inflation has had a minimal effect on the Company.
OTHER
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121") regarding accounting
for the impairment of long-lived assets. The Joint Venture adopted SFAS No. 121
effective January 1, 1996. However, its provisions are not applicable to the
Joint Venture's oil and gas properties as they are accounted for under the full
cost method of accounting. The effect of adopting SFAS No. 121 was not material
for any period presented.
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BUSINESS OF THE COMPANY
OVERVIEW
The Company explores for oil and natural gas by emphasizing the integrated
application of highly advanced data visualization and computerized 3-D seismic
data analysis to identify potential hydrocarbon accumulations. The Company
believes its approach to processing and analyzing geophysical data
differentiates it from other independent exploration and production companies
and is more effective than conventional 3-D seismic data interpretation
methods. The Company utilizes a fully integrated, client-server environment
including nine workstation nodes with a high performance Silicon Graphics
server. This hardware configuration enables the Company to utilize advanced
interpretation software, including both Earth Cube and Voxel Geo technology.
The Company also believes that it maintains one of the largest databases of
onshore South Texas Gulf Coast 3-D seismic data of any independent oil and gas
company, and is continuously acquiring substantial additional data within this
core region.
The Company acquires 3-D seismic data by organizing and designing regional
data acquisition surveys for its proprietary use, as well as through selective
participation in regional non-proprietary 3-D surveys. The Company negotiates
seismic options for a substantial majority of the areas encompassed by its
proprietary surveys, thereby allowing it to later secure identified prospect
leasehold interests on a non-competitive, pre-arranged basis. In the Company's
non-proprietary 3-D survey areas, the Company's technical capabilities allow it
to rapidly and comprehensively evaluate large volumes of regional 3-D seismic
data, facilitating its ability to identify attractive prospects within a
surveyed region and to secure the corresponding leasehold interests ahead of
other industry participants.
The Company's extensive technical expertise has enabled it to internally
generate all of its 3-D prospects drilled to date and to assemble a large
portfolio of 3-D based drilling prospects. The Company pursues drilling
opportunities that include a blend of shallower, normally pressured reservoirs
that generally involve moderate costs and risks as well as deeper, over-
pressured reservoirs that generally involve greater costs and risks, but have
higher economic potential. The Company mitigates its exposure to exploration
costs and risk by conducting its operations with industry partners, including
major oil companies and large independents, that generally pay a
disproportionately greater share of seismic acquisition and, in many instances,
leasing and drilling costs than the Company.
The Company has experienced rapid increases in reserves, production and cash
flow since early 1995 due to the growth of its 3-D based drilling activities
and the retention of progressively larger interests in its exploration
projects. From January 1, 1995 to September 30, 1996, reserves discovered from
Company-generated prospects totaled 91.1 Bcfe, while the Company's net proved
reserves more than tripling from 5.9 Bcfe to 18.3 Bcfe at an average finding
cost to the Company of $.51 per Mcfe. The Company drilled 13 gross (0.42 net)
wells in 1994, 35 gross (13.5 net) wells in 1995 and 34 gross (14.7 net) wells
in the nine months ended September 30, 1996. For the period from January 1,
1995 through September 30, 1996, the Company's commercial well success rate was
approximately 67% for the 69 gross (28.2 net) exploratory wells drilled (of
which 62 were based on its interpretation of 3-D seismic data).
The Company's future growth will be driven by the drilling and development of
existing opportunities from its prospect portfolio as well as new 3-D based
prospects that are continually being identified by the Company's exploration
team. The Company has budgeted for drilling 120 gross (46.3 net) wells in 1997.
The Company currently anticipates increasing its capital expenditure budget to
at least $20.0 million in 1997 from $11.2 million in 1996. The Company believes
the proceeds of the Offering will enable it to increase the number and size of
additional 3-D seismic acquisition projects in which it participates,
accelerate its drilling activities and retain a greater share of the reserves
it discovers.
The address of the Company's principal executive offices is Texaco Heritage
Plaza, 1111 Bagby, Suite 2100, Houston, Texas 77002, and its telephone number
is (713) 654-8960.
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BUSINESS STRATEGY
The Company's business strategy is to expand its reserves, production and
cash flow through a disciplined, integrated technology-based program of
exploring for oil and natural gas, which emphasizes the following key
components:
FOCUSED EXPLORATION. The Company intends to maintain its exploration
focus along the onshore Gulf Coast with continued emphasis in South Texas
because of its 3-D seismic expertise in this region. The Company believes,
based on the results of its recent exploration activities, that significant
undiscovered reserves remain in this region. The Company also plans to
utilize its existing database consisting of 567 square miles of 3-D seismic
and geologic data (509 square miles of which are in South Texas) and its
knowledge of the region's producing fields and trends to further expand its
operations within this core region. The Company is currently in the process
of acquiring an additional 459 square miles of 3-D seismic data in South
Texas, which the Company believes will generate a significant number of
additional prospects in 1997 and beyond.
TECHNOLOGICAL EXPERTISE. The Company seeks to explore for and add oil and
natural gas reserves through its advanced 3-D seismic data visualization
and interpretation techniques. These techniques enable its exploration team
to analyze large amounts of 3-D seismic information and to rapidly identify
important patterns or attributes in the data which may indicate hydrocarbon
traps. The Company's technical abilities have allowed it to discover oil
and natural gas reservoirs in existing producing trends with geological
complexities that have eluded conventional interpretation. The Company
plans to continue to enhance its visualization and interpretation strengths
as new technologies and processes are developed.
SOPHISTICATED AND EXPERIENCED TECHNICAL TEAM. The Company has assembled a
team of highly talented geoscientists and other technical personnel who are
experienced in the use of advanced exploration methodologies, and it
actively seeks to identify and attract new members to its exploration team.
The Company provides its personnel with a technologically advanced work
environment, training and results-oriented compensation, including
participation in the Company's stock option plan. The Company believes that
the use of advanced technology by its technical personnel together with
increased capital resources will be critical components to implementing its
business strategy.
PROSPECTS WITH ATTRACTIVE RISK/REWARD BALANCE. The Company typically
retains all or the majority of its interests in prospects with normally
pressured and generally shallow reservoirs. Such prospects are often
located in areas with existing pipelines and production infrastructure,
which facilitate and expedite the commencement of production and cash flow.
The Company typically sells to industry partners, on a promoted basis, a
portion of its interests in prospects that involve higher costs and greater
risks, or consist of deep, over-pressured and often larger reservoirs, in
order to mitigate its exploration risk and fund the anticipated capital
requirements for the portion of those prospects it retains.
CONTROL OVER CRITICAL EXPLORATION FUNCTIONS. In its participation
agreements with industry partners, the Company generally seeks to exercise
control over what it believes to be the most critical functions in the
exploration process. These functions include determining the area to
explore; managing the land permitting and optioning process; determining
seismic survey design; overseeing data acquisition and processing;
preparing, integrating and interpreting the data; and identifying each
prospect and drill site. The Company seeks operator status and control over
the remaining aspects of field operations when it believes its expertise
can add value to these functions.
EXPLORATION TECHNOLOGY
Since 1992, as a result of the advent of economic onshore 3-D seismic surveys
and the improvement and increased affordability of data interpretation
technologies, the Company had relied almost exclusively on the interpretation
of 3-D seismic data in its exploration strategy. The principal advantage of 3-D
seismic data over 2-D seismic data is that it affords a geoscientist the
ability to investigate the entire prospective area using a 3-D seismic data
volume, as compared to the limited number of two dimensional profiles covering
a small percentage
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of the prospective area that are available using 2-D seismic data. As a
consequence, a geoscientist using 3-D seismic data is able to more fully
evaluate prospective areas and produce more accurate interpretations. The use
of structural maps based upon 3-D seismic data can significantly improve the
probability of drilling commercially successful wells, since this data allows
structurally advantageous positions to be more accurately located in highly
drilled exploration plays where only 2-D seismic data was used in the past.
The Company's methodology for interpreting 3-D seismic data has advanced
beyond traditional 3-D interpretation techniques which consist of interpreting
multiple closely spaced 2-D profiles extracted from 3-D seismic volumes to
generate 3-D structural maps. The Company's advanced visualization and data
analysis techniques and resources enable its geoscientists to view collectively
large volumes of information contained within the 3-D seismic data. This
improves the geoscientist's ability to recognize certain important patterns or
attributes in the data which may indicate hydrocarbon traps and which, if
viewed incorrectly or with the application of improper techniques, could go
undetected. Visualization techniques also enable the geoscientist to quickly
identify and prioritize key areas from the large volumes of data reviewed in
order to realize the greatest early benefit. The Company's sophisticated
computing resources and unique visualization and data analysis techniques allow
its geoscientists to more easily identify features such as shallow amplitude
anomalies, complex channel systems, sharp structural details and fluid
contacts, which might have been overlooked using less sophisticated 3-D seismic
data interpretation techniques.
The application of advanced 3-D exploration technology requires large scale
information processing and graphic visualization, made possible by the rapid
improvements in computing technology. The Company has made a significant
investment in its 3-D seismic data visualization technology, which is closely
linked with the Company's well-log database and other geoscience application
software. Additionally, the Company has developed a fully integrated, client-
server environment utilizing nine scientific workstation nodes. For large scale
visualization, the Company uses a Silicon Graphics Onyx R10000 server with the
SGI Reality Engine-2. The Company uses a comprehensive suite of Landmark
Graphics geoscience applications in its interpretation environment, including
Landmark's EarthCube software, which is designed specifically to integrate
visualization and 3-D geologic interpretation. In addition, the Company
utilizes Cogniseis' Voxel Geotechnology in its visualization efforts.
The Company's technological success is dependent in part upon hiring and
retaining highly skilled technical personnel. The Company has assembled a
technical team that it believes has the capacity to adapt to the rapidly
changing technological demands in the field of oil and natural gas exploration.
This team consists of seven geoscientists with an average of 15 years industry
experience, most of which have had extensive experience with major oil
companies. The Company provides its technical team with a sophisticated work
environment and enables these employees to participate in the upside potential
of prospects by assigning them overriding royalty interests in prospects they
identify. See "Management--Other Compensatory Arrangements." With its technical
capabilities and personnel, the Company believes that it will be able to
analyze increasingly large quantities of data without a commensurate increase
in the number of employees. Additionally, the expertise of the Company's team
of geoscientists reduces its dependence on outside technical consultants and
enables the Company to internally generate substantially all of its prospects.
EXPLORATION AND OPERATING APPROACH
The Company's exploration approach is to acquire large 3-D seismic data sets
along prolific, producing trends of the onshore Gulf Coast and to utilize
advanced visualization and interpretation techniques to identify or evaluate
prospects and then drill the prospects which it believes provide the potential
for significant returns. The Company typically seeks to explore in areas with
(i) numerous accumulations of normally pressured reserves at shallow depths and
in geologic traps that are difficult to define without the use of advanced 3-D
data visualization and interpretation and (ii) the potential for large
accumulations of deeper, over-pressured reserves. The Company typically sells a
portion of its interest in the deep, over-pressured prospects in order to
mitigate its exploration risk and fund the anticipated capital requirements for
the interests it retains in such prospects, while retaining all or the majority
of its interest in the prospects with normally pressured reservoirs.
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The Company emphasizes preplanning in project development to lower capital
and operational costs and to efficiently integrate potential well locations
into the existing and planned infrastructure, including gathering systems and
other surface facilities. In constructing surface facilities, the Company
seeks to use reliable, high quality, used equipment in place of new equipment
to achieve cost savings. The Company also seeks to minimize cycle time from
drilling to hook-up of wells, thereby accelerating cash flow and improving
ultimate project economics.
An important component of the Company's exploration approach is the
acquisition of large 3-D seismic data sets at the lowest possible cost. The
Company has sought to obtain large 3-D data sets either by participating in
large seismic data acquisition programs through joint venture arrangements
with other energy companies or "group shoots" in which the Company shares the
costs and results of seismic surveys. The Company believes its technical
capabilities allow it to rapidly evaluate these large 3-D datasets and
identify and secure drilling opportunities prior to the other participants in
these group shoots. In both the joint ventures and the group shoots, the
Company's partners have borne a disproportionate share of the up-front costs
of seismic data acquisition and interpretation in return for the Company's
expertise in the management of seismic surveys, interpretation of 3-D seismic
data, development of prospects and acquisition of exploration rights.
Substantially all of the Company's operations are conducted through joint
operations with industry participants. The Company is currently actively
involved in 14 joint project areas based on 3-D seismic surveys with, among
others, Belco Oil and Gas Corp., Carrizo Oil and Gas Inc., Chevron
Corporation, Cheyenne Petroleum Company, IP Petroleum Company, Inc., KCS
Energy, Inc., Pennzoil Company, Phillips Petroleum Company and Texaco Inc.
Following the Offering, the Company intends to increase the number and size of
seismic data acquisitions and interpretation projects it manages to accelerate
its prospect generation activities and capture a greater share of the oil and
natural gas properties discovered as a result of its technological expertise.
Under the participation agreements on its recent projects, the Company is
generally responsible for determining the area to explore; managing the land
permitting and optioning process; determining seismic survey design;
overseeing data acquisition and processing; preparing, integrating and
interpreting the data; identifying the drill site; and in selected instances,
managing drilling and production operations. The Company is therefore
responsible for exercising control over what it believes are the critical
functions in the exploration process. The Company seeks to obtain lease
operator status and control over field operations, including decisions
regarding drilling and completion methods and accounting and reporting
functions, only when its expertise and planning capabilities indicate that
meaningful value can be added through its performance of these functions.
Typically, in cases when the Company does not have field operator status, the
Company is primarily responsible for identifying prospects for the operator
and, when necessary, asserts its rights under its joint operating agreements
to ensure drilling of such prospects. The Company began field operations of
wells in 1995 and currently operates producing oil and natural gas wells in
South Texas and Alabama. These wells range in depth from 3,000 feet to greater
than 14,000 feet.
The Company has developed extensive experience in the development and
management of projects along the Gulf Coast. Over the past 13 years, the
Company has generated and assembled approximately 130 prospects within the
onshore Gulf Coast area. The Company believes that the ability to develop
large scale 3-D projects in this area on an economic basis requires experience
in obtaining the rights to explore and is a source of competitive advantage
for the Company.
The Company's primary strategy for acreage acquisition is to obtain leasing
options covering large geographic areas prior to conducting its 3-D seismic
surveys. The Company, therefore, typically seeks to acquire seismic permits
that include options to lease, thereby reducing the cost and the level of
competition for leases on drilling prospects that may result upon completing a
successful seismic data acquisition program over a project area.
CURRENT EXPLORATORY PROJECTS
The Company is currently evaluating 14 exploration project areas covering
approximately 1,026 square miles (656,640 acres) that are based on 3-D seismic
surveys ranging from regional non-proprietary group shoots
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to single field proprietary surveys. To date, all project areas for which
seismic data has been interpreted have yielded multiple prospects and drill
sites. The Company is continuing to receive and interpret data covering these
project areas and believes that each project area has the potential for
additional prospects and drill sites. The Company's partners in these projects
include, among others, Belco Oil and Gas Corp., Carrizo Oil and Gas, Inc.,
Chevron Corporation, Cheyenne Petroleum Company, IP Petroleum Company, Inc.,
KCS Energy, Inc., Pennzoil Company, Phillips Petroleum Company and Texaco Inc.
For additional information as to these project areas, see "--Significant
Project Areas."
1997 3-D BASED EXPLORATION PROGRAM
<TABLE>
<CAPTION>
SQUARE MILES OF GROSS ACREAGE
3-D SEISMIC DATA SCHEDULED ADDITIONAL LEASED OR
RELATING TO 1997 1997 BUDGETED TOTAL 1997 UNDER OPTION AT
PROJECT AREAS PROJECT AREA WELLS (/1/) WELLS (/2/) BUDGETED WELLS SEPTEMBER 30, 1996
- ------------- ---------------- ----------- ------------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
TEXAS
Encinitas/Kelsey...... 32 6 2 8 9,110
Everest............... 340 (/3/) 8 11 19 4,888
Cameron............... 325*(/3/) * * * *
Nita/Austin........... 42 2 2 4 19,119
Spartan............... 23 5 1 6 5,855
Belco................. 114* * 41(/4/) 41(/4/) 38,476
Tyler................. 25 1 -- 1 3,750
Buckeye............... 20* * 11(/4/) 11(/4/) 12,000
Hiawatha.............. 23 3 9 12 14,985
East McFaddin......... 11 4 3 7 6,640
Triple "A"............ 13 -- 1 1 2,830
MISSISSIPPI
Tallahala Creek....... 28 4 -- 4 3,240
Quito................. 10 1 3 4 2,760
ALABAMA
Barnett............... 20 2 -- 2 578
----- --- --- --- -------
Total................... 1,026 36 85 120 124,231
===== === === === =======
</TABLE>
- --------
* 3-D seismic data is currently being acquired and/or processed in the project
area.
(1) Consists of identified drill sites that are fully evaluated, leased and
have been or are scheduled to be drilled during 1997.
(2) Consists of budgeted wells based upon the Company's 1997 capital budget.
The number of budgeted wells drilled could be materially affected by
drilling results of other scheduled or budgeted wells. There is less
certainty as to the drilling of these wells than with scheduled wells.
(3) Represents non-proprietary group shoots in which the Company is a
participant.
(4) Includes prospects for which 3-D seismic data is being acquired. The
number of wells indicated is based upon statistical results of drilling
activities in adjoining Company 3-D project areas that the Company
believes are geologically similar.
SIGNIFICANT PROJECT AREAS
Set forth below are descriptions of the Company's key project areas where it
is actively exploring for potential oil and natural gas prospects and in many
cases currently has production. The 3-D surveys the Company is using to
analyze its project areas range from regional non-proprietary group shoots to
single field proprietary surveys. The Company has participated in these
project areas with industry partners under agreements that typically provide
for the industry partners to bear a disproportionately greater share of the
up-front costs associated with obtaining option arrangements with landowners,
seismic data acquisition and related data interpretation than the costs
incurred by the Company.
Although the Company is currently pursuing prospects within the project
areas listed below, there can be no assurance that these prospects will be
drilled at all or within the expected timeframe. The final determination
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with respect to the drilling of any scheduled or budgeted wells will be
dependent on a number of factors, including (i) the results of exploration
efforts and the acquisition, review and analysis of the seismic data, (ii) the
availability of sufficient capital resources by the Company and the other
participants for the drilling of the prospects, (iii) the approval of the
prospects by other participants after additional data has been compiled, (iv)
economic and industry conditions at the time of drilling, including prevailing
and anticipated prices for natural gas and oil and the availability of drilling
rigs and crews, (v) the financial resources and results of the Company and (vi)
the availability of leases on reasonable terms and permitting for the prospect.
There can be no assurance that these projects can be successfully developed or
that the scheduled or budgeted wells discussed will, if drilled, encounter
reservoirs of commercially productive natural gas or oil. The reserve data set
forth below for the various prospects is based upon the Ryder Scott Report.
There are numerous uncertainties in estimating quantities of proved reserves,
including many factors beyond the control of the Company. See "Risk Factors--
Risks Associated with the Business of the Company--Dependence on Exploratory
Drilling Activities," "--Reserve Replacement Risk" and "--Uncertainty of
Reserve Information and Future Net Revenue Estimates."
TEXAS
Encinitas/Kelsey Project Area: Frio-Vicksburg Trend
The Encinitas/Kelsey Project Area is located in Brooks County, Texas in the
geologically complex Frio-Vicksburg trend. The Company acquired 9,110 acres in
this project area in December 1994 to re-develop the property. Upon acquisition
of its interests in this project area, the Company undertook a comprehensive
petrophysical study and a 32 square mile 3-D survey over the area which has
resulted in the identification of numerous prospects. Four of these prospects
were drilled between January and June 1996, resulting in four new field
discoveries. During the quarter ended September 30, 1996, the Company's share
of production from wells in this project area was 54 Bbls/d of oil and 2.6
MMcf/d of gas. As of September 30, 1996, the Company's net estimated proved
reserves in the fields were 1.8 Bcf of gas and 23 MBbls of oil. The Company has
identified six drill sites to be drilled in the first half of 1997. Two
additional wells may be drilled in 1997, depending upon the results of the six
wells scheduled to be drilled. The Company believes that continuing
interpretation of the 3-D seismic data will result in additional prospects and
drilling locations. The Company has a 22.5% working interest and an 18.8% net
revenue interest in the properties in this project area.
Everest Project Area: Frio-Vicksburg Trend
The Everest Project Area is located in Starr and Hidalgo Counties, Texas in
the prolific Frio-Vicksburg Trend. The Company and a partner licensed
approximately 340 square miles of non-proprietary 3-D seismic data in this
project area in August 1995 and June 1996. Through its data processing,
analysis and interpretation techniques, the Company has identified 64 prospects
in the shallow Frio trend and the deeper structurally complex Vicksburg Trend,
and two potentially large prospects in the relatively unexplored Eocene Trend.
The Company and its partner currently control 18 of these prospects (ten Frio,
seven Vicksburg and one Eocene). As of December 31, 1996, eight of these
prospects have been drilled (five Frio prospects and three Vicksburg),
resulting in six new field discoveries, one field extension and one dry hole.
These discoveries have resulted in additional net proved reserves to the
Company of 3.8 Bcf of gas and 47 MBbls of oil as of September 30, 1996. A
portion of the Company's interest in the Vicksburg prospects was sold to
industry partners, the proceeds of which were used to finance the drilling
costs of the Company's retained working interest. For 1997, the Company has
scheduled two development wells on previous discoveries and six exploratory
wells. The Company has also budgeted for drilling 11 additional exploratory
prospects to be selected from the remaining inventory of 48 prospects. The
Company also believes that continuing interpretation of the Everest Project 3-D
data will result in additional prospects and drilling locations. The Company is
entitled to 50% of any interests acquired by the Company and its partner in
prospects developed in this project area.
Cameron Project Area: Wilcox and Jackson-Yegua Trends
The Cameron Project Area is located in Webb and Duval Counties, Texas in the
prolific structurally complex Wilcox trend and the highly stratigraphic
Jackson-Yegua trend. The Company and a partner have
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underwritten approximately 325 square miles of non-proprietary 3-D seismic data
in this project area. The first 100 square miles of the data is expected to be
received by the Company in March 1997, with the remainder expected to be
delivered to the Company over the remainder of 1997. As in the Everest Project,
the Company's strategy is to drill all shallow, normally pressured prospects
and to sell portions of the deeper over-pressured prospects using the resulting
proceeds to finance the drilling costs of the retained interests in such
prospects. The Company believes that, given the geologic similarities of the
Everest and Cameron Project areas, the Company's experience in the Everest
Project Area will assist it in its exploration efforts in the Cameron Project.
The Company is entitled to 50% of any interests acquired by the Company and its
partner in prospects developed in this project area.
Nita/Austin Project Area
Nita/Austin Project Area: Wilcox Formation. The Nita/Austin Project Area is
located along the Gulf Coast of South Texas in Goliad County. The Company has
identified two large Wilcox prospects in this project area. The first of these
prospects was discovered by the Company and is called the Bego Field. An
initial test well drilled in 1991 based on 2-D seismic data resulted in a new
field discovery. A second well in the Bego Field was drilled in 1994 and
experienced mechanical failure. In early 1995 the Company acquired a 42 square
mile 3-D seismic survey covering this project area. A third Bego Field well was
drilled in 1995 using the 3-D seismic data and is currently in the
developmental stage. Currently, two delineation wells are also being drilled.
Given the early stage of development and current uncertainty as to the
commerciality of the field, the Company has not included any estimate of
reserves from these wells. The second of the two large Wilcox prospects was
identified using 3-D seismic data and is scheduled to be drilled in the first
quarter of 1997. The Company has an average 1.7% working interest and an
average 6% after payout working interest in its properties in the Wilcox
formation portion of this project area.
Nita/Austin Project Area: Shallow Frio Trend. In mid-1995, the Company,
through its analysis of the Nita/Austin 3-D seismic survey, identified 26
prospects in the shallow Frio trend. During the second half of 1995 and the
first nine months of 1996, 22 of these prospects were drilled, resulting in 17
commercial wells. For the quarter ended September 30, 1996, these wells
produced 2.8 MMcf/d of natural gas net to the Company. The estimated net proved
reserves to the Company for these wells were 4.6 Bcf of natural gas as of
September 30, 1996. The Company currently expects to drill one additional well
in the shallow Frio trend portion of this project area during the first quarter
of 1997. The Company has also budgeted two additional shallow Frio wells for
the end of 1997. The Company has an approximate average 80% working interest
and an approximate average 60% net revenue interest in the properties in the
shallow Frio trend portion of this project area.
Spartan Project Area: Frio Trend
The Spartan Project Area is a 23 square mile 3-D seismic project area located
adjacent to the Nita/Austin Project Area in Goliad and Victoria Counties,
Texas. The Company currently has approximately 5,855 acres under lease or
option in this project area. The objective for this project area is primarily
the shallow Frio trend, with additional potential in the deeper Yegua and
Wilcox formations. The Company began interpreting the 23 square miles of
seismic data in August 1996, and has identified four Frio drill sites, one deep
Wilcox prospect and one Queen City prospect to date. The Company has completed
the first Frio well, and the remaining wells are scheduled to be drilled in
1997. The Company has also budgeted for 1997 one additional well that is
currently being evaluated. The Company's primary exploration leases and
options, if exercised, provide for a 50% working interest and an average 39.5%
net revenue interest in its properties in this project area.
Belco Project Area: Frio Trend and Yegua and Wilcox Formations
The Belco Project Area is located in Goliad, Bee and Victoria Counties, Texas
where the Company controls 38,476 acres through lease or option. The primary
exploration objectives for this project area, like the Nita/Austin Project Area
and the Spartan Project Area, are the shallow Frio gas accumulations, with the
secondary objectives
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being the deeper Yegua and Wilcox formations. The Company and its partner on
this project area, Belco Oil & Gas Corp. ("Belco"), are currently in the
initial phase of this project which involves acquiring a total of 250 square
miles of proprietary 3-D seismic data. The first 114 square miles of the
seismic data area are currently being shot, and the seismic data is expected
to be available for interpretation during the first quarter of 1997. If the
Company is successful in the development of this initial phase, the project is
expected to expand to a total of 750 square miles of data acquisition. The
Company's agreement with Belco provides for the Company to manage all aspects
of the project's development, with Belco performing field operations for the
deep prospects developed and the Company operating any shallow Frio wells. The
Company has budgeted to drill 41 wells in this project area in 1997 based upon
statistical results of drilling activities in the adjoining Nita/Austin and
Spartan Project Areas that the Company believes are geologically similar. The
Company is entitled to 50% of any interests acquired by the Company and Belco
in prospects developed in this project area.
Tyler Project Area: Wilcox, Hockley, Pettus and Yegua Formations
The Tyler Project Area is located in Live Oak County, Texas where the
Company currently has approximately 3,750 gross acres under lease. The
exploration objectives are the deep, over-pressured zones of the expanded
Upper Wilcox formation and the shallow zones of the Hockley, Pettus and Yegua
formations. A 25 square mile proprietary 3-D seismic survey over the project
area was shot in 1994, from which an approximately 3,500 acre Wilcox prospect
was identified. An initial well drilled on the project area in 1995 was
temporarily abandoned for mechanical reasons, but the Company reentered and
completed the well and it was flowing at a rate of 1.0 MMcf/d of gas as of
September 30, 1996. The Company is currently attempting to complete an
additional deep well that was drilled in late 1996 and experienced mechanical
problems. One additional deep prospect is anticipated to be drilled in 1997.
The Company has a 1.5% working interest and a 15.2% after payout working
interest in these wells. In addition, in the shallow zones of the Hockley and
Pettus formations, the Company has drilled and developed six producing wells
which are currently producing approximately 130 Bbls/d and 180 Mcf/d net to
the Company's interest. These six discoveries have resulted in additional
reserves of 0.5 Bcf of gas and 150 MBbls of oil net to the Company as of
September 30, 1996. The Company has working interests ranging from 56% to 100%
in the shallow producing wells.
Buckeye Project Area: Wilcox, Hockley, Pettus and Yegua Formations
The Buckeye Project Area is located in Live Oak County, Texas adjacent to
the Company's Tyler Project Area. The Company currently holds approximately
12,000 acres under option and has acquired an approximate 20 square mile 3-D
seismic survey of the area. The Company currently is processing this 3-D
seismic data. As with the Tyler Project Area, the exploration objectives for
the Buckeye Project Area are the shallow zones of the Hockley, Pettus and
Yegua formations and the deep zones of the expanded upper Wilcox formation.
The Company plans to drill any prospects it identifies in the shallow
formations and to seek to promote any deep Wilcox prospects identified to
other energy companies for cash and a reversionary interest. The Company has
budgeted to drill 11 wells in this project area in 1997 based upon statistical
results of drilling activities in the adjoining Tyler Project Area that the
Company believes is geologically similar. The Company's lease options, if
exercised, provide for a 50% working interest and an average of approximately
39% net revenue interest in the acreage in this project area.
Hiawatha Project Area: Pettus and Yegua Formations
The Hiawatha Project Area is located in Duval County, Texas. The majority of
past drilling and production activity occurred in the 1940s, with the most
recent well in the area being drilled in the 1970s. Although the area has
experienced limited recent exploration due to complex landowner and leasehold
owner problems, the Company has leased 11,754 acres and has options on an
additional 3,231 acres in this project area. A 23 square mile proprietary 3-D
seismic survey was obtained by the Company in August 1996 and is currently
being interpreted with multiple prospect leads under evaluation. Three wells
were completed in the project area during the fourth quarter of 1996, and an
additional two wells were completed in January 1997. One additional well is
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currently scheduled to be drilled during 1997. The Company has identified at
least 9 additional prospects in various stages of development which it has
budgeted for drilling in 1997. Some of these wells are dependent upon the
results of the first four scheduled wells. The Company has an average 50%
working interest and an average 38.5% net revenue interest in the acreage under
lease in this project area.
East McFaddin Project Area: Frio Formation
The East McFaddin Project Area is located in Victoria County, Texas. In 1995,
the Company obtained a 40% working interest in a 4,680 acre lease in the
project area by agreeing to conduct and pay for a 3-D seismic survey of the
project area. Subsequently, the Company expanded its leasehold acreage and
purchased options for 1,760 acres. The Company then obtained a partner to fund
an approximately 11 square mile 3-D seismic survey in exchange for 50% of the
Company's 40% interest. Two successful wells and three dry holes have been
drilled on the lease since acquisition of the 3-D seismic data. The two
successful wells produced an average of over 1.9 MMcf/d of gas during the third
quarter of 1996. The two producing wells are currently awaiting hook-up from a
low-pressure to a high-pressure pipeline, in order to increase production
rates. The 3-D seismic data was recently reprocessed and four prospects are
currently being evaluated and are scheduled to be drilled in 1997. Three
additional wells have been budgeted to be drilled in 1997.
Triple "A" Project Area: Frio Formation
The Triple "A" Project Area involves the redevelopment of a mature field
located in San Patricio County, Texas. All of the prospects in this project
area are located in the normally pressured Frio trend. In 1995 the Company
acquired a 2,230 acre lease in the Triple "A" Project Area by conducting a 13
square mile 3-D seismic survey over the field area. An additional 600 acres has
been acquired by the Company to cover what the Company believes to be the
prospective areas around the field. The Company has recently drilled and
completed the first of two identified prospects. The well produced 500 Mcf/d of
gas and 8 Bbls/d of oil net to the Company's interest during December 1996 with
net proved reserves of 0.4 Bcf of gas and 7.0 MBbls of oil as of September 30,
1996. Should the Company identify any additional drill sites, it would expect
to drill the normally pressured prospects and, like in the Starr-Hidalgo
Project Area, it would seek to develop and sell deeper prospects for up-front
cash and an after payout working interest. The Company has an average 25%
working interest and an average 18.8% net revenue interest in the acreage under
lease in this project area.
MISSISSIPPI
Tallahala Creek Field: Cotton Valley and Smackover Formation
The Tallahala Creek Field is located in Smith County, Mississippi, and
approximately 3,240 acres are under lease. Following acquisition of the field,
improvements in operations of producing wells and several recompletions
identified by the Company in a detailed petrophysical study of the existing
wells resulted in a production increase from 180 Bbls/d of oil at the time of
acquisition in November 1994 to 370 Bbls/d of oil during the quarter ended
September 30, 1996. As of September 30, 1996, the estimated proved reserves of
this field were 1.2 MMBbls of oil and 1.5 Bcf of natural gas. In the fourth
quarter of 1995 the Company acquired a 28 square mile 3-D seismic survey over
the field. Interpretation of the 3-D data has revealed five prospects within
the field. The Company is currently drilling the first of these locations to a
depth of approximately 16,200 feet. The Company has an 18% to 23.5% working
interest and a 10.6% to 17.4% net revenue interest in the properties in this
field.
Quito Prospect: Cotton Valley and Smackover Formation
The Quito Prospect is located in Wayne County, Mississippi, and approximately
2,760 acres are under lease. The Company identified the prospect using 2-D
seismic data and acquired 3-D seismic data in November 1996 to better delineate
the prospect. The Company believes the 3-D seismic data indicates a structure
that could potentially support four producing wells. The Company has an average
50% working interest and an average 36.3% net revenue interest in the acreage
under lease.
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<PAGE>
ALABAMA
Barnett Project Area: Smackover Formation
The Barnett Project Area is located in Escambia County, Alabama, and
approximately 578 acres are under lease. A 20 square mile 3-D seismic survey
was acquired and interpreted in 1994, resulting in the identification of six
prospects in the Smackover Formation. Four of these prospects have been
drilled, resulting in the completion of three producing wells. Production from
the first two producing wells averaged 730 Bbls/d of oil and 825 Mcf/d of gas
during the quarter ended September 30, 1996. The third well began production in
the fourth quarter of 1996. The two remaining prospects are scheduled to be
drilled during 1997. The Company has an average 18.5% after payout working
interest and an average 13.6% after payout net revenue interest in the acreage
under lease in this project area.
LOUISIANA
South Mermentau Field
The South Mermentau Field is located in Acadia Parish, Louisiana. The Company
discovered a new natural gas reservoir in this field by drilling an initial
exploration well. A second well was drilled on an offset fault block and was
also found to be productive. The field produced approximately 9.8 MMcf/d of
natural gas and 575 Bbls/d of oil during the third quarter of 1996. The
Company's net estimated proved reserves are 0.8 Bcf of gas and 44 Mbls of oil
as of September 30, 1996. The Company is currently attempting to permit a 3-D
survey over this project area. The Company has a 15.8% working interest and an
11.3% net revenue interest in its properties in this field.
SIGNIFICANT FULLY DEVELOPED PROPERTIES
In addition to its exploration project areas, the Company has interests in
the following significant development properties. No exploration is expected to
be conducted on such properties. The reserve data set forth below for the
properties is based on the Ryder Scott Report. There are numerous uncertainties
in estimating quantities of proved reserves, including many factors beyond the
control of the Company. See "Risk Factors--Risks Associated with the Business
of the Company--Uncertainty of Reserve Information and Future Net Revenue
Estimates."
South Maurice Field
South Maurice Field is located in Vermillion Parish, Louisiana, and is the
largest single discovery made to date by the Company. The field has produced
approximately 80 Bcf of gas since its discovery by the Company in 1987 and was
producing 21.4 MMcf/d of gas and 120 Bbls/d of oil as of September 30, 1996.
The Company distributed most of its interests in this field to its former
equity holders, but still retains a 2.7% working interest and a 2.0% average
net revenue interest with proved reserves of 0.4 Bcfe attributable to the
Company as of September 30, 1996.
North Excel Field
The North Excel Field is located in Monroe County, Alabama, and approximately
769 acres are under lease. The North Excel Field was discovered by the Company
in November 1994. During 1994, a 3-D seismic survey was acquired and
interpreted within the Frisco City Sands and the Norphlet Sands. Four producing
wells have been completed in the field, which produced 790 Bbls/d of oil and
4,700 Mcf/d of gas during the quarter ended September 30, 1996 with estimated
proved reserves of 188 MBbls of oil and 0.5 Bcf of gas as of September 30,
1996. The Company believes that the North Excel Field is fully drilled and
offers the potential for increased reserves solely from operational and
engineering improvements. The Company has a 13% after payout working interest
in the acreage under lease in this field, with approximately $700,000 remaining
until payout as of September 30, 1996.
95
<PAGE>
ESSEX ROYALTY PROPERTIES
The Company is the managing venturer of two joint ventures (the "Essex
Royalty Joint Ventures") that have acquired royalty, overriding royalty, net
profits and other non-operating interests with respect to producing and non-
producing properties located in Louisiana, Texas, Alabama, Mississippi, New
Mexico and Oklahoma.
Pursuant to the joint venture agreements for the Essex Royalty Joint
Ventures, the Company, as managing venturer, receives certain management fees.
In addition, after the other participants in each of the two Essex Royalty
Joint Ventures receive distributions equivalent to 110% and 111.3%,
respectively, of their capital contributions, the Company will receive 40% and
25%, respectively, of the profits, losses and distributions of the Essex
Royalty Joint Ventures. As of September 30, 1996, approximately $1.2 million
and $2.4 million remained until payout with respect to the two Essex Royalty
Joint Ventures. The Company is currently in the process of attempting to cure
title defects with respect to a property with accrued revenue in suspense
which the Company estimates should be at least $325,000 as of September 30,
1996 with respect to the Essex Royalty Joint Venture with $2.4 million
remaining until payout. For a more extensive discussion of the joint venture
agreements with respect to the Essex Royalty Joint Ventures, see "Certain
Transactions--Essex Royalty Joint Ventures."
From its inception in 1992 through September 30, 1996, in addition to the
payment of management fees, the Essex Royalty Joint Ventures made
distributions of $2.2 million, all of which, pursuant to the sharing ratios
described above, were distributed to the other participants in the Essex
Royalty Joint Ventures.
OIL AND NATURAL GAS RESERVES
The following table sets forth estimated net proved oil and natural gas
reserves of the Company and the present value of estimated future pretax net
cash flows related to such reserves as of September 30, 1996. The reserve data
and the present value as of September 30, 1996 were prepared by Ryder Scott.
For further information concerning Ryder Scott's estimate of the proved
reserves of the Company at September 30, 1996, see Ryder Scott's letter
included as Annex B to this Prospectus. The present value of estimated future
net revenues before income taxes was prepared using constant prices as of the
calculation date, discounted at 10% per annum on a pretax basis, and is not
intended to represent the current market value of the estimated oil and
natural gas reserves owned by the Company. For further information concerning
the present value of future net revenue from these proved reserves, see Note 9
of Notes to Combined Financial Statements of the Company. Also see "Risk
Factors--Risks Associated with the Business of the Company--Uncertainty of
Reserve Information and Future Net Revenue Estimates."
<TABLE>
<CAPTION>
PROVED RESERVES
-----------------------------
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Oil and condensate (MBbls).................... 789 42 831
Natural gas (MMcf)............................ 10,985 2,579 13,564
Total proved reserves (MMcfe)................. 15,719 2,831 18,550
Present value of estimated future net revenues
before income taxes(1)....................... $23,024 $2,632 $25,656
</TABLE>
- --------
(1) The present value of estimated future pretax net cash flows as of
September 30, 1996 was determined by using the September 30, 1996 weighted
average sales prices of $21.17 per Bbl of oil and $2.01 per Mcf of natural
gas. By comparison, the present value of estimated future pretax net cash
flows as of December 31, 1995 was determined by using the weighted average
sales prices that were being realized as of that date of $17.77 per Bbl of
oil and $2.12 per Mcf of natural gas.
There are numerous uncertainties inherent in estimating quantities of proved
oil and natural gas reserves and in projecting future rates of production and
timing of development expenditures, including many factors beyond the control
of the producer. The reserve data set forth herein represents estimates only.
Reserve
96
<PAGE>
engineering is a subjective process of estimating underground accumulations of
oil and natural gas that cannot be measured in an exact way, and the accuracy
of any reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a result, estimates
made by different engineers often vary from one another. In addition, results
of drilling, testing and production subsequent to the date of an estimate may
justify revision of such estimates, and such revisions may be material.
Accordingly, reserve estimates are generally different from the quantities of
oil and natural gas that are ultimately recovered. Furthermore, the estimated
future net revenues from proved reserves and the present value thereof are
based upon certain assumptions, including future prices, production levels and
costs, that may not prove correct.
No estimates of proved reserves comparable to those included herein have
been included in reports to any federal agency other than the Commission.
The prices used in calculating the estimated future net revenue attributable
to proved reserves do not necessarily reflect market prices for oil and
natural gas production subsequent to September 30, 1996. There can be no
assurance that all of the proved reserves will be produced and sold within the
periods indicated, that the assumed prices will actually be realized for such
production or that existing contracts will be honored or judicially enforced.
VOLUMES, PRICES AND OIL & GAS OPERATING EXPENSE
The following table sets forth certain information regarding the production
volumes of, average sales prices received for and average production costs
associated with the Company's sales of oil and natural gas for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
NINE MONTHS ENDED
1993 1994 1995 SEPTEMBER 30, 1996
------- ------- ------- ------------------
<S> <C> <C> <C> <C>
PRODUCTION:
Oil and condensate (MBbls)..... 26 61 64 81
Gas (MMcf)..................... 457 588 513 1,557
Total (MMcfe).................. 611 954 897 2,043
AVERAGE SALES PRICE:
Oil and condensate ($ per
MBbl)......................... $ 17.52 $ 17.66 $ 15.88 $19.00
Gas ($ per MMcf)............... 2.20 1.57 1.99 2.29
Average Oil & Natural Gas
Operating Expense ($ per
MMcfe)(1)..................... 0.27 0.32 0.77 0.35
</TABLE>
- --------
(1) Includes direct lifting costs (labor, repairs and maintenance, materials
and supplies), workover costs and the administrative costs of production
offices, insurance and property and severance taxes.
97
<PAGE>
FINDING AND DEVELOPMENT COSTS
The following table sets forth certain information regarding the costs
associated with finding, acquiring and developing the Company's proved oil and
natural gas reserves (in thousands, except MCFE and per MCFE data).
<TABLE>
<CAPTION>
COST TO
FIND AND
RESERVES DEVELOP
CAPITALIZED ADDED (PER
COSTS(1) (MCFE)(2) MCFE)
----------- --------- --------
<S> <C> <C> <C>
1993...................................... $ 555 1,497 $0.37
1994...................................... 935 1,081 0.86
1995...................................... 3,883 7,916 0.49
1996 (through September 30)............... 3,791 7,071 0.54
------ ------
January 1, 1993 through September 30,
1996..................................... $9,164 17,565 0.51
====== ======
</TABLE>
- --------
(1) Capitalized costs represent all capitalized expenditures of the Company
excluding acquisition costs for unproved prospects as shown in the table
under the caption "--Development, Exploration and Acquisition Capital
Expenditures."
(2) Reserves added equals the extensions and discoveries on an Mcfe basis. See
Note 8 to the unaudited Combined Financial Statements of the Company.
DEVELOPMENT, EXPLORATION AND ACQUISITION CAPITAL EXPENDITURES
The following table sets forth certain information regarding the capitalized
costs incurred in the purchase of proved and unproved properties and in
development and exploration activities.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Acquisition Costs:
Unproved prospects............ $ 2,914 $ 5,497 $ 3,659 $ 3,695 $ 3,309
Proved properties............. 7 26 91 91 36
Exploration..................... 527 670 2,642 1,122 2,041
Development..................... 21 238 1,150 297 1,714
------- ------- ------- -------- --------
Total capitalized costs..... $ 3,469 $ 6,431 $ 7,542 $ 5,205 $ 7,100
======= ======= ======= ======== ========
</TABLE>
98
<PAGE>
DRILLING ACTIVITY
The following table sets forth the drilling activity of the Company for the
years ended December 31, 1993, 1994 and 1995 and for the nine months ended
September 30, 1996. In the table, "gross" refers to the total wells in which
the Company has a working interest and "net" refers to gross wells multiplied
by the Company's working interest therein. Wells in which the Company holds a
reversionary interest are not included in the following table because such
interests had not been earned at the time of drilling. The percentage of the
Company's wells in which it holds solely a reversionary interest has decreased
in the last two years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
NINE MONTHS
ENDED
1993 1994 1995 SEPTEMBER 30, 1996
--------- --------- ----------- --------------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ----- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exploratory Wells
Productive........... 3 .07 4 .09 17 8.66 24 11.92
Nonproductive........ 8 .20 4 .10 12 4.64 9 2.55
--- --- --- --- --- ----- -------- ----------
Total.............. 11 .27 8 .19 29 13.30 33 14.47
Development Wells
Productive........... 1 -- 5 .23 5 .20 -- --
Nonproductive........ -- -- -- -- 1 .01 1 .20
--- --- --- --- --- ----- -------- ----------
Total.............. 1 -- 5 .23 6 .21 1 .20
</TABLE>
- --------
* An additional 1 gross (.004 net) exploratory well drilled in 1996 was
awaiting completion at September 30, 1996 and could not yet be classified as
productive or nonproductive.
Since September 30, 1996, the Company has drilled 6 gross productive
exploratory wells (3.47 net). The Company is currently drilling or evaluating 1
gross exploratory well (.25 net) and 1 gross development well (.22 net).
PRODUCTIVE WELLS
The following table sets forth the number of productive oil and natural gas
wells in which the Company owned an interest as of September 30, 1996.
<TABLE>
<CAPTION>
COMPANY-
OPERATED OTHER TOTAL
----------- ----------- -----------
GROSS NET GROSS NET GROSS NET
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Oil................................... 3 1.66 31 5.57 34 7.23
Natural gas........................... 19 13.27 32 5.95 51 19.22
--- ----- --- ----- --- -----
Total............................. 22 14.93 63 11.52 85 26.45
</TABLE>
ACREAGE DATA
The following table sets forth certain information regarding the Company's
developed and undeveloped lease acreage as of September 30, 1996. Developed
acres refers to acreage within producing units and undeveloped acres refers to
acreage that has not been placed in producing units.
<TABLE>
<CAPTION>
DEVELOPED ACRES UNDEVELOPED ACRES
---------------- -----------------
GROSS NET GROSS NET
-------- ------- -----------------
<S> <C> <C> <C> <C>
Alabama................................ 2,925 157 7,712 1,262
Louisiana.............................. 2,841 315 117 97
Mississippi............................ 2,660 87 6,041 747
Texas.................................. 30,486 7,740 50,512 14,451
-------- ------- -------- --------
Total.............................. 38,912 8,299 64,382 16,557
======== ======= ======== ========
</TABLE>
99
<PAGE>
Leases covering approximately 11,828 gross (1,754 net), 16,524 gross (5,140
net), 22,707 gross (4,316 net), 1,822 gross (196 net) and 1,604 gross (161 net)
undeveloped acres are scheduled to expire in 1996, 1997, 1998, 1999 and 2000,
respectively.
The table does not include 59,562 gross (29,781 net) acres that the Company
has a right to acquire pursuant to various seismic option agreements. In
addition, the Company is expected to acquire options on an additional 37,900
acres pursuant to various seismic option agreements by December 31, 1997.
MARKETING
The Company's production is marketed to third parties consistent with
industry practices. Typically, oil is sold at the wellhead at field-posted
prices and natural gas is sold under contract at a negotiated price based upon
factors normally considered in the industry, such as distance from the well to
the pipeline, well pressure, estimated reserves, quality of natural gas and
prevailing supply/demand conditions.
The Company's marketing objective is to receive the highest possible wellhead
price for its product. The Company is aided by the presence of multiple outlets
near its production in the Gulf Coast. The Company takes an active role in
determining the available pipeline alternatives for each property based upon
historical pricing, capacity, pressure, market relationships, seasonal
variances and long-term viability.
There are a variety of factors which affect the market for oil and natural
gas, including the extent of domestic production and imports of oil and natural
gas, the proximity and capacity of natural gas pipelines and other
transportation facilities, demand for oil and natural gas, the marketing of
competitive fuels and the effects of state and federal regulations on oil and
natural gas production and sales. The Company has not experienced any
difficulties in marketing its oil and natural gas. The oil and natural gas
industry also competes with other industries in supplying the energy and fuel
requirements of industrial, commercial and individual customers.
The Company markets its own production where feasible with a combination of
market-sensitive pricing and forward-fixed pricing. Forward pricing is utilized
to take advantage of anomalies in the futures market and to hedge a portion of
the Company's production deliverability at prices exceeding forecast. All of
such hedging transactions provide for financial rather than physical
settlement. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--The Company--General Overview."
Despite the measures taken by the Company to attempt to control price risk,
the Company remains subject to price fluctuations for natural gas sold in the
spot market due primarily to seasonality of demand and other factors beyond the
Company's control. Domestic oil prices generally follow worldwide oil prices,
which are subject to price fluctuations resulting from changes in world supply
and demand. The Company continues to evaluate the potential for reducing these
risks by entering into, and expects to enter into, additional hedge
transactions in future years. In addition, the Company may also close out any
portion of hedges that may exist from time to time as determined to be
appropriate by management. As of December 31, 1996, there were no existing
hedge positions. Total Mcfs of natural gas purchased and sold under swap
arrangements during the nine month period ended September 30, 1996 and the year
ended December 31, 1995 were 182,000 Mcfs and 122,000 Mcfs, respectively. Gains
and losses realized by the Joint Venture under such swap arrangements were
$5,270 and $(15,720) for the nine month period ended September 30, 1996 and the
year ended December 31, 1995, respectively. There was no hedging activity in
1994 or 1993.
COMPETITION
The Company encounters competition from other oil and natural gas companies
in all areas of its operations, including the acquisition of exploratory
prospects and proven properties. The Company's competitors include major
integrated oil and natural gas companies and numerous independent oil and
natural gas companies, individuals and drilling and income programs. Many of
its competitors are large, well-established companies with substantially larger
operating staffs and greater capital resources than the Company's and which, in
many
100
<PAGE>
instances, have been engaged in the oil and natural gas business for a much
longer time than the Company. Such companies may be able to pay more for
exploratory prospects and productive natural gas and oil properties and may be
able to define, evaluate, bid for and purchase a greater number of properties
and prospects than the Company's financial or human resources permit. In
addition, such companies may be able to expend greater resources on the
existing and changing technologies that the Company believes are and will be
increasingly important to the current and future success of oil and natural gas
companies. The Company's ability to explore for oil and natural gas prospects
and to acquire additional properties in the future will be dependent upon its
ability to conduct its operations, to evaluate and select suitable properties
and to consummate transactions in this highly competitive environment. The
Company believes that its technological expertise, its exploration, drilling
and production capabilities and the experience of its management generally
enable it to compete effectively. Many of the Company's competitors, however,
have financial resources and exploration and development budgets that are
substantially greater than those of the Company, which may adversely affect the
Company's ability to compete with these companies.
REGULATION
The availability of a ready market for oil and gas production depends upon
numerous factors beyond the Company's control. These factors include regulation
of natural gas and oil production, federal and state regulations governing
environmental quality and pollution control, state limits on allowable rates of
production by well or proration unit, the amount of natural gas and oil
available for sale, the availability of adequate pipeline and other
transportation and processing facilities and the marketing of competitive
fuels. For example, a productive natural gas well may be "shut-in" because of
an oversupply of natural gas or lack of an available natural gas pipeline in
the areas in which the Company may conduct operations. State and federal
regulations generally are intended to prevent waste of natural gas and oil,
protect rights to produce natural gas and oil between owners in a common
reservoir, control the amount of natural gas and oil produced by assigning
allowable rates of production and control contamination of the environment.
Pipelines are subject to the jurisdiction of various federal, state and local
agencies. The following discussion summarizes the regulation of the United
States oil and gas industry. The Company believes that it is in substantial
compliance with such statutes, rules, regulations and governmental orders,
although there can be no assurance that this is or will remain the case. The
following discussion is not intended to constitute a complete discussion of the
various statutes, rules, regulations and governmental orders to which the
Company's operations may be subject.
REGULATION OF NATURAL GAS AND OIL EXPLORATION AND PRODUCTION. The Company's
operations are subject to various types of regulation at the federal, state and
local levels. Such regulation includes requiring permits for the drilling of
wells, maintaining bonding requirements in order to drill or operate wells and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled in, the
plugging and abandoning of wells and the disposal of fluids used in connection
with operations. The Company's operations are also subject to various
conservation laws and regulations. These include the regulation of the size of
drilling and spacing units or proration units and the density of wells which
may be drilled in and the unitization or pooling of oil and gas properties. In
this regard, some states allow the forced pooling or integration of tracts to
facilitate exploration while other states rely primarily or exclusively on
voluntary pooling of lands and leases. In areas where pooling is voluntary, it
may be more difficult to form units, and therefore, more difficult to develop a
project if the operator owns less than 100% of the leasehold. In addition,
state conservation laws establish maximum rates of production from oil and
natural gas wells, generally prohibit the venting or flaring of natural gas and
impose certain requirements regarding the ratability of production. The effect
of these regulations may limit the amount of oil and natural gas the Company
can produce from its wells and may limit the number of wells or the locations
at which the Company can drill. The regulatory burden on the oil and gas
industry increases the Company's costs of doing business and, consequently,
affects its profitability. Inasmuch as such laws and regulations are frequently
expanded, amended and reinterpreted, the Company is unable to predict the
future cost or impact of complying with such regulations.
FEDERAL REGULATION OF SALES AND TRANSPORTATION OF NATURAL GAS. Historically,
the transportation and sale for resale of natural gas in interstate commerce
have been regulated pursuant to the Natural Gas Act of 1938
101
<PAGE>
(the "NGA"), the Natural Gas Policy Act of 1978 (the "NGPA") and the
regulations promulgated thereunder by the Federal Energy Regulatory Commission
(the "FERC"). Maximum selling prices of certain categories of natural gas sold
in "first sales," whether sold in interstate or intrastate commerce, were
regulated pursuant to the NGPA. On July 26, 1989, the Natural Gas Wellhead
Decontrol Act (the "Decontrol Act") was enacted, which removed, as of not later
than January 1, 1993, all remaining federal price controls from natural gas
sold in "first sales." The FERC's jurisdiction over natural gas transportation
was unaffected by the Decontrol Act.
Historically, producers typically sold their production to intrastate and
interstate pipelines, which then functioned as the wholesalers selling to the
local distributors and other end-use customers. However, in April 1992, the
FERC issued Order No. 636, a rule designed to restructure the interstate
natural gas transportation and marketing system and remove various barriers and
practices that have historically limited non-pipeline natural gas sellers,
including producers, from effectively competing with interstate pipelines for
sales to local distribution companies and large industrial and commercial
customers. The most significant provisions of Order No. 636: (a) require that
interstate pipelines provide firm and interruptible transportation solely on an
"unbundled" basis, separate from their sales service, and convert each
pipeline's bundled firm sales service into unbundled firm transportation
service; (b) provide for the issuance of blanket certificates to pipelines to
provide unbundled sales service, giving all customers a chance to purchase
their firm supplies from nonpipeline merchants (see the discussion of Order No.
547 below); (c) require that pipelines provide firm and interruptible
transportation service on a basis that is equal in quality for all natural gas
supplies, whether purchased from the pipeline or elsewhere; (d) require that
pipelines provide new, nondiscriminatory "no-notice" transportation for certain
of their traditional sales customers that largely replicates the "bundled"
sales service previously provided by pipelines; (e) establish two new generic
programs for the reallocation of firm pipeline capacity; (f) require that all
pipelines offer access to their storage facilities on a firm and interruptible
basis; (g) provide for pregranted abandonment of pipeline sales agreements,
interruptible and short-term (defined as one year or less) transportation
agreements and conditional pregranted abandonment of long-term transportation
service; (h) modify transportation rate design by requiring that all fixed
costs related to transportation be recovered through the reservation charge;
and (i) provide mechanisms for the recovery by pipelines of certain types of
costs likely to occur from implementation of Order No. 636. The restructuring
process has been implemented on a pipeline-by-pipeline basis through
negotiations in individual pipeline proceedings. All of the interstate
pipelines have filed their Order No. 636 compliance plans with the FERC and
most have had those plans approved, subject to certain conditions and subject
to appeals to the reviewing court respecting various issues. Since the issuance
of Order No. 636, the FERC has issued two orders making relatively minor
modifications to Order No. 636. Numerous parties have filed for judicial review
of Order No. 636 as well as for judicial review of the FERC's orders approving
restructuring plans for various individual pipelines. The United States Court
of Appeals for the District of Columbia Circuit (the "Court") recently issued
its decision in the appeal of Order No. 636. The Court largely upheld the basic
tenets of Order No. 636, including the requirements that interstate pipelines
"unbundle" their sales of gas from transportation and that pipelines provide
open-access transportation on a basis that is equal for all gas supplies. The
Court remanded five relatively narrow issues for further explanation by the
FERC. In doing so, the Court made it clear that the FERC's existing rules on
the remanded issues would remain in effect pending further consideration. The
Court's decision is still subject to rehearing and parties could potentially
petition for writ of certiorari to the United States Supreme Court. It is not
possible to predict what effect, if any, the ultimate outcome of this judicial
review process or the other appeals still pending in individual pipeline
restructuring proceedings will have on the FERC's open-access regulations or on
the Company.
For decades, the principal methodology used to set pipeline rates has been
based on the actual cost to provide that service. In recent years, regulators
have concluded that sufficient competition may exist in certain markets to
allow a relaxation of this historic approach. In January 1996, the FERC issued
a statement of policy and a request for comments concerning alternatives to its
traditional cost-of-service ratemaking methodology to establish the rates
interstate pipelines may charge for their services. The policy statement
articulates the criteria that the FERC will use to evaluate proposals to charge
market-based rates for the transportation of natural gas. The policy statement
also provides that the FERC will consider proposals for negotiated rates for
individual shippers of natural gas, so long as a cost-of-service-based rate is
available to the customer to protect against abuse. The FERC
102
<PAGE>
requested comments on whether it should allow gas pipelines the flexibility to
negotiate the terms and conditions of transportation service with prospective
shippers. The Company cannot predict what further action the FERC will take on
these matters; however, the Company does not believe that it will be affected
by any action taken materially differently than other natural gas producers,
gatherers and marketers with which it competes.
The FERC recently issued a notice of proposed rulemaking ("NOPR") pursuant to
which it proposes to substantially revise its regulations regarding releases of
firm interstate pipeline capacity. In the NOPR, the FERC proposes to (i)
require pipelines to have comparable procedures for capacity release
transactions and interruptible transportation transactions; (ii) allow
replacement shippers to release capacity in segments and change primary receipt
and delivery points; (iii) eliminate the requirement to bid on release
transactions; and (iv) lift the price cap for released capacity, interruptible
transportation, and short-term firm pipeline capacity in markets where the
shipper or the pipeline demonstrates a lack of market power. Simultaneously
with the issuance of the NOPR, the FERC issued an order establishing an
experimental pilot program that would implement certain provisions of the NOPR
during the 1996-97 winter heating season. The FERC intends the pilot programs
to help in determining whether the criteria in the NOPR is indicative of a lack
of market power. The Company cannot predict what further action the FERC will
take on these matters; however, the Company does not believe that it will be
affected by any action taken materially differently than other natural gas
producers, gatherers and marketers with which it competes.
In May 1995, the FERC issued a policy statement on how interstate gas
pipelines can recover the costs of new pipeline facilities. While this policy
statement affects the Company only indirectly, in its present form the new
policy should enhance competition in natural gas markets and facilitate
construction of gas supply laterals. However, requests for rehearing of this
policy statement are currently pending. The Company cannot predict what action
the FERC will take on these requests.
Commencing in May 1994, the FERC issued a series of orders in individual
cases that delineate a new gathering policy in light of the interstate pipeline
industry's restructuring under Order No. 636. As a general matter, gathering is
exempt from the FERC's jurisdiction; however, the courts have held that where
the gathering is performed by the interstate pipelines in association with the
pipeline's jurisdictional transportation activities, the FERC retains
regulatory control over the associated gathering services to prevent abuses.
Among other matters, the FERC slightly narrowed its statutory tests for
establishing gathering status and reaffirmed that, except in situations in
which the gatherer acts in concert with an interstate pipeline affiliate to
frustrate the FERC's transportation policies, the FERC does not generally have
jurisdiction over natural gas gathering facilities and services. In the FERC's
opinion, such facilities and services are more properly regulated by state
authorities. In addition, the FERC has approved several transfers proposed by
interstate pipelines of gathering facilities to unregulated independent or
affiliated gathering companies. Certain of the FERC's orders delineating its
new gathering policy recently were the subject of an opinion issued by the
Court. That opinion generally upheld the FERC's policy of approving the
interstate pipeline's proposed "spindown" of its gathering facilities to an
unregulated affiliate company, but reversed and remanded to the FERC that
portion of the FERC's orders imposing so-called "default contracts" by which
the unregulated affiliate was obligated to continue existing gathering services
to customers under "default contracts" for up to two years after spindown. It
remains unclear whether the FERC will attempt to reimpose such conditions or
will otherwise act in response to producer requests for additional protection
against perceived monopolistic action by pipeline-related gatherers. In
addition, in February 1996, the FERC issued a policy statement that, among
other matters, reaffirmed, with some clarifications, its long-standing test for
determining whether particular pipeline facilities perform a jurisdictional
transmission function or non jurisdictional gathering function. While changes
to the FERC's gathering policy affect the Company only indirectly, such changes
could affect the price and availability of capacity on certain gathering
facilities, and thus access to certain interstate pipelines, which, in turn,
could affect the price of gas at the wellhead and in markets in which the
Company competes. However, the Company does not believe that it will be
affected by these changes to the FERC's gathering policy materially differently
than other natural gas producers with which it competes.
In December 1992, the FERC issued Order No. 547, governing the issuance of
blanket marketer sales certificates to all natural gas sellers other than
interstate pipelines. The order applies to non-first sales that remain
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subject to the FERC's NGA jurisdiction. Among other things, the order
eliminates the need for natural gas producers and marketers to seek specific
authorization under Section 7 of the NGA from the FERC to make sales of natural
gas for resale. Instead, effective January 7, 1993, these natural gas sellers,
by operation of the order, were issued blanket certificates of public
convenience and necessity allowing them to make jurisdictional natural gas
sales for resale at negotiated rates without seeking specific FERC
authorization, thus allowing such sellers to compete with sellers making
deregulated first sales. The FERC intends Order 547, in tandem with Order No.
636, to foster a competitive market for natural gas by giving natural gas
purchasers access to multiple supply sources at market-driven prices. Order No.
547 may increase competition in markets in which the Company's natural gas is
sold.
In October 1992, the Energy Policy Act of 1992 was enacted. This Act
streamlined the permitting process necessary to import Canadian natural gas and
altered the treatment of such gas under the NGPA, eliminating the FERC's
jurisdiction over the price of non-pipeline sales of natural gas imported from
Canada. Canadian natural gas imports still require import authorizations from
the Department of Energy's Office of Fossil Energy under Section 3 of the NGA
and construction and siting authorizations, where applicable, from the FERC.
These changes could enhance the ability of Canadian producers to export natural
gas to the United States and increase competition in the domestic natural gas
market.
Commencing in October 1993, the FERC has modified its regulation of oil
pipeline rates and services in order to comply with the Energy Policy Act of
1992. That Act mandated the FERC to streamline oil pipeline ratemaking by
abandoning its old, cumbersome procedures. It also grandfathered certain
existing rates. To respond to the statute, the FERC issued a series of rules
(Order Nos. 561 and 561-A) establishing an indexing system under which oil
pipelines will be able to change their transportation rates, subject to
prescribed ceiling levels. The indexing system, which allows or may require
pipelines to make rate changes to track changes in the Producer Price Index for
Finished Goods, minus one percent, became effective January 1, 1995. The FERC's
decision in these matters was recently affirmed by the Court. The Company is
not able at this time to predict the effects of Order Nos. 561 and 561-A, if
any, on the transportation costs associated with oil production from the
Company's oil producing operations.
Additional proposals and proceedings that might affect the natural gas
industry are pending before Congress, the FERC and the courts. The natural gas
industry historically has been very heavily regulated; therefore, there is no
assurance that the less stringent regulatory approach recently pursued by the
FERC and Congress will continue.
OIL PRICE CONTROLS AND TRANSPORTATION RATES. Sales of crude oil, condensate
and gas liquids by the Company are not currently regulated and are made at
market prices. The FERC has issued an order establishing an indexing system for
transportation rates for oil that could increase the cost of transporting oil
to the purchaser. Because this order is subject to administrative and judicial
review, the Company is not able to predict what effect, if any, this order will
have on it.
ENVIRONMENTAL REGULATIONS. The Company's operations are subject to numerous
laws and regulations governing the discharge of materials into the environment
or otherwise relating to environmental protection. Public interest in the
protection of the environment has increased dramatically in recent years. The
trend of more expansive and stricter environmental legislation and regulations
could continue. To the extent laws are enacted or other governmental action is
taken that restricts drilling or imposes environmental protection requirements
that result in increased costs to the oil and gas industry in general, the
business and prospects of the Company could be adversely affected.
The Company generates wastes, including hazardous wastes, that are subject to
the federal Resource Conservation and Recovery Act ("RCRA") and comparable
state statutes. The EPA and various state agencies have limited the approved
methods of disposal for certain hazardous and nonhazardous wastes. Furthermore,
certain wastes generated by the Company's oil and natural gas operations that
are currently exempt from
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treatment as "hazardous wastes" may in the future be designated as "hazardous
wastes," and therefore be subject to more rigorous and costly operating and
disposal requirements.
The Company currently owns or leases numerous properties that for many years
have been used for the exploration and production of oil and gas. Although the
Company believes that it has utilized good operating and waste disposal
practices, prior owners and operators of these properties may not have utilized
similar practices, and, hydrocarbons or other wastes may have been disposed of
or released on or under the properties owned or leased by the Company or on or
under locations where such wastes have been taken for disposal. In addition,
many of these properties have been operated by third parties whose treatment
and disposal or release of hydrocarbons or other wastes was not under the
Company's control. These properties and the wastes disposed thereon may be
subject to CERCLA, RCRA and analogous state laws. Under such laws, the Company
could be required to remove or remediate previously disposed wastes (including
wastes disposed of or released by prior owners or operators) or property
contamination (including groundwater contamination) or to perform remedial
plugging operations to prevent future contamination.
The Company's operations may be subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Amendments to the CAA were adopted in
1990 and contain provisions that may result in the gradual imposition of
certain pollution control requirements with respect to air emissions from the
operations of the Company. The EPA and states have been developing regulations
to implement these requirements. The Company may be required to incur certain
capital expenditures in the next several years for air pollution control
equipment in connection with maintaining or obtaining operating permits and
approvals addressing other air emissionrelated issues. However, the Company
does not believe its operations will be materially adversely affected by any
such requirements.
Federal regulations require certain owners or operators of facilities that
store or otherwise handle oil, such as the Company, to prepare and implement
spill prevention, control, countermeasure and response plans relating to the
possible discharge of oil into surface waters. The Oil Pollution Act of 1990,
as amended ("OPA"), contains numerous requirements relating to the prevention
of and response to oil spills into waters of the United States. The OPA
subjects owners of facilities to strict joint and several liability for all
containment and cleanup costs and certain other damages arising from a spill,
including, but not limited to, the costs of responding to a release of oil to
surface waters. The OPA also requires owners and operators of offshore
facilities that could be the source of an oil spill into waters of the United
States, including wetlands, to post a bond, letter of credit or other form of
financial assurance in the amount of $35 million, subject to later increase to
as much as $150 million if a formal risk assessment indicates that the increase
is warranted, to cover costs that could be incurred by governmental authorities
in responding to an oil spill. In addition to OPA, other federal and state laws
for the control of water pollution also provide varying civil and criminal
penalties and liabilities in the case of releases of petroleum or its
derivatives into surface waters or into the ground. Regulations are currently
being developed under OPA and state laws concerning oil pollution prevention
and other matters that may impose additional regulatory burdens on the Company.
In addition, the CWA and analogous state laws require permits to be obtained to
authorize discharge into surface waters or to construct facilities in wetland
areas. With respect to certain of its operations, the Company is required to
maintain such permits or meet general permit requirements. The EPA recently
adopted regulations concerning discharges of storm water runoff. This program
requires covered facilities to obtain individual permits, participate in a
group permit or seek coverage under an EPA general permit. The Company believes
that it will be able to obtain, or be included under, such permits, where
necessary, and minor modifications to existing facilities and operations that
would not have a material effect on the Company.
The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Superfund" law, and similar state laws impose
liability, without regard to fault or the legality of the original conduct, on
certain classes of persons that are considered to have contributed to the
release of a "hazardous substance" into the environment. These persons include
the owner or operator of the disposal site or sites where the release occurred
and companies that disposed or arranged for the disposal of the hazardous
substances found at the site. Persons who are or were responsible for releases
of hazardous substances under
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CERCLA may be subject to joint and several liability for the costs of cleaning
up the hazardous substances that have been released into the environment and
for damages to natural resources, and it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by the hazardous substances released into the
environment.
The Company also is subject to a variety of federal, state and local
permitting and registration requirements relating to protection of the
environment. Management believes that the Company is in substantial compliance
with current applicable environmental laws and regulations and that continued
compliance with existing requirements will not have a material adverse effect
on the Company.
OPERATING HAZARDS AND INSURANCE
The oil and natural gas business involves a variety of operating risks,
including the risk of fire, explosion, blow-out, pipe failure, casing collapse,
abnormally pressured formations and environmental hazards such as oil spills,
gas leaks, ruptures and discharges of toxic gases, the occurrence of any of
which could result in substantial losses to the Company due to injury or loss
of life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, cleanup responsibilities,
regulatory investigation and penalties and suspension of operations.
In accordance with customary industry practice, the Company maintains
insurance against some, but not all, of the risks described above. The
Company's insurance does not cover business interruption or protect against
loss of revenues. There can be no assurance that any insurance obtained by the
Company will be adequate to cover any losses or liabilities. The Company cannot
predict the continued availability of insurance or the availability of
insurance at premium levels that justify its purchase. The occurrence of a
significant event not fully insured or indemnified against could materially and
adversely affect the Company's financial condition and operations.
TITLE TO PROPERTIES
The Company believes it has satisfactory title to all of its producing
properties in accordance with standards generally accepted in the oil and
natural gas industry. The Company's properties are subject to customary royalty
interests, liens incident to operating agreements, liens for current taxes and
other burdens which the Company believes do not materially interfere with the
use of or affect the value of such properties. As is customary in the industry
in the case of undeveloped properties, little investigation of record title is
made at the time of acquisition (other than a preliminary review of local
records). Investigations, including a title opinion of local counsel, are
generally made before commencement of drilling operations. The Revolving Credit
Facility is secured by substantially all of the Company's oil and natural gas
properties.
EMPLOYEES
At September 30, 1996, the Company had approximately 27 full-time and three
part-time employees, primarily professionals, including five
geologists/geophysicists, two data visualization geoscientists and two
engineers. The Company believes that its relationships with its employees are
good. None of the Company's employees are covered by a collective bargaining
agreement. From time to time, the Company utilizes the services of independent
consultants and contractors to perform various professional services,
particularly in the areas of construction, design, well site surveillance,
permitting and environmental assessment. Field and on-site production operation
services, such as pumping, maintenance, dispatching, inspection and testing,
are generally provided by independent contractors.
LEGAL PROCEEDINGS
From time to time the Company is a party to various legal proceedings arising
in the ordinary course of business. The Company is not currently a party to any
litigation that it believes could have a material adverse effect on the
financial position of the Company.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
Following the completion of the Combination Transactions and the Offering,
the officers, directors and key employees of the Company will be substantially
the same as those of Old Edge, immediately prior to such events. The following
table sets forth certain information with respect to directors, executive
officers and certain employees of the Company, together with their ages (as of
January 1, 1997) and positions:
<TABLE>
<CAPTION>
DIRECTOR'S
TERM
NAME AGE POSITION ENDING
---- --- -------- ----------
<S> <C> <C> <C>
Executive Officers and
Directors:
John E. Calaway........ 39 Chief Executive Officer and Chairman of the 2000
Board
James D. Calaway....... 39 President and Director 2000
Michael G. Long........ 44 Chief Financial Officer
Richard S. Dale........ 41 Controller, Treasurer and Secretary
Vincent Andrews........ 56 Director 1999
David B. Benedict...... 57 Director 1999
Nils P. Peterson....... 60 Director 1999
Stanley S. Raphael..... 61 Director 1998
John Sfondrini......... 48 Director 2000
Robert W. Shower....... 59 Director* 1998
Other Key Employees:
David L. Blake......... 35 Director of Exploration
Mark J. Gabrisch....... 36 Director of Land
John O. Hastings, Jr... 36 Director of Exploration
John O. Tugwell........ 33 Director of Production Engineering
</TABLE>
- --------
*Mr. Shower will become a director of the Company following the completion of
the Offering.
The Company's Board of Directors is divided into three classes with staggered
terms of office, initially ending as set forth above. Thereafter, the term for
each class will expire on the date of the third annual stockholders' meeting
for the election of directors following the most recent election of directors
for such class. Each director holds office until the next annual meeting of
stockholders for the election of directors of his class and until his successor
has been duly elected and qualified. The 1997 Annual Meeting of Stockholders
will be held prior to the completion of this Offering. Officers serve at the
discretion of the Board of Directors.
The Board of Directors will have three standing committees: the Audit
Committee, the Compensation Committee and the Nominating Committee.
JOHN E. CALAWAY is the Chief Executive Officer and Chairman of the Board of
the Company. He was a founder of the predecessor of Old Edge and has served as
the Chief Executive Officer and Chairman of the Board of Old Edge or its
predecessor since 1986. Mr. John E. Calaway has more than 20 years of
experience in the oil and natural gas exploration and production business.
JAMES D. CALAWAY is the President and a director of the Company. He served as
a director of Old Edge since April 1991. Since January 1994, Mr. James D.
Calaway has served as Special Advisor to Old Edge. From 1989 to January 1994,
Mr. James D. Calaway was primarily engaged in the organization and
capitalization of several high technology companies, including The Forefront
Group, Inc. Prior thereto, he served as Vice President of Business Development
for Space Industries International, Inc., a company he co-founded in 1982 that
develops, fabricates, integrates and operates spacecraft and spaceflight
equipment. Mr. James D. Calaway received a B.A. in Economics from the
University of Texas and an M.A. in Politics, Philosophy and Economics from
Oxford University.
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MICHAEL G. LONG is the Chief Financial Officer of the Company and has held
this position since December 1996. Mr. Long served as Vice President--Finance
of W&T Offshore, Inc., an oil and gas exploration and production company, from
July 1995 to December 1996. From May 1994 to July 1995, he served as Vice
President of the Southwest Petroleum Division for Chase Manhattan Bank, N.A.
Prior thereto, he served in various capacities with First National Bank of
Chicago, most recently that of Vice President and Senior Corporate Banker of
the Energy and Transportation Department, from March 1992 to May 1994. Mr. Long
received a B.A. in Political Science and an M.S. in Economics from the
University of Illinois.
RICHARD S. DALE is the Controller, Treasurer and Secretary of the Company. He
has held the same positions with Old Edge and its predecessor since 1986. Prior
thereto, Mr. Dale was a Senior Accountant at the public accounting firm of
Kares & Cihlar and a staff accountant with Texaco Inc. He is a Certified Public
Accountant, a member of the American Institute of Certified Public Accountants
and holds a B.B.A. in Accounting from the University of Mississippi.
VINCENT ANDREWS is a director of the Company and has served as a director of
Old Edge since April 1991. Mr. Andrews has, for more than five years, served as
President of Vincent Andrews Management Corporation, a privately held
investment company primarily involved in personal financial management. He
received a B.S. in Business Administration from Georgetown University. In 1994,
Mr. Andrews and Vincent Andrews Management Corporation, a company of which Mr.
Andrews is the President, each filed a voluntary petition for reorganization
pursuant to Chapter 11 of the United States Bankruptcy Code.
DAVID B. BENEDICT is a director of the Company. He was appointed a director
of Old Edge in March 1995, and has been an active investor in Old Edge and its
predecessor since 1983. Since 1987, Mr. Benedict has served as Managing
Director of Capital Markets for First Albany Corporation, an investment banking
and brokerage firm. Prior thereto, he served in various capacities with other
investment banking firms, including Dillon Read & Company, Bear Stearns
Companies Inc. and Oppenheimer Capital L.P. Mr. Benedict holds a B.A. and a
B.S. in Metallurgical Engineering from Lehigh University.
NILS P. PETERSON is a director of the Company and has served as a director of
Old Edge since March 1995. Since January 1991 he has been primarily engaged as
a private investor and formerly served as a director of the Eastern Bancorp,
Inc. and the Boston Mutual Life Insurance Co. Prior thereto, he was Chief
Investment Officer of the Harvard Management Company, investment manager of the
Harvard University endowment funds.
STANLEY S. RAPHAEL is a director of the Company and has served as a director
of Old Edge since April 1991. For more than five years, Mr. Raphael has been
primarily engaged as a private investor and is presently a director of American
Polymers Inc., a polystyrene manufacturer, Big City Bagels Inc., a publicly
held bagel store franchisor, and Trade Consultants, Inc., a management
consulting firm. Previously, he was active in trading crude oil, petroleum
products, LPG, petrochemicals, and plastics worldwide. Mr. Raphael received a
B.B.A. in Foreign Trade and Economics from the City College of New York.
JOHN SFONDRINI is a director of the Company and has served as a director of
Old Edge or its predecessor since 1986, when he arranged for the capitalization
of the Joint Venture's predecessor. For more than five years, he has managed
various general and limited partnerships that invest primarily in the oil and
natural gas industry. He holds a B.S. in Economics from the Wharton School of
Finance. Mr. Sfondrini and Napamco, a corporation wholly owned by Mr. Sfondrini
of which he is the President, are the general partners of certain partnerships
that are affiliates of Old Edge.
ROBERT W. SHOWER will become a director of the Company following the
completion of the Offering. Mr. Shower served as Executive Vice President and
Chief Financial Officer of Seagull Energy Corporation, an oil and gas
exploration, development and production company, from December 1993 until his
retirement in April 1996. From March 1992 to December 1993, he served as such
company's Senior Vice President and Chief Financial Officer. From 1991 to 1992,
Mr. Shower served as Senior Vice President, Corporate Development for Albert
Fisher, Inc., a company engaged in produce distribution. Prior thereto, he
served as Senior Vice President
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and Chief Financial Officer of Ameriserv. Mr. Shower also serves as a director
of Lear Corporation and Highlands Insurance Group, Inc.
There are no family relations, of first cousin or closer, among the Company's
directors or executive officers, by blood, marriage or adoption, except that
Mr. John E. Calaway and Mr. James D. Calaway are twin brothers.
OTHER KEY EMPLOYEES
DAVID L. BLAKE is a Director of Exploration for the Company and served as a
geophysicist/geologist with Old Edge since July 1989. From 1984 to July 1989,
he held the position of geophysicist for Mobil Exploration and Production
Company. Mr. Blake holds a B.S. in Geophysics from Texas A&M University.
MARK J. GABRISCH is the Director of Land for the Company. Since November
1994, he served in a similar capacity with Old Edge. From 1985 to October 1994,
he was a land man, most recently a Senior Land man, for Shell Oil Company. Mr.
Gabrisch holds a B.S. in Petroleum Land Management from the University of
Houston.
JOHN O. HASTINGS, JR. is a Director of Exploration for the Company and served
in a similar capacity with Old Edge since February 1994. From 1984 to February
1994, he was an exploration geologist with Shell Oil Company, serving as Senior
Geologist before his departure. Mr. Hastings holds a B.A. from Dartmouth in
Earth Sciences and an M.S. in Geology from Texas A&M University.
JOHN O. TUGWELL is the Director of Production Engineering for the Company and
served as Senior Petroleum Engineer of Old Edge since May 1995. From 1986 to
May 1995, he held various reservoir/production engineering positions with Shell
Oil Company, most recently that of Senior Reservoir Engineer. Mr. Tugwell holds
a B.S. in Petroleum Engineering from Louisiana State University. Mr. Tugwell is
a registered Professional Engineer in the State of Texas.
DIRECTOR COMPENSATION
Directors who are employees of the Company are not entitled to receive
additional compensation for serving as directors. Following the Offering, each
director who is not an employee of the Company or a subsidiary (a "Nonemployee
Director") will receive, subject to attending a minimum of three Board meetings
per year, an annual retainer of $10,000 to be paid 50% in cash and 50% in
shares of restricted Common Stock (the "Director Restricted Stock") pursuant to
the Incentive Plan of Edge Petroleum Corporation (the "Incentive Plan"). The
Director Restricted Stock will vest ratably, subject to continued service as a
director, over three years beginning on the first anniversary of the date of
grant. Each Nonemployee Director shall receive a $1,000 cash payment for in-
person attendance at a meeting of the Board of Directors ($400 if such
attendance is telephonic) and $400 for each meeting of a Committee of the Board
of Directors attended (whether in-person or telephonic). All directors will be
reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board or Board committees and for other expenses incurred in their capacity as
directors. In addition, Nonemployee Directors will receive options for the
purchase of Common Stock pursuant to the Incentive Plan. See "--Incentive
Plans--Incentive Plan."
OFFICER AND DIRECTOR INDEMNIFICATION
The Company's Bylaws provide for the indemnification of its officers and
directors, and the advancement to them of expenses in connection with
proceedings and claims, to the fullest extent permitted by the Delaware General
Corporation Law. The Bylaws include related provisions meant to facilitate the
indemnitee's receipt of such benefits. These provisions cover, among other
things: (i) specification of the method of determining entitlement to
indemnification and the selection of independent counsel that will in some
cases make such determination; (ii) specification of certain time periods by
which certain payments or determinations must be made and actions must be
taken; and (iii) the establishment of certain presumptions in favor of an
indemnitee. The benefits of certain of these provisions are available to an
indemnitee only if there has been a change in
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control (as defined therein). The Company intends to enter into
indemnification agreements with its directors and officers that provide for
similar protections. In addition, the Company expects to purchase directors'
and officers' liability insurance policies that will take effect upon the
closing of this Offering.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation provided by Old Edge to its Chief Executive Officer and each of
the other persons that will serve as executive officers of the Company who
earned more than $100,000 in combined salary and bonus from Old Edge during
the year ended December 31, 1995 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
---------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(2)
--------------------------- -------- ------- ---------------
<S> <C> <C> <C>
John E. Calaway.............................. $322,666 -- $48,124
Chief Executive Officer and Chairman of the
Board
James D. Calaway............................. 150,000 -- 30,302
Special Advisor(3)
Richard S. Dale.............................. 90,000 $10,000 32,535
Controller, Treasurer and Secretary
</TABLE>
- --------
(1) Other annual compensation for the named individuals during 1995 did not
exceed the lesser of $50,000 or 10% of the annual compensation earned by
such individual.
(2) Represents the value of overriding royalty interests granted in 1995 in
respect of certain arrangements described under "--Other Compensatory
Arrangements" and in the case of Mr. John E. Calaway, $1,180 paid by Old
Edge for life insurance premiums. Substantially all of such overriding
royalty interests were sold shortly after the grant thereof. Accordingly,
such valuation is based primarily on the proceeds received from the sales
of such interests, and in cases where such interests have not been sold,
on sales of comparable interests.
(3) Mr. James D. Calaway served as Special Advisor of Old Edge during fiscal
1995. He currently serves as President of the Company.
No options were granted to any of the Named Executive Officers in 1995
pursuant to the Edge Petroleum Corporation 1994 Incentive Stock Option Plan
(the "Old Edge Plan"). In connection with the Combination Transactions, all
options previously granted under the Old Edge Plan will be converted into
options for the purchase of Common Stock. See "--Incentive Plans--Old Edge
Plan." The following table summarizes the number and value of the outstanding
options granted under the Old Edge Plan with respect to the Named Executive
Officers, adjusted for such conversion into options for the purchase of Common
Stock. None of the Named Executive Officers exercised any stock options during
1995. There are no outstanding stock appreciation rights, shares of restricted
stock or long-term incentive plans with respect to Old Edge.
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1995 YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1995 DECEMBER 31, 1995
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(2)
- ---- ---------------------------- ----------------------------
<S> <C> <C>
John E. Calaway...... -- --
James D. Calaway..... 48,922/0 $582,661/--
Richard S. Dale...... 48,922/0 $682,951/--
</TABLE>
- --------
(1) Represents the number of shares of Common Stock that may be issued pursuant
to options outstanding at December 31, 1995 that will be assumed by the
Company from Old Edge in connection with the Combination Transactions.
(2) Prior to the Offering, there was no public market for common stock of Old
Edge and, therefore, the value of each unexercised in-the-money stock
option is calculated as the difference between an estimated initial public
offering price of $16.00 per share and the exercise price of the stock
option, as adjusted for the conversion of shares of common stock of Old
Edge into shares of Common Stock. See "--Incentive Plans--Old Edge Plan."
EMPLOYMENT AGREEMENTS
Prior to the completion of the Offering, the Company expects to enter into
employment agreements with each of Mr. John E. Calaway and Mr. James D.
Calaway. The following describes possible terms of such agreements; however, if
entered into, the terms of such agreements may differ from that described
below. Each of these agreements is expected to provide for an annual base
salary in an amount not less than $295,000 in the case of Mr. John E. Calaway
and $200,000 in the case of Mr. James D. Calaway and to entitle the employee to
participate in all of the Company's incentive, savings, retirement and welfare
benefit plans in which other executive officers of the Company participate. The
agreement for Mr. John E. Calaway's employment is expected to provide for the
award of an annual cash bonus of $55,000 if the Company's audited annual net
cash flow increases by 15% or more relative to the audited net cash flow of the
prior calendar year, which bonus will be increased by $50,000 to $105,000 if
such increase in audited net cash flow is 25% or more. In the case of Mr. James
D. Calaway, his employment agreement is expected to provide that he receive an
annual bonus in an amount comparable to the annual bonus of other Company
executives, taking into account his position and responsibilities. The
agreements of each of Mr. John E. Calaway and Mr. James D. Calaway will provide
for restricted stock awards pursuant to the Incentive Plan of (a) 66,823 and
58,470 shares of Common Stock, respectively, that it is expected will vest
ratably over five years beginning on the first anniversary of the date of grant
and (b) 66,822 and 58,470 shares of Common Stock, respectively (together, the
"Performance Shares"), that it is expected will vest on the earlier to occur of
ten years or the achievement of certain performance milestones. If the average
closing price per share for the Common Stock for the month of December for any
given year, as compared with the month of January for that same year (the
"Annual Growth"), has increased by 25% or more, then 20% of the Performance
Shares will vest. If the Annual Growth for a particular year is not at least
25% and as a result none of the Performance Shares vest for such year (a
"Nonachieving Year"), then a deficit equal to 25% less the Nonachieving Year
Annual Growth shall exist. In the year subsequent to a Nonachieving Year, an
additional 20% of the Performance Shares will vest if the Annual Growth for
such subsequent year is at least 25% plus the deficit of the Nonachieving Year.
Upon completion of the Offering, Mr. John E. Calaway and Mr. James D. Calaway
will also each receive option grants, pursuant to the Incentive Plan, to
purchase 133,645 and 116,940 shares of Common Stock, respectively. See "--
Incentive Plans--Incentive Plan." Each of the employment agreements is expected
to have an initial five-year term provided that beginning at the end of the
second year of such initial term and every anniversary thereafter, the term of
each such employment agreement will automatically be extended for one year,
such that the remaining term of the agreement shall never be less than three
years. Each agreement will be subject to the right of the Company and the
employee to terminate the employee's employment at any time. It is expected
that, upon termination of employment on account of disability or if employment
is terminated by the Company for any reason, except under certain limited
circumstances defined as "for cause" in the agreement, or by the employee
subsequent to
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a change of control (as defined) or with good reason (as defined), the employee
will generally be entitled to (i) cash payment(s) equal to his annual base
salary, an amount equivalent to the benefits which would otherwise have been
earned under incentive, savings and retirements plans, and cash bonuses (in the
case of performance bonuses, payment shall be made in the amount of the
projected bonus for subsequent periods based on the average of the applicable
performance measure for the prior three years), for the remainder of the term
of the applicable agreement, (ii) continued participation in all the Company's
welfare benefit plans and (iii) the immediate vesting of any stock options or
restricted stock previously granted to such employee and outstanding as of the
time immediately prior to the date of his termination. Each agreement is
expected to provide that the Company will provide a $2 million term life
insurance policy for the employee.
The Company has entered into an employment agreement with Mr. Michael Long.
The following summary of that agreement does not purport to be complete and is
qualified by reference to it, a copy of which is filed as an exhibit to the
Registration Statement of which this Joint Proxy and Consent Solicitation
Statement/Prospectus is a part. The agreement provides for an annual base
salary in an amount not less than $125,000 and entitles Mr. Long to participate
in all the Company's incentive, savings, retirement and welfare benefit plans.
Such annual base salary is subject to increase to $150,000 as of July 1, 1997
if this Offering is completed and certain specified objectives relating to
investor relations, risk management and employee benefits administration are
completed. Mr. Long is entitled to an annual bonus of up to 50% of his base
salary, to be paid approximately 25% in cash and 75% in shares of Common Stock,
which bonus shall be based on the achievement of the Company's annual
performance goals with respect to increases in per share reserves and audited
annual net cash flow per share. The agreement provides that Mr. Long receive an
option for the purchase of 33,513 shares of Common Stock upon completion of the
Offering, pursuant to the Incentive Plan. See "--Incentive Plans--Incentive
Plan." Mr. Long's employment agreement has an automatically renewing two-year
term. The agreement is subject to the right of the Company and Mr. Long to
terminate his employment at any time. Upon termination of employment on account
of disability or if employment is terminated by the Company without cause (as
defined) or by Mr. Long subsequent to a change of control (as defined) or with
good reason (as defined), Mr. Long will be entitled to (i) a payment equal to
his annual base salary and (ii) the immediate vesting of any stock options or
restricted stock previously granted to him and outstanding as of the time
immediately prior to the date of his termination. Upon termination on account
of death, the Company shall be obligated to pay, in addition to any accrued
benefits, an amount equal to one-half of his annual base salary.
The employment agreement of Mr. Michael G. Long described above provides that
the employee shall not divulge any of the Company's confidential information,
knowledge or data following the termination of employment. The employment
agreements of each of Messrs. John E. Calaway and James D. Calaway are expected
to contain a similar provision. Mr. Long's agreement provides, and the
employment agreements of each of John E. Calaway and James D. Calaway are
expected to provide, for a covenant limiting competition with the Company
during employment with the Company, and, if the employment ends by reason of
the employee terminating his employment for other than good reason or
disability, for one year thereafter in the case of Mr. Long, and for two years
thereafter in the case of each of John E. Calaway and James D. Calaway. Such
covenant provides that the employee will not, within a 75 mile radius of
certain geographic locations, (i) accept employment or render services to a
competitor of the Company or (ii) enter into or take part in any business that
would be competitive with the Company.
Old Edge and Mr. John E. Calaway entered into an employment agreement as of
April 1991 that expired in April 1996. This agreement will be superseded by the
new employment agreement described above. Such agreement provided that Mr. John
E. Calaway was to receive base compensation of at least $295,000 per year,
subject to automatic upward adjustment based on certain price index changes and
discretionary upward adjustment upon the vote of two-thirds of the board of
directors of Old Edge. Pursuant to such agreement, Mr. John E. Calaway was also
entitled to receive a .3% overriding royalty interest in new prospects of Old
Edge or the Joint Venture during the term of the agreement. Such overriding
royalty interest was assigned to Mr. John E. Calaway as described under "--
Other Compensatory Arrangements." The agreement also provides that Old Edge
will provide at its expense a $1 million life insurance policy payable to Mr.
John E. Calaway or his designated beneficiaries.
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INCENTIVE PLANS
Incentive Plan. Prior to the completion of the Offering, the Company expects
to adopt the Incentive Plan. The objectives of the Incentive Plan are to (i)
attract and retain the services of key employees, qualified independent
directors and qualified consultants and other independent contractors and (ii)
encourage the sense of proprietorship in and stimulate the active interest of
those persons in the development and financial success of the Company by making
awards ("Awards") designed to provide participants in the Incentive Plan with
proprietary interest in the growth and performance of the Company.
The Company plans to reserve 1,000,000 shares of Common Stock for use in
connection with the Long-Term Incentive Plan. Persons eligible for Awards are
(i) employees holding positions of responsibility with the Company or any of
its subsidiaries and whose performance can have a significant effect on the
success of the Company, (ii) Nonemployee Directors and (iii) certain
nonemployee consultants and other independent contractors providing, or who
will provide, services to the Company or any of its subsidiaries.
The Compensation Committee of the Company's Board of Directors (the
"Committee") will administer the Incentive Plan. With respect to Awards to
employees and independent contractors, the Committee has the exclusive power to
administer the Incentive Plan, to take all actions specifically contemplated
thereby or necessary or appropriate in connection with the administration
thereof, to interpret the Incentive Plan and to adopt such rules, regulations
and guidelines for carrying out its purposes as the Committee may deem
necessary or proper in keeping with the objectives of such plan. With respect
to Awards to employees and independent contractors, the Committee may, in its
discretion, among other things, extend or accelerate the exercisability of,
accelerate the vesting of or eliminate or make less restrictive any
restrictions contained in any Award, waive any restriction or other provision
of the Incentive Plan or in any Award or otherwise amend or modify any Award in
any manner that is either (i) not adverse to that participant holding the Award
or (ii) consented to by that participant. The Committee also may delegate to
the chief executive officer and other senior officers of the Company its duties
under the Incentive Plan.
The Board of Directors may amend, modify, suspend or terminate the Incentive
Plan for the purpose of addressing any changes in legal requirements or for any
other lawful purpose, except that (i) no amendment or alteration that would
adversely affect the rights of any participant under any Award previously
granted to such participant shall be made without the consent of such
participant and (ii) no amendment or alteration shall be effective prior to its
approval by the stockholders of the Company to the extent such approval is then
required pursuant to Rule 16b-3 in order to preserve the applicability of any
exemption provided by such rule to any Award then outstanding (unless the
holder of such Award consents) or to the extent stockholder approval is
otherwise required by applicable legal requirements. The Board of Directors may
make certain adjustments in the event of any subdivision, split or
consolidation of outstanding shares of Common Stock, any declaration of a stock
dividend payable in shares of Common Stock, any recapitalization or capital
reorganization of the Company, any consolidation or merger of the Company with
another corporation or entity, any adoption by the Company of any plan of
exchange affecting the Common Stock or any distribution to holders of Common
Stock of securities or property (other than normal cash dividends).
Awards to employees and independent contractors may be in the form of (i)
rights to purchase a specified number of shares of Common Stock at a specified
price ("Options"), (ii) rights to receive a payment, in cash or Common Stock,
equal to the fair market value or other specified value of a number of shares
of Common Stock on the rights exercise date over a specified strike price,
(iii) grants of restricted or unrestricted Common Stock or units denominated in
Common Stock, (iv) grants denominated in cash and (v) grants denominated in
cash, Common Stock, units denominated in Common Stock or any other property
which are made subject to the attainment of one or more performance goals
("Performance Awards"). An Option may be either an incentive stock option
("ISO") that qualifies, or a nonqualified stock option ("NSO") that does not
qualify, with the requirements of Section 422 of the Code; provided, that
independent contractors cannot be awarded ISOs. The Committee will determine
the employees and independent contractors to receive Awards and the terms,
conditions and limitations applicable to each such Award, which conditions may,
but need not, include
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continuous service with the Company, achievement of specific business
objectives, attainment of specified growth rates, increases in specified
indices or other comparable measures of performance. Performance Awards may
include more than one performance goal, and a performance goal may be based on
one or more business criteria applicable to the grantee, the Company as a whole
or one or more of the Company's business units and may include any of the
following: increased revenue, net income, stock price, market share, earnings
per share, return on equity or assets or decrease in costs.
On the date the Offering closes, Options under the Incentive Plan will be
granted to approximately 16 employees of the Company to purchase a total of
approximately 350,000 shares of Common Stock at an exercise price per share
equal to the initial public offering price per share set forth on the cover
page of this Prospectus. These awards include options to be granted to Messrs.
John E. Calaway, James D. Calaway, Michael G. Long and Richard S. Dale to
purchase 133,645, 116,940, 33,513 and 16,706 shares of Common Stock,
respectively. All such options will have a term of ten years and become
exercisable in cumulative annual increments of one-fifth of the total number of
shares of Common Stock subject thereto, beginning on the first anniversary of
the date of grant.
On the date the Offering closes, each of the current Nonemployee Directors:
Messrs. Andrews, Benedict, Peterson, Raphael and Sfondrini, automatically will
be granted NSOs (based on years of service) to purchase 8,000, 2,000, 2,000,
8,000 and 8,000 shares of Common Stock, respectively. In addition, on the first
business day following the date on which each annual meeting of the Company's
stockholders is held, each Nonemployee Director then serving will automatically
be granted NSOs to purchase 3,000 shares of Common Stock. Any person who first
becomes a Nonemployee Director on or after the date this Offering closes
automatically will be granted, on the date of his or her election, NSOs to
purchase 5,000 shares of Common Stock. Consequently, on the date this Offering
closes, Mr. Shower will be granted NSOs to purchase 5,000 shares of Common
Stock. Each NSO granted to Nonemployee Directors will (i) have a ten year term,
(ii) have an exercise price per share equal to the fair market value of a
Common Stock share on the date of grant (the IPO price in the case of NSOs
granted on the closing of the Offering) and (iii) become exercisable in
cumulative annual increments of one-fifth of the total number of shares of
Common Stock subject thereto, beginning on the first anniversary of the date of
grant. If a Nonemployee Director resigns from the Board without the consent of
a majority of the other directors, such director's NSOs may be exercised only
to the extent they were exercisable on the resignation date.
The foregoing description summarizes the principal terms and conditions of
the Incentive Plan, does not purport to be complete and is qualified in its
entirety by reference to the Incentive Plan, a copy of which has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
401(K) Plan. Following the completion of the Offering, the Company expects to
adopt a 401(k) Employee Savings Plan (the "401(k) Plan") for its employees. The
following describes possible terms of such plan; however, the decision to adopt
any such plan and the terms thereof will be in the discretion of the
Compensation Committee and the Board of Directors and, if adopted, may differ
from that described below. Under the 401(k) Plan, eligible employees will be
permitted to defer receipt of up to 15% of their compensation (subject to
certain limitations imposed under the Internal Revenue Code of 1986, as amended
(the "Code")). The 401(k) Plan is expected to provide that a discretionary
match of employee deferrals may be made by the Company in cash. Pursuant to the
401(k) Plan, the Company currently expects to elect to match 50% of the first
6% of employee deferral, with the Company's contribution not to exceed $9,000,
subject to limitations imposed by the Internal Revenue Service. The amounts
held under the 401(k) Plan are expected to be invested among various investment
funds maintained under the 401(k) Plan in accordance with the directions of
each participant, except that matching contributions are expected to be
invested in securities of the Company. Salary deferral contributions under the
401(k) Plan are expected to be 100% vested. Matching contributions are expected
to vest at the rate of 20% after two years of service and 20% for each year
thereafter. Participants or their beneficiaries are expected to be entitled to
payment of vested benefits upon termination of employment.
Old Edge Plan. Old Edge adopted the Old Edge Plan pursuant to which, in 1994,
all of the options held by Messrs. James D. Calaway and Dale were granted. The
Old Edge Plan was administered by nonemployee members of the Board of Directors
of Old Edge. In connection with the Combination Transactions, such options
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will be converted into incentive stock options for the purchase of such number
of shares of Common Stock as each of Messrs. James D. Calaway and Dale would
have received in the Combination Transactions if such options had been
exercised immediately prior to the Combination Transactions. After adjustment
for such conversion, the option exercise price per share of Common Stock will
be approximately $4.09 and $2.04 for Messrs. James D. Calaway and Dale,
respectively.
OTHER COMPENSATORY ARRANGEMENTS
Overriding Royalty Income. Overriding royalty interests are assigned to
certain employees of Old Edge to reward such employees with incentive
compensation based on the results of the oil and natural gas drilling
activities conducted through the Joint Venture. Pursuant to the Joint Venture
Agreement, Old Edge as managing joint venturer has the right to cause the Joint
Venture to grant overriding royalty interests on prospects sold by the Joint
Venture to geologists, scientists or other persons who originate prospects and
to grant up to a .8% overriding royalty interest to any of certain Old Edge
executives. In the past, Old Edge has caused the Joint Venture to assign
overriding royalty interests in certain oil and natural gas leases pursuant to
this arrangement to certain employees employed at the time of the execution of
the lease. The percentage of overriding royalty interest assigned to employees
as a group for a given lease typically has ranged from 2.6% to 3.8% of the
Joint Venture's total interest in such lease. An individual employee's
overriding royalty interest in a lease was determined in the discretion of Old
Edge's management. Employees receiving overriding royalty interests were
entitled to receive revenues immediately upon the assignment thereof, and such
interests were not subject to forfeiture.
Following the completion of the Offering, the Company intends to assign
overriding royalty interests on a more limited basis with respect to leases
entered into by the Joint Venture or otherwise by the Company that are included
in projects not in existence as of December 31, 1996 and subsequent projects
that are not based on 3-D seismic work firmly committed as of such date ("New
Projects"). Only members of the generating geological team for a given lease in
a New Project will receive overriding royalty interests, and the Company
currently does not expect such interests in the aggregate to exceed 1.7% of the
Company's total interest in such lease. The Company expects that the director
of engineering production and the director of land would continue to receive
overriding royalty interests in leases that are not in New Projects.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Offering, the Company expects to establish a Compensation
Committee. In the past, matters with respect to the compensation of executive
officers of Old Edge were determined by the nonemployee members of the Board of
Directors, as a whole.
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INFORMATION CONCERNING THE JOINT VENTURE
Substantially all of the activities described above under "Business of the
Company" are currently conducted through the Joint Venture, of which Old Edge,
Edge Group II, Gulfedge and Edge Group are the venturers. All of the reserves,
oil and gas properties and 2-D and 3-D seismic data described under "Business
of the Company" are owned by the Joint Venture, other than reserves and
interests attributable to the J.C. Calaway Interests (which reserves had
estimated future net revenues of $346,697 as of September 30, 1996). See
"Summary--The Combination Transactions--The James C. Calaway Exchange" for a
description of the J.C. Calaway Interests. Under the terms of the Joint Venture
Agreement, the Joint Venture is a limited purpose entity organized to engage in
oil and gas exploration and production and the management of oil and gas
interests.
Pursuant to the Joint Venture Agreement, Old Edge serves as the managing
venturer and generally directs and exercises control over all of the day-to-day
activities of the Joint Venture. The Joint Venture itself has no employees; all
employees associated with the operations of the Joint Venture are employees of
Old Edge. Old Edge also provides office space, office equipment and furnishings
used in the operations of the Joint Venture. Pursuant to the Joint Venture
Agreement, Old Edge prepares and delivers to Edge Group II quarterly reports, a
yearly budget and a budget for each prospect. Old Edge is reimbursed for all
costs incurred by it in connection with the operations of the Joint Venture,
subject to certain limitations based on the budgeted amounts. Old Edge also has
the right to cause the Joint Venture to grant overriding royalty interests to
geologists and others who originate prospects and certain executive officers of
Old Edge. Old Edge receives no other form of management fee in respect of its
management of the Joint Venture.
Although Old Edge is the managing venturer, Edge Group II has the right to
approve, among other things, all oil and gas lease acquisitions, all capital
purchases, certain aspects of the budget of the Joint Venture and significant
variations therefrom. Without first obtaining the consent of Edge Group II, Old
Edge is restricted from, among other things, causing the Joint Venture to incur
debt, granting mortgages on the Joint Venture's assets or selling all or
substantially all of the Joint Venture's assets. In addition, Old Edge may not,
without the consent of Edge Group II, assign any explorationist who was hired
and assigned substantially to Joint Venture operations to any other business
activity of Old Edge. Edge Group II does not have any right to receive
reimbursement for any costs incurred by it in connection with the Joint Venture
or to any form of management fee.
The Joint Venture was formed with approximately $5.2 million in net assets,
on a historical financial statement basis (reflecting the assets purchased from
a predecessor at historical cost). Upon formation, the Joint Venture purchased
substantially all of the assets and assumed substantially all of the
liabilities of a related entity, Edge Group Joint Venture, which had been
engaged in oil and gas exploration and production operations since 1983. The
initial sharing ratio, which determines the allocation of net income and other
items, as well as the allocation of distributable cash, was approximately
29.1%, 67.3%, 2.3% and 1.3% for Old Edge, Edge Group II, Gulfedge and Edge
Group, respectively. Such sharing ratio is applicable until the value of cash
and carried interests and other property distributed to each venturer is equal
to $5,750,000, $13,324,500, $451,500 and $258,000, respectively (the "Sharing
Ratio Shift A Amounts"), which has not yet occurred. At such time, the sharing
ratio shifts to 50%, 47.5%, 1.6% and 0.9 %, respectively, which continues until
the value of cash and carried interests and other property distributed to each
venturer is six times the Sharing Ratio Shift A Amounts (the "Sharing Ratio
Shift B Amounts"). When the Sharing Ratio Shift B Amounts are met, the
applicable sharing ratio for the duration of the Joint Venture will be 55%,
42.7%, 1.5% and 0.8%, respectively. The Joint Venture Agreement provides that,
subject to restrictions on distributions provided for in debt instruments of
the Joint Venture, the managing venturer shall, upon the demand of Edge Group
II, as soon as practicable, but no less frequently than annually, make
distributions of one-half of the "excess net cash flow," which is the annual
net income of the Joint Venture less (i) 20% of the book value of intangible
assets and (ii) any amounts paid or anticipated to be paid within the twelve
months subsequent to the most recent determination of net income. There have
been no distributions to date and the covenants of the Revolving Credit
Facility restrict such distributions of excess net cash flow.
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During the term of the Joint Venture, venturers are prohibited from engaging
in the prospect generation business in the United States or its offshore
waters, with certain exceptions. The Joint Venture Agreement also prohibits the
sale, assignment, transfer, pledge or encumbrance of any venturer's interest
without the consent of the other venturers. The proposed transfer of Edge
Group's interest in the Joint Venture pursuant to the Purchase Offer has been
approved by each of the other venturers.
The term of the Joint Venture originally was to have expired on April 8,
1996; however, the parties to the Joint Venture extended the dissolution date
to December 31, 1996. Prior to the amendment of the Joint Venture Agreement in
April 1996, such agreement required Old Edge to sell certain prospects of the
Joint Venture during windup and distribute the proceeds therefrom. Due to
changes in the nature of the Joint Venture's operations described herein under
"The Combination Transactions--Background of and Reasons for the Combination
Transactions--Determination to Postpone the Dissolution of the Joint Venture,"
the Joint Venture Agreement was amended to provide that Old Edge, as
liquidating agent, have the discretion to distribute substantially all of the
Joint Venture's assets in-kind which, prior to such amendment, it would have
been required to sell.
The Joint Venture dissolved on December 31, 1996 and entered a windup period
that will generally last for up to two years. It is currently expected that
during this time, most of the existing oil and gas properties of the Joint
Venture will continue to be held by the Joint Venture. By the end of the windup
period, the Joint Venture will distribute substantially all of the assets of
the Joint Venture, including working interests, in accordance with the
applicable sharing ratios or as specifically provided for in the case of each
of the Belco Right, the Fifty Square Mile Right and the Western Assets. The
valuation of the interests so distributed will be determined as follows. With
respect to prospects already drilled as of the end of the windup period and
carried interests on producing properties, the valuation shall be based on 100%
of the present value of future net revenues (discounted at 10%) of proved
reserves and 40% of the present value of future net revenues (discounted at
10%) of probable reserves. With respect to all other assets to be distributed,
the valuation will be determined through an auction process involving only
venturers. At the conclusion of the bidding process, any venturer other than
the highest bidder shall advise the successful bidder that the bid is either
(a) accepted, in which case, the asset will be transferred to the successful
bidder in return for payment of the bid price in cash or (b) that the bid is
not accepted, in which event, all venturers will retain their interests in such
asset. In any event, the high bid with respect to each such asset shall serve
as the valuation of the asset for purposes of the sharing ratios. The Joint
Venture Agreement, as amended, generally requires the Joint Venture and Old
Edge to give any bidder who acquires assets pursuant to such auction process, a
non-transferable license to use the relevant 3-D data for the specific property
sold. Prior to liquidating distributions, the Joint Venture will pay or make
provision for all expenses of liquidation and debt of the Joint Venture;
provided that amounts owed to the lender under the Revolving Credit Facility
will be assumed by the venturers according to their sharing ratios and that
equipment loans and leases will be assumed by Old Edge in consideration of the
transfer of such assets to Old Edge. In the event that the fair market value of
such equipment is lower or higher than the debt assumed by Old Edge,
liquidating distributions to Old Edge will be increased or decreased,
respectively, by the amount of such difference.
The Western Allocation, as set forth in the Joint Venture Agreement, as
amended, provides that, effective upon dissolution, ownership of the Western
Assets were owned and the related costs of development shall be borne, 50% by
Old Edge and 50% by the other venturers (in accordance with their relative
sharing ratios). At such time as the venturers' interests in the Western Assets
have been sufficiently developed such that their interests can be pledged by
the venturers to obtain secured non-recourse loans on terms comparable to other
loans secured by similar property, the venturers are required to use their best
efforts to obtain such loans and to utilize borrowings therefrom to the fullest
extent possible to fund their share of the acquisition and development of the
Western Assets.
With respect to 2-D seismic data, pursuant to the Joint Venture Agreement, as
amended, as of December 31, 1996, Old Edge was entitled to receive all non-
proprietary 2-D seismic data (generally, seismic data obtained from third
parties which the Joint Venture is not entitled to sell to others) and to
receive all other components of the Joint Venture's regional information
database without payment to the Joint Venture or the other venturers.
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Old Edge is required to put up for non-exclusive license all proprietary 2-D
seismic data (generally, seismic data obtained from third parties which the
Joint Venture is entitled to sell to others), but is entitled to use all such
data and may refrain from licensing any data by making a payment to the Joint
Venture equal to the fair value of such data. Proceeds generated before
December 1998 from the sale or license of such proprietary 2-D seismic data are
to be used by the Joint Venture in operations, while proceeds generated after
windup are generally to be distributed to the venturers in accordance with
their sharing ratios. These provisions do not apply to a situation in which
seismic data is conveyed incidental to a transaction where the seismic data is
not the sole or principal item sold or licensed.
Under the amended Joint Venture Agreement, as of December 31, 1996, Old Edge
generally owned all 3-D seismic data and all related maps, interpretations and
work product based thereon and has the right to sell or license such 3-D
seismic data and related information to third parties on such terms and for
such consideration as it deems appropriate; provided that the Joint Venture and
the other venturers have the right to access and use such data. Proceeds from
such sales or licensing will be distributed 50% to Old Edge and 50% to the
other venturers (in accordance with their relative sharing ratios).
Pursuant to the Joint Venture Agreement, as amended, AMIs were established
with respect to the Existing JV Projects, which are areas with respect to
which, as of December 31, 1996, the Joint Venture or Old Edge directly or
indirectly through an industry partner either (i) has acquired a seismic
option, lease or other interest or (ii) has acquired, permitted, shot or
commenced to permit or shoot a 3-D seismic survey, lease or other interest or
(iii) has a firm contractual commitment to acquire, permit or shoot a 3-D
seismic survey or acquire a seismic option, lease or other interest. Each such
AMI is bounded according to the applicable option, lease or outline of the
proposed or actual survey, as the case may be. Prior to liquidation, the Joint
Venture will continue to develop the Existing JV Projects, including through
the acquisition of leases, seismic data, interests in land and other interests
and rights. During such time, none of the venturers may acquire for its own
account any leases, seismic data or other interests with respect to any such
AMI. Subsequent to the liquidating distributions to the venturers of the
interests relative to such AMIs, each venturer shall have a right to acquire a
portion of any interest acquired by any other venturer in such an AMI, the size
of such interest to be based on their sharing ratios. The Joint Venture
Agreement, as amended, provides that in the event such a right is exercised,
the participating venturers will enter into a specified form of joint operating
agreement under which Old Edge (or a designated affiliate) will act as operator
or if a joint operating agreement is already in existence with respect to such
property, the venturers will use their best efforts to have Old Edge (or a
designated affiliate) designated as operator thereunder.
Generally under the Joint Venture Agreement, as amended, prospects arising as
a result of 3-D seismic work performed or acquired by Old Edge after December
31, 1996 and not arising in connection with a lease or option entered into
before, or not at least firmly committed to before, December 31, 1996 (in other
words, prospects not within an Existing JV Project), will be the exclusive
property of Old Edge, in which the Joint Venture and the other venturers have
no interest or rights. However, the amendment to the Joint Venture Agreement
does provide for certain post-dissolution rights on the part of the venturers
(other than Old Edge) pursuant to the Fifty Square Mile Right and the Belco
Right. The venturers, other than Old Edge, have the right to participate, based
on their relative sharing ratios, in 25% of Old Edge's rights and interests in
up to 50 square miles of 3-D seismic data acquired or committed to be acquired
by Old Edge during 1997, 1998 or 1999, excluding the 3-D seismic data within an
AMI with respect to an Existing JV Project, the Western Assets, the Belco Right
or any other AMI already in existence as of such date, and seismic data
acquired by Old Edge over a producing property or existing oilfield. The Joint
Venture Agreement, as amended, provides with respect to the Belco Project Area
(see "Business of the Company--Significant Project Areas--Belco Project Area")
that the venturers, other than Old Edge, have the right to participate, based
on their relative sharing ratios, in 25% of Old Edge's rights and interests in
any 150 square miles committed to be developed and permitted and acquired
subsequent to December 31, 1996. In the case of the areas developed pursuant to
the Fifty Square Mile Right and the Belco Right, the participating venturers
shall pay a pro rata share, based on their respective ownership interests, of
Old Edge's share of costs and fees. In addition, in the case of the Belco
Right, each participating venturer agrees to pay to Old Edge a pro rata share
of a one-time administrative fee of $18,750, in the aggregate. Decisions
regarding
118
<PAGE>
whether to participate pursuant to the Belco Right and the Fifty Square Right
and in the event of participation, decisions regarding the selection of any
specific square mileage, will be made by Edge Group II on behalf of itself,
Gulfedge and Edge Group. The Joint Venture Agreement, as amended, provides
that, at the request of Edge Group II, Old Edge, as liquidating agent, shall
cause the Joint Venture to distribute funds to Edge Group II, Gulfedge and Edge
Group for the purpose of funding the acquisition or development of their
respective shares of the Western Assets, the Belco Right and the Fifty Square
Mile Right. Upon such event, funds will also be distributed to Old Edge based
on the applicable sharing ratios. Old Edge may in its reasonable business
judgment and upon notice to the venturers, decline to make such requested
distributions with respect to the Belco Right and the Fifty Square Mile Right,
but shall make reasonable efforts to obtain other financing for the venturers.
For additional information regarding certain terms of the Joint Venture
Agreement and applicable law, see "Comparison of Securityholder Rights."
The Joint Venture Agreement, as amended, is filed as an exhibit to the
registration statement of which this Joint Proxy and Consent Solicitation
Statement/Prospectus is a part, and is publicly available as described herein
under "Available Information." In addition, a copy of such agreement is
available free of charge from the Company upon request directed to its
executive offices at Texaco Heritage Plaza, 1111 Bagby, Suite 2100, Houston,
Texas 77002, (713) 654-8960.
INFORMATION CONCERNING OLD EDGE
The interest of Old Edge in the Joint Venture represents substantially all of
its assets. Substantially all of Old Edge's operations consist of its
activities as managing venturer of the Joint Venture. Old Edge anticipates (i)
continuing its oil and gas operations in the Joint Venture with respect to the
Existing JV Projects and (ii) conducting new exploration and production
activities (similar to those it has managed on behalf of the Joint Venture)
through Old Edge or a subsidiary. Pursuant to the amended Joint Venture
Agreement, the Joint Venture's equipment, including sophisticated computer
software and hardware, will be distributed to Old Edge, subject to Old Edge's
assumption of the debt associated with such equipment. Other than its Joint
Venture interest, the assets of Old Edge consist primarily of minor oil and gas
interests contributed by a predecessor and office equipment and related assets
used in the conduct of the Joint Venture. The management and technical team
responsible for the operations of the Joint Venture are employees of Old Edge.
For additional information regarding certain terms of the charter and bylaws of
Old Edge and applicable law, see "Comparison of Securityholder Rights."
119
<PAGE>
INFORMATION CONCERNING EDGE GROUP II
Edge Group II conducts no operations and its interest in the Joint Venture
constitutes its only substantial asset. As described above, Edge Group II has
certain rights with respect to the management of the Joint Venture. Edge Group
II was formed pursuant to an agreement of limited partnership in 1991 (the
"Edge Group II Partnership Agreement"). John Sfondrini and Napamco are the
general partners of Edge Group II. Pursuant to the Edge Group II Partnership
Agreement, Mr. Sfondrini and Napamco, as general partners, contributed, in the
aggregate, $100. Each limited partner made a capital contribution of $70,500
per Edge Group II Unit. 189 such units were sold, resulting in aggregate
limited partner capital contributions to Edge Group II of $13,342,500. The Edge
Group II Partnership Agreement provides initially for the general partners (in
the aggregate) to be allocated 1% of all income, gains, losses, deductions and
distributions, with the remaining 99% of such items to be allocated to the
limited partners based on their relative capital accounts. Such agreement
further provides that, at such time as the limited partners, in the aggregate,
have recovered 150% of their capital contribution, the general partners (in the
aggregate) are to be allocated 25% of such items, with the remaining 75% being
allocated to the limited partners.
The general partners have the right to be reimbursed for all costs and
expenses incurred in connection with Edge Group II. In addition, the general
partners, in the aggregate, have the right to a management fee for each of the
first five years of the partnership equal to 2% of the aggregate capital
contributions of the limited partners (which amount has not been paid to date).
Thereafter, the general partners, in the aggregate, are entitled to 3% of the
cash flow of the partnership as a management fee. The Edge Group II Partnership
Agreement prohibits the transfer of a general partner's interest without first
obtaining the consent of partners of Edge Group II whose capital contributions,
in the aggregate, represent at least 60% of the aggregate capital contributions
of all partners to Edge Group II. The consent of the limited partners of Edge
Group II with respect to the proposed transfer to the Company of the general
partner interests of Mr. Sfondrini and Napamco is sought pursuant to this Joint
Proxy and Consent Solicitation Statement/Prospectus. For additional information
regarding certain terms of the Edge Group II Partnership Agreement and
applicable law, see "Comparison of Securityholder Rights."
INFORMATION CONCERNING GULFEDGE
Gulfedge conducts no operations and its interest in the Joint Venture
represents substantially all of its assets. Pursuant to the Agreement of
Limited Partnership dated as of April 1, 1991 (the "Gulfedge Partnership
Agreement"), Old Edge, as general partner, made a capital contribution of $100
and each limited partner made a capital contribution of $64,500 per Gulfedge
Unit. Seven such units were sold, resulting in aggregate limited partner
capital contributions to Gulfedge of $451,500. The Gulfedge Partnership
Agreement provides that items of income, gain, losses, deductions and
distributions be allocated 1% to the general partner, with the remaining 99% of
such items to be distributed to the limited partners, based on their relative
capital accounts. Such agreement also provides that Gulfedge reimburse Old Edge
for all reasonable expenses and costs incurred in connection with the business
of Gulfedge. Old Edge does not have the right to receive any management fees or
other form of compensation. For additional information regarding certain terms
of the Gulfedge Partnership Agreement and applicable law, see "Comparison of
Securityholder Rights."
120
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
THE COMPANY
The following table sets forth information with respect to beneficial
ownership of the Common Stock of the Company both after giving effect to the
Combination Transactions but before giving effect to the Offering and after
giving effect to the Combination Transactions and the Offering by: (i) all
persons, assuming 100% conversion of the interests in the Limited Partnerships,
who will be the beneficial owner of 5% or more of the outstanding Common Stock;
(ii) each director or nominee for director; (iii) each executive officer of the
Company; and (iv) all officers and directors of the Company as a group,
assuming in each case, the issuance of Common Stock to all parties to the
Combination Transactions and an initial public offering price of $16.00 per
share.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED PERCENT OF COMMON STOCK
AS A RESULT OF THE BENEFICIALLY OWNED
COMBINATION AS A RESULT OF THE
TRANSACTIONS COMBINATION TRANSACTIONS
------------------ ------------------------------
PRIOR TO THE AFTER THE
NAME(1) NUMBER OF SHARES OFFERING OFFERING
------- ------------------ ------------- ------------
<S> <C> <C> <C>
John E. Calaway(2)...... 481,541 10.24% 8.85%
James D. Calaway(3)..... 195,498 4.11% 4.46%
Michael G. Long......... -- -- --
Richard S. Dale(4)...... 48,922 1.03% *
Vincent Andrews(5)...... 206,814 4.40% 2.97%
David B. Benedict(6).... 36,338 * *
Nils Peterson(7)........ 14,664 * *
Stanley S. Raphael(8)... 277,987 5.91% 4.00%
John Sfondrini(9)....... 1,254,110 26.67% 18.04%
Robert W. Shower........ -- -- --
Edge Holding Company.... 858,853 18.26% 12.35%
36 Catoonah St., #16
Ridgefield, Connecticut
06877
All directors and
executive officers as a
group (10
persons)(1)(10)........ 2,515,874 52.95% 39.23%
</TABLE>
- --------
*Less than one percent.
(1) Except as otherwise noted, each stockholder has sole voting and investment
power with respect to the shares beneficially owned.
(2) Shares shown represent (i) 364,938 shares of Common Stock that could be
acquired through the Merger by Calaway Oil and Gas Corporation ("COG"), a
company wholly owned by Mr. John E. Calaway and his wife, (ii) 116,603
shares that could be acquired through the Merger by Calaway Partners, a
Texas general partnership of which COG is a partner and, in the case of
After this Offering, (iii) 133,645 shares of restricted Common Stock to be
issued concurrent with the Offering. Pursuant to the partnership agreement
for Calaway Partners, COG has the exclusive right to vote such 116,603
shares.
(3) Shares shown include (i) 118,366 shares of Common Stock that could be
acquired through the Merger by KPC Interests, Inc., a company owned by Mr.
James D. Calaway, (ii) 48,922 shares of Common Stock that could be acquired
pursuant to immediately exercisable stock options and, in the case of After
the Offering, (iii) 116,940 shares of restricted Common Stock to be issued
concurrent with the Offering.
121
<PAGE>
(4) Shares shown represent 48,922 shares of Common Stock that could be acquired
pursuant to immediately exercisable stock options.
(5) Shares shown represent 146,757 shares of Common Stock that could be
acquired through the Merger by Bama Edge Limited Partnership, the general
partner of which is Andex Energy Corp., a company owned by members of Mr.
Andrews' family and of which Mr. Andrews is an officer; 45,598 shares of
Common Stock that could be acquired through the Merger by Texedge Energy
Corporation, of which Mr. Andrews is an officer; and 14,460 shares that
could be acquired through the Edge Group II Exchange Offer by a partnership
owned in part by Mr. Andrews' wife. Mr. Andrews may be deemed the
beneficial owner of the shares of Common Stock held by Bama Edge Limited
Partnership, Texedge Energy Corporation and the shares that may be acquired
through the Edge Group II Exchange Offer. Mr. Andrews disclaims such
beneficial ownership.
(6) Shares shown represent shares of Common Stock that could be acquired
through the Edge Group II Exchange Offer.
(7) Shares shown represent shares of Common Stock that could be acquired
through the Edge Group II Exchange Offer.
(8) Shares shown represent 147,673 shares of Common Stock (of which 19,552
could be acquired through the Edge Group II Exchange Offer and the
remainder through the Merger) owned by the Trade Consultants, Inc. Pension
Plan, of which Mr. Raphael is the trustee, 46,194 shares of Common Stock
that could be acquired by Mr. Raphael's wife (of which 19,552 could be
acquired through the Edge Group II Exchange Offer and the remainder through
the Merger), and 84,120 shares that could be acquired directly by Mr.
Raphael (of which 19,552 shares could be acquired through the Edge Group II
Exchange Offer and the remainder through the Merger). Mr. Raphael may be
deemed the beneficial owner of shares of Common Stock held by the Trade
Consultants, Inc. Pension Plan and his wife. Mr. Raphael disclaims such
beneficial ownership.
(9) Shares shown represent (i) 858,853 shares of Common Stock that could be
acquired through the Merger by Edge Holding Company, a limited partnership
of which Mr. Sfondrini and Napamco are the general partners, (ii) 42,896
shares of stock which could be acquired in the Purchase Offer by Edge
Group, whose partners are certain limited partnerships, each of which Mr.
Sfondrini and Napamco are the general partners of and (iii) 352,361 shares
which could be acquired pursuant to the Edge Group II Exchange Offer. Mr.
Sfondrini may be deemed the beneficial owner of the shares which could be
acquired by Edge Holding Company and Edge Group. Mr. Sfondrini disclaims
such beneficial ownership. Mr. Sfondrini's address is the same as for Edge
Holding Company.
(10) Shares shown include 97,844 shares of Common Stock that may be acquired
pursuant to immediately exercisable stock options.
122
<PAGE>
OLD EDGE
The following table sets forth information with respect to beneficial
ownership of the Old Edge Common Stock as of November 1, 1996 by: all persons
who are the beneficial owners of 5% or more of the outstanding Old Edge Common
Stock; each director of Old Edge; each executive officer of Old Edge; and all
officers and directors of Old Edge as a group.
<TABLE>
<CAPTION>
OLD EDGE COMMON STOCK
BENEFICIALLY OWNED
---------------------
NUMBER OF
NAME (1) SHARES PERCENTAGE
- -------- ---------- ----------
<S> <C> <C>
John E. Calaway (2)...................................... 92,407.20 88.32%
James D. Calaway (3)..................................... 9,785.60 9.16
Richard S. Dale (4)...................................... 2,193.00 2.05
Vincent Andrews (5)...................................... 8,622.73 8.24
David B. Benedict........................................ -- --
Nils Peterson............................................ -- --
Stanley S. Raphael (6)................................... 9,832.03 9.40
John Sfondrini (7)....................................... 92,407.20 88.32
Bama Edge Limited Partnership (8)........................ 6,578.73 6.29
c/o Vincent Andrews Management Corp.
16 West Avenue
Darien, Connecticut 06820
Nell Calaway (9)......................................... 5,227.00 5.00
Calaway Partners
1111 Bagby, Suite 2100
Houston, Texas 77002
Calaway Oil and Gas Corporation (2)...................... 92,407.20 88.32
1111 Bagby, Suite 2100
Houston, Texas 77002
Calaway Partners (9)..................................... 5,277.00 5.00
1111 Bagby, Suite 2100
Houston, Texas 77002
Joel Davis (10).......................................... 5,269.00 5.04
825 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206
Edge Holding Company (7)................................. 92,407.20 88.32
36 Catoonah St., #16
Ridgeville, Connecticut 06877
KPC Interests, Inc. (11)................................. 5,306.00 5.07
1111 Bagby, Suite 2100
Houston, Texas 77002
Northedge Corp. (10)..................................... 5,269.00 5.04
P. O. Box 5409A8
Houston, Texas 77254
RIMCO Associates, Inc. (12).............................. 5,263.00 5.03
22 Waterville Road
Avon, Connecticut 06001
All directors and executive officers as a group (8
persons)(13)............................................ 103,753.60 95.17
</TABLE>
- --------
See "Comparison of Securityholder Rights--Management" for a discussion of
voting agreements with respect to Old Edge Common Stock. All outstanding shares
of Old Edge Common Stock owned by shareholders other
than RIMCO are subject to an obligation under a shareholders' agreement dated
April 16, 1991 among the initial Old Edge shareholders and certain other
persons (the "Shareholders' Agreement"), to vote for one person nominated by
RIMCO for director of Old Edge.
123
<PAGE>
(1) Except as otherwise noted, each shareholder has sole voting and investment
power with respect to the shares beneficially owned.
(2) Shares shown represent (i) 16,359.14 shares of Old Edge Common Stock owned
by Calaway Oil and Gas, a company wholly owned by Mr. John E. Calaway,
(ii) 5,227 shares held by Calaway Partners, a Texas general partnership
whose partnership agreement provides for the exclusive right of Calaway
Oil and Gas (a partner therein) to vote all such shares but not to dispose
of such shares, (iii) 32,321.06 shares owned by other persons subject to
various voting agreements, including the Shareholders' Agreement and
certain other agreements, some of which are described herein under
"Comparison of Securityholder Rights--Management--Old Edge," providing
Calaway Oil and Gas with voting rights with respect to such stock and as
to which Calaway Oil and Gas has waived any right to vote with respect to
the Merger and (iv) 38,500 shares held by Edge Holding Company with
respect to which Calaway Oil and Gas has the right to direct the vote of
such stock in the election of directors. All of such 92,407.2 shares are
subject to certain voting agreements between Calaway Oil and Gas and Edge
Holding Company with respect to the election of directors and other
matters contained in the Shareholders' Agreement. In addition, pursuant to
certain other voting agreements, Calaway Oil and Gas has agreed to vote
all shares of Old Edge Common Stock owned or controlled by it for Mr.
Raphael as a director of Old Edge.
(3) Shares shown represent (i) 5,306 shares of Old Edge Common Stock owned by
KPC Interests, Inc., a company wholly owned by Mr. James D. Calaway, (ii)
1,022 shares owned by Jamtex, Inc. subject to the Shareholders' Agreement
providing KPC Interests, Inc. with voting rights with respect to such
stock and as to which KPC Interests, Inc. has waived any right to vote
with respect to the Merger, (iii) 2,193 shares that could be acquired
pursuant to immediately exercisable stock options and (iv) 1,264.6 shares
that Mr. James D. Calaway owns that are subject to voting rights in favor
of Calaway Oil and Gas as to which Calaway Oil and Gas has waived any
right to vote with respect to the Merger.
(4) Shares shown represent 2,193 shares of Old Edge Common Stock that could be
acquired pursuant to immediately exercisable stock options.
(5) Shares shown represent 6,578.73 shares of Old Edge Common Stock owned by
Bama Edge Limited Partnership ("Bama Edge"), of which Andex Energy, a
company owned by members of Mr. Andrews' family, is the general partner;
and 2,044 shares owned by Texedge Energy Corporation ("Texedge"), of which
Mr. Andrews is an officer. Mr. Andrews may be deemed the beneficial owner
of the shares of Old Edge Common Stock held by Bama Edge and Texedge. Mr.
Andrews disclaims such beneficial ownership. All of the shares held by
Texedge and Bama Edge are subject to voting agreements in favor of Calaway
Oil and Gas as to which Calaway Oil and Gas has waived any right to vote
with respect to the Merger.
(6) Shares shown include 3,420.73 shares of Old Edge Common Stock owned by
Trade Consultants, Inc. Pension Plan, of which Mr. Raphael is the trustee,
and 1,194.3 shares of Old Edge Common Stock held by Mr. Raphael's wife.
Mr. Raphael may be deemed the beneficial owner of the shares of Old Edge
Common Stock held by Trade Consultants, Inc. Pension Plan and his wife.
Mr. Raphael disclaims such beneficial ownership. All of such shares are
subject to one or more voting agreements in favor of Calaway Oil and Gas
as to which Calaway Oil and Gas has waived any right to vote with respect
to the Merger.
(7) Shares shown represent 38,500 shares of Old Edge Common Stock owned by
Edge Holding Company, a limited partnership of which Mr. Sfondrini and
Napamco are the general partners, and 53,907.20 shares with respect to
which Edge Holding Company has the right to direct the vote of such shares
with respect to the election of directors. Mr. Sfondrini may be deemed the
beneficial owner of such shares. Mr. Sfondrini disclaims such beneficial
ownership. All of such shares are subject to certain voting agreements
between Calaway Oil and Gas and Edge Holding Company with respect to the
election of directors and other matters contained in the Shareholders'
Agreement.
(8) Voting of all shares shown is subject to certain voting agreements in
favor of Calaway Oil and Gas, with respect to which Calaway Oil and Gas
has waived any right to vote on the Merger.
(9) Shares shown are owned by Calaway Partners, a Texas general partnership,
of which Ms. Nell Calaway is a partner. Pursuant to the partnership
agreement for Calaway Partners, Calaway Oil and Gas has the exclusive
right to vote such shares and Ms. Calaway has the exclusive right to
require the disposition of such shares by the partnership.
124
<PAGE>
(10) Shares shown are owned by Northedge Corp., a company wholly owned by Mr.
Davis. All of such shares are subject to the Shareholders' Agreement that
provides for voting rights in favor of Calaway Oil and Gas as to which
Calaway Oil has waived any right to vote with respect to the Merger.
(11) Shares shown represent (i) 5,306 shares of Old Edge Common Stock owned by
KPC Interests, Inc., a company wholly owned by Mr. J.D. Calaway and (ii)
1,022 shares owned by Jamtex, Inc. subject to the Shareholders' Agreement
providing voting rights in favor of KPC Interests, Inc. With respect to
the latter, KPC Interests, Inc. has waived any right to vote on the
Merger.
(12) Shares owned represent 5,263 shares of Old Edge Common Stock owned by the
RIMCO Partnerships. The general partner of each of the RIMCO Partnerships
is RIMCO, and its general partner is RIMCO Associates, Inc. Voting and
investment power over the shares held by the RIMCO Partnerships is
exercised by the managing directors of RIMCO, and by the officers and
directors of RIMCO Associates, Inc. Mr. McCollam, a former director of Old
Edge, is a managing director of RIMCO. All outstanding shares of Old Edge
Common Stock owned by shareholders other than RIMCO are subject to an
obligation under the Shareholders' Agreement to vote for one person
nominated by RIMCO for director of Old Edge.
(13) Shares shown include 4,386 shares of Old Edge Common Stock that could be
acquired pursuant to immediately exercisable stock options.
EDGE GROUP II
The following table sets forth information with respect to beneficial
ownership of the units representing limited partner interests in Edge Group II
("Edge Group II Units") as of November 1, 1996 by all persons who are the
beneficial owner of 5% or more of the outstanding Edge Group II Units and the
general partners of Edge Group II, Mr. Sfondrini and Napamco, a corporation
wholly owned by Mr. Sfondrini.
<TABLE>
<CAPTION>
EDGE GROUP II
UNITS
BENEFICIALLY
OWNED
-----------------
NUMBER
OF
NAME (1) UNITS PERCENTAGE
-------- ------ ----------
<S> <C> <C>
Charles Slanetz, Jr..................................... 10 5.29%
107 Ayer Road
Locust Valley, New York 11560
John Sfondrini (2)...................................... 1 *
Napamco (2)............................................. -- --
</TABLE>
- --------
* Less than one percent.
(1) Except as otherwise noted, each holder of Edge Group II Units has sole
voting and investment power with respect to such units beneficially owned.
(2) In addition to his general partner interest in Edge Group II, Mr. Sfondrini
owns one Edge Group II Unit, as set forth above. Napamco does not own any
Edge Group II Units. Pursuant to the Edge Group II Partnership Agreement,
Mr. Sfondrini and Napamco, as general partners, contributed, in the
aggregate, $100. Each limited partner contributed $70,500 per Edge Group II
Unit. The Edge Group II Partnership Agreement provides initially for the
general partners (in the aggregate) to be allocated 1% of all income,
gains, losses,
deductions and distributions, with the remaining 99% of such items to be
allocated to the limited partners based on their relative capital accounts.
Such agreement further provides that, at such time as the limited partners,
in the aggregate, have recovered 150% of their capital contribution, the
general partners (in the aggregate) are to be allocated 25% of such items,
with the remaining 75% being allocated to the limited partners. See
"Information Concerning Edge Group II" and "Comparison of Securityholder
Rights."
125
<PAGE>
GULFEDGE
The following table sets forth information with respect to beneficial
ownership of the units representing limited partner interests in Gulfedge
("Gulfedge Units") as of November 1, 1996 by all persons who are the beneficial
owners of 5% or more of the outstanding Gulfedge Units and Old Edge, the
general partner of Gulfedge.
<TABLE>
<CAPTION>
GULFEDGE UNITS
BENEFICIALLY
OWNED
-----------------
NUMBER
OF
NAME (1) UNITS PERCENTAGE
-------- ------ ----------
<S> <C> <C>
Orion Investors, L.L.C.................................. 6 71%
412 Edwards St., Suite 1805
Shreveport, LA 71101
Bela J. Garet........................................... 1 29
210 Harwick Road
Woodside, CA 94062
Old Edge (2)............................................ -- --
</TABLE>
- --------
(1) Except as otherwise noted, each holder of Gulfedge Units has sole voting
and investment power with respect to such units beneficially owned.
(2) Old Edge does not own any limited partner interest in Gulfedge. Pursuant to
the Gulfedge Partnership Agreement, Old Edge, as general partner, made a
capital contribution of $100 and each limited partner contributed $64,500
per Gulfedge Unit. The Gulfedge Partnership Agreement provides that items
of income, gain, losses, deductions and distributions be allocated 1% to
the general partner, with the remaining 99% of such items to be distributed
to the limited partners based on their relative capital accounts. See
"Information Concerning Gulfedge" and "Comparison of Securityholder
Rights."
126
<PAGE>
CERTAIN TRANSACTIONS
THE COMBINATION TRANSACTIONS
For a description of the Combination Transactions, see "The Combination
Transactions."
TRANSFER OF EDGE GROUP II GENERAL PARTNER INTERESTS
For a description of certain transactions relating to the transfer of the
Edge Group II General Partner Interests, see "The Combination Transactions--
Conflicts of Interests; Interests of Certain Persons and Affiliates in the
Combination Transactions" and "Plan of Distribution."
CERTAIN AFFILIATE RELATIONSHIPS
The Joint Venture is owned by Old Edge, Edge Group II, Gulfedge and Edge
Group, as described above. John Sfondrini and Napamco, a company Mr. Sfondrini
owns and is the President of, are the general partners of Edge Group II and
each of the three limited partnerships that are the general partners in Edge
Group. Mr. Sfondrini and Napamco are also the general partners of Edge Holding
Company, which owns, prior to the Combination Transactions, approximately 37%
of the common stock of Old Edge. In the case of Edge Group II, in the event of
the death, incapacity or withdrawal of Mr. Sfondrini from his position as
general partner, Mr. Andrews would, if he so chose, serve as a general partner
of Edge Group II. Old Edge is the general partner of Gulfedge. Napamco is the
general partner of each of Essex Royalty Limited Partnership ("Essex I L.P.")
and Essex Royalty Limited Partnership II ("Essex II L.P."). Resource Investors
Management Company Limited Partnership ("RIMCO") is the general partner of each
of two limited partnerships (the "RIMCO Partnerships") that, in the aggregate
own, prior to the Combination Transactions, approximately 5% of the common
stock of Old Edge.
Mr. James D. Calaway and Mr. John E. Calaway are twin brothers and their
father is Mr. James C. Calaway.
ESSEX ROYALTY JOINT VENTURES
In April 1992, the Joint Venture and Essex I L.P. entered into a Joint
Venture Agreement (the "Essex I Joint Venture") with respect to the purchase of
certain royalty interests in oil and natural gas properties. The initial term
of the Essex I Joint Venture was four years, but by consent of both parties to
such agreement, it has been extended until April 1997. Under the terms of the
Essex I Joint Venture Agreement, Essex I L.P. made capital contributions
aggregating $3 million and the Joint Venture made no capital contributions. The
Essex I Joint Venture Agreement provides that quarterly distributions of cash
be made, in accordance with the sharing ratios, in an amount, subject to
certain adjustments, not less than that equal to revenues received from
royalties less the management fee paid to the Joint Venture, as managing
venturer. Initially, Essex I L.P. receives 100% of all cash distributions
pursuant to the sharing ratios. At such time as the cash and value of property
distributed to Essex I L.P. is equal to 110% of its capital contribution, the
sharing ratio shifts to 40% for the Joint Venture and 60% for Essex I L.P. Such
40% is to be allocated directly to the venturers of the Joint Venture, and does
not affect the sharing ratio calculations with respect to the Joint Venture. As
managing venturer of the Essex I Joint Venture, the Joint Venture receives
reimbursement for costs incurred to acquire royalty interests, certain
administrative costs, a portion of the payroll costs attributable to the Essex
II Joint Venture and, prior to the sharing ratio shift, a management fee
(allocated directly to Old Edge) equal to 1% of the capital contributions of
Essex I L.P.
In May 1994, the Joint Venture and Essex II L.P. entered into a Joint Venture
Agreement (the "Essex II Joint Venture") effective until December 1997 and
similar in nature to the Essex I Joint Venture. Essex II L.P. made capital
contributions aggregating approximately $2.8 million and the Joint Venture made
no capital contributions. Initially, Essex II L.P. receives 100% of all cash
distributions pursuant to the sharing ratios. At such time as the cash and
property distributed to Essex II L.P. is equivalent to 111.3% of its capital
contribution,
127
<PAGE>
the Joint Venture will thereafter receive 25% of distributions. Provisions with
respect to mandatory distributions and dissolution are similar to those
described for the Essex I Joint Venture. As managing venturer of the Essex II
Joint Venture, the Joint Venture receives reimbursement for costs incurred to
acquire royalty interests, certain administrative costs, a portion of the
payroll costs attributable to the Essex II Joint Venture and, prior to the
earlier of the expenditure by the Essex II Joint Venture of its capital or the
sharing ratio shift, a management fee (allocated directly to Old Edge) of
$30,000 every six months.
The management fees earned by Old Edge pursuant to the Essex I and II Joint
Ventures (combined), in 1995, 1994 and 1993 were $120,000, $80,000 and $60,000,
respectively. Old Edge invoiced the Essex I and II Joint Ventures (combined)
for reimbursement for expenses in 1995, 1994 and 1993 in the amounts of
$40,250, $18,750 and $36,750, respectively. At December 31, 1995 and 1994, Old
Edge had accrued receivables for such management fees and reimbursements of
$115,000 and $63,600, respectively.
In May 1993, the Joint Venture received a short-term $1 million loan from
the Essex I Joint Venture secured by the Joint Venture's interests in certain
prospects. In addition to interest of 10% per annum, the loan agreement
provided for an assignment to the Essex I Joint Venture of overriding royalty
interests in the collateral. In October 1993, the Joint Venture borrowed
$125,000 on a short-term basis from the Essex I Joint Venture. Such note
carried interest of 11% per year and was unsecured. In August 1994, the Joint
Venture borrowed $125,000 on a short-term basis from the Essex II Joint Venture
at an interest rate of 10% per year. In December 1993, the Essex I Joint
Venture borrowed $30,000 on a short-term basis from the Joint Venture. Such
note carried interest of 11% per year and was unsecured. In May 1994, the Joint
Venture loaned, on a short-term basis, $46,800 to the Essex II Joint Venture.
No loans between the Joint Venture and either of the Essex I Joint Venture or
the Essex II Joint Venture are presently outstanding.
RIMCO INTERESTS
In April 1991, the Joint Venture borrowed, in the aggregate, $4,500,000 from
the RIMCO Partnerships and another partnership of which RIMCO is the general
partner, at an annual interest rate of 15.5% (the "RIMCO Note"). The Joint
Venture and such partnerships agreed to reduce the interest rate of the RIMCO
Note from 15.5% to 10% for the period from October 1, 1993 through September
30, 1995. Pursuant to such agreement, the Joint Venture conveyed to such
partnerships a 0.4% after-payout royalty interest, in the aggregate, in all
prospects sold by the Joint Venture during such period. The RIMCO Note was
repaid in March 1995.
SUBORDINATED LOAN AGREEMENT
In December 1994, the Joint Venture and Mr. James C. Calaway entered into the
Subordinated Loan Agreement, which has since been amended as described below. A
portion of the proceeds from the Offering will be used to pay the amounts
outstanding on such loan, which will be terminated. The Subordinated Loan
Agreement provides for a $1 million term loan and a $1 million line of credit.
At September 30, 1996, the aggregate amount outstanding under the Subordinated
Loan was $1.3 million, which includes $300,000 outstanding under the line of
credit. The principal is due, unless earlier retired by the Joint Venture, upon
the earlier of April 8, 1998 or the conclusion of the Joint Venture's windup
period. Interest at 10% per annum is due monthly. Mr. James C. Calaway also has
the option, pursuant to the Subordinated Loan, to participate in certain future
debt financing of the Joint Venture to the extent of the amount outstanding
under the Subordinated Loan. The Subordinated Loan is secured by certain oil
and natural gas properties, equipment and other assets of the Joint Venture,
but is subordinated to the Revolving Credit Facility. The mortgage and security
agreement restricts the transfer of properties, creation of liens and other
matters. The Subordinated Loan is without recourse to the venturers.
The Subordinated Loan provides that Mr. James C. Calaway will receive, with
respect to prospects of the Joint Venture which were undrilled as of December
20, 1994 and any acquisition subsequent to such date by the Joint Venture of
interests in existing production or proven reserves, (i) a Calaway RWI of 1%
and (ii) on all prospects that had not been marketed as of such date, a Calaway
ORRI of .2%, each of which is subject to
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proportionate reduction under certain circumstances. The Calaway ORRI is
reduced to .1% with respect to any well located in certain specified 3-D areas
that is proposed after August 1, 1996 but prior to the later of the repayment
in full of the Subordinated Loan or the dissolution of the Joint Venture (the
"Change of Interest Date"). Effective upon the Change of Interest Date AMIs
will be created consisting of all acreage in which the Joint Venture has, as of
such date, shot or acquired or has a commitment to shoot or acquire 3-D
geophysical data. The Calaway ORRI and the Calaway RWI will be reduced to .1%
and .05%, respectively, with respect to each well and lease proposed after the
Change of Interest Date located within such an AMI. After the Change of
Interest Date, Mr. Calaway is not entitled to receive any additional interests
in any Joint Venture prospects or 3-D areas other than those situated within
such AMIs or as provided for originally in the Subordinated Loan Agreement.
The Subordinated Loan Agreement provides for certain rights, on the part of
Mr. James C. Calaway, to exchange the Calaway Interests for Common Stock.
Accordingly, the portion of the Calaway Interests consisting of producing
properties is being purchased by the Company pursuant to the Calaway Exchange
by valuing such interests at $672,245 based on the December 31, 1996 Reserve
Report. See "Summary--The Combination Transactions--The James C. Calaway
Exchange."
A portion of the Subordinated Loan replaced an unsecured loan in the
aggregate principal amount of $400,000 made by Mr. James C. Calaway to the
Joint Venture in June 1994. Interest at 10% per annum was due monthly. As
additional consideration for such loan, Mr. James C. Calaway received a .5% RWI
and a .05% ORRI in five prospects generated by the Joint Venture subsequent to
the date of such note. Prior to the loan of June 1994, Mr. James C. Calaway had
made loans of $250,000 and $205,000 to the Joint Venture, which were repaid in
1994 and 1993, respectively. Each of such loans provided for an interest rate
of 10% and the granting of interests in certain specified oil and natural gas
properties to Mr. James C. Calaway.
JAMES C. CALAWAY CONSULTING AGREEMENT
Old Edge is obligated to pay Mr. James C. Calaway $40,000 annually for the
remainder of his natural life pursuant to a March 1989 consulting agreement.
Under the terms of such agreement, Mr. James C. Calaway is obligated to provide
consulting services as and to the extent as may be mutually agreed upon.
SALES OF PROSPECTS TO AFFILIATES
In 1993 and 1994, the Joint Venture sold certain drilling prospects to
partnerships owned by Mr. James D. Calaway for $32,095 and $241,395,
respectively, and, in 1994, to an affiliate of the RIMCO Partnerships for
$60,000. No sales of prospects to affiliates of the Company took place in 1995.
The cost to develop such prospects was $16,652, $153,520 and $39,593,
respectively. The purchase price was based on the amounts paid for interests in
such prospects by energy industry participants.
Napamco and another corporation of which Mr. Andrews is an officer, are the
general partners of each of two limited partnerships that have invested, on the
same basis as outside parties, in two wells that the Company acts as operator
for. Such partnerships, in the aggregate, have a working interest of 7.5% in a
well in the Barnett Project Area and a working interest of approximately 30% in
a well in the Tyler Project Area. The partnerships have paid to the Company, in
the aggregate, approximately $105,000 with respect to the Barnett Project Area
well and $600,000 with respect to the Tyler Project Area well, which
represents, in the aggregate such partnerships' share of the costs to develop
each such well proportionate to their relative working interests therein.
REGISTRATION RIGHTS AGREEMENT OF EDGE HOLDING COMPANY LIMITED PARTNERSHIP
In connection with the Offering, the Company will enter into a registration
rights agreement with Edge Holding Company (the "Registration Rights
Agreement"). The Registration Rights Agreement will provide that, upon the
request of Edge Holding Company, the Company will file a registration statement
under the Securities Act to register the Common Stock being issued to Edge
Holding Company pursuant to the Merger for distribution
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to the partners of Edge Holding Company. Such request may not be made before
six months after the closing of the Offering. The Registration Rights Agreement
will terminate on December 31, 1998, or earlier in certain circumstances. An
aggregate of 858,853 outstanding shares of Common Stock will be subject to the
Registration Rights Agreement.
The Company is required to pay all costs associated with such registration
other than underwriting commissions and transfer taxes attributable to the
shares distributed. The Company will indemnify Edge Holding Company, and Edge
Holding Company will indemnify the Company, against certain liabilities in
respect of any registration statement or offering covered by the Registration
Rights Agreement.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
INTRODUCTION
This section summarizes the material federal income tax consequences of
general application that should be considered by holders of interests in Edge
Group II, holders of Gulfedge Units, Edge Group and holders of Old Edge Common
Stock resulting from their participation in the proposed Combination Agreement
Transactions. It does not, however, comment on all tax matters that may affect
Edge Group II, Gulfedge, Edge Group, the Company or holders of interests in
Edge Group II, holders of Gulfedge Units, and holders of Old Edge Common Stock,
and it does not consider various facts or limitations applicable to any
particular participant that may modify or alter the results described herein.
It may not be applicable to certain classes of taxpayers, including, without
limitation, insurance companies, tax-exempt organizations, financial
institutions, securities dealers, broker-dealers, and foreign persons.
Except as otherwise indicated, statements of legal conclusion regarding tax
treatments, tax effects or tax consequences reflect the opinions of Baker &
Botts, L.L.P., counsel for the Company, based on laws, regulations, rulings,
practice, and judicial decisions in effect at the date of this Joint Proxy and
Consent Solicitation Statement/Prospectus. Statements of legal conclusion
regarding tax treatments, tax effects or tax consequences regarding the receipt
of the GP's Management Fee Shares reflect the opinion of Brauner Baron
Rosenzweig & Klein, L.L.P. based on laws, regulations, rulings, practice, and
judicial decisions in effect at the date of this Joint Proxy and Consent
Solicitation Statement/Prospectus. However, legislative, judicial, or
administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to stockholders as described herein. No rulings have been
requested from the Internal Revenue Service ("IRS"), and the IRS may disagree
with some of the conclusions set forth below, particularly those as to which
tax counsel's opinion is qualified. Further, the IRS has announced generally
that it will not issue rulings regarding the tax consequences of transactions
similar to the Combination Agreement Transactions. Accordingly, each
participant is urged to consult his own tax advisor as to the particular
consequences to him of the Combination Agreement Transactions.
HOLDERS OF INTERESTS IN EDGE GROUP II
Pre-Edge Group II Exchange Offer Operations. The income and deductions of
Edge Group II incurred during 1996 and during 1997 prior to the closing of the
Edge Group II Exchange Offer will be allocated among the holders of interests
in Edge Group II, and each holder's basis in his interest in Edge Group II will
be adjusted by such allocations, in essentially the same manner as they would
have been allocated and adjusted apart from the closing of the Edge Group II
Exchange Offer. Each holder of an interest in Edge Group II will receive a
Schedule K-1 for 1996 reflecting the income and deductions allocated to him
during 1996 and for 1997 reflecting the income and deductions allocated to him
during the period in 1997 he owned such interest.
The Edge Group II Exchange Offer--Effect on Limited Partners. The tax
consequences to a holder of Edge Group II Units who receives shares of Common
Stock in the Edge Group II Exchange Offer will be as follows:
(a) General Nonrecognition. Except as otherwise provided below, a holder
of Edge Group II Units will not recognize gain or loss as a result of the
closing of the Edge Group II Exchange Offer.
(b) Low-Basis Units. A holder who has a tax basis in his Edge Group II
Units that is significantly less than the tax basis of an original holder
of such Units may recognize gain on the Edge Group II Exchange Offer, but
any such gain will be offset by otherwise suspended losses.
(c) Tax Basis. A holder of Edge Group II Units will have an aggregate tax
basis in all shares of Common Stock received in the Edge Group II Exchange
Offer equal to his aggregate basis in his Edge Group II Units, as adjusted
for 1996 and 1997 operations, increased by any gain recognized on the Edge
Group II Exchange Offer, but such basis will exclude his share of any Joint
Venture or Edge Group II debts. Such basis will be prorated among all
shares of Common Stock received.
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(d) Holding Period. The holding period required for long-term capital
gains treatment is one year. For holding period purposes, each share of
Common Stock will be divided into two parts. One part will be the portion
of the value of the share that is attributable to ordinary income assets
transferred to the Company in the Edge Group II Exchange Offer. Its holding
period will begin on the day following the closing of the Edge Group II
Exchange Offer. The remaining part will have a holding period that includes
the holding period of the Edge Group II Units in the hands of the holder.
(e) Suspended Deductions. Any loss previously allocated to a holder of
Edge Group II Units in prior years or during 1997 that he has not been able
to use because of the at-risk limitations can be used only to the extent of
any income or gain recognized on the Edge Group II Exchange Offer pursuant
to paragraph (b) above. A holder of Edge Group II Units will also be
entitled to deduct suspended passive losses to the extent of a portion of
any gain realized on the Edge Group II Exchange Offer. Such portion will be
approximately equal to a fraction, the numerator of which is the amount of
net passive income and gain that would have been allocated to the holder if
Edge Group II had sold all its trade or business assets for their fair
market value, and the denominator of which is the aggregate amount of
income and gain that would have been allocated to the holder if Edge Group
II had sold all of its assets in only those activities in which Edge Group
II would have realized gain. Any passive losses not so used may
subsequently be used only as provided below under "--Sale of Shares." Any
suspended at-risk loss not so used, and any suspended basis limitation
loss, will disappear.
(f) Reporting Requirements. Each holder who receives shares in the Edge
Group II Exchange Offer will be required to file with his federal income
tax return a statement that provides details relating to the property
transferred, the stock and securities received and his share of any
liabilities assumed by the Company in the Edge Group II Exchange Offer. The
Company will provide shareholders with information to assist them in
preparing such statement.
(g) Control Assumption. The above conclusions are based on the assumption
that not more than 20% of the aggregate number of shares of Common Stock
issued in the Offering and shares of Common Stock transferred to holders of
interests in Edge Group II, holders of Gulfedge Units, Edge Group, the
holder of the J.C. Calaway Interests and holders of Old Edge Common Stock
pursuant to the Combination Transactions will be subsequently sold pursuant
to contracts entered into prior to the Combination Transactions (the
"Control Assumption"). None of the Company, Old Edge, Edge Group, Edge
Group II or Gulfedge is aware of any contracts that have been or will be
entered into prior to the Combination Transactions which would make the
Control Assumption incorrect. If the Control Assumption were not correct,
each holder of Edge Group II Units would recognize gain or loss on the
transfer of his Edge Group II Units to the Company as if the holder had
sold the Edge Group II Units for an amount equal to the value of the Common
Stock received in the Edge Group II Exchange Offer, plus his share of the
Joint Venture's or Edge Group II's nonrecourse liabilities assumed by the
Company in the Edge Group II Exchange Offer. Moreover, each holder's basis
in the Common Stock received would be increased (or reduced) by the gain
(or loss) recognized, and each holder's holding period in the shares of
Common Stock received would begin on the day after the closing of Edge
Group II Exchange Offer.
The Edge Group II Exchange Offer--Effect on General Partners. The tax
consequences to the holder of a general partner interest in Edge Group II who
receives shares of Common Stock in the Edge Group II Exchange Offer will be as
follows:
(a) General Nonrecognition. Except as otherwise provided below, a holder
of a general partner interest in Edge Group II will not recognize gain or
loss as a result of the closing of the Edge Group II Exchange Offer.
(b) Recapture of Previously Deducted Losses. A holder of a general
partner interest will recognize gain as a result of the closing of the Edge
Group II Exchange Offer in the amount of the net losses previously
allocated to the holder.
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(c) Tax Basis. A holder of a general partner interest in Edge Group II
will have an aggregate tax basis in his shares of Common Stock (other than
the GP's Management Fee Shares) received in the Edge Group II Exchange
Offer equal to his aggregate basis in his general partner interest in Edge
Group II, as adjusted for 1996 and 1997 operations, increased by any gain
recognized on the Edge Group II Exchange Offer, but such basis will exclude
his share of any Joint Venture or Edge Group II debts. Such basis will be
prorated among such shares of Common Stock received.
(d) Holding Period. The holding period required for long-term capital
gains treatment is one year. For holding period purposes, each share of
Common Stock (other than the GP's Management Fee Shares) will be divided
into two parts. One part will be the portion of the value of the share that
is attributable to ordinary income assets transferred to the Company in the
Edge Group II Exchange Offer. Its holding period will begin on the day
following the closing of the Edge Group II Exchange Offer. The remaining
part will have a holding period that includes the holding period of the
general partner interest in Edge Group II in the hands of the general
partner.
(e) Reporting Requirements. Each holder of a general partner interest in
Edge Group II who receives shares in the Edge Group II Exchange Offer will
be required to file with his federal income tax return a statement that
provides details relating to the property transferred, the stock and
securities received and his share of any liabilities assumed by the Company
in the Edge Group II Exchange Offer. The Company will provide shareholders
with information to assist them in preparing such statement.
(f) Control Assumption. The above conclusions are based on the assumption
that not more than 20% of the aggregate number of shares of Common Stock
issued in the Offering and shares of Common Stock transferred to holders of
interests in Edge Group II, holders of Gulfedge Units, Edge Group, the
holder of the J.C. Calaway Interests and holders of Old Edge Common Stock
pursuant to the Combination Transactions will be subsequently sold pursuant
to contracts entered into prior to the Combination Transactions (the
"Control Assumption"). None of the Company, Old Edge, Edge Group, Edge
Group II or Gulfedge is aware of any contracts that have been or will be
entered into prior to the Combination Transactions which would make the
Control Assumption incorrect. If the Control Assumption were not correct,
each holder of a general partner interest in Edge Group II would recognize
gain or loss on the transfer of his general partner interest in Edge Group
II to the Company as if the holder had sold the general partner interest in
Edge Group II for an amount equal to the value of the Common Stock received
in the Edge Group II Exchange Offer (other than the GP's Management Fee
Shares), plus his share of the Joint Venture's or Edge Group II's
liabilities assumed by the Company in the Edge Group II Exchange Offer.
Moreover, each holder's basis in the Common Stock received would be
increased (or reduced) by the gain (or loss) recognized, and each holder's
holding period in the shares of Common Stock received would begin on the
day after the closing of Edge Group II Exchange Offer.
(g) Receipt of GP's Management Fee Shares. A general partner of Edge
Group II (i) will recognize ordinary income equal to the value of the GP's
Management Shares received in the Edge Group II Exchange Offer attributable
to the accrued but unpaid management fee and (ii) may recognize ordinary
income on the receipt of certain shares the GP's are entitled to in respect
of future management fees determined under the partnership agreement based
upon future cash flow which are unearned as of the date of this transaction
(the Management Fee shares) received in the Edge Group II Exchange Offer. A
General Partner of Edge Group II will have a tax basis in his GP's
Management Fee Shares which were subject to current taxation equal to the
value of such shares received, and the General Partner's holding period in
such shares will begin on the day after the Edge Group II Exchange Offer.
With respect to the shares received on the exchange which are not subject
to current taxation, the General Partner will have a carryover basis equal
to the basis in the proportional part of partnership interests exchanged
therefore which in most cases will be zero, and a holding period that
includes the period he held the partnership interest. No opinion is
expressed concerning the effect of subsequent transfers by the General
Partner of shares received in the exchange.
Sale of Shares. A holder of an interest in Edge Group II who receives shares
of Common Stock in the Edge Group II Exchange Offer and thereafter sells such
shares will recognize gain or loss measured by the difference
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between the amount realized on such sale and his tax basis in the shares sold.
Although definitive Treasury Regulations have not yet been issued concerning
dispositions, a shareholder probably will not be able to use any part of a
suspended passive loss on a sale of only some of his shares, not even to the
extent of any gain realized on the sale; however, all of a suspended passive
loss can be used if the shareholder sells all his shares to an unrelated person
in an arm's length transaction in which all realized gain or loss is otherwise
recognized.
Ownership of Shares. After the closing of the Edge Group II Exchange Offer, a
shareholder will be taxable only on distributions received from the Company, if
any. Such distributions will be taxable as dividends to the extent of any
current or accumulated earnings and profits of the Company. See "--The Company"
below. Any other distributions will be treated as a tax-free return of capital
to the extent of the holder's basis in the shares and as capital gain to the
extent of the balance. Except on the sale of all shares, a shareholder probably
will not be entitled to use any passive loss, even to offset any dividends
thereafter received from the Company (see "--Sale of Shares" above).
Nonexchanging Holders. A holder who does not participate in the Edge Group II
Exchange Offer will not recognize any gain on the consummation of the Edge
Group II Exchange Offer, unless he has a basis in his Edge Group II Units that
is significantly less than the basis of an original holder of such Units.
A nonexchanging holder could have adverse federal income tax consequences if
the Edge Group II Exchange Offer is accepted by partners holding Edge Group II
Units which, when added to other sales or exchanges of Edge Group II Units
occurring during any 12-month period that includes the Closing Date, comprise
Edge Group II Units which represent 50% or more of the total interests in Edge
Group II's capital and profits. In such a case, there would be a constructive
termination ("Constructive Termination"), and then a reconstitution by the
remaining partners of Edge Group II for federal income tax purposes. The
Combination Agreement Transactions are conditioned upon acceptance of the Edge
Group II Exchange Offer by at least 70% of the Edge Group II limited partners.
A Constructive Termination and reconstitution of Edge Group II would cause a
nonexchanging holder to recognize gain to the extent cash constructively
distributed exceeds the adjusted tax basis of his Edge Group II Units. The gain
would be treated as ordinary income to the extent attributable to such holder's
share of the ordinary income that would be recognized by Edge Group II if the
Joint Venture sold all of its assets and the balance of such gain would be
treated as gain from the sale or exchange of the Edge Group II Units and,
provided that the Edge Group II Units are capital assets in the hands of the
holder, such gain would be capital gain. The Company estimates that a
nonexchanging limited partner would not recognize gain as a result of a
Constructive Termination of Edge Group II unless he has a basis in his Edge
Group II Units that is significantly less than the basis of an original holder
of such Units, but any such gain would be offset by otherwise suspended losses.
Edge Group II's taxable year ends December 31. Edge Group II's taxable year
would terminate upon its Constructive Termination and, if a holder's taxable
year does not also end on December 31, the Constructive Termination could
result in the bunching of more than one year of the holder's share of Edge
Group II's income or loss in such holder's income tax return for the taxable
year in which Edge Group II is terminated.
HOLDERS OF GULFEDGE UNITS
Pre-Gulfedge Exchange Offer Operations. The income and deductions of Gulfedge
incurred during 1996 and during 1997 prior to the closing of the Gulfedge
Exchange Offer will be allocated among the holders of the Gulfedge Units, and
each holder's basis in the Gulfedge Units will be adjusted by such allocations,
in essentially the same manner as they would have been allocated and adjusted
apart from the closing of the Gulfedge Exchange Offer. Each holder of Gulfedge
Units will receive a Schedule K-1 for 1996 reflecting the income and deductions
allocated to him during 1996 and for 1997 reflecting the income and deductions
allocated to him during the period in 1997 he owned such Units.
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The Gulfedge Exchange Offer. The tax consequences to a holder of Gulfedge
Units who receives shares of Common Stock in the Gulfedge Exchange Offer will
be as follows:
(a) General Nonrecognition. Except as otherwise provided below, a holder
of Gulfedge Units will not recognize gain or loss as a result of the
closing of the Gulfedge Exchange Offer.
(b) Low-Basis Units. A holder who has a tax basis in his Gulfedge Units
that is significantly less than the tax basis of an original holder of such
Units may recognize gain on the Gulfedge Exchange Offer, but any such gain
will be offset by otherwise suspended losses.
(c) Tax Basis. A holder of Gulfedge Units will have an aggregate tax
basis in all shares of Common Stock received in the Gulfedge Exchange Offer
equal to his aggregate basis in his Gulfedge Units, as adjusted for 1996
and 1997 operations, increased by any gain recognized on the Gulfedge
Exchange Offer, but such basis will exclude his share of any Joint Venture
or Gulfedge debts. Such basis will be prorated among all shares of Common
Stock received.
(d) Holding Period. The holding period required for long-term capital
gains treatment is one year. For holding period purposes, each share of
Common Stock will be divided into two parts. One part will be the portion
of the value of the share that is attributable to ordinary income assets
transferred to the Company in the Gulfedge Exchange Offer. Its holding
period will begin on the day following the closing of the Gulfedge Exchange
Offer. The remaining part will have a holding period that includes the
holding period of the Gulfedge Units in the hands of the holder.
(e) Suspended Deductions. Any loss previously allocated to a holder of
Gulfedge Units in prior years or during 1997 that he has not been able to
use because of the at-risk limitations can be used only to the extent of
any income or gain recognized on the Gulfedge Exchange Offer pursuant to
paragraph (b) above. A holder of Gulfedge Units will also be entitled to
deduct suspended passive losses to the extent of a portion of any gain
realized on the Gulfedge Exchange Offer. Such portion will be approximately
equal to a fraction, the numerator of which is the amount of net passive
income and gain that would have been allocated to the holder if Gulfedge
had sold all its trade or business assets for their fair market value, and
the denominator of which is the aggregate amount of income and gain that
would have been allocated to the holder if Gulfedge had sold all of its
assets in only those activities in which Gulfedge would have realized gain.
Any passive losses not so used may subsequently be used only as provided
below under "--Sale of Shares." Any suspended at-risk loss not so used, and
any suspended basis limitation loss, will disappear.
(f) Reporting Requirements. Each holder who receives shares in the
Gulfedge Exchange Offer will be required to file with his federal income
tax return a statement that provides details relating to the property
transferred, the stock and securities received and his share of any
liabilities assumed by the Company in the Gulfedge Exchange Offer. The
Company will provide shareholders with information to assist them in
preparing such statement.
(g) Control Assumption. The above conclusions are based on the assumption
that not more than 20% of the aggregate number of shares of Common Stock
issued in the Offering and shares of Common Stock transferred to holders of
interests in Edge Group II, holders of Gulfedge Units, Edge Group, the
holder of the J.C. Calaway Interests and holders of Old Edge Common Stock
pursuant to the Combination Transactions will be subsequently sold pursuant
to contracts entered into prior to the Combination Transactions (the
"Control Assumption"). None of the Company, Old Edge, Edge Group, Edge
Group II or Gulfedge is aware of any contracts that have been or will be
entered into prior to the Combination Transactions which would make the
Control Assumption incorrect. If the Control Assumption were not correct,
each holder of Gulfedge Units would recognize gain or loss on the transfer
of his Gulfedge Units to the Company as if the holder had sold the Gulfedge
Units for an amount equal to the value of the Common Stock received in the
Gulfedge Exchange Offer, plus his share of the Joint Venture's or
Gulfedge's nonrecourse liabilities assumed by the Company in the Gulfedge
Exchange Offer. Moreover, each holder's basis in the Common Stock received
would be increased (or reduced) by the gain (or loss) recognized, and
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each holder's holding period in the shares of Common Stock received would
begin on the day after the closing of Gulfedge Exchange Offer.
Sale of Shares. A holder of Gulfedge Units who receives shares of Common
Stock in the Gulfedge Exchange Offer and thereafter sells such shares will
recognize gain or loss measured by the difference between the amount realized
on such sale and his tax basis in the shares sold. Although definitive Treasury
Regulations have not yet been issued concerning dispositions, a shareholder
probably will not be able to use any part of a suspended passive loss on a sale
of only some of his shares, not even to the extent of any gain realized on the
sale; however, all of a suspended passive loss can be used if the shareholder
sells all his shares to an unrelated person in an arm's length transaction in
which all realized gain or loss is otherwise recognized.
Ownership of Shares. After the closing of the Gulfedge Exchange Offer, a
shareholder will be taxable only on distributions received from the Company, if
any. Such distributions will be taxable as dividends to the extent of any
current or accumulated earnings and profits of the Company. See "--The Company"
below. Any other distributions will be treated as a tax-free return of capital
to the extent of the holder's basis in the shares and as capital gain to the
extent of the balance. Except on the sale of all shares, a shareholder probably
will not be entitled to use any passive loss, even to offset any dividends
thereafter received from the Company (see "--Sale of Shares" above).
Nonexchanging Holders. A holder who does not participate in the Gulfedge
Exchange Offer will not recognize any gain on the consummation of the Gulfedge
Exchange Offer, unless he has a basis in his Gulfedge Units that is
significantly less than the basis of an original holder of such Units.
A nonexchanging holder could have adverse federal income tax consequences if
the Gulfedge Exchange Offer is accepted by partners holding Gulfedge Units
which, when added to other sales or exchanges of Gulfedge Units occurring
during any 12-month period that includes the Closing Date, comprise Gulfedge
Units which represent 50% or more of the total interests in Gulfedge's capital
and profits. In such a case, there would be a constructive termination
("Constructive Termination"), and then a reconstitution by the remaining
partners of Gulfedge for federal income tax purposes.
A Constructive Termination and reconstitution of Gulfedge would cause a
nonexchanging holder to recognize gain to the extent cash constructively
distributed exceeds the adjusted tax basis of his Gulfedge Units. The gain
would be treated as ordinary income to the extent attributable to such holder's
share of the ordinary income that would be recognized by Gulfedge if the Joint
Venture sold all of its assets and the balance of such gain would be treated as
gain from the sale or exchange of the Gulfedge Units and, provided that the
Gulfedge Units are capital assets in the hands of the holder, such gain would
be capital gain. The Company estimates that a nonexchanging holder would not
recognize gain as a result of a Constructive Termination of Gulfedge unless he
has a basis in his Gulfedge Units that is significantly less than the basis of
an original holder of such Units, but any such gain would be offset by
otherwise suspended losses.
Gulfedge's taxable year ends December 31. Gulfedge's taxable year would
terminate upon its Constructive Termination and, if a holder's taxable year
does not also end on December 31, the Constructive Termination could result in
the bunching of more than one year of the holder's share of Gulfedge's income
or loss in such holder's income tax return for the taxable year in which
Gulfedge is terminated.
EDGE GROUP
Pre-Edge Group Purchase Offer Operations. The income and deductions of the
Joint Venture incurred during 1996 and during 1997 prior to the closing of the
Edge Group Purchase Offer will be allocated among the holders of interests in
the Joint Venture, and Edge Group's basis in Edge Group's Joint Venture
Interest will be adjusted by such allocations, in essentially the same manner
they would have been allocated and adjusted apart from the closing of the Edge
Group Purchase Offer. Edge Group will receive a Schedule K-1 for 1996
reflecting
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the income and deductions allocated to it during 1996 and for 1997 reflecting
the income and deductions allocated to it during the period in 1997 it owned
such Joint Venture Interest.
The Edge Group Purchase Offer. The tax consequences to Edge Group from the
receipt of shares of Common Stock in the Edge Group Purchase Offer will be as
follows:
(a) General Nonrecognition. Except as otherwise provided below, Edge
Group will not recognize gain or loss as a result of the closing of the
Edge Group Purchase Offer.
(b) Tax Basis. Edge Group's aggregate tax basis in all shares of Common
Stock received in the Edge Group Purchase Offer will equal its aggregate
basis in the Edge Group Joint Venture Interest, as adjusted for 1996 and
1997 operations, but will exclude Edge Group's share of any Joint Venture
debts. Such basis will be prorated among all shares of Common Stock
received.
(c) Holding Period. The holding period required for long-term capital
gains treatment is one year. For holding period purposes, each share of
Common Stock will be divided into two parts. One part will be the portion
of the value of the share that is attributable to ordinary income assets
transferred to the Company in the Edge Group Purchase Offer. Its holding
period will begin on the day following the closing of the Edge Group
Purchase Offer. The remaining part will have a holding period that includes
Edge Group's holding period in the Edge Group Joint Venture Interest.
(d) Suspended Deductions. Any loss previously allocated to an individual
holder of an indirect interest in Edge Group in prior years or during 1997
that he has not been able to use because of the at-risk limitations or
because of the basis limitations will disappear. Any loss previously
allocated to an individual holder of an indirect interest in Edge Group in
prior years or during 1997 that has not been able to be used because of the
passive loss limitations may subsequently be used only as provided below
under "--Sale of Shares."
(e) Reporting Requirements. If Edge Group accepts the Edge Group Purchase
Offer, it will be required to file with its federal income tax return a
statement that provides details relating to the property transferred, the
stock and securities received and its share of any liabilities assumed by
the Company in the Edge Group Purchase Offer. The Company will provide
shareholders with information to assist them in preparing such statement.
(f) Control Assumption. The above conclusions are based on the assumption
that not more than 20% of the aggregate number of shares of Common Stock
issued in the Offering and shares of Common Stock transferred to holders of
interests in Edge Group II, holders of Gulfedge Units, Edge Group, the
holder of the J.C. Calaway Interests and holders of Old Edge Common Stock
pursuant to the Combination Transactions will be subsequently sold pursuant
to contracts entered into prior to the Combination Transactions (the
"Control Assumption"). None of the Company, Old Edge, Edge Group, Edge
Group II or Gulfedge is aware of any contracts that have been or will be
entered into prior to the Combination Transactions which would make the
Control Assumption incorrect. If the Control Assumption were not correct,
Edge Group would recognize gain or loss on the transfer of Edge Group's
Joint Venture Interest to the Company as if Edge Group had sold its Joint
Venture Interest for an amount equal to the value of the Common Stock
received in the Edge Group Purchase Offer, plus its share of the Joint
Venture's liabilities assumed by the Company in the Edge Group Purchase
Offer. Moreover, Edge Group's basis in the Common Stock received would be
increased (or reduced) by the gain (or loss) recognized, and Edge Group's
holding period in the shares of Common Stock received would begin on the
day after the closing of Edge Group Purchase Offer.
Sale of Shares. If Edge Group receives shares of Common Stock in the Edge
Group Purchase Offer and thereafter sells such shares, it will recognize gain
or loss measured by the difference between the amount realized on such sale and
its tax basis in the shares sold. Although definitive Treasury Regulations have
not yet been issued concerning dispositions, an individual holder of an
indirect interest in Edge Group probably will not be able to use any part of a
suspended passive loss on a sale of only some of the shares by Edge Group, not
even to
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the extent of any gain realized on the sale; however, all of a suspended
passive loss can be used if Edge Group sells all its shares, or if the
individual holder sells all of his indirect interest in Edge Group, to an
unrelated person in a transaction in which all realized gain or loss is
otherwise recognized.
Ownership of Shares. After the closing of the Edge Group Purchase Offer, Edge
Group will only include in its income distributions received from the Company,
if any. Such distributions will be includible as dividends to the extent of any
current or accumulated earnings and profits of the Company. See "--The Company"
below. Any other distributions will be treated as a tax-free return of capital
to the extent of Edge Group's basis in its shares and as capital gain to the
extent of the balance. Except on the sale by Edge Group of all shares or on the
sale by the individual holder of his entire indirect interest in Edge Group, an
individual holder of an indirect interest in Edge Group probably will not be
entitled to use any passive loss, even to offset his share of any dividends
thereafter received by Edge Group from the Company (see "--Sale of Shares"
above).
Failure to Accept the Edge Group Purchase Offer. If Edge Group does not
participate in the Edge Group Purchase Offer, it will not recognize any gain on
the consummation of the Combination Agreement Transactions.
HOLDERS OF OLD EDGE COMMON STOCK
Pre-Merger Operations. Any distribution paid with respect to the Old Edge
Common Stock prior to the Merger will be included in the income of the holders
of the Old Edge Common Stock to the extent of the current or accumulated
earnings and profits of Old Edge. Any other distributions will be treated as
tax-free return of capital to the extent of the holder's basis in the shares
and as capital gain to the extent of the balance.
The Merger. The tax consequences to a holder of Old Edge Common Stock who
receives shares of Common Stock in the Merger will be as follows:
(a) General Nonrecognition. Except as otherwise provided below, a holder
of Old Edge Common Stock will not recognize gain or loss as a result of the
Merger.
(b) Tax Basis. A shareholder of Old Edge will have a tax basis in all
shares of Common Stock received in the Merger equal to his aggregate basis
in the Old Edge Common Stock. Such basis will be prorated among all shares
of Common Stock received.
(c) Holding Period. For holding period purposes, each share of Common
Stock will have a holding period that includes the holding period of the
Old Edge Common Stock in the hands of the holder, assuming the Old Edge
Common Stock was held as a capital asset.
(d) Continuity Assumption. The above conclusions are based on the
assumption that there is no plan or intention on the part of the Old Edge
shareholders to sell, exchange or otherwise dispose of a number of shares
of Common Stock received in the Merger that would reduce the Old Edge
shareholders' ownership of Common Stock to a number of shares of Common
Stock that is less than 50% of the number of shares of Common Stock issued
in the Merger (the "Continuity Assumption"). If the Continuity Assumption
were not correct, each holder of Old Edge Common Stock would recognize gain
or loss on the transfer of its Old Edge Common Stock to the Company as if
the holder had sold the Old Edge Common Stock for an amount equal to the
value of the Common Stock received in the Merger. Moreover, each holder's
basis in the Common Stock received would be increased (or reduced) by the
gain (or loss) recognized, and each holder's holding period in the shares
of Common Stock received would begin on the day after the Merger.
Sale of Shares. A holder who receives shares of Common Stock in the Merger
and thereafter sells such shares will recognize gain or loss measured by the
difference between the amount realized on such sale and his tax basis in the
shares sold.
Ownership of Shares. After the closing of the Merger, a shareholder will be
taxable only on distributions received from the Company, if any. Such
distributions will be taxable as dividends to the extent of any current or
accumulated earnings and profits of the Company. See "--The Company" below. Any
other distributions
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will be treated as a tax-free return of capital to the extent of the holder's
basis in the shares and as capital gain to the extent of the balance.
Dissenting Holders. A holder of Old Edge Common Stock who exercises his
dissenters' rights and receives cash from Old Edge in exchange for such shares
will recognize capital gain or loss equal to the difference between the cash
received and the holder's tax basis in the shares, assuming the Old Edge Common
Stock was held as a capital asset.
THE COMPANY
The Combination Transactions. Following the Combination Transactions, the
interests in Edge Group II, the Gulfedge Units, Edge Group's Joint Venture
Interest, the Old Edge Common Stock and the exchanged J.C. Calaway Interests
held by the exchanging holders will be owned by the Company. Assuming the
validity of the Control Assumption and the Continuity Assumption, the tax
consequences to the Company of the Combination Transactions will be as follows:
(a) Gain or Loss. The Company will not recognize any gain or loss on the
Combination Transactions.
(b) Tax Basis. The Company will have a tax basis in the interests in Edge
Group II, the Gulfedge Units, the Edge Group Joint Venture Interest, the
Old Edge Common Stock and the exchanged J.C. Calaway Interests equal to the
tax bases that all exchanging holders have in the interests in Edge Group
II, the Gulfedge Units, the Edge Group Joint Venture Interest, the Old Edge
Common Stock and the exchanged J.C. Calaway Interests, plus the amount of
any gain recognized by such exchanging holders (other than income
recognized in respect of the receipt of the GP's Management Fee Shares).
The Company will have a tax basis in the management fee agreement that it
acquires from the general partners of Edge Group II equal to the value of
the GP's Management Fee Shares issued to such general partners in exchange
for such management fee agreement. The Company's basis in its assets and
the Joint Venture's basis in its assets will not be affected by the
Combination Transactions. On the liquidation of the Joint Venture pursuant
to its winding up, the Company and Old Edge will obtain a tax basis in the
assets distributed to them equal to the tax basis that the Company and Old
Edge have in their interests in the Joint Venture. The tax basis will be
allocated among the various Joint Venture assets in proportion to the tax
basis to the Joint Venture of such assets.
(c) Holding Period. The holding period of each asset held by the Joint
Venture will not be affected by the Combination Transactions. On the
liquidation of the Joint Venture pursuant to its winding up, the Company
and Old Edge will have a holding period in the Joint Venture assets
distributed that includes the holding period of the Joint Venture.
(d) Control Assumption and Continuity Assumption. If the Control
Assumption were not valid, the Company still would not recognize gain or
loss, but the Company's tax basis in the interests in Edge Group II, the
Gulfedge Units, the Edge Group Joint Venture Interest, and the exchanged
J.C. Calaway Interests acquired from the exchanging holders would equal the
value of the shares issued to such exchanging holders plus the amount of
the exchanging holder's liabilities assumed by the Company. If the
Continuity Assumption were not valid, the Company still would not recognize
gain or loss, but the Company's tax basis in the Old Edge Common Stock
acquired from the Old Edge shareholders would equal the value of the shares
of Common Stock issued in the Merger.
Post-Transaction Operations. Following the Combination Transactions, the
income and deductions attributable to the assets and liabilities held by the
Joint Venture will be included in the tax return filed by the Company, and the
Company will pay taxes on any taxable profits it recognizes from time to time.
FOREIGN EXCHANGING HOLDERS
An exchanging holder who is not a U.S. person will generally recognize gain
on the exchange of his Edge Group II Units, the Gulfedge Units or Old Edge
Common Stock for Common Stock; loss will not be recognized.
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If an exchanging holder who is not a U.S. person receives shares of Common
Stock in exchange for his interest in Edge Group II, Gulfedge Units or Old Edge
Common Stock, the Company will be required to deduct and withhold an amount of
tax equal to ten percent (10%) of the sum of the fair market value of the
Common Stock transferred to the holder, plus the amount of the holder's share
of liabilities assumed by the Company.
OTHER TAXATION
None of Edge Group II, Gulfedge, Edge Group, Old Edge or the Company is
expected to incur any significant state or local tax incident to the
Combination Agreement Transactions. After the Combination Agreement
Transactions, however, the Company will be subject to state franchise taxes and
probably other state and local taxes to which the income of the Joint Venture
allocable to Edge Group and the holders of interests in Edge Group II and the
Gulfedge Units has not been subject. Apart from federal income taxes, no
attempt has been made to determine any tax that may be imposed on a holder by
the country, state or other jurisdiction in which he resides or is a citizen.
THE FOREGOING DISCUSSION IS INTENDED TO BE A SUMMARY OF THE MATERIAL FEDERAL
INCOME TAX CONSIDERATIONS OF THE COMBINATION AGREEMENT TRANSACTIONS. EACH
HOLDER OF INTERESTS IN EDGE GROUP II, HOLDERS OF GULFEDGE UNITS, EDGE GROUP,
AND HOLDERS OF OLD EDGE COMMON STOCK SHOULD CONSULT HIS OWN TAX ADVISOR
CONCERNING THE PARTICULAR FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES TO
HIM OF THE COMBINATION AGREEMENT TRANSACTIONS.
COMPARISON OF SECURITYHOLDER RIGHTS
INTRODUCTION
Upon completion of the Merger, the shareholders of Old Edge, a Texas
corporation, will become stockholders of the Company, a Delaware corporation.
Partners, both limited and general, in Edge Group II, a Connecticut limited
partnership, who elect to exchange their interests in such partnership pursuant
to the Edge Group II Exchange Offer will become stockholders of the Company.
Limited partners of Gulfedge, a Texas limited partnership, who elect to
exchange their interests in such partnership pursuant to the Gulfedge Exchange
Offer will become stockholders of the Company. Upon completion of the
transactions contemplated by the Edge Group Purchase Offer, Edge Group will
become a stockholder of the Company instead of an owner of an interest in the
Joint Venture, a Texas general partnership. Accordingly, the rights of the
former shareholders of Old Edge, the former partners of Edge Group II and
Gulfedge and of Edge Group will be governed by Delaware law, as well as the
Certificate of Incorporation and Bylaws of the Company.
The following summary compares a number of differences between the rights of
stockholders of the Company and the rights of shareholders in Old Edge,
partners of Edge Group II, limited partners of Gulfedge and the Joint Venture
interest held by Edge Group. This summary is qualified in its entirety by the
more complete legal description of the Common Stock contained under
"Description of Capital Stock of the Company" and the information contained in
the Bylaws and Certificate of Incorporation of the Company, the Bylaws and the
Articles of Incorporation of Old Edge, the partnership agreements of each of
Edge Group II and Gulfedge and the Joint Venture Agreement, all of which are
included as exhibits to the Registration Statement of which this Joint Proxy
and Consent Solicitation Statement/Prospectus is a part.
FEDERAL INCOME TAXATION
The Company will be classified as a corporation for federal income tax
purposes, and as such, will be taxed with respect to its income after allowable
deductions and credits. Stockholders will not be taxed with respect to the
Company's income, but will generally be taxed with respect to dividends
received from the Company. Old Edge is classified as a corporation for federal
income tax purposes and is subject to federal income tax on the
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same basis as the Company. Edge Group II, Gulfedge and the Joint Venture are
not taxpaying entities. Rather, each partner includes his share of the income
and, subject to certain limitations, the losses of such partnership in
computing such partner's taxable income without regard to the cash distributed
to the partner. Generally, cash distributions to partners are not taxable,
except to the extent the amount of the distribution exceeds such partner's
adjusted basis in his partnership interest.
MANAGEMENT
The Company. The business and affairs of the Company will be managed by or
under the direction of the Board of Directors of the Company. The Company's
Board of Directors is divided into three classes with staggered terms of
office, initially ending in 1997, 1998 and 1999, respectively. Thereafter, the
term for each class will expire on the date of the third annual stockholders'
meeting for the election of directors following the most recent election of
directors for such class. Each director holds the office until the next annual
meeting of stockholders for the election of directors of his class and until
his successor has been duly elected and qualified. A director may only be
removed for cause and then only upon the affirmative vote of the holders of at
least a majority of all outstanding capital stock entitled to vote. Any newly
created directorships or vacancies on the Company's Board of Directors
resulting for any reason shall be filled by affirmative vote of the remaining
directors. Cumulative voting is prohibited by the Certificate of Incorporation
of the Company.
Old Edge. The business and affairs of Old Edge are managed by or under the
direction of the Board of Directors of Old Edge. Since its inception, the
directors of Old Edge have been selected pursuant to the Shareholders'
Agreement entered into in connection with the formation of Old Edge and a May
1991 agreement between Calaway Oil and Gas, a company wholly owned by Mr. John
E. Calaway, and Mr. Stanley Raphael wherein Calaway Oil and Gas agreed to vote
shares of Old Edge Common Stock owned or controlled by it for Mr. Raphael as a
director (the "Raphael Voting Agreement" and, together with the Shareholders'
Agreement, the "Voting Agreements").
The Shareholders' Agreement provides that, among other things, Edge Holding
Company agrees to vote the shares of Old Edge Common Stock issued to it in
connection with such agreement, or acquired by it thereafter, for the election
of five nominees for director of Old Edge to be designated by Calaway Oil and
Gas. Calaway Oil and Gas agrees that at least one of such five designees will
be an independent director. Calaway Oil and Gas also agrees, pursuant to the
Shareholders' Agreement, to vote the shares of Old Edge Common Stock issued to
it in connection with such agreement, or acquired by it thereafter, for the
election of three nominees for director of Old Edge to be designated by Edge
Holding Company. These voting agreement provisions between Edge Holding Company
and Calaway Oil and Gas terminate on the earlier of April 8, 2001 or such time
as any Old Edge Common Stock is publicly traded. In addition, Calaway Oil and
Gas' obligation to vote for Edge Holding Company's three designees terminates
if Edge Holding Company distributes its Old Edge Common Stock to its partners
without the reservation of voting rights in Edge Holding Company's favor.
Finally, on the occurrence of any of (i) the death or incompetence of Mr. John
E. Calaway, (ii) Calaway Oil and Gas ceases to own either through itself or
affiliates (as defined therein) at least 40,000 shares of Old Edge Common
Stock, or (iii) Old Edge merges or consolidates and Mr. James D. Calaway and
Mr. John E. Calaway, in the aggregate, do not have "control" as defined in the
Securities Exchange Act, of the resulting entity; then for a period of ten days
from the occurrence of any such event and notice thereof to Mr. Sfondrini, as
the general partner of Edge Holding Company, Edge Holding Company shall have
the right to terminate, among others, the provisions of the Shareholders'
Agreement described above. Calaway Oil and Gas has informed the Company that no
notice of any of the events described in (i), (ii) or (iii) above has been
provided to Mr. Sfondrini and that it believes that none of such events has
occurred.
The Shareholders' Agreement provides that each subscriber of Old Edge Common
Stock in connection therewith agrees to vote all of the shares of Old Edge
Common Stock issued to such subscriber under such agreement or acquired
thereafter for one nominee for director of Old Edge designated by RIMCO.
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The Shareholders' Agreement also contains several voting agreements between
Calaway Oil and Gas and other subscribers, providing in each case for voting
rights in favor of Calaway Oil and Gas with respect to all matters presented
for action to the shareholders of Old Edge. Each such provision terminates on
the earliest to occur of (i) the death or incompetence of Mr. John E. Calaway,
(ii) Mr. John E. Calaway shall cease to be the President of the Company for a
period longer than six months, (iii) Calaway Oil and Gas shall cease to own
(either through itself or affiliates (as defined therein)) at least 40,000
shares of Old Edge Common Stock, (iv) Old Edge merges or consolidates and Mr.
James D. Calaway and Mr. John E. Calaway, in the aggregate, do not have
control, as defined in the Securities Exchange Act, of the resulting entity, or
(v) any common stock of Old Edge is publicly traded. At least one shareholder
has previously taken the position that there has been a termination of such
provisions. Solely with respect to the shareholders' vote on the Merger,
Calaway Oil and Gas has agreed to waive its rights, if any, under such
provisions.
The Shareholders' Agreement also provides that KPC Interests, Inc., a company
wholly owned by Mr. James D. Calaway, has the right, under similar
circumstances, to direct the vote of Jamtex, Inc. The rights, if any, under the
Shareholders' Agreement of KPC Interests, Inc. to vote the shares held by
Jamtex, Inc. are waived solely with respect to the shareholders' vote on the
Merger.
The Raphael Voting Agreement provides that, with respect to 6578.73 shares of
Old Edge Common Stock transferred, in the aggregate, to Mr. Raphael and the
Trade Consultants, Inc. Pension Plan, Calaway Oil and Gas will retain voting
rights with respect to all matters presented to shareholders of Old Edge. Such
voting agreement terminates upon the occurrence of any of the events described
in (i), (ii), (iii), (iv) and (v), immediately above. The Raphael Voting
Agreement also provides that, for as long as legally permissible, Calaway Oil
and Gas will vote all shares owned by it, or with respect to which it holds
voting powers, for the election of Mr. Raphael as a director of Old Edge.
Solely with respect to the shareholders' vote on the Merger, Calaway Oil and
Gas has agreed to waive its rights, if any, under the Raphael Voting Agreement.
In several instances, shares of Old Edge Common Stock were transferred from
Calaway Oil and Gas, subject to the reservation of voting rights with respect
to such shares in favor of Calaway Oil and Gas. Solely with respect to the
shareholders' vote on the Merger, Calaway Oil and Gas has agreed to waive its
rights under all such agreements.
In several other instances, shares of Old Edge Common Stock have been
transferred from one holder of record to another, subject to the reservation of
voting rights. Consequently, in some cases, a holder of record of Old Edge
Common Stock may not have the right to vote on the Merger, notwithstanding the
waiver of voting rights, if any, by Calaway Oil and Gas and KPC Interests, Inc.
solely with respect to the shareholders' vote on the Merger. See "Security
Ownership of Certain Beneficial Owners and Management--Old Edge."
In the absence of voting agreements and the reservation of voting rights,
each director of Old Edge is elected annually by the shareholders and may be
removed and replaced, with or without cause, by shareholders holding a majority
of the Old Edge Common Stock. The Voting Agreements will terminate following
the Merger. Cumulative voting is prohibited by the Articles of Incorporation of
Old Edge.
Edge Group II. The business and affairs of Edge Group II are managed by the
general partners of Edge Group II, currently Mr. Sfondrini and Napamco. Unless
Mr. Andrews agrees to serve as general partner, Mr. Sfondrini and Napamco may
not withdraw without the consent of the partners whose capital contributions,
in the aggregate, represent at least 60% of the capital contributions made to
Edge Group II. A general partner may not sell, assign or otherwise transfer
such interest without receiving such consent. In connection with the Edge Group
II Exchange Offer, Mr. Sfondrini and Napamco seek the consent of the partners
of Edge Group II to the transfer to the Company of each of their general
partner interests in Edge Group II. Assuming such consent is received, the
Company will thereafter serve as the general partner of Edge Group II. The
limited partners of Edge Group II do not have the right to remove a general
partner.
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Gulfedge. The business and affairs of Gulfedge are managed by Old Edge, the
general partner of Gulfedge. Old Edge may not withdraw as general partner
without the consent of the partners whose capital contributions, in the
aggregate, represent at least 60% of the capital contributions made to Gulfedge
and may not sell, assign or otherwise transfer its interest without receiving
such consent. The limited partners of Gulfedge do not have the right to remove
the general partner.
Edge Group. As provided for in the Joint Venture Agreement, the business and
affairs of the Joint Venture are managed by Old Edge, as managing venturer,
subject to obtaining the consent of Edge Group II with respect to certain
actions. See "Information Concerning the Joint Venture." The Joint Venture
Agreement does not provide for the removal of the managing venturer.
VOTING RIGHTS
The Company. Under Delaware law and the Company's Certificate of
Incorporation, stockholders have voting rights with respect to (i) the election
of the relevant class of directors at annual stockholders' meetings, (ii) the
removal of directors for cause, (iii) certain mergers, consolidations and
exchanges involving the Company, (iv) the sale of all or substantially all of
the Company's assets other than in the ordinary course of business, (v) certain
business combinations involving related parties, (vi) the dissolution of the
Company and (vii) amendments to the Company's Certificate of Incorporation and
Bylaws. Each share of Common Stock entitles its holder to cast one vote on each
matter presented to stockholders. Stockholders may not act by written consent.
With respect to (i) and (ii), see "--Management"; with respect to (iii), (iv)
and (v), see "--Mergers and Other Fundamental Transactions"; with respect to
(vi), see "--Mergers and Other Fundamental Transactions" and "--Right to Compel
Dissolution"; and with respect to (vii), see "--Amendments to Organizational
Documents."
Old Edge. Under Texas law and Old Edge's Articles of Incorporation, and
subject to the various voting agreements described under "--Management,"
shareholders have voting rights with respect to (i) the annual election of
directors, (ii) the removal, with or without cause, and replacement of
directors, (iii) certain mergers and share exchanges involving Old Edge, (iv)
the sale of all or substantially all of the assets of Old Edge other than in
the regular course of business, (v) the dissolution of Old Edge and (vi)
amendments to Old Edge's Articles of Incorporation and bylaws. Each share of
Old Edge Common Stock entitles its holder to cast one vote on each matter
presented to shareholders. Shareholders of Old Edge may act without a meeting
only by unanimous written consent. With respect to (i) and (ii), see "--
Management"; with respect to (iii) and (iv), see "--Mergers and Other
Fundamental Transactions"; with respect to (v), see "--Mergers and Other
Fundamental Transactions" and "--Right to Compel Dissolution"; and with respect
to (vi), see "Amendments to Organizational Documents."
Edge Group II. Under Connecticut law and the Edge Group II Partnership
Agreement, limited partners have voting rights with respect to (i) certain
transfers of a general partner's interest, (ii) the merger of Edge Group II,
(iii) the dissolution of Edge Group II and (iv) amendments to the partnership
agreement. The affirmative vote of partners of Edge Group II whose aggregate
capital contributions represent at least 60% of the aggregate capital
contributions is required with respect to (i) above. A similar degree of
consent is required with respect to (iv) above, except in certain circumstances
when the consent of all of the partners is required. The affirmative vote of
all of the general partners and by limited partners who own at least two-thirds
of the interests in the profits of Edge Group II is required with respect to
(ii) above. The consent of all of the partners of Edge Group II is required
with respect to (iii) above. Partners may act by written consent in all of the
foregoing instances.
Gulfedge. Under Texas law and the Gulfedge Partnership Agreement, limited
partners have voting rights with respect to (i) certain transfers of a general
partner's interest, (ii) the dissolution of Gulfedge, and (iii) following
recommendation by the general partner, amendments to the Gulfedge Partnership
Agreement. The affirmative vote of partners of Gulfedge whose aggregate capital
contributions represent at least 60% of the aggregate capital contributions is
required with respect to (i) above. A similar degree of consent is required
with respect to (iii) above, except in certain circumstances when the consent
of all of the partners is required. The
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consent of all of the partners of Gulfedge is required with respect to (iii)
above. Partners may act by written consent in all of the foregoing instances.
Edge Group. The Joint Venture Agreement provides that it may be amended with
the consent of all participants therein. The Joint Venture Agreement provides
for Old Edge, as managing venturer, to make all decisions with respect to
operations of the business, subject to obtaining the approval of Edge Group II
with respect to certain matters. The Joint Venture Agreement does not otherwise
provide for voting rights of the participants.
SPECIAL MEETINGS
The Certificate of Incorporation of the Company provides that special
meetings of the stockholders of the Company may be called only by the Chairman
of the Board of Directors, the President or a majority of the Board of
Directors of the Company. Special meetings of shareholders of Old Edge may be
called by the Company's Chairman of the Board of Directors, the President, the
Board of Directors or holders of at least 10% of the shares entitled to vote at
the meeting. The laws of Connecticut and Texas, respectively, do not provide
for meetings, special or otherwise, of partners in the absence of such a
provision in the relevant partnership agreement. The Edge Group II and Gulfedge
Partnership Agreements make no provision for meetings of the partners, special
or otherwise. The Joint Venture Agreement and Texas law make no provision for
meetings, special or otherwise, of participants in the Joint Venture.
AMENDMENTS TO ORGANIZATIONAL DOCUMENTS
Amendments to the Certificate of Incorporation of the Company must be
approved by the board of directors and by a majority of all stockholders
entitled to vote and by a majority of all outstanding shares of any class whose
par value or number of authorized shares is increased or decreased or the
powers, preferences or special rights of the shares of such class would be
altered or changed thereby so as to affect them adversely. Amendments to the
Articles of Incorporation of Old Edge must be approved by the board of
directors and by the affirmative vote of the holders of at least two-thirds of
all outstanding shares. As Old Edge has only one class of stock authorized,
class voting provisions of Texas law are inapplicable. The Shareholders'
Agreement provides that, in the event that an amendment to the bylaws of Old
Edge is proposed to the shareholders thereof, Calaway Oil and Gas and Edge
Holding Company shall decide how to vote in writing ahead of time or both vote
their shares against such proposition. Amendments to each of the partnership
agreements of Edge Group II and Gulfedge must be approved by the general
partner and by partners who represent at least 60% of the aggregate capital
contributions, except for amendments to certain provisions of each such
agreement, which must be approved by all partners. Amendments to the Joint
Venture Agreement must be approved by all of the participants.
MERGERS AND OTHER FUNDAMENTAL TRANSACTIONS
The Company. Certain mergers, and a consolidation, dissolution or sale of all
or substantially all of the assets of the Company must be approved by the
holders of at least a majority of all outstanding capital stock entitled to
vote. Under Delaware law, stockholders of the surviving corporation in a merger
have no right to vote, except under limited circumstances, on the acquisition
by merger directly into the surviving corporation of companies that are
substantially smaller than the surviving corporation (i.e., where the amount of
the surviving corporation's common stock to be issued or delivered under the
plan of merger does not exceed 20% of the total shares outstanding immediately
prior to the acquisition). Dissolution of the Company must be approved by the
board of directors and holders of a majority of the outstanding capital stock
entitled to vote thereon.
Subject to certain exceptions, a publicly held Delaware corporation may not
engage in a business combination (including a merger) with any "interested
stockholder" for three years after such stockholder became an interested
stockholder unless (i) the interested stockholder acquired at least 85% of the
corporation's voting stock (excluding stock owned by directors who are also
officers and stock held in certain employee stock
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plans) in the transaction that resulted in the stockholder becoming an
interested stockholder or (ii) such business combination is approved by the
board of directors and at least 66 2/3% of the outstanding voting stock not
owned by the interested stockholder. An "interested stockholder" is generally
defined as any person or entity that owns 15% or more of the corporation's
voting stock. See "Description of Capital Stock of the Company."
Old Edge. Mergers and share exchanges involving Old Edge, sales of all or
substantially all of its assets not in the ordinary course of business and its
dissolution must generally be approved by the board of directors and by two-
thirds of all outstanding shares entitled to vote, except for (i) mergers
between a corporation and subsidiaries owned 90% or more by such corporation
and (ii) certain mergers in which the rights of holders are not significantly
altered. The Shareholders' Agreement provides that, if a matter is presented to
the shareholders of Old Edge requiring under Texas law the consent of 66 2/3%
of such shares, Calaway Oil and Gas and Edge Holding Company shall decide how
to vote in writing ahead of time or both vote their shares against such
proposition.
Edge Group II. The merger of Edge Group II with another limited partnership
requires the affirmative vote of all of the general partners and of limited
partners who own at least two-thirds of the interests in the profits of Edge
Group II. The dissolution of Edge Group II would require the consent of all of
the partners of Edge Group II.
Gulfedge. Under Texas law, a limited partnership may not merge unless the
relevant partnership agreement makes specific provision with respect thereto.
The Gulfedge Partnership Agreement has no provision concerning merger. The
dissolution of Gulfedge would require the consent of all of the partners of
Gulfedge.
Edge Group. The Joint Venture Agreement does not make any provision for the
merger or consolidation of the Joint Venture. The sale of all or substantially
all of the assets of the Joint Venture requires the consent of Old Edge and
Edge Group II. See "Information Concerning the Joint Venture." Dissolution
under circumstances other than as provided for in the Joint Venture Agreement
would require an amendment to the Joint Venture Agreement, to amend the term
thereof, consented to by all of the participants.
DIVIDENDS AND DISTRIBUTIONS
The Company and Old Edge. The Company does not expect to pay dividends on the
Common Stock in the foreseeable future. Dividends may be paid if, as and when
declared by the Board of Directors of the Company in its discretion, subject to
legal and contractual limitations. Old Edge does not expect to pay dividends on
its common stock in the foreseeable future. Dividends may be paid if, as and
when declared by the Board of Directors of Old Edge in its discretion, subject
to legal and contractual limitations.
Edge Group II and Gulfedge. Neither Edge Group II nor Gulfedge has paid cash
distributions. Neither Edge Group II nor Gulfedge expect to pay distributions
in the foreseeable future, unless and until they receive net cash from the
Joint Venture. Oil and gas properties will be distributed to Edge Group II and
Gulfedge at or prior to the end of the two year windup period. It is expected
that Edge Group II and Gulfedge would continue to hold these oil and gas
properties. Some revenues would be retained by Edge Group II and Gulfedge as
necessary for the operation of these oil and gas properties, and, if necessary,
for the further development of the properties. Any remaining net revenue would
generally be distributed to the respective partners of these partnerships.
The Edge Group II Partnership Agreement provides initially for the general
partners (in the aggregate) to be allocated 1% of all income, gains, losses,
deductions and distributions, with the remaining 99% of such items to be
allocated to the limited partners based on their relative capital accounts.
Such agreement further provides that, at such time as the limited partners, in
the aggregate, have recovered 150% of their capital contribution, the general
partners (in the aggregate) are to be allocated 25% of such items, with the
remaining 75% being allocated to the limited partners.
In the case of Edge Group II, the general partners have the right to be
reimbursed for all costs and expenses incurred in connection with such
partnership. In addition, the general partners, in the aggregate, have the
right to
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a management fee for each of the first five years of the partnership equal to
2% of the aggregate capital contributions of the limited partners. Thereafter,
the general partners, in the aggregate, are entitled to 3% of the cash flow of
the partnership as a management fee. The Gulfedge Partnership Agreement
provides that items of income, gain, losses, deductions and distributions be
allocated 1% to the general partner, with the remaining 99% of such items to be
allocated to the limited partners, based on their relative capital accounts.
Such agreement also provides that Gulfedge reimburse Old Edge for all
reasonable expenses and costs incurred in connection with the business of
Gulfedge. Old Edge does not have the right to receive any management fees or
other form of compensation. Limited partners generally have no right to compel
a partnership or the general partners to make distributions. See "--Liquidation
Rights."
Edge Group. The Joint Venture's initial sharing ratio, which determines the
allocation of net income and other items, as well as the allocation of
distributable cash, was approximately 29.1%, 67.3%, 2.3% and 1.3% for Old Edge,
Edge Group II, Gulfedge and Edge Group, respectively. Such ratio is subject to
two shifts as described under "Information Concerning the Joint Venture." The
Joint Venture Agreement provides that, subject to restrictions on distributions
provided for in debt instruments of the Joint Venture, the managing venturer,
shall, upon the demand of Edge Group II, as soon as practicable, but no less
frequently than annually, make distributions of one-half of the "excess net
cash flow," which is the annual net income of the Joint Venture less (i) 20% of
the book value of intangible assets and (ii) any amounts paid or anticipated to
be paid within the twelve months subsequent to the most recent determination of
net income. There have been no distributions to date and the covenants of the
Revolving Credit Facility restricted any such distributions of excess net cash
flow. It is not anticipated that any distributions will be made prior to the
beginning of the two-year windup period of the Joint Venture that commenced
with its December 1996 dissolution. During such windup period, substantially
all of the assets of the Joint Venture will be distributed to the venturers in
accordance with the applicable sharing ratios or as provided for in the Joint
Venture Agreement, as amended. The terms of the Joint Venture Agreement, as
amended, specifying the terms of such distributions are described under
"Information Concerning the Joint Venture."
LIQUIDATION RIGHTS
The Company and Old Edge. Upon liquidation, dissolution or winding up of the
affairs of either of the Company or Old Edge, such company's assets remaining
after provision for payment of creditors are distributable pro rata among the
holders of such company's common stock.
Edge Group II. Under the Edge Group II Partnership Agreement, property and
cash remaining upon liquidation after provision for payment for the
partnership's creditors are to be allocated 99% to the limited partners on the
basis of their capital contributions and 1% (in the aggregate) to the general
partners until the value of all prior distributions and such liquidating
distributions to the limited partners is equal to 150% of the limited partners'
capital contributions. Thereafter, distributions are allocated 75% to the
limited partners on the basis of their relative capital contributions and 25%
to the general partners.
Gulfedge. In a liquidation of Gulfedge, available cash and property would be
distributed in proportion to the respective capital accounts of the partners,
following provision for the contingent and other liabilities of the
partnership.
Edge Group. The Joint Venture Agreement contains lengthy provisions regarding
the allocation of debt and assets upon its dissolution and windup, which are
described under "Information Concerning the Joint Venture." Generally, such
provisions provide for the distribution of the assets of the Joint Venture to
its participants based on applicable sharing ratios.
LIMITED LIABILITY
Shares of Common Stock will be fully paid and nonassessable. Stockholders
generally will not have personal liability for obligations of the Company.
Shares of Old Edge Common Stock are fully paid and
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nonassessable. Shareholders generally do not have personal liability for
obligations of Old Edge. The limited partners of Edge Group II and Gulfedge
generally do not have personal liability for obligations of their respective
partnerships. The general partners of Edge Group II are generally jointly and
severally liable for obligations of Edge Group II. Under Texas law, Edge
Group's interest in the Joint Venture is a general partner interest and, as
such, Edge Group is jointly and severally liable, along with the other
participants in the Joint Venture, for obligations of the Joint Venture.
CONTINUITY OF EXISTENCE
Under Delaware law, the Company has perpetual existence. The Articles of
Incorporation of Old Edge provide for perpetual existence. The Edge Group II
Partnership Agreement provides for such partnership to continue in existence
until December 31, 2025, unless earlier terminated or extended in accordance
with such agreement. The Gulfedge Partnership Agreement provides for such
partnership to continue in existence until December 31, 2020, unless earlier
terminated or extended in accordance with such agreement. The Joint Venture
Agreement, as amended, provides for the Joint Venture to continue in existence
until December 31, 1996, unless earlier terminated or extended in accordance
with such agreement. A Joint Venture windup period of two years is anticipated.
FINANCIAL REPORTING
Following the Offering, the Company will be subject to the reporting
requirements of the Exchange Act and file annual and quarterly reports
thereunder. None of Old Edge, Edge Group II, Gulfedge or the Joint Venture is
subject to the reporting requirements of the Exchange Act. Pursuant to the
Joint Venture Agreement, Old Edge prepares and delivers to Edge Group II
certain periodic and annual financial reports and budgets. In addition, the
Joint Venture Agreement requires the Company, as the managing venturer, to
deliver annual and quarterly financial reports to all participants in the Joint
Venture.
REDEMPTION
None of the Common Stock or the partnership interests in Edge Group II,
Gulfedge or the Joint Venture are subject to mandatory redemption by either the
holder or issuer. Generally, the Old Edge Common Stock is not subject to
mandatory redemption by either the holder or Old Edge. A shareholder of Old
Edge has the right to require Old Edge to purchase its 5,263 shares of Old Edge
Common Stock at a formula price at any time before March 31, 1998. See "Certain
Transactions--RIMCO Interests."
CONVERSION RIGHTS
None of the Common Stock, the Old Edge Common Stock or the partnership
interests in Edge Group II, Gulfedge or the Joint Venture are convertible into
any other securities.
RIGHT TO COMPEL DISSOLUTION
Stockholders of the Company may authorize dissolution without prior action by
the board of directors only by unanimous consent of all stockholders.
Shareholders of Old Edge may compel the dissolution of the corporation by
unanimous written consent. The limited partners of each of Edge Group II and
Gulfedge may not compel the dissolution of such partnership absent the consent
of all general partners of such partnership. Dissolution of the Joint Venture
would require the consent of all of its participants.
LIQUIDITY, MARKETABILITY AND RESTRICTIONS ON TRANSFER
The Company. The Common Stock will be freely transferrable and application
has been made for listing the Common Stock on the Nasdaq National Market. As
required by the Underwriters as a condition to the Offering, the Bylaws of the
Company prohibit persons receiving shares of Common Stock in the Combination
Agreement
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Transactions from selling any of their shares for a period of at least 180 days
after the completion of the Offering. See "Description of Capital Stock of the
Company."
Old Edge, Edge Group II and Gulfedge. There is no public market for any of
the outstanding shares of Old Edge, or the partnership interests of Edge Group
II, Gulfedge and the Joint Venture. Because such shares and partnership
interests are not registered under the Securities Act or under the laws of any
state, such shares and partnership interests may not be transferred without
registration unless an exemption from all applicable registration requirements
is available. In addition, the transfer or assignment of limited partner
interests in each of Edge Group II and Gulfedge is prohibited without the
consent of the general partner of such partnership. These consents have been
obtained for the transfers pursuant to the Combination Agreement Transactions.
A limited partner of either of Edge Group II or Gulfedge may assign its rights
to distributions pursuant to its partnership interest, without the consent of
the general partner thereof.
Edge Group. The sale, assignment, transfer or encumbrance of interests in the
Joint Venture requires the consent of all of the other participants in the
Joint Venture. However, a participant in the Joint Venture may pledge its right
to up to one-half of the revenue arising from its interest, subject to certain
conditions. The consent of each of the other members of the Joint Venture: Edge
Group II, Old Edge and Gulfedge, has been obtained with respect to the proposed
transfer of Edge Group's Joint Venture interest to the Company.
CERTAIN LEGAL RIGHTS OF SECURITYHOLDERS AND LIMITATIONS ON LIABILITY OF
MANAGEMENT
The Company. Delaware law affords stockholders of a corporation the right to
institute legal action on behalf of the corporation (a shareholder derivative
action) to recover damages from a third party or a director when the board of
directors of such corporation has failed to institute an action against third
parties or directors of the corporation. In addition, a stockholder may
institute legal action on behalf of himself or all other similarly situated
shareholders (a class action) to recover damages from directors for violations
of their fiduciary duties. Stockholders may also have rights to bring actions
in federal courts to enforce federal rights.
Under Delaware law, a corporation's charter or certificate of incorporation
may contain a provision which, subject to the limitations described below,
would limit or eliminate a director's personal liability to the corporation or
its shareholders for monetary damages for breach of his or her fiduciary duty.
Delaware law prohibits the limitation of liability of a director (i) for
breaches of the duty of loyalty to the corporation or its stockholders, (ii)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) for transactions from which the director
derived an improper personal benefit or (iv) for the payment of unlawful
dividends or expenditure of funds for unlawful stock purchase or redemptions.
The Company's Certificate of Incorporation eliminates liability for monetary
damages for breach of the director's fiduciary duty of care to the fullest
extent permitted under Delaware law.
Delaware law contains provisions setting forth conditions under which a
corporation may indemnify its directors and officers. Delaware law generally
provides for indemnification if the person acted in good faith and in a manner
he or she reasonably believed to be in, or in some cases at least not opposed
to, the best interests of the corporation and, with respect to any criminal
action or proceeding, had no reasonable cause to believe the conduct was
unlawful. Under Delaware law, indemnification of directors and officers is
permissive except that an officer or director of a corporation must be
indemnified against expenses if he or she is successful on the merits or
otherwise in defense of any action, suit or proceeding to which he or she was a
party by reason of the fact that he or she is or was a director or officer of
the corporation. A corporation may not indemnify, except in certain cases for
expenses only, a director or officer of the corporation in connection with a
proceeding by or in the right of the corporation in which the director or
officer was adjudged liable to the corporation. Delaware law permits
indemnification in such a case if the Delaware Court of Chancery or the court
in which such action or suit was brought determines that the person is fairly
and reasonably entitled to indemnification ("Adjudicated Indemnification").
Reasonable expenses may be indemnified in advance under certain circumstances
under Delaware law. The Company's Bylaws provide that the Company shall
indemnify and advance expenses to its directors and executive officers to the
fullest extent permitted by law. The Bylaws include related provisions
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meant to facilitate the indemnitee's receipt of such benefits. In addition, the
Company intends to enter into indemnification agreements with its directors and
executive officers and purchase directors' and officers' liability insurance.
Old Edge. The rights of shareholders under Texas law to bring a derivative
action or an action for breach of fiduciary duty are analogous to those under
Delaware law. Texas law and the Articles of Incorporation of Old Edge prohibit
the limitation of liability of a director for (1) a breach of the director's
duty of loyalty to the corporation or its shareholders or members; (2) an act
or omission not in good faith that constitutes a breach of duty of the director
to the corporation or an act or omission that involves intentional misconduct
or a knowing violation of the law; (3) a transaction from which the director
received an improper benefit, whether or not the benefit resulted from an
action taken within the scope of the director's office; or (4) an act or
omission for which the liability of a director is expressly provided by an
applicable statute.
Texas law has provisions similar to that of Delaware with respect to
permissible, mandatory and prohibited indemnification, except that no exception
analogous to Adjudicated Indemnification exists and under Texas law, a
corporation also may not indemnify a director or officer in connection with a
proceeding in which such a person was found liable on the basis that personal
benefit was improperly received by such person. Reasonable expenses may also be
indemnified for in advance under certain circumstances under Texas law. The Old
Edge Bylaws provide that Old Edge shall indemnify and advance expenses to
persons who were or are directors or officers of Old Edge under all
circumstances under which indemnification is permissible under current Texas
law.
Edge Group II and Gulfedge. Under Texas and Connecticut law, a limited
partner may bring an action against a general partner, upon a showing of the
breach of its fiduciary duty, to recover his capital contribution or to seek an
accounting and dissolution of the partnership. Rights of action against a
general partner by or on behalf of the limited partners, seeking damages or
other relief for any breach of these duties are provided for in the partnership
agreements of each of Edge Group II and Gulfedge.
The partnership agreements of each of Edge Group II and Gulfedge provide that
the partnership will indemnify a general partner thereof against any loss or
liability resulting from good faith acts or omission to act on behalf of the
partnership and, in any event, to the extent permissible under the laws of the
State of Connecticut or Texas, as the case may be. The partnership agreements
of Edge Group II and Gulfedge provide that a general partner thereof shall not
have any liability for any failure or misfeasance on his part, other than a
willful failure or misfeasance with respect to obligations under such
agreement. Each such partnership agreement also specifically provides that,
whenever a conflict of interests exists between the general partner and the
partnership or a limited partner, the general partner shall resolve such
conflict of interest, take such action or provide such terms considering, in
each case, the relative interests of each party to such conflict, agreement,
transaction or situation and the benefits and burdens relating to such
interest, any customary or accepted industry practices, and any applicable
generally accepted accounting or engineering practices or principles, and in
the absence of bad faith by the general partner, the resolution, action or
terms so made, taken or provided by the general partner shall not constitute a
breach of such partnership agreement, or any other agreement contemplated
therein or a breach of any standard of care or duty imposed in such partnership
agreement or under Texas or Connecticut law, as the case may be, or any other
applicable law, rule or regulation.
Edge Group. Generally under Texas law, one general partner may sue another
for breach of fiduciary duty. The Joint Venture Agreement provides that no
venturer shall have any liability to the Joint Venture or to the other
venturers for its negligent conduct, and the negligence of a venturer shall not
be deemed a breach by a venturer of its fiduciary obligations to the Joint
Venture or any other venturer.
The Joint Venture Agreement provides that the Joint Venture shall indemnify
(to the extent of the assets of the Joint Venture and without recourse to any
of the venturers) any venturer with respect to any proceeding involving an
alleged cause of action for liability or damages arising out of the ordinary
and proper conduct of the business of the Joint Venture or, on a limited basis,
the conduct of another business in which the Joint Venture has an economic
interest. Such agreement provides that the use of the term "proper" does not
exclude
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indemnification for instances involving the negligence, breach of trust or
fiduciary duty and specifically provides that the indemnification provision
shall apply notwithstanding the negligence of the venturer seeking
indemnification. In any action in which the Joint Venture sues any of the
venturers or in which one venturer sues any other venturer or the Joint Venture
for any reason arising out of or connected with the Joint Venture Agreement,
the losing party is required to bear the fees and expenses of the prevailing
party. The Joint Venture Agreement provides for the advancement of expenses
under certain circumstances. The Joint Venture Agreement, as amended, provides
for indemnification of Old Edge in connection with the management or operation
of certain properties.
RIGHT TO LIST OF HOLDERS; INSPECTION OF BOOKS AND RECORDS
Under Delaware law, any stockholder of the Company may, upon written demand
and for a proper purpose, inspect and copy the Company's stock ledger, a list
of its stockholders, and its other books and records. Under Texas law, upon
written request, at reasonable times and for a proper purpose, any person who
has been a shareholder for at least six months or is the holder of at least 5%
of the outstanding shares of capital stock of Old Edge has the right to examine
and copy relevant books of account, minutes and share transfer records,
including a list of current shareholders. Under Texas and Connecticut law, each
partner of Gulfedge or Edge Group II, respectively, has the right, upon written
request, to inspect and copy, among other things, a list of the partners with
their respective addresses and ownership interests, the limited partnership's
tax returns, and the books and records of account. Under Texas law and the
terms of the Joint Venture Agreement, the financial books and records and tax
returns are available at the Joint Venture's principal office for inspection
and copying by any venturer.
DISSENTERS' RIGHTS OF APPRAISAL
The Company and Old Edge. Under Texas law, any shareholder may dissent from
mergers and sales of substantially all of the corporation's assets which
require shareholder consent, except that a shareholder shall not have the right
to dissent from any plan of merger in which there is a single surviving or new
domestic or foreign corporation, or from any plan of exchange, if (i) the
shares held by shareholders are listed on a national securities exchange, or
are held of record by not less than 2,000 holders, on the record date fixed to
determine the shareholders entitled to vote on the plan of merger or the plan
of exchange, and (2) the shareholder is not required by the terms of the plan
of the merger or the plan of exchange to accept for his shares any
consideration other than (a) shares of a corporation that, immediately after
the effective time of the merger or exchange, will be part of a class or series
of shares of which are (i) listed, or authorized for listing upon official
notice of issuance, on a national securities exchange or (ii) held of record by
not less than 2,000 holders, and (b) cash in lieu of fractional shares
otherwise entitled to be received. Unless otherwise provided in the certificate
of incorporation, under Delaware law stockholders are generally not entitled to
dissenters' appraisal rights upon a sale of all or substantially all of the
assets of the corporation not made in the usual and regular course of its
business, as they are under Texas law. Stockholders of a Delaware corporation
are entitled to similar dissenters' rights; however, in certain circumstances,
under Delaware law no dissenters' appraisal rights are available to the holders
of shares of any class or series of stock of a constituent corporation in a
merger or consolidation that, at the record date fixed to determine the
stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the merger or consolidation, were either (i) listed on
a national securities exchange or (ii) held of record by more than 2,000
stockholders. Under Delaware law, stockholders of a constituent corporation
surviving a merger are not entitled to appraisal rights if the merger did not
require stockholder approval. In addition, under Delaware law, a stockholder is
entitled to appraisal rights under the foregoing circumstances if such
stockholder is required by the terms of an agreement of merger or consolidation
to accept for such shares anything other than (a) shares of stock of the
corporation surviving or resulting from such merger or consolidation, (b)
shares of stock of any other corporation which at the effective date of the
merger or consolidation will be either listed on a national securities exchange
or held of record by more than 2,000 shareholders, (c) cash in lieu of
fractional shares of the corporations described in the foregoing clauses (a)
and (b), or (d) any combination of the foregoing.
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Edge Group II. Neither Connecticut law nor the Edge Group II Partnership
Agreement provides a mechanism for partners of Edge Group II to seek a judicial
determination of the fair value of their interests in the event of a merger,
share exchange or sale of assets.
Gulfedge and Edge Group. None of Texas law, the Gulfedge Partnership
Agreement or the Joint Venture Agreement provides a mechanism for the partners
of Gulfedge or the Joint Venture, respectively, to seek a judicial
determination of the fair value of their interests in the event of a merger,
share exchange or sale of assets.
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DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
The Company's authorized capital stock consists of 40,000,000 shares of
Common Stock and 10,000,000 shares of Preferred Stock. Following consummation
of the Offering and the Combination Transactions there will be approximately
6,700,000 shares of Common Stock outstanding (assuming the over-allotment
option of the underwriters for the Offering is not exercised and that all
parties accept shares of Common Stock in the Combination Transactions), and no
shares of Preferred Stock will be outstanding. The following summary does not
purport to be complete, and reference is made to the more detailed provisions
of the Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation") and Bylaws, which are filed as exhibits to the registration
statement of which this Joint Proxy and Consent Solicitation
Statement/Prospectus is a part.
COMMON STOCK
The Common Stock possesses ordinary voting rights for the election of
directors and in respect of other corporate matters, each share being entitled
to one vote. There are no cumulative voting rights, meaning that the holders of
a majority of the shares voting for the election of directors can elect all the
directors if they choose to do so. The Common Stock carries no preemptive
rights and is not convertible, redeemable or assessable, or entitled to the
benefits of any sinking fund. The holders of Common Stock are entitled to
dividends in such amounts and at such times as may be declared by the Board of
Directors out of funds legally available therefor. See "Dividend Policy" for
information regarding dividend policy.
PREFERRED STOCK
The Board of Directors of the Company is empowered, without approval of the
stockholders, to cause shares of Preferred Stock to be issued in one or more
series, with the numbers of shares of each series to be determined by it. The
Board of Directors is authorized to fix and determine the powers, designations,
preferences and relative, participating, optional or other rights (including,
without limitation, voting powers, full or limited, preferential rights to
receive dividends or assets upon liquidation, rights of conversion or exchange
into Common Stock, Preferred Stock of any Series or other securities,
redemption provisions and sinking fund provisions) between series and between
the Preferred Stock or any series thereof and the Common Stock, and the
qualifications, limitations or restrictions of such rights.
Although the Company has no present intention to issue shares of Preferred
Stock, the issuance of shares of Preferred Stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of Preferred Stock might
impede a business combination by including class voting rights that would
enable the holders to block such a transaction; or such issuance might
facilitate a business combination by including voting rights that would provide
a required percentage vote of the stockholders. In addition, under certain
circumstances, the issuance of Preferred Stock could adversely affect the
voting power of the holders of the Common Stock. Although the Board of
Directors is required to make any determination to issue such stock based on
its judgment as to the best interests of the stockholders of the Company, the
Board of Directors could act in a manner that would discourage an acquisition
attempt or other transaction that some or a majority of the stockholders might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then market price of such stock. The Board of
Directors does not at present intend to seek stockholder approval prior to any
issuance of currently authorized stock, unless otherwise required by law or the
rules of any market on which the Company's securities are traded.
OTHER MATTERS
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware
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law, directors are accountable to corporations and their stockholders for
monetary damages for conduct constituting gross negligence in the exercise of
their duty of care. Delaware law enables corporations to limit available relief
to equitable remedies such as injunction or rescission. The Certificate of
Incorporation limits the liability of directors of the Company to the Company
or its stockholders to the fullest extent permitted by Delaware law.
Specifically, directors of the Company will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
for unlawful payments of dividends or unlawful stock repurchases or redemptions
as provided in Section 174 of the Delaware General Corporation Law or (iv) for
any transaction from which the director derived an improper personal benefit.
The inclusion of this provision in the Certificate of Incorporation may have
the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefited the Company and its
stockholders. The Company's Bylaws provide indemnification to the Company's
officers and directors and certain other persons with respect to certain
matters, and the Company has entered into agreements with each of its directors
providing for indemnification with respect to certain matters.
The Certificate of Incorporation provides that stockholders may act only at
an annual or special meeting of stockholders and may not act by written
consent. The Bylaws provide that special meetings of the stockholders can be
called only by the Chairman of the Board, the President or by a majority of the
Board of Directors of the Company.
The Certificate of Incorporation provides that the Board of Directors shall
consist of three classes of directors serving for staggered three-year terms.
As a result, approximately one-third of the Company's Board of Directors will
be elected each year. The classified board provision could prevent a party who
acquires control of a majority of the outstanding voting stock of the Company
from obtaining control of the Board of Directors until the second annual
stockholders' meeting following the date the acquiror obtains the controlling
interest. See "Management."
The Certificate of Incorporation provides that the number of directors will
be no greater than 12 and no less than three. The Certificate of Incorporation
further provides that directors may be removed only for cause (as defined in
the Certificate of Incorporation), and then only by the affirmative vote of the
holders of at least a majority of all outstanding voting stock entitled to
vote. This provision, in conjunction with the provisions of the Certificate of
Incorporation authorizing the Board of Directors to fill vacant directorships,
will prevent stockholders from removing incumbent directors without cause and
filling the resulting vacancies with their own nominees. The Company's Bylaws
also provide that the Board of Directors will include at least a majority of
directors who are not employees of the Company. In addition, the Bylaws provide
that the Compensation Committee will consist solely of members who are not
employees of the Company and the Audit Committee will include at least a
majority of members who are not employees of the Company.
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years following
the date such person became an interested stockholder unless (i) before such
person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder became
an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide employees
with the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer); or (iii)
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<PAGE>
following the transaction in which such person became an interested
stockholder, the business combination was approved by the board of directors of
the corporation and authorized at a meeting of stockholders by the affirmative
vote of the holders of two-thirds of the outstanding voting stock of the
corporation not owned by the interested stockholder. Under Section 203, the
restrictions described above also do not apply to certain business combinations
proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving the
corporation and a person who had not been an interested stockholder during the
previous three years or who became an interested stockholder with the approval
of a majority of the corporation's directors, if such extraordinary transaction
is approved or not opposed by a majority of the directors who were directors
prior to any person becoming an interested stockholder during the previous
three years or were recommended for election or elected to succeed such
directors by a majority of such directors. No stockholder will be subject to
the restrictions of Section 203 with respect to the Common Stock as a result of
the Combination Transactions.
STOCKHOLDER PROPOSALS
The Company's Bylaws contain provisions requiring that advance notice be
delivered to the Company of any business to be brought by a stockholder before
an annual meeting of stockholders, and providing for certain procedures to be
followed by stockholders in nominating persons for election to the Board of
Directors of the Company. Generally, such advance notice provisions provide
that written notice must be given to the Secretary of the Company by a
stockholder (i) in the event of business to be brought by a stockholder before
an annual meeting, not less than 45 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders of the Company (with
certain exceptions if the date of the annual meeting is different by more than
specified amounts from the anniversary date) and (ii) in the event of
nominations of persons for election to the Board of Directors by any
stockholder, (a) with respect to an election to be held at the annual meeting
of stockholders, not less than 45 days prior to the anniversary date of the
immediately preceding annual meeting of stockholders of the Company (with
certain exceptions if the date of the annual meeting is different by more than
specified amounts from the anniversary date) and (b) with respect to an
election to be held at a special meeting of stockholders for the election of
directors, not later than the close of business on the tenth day following the
day on which notice of the date of the special meeting was mailed to
stockholders or public disclosure of the date of the special meeting was made,
whichever first occurs. Such notice must set forth specific information
regarding such stockholder and such business or director nominee, as described
in the Company's Bylaws.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Securities
Transfer & Trust, Inc.
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PLAN OF DISTRIBUTION
This Joint Proxy and Consent Solicitation Statement/Prospectus covers the
issuance of the shares of Common Stock issued in the Combination Agreement
Transactions. This Joint Proxy and Consent Solicitation Statement/Prospectus
also covers the transfer by the general partners of Edge Group II of a portion
of the shares of Common Stock received by the general partners of Edge Group II
in exchange for the general partner interests in Edge Group II (i) to Mr. James
C. Calaway as the lender and Southwest Minerals, Inc. Defined Pension Plan,
Calaway Petroleum Int., Inc., Mr. Michael Gottesman, Antwerp Diamond
Distributors, Inc., Geiger Energy and Technology Employee Retirement Fund and
Mr. Joel Davis as the participants (collectively with Mr. James C. Calaway, the
"1991 Loan Participants") under a Loan Agreement dated April 7, 1991 between
the general partners of Edge Group II and Mr. James C. Calaway (the "1991 Loan
Agreement"); (ii) to Mr. James C. Calaway as the lender and Ms. Toby Gottesman
as the participant (collectively with Mr. James C. Calaway, the "1993 Loan
Participants") pursuant to a Loan Agreement dated October 1, 1993 between the
general partners of Edge Group II and Mr. James C. Calaway, as amended (the
"1993 Loan Agreement"); (iii) to the 1993 Loan Participants pursuant to the
Addendum to Loan Agreement dated April 26, 1994 (the "Addendum to the 1993 Loan
Agreement") by and among the General Partners and Mr. James C. Calaway as the
lender thereunder; and (iv) to Mr. David B. Benedict pursuant to a Loan
Agreement dated February 17, 1993, as amended on March 4, 1996 (the "Benedict
Agreement"), between the general partners of Edge Group II and Mr. Benedict.
Under the 1991 Loan Agreement, the 1991 Loan Participants are each entitled to
receive (i) one-half of the rights of the general partners of Edge Group II to
receive revenues and distributions plus one-half of the management fee under
the Edge Group II Partnership Agreement, multiplied by (ii) a fraction (A) the
numerator of which is an amount equal to the total amount of the loan
outstanding under the 1991 Loan Agreement on July 15, 1991 with respect to each
1991 Loan Participant ($80,508.92 for Mr. James C. Calaway; $156,041.18 for
Southwest Minerals Inc. Defined Pension Plan; $286,075.49 for Calaway Petroleum
Int., Inc.; $83,231.96 for Mr. Michael Gottesman; $62,416.47 for Antwerp
Diamond Distributors; $62,936.61 for Geiger Energy and Technology Employee
Retirement Fund; and $24,966.59 for Mr. Joel Davis) divided by $60,500 (the
amount initially contributed by each limited partner of Edge Group II with
respect to each Edge Group II Unit) and (B) the denominator of which is 189
(the total number of outstanding Edge Group II Units). In the event of a
transfer of the general partner interests in Edge Group II, the 1991 Loan
Participants are each entitled to receive a portion of the proceeds of such
transfer equal to the total amount of such proceeds multiplied by one-half of
the fraction referred to in clause (ii) of the preceding sentence. Under the
1993 Loan Agreement, the 1993 Loan Agreement Participants are each entitled to
receive an amount equal to (i) the net income after payout of Edge Group II
(i.e., after an amount equal to 150% of the total amount contributed by all
limited partners of Edge Group II has been distributed to the limited partners
of Edge Group II), payable out of the after payout interest of the general
partners of Edge Group II, multiplied by (ii) the product of (A) an amount
equal to the total amount loaned under the 1993 Loan Agreement with respect to
each 1993 Loan Agreement Participant ($150,000 for Mr. James C. Calaway and
$25,000 for Ms. Toby Gottesman) divided by the total amount loaned under the
1993 Loan Agreement ($175,000), multiplied by (B) 0.381344%. In the event of a
transfer of the general partner interests in Edge Group II, the 1993 Loan
Agreement Participants are each entitled to receive a portion of the proceeds
of such transfer equal to (i) the total amount of such proceeds, minus the
Payout Amount, minus the Management Fee Amount, multiplied by (ii) four,
multiplied by (iii) the product referred to in clause (ii) of the preceding
sentence. Under the Addendum to the 1993 Loan Agreement, Mr. James C. Calaway
is entitled to receive an amount equal to (i) the net income after payout of
Edge Group II, payable out of the after payout interest of the general partners
of Edge Group II, multiplied by (ii) 0.245196%. In the event of a transfer of
the general partner interests in Edge Group II, Mr. James C. Calaway is
entitled to receive a portion of the proceeds of such transfer equal to (i) the
total amount of such proceeds, minus the Payout Amount, minus the Management
Fee Amount, multiplied by (ii) four, multiplied by (iii) 0.245196%. Under the
Benedict Agreement, Mr. Benedict is entitled to receive an amount equal to the
product of (i) 1.063830% multiplied by (ii) the amount distributed with respect
to the general partner interest in Edge Group II with respect to their after
payout interest in Edge Group II. In the event of a transfer of the general
partner interests in Edge Group II, Mr. Benedict is entitled to receive a
portion of the proceeds of such transfer equal to (i) the total amount of such
proceeds, minus the Payout Amount, minus the Management Fee Amount, multiplied
by (ii) 1.063830%.
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Assuming an IPO price in the Offering of $16.00 per share of Common Stock,
the general partners of Edge Group II will transfer (i) 5,838 shares of Common
Stock to Mr. James C. Calaway pursuant to the 1991 Loan Agreement, the 1993
Loan Agreement and the Addendum to the 1993 Loan Agreement, (ii) 2,468 shares
of Common Stock to Southwest Minerals Inc. Defined Pension Plan pursuant to the
1991 Loan Agreement, (iii) 4,524 shares of Common Stock to Calaway Petroleum
Int., Inc. pursuant to the 1991 Loan Agreement, (iv) 1,316 shares of Common
Stock to Mr. Michael Gottesman pursuant to the 1991 Loan Agreement, (v) 987
shares of Common Stock to Antwerp Diamond Distributors pursuant to the 1991
Loan Agreement, (vi) 995 shares of Common Stock to Geiger Energy and Technology
Employees Retirement Fund pursuant to the 1991 Loan Agreement, (vii) 395 shares
of Common Stock to Mr. Joel Davis pursuant to the 1991 Loan Agreement, (viii)
435 shares of Common Stock to Ms. Toby Gottesman pursuant to the 1993 Loan
Agreement and (ix) 2,122 shares of Common Stock to Mr. Benedict pursuant to the
Benedict Agreement.
No commissions, fees or other compensation will be paid in connection with
the transfer of such shares to the lenders. The expenses of such transfer will
be paid by the Company.
The Edge Group II Exchange Offer, the Gulfedge Exchange Offer and the
Purchase Offer are not being made to, nor will tenders be accepted from or on
behalf of, partners of Edge Group II or Gulfedge or Edge Group in any
jurisdiction in which the making of the Edge Group II Exchange Offer, the
Gulfedge Exchange Offer and the Purchase Offer or the acceptance thereof would
not be in compliance with the laws of such jurisdiction. However, the Company
may, at its discretion, take such action as it may deem necessary to make the
Edge Group II Exchange Offer, the Gulfedge Exchange Offer and the Purchase
Offer in any such jurisdiction and extend the Edge Group II Exchange Offer, the
Gulfedge Exchange Offer and the Purchase Offer to partners of Edge Group II or
Gulfedge or Edge Group in such jurisdiction. In any jurisdiction where
securities or blue sky laws require the Edge Group II Exchange Offer, the
Gulfedge Exchange Offer and the Purchase Offer to be made by a licensed broker
or dealer, the Edge Group II Exchange Offer, the Gulfedge Exchange Offer and
the Purchase Offer shall be deemed to be made on behalf of the Company by one
or more registered brokers or dealers licensed under the laws of such
jurisdiction.
No person has been authorized to give any information or make any
representation on behalf of the Company not contained in this Joint Proxy and
Consent Solicitation Statement/Prospectus or in the Letter of Transmittal and,
if given or made, such information or representation must not be relied upon as
having been authorized.
LEGAL MATTERS
Certain legal matters in connection with the shares of Common Stock offered
hereby will be passed upon for the Company by Baker & Botts, L.L.P., Houston,
Texas. The federal income tax consequences of the Combination Agreement
Transactions will be passed upon for the Company by Baker & Botts, L.L.P.,
except the federal income tax consequences of the receipt of the GP's
Management Fee Shares will be passed upon by Brauner Baron Rosenzweig & Klein,
L.L.P.
156
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EXPERTS
The Supplementally Combined Financial Statements of Old Edge and the
Financial Statements with respect to each of Old Edge, Edge Group II, Gulfedge
and the Joint Venture as of September 30, 1996, December 31, 1995 and 1994, for
the nine month period ended September 30, 1996 and for each of the three years
in the period ended December 31, 1995 and the Balance Sheet of the Company as
of December 3, 1996, each of which is included in this Joint Proxy and Consent
Solicitation Statement/Prospectus, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and have been
so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The letter report of Ryder Scott included as Annex B to this Joint Proxy and
Consent Solicitation Statement/Prospectus and certain information with respect
to the Company's, the Joint Venture's, Old Edge's, Edge Group II's, Edge
Group's and Gulfedge's oil and natural gas reserves derived therefrom have been
included herein in reliance upon such firm as experts with respect to such
matters.
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements of
the Exchange Act. The Company has filed a Registration Statement on Form S-4
(the "Form S-4 Registration Statement") under the Securities Act with the
Commission with respect to the Combination Agreement Transactions. The Company
has also filed a Registration Statement on Form S-1 (the "Form S-1 Registration
Statement") under the Securities Act with the Commission with respect to the
Offering. This Joint Proxy and Consent Solicitation Statement/Prospectus, filed
as part of the Form S-4 Registration Statement, does not contain all of the
information set forth in the Form S-4 Registration Statement or the exhibits
and schedules thereto in accordance with the rules and regulations of the
Commission, and reference is hereby made to such omitted information.
Statements made in this Joint Proxy and Consent Solicitation
Statement/Prospectus concerning any document filed as an exhibit to the Form S-
4 Registration Statement are not necessarily complete, and in each instance
reference is made to such exhibit for a complete statement of its provisions.
The Form S-4 Registration Statement, the Form S-1 Registration Statement and
the exhibits and schedules thereto may be inspected, without charge, at the
public reference facilities of the Commission at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
its regional offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and at 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of all or any portion of the Form S-4 Registration Statement
and the Form S-1 Registration Statement can be obtained at prescribed rates
from the Public Reference Section of the Commission at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The
Commission maintains an Internet web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission (http://www.sec.gov).
157
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GLOSSARY OF CERTAIN INDUSTRY TERMS
The definitions set forth below shall apply to the indicated terms as used in
this Joint Proxy and Consent Solicitation Statement/Prospectus. All volumes of
natural gas referred to herein are stated at the legal pressure base of the
state or area where the reserves exist and at 60 degrees Fahrenheit and in most
instances are rounded to the nearest major multiple.
After Payout. With respect to an oil or gas interest in a property, refers to
the time period after which the costs to drill and equip a well have been
recovered.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
Bbls/d. Stock tank barrels per day.
Bcf. Billion cubic feet.
Bcfe. Billion cubic feet equivalent, determined using the ratio of six Mcf of
natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Before Payout. With respect to an oil or gas interest in a property, refers
to the time period before which the costs to drill and equip a well have been
recovered.
Completion. The installation of permanent equipment for the production of oil
or gas or, in the case of a dry hole, the reporting of abandonment to the
appropriate agency.
Developed acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
Development well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
Dry hole or well. A well found to be incapable of producing hydrocarbons in
sufficient quantities such that proceeds from the sale of such production
exceed production expenses and taxes.
Exploratory well. A well drilled to find and produce oil or gas reserves not
classified as proved, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir or to extend a known reservoir.
Farm-in or farm-out. An agreement whereunder the owner of a working interest
in an oil and natural gas lease assigns the working interest or a portion
thereof to another party who desires to drill on the leased acreage. Generally,
the assignee is required to drill one or more wells in order to earn its
interest in the acreage. The assignor usually retains a royalty or reversionary
interest in the lease. The interest received by an assignee is a "farm-in"
while the interest transferred by the assignor is a "farm-out."
Field. An area consisting of a single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.
Finding costs. Costs associated with acquiring and developing proved oil and
natural gas reserves which are capitalized by the Company pursuant to generally
accepted accounting principles, including all costs involved in acquiring
acreage, geological and geophysical work and the cost of drilling and
completing wells.
Gross acres or gross wells. The total acres or wells, as the case may be, in
which a working interest is owned.
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MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.
MBbls/d. One thousand barrels of crude oil or other liquid hydrocarbons per
day.
Mcf. One thousand cubic feet.
Mcf/d. One thousand cubic feet per day.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.
MMcf. One million cubic feet.
MMcf/d. One million cubic feet per day.
MMcfe. One million cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids,
which approximates the relative energy content of crude oil, condensate and
natural gas liquids as compared to natural gas. Prices have historically been
higher or substantially higher for crude oil than natural gas on an energy
equivalent basis.
Net acres or net wells. The sum of the fractional working interests owned in
gross acres or gross wells.
Normally pressured reservoirs. Reservoirs with a formation-fluid pressure
equivalent to 0.465 psi per foot of depth from the surface. For example, if the
formation pressure is 4,650 psi at 10,000 feet, then the pressure is considered
to be normal.
Over-pressured reservoirs. Reservoirs subject to abnormally high pressure as
a result of certain types of subsurface formations.
Petrophysical study. Study of rock and fluid properties based on well log and
core analysis.
Present value. When used with respect to oil and natural gas reserves, the
estimated future gross revenue to be generated from the production of proved
reserves, net of estimated production and future development costs, using
prices and costs in effect as of the date indicated, without giving effect to
nonproperty-related expenses such as general and administrative expenses, debt
service and future income tax expense or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
Productive well. A well that is found to be capable of producing hydrocarbons
in sufficient quantities such that proceeds from the sale of such production
exceed production expenses and taxes.
Proved developed nonproducing reserves. Proved developed reserves expected to
be recovered from zones behind casing in existing wells.
Proved developed producing reserves. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and able to produce to market.
Proved developed reserves. Proved reserves that can be expected to be
recovered from existing wells with existing equipment and operating methods.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
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Proved undeveloped location. A site on which a development well can be
drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.
Proved undeveloped reserves. Proved reserves that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion.
Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reservoir. A porous and permeable underground formation containing a natural
accumulation of producible oil and/or gas that is confined by impermeable rock
or water barriers and is individual and separate from other reservoirs.
Royalty interest. An interest in an oil and natural gas property entitling
the owner to a share of oil or gas production free of costs of production.
3-D seismic. Advanced technology method of detecting accumulations of
hydrocarbons identified through a three-dimensional picture of the subsurface
created by the collection and measurement of the intensity and timing of sound
waves transmitted into the earth as they reflect back to the surface.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and natural gas regardless of whether such acreage contains proved
reserves.
Working interest. The operating interest that gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
Workover. Operations on a producing well to restore or increase production.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EDGE PETROLEUM CORPORATION UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS:
Pro Forma Combined Balance Sheet (Unaudited), September 30, 1996........ F-3
Pro Forma Combined Statement of Operations (Unaudited) for the Nine
Month Period Ended
September 30, 1996..................................................... F-5
Pro Forma Combined Statement of Operations (Unaudited) for the Year
Ended December 31, 1995................................................ F-6
Pro Forma Combined Statement of Operations (Unaudited) for the Year
Ended December 31, 1994................................................ F-7
Pro Forma Combined Statement of Operations (Unaudited) for the Year
Ended December 31, 1993................................................ F-8
Notes to Unaudited Pro Forma Combined Financial Statements.............. F-9
EDGE PETROLEUM CORPORATION (A DELAWARE CORPORATION):
Independent Auditors' Report............................................ F-13
Balance Sheet, December 3, 1996......................................... F-14
Notes to Balance Sheet.................................................. F-15
EDGE PETROLEUM CORPORATION, (A TEXAS CORPORATION) SUPPLEMENTALLY COMBINED:
Independent Auditors' Report............................................ F-16
Supplementally Combined Balance Sheets, September 30, 1996, December 31,
1995 and 1994.......................................................... F-17
Supplementally Combined Statements of Operations for the Nine Month
Period Ended September 30, 1996 and 1995 (unaudited) and the Years
Ended December 31, 1995, 1994 and 1993................................. F-18
Supplementally Combined Statements of Equity for the Nine Month Period
Ended September 30, 1996 and the Years Ended December 31, 1995, 1994
and 1993............................................................... F-19
Supplementally Combined Statements of Cash Flows for the Nine Month
Period Ended September 30, 1996 and 1995 (unaudited) and the Years
Ended December 31, 1995, 1994 and 1993................................. F-20
Notes to Supplementally Combined Financial Statements................... F-21
EDGE JOINT VENTURE II (JOINT VENTURE)
Independent Auditors' Report............................................ F-32
Balance Sheets, September 30, 1996, December 31, 1995 and 1994.......... F-33
Statements of Operations for the Nine Month Period Ended September 30,
1996 and 1995 (unaudited) and the Years Ended December 31, 1995, 1994
and 1993............................................................... F-34
Statements of Venturers' Capital (Deficit) for the Nine Month Period
Ended September 30, 1996 and the Years Ended December 31, 1995, 1994
and 1993............................................................... F-35
Statements of Cash Flows for the Nine Month Period Ended September 30,
1996 and 1995 (unaudited) and the Years Ended December 31, 1995, 1994
and 1993............................................................... F-36
Notes to Financial Statements........................................... F-37
EDGE PETROLEUM CORPORATION, A TEXAS CORPORATION (OLD EDGE)
Independent Auditors' Report............................................ F-46
Consolidated Balance Sheets, September 30, 1996, December 31, 1995 and
1994................................................................... F-47
Consolidated Statements of Operations for the Nine Month Period Ended
September 30, 1996 and 1995 (unaudited) and the Years Ended December
31, 1995, 1994 and 1993................................................ F-48
Consolidated Statements of Stockholders' Equity for the Nine Month
Period Ended September 30, 1996 and the Years Ended December 31, 1995,
1994 and 1993.......................................................... F-49
Consolidated Statements of Cash Flows for the Nine Month Period Ended
September 30, 1996 and 1995 (unaudited) and the Years Ended December
31, 1995, 1994 and 1993................................................ F-50
Notes to Consolidated Financial Statements.............................. F-51
EDGE GROUP II LIMITED PARTNERSHIP (EDGE GROUP II)
Independent Auditors' Report............................................ F-59
Consolidated Balance Sheets, September 30, 1996, December 31, 1995 and
1994................................................................... F-60
Consolidated Statements of Operations for the Nine Month Period Ended
September 30, 1996 and 1995 (unaudited) and the Years Ended December
31, 1995, 1994 and 1993................................................ F-61
Consolidated Statements of Partners' Capital (Deficit) for the Nine
Month Period Ended September 30, 1996 and the Years Ended December 31,
1995, 1994 and 1993.................................................... F-62
Consolidated Statements of Cash Flows for the Nine Month Period Ended
September 30, 1996 and 1995 (unaudited) and the Years Ended December
31, 1995, 1994 and 1993................................................ F-63
Notes to Consolidated Financial Statements.............................. F-64
GULFEDGE LIMITED PARTNERSHIP (GULFEDGE)
Independent Auditors' Report............................................ F-73
Balance Sheets, September 30, 1996, December 31, 1995 and 1994.......... F-74
Statements of Operations for the Nine Month Period Ended September 30,
1996 and 1995 (unaudited) and the Years Ended December 31, 1995, 1994
and 1993............................................................... F-75
Statements of Partners' Capital (Deficit) for the Nine Month Period
Ended September 30, 1996 and the Years Ended December 31, 1995, 1994
and 1993............................................................... F-76
Statements of Cash Flows for the Nine Month Period Ended September 30,
1996 and 1995 (unaudited) and the Years Ended December 31, 1995, 1994
and 1993............................................................... F-77
Notes to Financial Statements........................................... F-78
</TABLE>
F-1
<PAGE>
EDGE PETROLEUM CORPORATION
(A RECENTLY FORMED DELAWARE CORPORATION)
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited Pro Forma Combined Financial Statements and related
notes are presented to show the pro forma effects of the proposed Combination
Transactions and the Offering in which Edge Petroleum Corporation, a recently
formed Delaware corporation (the "Company"), will issue up to 4,702,619 shares
of its common stock for the combined net assets of Edge Petroleum Corporation
(a Texas corporation) ("Old Edge"), affiliated entities and direct interests
and 2,000,000 shares of previously unissued common stock in a public offering
of shares.
In the Combination Transactions, the Company plans to complete (i) the
Merger, (ii) the Edge Group II Exchange Offer, (iii) the Gulfedge Exchange
Offer, (iv) the Edge Group Purchase Offer and (v) the James C. Calaway
Exchange. Upon consummation of the Combination Transactions, the Company
expects to acquire directly or indirectly substantially all of the interests
in the Joint Venture. See "Summary--Ownership of the Joint Venture; Post-
Combination." The Company does not expect to seek to consummate any of the
Combination Transactions unless the Merger, the Edge Group II Exchange Offer
(with at least a 70% acceptance level) and the Offering are each closed. The
number of shares of Common Stock to be issued in the Combination Transactions
will depend on (i) the number of shareholders of Old Edge who exercise
dissenters' rights in connection with the Merger, (ii) the number of partners
who elect to retain their current interests in Gulfedge and Edge Group II in
lieu of receiving Common Stock, (iii) whether Edge Group accepts the Edge
Group Purchase Offer and (iv) the number of shares issued in the James C.
Calaway Exchange.
Consummation of the Combination Transactions is subject to certain
conditions, including, among other things: (i) the approval of the Plan of
Merger by the shareholders of Old Edge, (ii) the acceptance of the Edge Group
II Exchange Offer by the general partners and by limited partners holding at
least 70% of the outstanding Edge Group II Units (which will thereby include
the requisite approval of the Change of Edge Group II General Partners by
partners of Edge Group II whose aggregate contributions to capital of Edge
Group II represent at least 60% of the aggregate contributions to capital of
all partners of Edge Group II) and (iii) the closing of the Offering at an IPO
price to the public of at least $14.50 per share. See "The Combination
Agreement--Conditions."
Pro forma data are based on assumptions and include adjustments as explained
in the notes to unaudited Pro Forma Combined Financial Statements. The
unaudited Pro Forma Combined Balance Sheet as of September 30, 1996 and the
unaudited Pro Forma Combined Statements of Operations for the nine month
period ended September 30, 1996 and each of the three years in the period
ended December 31, 1995 of the Company were prepared utilizing the historical
supplementally combined financial statements of Old Edge as described in Note
2 hereto. The unaudited Pro Forma Combined Financial Statements are not
necessarily indicative of the results of future operations of the Company and
should be read in conjunction with the historical supplementally combined
financial statements of Old Edge appearing elsewhere in this Prospectus.
F-2
<PAGE>
EDGE PETROLEUM CORPORATION
(A RECENTLY FORMED DELAWARE CORPORATION)
PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
EDGE
PETROLEUM
CORPORATION OLD EDGE PRO FORMA PRO FORMA
DECEMBER 3, SUPPLEMENTALLY PRO FORMA FOR THE PRO FORMA FOR THE
ASSETS 1996 COMBINED ADJUSTMENTS COMBINATION ADJUSTMENTS OFFERING
------ ----------- -------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents.......... $1,000 $ 930,581 $ 931,581 $18,809,959 (4) $19,741,540
Accounts receivable,
trade................ 1,668,119 1,668,119 1,668,119
Accounts receivable,
joint interest
owners............... 2,357,391 2,357,391 2,357,391
Receivables from
related parties...... 183,288 183,288 183,288
Other current assets.. 134,967 134,967 134,967
Advances to
stockholder.......... 3,371 3,371 3,371
------ ----------- ------- ----------- ----------- -----------
Total current assets. 1,000 5,277,717 5,278,717 18,809,959 24,088,676
PROPERTY AND EQUIPMENT,
Net--full cost method
of accounting for oil
and gas property..... 12,384,029 12,384,029 12,384,029
DEFERRED OFFERING COSTS. 750,000 750,000 (750,000)(3)
OTHER ASSETS............ 23,751 23,751 23,751
------ ----------- ------- ----------- ----------- -----------
TOTAL ASSETS............ $1,000 $18,435,497 $18,436,497 $18,059,959 $36,496,456
====== =========== ======= =========== =========== ===========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-3
<PAGE>
EDGE PETROLEUM CORPORATION
(A RECENTLY FORMED DELAWARE CORPORATION)
PRO FORMA COMBINED BALANCE SHEET (UNAUDITED)--(CONTINUED)
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
EDGE
PETROLEUM
CORPORATION OLD EDGE PRO FORMA PRO FORMA
LIABILITIES AND DECEMBER 3, SUPPLEMENTALLY PRO FORMA FOR THE PRO FORMA FOR THE
STOCKHOLDERS' EQUITY 1996 COMBINED ADJUSTMENTS COMBINATION ADJUSTMENTS OFFERING
-------------------- ----------- -------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable,
trade................ $ 2,459,510 $ 2,459,510 $ 2,459,510
Accounts payable to
related party........ 1,372,450 $(1,332,450)(2) 40,000 40,000
Accrued interest
payable.............. 62,625 62,625 62,625
Accrued liabilities... 371,653 371,653 $ (250,041)(4) 121,612
Accounts payable,
joint interest
owners............... 2,325,342 2,325,342 2,325,342
Current portion of
notes payable........ 316,030 316,030 316,030
------ ----------- ----------- ----------- ----------- -----------
Total current
liabilities......... 6,907,610 (1,332,450) 5,575,160 (250,041) 5,325,119
NOTES PAYABLE........... 10,132,919 10,132,919 (9,950,000)(4) 182,919
LONG-TERM LIABILITY..... 11,462 11,462 11,462
DEFERRED INCOME TAXES... 161,316 (161,316)(5)
MINORITY INTEREST....... 1,791,796 (1,791,796)(6)
------ ----------- ----------- ----------- ----------- -----------
Total liabilities.... 19,005,103 (3,285,562) 15,719,541 (10,200,010) 5,519,500
Common stock, $.01 par
value; 40,000,000
shares authorized;
4,700,000 shares
issued and
outstanding pro forma
for the combination;
6,700,000 shares
issued outstanding
pro forma for the
offering............. $ 10 47,000 (1) 47,000 20,000 (4) 67,000
Additional paid-in
capital.............. 990 (616,606)(1) 2,669,956 29,740,000 (4) 30,909,956
1,332,450 (2) (1,500,000)(3)
161,316 (5)
1,791,796 (6)
Retained earnings.....
Supplementally
Combined Equity
(deficit)............ (569,606) 569,606 (1)
------ ----------- ----------- ----------- ----------- -----------
Total stockholders'
equity.............. 1,000 (569,606) 3,285,562 2,716,956 28,260,000 30,976,956
------ ----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY... $1,000 $18,435,497 $ 0 $18,436,497 $18,059,959 $36,496,456
====== =========== =========== =========== =========== ===========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-4
<PAGE>
EDGE PETROLEUM CORPORATION
(A RECENTLY FORMED DELAWARE CORPORATION)
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
OLD EDGE PRO FORMA PRO FORMA
SUPPLEMENTALLY PRO FORMA FOR THE PRO FORMA FOR THE
COMBINED ADJUSTMENTS COMBINATION ADJUSTMENTS OFFERING
-------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
OIL AND NATURAL GAS
SALES.................. $5,105,079 $5,105,079 $5,105,079
---------- -------- ---------- -------- ----------
OPERATING EXPENSES:
Oil & natural gas
operating expenses... 711,430 711,430 711,430
Depreciation,
depletion and
amortization......... 1,212,738 1,212,738 1,212,738
General and
administrative....... 2,154,828 2,154,828 2,154,828
---------- -------- ---------- -------- ----------
Total operating
expenses........... 4,078,996 4,078,996 4,078,996
---------- -------- ---------- -------- ----------
OPERATING INCOME........ 1,026,083 1,026,083 1,026,083
OTHER INCOME AND
EXPENSES:
Interest expense...... (657,419) (657,419) $657,419(4)
---------- -------- ---------- -------- ----------
NET INCOME BEFORE INCOME
TAXES AND MINORITY
INTEREST............... 368,664 368,664 657,419 1,026,083
INCOME TAX EXPENSE...... (140,933) $140,933(5)
MINORITY INTEREST....... (123,783) 123,783(6)
---------- -------- ---------- -------- ----------
NET INCOME.............. $ 103,948 $264,716 $ 368,664 $657,419 $1,026,083
========== ======== ========== ======== ==========
EARNINGS PER SHARE...... $ 0.08 $ 0.19
========== ==========
Weighted Average Shares
Outstanding............ 4,700,000 5,415,625
========== ==========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-5
<PAGE>
EDGE PETROLEUM CORPORATION
(A RECENTLY FORMED DELAWARE CORPORATION)
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
OLD EDGE PRO FORMA PRO FORMA
SUPPLEMENTALLY PRO FORMA FOR THE PRO FORMA FOR THE
COMBINED ADJUSTMENTS COMBINATION ADJUSTMENTS OFFERING
-------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OIL AND NATURAL GAS
SALES.................. $ 2,040,446 $ 2,040,446 $ 2,040,446
----------- -------- ----------- -------- -----------
OPERATING EXPENSES:
Oil & natural gas
operating expenses... 686,438 686,438 686,438
Depreciation,
depletion and
amortization......... 813,402 813,402 813,402
General and
administrative....... 2,483,560 2,483,560 2,483,560
----------- -------- ----------- -------- -----------
Total operating
expenses........... 3,983,400 3,983,400 3,983,400
----------- -------- ----------- -------- -----------
OPERATING LOSS.......... (1,942,954) (1,942,954) (1,942,954)
OTHER INCOME AND
EXPENSES:
Interest expense...... (315,342) (315,342) $315,342(4)
Gain on sale of oil
and gas property..... 3,337,076 3,337,076 3,337,076
----------- -------- ----------- -------- -----------
NET INCOME BEFORE INCOME
TAXES AND MINORITY
INTEREST............... 1,078,780 1,078,780 315,342 1,394,122
INCOME TAX EXPENSE...... (397,088) $397,088(5)
MINORITY INTEREST....... (575,811) 575,811(6)
----------- -------- ----------- -------- -----------
NET INCOME.............. $ 105,881 $972,899 $ 1,078,780 $315,342 $ 1,394,122
=========== ======== =========== ======== ===========
EARNINGS PER SHARE...... $ 0.23 $ 0.26
=========== ===========
Weighted Average Shares
Outstanding............ 4,700,000 5,415,625
=========== ===========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-6
<PAGE>
EDGE PETROLEUM CORPORATION
(A RECENTLY FORMED DELAWARE CORPORATION)
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
OLD EDGE PRO FORMA PRO FORMA
SUPPLEMENTALLY PRO FORMA FOR THE PRO FORMA FOR THE
COMBINED ADJUSTMENTS COMBINATION ADJUSTMENTS OFFERING
-------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
OIL AND NATURAL GAS
SALES.................. $1,993,796 $1,993,796 $1,993,796
---------- -------- ---------- -------- ----------
OPERATING EXPENSES:
Oil & natural gas
operating expenses... 304,627 304,627 304,627
Depreciation,
depletion and
amortization......... 593,398 593,398 593,398
General and
administrative....... 2,026,499 2,026,499 2,026,499
---------- -------- ---------- -------- ----------
Total operating
expenses........... 2,924,524 2,924,524 2,924,524
---------- -------- ---------- -------- ----------
OPERATING LOSS.......... (930,728) (930,728) (930,728)
OTHER INCOME AND
EXPENSES:
Interest expense...... (384,927) (384,927) $384,927(4)
Gain on sale of oil
and gas property..... 2,284,419 2,284,419 2,284,419
---------- -------- ---------- -------- ----------
NET INCOME BEFORE INCOME
TAXES AND MINORITY
INTEREST............... 968,764 968,764 384,927 1,353,691
INCOME TAX EXPENSE ..... (292,207) $292,207(5)
Minority interest..... (542,671) 542,671(6)
---------- -------- ---------- -------- ----------
NET INCOME.............. $ 133,886 $834,878 $ 968,764 $384,927 $1,353,691
========== ======== ========== ======== ==========
EARNINGS PER SHARE...... $ 0.21 $ 0.25
========== ==========
Weighted Average Shares
Outstanding............ 4,700,000 5,415,625
========== ==========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-7
<PAGE>
EDGE PETROLEUM CORPORATION
(A RECENTLY FORMED DELAWARE CORPORATION)
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
OLD EDGE PRO FORMA PRO FORMA
SUPPLEMENTALLY PRO FORMA FOR THE PRO FORMA FOR THE
COMBINED ADJUSTMENTS COMBINATION ADJUSTMENTS OFFERING
-------------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
OIL AND NATURAL GAS
SALES.................. $ 1,455,438 $ 1,455,438 $1,455,438
----------- --------- ----------- -------- ----------
OPERATING EXPENSES:
Oil & natural gas
operating expenses... 166,817 166,817 166,817
Depreciation,
depletion and
amortization......... 441,710 441,710 441,710
General and
administrative....... 1,733,949 1,733,949 1,733,949
----------- --------- ----------- -------- ----------
Total operating
expenses........... 2,342,476 2,342,476 2,342,476
----------- --------- ----------- -------- ----------
OPERATING LOSS.......... (887,038) (887,038) (887,038)
OTHER INCOME AND
EXPENSES:
Interest expense...... (635,538) (635,538) $635,538(4)
Gain on sale of oil
and gas property..... 247,321 247,321 247,321
----------- --------- ----------- -------- ----------
NET INCOME BEFORE INCOME
TAXES AND MINORITY
INTEREST (LOSS)........ (1,275,255) (1,275,255) 635,538 (639,717)
INCOME TAX EXPENSE......
MINORITY INTEREST....... 721,041 (721,041)(6)
----------- --------- ----------- -------- ----------
NET INCOME (LOSS)....... $ (554,214) $(721,041) $(1,275,255) $635,538 $ (639,717)
=========== ========= =========== ======== ==========
LOSS PER SHARE.......... $ (0.27) $ (0.12)
=========== ==========
Weighted Average Shares
Outstanding............ 4,700,000 5,415,625
=========== ==========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-8
<PAGE>
EDGE PETROLEUM CORPORATION
(A RECENTLY FORMED DELAWARE CORPORATION)
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Combination will be accounted for as a reorganization of entities under
common control because of the high degree of common ownership of the Company
by stockholders and by virtue of their direct ownership of the entities and
interests exchanged. Accordingly, the net assets acquired in the exchange
transactions will be recorded at the historical cost basis of the affiliate
predecessor owners.
2. PRO FORMA ADJUSTMENTS
The Pro Forma Combined Balance Sheet and Statements of Operations are based
on the supplementally combined balance sheet and statements of operations of
Old Edge as of and for the nine month period ended September 30, 1996 and the
three years in the period ended December 31, 1995, and gives effect to the
consummation of the Combination and the Offering as if such transactions had
occurred on September 30, 1996 for the Pro Forma Combined Balance Sheet and on
January 1, 1993 for the Pro Forma Combined Statements of Operations,
reflecting the adjustments and assumptions described below:
(1) Reflects the proposed issuance of up to approximately 4,700,000
shares of common stock of the Company in connection with the exchange
offer, merger and acquisition transactions for the combined net assets of
the combined predecessor entities (the "Combination"). Accordingly, the
supplementally combined equity of Old Edge was reclassified to common stock
and additional paid-in capital.
(2) Reflects the satisfaction of an accrued administrative fee due the
general partner of Edge Group II, a combined predecessor entity, which will
be purchased with common stock of the Company, as a component of the
exchange offer transactions.
(3) Reflects the elimination of deferred offering costs accrued by the
Joint Venture which will be reimbursed by the Company from proceeds
received from the Offering.
(4) Reflects the receipt of the net proceeds from the Offering at an
assumed initial public offering price of $16.00 per share, estimated to be
approximately $28.3 million ($33.8 million if the Underwriters' over-
allotment option is exercised in full). The Company intends to use a
portion of the net proceeds to lend funds to the Joint Venture to repay
approximately $8.6 million of indebtedness incurred under the Revolving
Credit Facility that currently bears interest at 8% and matures on June 1,
1998, approximately $1.3 million of subordinated indebtedness that
currently bears interest at 10% and matures on April 8, 1998 and
approximately $1.5 million of offering costs including approximately
$250,000 incurred but not paid at September 30, 1996. The remainder of the
net proceeds will be used to provide working capital to the Company and for
general corporate purposes, including funding the Company's exploration,
development and acquisition activities. Following application of the
proceeds of the Offering, the Company anticipates its only long-term
indebtedness will consist of an aggregate of approximately $441,000
principal amount of equipment loans. On a pro forma basis, interest expense
would have been reduced by $635,538, $384,927 and $315,342 and $657,419 for
the three years ended December 31, 1995 and the nine month period ended
September 30, 1996, respectively.
(5) See Pro Forma taxes at footnote 4.
(6) The Supplementally Combined Financial Statements of Old Edge combine
the results of Old Edge and the Joint Venture. The Joint Venture interests
not owned by Old Edge are recorded as minority interest. As a result of the
Combination Transactions, the minority interest has been eliminated from
the Pro Forma Combined Balance Sheet and Statements of Operations.
F-9
<PAGE>
EDGE PETROLEUM CORPORATION
(A RECENTLY FORMED DELAWARE CORPORATION)
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. ACCEPTANCE OF THE OFFER
The following table shows the Pro Forma Combined Balance Sheet and
Statements of Operations assuming possible levels of acceptance of the
exchange offer by limited partnership unit holders in Edge Group II giving
effect for the Combination.
PRO FORMA COMBINED BALANCE SHEET, SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ASSETS 80% 90% 100%
------ ----------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................ $ 862,971 $ 889,673 $ 931,581
Accounts receivable, trade............... 1,386,709 1,497,875 1,668,119
Accounts receivable, joint interest
owners.................................. 2,172,528 2,245,526 2,357,391
Accounts receivable from related
parties................................. 309,852 259,891 183,288
Advances to stockholders................. 3,371 3,371 3,371
Other current assets..................... 115,744 123,334 134,967
----------- ----------- -----------
Total current assets................... 4,851,175 5,019,670 5,278,717
PROPERTY AND EQUIPMENT, Net--full cost
method of accounting for oil and gas
property.................................. 19,273,528 11,106,949 12,384,029
DEFERRED OFFERING COSTS.................... 622,080 672,593 750,000
OTHER ASSETS............................... 22,678 23,676 23,751
----------- ----------- -----------
TOTAL...................................... $24,769,461 $16,822,888 $18,436,497
=========== =========== ===========
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable, trade.................. $ 2,054,295 $ 2,214,724 $ 2,459,510
Accounts payable, joint interests
owners.................................. 2,325,342 2,325,342 2,325,342
Accounts payable to related party........ 41,346 41,513 40,000
Accrued interest payable................. 51,944 56,162 62,625
Accrued liabilities...................... 313,205 337,946 371,653
Current portion of notes payable......... 262,128 283,412 316,030
----------- ----------- -----------
Total current liabilities.............. 5,048,260 5,259,099 5,575,160
NOTES PAYABLE.............................. 8,404,648 9,087,100 10,132,919
LONG-TERM LIABILITY........................ 11,462 11,462 11,462
COMMITMENTS AND CONTINGENCIES.............. -- -- --
----------- ----------- -----------
Total liabilities...................... 13,464,370 14,357,661 15,719,541
EQUITY..................................... 11,305,091 2,465,227 2,716,953
----------- ----------- -----------
TOTAL...................................... $24,769,461 $16,822,888 $18,436,497
=========== =========== ===========
</TABLE>
F-10
<PAGE>
EDGE PETROLEUM CORPORATION
(A RECENTLY FORMED DELAWARE CORPORATION)
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<S> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF
OPERATIONS
FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1996
<CAPTION>
80% 90% 100%
----------- ----------- -----------
<S> <C> <C> <C>
Oil and natural gas sales............. $ 4,237,938 $ 4,580,351 $ 5,105,079
----------- ----------- -----------
Operating expenses:
Oil and natural gas operating
expenses........................... 590,378 638,179 711,430
Depreciation, depletion and
amortization....................... 1,838,946 1,088,208 1,212,738
General and administrative.......... 1,801,940 1,960,169 2,154,828
----------- ----------- -----------
Total operating expenses.......... 4,231,264 3,686,556 4,078,996
----------- ----------- -----------
Income from operations................ 6,674 893,795 1,026,083
Other income and expenses:
Interest expense.................... (543,941) (588,748) (657,419)
----------- ----------- -----------
Net Income (Loss) before income
taxes................................ (537,267) 305,047 368,664
Income tax expense....................
----------- ----------- -----------
Net Income (Loss)..................... $ (537,267) $ 305,047 $ 368,664
=========== =========== ===========
Net Income (Loss) per share........... $(0.13) $0.07 $0.08
=========== =========== ===========
Average common share outstanding (in
thousands)........................... 4,102 4,322 4,700
=========== =========== ===========
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<CAPTION>
80% 90% 100%
----------- ----------- -----------
<S> <C> <C> <C>
Oil and natural gas sales............. $ 1,696,558 $ 1,832,351 $ 2,040,446
----------- ----------- -----------
Operating Expenses:
Oil and natural gas operating
expenses........................... 569,892 615,913 686,438
Depreciation, depletion and
amortization....................... 1,293,238 731,611 813,402
General and administrative.......... 1,985,016 2,162,023 2,483,560
----------- ----------- -----------
Total operating expenses.......... 3,848,146 3,509,547 3,983,400
----------- ----------- -----------
Loss from operations.................. (2,151,588) (1,677,196) (1,942,954)
Other income and expenses:............
Interest expense.................... (262,728) (284,061) (315,342)
Gain on sale of oil and gas
property........................... 2,767,905 2,992,657 3,337,076
----------- ----------- -----------
Net income before taxes............... 353,589 1,031,400 1,078,780
Income tax expense....................
----------- ----------- -----------
Net income............................ $ 353,589 $ 1,031,400 $ 1,078,780
=========== =========== ===========
Net income per share.................. $0.09 $0.24 $0.23
=========== =========== ===========
Average common shares outstanding (in
thousands)........................... 4,102 4,322 4,700
=========== =========== ===========
</TABLE>
For levels of acceptance less than 100% the amounts shown above assume
consummation of the merger transaction with Old Edge and do not include any
amounts attributable to Gulfedge, Edge Group or the Calaway Interests, which
collectively do not materially affect the results. The 100% level of
acceptance includes 100% of the interests to be acquired in the Exchange
Transactions. Holders of at least 70% of the outstanding Edge Group limited
partnership units must tender their interests for the Combination to occur.
F-11
<PAGE>
EDGE PETROLEUM CORPORATION
(A RECENTLY FORMED DELAWARE CORPORATION)
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Management of the Company believes the Combination Transactions will be
acounted for as a reorganization of entities under common control because of
the high degree of common ownership of the stockholders of the Company and by
virtue of their direct ownership of the entities and interests exchanged.
Accordingly, management expects that the net assets acquired in the
Combination Transactions will be recorded at the historical cost basis of the
affiliated predecessor owners.
However, if less than 90% of the general and limited partner interests of
Edge Group II or Gulfedge are exchanged in their respective exchange offers,
then such exchange offer would not be considered a reorganization under common
control and purchase accounting would be applied. Under purchase accounting,
the net assets acquired in the Combination Transactions would be recorded at
the fair market value of the interests exchanged. Accordingly, the amounts
shown for the possible acceptance level of 80% includes an adjustment to the
Pro forma Combined Balance Sheet for property and equipment, net and equity of
approximately $9 million at September 30, 1996 and an adjustment to the Pro
Forma Combined Statements of Operations for depreciation, depletion and
amortization of approximately $832,000 and $615,000 for the nine month period
ended September 30, 1996 and the year ended December 31, 1995, respectively.
4. INCOME TAXES
The following pro forma income tax amounts have been presented for
disclosure purposes only. These amounts represent the Company"s estimated
provision for income taxes under the assumption that the Company has been a
taxpaying entity since inception of the Joint Venture (April 8, 1991). The
Joint Venture is not a taxpaying entity, and the applicable taxes are directly
taxable to the individual affiliate owners of the Joint Venture. Old Edge is a
taxpaying entity and, accordingly, the applicable taxes were paid by Old Edge.
Under SFAS No. 109, deferred income taxes are recognized based on the
estimated future tax effect of differences between the financial statement and
tax bases of assets and liabilities given the provisions of enacted laws. At
September 30, 1996, the estimated tax basis of the Company's net assets is
approximately $2.1 million above the recorded financial statement amounts. In
addition, the Company had net operating loss carryforwards of approximately
$2.2 million. Had the combined companies been a tax paying entity a deferred
tax asset of approximately $1.4 million would have been available for future
use to offset future tax liabilities of the Company, subject to any
limitations imposed by the Combination. Upon consummation of the Combination
Transactions, the Company will become a taxable corporation. Due to the
uncertainty of future earnings, a valuation allowance may be used to offset
the net tax asset.
The difference between the statutory federal income taxes and the Company's
pro forma effective taxes is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTH
DECEMBER 31, PERIOD ENDED
------------------------------ SEPTEMBER 30,
1993 1994 1995 1996
--------- --------- --------- ------------- ---
<S> <C> <C> <C> <C> <C>
Statutory federal income
taxes................... $ -- $ 339,067 $ 377,573 $ 129,032
Recognition of net
operating loss
carryforwards........... -- (339,067) (377,573) (129,032)
--------- --------- --------- ---------
Income tax expense....... $ -- $ -- $ -- $ --
========= ========= ========= =========
</TABLE>
The ultimate tax basis and related difference from financial basis cannot be
ultimately determined until consummation of the Combination Transactions and
such basis difference will change depending upon the level and nature of
operations and the amount of taxable income and deductions allocated to the
individual owners, limited partners and interests of the affiliated entities
through the date of the Combination. Such basis differences could vary
materially from the estimate.
F-12
<PAGE>
INDEPENDENT AUDITORS' REPORT
To Edge Petroleum Corporation:
We have audited the accompanying balance sheet of Edge Petroleum Corporation,
a recently formed Delaware corporation (the "Company"), as of December 3, 1996.
This financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Edge Petroleum Corporation as of
December 3, 1996, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
December 3, 1996
F-13
<PAGE>
EDGE PETROLEUM CORPORATION
(A RECENTLY FORMED DELAWARE CORPORATION)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 3,
ASSETS 1996
- ------ -----------
<S> <C>
Cash............................................................... $1,000
======
<CAPTION>
STOCKHOLDERS' EQUITY
- --------------------
<S> <C>
Preferred stock; $.01 par value, 10,000,000 shares authorized; no
shares issued and outstanding..................................... $ --
Common stock; $.01 par value, 40,000,000 shares authorized; 1,000
shares issued and outstanding..................................... 10
Additional paid-in capital......................................... 990
------
Total stockholders' equity....................................... $1,000
======
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-14
<PAGE>
EDGE PETROLEUM CORPORATION
(A RECENTLY FORMED DELAWARE CORPORATION)
NOTES TO BALANCE SHEET
1. ORGANIZATION
Edge Petroleum Corporation (the "Company") was organized as a Delaware
corporation in August 1996 in connection with a pending combination of certain
properties and businesses (the "Combined Assets") in anticipation of the
closing of its proposed initial public offering of common stock. The Combined
Assets will consist of ownership interests in certain entities (the
"Predecessor Entities") and direct interests in oil and gas properties
currently held by Edge Joint Venture II (the "Joint Venture"). In the
"Combination Transactions," the Company plans to complete (i) a merger (the
"Merger") of Old Edge with Edge Mergeco, Inc. ("Mergeco"), a wholly owned
subsidiary of the Company organized for this purpose, in which the shareholders
of Old Edge will receive common stock; (ii) an exchange offer (the "Edge Group
II Exchange Offer") to the general and limited partners of Edge Group II
Limited Partnership ("Edge Group II"), in which such partners will have the
opportunity to exchange their interests in Edge Group II for common stock,
(iii) an exchange offer (the "Gulfedge Exchange Offer" and, together with the
Edge Group II Exchange Offer, the "Limited Partnership Exchange Offers") to the
limited partners of Gulfedge Limited Partnership, of which Old Edge is the
general partner ("Gulfedge" and, together with Edge Group II, the "Limited
Partnerships"), in which such limited partners will have the opportunity to
exchange their interests in Gulfedge for common stock; (iv) an offer to
purchase (the "Purchase Offer") from Edge Group Partnership ("Edge Group") its
interest in the Joint Venture, for consideration consisting of common stock;
and (v) an exchange (the "Calaway Exchange") of interests in certain oil and
gas properties held by Mr. James C. Calaway ("Mr. J.C. Calaway") for common
stock. Upon consummation of the Combination Transactions, the Company expects
to acquire directly or indirectly substantially all of the interests in the
Joint Venture.
2. PREFERRED STOCK
The Board of Directors (the "Board") of the Company is empowered, without
approval of the stockholders, to cause shares of preferred stock to be issued
in one or more series, with the number of shares of each series to be
determined by the Board. The Board is authorized to fix and determine
variations in the voting power designations, preferences, and relative,
participating, optional or other special rights (including, without limitation,
special voting rights, rights to receive dividends or assets upon liquidation,
rights of conversion into common stock or other securities, redemption
provisions and sinking fund provisions) between series and between the
preferred stock and common stock.
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Edge Petroleum Corporation,
a Texas corporation
We have audited the accompanying supplementally combined balance sheets of
Edge Petroleum Corporation, a Texas corporation ("Old Edge"), (the "Company")
as of December 31, 1994 and, 1995 and September 30, 1996, and the related
supplementally combined statements of operations, equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1995 and
the nine month period ended September 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the supplementally combined financial position of the Company at
December 31, 1994 and, 1995 and September 30, 1996, and the supplementally
combined results of its operations and cash flows for each of the three years
in the period ended December 31, 1995 and the nine month period ended
September 30, 1996, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Houston, Texas
January 13, 1997
F-16
<PAGE>
EDGE PETROLEUM CORPORATION
SUPPLEMENTALLY COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
ASSETS 1994 1995 1996
------ ---------- ----------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............. $ 348,919 $ 200,831 $ 930,581
Accounts receivable, trade............ 1,228,018 1,167,920 1,668,119
Accounts receivable, joint interest
owners............................... 120,252 333,552 2,357,391
Accounts receivable from related
parties.............................. 95,035 118,515 183,288
Advances to stockholders.............. 30,982 30,826 3,371
Other current assets.................. 53,732 36,954 134,967
---------- ----------- -----------
Total current assets................ 1,876,938 1,888,598 5,277,717
PROPERTY AND EQUIPMENT, Net--full cost
method of accounting for oil and gas
property............................... 4,135,959 7,911,068 12,384,029
DEFERRED OFFERING COSTS................. 750,000
OTHER ASSETS............................ 115,041 58,541 23,751
---------- ----------- -----------
TOTAL................................... $6,127,938 $ 9,858,207 $18,435,497
========== =========== ===========
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable, trade............... $ 724,151 $ 1,144,408 $ 2,459,510
Accounts payable, joint interest
owners............................... 2,325,342
Accounts payable to related party..... 1,039,337 1,305,827 1,372,450
Accrued interest payable.............. 33,422 46,418 62,625
Accrued liabilities................... 109,675 160,493 371,653
Current portion of notes payable...... 943,767 178,898 316,030
---------- ----------- -----------
Total current liabilities........... 2,850,352 2,836,044 6,907,610
NOTES PAYABLE........................... 3,233,722 5,945,076 10,132,919
LONG-TERM LIABILITY..................... 77,802 46,245 11,462
DEFERRED INCOME TAXES................... 87,036 161,316
MINORITY INTEREST....................... 715,497 1,601,360 1,791,796
COMMITMENTS AND CONTINGENCIES........... -- -- --
---------- ----------- -----------
Total liabilities................... 6,877,373 10,515,761 19,005,103
EQUITY (DEFICIT)........................ (749,435) (657,554) (569,606)
---------- ----------- -----------
TOTAL................................... $6,127,938 $ 9,858,207 $18,435,497
========== =========== ===========
</TABLE>
See notes to supplementally combined financial statements.
F-17
<PAGE>
EDGE PETROLEUM CORPORATION,
SUPPLEMENTALLY COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------------- -----------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OIL AND NATURAL GAS
SALES.................. $1,455,438 $1,993,796 $ 2,040,446 $ 1,376,905 $5,105,079
---------- ---------- ----------- ----------- ----------
OPERATING EXPENSES:
Oil and natural gas
operating expenses... 166,817 304,627 686,438 502,289 711,430
Depreciation,
depletion and
amortization......... 441,710 593,398 813,402 525,111 1,212,738
General and
administrative....... 1,733,949 2,026,499 2,483,560 2,069,763 2,154,828
---------- ---------- ----------- ----------- ----------
Total operating
expenses........... 2,342,476 2,924,524 3,983,400 3,097,163 4,078,996
---------- ---------- ----------- ----------- ----------
OPERATING INCOME (LOSS). (887,038) (930,728) (1,942,954) (1,720,258) 1,026,083
OTHER INCOME AND
EXPENSES:
Interest expense...... (635,538) (384,927) (315,342) (195,100) (657,419)
Gain on sale of oil
and gas property..... 247,321 2,284,419 3,337,076 3,134,287
---------- ---------- ----------- ----------- ----------
NET INCOME (LOSS) BEFORE
INCOME TAXES AND
MINORITY INTEREST...... (1,275,255) 968,764 1,078,780 1,218,929 368,664
INCOME TAX EXPENSE ..... (292,207) (397,088) (422,194) (140,933)
MINORITY INTEREST....... 721,041 (542,671) (575,811) (622,612) (123,783)
---------- ---------- ----------- ----------- ----------
NET INCOME (LOSS)....... $(554,214) $ 133,886 $ 105,881 $ 174,123 $ 103,948
========== ========== =========== =========== ==========
</TABLE>
See notes to supplementally combined financial statements.
F-18
<PAGE>
EDGE PETROLEUM CORPORATION
SUPPLEMENTALLY COMBINED STATEMENTS OF EQUITY (DEFICIT)
<TABLE>
<S> <C>
BALANCE, JANUARY 1, 1993............................................ $(317,107)
Net loss.......................................................... (554,214)
---------
BALANCE, DECEMBER 31, 1993.......................................... (871,321)
Net income........................................................ 133,886
Treasury stock acquired........................................... (24,000)
Treasury stock reissued........................................... 12,000
---------
BALANCE, DECEMBER 31, 1994.......................................... (749,435)
Net income........................................................ 105,881
Treasury stock acquired........................................... (28,000)
Treasury stock reissued........................................... 14,000
---------
BALANCE, DECEMBER 31, 1995.......................................... (657,554)
Net income........................................................ 103,948
Treasury stock acquired........................................... (32,000)
Treasury stock reissued........................................... 16,000
---------
BALANCE, SEPTEMBER 30, 1996......................................... $(569,606)
=========
</TABLE>
See notes to supplementally combined financial statements.
F-19
<PAGE>
EDGE PETROLEUM CORPORATION
SUPPLEMENTALLY COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTH PERIOD
ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)..... $ (554,214) $ 133,886 $ 105,881 $ 174,123 $ 103,948
Adjustments to
reconcile net income
(loss) to net cash
provided (used) by
operating activities:
Depreciation,
depletion and
amortization........ 441,710 593,398 813,402 525,111 1,212,738
Gain on sale of oil
and gas property.... (247,321) (2,284,419) (3,337,076) (3,134,287)
Deferred income
taxes............... 292,207 397,088 422,194 140,933
Minority interest.... (721,041) 542,671 575,811 622,612 123,783
Changes in assets and
liabilities:
Accounts receivable,
trade............... (323,787) (268,785) 60,098 619,957 (500,199)
Accounts receivable,
working interest
owners.............. (104,821) 54,302 (213,300) (683,838) (2,023,839)
Accounts receivable
from related
parties............. (17,185) (62,196) (23,480) (66,698) (64,773)
Advance to
stockholders........ (13,500) (14,111) 156 11,194 27,455
Other current assets. 3,621 (4,724) 16,778 (14,124) (98,012)
Refundable federal
income taxes........ 10,429
Other assets......... (41,133) (41,129)
Accounts payable,
trade............... 135,954 145,424 420,257 1,270,405 1,315,102
Accounts payable,
working interest
owners.............. 2,325,342
Accounts payable to
related parties..... 291,104 258,066 266,490 199,868 66,623
Accrued interest
payable............. (23,551) 32,199 12,996 (30,290) 16,207
Accrued liabilities.. 53,524 (32,345) 50,818 24,924 211,160
Deferred management
fee revenues........ 1,400 (20,000)
Long-term liability.. 21,226 30,413 (31,557) (24,240) (34,783)
----------- ----------- ----------- ----------- -----------
Net cash provided
(used) by operating
activities.......... (1,046,452) (604,014) (926,771) (124,218) 2,821,685
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Oil and gas property
and equipment
purchases............ (3,660,054) (6,809,437) (8,511,991) (5,406,978) (7,880,777)
Proceeds from the sale
of oil and gas
properties........... 3,403,067 7,071,025 7,358,189 6,673,240 2,229,868
Proceeds from notes
receivable........... 154,250
Issue of notes
receivable........... (30,000) (125,000)
Certificate of
deposit, redemption.. 15,000
----------- ----------- ----------- ----------- -----------
Net cash (used)
provided by
investing
activities.......... (271,987) 290,838 (1,153,802) 1,266,262 (5,650,909)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from notes
payable.............. 495,000 105,000 313,131 2,383,101 4,487,000
Payment on notes
payable.............. (475,000) (475,000) (83,691) (3,650,296) (162,026)
Proceeds from long-
term notes payable... 590,000 5,300,000
Payment on long-term
notes payable........ (422,769) (652,696) (3,582,955)
Accounts receivable,
subscriptions........ 1,823,917 20,000
Net treasury stock
transactions......... (12,000) (14,000) (14,000) (16,000)
Deferred offering
costs................ (750,000)
----------- ----------- ----------- ----------- -----------
Net cash (used)
provided by
financing
activities.......... 1,421,148 (424,696) 1,932,485 (1,281,195) 3,558,974
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 102,709 (737,872) (148,088) (139,151) 729,750
CASH AND CASH
EQUIVALENTS, BEGINNING
OF YEAR................ 984,082 1,086,791 348,919 348,919 200,831
----------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................. $ 1,086,791 $ 348,919 $ 200,831 $ 209,768 $ 930,581
=========== =========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW
DISCLOSURES--Cash paid
for interest........... $ 669,116 $ 381,833 $ 307,510 $ 230,099 $ 658,763
</TABLE>
See notes to supplementally combined financial statements.
F-20
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO SUPPLEMENTALLY COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMBINATION TRANSACTIONS--Edge Petroleum Corporation, a recently formed
Delaware corporation ("New Edge"), was incorporated in August 1996. In the
"Combination Transactions," New Edge plans to complete (i) a merger (the
"Merger") of Edge Petroleum Corporation, a Texas corporation ("Old Edge"),
with Edge Mergeco, Inc. ("Mergeco"), a wholly owned subsidiary of New Edge
organized for this purpose, in which the shareholders of Old Edge will receive
common stock of New Edge, (ii) an exchange offer (the "Edge Group II Exchange
Offer") to the general and limited partners of Edge Group II Limited
Partnership ("Edge Group II") in which such partners will have the opportunity
to exchange their interests in Edge Group II for common stock (iii) an
exchange offer (the "Gulfedge Exchange Offer") and, together with the Edge
Group II Exchange Offer (the "Limited Partnership Exchange Offers") to the
limited partners of Gulfedge Limited Partnership, of which Old Edge is the
general partner ("Gulfedge" and, together with Edge Group II, the "Limited
Partnerships"), in which such limited partners will have the opportunity to
exchange their interests in Gulfedge for common stock, (iv) an offer to
purchase (the "Purchase Offer") from Edge Group Partnership ("Edge Group") its
interest in the Edge Joint Venture II (the "Joint Venture"), for consideration
consisting of common stock and (v) an exchange (the "Calaway Exchange") of
interests in certain oil and gas properties held by Mr. James C. Calaway ("Mr.
J.C. Calaway") for common stock. Upon consummation of the Combination
Transactions, New Edge expects to acquire directly or indirectly substantially
all of the interest in the Joint Venture. The Combination will be accounted
for as a reorganization of entities under common control because of the high
degree of common ownership of the stockholders of the Company and by virtue of
their direct ownership of the entities and interest exchanged. Accordingly,
the combined accounts will be prepared using the historical costs and results
of operations of the affiliated entities as if such entities had always been
combined. All intercompany balances will be eliminated in combination.
PRINCIPLES OF COMBINATION--The accompanying supplementally combined
financial statements include the accounts of Old Edge and the Joint Venture
both of which share common ownership and management (collectively, the
"Company"). The Joint Venture, a general partnership, was formed by Old Edge,
Edge Group II, Edge Group and Gulfedge. The Joint Venture interests not owned
by Old Edge are recorded as minority interest.
INTERIM FINANCIAL STATEMENTS--In the opinion of management, the unaudited
supplementally combined financial statements include all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the results of operations and cash flows for the nine-month
period ended September 30, 1995. Although management believes the disclosures
in the financial statements are adequate to make the information presented,
not misleading certain information and footnote disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted for the nine months ended
September 30, 1995 pursuant to the rules and regulations of the Securities and
Exchange Commission. The results of operations and cash flows for the nine-
month period ended September 30, 1996 are not necessarily indicative of the
results to be expected for the full year.
NATURE OF OPERATIONS--The Company is an independent oil and gas exploration
and production company with operations primarily along the onshore United
States Gulf Coast. In its exploration efforts the Company emphasizes an
integrated geologic interpretation method incorporating 3-D seismic technology
and advanced visualization and data analysis techniques utilizing state-of-
the-art computer hardware and software. The Company focuses a majority of its
resources toward the development of its South Texas projects.
The term of the Joint Venture was to have expired on April 8, 1996 according
to the Joint Venture Agreement; however, the venturers extended the
dissolution date to December 31, 1996. The Joint Venture will continue to
operate under the terms of the original Joint Venture Agreement, as amended,
until the dissolution is completed.
F-21
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO SUPPLEMENTALLY COMBINED FINANCIAL STATEMENTS--(CONTINUED)
REVENUE RECOGNITION. The Company recognizes oil and gas revenue from its
interests in producing wells as oil and gas is produced and sold from those
wells. Oil and gas sold in production operations is not significantly different
from the Company's share of production.
OIL AND GAS PROPERTY--During 1996, the Company changed its method of
accounting from the successful efforts method to the full cost method of
accounting for oil and gas property and adjusted all historical periods to
reflect the change in accounting. Management believes that the full cost method
of accounting better reflects the results of its oil and natural gas
exploration activities.
Investments in oil and gas properties are accounted for using the full cost
method of accounting. All costs associated with the acquisition, exploration
and development of oil and gas properties are capitalized.
Oil and gas properties are amortized using the unit-of-production method
using estimates of proved reserve quantities. Investments in unproved
properties are not amortized until proved reserves associated with the projects
can be determined or until impairment occurs. If the results of an assessment
indicate that the properties are impaired, the amount of impairment is added to
the proved oil and gas property costs to be amortized. The amortizable base
includes estimated future development costs and, where significant,
dismantlement, restoration and abandonment costs, net of estimated salvage
values. The depletion rate per Mcfe for the years ended December 31, 1993, 1994
and 1995 and the nine month period ended September 30, 1996 was $0.43, $0.42,
$0.49 and $0.44, respectively.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments
would significantly alter the relationship between capitalized costs and proved
reserves. Abandonments of properties are accounted for as adjustments of
capitalized costs with no loss recognized.
In addition, the capitalized costs of oil and gas properties are subject to a
"ceiling test," which limits such costs to the estimated present value,
discounted at a 10% interest rate, of future net cash flows from proved
reserves, based on current economic and operating conditions, plus the cost of
unproved prospects. If capitalized costs exceed this limit, the excess is
charged to depreciation, depletion and amortization. For the nine month period
ended September 30, 1996 and for the years ended December 31, 1995, 1994 and
1993, no write-down of the Company's oil and gas assets was necessary.
Depreciation of other property and equipment is provided using the straight-
line method based on estimated useful lives ranging from five to ten years.
DEFERRED LOAN AND ORGANIZATION COSTS--Deferred loan costs are capitalized as
deferred assets and amortized over five years or the term of the loan.
Organization costs have been capitalized and are amortized on a straight-line
basis over five years.
HEDGING ACTIVITIES--The Company periodically uses derivative financial
instruments to manage price risks related to natural gas sales and not for
speculative purposes. For book purposes, gains and losses related to the
hedging of anticipated transactions are recognized as income when the hedged
transaction occurs. The natural gas swap agreements generally provide for the
Company to receive or make counter-party payments on the differential between a
fixed price and a variable indexed price for natural gas. Total MCFs of natural
gas purchased and sold under swap arrangements during the nine month period
ended September 30, 1996 and the year ended December 31, 1995 were 182,000 MCFs
and 122,000 MCFs, respectively. Gains (losses) realized by the Company under
such swap arrangements were $5,270 and $(15,720) for the nine month period
ended September 30, 1996 and the year ended December 31, 1995, respectively.
There was no hedging activity during
F-22
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO SUPPLEMENTALLY COMBINED FINANCIAL STATEMENTS--(CONTINUED)
the years ended December 31, 1994 and 1993. Outstanding hedges at December 31,
1995 were not material, and the Company had no exiting hedging positions as of
September 30, 1996.
STATEMENTS OF CASH FLOWS--The statements of cash flows are presented using
the indirect method and consider all highly liquid investments with original
maturities of three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS--The Company's financial instruments consist of cash,
receivables, payables, long-term debt and natural gas commodity hedges. The
carrying amount of cash, receivables and payables approximates fair value
because of the short-term nature of these items. The carrying amount of long-
term debt approximates fair value since the individual borrowings were
negotiated or renegotiated during or after 1993 and/or bear interest at
floating market interest rates. The carrying amount of natural gas commodity
hedges approximates fair value based on the expected settlement amounts of
these transactions in 1996.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from these estimates.
Significant estimates include depreciation, depletion and amortization of
proved producing oil and gas properties; estimates of proved oil and gas
reserve volumes; and discounted future net cash flows (see Note 8).
CONCENTRATION OF CREDIT RISK--Substantially all of the Company's accounts
receivable result from oil and natural gas sales or joint interest billings to
third parties in the oil and gas industry. This concentration of customers and
joint interest owners may impact the Company's overall credit risk in that
these entities may be similarly affected by changes in economic and other
conditions. Historically, the Company has not experienced credit losses on
such receivables.
2. PROPERTY AND EQUIPMENT
At December 31, 1994 and 1995 and September 30, 1996, property and equipment
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1994 1995 1996
----------- ----------- -------------
<S> <C> <C> <C>
Oil and gas property................... $ 4,934,737 $ 9,029,797 $13,900, 491
Computer equipment..................... 601,183 1,004,509 1,784,721
Other property and equipment........... 166,523 184,018 184,018
----------- ----------- ------------
Total property and equipment........... 5,702,443 10,218,324 15,869,230
Accumulated depreciation, depletion and
amortization.......................... (1,566,484) (2,307,256) (3,485,201)
----------- ----------- ------------
Property and equipment, net............ $ 4,135,959 $ 7,911,068 $ 12,384,029
=========== =========== ============
</TABLE>
Oil and natural gas properties not subject to amortization consist of the
cost of undeveloped leaseholds, exploratory and developmental wells in
progress, and secondary recovery projects before the assignment of proved
reserves. These costs are reviewed periodically by management for impairment,
with the impairment provision included in the cost of oil and natural gas
properties subject to amortization. Factors considered by management in its
impairment assessment include drilling results by the Company and other
operators, the terms of oil and gas leases not held by production, production
response to secondary recovery activities and available
F-23
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO SUPPLEMENTALLY COMBINED FINANCIAL STATEMENTS--(CONTINUED)
funds for exploration and development. The following table summarizes the cost
of the properties not subject to amortization for the year the cost was
incurred:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
Year cost incurred:
Remainder.............................. $ 280,335 $ 226,979 $ 207,651
1993................................... 341,445 276,411 235,463
1994................................... 1,214,255 744,744 476,245
1995................................... -- 696,418 469,125
1996................................... 1,635,330
---------- ---------- ----------
$1,836,035 $1,944,552 $3,023,814
========== ========== ==========
</TABLE>
During 1994 the Joint Venture issued a note payable for $91,695 to the seller
of certain seismic data. Subsequently, the Joint Venture entered into a sales
agreement with the same entity to sell the Joint Venture's interest in an
undeveloped oil and gas property for $1,491,695 resulting in a gain of
$1,288,363. As a component of the sales agreement, the note payable was used to
reduce the proceeds from the sale.
3. LONG-TERM DEBT
In April 1991 the Joint Venture borrowed, in the aggregate, $4,500,000 from
the RIMCO Partnerships and another partnership of which RIMCO is the general
partner, at an annual interest rate of 15.5% (the "RIMCO Note"). The Joint
Venture and such partnerships agreed to reduce the interest rate of the RIMCO
Note from 15.5% to 10% for the period from October 1, 1993 through September
30, 1995. Pursuant to such agreement, the Joint Venture conveyed to such
partnerships a 0.4% after-payout royalty interest, in the aggregate, in all
prospects sold by the Joint Venture during such period. The RIMCO Note was
repaid in March 1995.
During July 1995, the Joint Venture entered into a revolving credit facility
(the "Revolving Credit Facility") with a bank to finance temporary working
capital requirements. The Revolving Credit Facility provides up to $20,000,000
in available borrowings limited by a borrowing base (as defined by the
Revolving Credit Facility) which was $4,500,000 and $10,225,000 at December 31,
1995 and September 30, 1996, respectively. At December 31, 1995 and September
30, 1996, borrowings outstanding under the Revolving Credit Facility totaled
$4,500,000 and $8,650,000, respectively. The Revolving Credit Facility provides
for interest at the lender's prime rate plus 0.75% (9.25% and 9.0% at December
31, 1995 and September 30, 1996, respectively). The borrowing base is subject
to review by the bank on a quarterly basis and may be adjusted subject to the
provisions of the Revolving Credit Facility.
In January 1995 the Joint Venture entered into a Subordinated Loan Agreement
(the "Subordinated Loan") with a shareholder of Old Edge. Such agreement
provides for a $1 million term loan and a $1 million line of credit. Drawdowns
under the line of credit require 30 days notice. At December 31, 1994 and 1995
and September 30, 1996, the aggregate amount outstanding under the Subordinated
Loan was $500,000, $1.3 million and $1.3 million, respectively, including $0.3
million outstanding under the line of credit. The principal is due, unless
retired earlier by the Joint Venture, upon the earlier of April 8, 1998 or the
conclusion of the Joint Venture's wind-up period. Interest at 10% per annum is
due monthly. The Subordinated Loan is secured by certain oil and gas
properties, equipment and other assets of the Joint Venture, but is subordinate
to the Revolving Credit Facility. The mortgage and security agreement restricts
the transfer of properties, creation of liens and other matters. The
Subordinated Loan is without recourse to the venturers. Under the Subordinated
Loan Agreement, the shareholder has a right to receive specified reversionary
and overriding royalty interests on prospects of the Joint Venture and certain
rights to convert such interests into common stock which is triggered by the
execution of certain transactions by the Joint Venture as defined within the
Subordinated Loan Agreement.
F-24
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO SUPPLEMENTALLY COMBINED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1994 and 1995, notes payable and long-term debt consisted of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- ------------- ---
<S> <C> <C> <C> <C>
Revolving credit facility, lenders'
prime rate plus 0.75%, interest
payable monthly, maturing June 1,
1998............................... $4,500,000 $ 8,650,000
RIMCO note payable, 10% interest,
interest payable monthly, repaid in
1995............................... $3,300,000
RIMCO deferred interest notes
payable, 10% interest, interest
payable quarterly, repaid in 1995.. 282,955
Note payable to bank, lenders' prime
rate plus 0.75%, payable in monthly
principal installments of $7,500
plus accrued interest, matures
March 1, 1997...................... 180,000 112,500
Note payable to bank, lenders' prime
rate plus 1.5%, payable in monthly
principal installments of $5,547
plus accrued interest, matures
March 1, 1997...................... 83,207 33,283
Note payable, 9% interest, payable
in quarterly installments of
$13,750 plus interest, repaid in
1995............................... 13,750
Note payable, 10.996% interest,
payable in monthly installments of
principal and interest of $2,326,
matures June 22, 1998.............. 80,784 60,767 44,249
Note payable, lenders' prime plus
0.75%, payable in monthly principal
installments of $14,042 plus
accrued interest, matures July 1,
1998............................... 308,917
Subordinated note payable to a
shareholder of Old Edge, 10%
interest, interest payable monthly,
matures April 8, 1998.............. 500,000 1,300,000 1,300,000
---------- ---------- -----------
Total............................... 4,177,489 6,123,974 10,448,949
Current portion..................... (943,767) (178,898) (316,030)
---------- ---------- -----------
Long-term portion................... $3,233,722 $5,945,076 $10,132,919
========== ========== ===========
</TABLE>
Substantially all of the Joint Venture's property and equipment are pledged
as collateral on certain notes payable.
At September 30, 1996, notes payable require minimum principal payments as
follows:
<TABLE>
<S> <C>
1997.......................................................... $ 316,030
1998.......................................................... 10,132,919
-----------
Total....................................................... $10,448,949
===========
</TABLE>
The Revolving Credit Facility and certain other note agreements provide for
certain financial covenants and restrictions on the Joint Venture including,
but not limited to, limitations on additional borrowings, sales of its oil and
gas properties or other collateral, a prohibition of dividends and certain
distributions of cash or properties, a prohibition on certain liens, a
limitation on annual lease payments, and a requirement to maintain minimum
tangible net worth and other financial ratios. For the quarters ended March 31,
1996 and June 30, 1996, the Joint Venture was not in compliance with the
original cash flow/debt service ratio covenant. The Joint Venture has received
a waiver for such non-compliance, and the provisions of the covenants were
subsequently amended in August 1996 to be less stringent.
4. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is party to certain lawsuits and claims
arising in the ordinary course of business. While the outcome of lawsuits and
claims cannot be predicted with certainty, management does not
F-25
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO SUPPLEMENTALLY COMBINED FINANCIAL STATEMENTS--(CONTINUED)
expect these matters to have a materially adverse effect on the Company's
financial condition, results of operations or cash flows.
At September 30, 1996, Old Edge was obligated under a noncancelable
operating lease for office space. Following is a schedule of the remaining
future minimum lease payments under this lease:
<TABLE>
<S> <C>
1997............................................................. $123,500
1998............................................................. 31,805
</TABLE>
Rent expense for the years ended December 31, 1993, 1994, and 1995 and the
nine month period ended September 30, 1996 was $156,207, $164,436, $165,317
and $148,966, respectively.
5. INCOME TAXES
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts calculated for income tax purposes.
Significant components of Old Edge's deferred tax liabilities and assets as
of December 31, 1994 and 1995 and September 30, 1996 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Deferred tax liability:
Loss allowed for tax purposes in excess of
book loss from Old Edge's partnership
interest in the Joint Venture.............. $279,455 $784,789 $967,044
Other....................................... 651 538 538
-------- -------- --------
Total......................................... 280,106 785,327 967,582
-------- -------- --------
Deferred tax assets:
Net operating tax loss carryforwards........ 439,968 646,340 769,684
Other....................................... 49,725 51,951 36,582
Less valuation allowance.................... (209,587)
-------- -------- --------
Total deferred tax assets..................... 280,106 698,291 806,266
-------- -------- --------
Net deferred tax liability.................... $ -- $ 87,036 $161,316
======== ======== ========
</TABLE>
The differences between the statutory federal income taxes and the Company's
effective taxes is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTH
DECEMBER 31, PERIOD ENDED
-------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- -------- -------- -------------
<S> <C> <C> <C> <C>
Statutory federal income taxes....... -- $339,068 $377,575 $129,032
Recognition of operating loss
carryforwards....................... (46,861) (67,523) (62,379)
Income tax expense deferred.......... 87,036 74,280
------- -------- -------- --------
Income tax expense................... -- $292,207 $397,088 $140,933
======= ======== ======== ========
</TABLE>
As of September 30, 1996, Old Edge has net operating tax loss carryforwards
of $2,199,096 which will begin to expire in the year 2007.
6. EQUITY
In 1991, Old Edge entered into an agreement with a related party to
repurchase 5,263 shares of its outstanding common stock. The repurchase
obligation is effective if holders of such shares demand repurchase between
January 1995 and January 1998. However, Old Edge will have no obligation to
repurchase these shares
F-26
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO SUPPLEMENTALLY COMBINED FINANCIAL STATEMENTS--(CONTINUED)
if it has registered common stock under the Securities Exchange Act of 1933
prior to demand for repurchase. The amount to be paid for these shares equals
the percentage obtained by dividing 5,263 shares by the total number of
outstanding shares of Old Edge and multiplying this percentage by the greater
of (1) the net cash flow of Old Edge (as defined in the agreement) or (2) the
adjusted net worth of Old Edge (as defined in the agreement). As of September
30, 1996, this repurchase obligation approximated $174,000.
During 1994, a third party entered into an agreement to acquire shares of Old
Edge's outstanding common stock from a shareholder. These shares are held in
escrow as security for a nonrecourse promissory note issued to the third party
by the shareholder. The final payment is due January 15, 1997. Upon payment of
each annual principal amount, a proportionate number of shares will be released
by the shareholder from escrow to the third party. A stock repurchase agreement
gives Old Edge the option of participating in these annual principal payments.
Upon participation, Old Edge would take possession of its pro rata share of the
stock acquired. If Old Edge elects not to participate in a principal payment,
Old Edge shall be deemed to have forfeited the ownership rights in the stock
for which the payment pertains. As of September 30, 1996, approximately 1,264
shares had been repurchased by Old Edge through the agreement.
In 1994, Old Edge adopted the 1994 Incentive Stock Option Plan which provides
for the granting of options to certain key employees to purchase up to 6,000
shares of Old Edge common stock. The recipient, timing and number of shares are
determined by the Board of Directors of Old Edge. The exercise price of any
options granted may not be less than 110% of the fair market value of Old
Edge's stock at the date of grant. In 1994 options to acquire 4,386 shares of
Old Edge common stock were granted and were immediately vested at prices
ranging from $45.60 to $91.20 per share. No options were granted in 1995. The
options expire in April 2004. No options were exercised or forfeited during
1994, 1995 or the nine month period ended September 30, 1996; thus all shares
originally granted remained exercisable at September 30, 1996.
In October 1995, the Financial Accounting Standards Board issued No. 123
("SFAS No. 123"). SFAS No. 123 is a new standard of accounting for stock-based
compensation and establishes a fair value method of accounting for awards
granted after December 31, 1995 under stock compensation plans. SFAS No. 123
encourages, but does not require, companies to adopt the fair value method of
accounting in place of the existing method of accounting for stock-based
compensation whereupon compensation costs are recognized only in situations
where stock compensation plans award intrinsic value to recipients at the date
of grant. Companies that do not adopt the fair value method of accounting
prescribed in SFAS No. 123 must, nonetheless, make annual pro forma disclosures
of the estimated effects on net income and earnings per share in their year-end
1996 financial statements as if the fair value method had been used for grants
after December 31, 1994.
7. RELATED PARTY TRANSACTIONS
Edge Group II incurred management fees from the General Partner of $266,490
for each of the three years ended December 31, 1995 and $66,623 for the nine
month period ended September 30, 1996. Included in accounts payable to related
party at December 31, 1994 and 1995 and September 30, 1996 was $999,337,
$1,265,827 and $1,332,450, respectively, representing accrued management fees
due the General Partner.
At December 31, 1994 and 1995 and September 30, 1996, included in advances to
stockholders, was $30,987, $27,455 and $24,315, respectively, due from
directors of Old Edge. At December 31, 1994 and 1995 and September 30, 1996, an
employee owed Old Edge $3,492, which was included in receivables from related
parties. At December 31, 1994, Old Edge owed to one of its directors $2,488,
which was included in payable to related parties.
At December 31, 1994 and 1995 and September 30, 1996, the Joint Venture was
liable to a shareholder of Old Edge for $500,000, $1,300,000 and $1,300,000,
respectively, of notes payable and at December 31, 1994 and 1995, $3,205 and
$11,041, respectively, of accrued interest (see Note 3).
F-27
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO SUPPLEMENTALLY COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Old Edge receives revenue from various related parties for maintaining
certain oil and gas properties. Representation fees amounted to $23,372,
$24,000, $24,000 and $22,500 for the years ended December 31, 1993, 1994 and
1995, and for the nine month period ended September 30, 1996, respectively. At
December 31, 1994 and 1995 and September 30, 1996, was $10,492, $3,306 and
$7,356, respectively, of representation fees due Old Edge was included in
receivables from related parties.
During 1994, the Joint Venture sold $241,395 in undeveloped oil and gas
prospects to a partnership of which an officer of Old Edge is a partner and
sold $60,000 in undeveloped oil and gas prospects to a stockholder of Old
Edge.
During 1991, Old Edge entered into a consulting agreement with a stockholder
whereby Old Edge is obligated to pay $40,000 annually for the remainder of
this individual's life in exchange for consulting services.
In May 1992, the Joint Venture became the managing venturer of the Essex
Royalty Joint Venture ("Essex") and Old Edge entered into a management
agreement with Essex. In September 1994, the Joint Venture became the managing
venturer of the Essex Royalty Joint Venture II ("Essex II") and Old Edge
entered into a management agreement with Essex II. During 1993, the Joint
Venture issued a $30,000 note receivable to Essex which was collected in 1994.
During 1994, the Joint Venture loaned $125,000 to Essex II. This loan, plus
accrued interest, was repaid during 1994. Under the management agreements with
Essex and Essex II (collectively, the "Essex Joint Ventures"), Old Edge
receives a monthly management fee for managing oil and gas joint ventures. For
the years ended December 31, 1993, 1994 and 1995 and the nine month period
ended September 30, 1996, Old Edge recorded management fee proceeds totaling
$60,000, $80,000, $120,000 and $90,000, respectively, and have netted these
amounts within general and administrative expenses. In addition, these
agreements stipulate that Old Edge is entitled to be reimbursed for certain
general and administrative expenses. Such expenses invoiced by Old Edge to the
Essex Joint Ventures for the years ended December 31, 1993, 1994 and 1995 and
the nine month period ended September 30, 1996, amounted to $36,750, $18,750
and $40,250 and $50,250 respectively. At December 31, 1994 and 1995 and
September 30, 1996, Old Edge had a receivable from the Essex Joint Ventures of
$63,600, $115,000 and $147,375, respectively, relating to these expenses and
management fees.
8. SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS EXPLORATION, DEVELOPMENT
AND PRODUCTION ACTIVITIES (UNAUDITED)
This footnote provides supplementally combined unaudited information
required by SFAS No. 69, "Disclosures About Oil and Gas Producing Activities."
CAPITALIZED COSTS--Capitalized costs and accumulated depreciation, depletion
and amortization relating to the Company's oil and gas producing activities,
all of which are conducted within the continental United States, are
summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------ SEPTEMBER 30,
1994 1995 1996
----------- ----------- -------------
<S> <C> <C> <C>
Proved producing oil and gas
properties...................... $ 3,098,702 $ 7,085,245 $10,876,677
Accumulated depreciation,
depletion and amortization...... (1,178,985) (1,746,663) (2,793,418)
----------- ----------- -----------
Net capitalized costs............ $ 1,919,717 $ 5,338,582 $ 8,083,259
=========== =========== ===========
</TABLE>
F-28
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO SUPPLEMENTALLY COMBINED FINANCIAL STATEMENTS--(CONTINUED)
COSTS INCURRED--Costs incurred in oil and gas property acquisition,
exploration and development activities are summarized below:
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDED
-------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Property acquisition
costs:
Unproved.............. $2,914,010 $5,496,613 $3,658,573 $3,308,931
Proved................ 6,873 26,236 91,025 36,386
Exploration costs..... 527,194 670,270 2,642,025 2,040,546
Development costs..... 20,569 238,341 1,149,548 1,714,702
---------- ---------- ---------- ----------
Total costs incurred.. $3,468,646 $6,431,460 $7,541,171 $7,100,565
========== ========== ========== ==========
</TABLE>
RESERVES--Proved reserves are estimated quantities of oil and natural gas
which geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from known reservoirs under existing economic
and operating conditions. Proved developed reserves are proved reserves that
can reasonably be expected to be recovered through existing wells with
existing equipment and operating methods.
Proved oil and natural gas reserve quantities and the related discounted
future net cash flows before income taxes for the periods presented are based
on estimates prepared by Ryder Scott Company, independent petroleum engineers.
Such estimates have been prepared in accordance with guidelines established by
the Securities and Exchange Commission.
The Company's net ownership interests in estimated quantities of proved oil
and natural gas reserves and changes in net proved reserves, all of which are
located in the continental United States, are summarized below. These
quantities include the minority interest in the Joint Venture as the Joint
Venture is consolidated.
<TABLE>
<CAPTION>
OIL, CONDENSATE AND NATURAL GAS
LIQUIDS (BBLS)
----------------------------------------
NINE MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDED
------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Proved developed and undeveloped
reserves:
Beginning of year................... 174,805 169,947 368,160 708,933
Revisions of previous estimates..... (43,959) 28,492 156,687 62,311
Purchases of oil and gas properties. 84,116 6,275
Extensions and discoveries.......... 64,771 146,213 278,268 141,183
Sales of oil and gas properties..... (36,572)
Production.......................... (25,670) (60,608) (63,885) (81,026)
------- ------- ------- -------
End of year......................... 169,947 368,160 708,933 831,401
======= ======= ======= =======
Proved developed reserves at end of
year................................. 169,947 244,441 652,843 789,440
======= ======= ======= =======
Minority Interest:
Proved developed and undeveloped,
end of year........................ 120,554 261,158 502,889 589,763
======= ======= ======= =======
Proved developed, end of year....... 120,554 173,397 463,101 559,997
======= ======= ======= =======
</TABLE>
F-29
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO SUPPLEMENTALLY COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
NATURAL GAS (MCF)
-----------------------------------------------
NINE MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDED
-------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
--------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Proved developed and
undeveloped reserves:
Beginning of year............ 1,295,911 2,550,000 3,673,000 8,821,000
Revisions of previous
estimates................... 597,487 1,465,329 277,863 (54,622)
Purchases of oil and gas
properties.................. 37,000 1,047,000
Extensions and discoveries... 1,108,158 204,000 6,247,000 6,355,000
Sales of oil and gas
properties.................. (1,910,962)
Production................... (451,556) (583,329) (512,901) (1,557,378)
--------- --------- ---------- ----------
End of year.................. 2,550,000 3,673,000 8,821,000 13,564,000
========= ========= ========== ==========
Proved developed reserves at
year end...................... 2,550,000 3,548,000 6,692,000 10,985,000
========= ========= ========== ==========
Minority Interest:
Proved developed and
undeveloped, end of year.... 1,808,868 2,605,479 6,257,265 9,608,991
========= ========= ========== ==========
Proved developed, end of
year........................ 1,808,868 2,516,809 4,747,037 7,792,320
========= ========= ========== ==========
</TABLE>
STANDARDIZED MEASURE--The table of the Standardized Measure of Discounted
Future Net Cash Flows relating to the Company's ownership interests in proved
oil and gas reserves as of period end is shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------ SEPTEMBER 30,
1993 1994 1995 1996
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Future cash inflows........ $7,955,845 $13,143,411 $31,011,202 $44,372,060
Future oil and natural gas
operating expenses........ (938,051) (2,417,571) (5,906,519) (8,118,033)
Future development costs... (164,894) (641,475) (972,662)
Future income tax expenses. (933,424) (2,055,590) (5,883,983) (8,945,210)
---------- ----------- ----------- -----------
Future net cash flows...... 6,084,370 8,505,356 18,579,225 26,336,155
10% annual discount for
estimating timing of cash
flows..................... (818,220) (1,725,504) (4,633,593) (6,352,423)
---------- ----------- ----------- -----------
Standardized measure of
discounted future net cash
flows..................... $5,266,150 $ 6,779,852 $13,945,632 $19,983,732
========== =========== =========== ===========
</TABLE>
The table of standardized measure of Discounted Future Net Cash Flows
includes the consolidation of the Joint Venture. The Minority Interest's share
of standardized measure of future net cash flows is $3,735,596, $4,809,356,
$9,892,474 and $14,756,624, at December 31, 1993, 1994 and 1995 and September
30, 1996, respectively.
Future cash flows are computed by applying year end prices of oil and
natural gas to year end quantities of proved oil and natural gas reserves.
Future operating expenses and development costs are computed primarily by the
Company's petroleum engineers by estimating the expenditures to be incurred in
developing and producing the Company's proved oil and natural gas reserves at
the end of the year, based on year end costs and assuming the continuation of
existing economic conditions.
Future income taxes are based on year end statutory rates, adjusted for
operating loss carryforwards and tax credits. A discount factor of 10% was
used to reflect the timing of future net cash flows. The standardized measure
of discounted future net cash flows is not intended to represent the
replacement cost or fair market value of the Company's oil and gas properties.
F-30
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO SUPPLEMENTALLY COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair value of the
Company's oil and natural gas reserves. An estimate of fair value would also
take into account, among other things, the recovery of reserves not presently
classified as proved, anticipated future changes in prices and costs, a
discount factor more representative of the time value of money and the risks
inherent in reserve estimates.
CHANGES IN STANDARDIZED MEASURE--Changes in standardized measure of future
net cash flows relating to proved oil and gas reserves are summarized below:
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDED
------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Changes due to current
year operations:
Sales of oil and natural
gas, net of oil and
natural gas operating
expenses............... $(1,288,621) $(1,689,169) $(1,354,008) $(4,393,649)
Sales of oil and gas
properties............. (3,113,415)
Extensions and
discoveries............ 2,474,136 1,612,402 10,194,038 8,917,139
Purchases of oil and gas
properties............. 485,609 540,345
Changes due to revisions
in standardized
variables:
Prices and operating
expenses............... 192,281 (505,924) 408,398 1,664,760
Revisions of previous
quantity estimates..... 553,313 2,060,290 1,935,454 686,576
Estimated future
development costs...... (573) 62,740 (256,121)
Income taxes............ (933,425) (654,726) (2,330,338) (2,175,769)
Accretion of discount... 354,143 577,807 794,640 1,744,261
Production rates
(timing) and other..... 372,898 (372,014) 27,926 (149,097)
----------- ----------- ----------- -----------
Net change................ 1,724,725 1,513,702 7,165,780 6,038,100
----------- ----------- ----------- -----------
Beginning of year......... 3,541,425 5,266,150 6,779,852 13,945,632
----------- ----------- ----------- -----------
End of year............... $ 5,266,150 $ 6,779,852 $13,945,632 $19,983,732
=========== =========== =========== ===========
</TABLE>
Sales of oil and natural gas, net of oil and natural gas operating expenses,
are based on historical pre-tax results. Sales of oil and gas properties,
extensions and discoveries, purchases of minerals in place and the changes due
to revisions in standardized variables are reported on a pre-tax discounted
basis, while the accretion of discount is presented on an after tax basis.
* * * * * *
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Venturers of Edge Joint Venture II:
We have audited the accompanying balance sheets of Edge Joint Venture II (the
"Joint Venture") as of December 31, 1994 and 1995 and September 30, 1996, and
the related statements of operations, venturers' capital (deficit) and cash
flows for each of the three years in the period ended December 31, 1995 and the
nine month period ended September 30, 1996. These financial statements are the
responsibility of the Joint Venture's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Joint Venture as of December 31, 1994
and 1995 and September 30, 1996, and the results of its operations and its cash
flows for the each of the three years in the period ended December 31, 1995 and
the nine month period ended September 30, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
January 13, 1997
F-32
<PAGE>
EDGE JOINT VENTURE II
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1994 1995 1996
----------- ----------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............. $ 288,458 $ 59,318 $ 396,147
Accounts receivable, trade............. 1,223,517 1,142,562 1,647,470
Accounts receivable, working interest
owners................................ 120,252 333,552 1,083,860
Other current assets................... 37,633 27,527 112,707
----------- ----------- -----------
Total current assets................. 1,669,860 1,562,959 3,240,184
----------- ----------- -----------
PROPERTY AND EQUIPMENT, Net-full cost
method of accounting for oil and gas
property................................ 4,115,062 7,895,292 12,374,424
DEFERRED OFFERING COSTS.................. 750,000
OTHER ASSETS............................. 110,665 54,603 19,813
----------- ----------- -----------
TOTAL.................................... $ 5,895,587 $ 9,512,854 $16,384,421
=========== =========== ===========
LIABILITIES AND VENTURERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable, trade................ $ 607,583 $ 1,038,696 $2,353,943
Payable to Old Edge.................... 68,442 46,295 742,930
Accrued interest payable............... 33,422 46,418 62,625
Accrued liabilities.................... 250,041
Current portion of long-term debt...... 943,767 178,898 316,030
----------- ----------- -----------
Total current liabilities............ 1,653,214 1,310,307 3,725,569
----------- ----------- -----------
LONG-TERM DEBT........................... 3,233,722 5,945,076 10,132,919
VENTURERS' CAPITAL....................... 1,008,651 2,257,471 2,525,933
----------- ----------- -----------
TOTAL.................................... $ 5,895,587 $ 9,512,854 $16,384,421
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-33
<PAGE>
EDGE JOINT VENTURE II
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
----------- ---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OIL AND NATURAL GAS
SALES.................. $ 1,437,837 $1,977,242 $ 2,016,230 $ 1,363,505 $5,084,080
----------- ---------- ----------- ----------- ----------
COST AND EXPENSES:
Oil and natural gas
operating expenses... 164,140 300,458 683,315 500,337 709,735
General and
administrative
expenses............. 1,498,381 1,827,362 2,311,936 1,934,440 2,234,016
Depreciation,
depletion and
amortization......... 402,324 556,898 792,475 516,586 1,206,567
----------- ---------- ----------- ----------- ----------
Total cost and
expenses........... 2,064,845 2,684,718 3,787,726 2,951,363 4,150,318
----------- ---------- ----------- ----------- ----------
INCOME (LOSS) FROM
OPERATIONS............. (627,008) (707,476) (1,771,496) (1,587,858) 933,762
OTHER INCOME AND
EXPENSES:
Interest expense...... (636,780) (399,998) (316,760) (196,108) (665,300)
Gain on sale of oil
and gas property..... 247,321 2,284,419 3,337,076 3,134,287
----------- ---------- ----------- ----------- ----------
NET INCOME (LOSS)....... $(1,016,467) $1,176,945 $ 1,248,820 $ 1,350,321 $ 268,462
=========== ========== =========== =========== ==========
Income (loss) per Lim-
ited Partner unit...... $ (5,082) $ 5,885 $ 6,244 $ 6,752 $ 1,342
=========== ========== =========== =========== ==========
Weighted average units
outstanding............ 200 200 200 200 200
=========== ========== =========== =========== ==========
</TABLE>
See notes to financial statements.
F-34
<PAGE>
EDGE JOINT VENTURE II
STATEMENTS OF VENTURERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTH
DECEMBER 31, PERIOD ENDED
------------------------------------ SEPTEMBER 30,
1993 1994 1995 1996
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF
YEAR....................... $ 848,173 $ (168,294) $ 1,008,651 $2,257,471
NET INCOME (LOSS)........... (1,016,467) 1,176,945 1,248,820 268,462
---------- ----------- ----------- ----------
BALANCE AT END OF PERIOD.... $ (168,294) $ 1,008,651 $ 2,257,471 $2,525,933
========== =========== =========== ==========
</TABLE>
See notes to financial statements.
F-35
<PAGE>
EDGE JOINT VENTURE II
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net (loss) income..... $(1,016,467) $ 1,176,945 $ 1,248,820 $ 1,350,321 $ 268,462
Adjustments to
reconcile net (loss)
income to net cash
provided (used) by
operating activities:
Depreciation,
depletion and
amortization....... 402,324 556,898 792,475 516,586 1,206,567
Gain on sale of oil
and gas property... (247,321) (2,284,419) (3,337,076) (3,134,287)
Changes in assets and
liabilities:
Accounts
receivable,
trade............ (330,051) (268,408) 80,955 620,112 (504,908)
Accounts
receivable,
working interest
owners........... (104,821) 54,302 (213,300) (683,838) (750,308)
Accounts
receivable from
related party.... (19,941) 19,941
Receivable from
Old Edge......... 16,764
Other current
assets........... (697) (13,948) (31,465) (49,729) (85,605)
Accounts payable,
trade............ 141,244 137,792 431,113 1,278,425 1,315,247
Payable to Old
Edge............. 92,739 (24,297) (22,147) (20,060) 696,635
Accrued interest
payable.......... (23,551) 32,199 12,996 (30,290) 16,207
Accrued
liabilities...... 250,041
Liability to
related party.... (58,639)
----------- ----------- ----------- ----------- -----------
Net cash
provided (used)
by operating
activities..... (1,148,417) (612,995) (1,037,629) (152,760) 2,412,338
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Oil and gas property
and equipment
purchases............ (3,655,889) (6,803,716) (8,496,185) (5,545,404) (7,880,352)
Proceeds from the sale
of oil and gas
properties........... 3,403,067 7,071,025 7,358,189 6,823,240 2,229,868
Purchase of note
receivable from
related party........ (30,000) (125,000)
Collection of notes
receivable from
related party........ 155,000
Certificate of deposit
redemption........... 15,000
----------- ----------- ----------- ----------- -----------
Net cash
provided (used)
by investing
activities..... (267,822) 297,309 (1,137,996) 1,277,836 (5,650,484)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from notes
payable.............. 475,000 105,000 313,131 337,000
Payments on notes
payable.............. (475,000) (455,000) (83,691) (162,025)
Proceeds from long-
term debt............ 590,000 5,300,000 2,383,101 4,150,000
Payments on long-term
debt................. (422,769) (652,696) (3,582,955) (3,650,296)
Collections on
subscriptions
receivable........... 1,995,000
Deferred offering
costs................ (750,000)
----------- ----------- ----------- ----------- -----------
Net cash
provided (used)
by financing
activities..... 1,572,231 (412,696) 1,946,485 (1,267,195) 3,574,975
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 155,992 (728,382) (229,140) (142,119) 336,829
CASH AND CASH
EQUIVALENTS, BEGINNING
OF YEAR................ 860,848 1,016,840 288,458 288,458 59,318
----------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................. $ 1,016,840 $ 288,458 $ 59,318 $ 146,339 $ 396,147
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES
TO CASH FLOW
INFORMATION:
Cash paid for
interest............. $ 669,116 $ 381,833 $ 307,510 $ 230,099 $ 658,763
</TABLE>
See notes to financial statements.
F-36
<PAGE>
EDGE JOINT VENTURE II
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS--The Joint Venture is an independent oil and natural gas
exploration and production company with operations primarily along the onshore
United States Gulf Coast. In its exploration efforts the Joint Venture
emphasizes an integrated geologic interpretation method incorporating 3-D
seismic technology and advanced visualization and data analysis techniques
utilizing state-of-the-art computer hardware and software. The Joint Venture
focuses a majority of its resources toward the development of its South Texas
projects. These long-term projects offer the potential to add substantial
incremental reserves as the Joint Venture continues to develop its other
project-specific drilling opportunities in South Texas, South Louisiana, the
Mississippi Salt Basin, the South Alabama Smackover and Frisco City Trends.
ORGANIZATION--On April 8, 1991, the Joint Venture, a general partnership, was
formed by Edge Petroleum Corporation, a Texas corporation ("Old Edge"), Edge
Group II Limited Partnership ("Edge Group II"), Edge Group Partnership and
Gulfedge Limited Partnership. The Joint Venture purchased the assets and
assumed the liabilities of a related entity, Edge Group Joint Venture I.
Certain of the partners of Edge Group II were entitled to receive the proceeds
of the sale and authorized the application of their portion of the proceeds as
their capital contribution to the Joint Venture. This flow of funds was deemed
to have occurred at closing as a part of the organization of the Joint Venture
and its acquisition of the indicated assets. The Joint Venture when formed was
accounted for as a reorganization of entities under common control because of
the high degree of common ownership of the Venturers and by virtue of their
direct ownership of the assets contributed. Accordingly, the assets and
liabilities were recorded at their historical cost.
The predecessor to the Joint Venture was a partnership which conducted the
same type of business as the Joint Venture. This predecessor partnership
terminated on April 8, 1991 in accordance with the provisions of the
partnership agreement. The Joint Venture was formed in order to carry on the
business of the predecessor partnership.
Old Edge is the managing venturer of the Joint Venture. Without the approval
of Edge Group II, Old Edge is restricted from creating debt or mortgages on the
Joint Venture, selling all or substantially all of the Joint Venture's assets
or taking any additional action not in compliance with the Joint Venture
Agreement or that would restrict it from doing business. Edge Group II has the
right to approve all lease acquisitions, capital purchases and budgets.
The term of the Joint Venture was to have expired on April 8, 1996 according
to the Joint Venture Agreement; however, the Venturers extended the dissolution
date to December 31, 1996. The Joint Venture will continue to operate under the
terms of the original Joint Venture Agreement, as amended, until the
dissolution is completed.
INTERIM FINANCIAL STATEMENTS--In the opinion of management, the unaudited
consolidated financial statements include all adjustments (consisting solely of
normally recurring adjustments) necessary for a fair presentation of the
results of operations and cash flows for the nine-month period ended September
30, 1995. Although management believes the disclosures in the financial
statements are adequate to make the information presented not misleading,
certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted for the nine months ended September
30, 1995 pursuant to the rules and regulations of the Securities and Exchange
Commission. The results of operations and cash flows for the nine-month period
ended September 30, 1996 are not necessarily indicative of the results to be
expected for the full year.
F-37
<PAGE>
EDGE JOINT VENTURE II
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
REVENUE RECOGNITION--The Company recognizes oil and gas revenue from its
interests in producing wells as oil and gas is produced and sold from those
wells. Oil and gas sold in production operations is not significantly different
from the Company's share of production.
PROPERTY & EQUIPMENT--During 1996, the Joint Venture changed its method of
accounting from the successful efforts method to the full cost method of
accounting for oil and gas property and adjusted all historical periods to
reflect the change in accounting. Management believes that the full cost method
of accounting better reflects the results of its oil and gas exploration
activities.
Oil and gas properties are amortized on the unit-of-production method using
estimates of proved reserve quantities. Investments in unproved properties are
not amortized until proved reserves associated with the projects can be
determined or until impairment occurs. If the results of an assessment indicate
that the properties are impaired, the amount of impairment is added to the
proved oil and gas property costs to be amortized. The amortizable base
includes estimated future development costs and, where significant,
dismantlement, restoration and abandonment costs, net of estimated salvage
values. The depletion rate per Mcfe for the years ended December 31, 1993,
1994, 1995 and the nine month period ended September 30, 1996 was $0.43, $0.42,
$0.49 and $0.44, respectively.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments
would significantly alter the relationship between capitalized costs and proved
reserves. Abandonments of properties are accounted for as adjustments of
capitalized costs with no loss recognized.
In addition, the capitalized costs of oil and gas properties are subject to a
"ceiling test," which limits such costs to the estimated present value,
discounted at a 10 percent interest rate, of future net cash flows from proved
reserves, based on current economic and operating conditions, plus the costs of
unproved prospects. For the nine month period ended September 30, 1996 and for
the years ended December 31, 1995, 1994 and 1993, no write-down of the Joint
Venture's oil and gas assets was necessary. If capitalized costs exceed this
limit, the excess is charged to depreciation, depletion and amortization.
Depreciation of other property and equipment is provided using the straight-
line method based on estimated useful lives ranging from five to ten years.
DEFERRED LOAN AND ORGANIZATION COSTS--Deferred loan costs are capitalized as
deferred assets and amortized over the term of the loan. Organization costs
have been capitalized and are amortized on a straight-line basis over five
years.
INCOME TAXES--Federal and state income taxes are the liability of the
individual partners and not of the Joint Venture. Therefore, no provision or
liability for federal and state income taxes has been provided in the financial
statements.
HEDGING ACTIVITIES--The Joint Venture periodically uses derivative financial
instruments to manage price risk related to natural gas sales and not for
speculative purposes. For book purposes, gains and losses related to the
hedging of anticipated transactions are recognized in income when the hedged
transaction occurs. The natural gas swap agreements generally provide for the
Joint Venture to receive or make counterparty payments on the differential
between a fixed price and a variable indexed price for natural gas. Total MCFs
of Natural Gas purchased and sold under swap arrangements during the nine month
period ended September 30, 1996 and the year ended December 31, 1995 were
182,000 MCFs and 122,000 MCFs respectively. Gains (losses) realized by the
Joint Venture under such swap arrangements were $5,270 and $(15,720) for the
nine month period ended September 30, 1996 and the year ended December 31, 1995
respectively. Outstanding hedges at December 31,
F-38
<PAGE>
EDGE JOINT VENTURE II
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1995 were not material and the Company had no existing hedging positions as of
September 30, 1996. There was no hedging activity during the year ended
December 31, 1994 or 1993.
STATEMENTS OF CASH FLOWS--The Joint Venture has presented its cash flows
using the indirect method and considers all highly liquid investments with
original maturities of three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS--The Joint Venture's financial instruments consist of
cash, receivables, payables, long-term debt and natural gas commodity hedges.
The carrying amount of cash, receivables and payables approximates fair value
because of the short-term nature of these items. The carrying amount of long-
term debt approximates fair value as the individual borrowings were negotiated
or renegotiated during or after 1993 and/or bear interest at floating market
interest rates. The carrying amount of natural gas commodity hedges
approximates fair value based on the expected settlement amounts of these
transactions in 1996.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from these estimates.
Significant estimates include depreciation, depletion and amortization,
estimates of proved oil and gas reserve volumes and discounted future net cash
flows (see Note 5).
CONCENTRATION OF CREDIT RISK--Substantially all of the Joint Venture's
accounts receivable result from natural gas and oil sales or joint interest
billings to third parties in the oil and gas industry. This concentration of
customers and joint interest owners may impact the Joint Venture's overall
credit risk in that these entities may be similarly affected by changes in
economic and other conditions. Historically, the Joint Venture has not
experienced credit losses on such receivables.
2. PROPERTY AND EQUIPMENT
At December 31, 1994 and 1995 and September 30, 1996, property and equipment
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1994 1995 1996
----------- ----------- -------------
<S> <C> <C> <C>
Oil and gas property................... $ 4,934,737 $ 9,029,797 $13,900,491
Computer equipment..................... 601,183 1,004,509 1,784,721
Other property and equipment........... 7,781 9,471 9,471
----------- ----------- -----------
Total property and equipment........... 5,543,701 10,043,777 15,694,683
Accumulated depreciation, depletion and
amortization.......................... (1,428,639) (2,148,485) (3,320,259)
----------- ----------- -----------
Property and equipment, net............ $ 4,115,062 $ 7,895,292 $12,374,424
=========== =========== ===========
</TABLE>
Oil and natural gas properties not subject to amortization consist of the
cost of undeveloped leaseholds, exploratory and developmental wells in
progress, and secondary recovery projects before the assignment of proved
reserves. These costs are reviewed periodically by management for impairment,
with the impairment provision included in the cost of oil and natural gas
properties subject to amortization. Factors considered by management in its
impairment assessment include drilling results by the Company and other
operators, the terms of oil and gas leases not held by production, production
response to secondary recovery activities and available funds for exploration
and development. The following table summarizes the cost of the properties not
subject to amortization for the year the cost was incurred:
F-39
<PAGE>
EDGE JOINT VENTURE II
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
Year cost incurred:
Remainder.............................. $ 280,335 $ 226,979 $ 207,651
1993................................... 341,445 276,411 235,463
1994................................... 1,214,255 744,744 476,245
1995................................... -- 696,418 469,125
1996................................... 1,635,330
---------- ---------- ----------
$1,836,035 $1,944,552 $3,023,814
========== ========== ==========
</TABLE>
During 1994, the Joint Venture entered into a note payable for $91,695 issued
to the seller of certain seismic data. Subsequently, the Joint Venture entered
into a sales agreement with the same entity to sell the Joint Venture's
interest in an unevaluated property for $1,491,695 resulting in a gain of
$1,288,363. As a component of the sales agreement, the note payable was used to
reduce the proceeds from the sale.
3. LONG-TERM DEBT
In April 1991, the Joint Venture borrowed, in the aggregate, $4,500,000 from
the RIMCO Partnerships and another partnership of which RIMCO is the general
partner, at an annual interest rate of 15.5% (the "RIMCO Note"). The Joint
Venture and such partnerships agreed to reduce the interest rate of the RIMCO
Note from 15.5% to 10% for the period from October 1, 1993 through September
30, 1995. Pursuant to such agreement, the Joint Venture conveyed to such
partnerships a 0.4% after-payout royalty interest, in the aggregate, in all
prospects sold by the Joint Venture during such period. The RIMCO Note was
repaid in March 1995.
During July 1995, the Joint Venture entered into a revolving credit facility
(the "Revolving Credit Facility") with a bank to finance temporary working
capital requirements. The Revolving Credit Facility provides up to $20,000,000
in available borrowings limited by a borrowing base (as defined by the
Revolving Credit Facility) which was $4,500,000 at December 31, 1995 and
$10,225,000 at September 30, 1996. At December 31, 1995 and September 30, 1996
the Joint Venture borrowed and has outstanding $4,500,000 and $8,650,000,
respectively, under this Revolving Credit Facility. The Revolving Credit
Facility provides for interest at the lenders' prime rate plus 0.75% (9.25% and
9.0% at December 31, 1995 and September 30, 1996, respectively). The borrowing
base is subject to review by the bank at the close of each quarter and may be
adjusted subject to the provisions of the Revolving Credit Facility.
In January 1995, the Joint Venture entered into a Subordinated Loan Agreement
(the "Subordinated Loan") with a shareholder of Old Edge. Such agreement
provides for a $1 million term loan and a $1 million line of credit. Drawdowns
under the line of credit require 30 days' notice. At December 31, 1994, 1995
and September 30, 1996, the aggregate amount outstanding under the Subordinated
Loan was $500,000, $1.3 million and $1.3 million, respectively, including $0.3
million outstanding under the line of credit. The principal is due, unless
earlier retired by the Joint Venture, upon the earlier of April 8, 1998 or the
conclusion of the Joint Venture's wind-up period. Interest at 10% per annum is
due monthly. The Subordinated Loan is secured by certain oil and gas
properties, equipment and other assets of the Joint Venture, but is subordinate
to the Revolving Credit Facility. The mortgage and security agreement restricts
the transfer of properties, creation of liens and other matters. The
Subordinated Loan is without recourse to the venturers. Under the Subordinated
Loan, the shareholder has a right to receive specified reversionary and
overriding royalty interests on prospects of the Joint Venture and certain
rights to convert such interests into common stock which is triggered by the
execution of certain transactions by the Joint Venture as defined within the
Subordinated Loan.
F-40
<PAGE>
EDGE JOINT VENTURE II
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and September 30, 1996, notes payable and long-term debt
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
Revolving credit facility payable,
lenders' prime rate plus 0.75%, interest
payable monthly, maturing June 1, 1998.. $4,500,000 $8,650,000
RIMCO note payable, 10% interest,
interest payable monthly, repaid in
1995.................................... $3,300,000
RIMCO interest-deferred notes payable,
10% interest, interest payable
quarterly, repaid in 1995............... 282,955
Note payable, lenders' prime rate plus
0.75%, payable in monthly principal
installments of $7,500 plus accrued
interest, matures March 1, 1997......... 180,000 112,500
Note payable, lenders' prime rate plus
1.5%, payable in monthly principal
installments of $5,547 plus accrued
interest, matures March 1, 1997......... 83,207 33,283
Note payable, 9% interest, payable in
quarterly installments of $13,750 plus
interest, repaid in 1995................ 13,750
Note payable, 10.996% interest, payable
in monthly installments of principal and
interest of $2,326, matures June 22,
1998.................................... 80,784 60,767 44,249
Note payable, lenders' prime plus 0.75%,
payable in monthly principal
installments of $14,042 plus accrued
interest, matures July 1, 1998.......... 308,917
Subordinate note payable to a shareholder
of Old Edge, 10% interest, interest
payable monthly, matures April 8, 1998.. 500,000 1,300,000 1,300,000
---------- ---------- -----------
Total.................................... 4,177,489 6,123,974 10,448,949
Current portion.......................... (943,767) (178,898) (316,030)
---------- ---------- -----------
Long-term portion........................ $3,233,722 $5,945,076 $10,132,919
========== ========== ===========
</TABLE>
Substantially all of the Joint Venture's property and equipment are pledged
as collateral on certain notes payable.
In future years ending September 30, these notes payable require minimum
principal payments as follows:
<TABLE>
<S> <C>
1997.......................................................... $ 316,030
1998.......................................................... 10,132,919
-----------
Total....................................................... $10,448,949
===========
</TABLE>
The Revolving Credit Facility and certain other note agreements provide for
certain financial covenants and restrictions on the Joint Venture including,
but not limited to, limitations on additional borrowings, sales of its oil and
gas properties or other collateral, a prohibition of dividends and certain
distributions of cash or properties to the venturers, a prohibition on certain
liens, a limitation on annual lease payments, and other financial ratios. For
the quarters ended March 31, 1996 and June 30, 1996 the Joint Venture was not
in compliance with the original cash flow/debt service ratio covenant. The
Joint Venture has received a waiver from the bank for such non-compliance for
all periods affected. These covenants were amended in August 1996 to be less
stringent.
F-41
<PAGE>
EDGE JOINT VENTURE II
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. RELATED PARTY TRANSACTIONS
The Joint Venture has agreed to reimburse the expenses incurred by its
managing venturer, Old Edge. This venturer employs geologists, landmen,
draftsmen, accountants and executives and provides office facilities and
related overhead. The principal business of Old Edge is to manage the affairs
of the Joint Venture, and as a result, it invoices the Joint Venture for
substantially all of its expenses. Such expenses invoiced to the Joint Venture
for the years ended December 31, 1993, 1994, 1995 and the nine month period
ended September 30, 1996 totaled $1,748,490, $2,215,895, $2,370,168 and
$2,043,128, respectively. At December 31, 1994, 1995 and September 30, 1996,
the Joint Venture owed Old Edge $68,442, $46,295 and $121,606, respectively.
Old Edge acts as operator of several wells owned by the Joint Venture. At
September 30, 1996 the Joint Venture owed Old Edge $621,324 for various joint
interest billings paid by Old Edge on behalf the Joint Venture to operate such
wells.
At December 31, 1994 and 1995 and September 30 1996, the Joint Venture had a
receivable from a related party of $5,000. At December 31, 1994, the Joint
Venture owed a shareholder of Old Edge $2,965.
At December 31, 1994 and 1995 and September 30, 1996, the Joint Venture was
liable for $500,000, $1.3 million and $1.3 million, respectively, of notes
payable to a shareholder of Old Edge and at December 31, 1995 and 1994, $3,205
and $11,041, respectively, of accrued interest (see Note 3).
On May 1, 1992, the Joint Venture became the managing venturer of the Essex
Royalty Joint Venture ("Essex"). On December 17, 1993 the Joint Venture issued
a $30,000 note receivable to Essex. This note receivable was collected during
1994.
On September 22, 1994, the Joint Venture became the managing venturer of
Essex Royalty Joint Venture II ("Essex II"). During 1994 the Joint Venture
loaned Essex II $125,000. This loan, plus accrued interest, was repaid during
1994.
During 1994 the Joint Venture had sales of undeveloped oil and gas property
to a partnership of which an officer of Old Edge is a partner. Such sales
amounted to $241,395 for the year ended December 31, 1994.
During 1994 the Joint Venture had sales of undeveloped oil and gas property
to a stockholder which amounted to $60,000.
5. SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS EXPLORATION, DEVELOPMENT
AND PRODUCTION ACTIVITIES (UNAUDITED)
This footnote provides unaudited information required by Statement of
Financial Accounting Standards No. 69, "Disclosures About Oil and Gas
Producing Activities."
CAPITALIZED COSTS--Capitalized costs and accumulated depreciation, depletion
and amortization relating to the Company's oil and natural gas producing
activities, all of which are conducted within the continental United States,
are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------- SEPTEMBER 30,
1994 1995 1996
----------- ------------ -------------
<S> <C> <C> <C>
Proved producing oil and gas
properties........................ $ 3,098,702 $ 7,085,245 $10,876,677
Accumulated depreciation, depletion
and amortization.................. (1,178,985) (1,746,663) (2,793,418)
----------- ------------ -----------
Net capitalized costs.............. $ 1,919,717 $ 5,338,582 $ 8,083,259
=========== ============ ===========
</TABLE>
F-42
<PAGE>
EDGE JOINT VENTURE II
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
COSTS INCURRED--Costs incurred in oil and gas property acquisition,
exploration and development activities are summarized below:
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDED
-------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Property acquisition costs:
Unproved...................... $2,914,010 $5,496,613 $3,658,573 $3,308,931
Proved........................ 6,873 26,236 91,025 36,386
Exploration cost.............. 527,194 670,270 2,642,025 2,040,546
Development costs............. 20,569 238,341 1,149,548 1,714,702
---------- ---------- ---------- ----------
Total costs incurred............ $3,468,646 $6,431,460 $7,541,171 $7,100,565
========== ========== ========== ==========
</TABLE>
RESERVES--Proved reserves are estimated quantities of oil and natural gas
which geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from known reservoirs under existing economic
and operating conditions. Proved developed reserves are proved reserves that
can reasonably be expected to be recovered through existing wells with existing
equipment and operating methods.
Proved oil and natural gas reserve quantities and the related discounted
future net cash flows for the periods presented are based on estimates prepared
by Ryder Scott Company, independent petroleum engineers. Such estimates have
been prepared in accordance with guidelines established by the Securities and
Exchange Commission.
The Joint Venture's net ownership interests in estimated quantities of proved
oil and natural gas reserves and changes in net proved reserves, all of which
are located in the continental United States, are summarized below:
<TABLE>
<CAPTION>
OIL, CONDENSATE
AND NATURAL GAS LIQUIDS
(BBLS)
----------------------------------------
YEAR ENDED NINE MONTH
DECEMBER 31, PERIOD ENDED
------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Proved developed and undeveloped
reserves:
Beginning of year................... 174,805 169,947 368,160 708,933
Revisions of previous estimates..... (44,269) 27,989 155,908 42,374
Purchases of oil and gas
properties......................... 84,116 6,275
Extensions and discoveries.......... 64,771 146,213 278,268 160,787
Sales of oil and gas properties..... (36,572)
Production.......................... (25,360) (60,105) (63,106) (80,693)
------- ------- ------- -------
End of year......................... 169,947 368,160 708,933 831,401
======= ======= ======= =======
Proved developed reserves at end of
year................................. 169,947 244,441 652,843 789,440
======= ======= ======= =======
</TABLE>
F-43
<PAGE>
EDGE JOINT VENTURE II
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
NATURAL GAS
(MCF)
-----------------------------------------------
YEAR ENDED NINE MONTH
DECEMBER 31, PERIOD ENDED
-------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
--------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Proved developed and undevel-
oped reserves:
Beginning of year............ 1,295,911 2,550,000 3,673,000 8,821,000
Revisions of previous
estimates................... 597,487 1,465,329 271,155 187,972
Purchases of oil and gas
properties.................. 37,000 1,047,000
Extensions and discoveries... 1,108,158 204,000 6,247,000 6,106,000
Sales of oil and gas
properties.................. (1,910,962)
Production................... (451,556) (583,329) (506,193) (1,550,972)
--------- --------- ---------- ----------
End of year.................. 2,550,000 3,673,000 8,821,000 13,564,000
========= ========= ========== ==========
Proved developed reserves at
end of year................... 2,550,000 3,548,000 6,692,000 10,985,000
========= ========= ========== ==========
</TABLE>
STANDARDIZED MEASURE--The table of the Standardized Measure of Discounted
Future Net Cash Flows relating to the Joint Venture's ownership interests in
proved oil and gas reserves as of year-end is shown below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Future cash inflows....... $ 7,955,845 $13,143,411 $31,011,202 $44,372,060
Future oil and gas
operating expenses....... (938,051) (2,417,571) (5,906,519) (8,118,033)
Future development costs.. (164,894) (641,475) (972,662)
----------- ----------- ----------- -----------
Future net cash flows..... 7,017,794 10,560,946 24,463,208 35,281,365
10% annual discount for
estimating timing of cash
flows.................... (1,239,728) (2,614,551) (7,020,596) (9,624,883)
----------- ----------- ----------- -----------
Standardized measure of
discounted future net
cash flows............... $ 5,778,066 $ 7,946,395 $17,442,612 $25,656,482
=========== =========== =========== ===========
</TABLE>
Future cash flows are computed by applying year end prices of oil and natural
gas to year end quantities of proved oil and natural gas reserves. Future
operating expenses and development costs are computed primarily by the Joint
Venture's petroleum engineers by estimating the expenditures to be incurred in
developing and producing the Joint Venture's proved oil and natural gas
reserves at the end of the year, based on year end costs and assuming the
continuation of existing economic conditions.
A discount factor of 10% was used to reflect the timing of future net cash
flows. The standardized measure of discounted future net cash flows is not
intended to represent the replacement cost or fair market value of the Joint
Venture's oil and gas properties.
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair value of the Joint
Venture's oil and natural gas reserves. An estimate of fair value would also
take into account, among other things, the recovery of reserves not presently
classified as proved, anticipated future changes in prices and costs, and a
discount factor more representative of the time value of money and the risks
inherent in reserve estimates.
F-44
<PAGE>
EDGE JOINT VENTURE II
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
CHANGES IN STANDARDIZED MEASURE--Changes in standardized measure of future
net cash flows relating to proved oil and gas reserves are summarized below:
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDED
------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Changes due to current
year operations:
Sales of oil and natural
gas, net of oil and
natural gas operating
expenses............... $(1,273,697) $(1,676,784) $(1,332,915) $(4,374,345)
Sales of oil and gas
properties............. (3,113,415)
Extensions and
discoveries............ 2,474,136 1,612,402 10,194,038 8,917,139
Purchases of oil and gas
properties............. 485,609 540,345
Changes due to revisions
in standardized
variables:
Prices and operating
expenses............... 181,546 (512,308) 408,398 1,651,190
Revisions of previous
quantity estimates..... 551,759 2,060,290 1,935,454 673,313
Estimated future
development costs...... (573) 62,740 (256,121)
Accretion of discount... 354,143 577,807 794,640 1,744,261
Production rates
(timing) and other..... (51,246) (378,114) 6,932 (141,567)
----------- ----------- ----------- -----------
Net change................ 2,236,641 2,168,329 9,496,217 8,213,870
----------- ----------- ----------- -----------
Beginning of year......... 3,541,425 5,778,066 7,946,395 17,442,612
----------- ----------- ----------- -----------
End of year............... $ 5,778,066 $ 7,946,395 $17,442,612 $25,656,482
=========== =========== =========== ===========
</TABLE>
Sales of oil and natural gas, net of oil and natural gas operating expenses,
are based on historical results. Sales of oil and gas properties, extensions
and discoveries, purchases of minerals in place, and the changes due to
revisions in standardized variables are reported on a discounted basis.
* * * * * *
F-45
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders ofEdge Petroleum Corporation and Subsidiary:
We have audited the accompanying consolidated balance sheets of Edge
Petroleum Corporation, a Texas corporation, and subsidiary ("Old Edge") as of
December 31, 1994 and 1995 and September 30, 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995 and the nine month period
ended September 30, 1996. These financial statements are the responsibility of
Old Edge's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Old Edge as of December 31, 1994
and 1995 and September 30, 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 and the
nine month period ended September 30, 1996, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
January 13, 1997
F-46
<PAGE>
EDGE PETROLEUM CORPORATION AND SUBSIDIARY, A TEXAS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
--------- ---------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ 60,130 $ 141,296 $ 534,217
Accounts receivable, trade.............. 2,414 23,271 18,562
Accounts receivable, working interest
owners................................. 1,273,531
Receivable from Edge Joint Venture II... 68,442 46,295 742,930
Receivable from related parties......... 94,285 117,765 182,538
Advance to stockholders................. 30,982 30,826 3,371
Other current assets.................... 16,099 9,427 22,260
--------- ---------- ----------
Total current assets.................. 272,352 368,880 2,777,409
--------- ---------- ----------
PROPERTY AND EQUIPMENT, Net............... 20,897 15,776 9,605
INVESTMENT IN EDGE JOINT VENTURE II....... 293,195 656,152 734,178
OTHER ASSETS.............................. 9,376 8,938 8,938
--------- ---------- ----------
TOTAL..................................... $ 595,820 $1,049,746 $3,530,130
========= ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade................. $ 97,714 $ 86,858 $ 86,713
Accounts payable, working interest
owners................................. 2,325,342
Payable to related parties.............. 40,000 40,000 40,000
Accrued liabilities..................... 6,052 48,870 42,611
--------- ---------- ----------
Total current liabilities............. 143,766 175,728 2,494,666
--------- ---------- ----------
LONG-TERM LIABILITY....................... 77,802 46,245 11,462
DEFERRED INCOME TAXES..................... 87,036 161,316
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 150,000
shares authorized, 105,263 shares
issued and outstanding; 5,263 shares
redeemable............................. 1,053 1,053 1,053
Contributed capital in excess of par
value.................................. 634,695 634,695 634,695
Retained earnings (deficit)............. (249,496) 130,989 268,938
Treasury stock 211 shares, 422 shares
and 632 shares at December 31, 1994 and
1995, and September 30, 1996,
respectively, at cost.................. (12,000) (26,000) (42,000)
--------- ---------- ----------
Total stockholders' equity............ 374,252 740,737 862,686
--------- ---------- ----------
TOTAL..................................... $ 595,820 $1,049,746 $3,530,130
========= ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-47
<PAGE>
EDGE PETROLEUM CORPORATION AND SUBSIDIARY,
A TEXAS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- --------------------
1993 1994 1995 1995 1996
--------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Oil and natural gas
sales.................. $ 17,601 $ 16,554 $ 24,216 $ 13,400 $ 20,999
Representation fees..... 23,372 24,000 24,000 18,000 22,500
Management fees......... 60,000 80,000 120,000 90,000 150,118
--------- -------- -------- -------- --------
Total revenue......... 100,973 120,554 168,216 121,400 193,617
--------- -------- -------- -------- --------
EXPENSES:
Oil and natural gas
operating expenses..... 2,677 4,169 3,123 1,952 1,695
General and
administrative......... 39,432 24,520 41,014 37,365 59,429
Depreciation............ 39,386 36,500 20,927 8,525 6,171
--------- -------- -------- -------- --------
Total expenses........ 81,495 65,189 65,064 47,842 67,295
--------- -------- -------- -------- --------
INCOME FROM OPERATIONS.... 19,478 55,365 103,152 73,558 126,322
OTHER INCOME AND EXPENSES:
Other income............ 13,749
Interest income......... 956 1,255 1,412 1,002 7,881
Interest expense........ (1,468) (23)
INCOME (LOSS) FROM
INVESTMENT IN
EDGE JOINT VENTURE II.... (295,426) 342,068 362,957 392,457 78,026
--------- -------- -------- -------- --------
INCOME (LOSS)--Before
income taxes............. (276,460) 412,414 467,521 467,017 212,229
INCOME TAX EXPENSE--
Deferred................. (87,036) (86,942) (74,280)
--------- -------- -------- -------- --------
NET INCOME (LOSS)......... $(276,460) $412,414 $380,485 $380,075 $137,949
========= ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-48
<PAGE>
EDGE PETROLEUM CORPORATION AND SUBSIDIARY,
A TEXAS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONTRIBUTED
CAPITAL IN RETAINED
COMMON EXCESS OF EARNINGS TREASURY
STOCK PAR VALUE (DEFICIT) STOCK TOTAL
------ ----------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993.. $1,053 $634,695 $(385,450) $ $ 250,298
Net loss.................. (276,460) (276,460)
------ -------- --------- -------- ---------
BALANCE AT DECEMBER 31,
1993....................... 1,053 634,695 (661,910) (26,162)
Treasury stock purchase,
422 shares............... (24,000) (24,000)
Issue of treasury stock,
211 shares............... 12,000 12,000
Net income................ 412,414 412,414
------ -------- --------- -------- ---------
BALANCE AT DECEMBER 31,
1994....................... 1,053 634,695 (249,496) (12,000) 374,252
Treasury stock purchase,
422 shares............... (28,000) (28,000)
Issue of treasury stock,
211 shares............... 14,000 14,000
Net income................ 380,485 380,485
------ -------- --------- -------- ---------
BALANCE AT DECEMBER 31,
1995....................... 1,053 634,695 130,989 (26,000) 740,737
Treasury stock purchase,
420 shares............... (32,000) (32,000)
Issue of treasury stock,
210 shares............... 16,000 16,000
Net income................ 137,949 137,949
------ -------- --------- -------- ---------
BALANCE AT SEPTEMBER 30,
1996....................... $1,053 $634,695 $ 268,938 $(42,000) $ 862,686
====== ======== ========= ======== =========
</TABLE>
See notes to consolidated financial statements.
F-49
<PAGE>
EDGE PETROLEUM CORPORATION AND SUBSIDIARY,
A TEXAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)..... $(276,460) $ 412,414 $ 380,485 $380,075 $ 137,949
Adjustments to recon-
cile net income
(loss) to net cash
provided (used) by
operating activities:
Depreciation........ 39,386 36,500 20,927 8,525 6,171
(Income) loss from
investment in Edge
Joint Venture II... 295,426 (342,068) (362,957) (392,457) (78,026)
Deferred income tax-
es................. 87,036 86,942 74,280
Changes in assets and
liabilities:
Accounts receivable,
trade.............. 6,264 (377) (20,857) (155) 4,709
Accounts receivable,
working interest
owners............. (1,273,531)
Receivable from Edge
Joint Venture II... (92,739) 24,297 22,147 20,060 (696,635)
Receivable from re-
lated parties...... 2,756 (82,137) (23,480) (66,698) (64,773)
Advances to stock-
holders............ (13,500) (14,111) 156 11,194 27,455
Other current as-
sets............... 4,318 9,224 6,672 (5,963) (12,833)
Other assets........ 438 439
Accounts payable,
trade.............. (5,290) 10,257 (10,856) (8,020) (145)
Payable to related
parties............ (26,747) (8,424)
Accounts payable,
working interest
owners............. 2,325,342
Deferred management
fee revenue........ 1,400 (20,000)
Accrued liabili-
ties............... 43,524 (44,345) 42,818 18,924 (6,259)
Refundable income
taxes.............. 10,429
Payable to Edge
Joint Venture II... (16,764)
Long-term liabili-
ty................. 21,226 30,413 (31,557) (24,240) (34,783)
--------- --------- --------- -------- ----------
Net cash provided
(used) by
operating
activities....... (6,771) 11,643 110,972 28,626 408,921
--------- --------- --------- -------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES--
Capital expenditures... (4,165) (5,721) (15,806) (11,574)
--------- --------- --------- -------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Treasury stock pur-
chase................ (24,000) (28,000) (28,000) (32,000)
Proceeds from issuance
of treasury stock.... 12,000 14,000 14,000 16,000
--------- --------- --------- -------- ----------
Net cash (used) by
financing
activities....... (12,000) (14,000) (14,000) (16,000)
--------- --------- --------- -------- ----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ (10,936) (6,078) 81,166 3,052 392,921
CASH AND CASH
EQUIVALENTS, BEGINNING
OF YEAR................ 77,144 66,208 60,130 60,130 141,296
--------- --------- --------- -------- ----------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................. $ 66,208 $ 60,130 $ 141,296 $ 63,182 $ 534,217
========= ========= ========= ======== ==========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION--
Cash received for
income taxes......... $ (10,429) $ (7,749)
</TABLE>
See notes to consolidated financial statements.
F-50
<PAGE>
EDGE PETROLEUM CORPORATION AND SUBSIDIARY, A TEXAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--Edge Petroleum Corporation, a Texas corporation ("Old Edge")
was organized on April 8, 1991 when it issued 105,263 shares of its common
stock in consideration for oil and gas properties, 100% of the common stock of
Old EPC, Inc. (the "Subsidiary") and $500,000 in cash. The oil and gas
properties were contributed by related parties; these assets have been recorded
at the historical cost basis of those stockholders who made the contribution.
The common stock of the Subsidiary contributed to Old Edge has been accounted
for as a reorganization of entities under common control.
Old Edge is the managing venturer of Edge Joint Venture II (the "Joint
Venture"). Under the Joint Venture Agreement (the "Agreement"), Old Edge is
restricted from creating debt or mortgages on the Joint Venture, selling all or
substantially all of the Joint Venture's assets, except in the normal course of
business, and taking any additional action not in compliance with the Agreement
or that would restrict the Joint Venture from doing business without the
approval of Edge Group II Limited Partnership ("Edge Group II"). Edge Group II
has the right to approve all purchases of oil and gas leases for Joint Venture
prospects, Joint Venture purchases of capital items and Joint Venture budgets.
The term of the Joint Venture was to have expired on April 8, 1996 according
to the Agreement; however, the venturers extended the dissolution date to
December 31, 1996. The Joint Venture will continue to operate under the terms
of the Agreement, as amended, until the dissolution is completed.
INTERIM FINANCIAL STATEMENTS--In the opinion of management, the unaudited
consolidated financial statements include all adjustments (consisting solely of
normally recurring adjustments) necessary for a fair presentation of the
results of operations and cash flows for the nine-month period ended September
30, 1995. Although management believes the disclosures in the financial
statements are adequate to make the information presented not misleading,
certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounted
principles have been condensed or omitted for the nine months ended September
30, 1995 pursuant to the rules and regulations of the Securities and Exchange
Commission. The results of operations and cash flows for the nine-month period
ended September 30, 1996 are not necessarily indicative of the results to be
expected for the full year.
CONSOLIDATED FINANCIAL STATEMENTS--The accompanying consolidated financial
statements include the accounts of Old Edge and its wholly owned subsidiary.
All intercompany balances have been eliminated in consolidation.
REVENUE RECOGNITION. The Company recognizes oil and gas revenue from its
interests in producing wells as oil and gas is produced and sold from those
wells. Oil and gas sold in production operations is not significantly different
from the Company's share of production.
INVESTMENT IN THE JOINT VENTURE--Old Edge records its share of the income or
losses of the Joint Venture using the equity method of accounting.
PROPERTY AND EQUIPMENT--Depreciation of property and equipment is provided
using the straight-line method of accounting based on estimated useful lives
ranging from five to ten years.
STATEMENTS OF CASH FLOWS--Old Edge has presented its cash flows using the
indirect method and considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements
F-51
<PAGE>
EDGE PETROLEUM CORPORATION AND SUBSIDIARY, A TEXAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from these estimates.
CONCENTRATION OF CREDIT RISK--Substantially all of Old Edge's accounts
receivable result from natural gas and oil sales or joint interest billings to
third parties in the oil and natural gas industry. This concentration of
customers and joint interest owners may impact Old Edge's overall credit risk
in that these entities may be similarly affected by changes in economic and
other conditions. Historically, Old Edge has not experienced credit losses on
such receivables.
2. INVESTMENT IN EDGE JOINT VENTURE II
Following are the balance sheets of the Joint Venture at December 31, 1994
and 1995 and September 30, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................ $ 288,458 $ 59,318 $ 396,147
Accounts receivable, trade............... 1,223,517 1,142,562 1,647,470
Accounts receivable, working interest
owners.................................. 120,252 333,552 1,083,860
Other current assets..................... 37,633 27,527 112,707
---------- ---------- -----------
Total current assets................... 1,669,860 1,562,959 3,240,184
---------- ---------- -----------
PROPERTY AND EQUIPMENT, NET--Full cost
method of accounting for oil and gas
property.................................. 4,115,062 7,895,292 12,374,424
DEFERRED OFFERING COSTS.................... 750,000
OTHER ASSETS............................... 110,665 54,603 19,813
---------- ---------- -----------
TOTAL...................................... $5,895,587 $9,512,854 $16,384,421
========== ========== ===========
LIABILITIES AND VENTURERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable, trade.................. $ 607,583 $1,038,696 $ 2,353,943
Payable to Edge Petroleum Corporation.... 68,442 46,295 742,930
Accrued interest payable................. 33,422 46,418 62,625
Accrued liabilities...................... 250,041
Current portion of long-term debt........ 943,767 178,898 316,030
---------- ---------- -----------
Total current liabilities.............. 1,653,214 1,310,307 3,725,569
---------- ---------- -----------
LONG-TERM DEBT............................. 3,233,722 5,945,076 10,132,919
VENTURERS' CAPITAL......................... 1,008,651 2,257,471 2,525,933
---------- ---------- -----------
TOTAL...................................... $5,895,587 $9,512,854 $16,384,421
========== ========== ===========
</TABLE>
F-52
<PAGE>
EDGE PETROLEUM CORPORATION AND SUBSIDIARY, A TEXAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the years ended December 31, 1993, 1994 and 1995 and the nine month
period ended September 30, 1996 and 1995, the statements of income were as
follows:
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
----------- ---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OIL AND GAS SALES....... $ 1,437,837 $1,977,242 $ 2,016,230 $ 1,363,505 $5,084,080
----------- ---------- ----------- ----------- ----------
COST AND EXPENSES:
Oil and gas operating
expenses............. 164,140 300,458 683,315 500,337 709,735
General and
administrative
expenses............. 1,498,381 1,827,362 2,311,936 1,934,440 2,234,016
Depreciation,
depletion and
amortization......... 402,324 556,898 792,475 516,586 1,206,567
----------- ---------- ----------- ----------- ----------
Total cost and
expenses........... 2,064,845 2,684,718 3,787,726 2,951,363 4,150,318
----------- ---------- ----------- ----------- ----------
INCOME (LOSS) FROM
OPERATIONS............. (627,008) (707,476) (1,771,496) (1,587,858) 933,762
OTHER INCOME AND
EXPENSES:
Interest expense,
net.................. (636,780) (399,998) (316,760) (196,108) (665,300)
Gain on sale of oil
and gas property..... 247,321 2,284,419 3,337,076 3,134,287
----------- ---------- ----------- ----------- ----------
NET INCOME (LOSS)....... $(1,016,467) $1,176,945 $ 1,248,820 $ 1,350,321 $ 268,462
=========== ========== =========== =========== ==========
</TABLE>
Old Edge's investment in the Joint Venture is as follows:
<TABLE>
<S> <C>
Negative equity in the Joint Venture at January 1, 1994....... $ (48,873)
Net income--1994.............................................. 342,068
---------
Investment in the Joint Venture at December 31, 1994.......... 293,195
Net income--1995.............................................. 362,957
---------
Investment in the Joint Venture at December 31, 1995.......... 656,152
Net income--nine month period ended September 30, 1996........ 78,026
---------
Investment in the Joint Venture, September 30, 1996........... $734,178
=========
</TABLE>
The above balance sheets and statements of income represent 100% of the Joint
Venture's assets, and liabilities and operations. Old Edge has an initial
ownership interest of approximately 29.064% and as the General Partner is
contingently liable for certain debts and obligations of the Joint Venture.
3. PROPERTY AND EQUIPMENT
At December 31, 1994 and 1995 and September 30, 1996, property and equipment
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Leasehold improvements.................... $ 52,954 $ 64,527 $ 64,527
Furniture and fixtures.................... 81,490 84,582 84,582
Office equipment.......................... 24,298 25,438 25,438
-------- -------- --------
Total property and equipment.............. 158,742 174,547 174,547
Accumulated depreciation and
amortization............................. (137,845) (158,771) (164,942)
-------- -------- --------
Total................................... $ 20,897 $ 15,776 $ 9,605
======== ======== ========
</TABLE>
F-53
<PAGE>
EDGE PETROLEUM CORPORATION AND SUBSIDIARY, A TEXAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM LIABILITY
Old Edge received an abatement on the operating lease arrangement for its
office space, which is described in Note 6. The long-term liability relates to
the future obligations on such lease and is being amortized over the life of
the lease.
5. COMMON STOCK
In 1994, Old Edge entered into an agreement with a related party to
repurchase 5,263 shares of its outstanding common stock. The repurchase
obligation is effective if the holders of such shares demand repurchase between
January 1995 and January 1998. However, Old Edge will have no obligation to
repurchase these shares if it has registered common stock under the Securities
Exchange Act of 1933 prior to the demand for repurchase. The amount to be paid
for these shares equals the percentage obtained by dividing 5,263 shares by the
total number of outstanding shares of Old Edge and multiplying this percentage
by the greater of (1) the net cash flow of Old Edge (as defined in the
agreement) times eight or (2) the adjusted net worth of Old Edge as defined in
the agreement.
During 1994, a third party entered into an arrangement to acquire shares of
Old Edge's outstanding common stock from a shareholder. These shares are held
in escrow as security for a nonrecourse promissory note issued to the third
party by the shareholder. The final payment is due January 15, 1997. Upon
payment of each annual principal amount, a proportionate number of shares will
be released by the shareholder from escrow to the third party. A stock
repurchase agreement gives Old Edge the option of participating in these annual
principal payments. Upon participation, Old Edge would take possession of its
pro rata share of the stock acquired. Should Old Edge elect not to participate
in a principal payment, Old Edge shall be deemed to have forfeited the
ownership rights in the stock for which the payment pertains. As of September
30, 1996, approximately 1,264 shares had been repurchased by Old Edge through
the arrangement.
In 1994 Old Edge adopted the 1994 Incentive Stock Option Plan, which provides
to certain key employees the granting of options to purchase up to 6,000 shares
of Old Edge's common stock. The recipient, timing and number of shares are
determined by the Board of Directors. The exercise price of any options granted
may not be less than 110 percent of the fair market value of Old Edge's stock
at the date of grant. In 1994 options to acquire 4,386 shares of Old Edge's
common stock were granted and vested immediately. No options were granted
during the year ended December 31, 1995 or the nine month period ended
September 30, 1996. No options were exercised or forfeited during the year
ended December 31, 1995 or the nine month period ended September 30, 1996 thus
all shares originally granted remain exercisable at September 30, 1996. The
options expire April 2004 at prices ranging from $45.60 to $91.20 per share.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 ("SFAS No. 123"). SFAS No. 123 is a new standard of accounting for
stock-based compensation and establishes a fair value method of accounting for
awards granted after December 31, 1995 under stock compensation plans. SFAS No.
123 encourages, but does not require, companies to adopt the fair value method
of accounting in place of the existing method of accounting for stock-based
compensation whereupon compensation costs are recognized only in situations
where stock compensation plans award intrinsic value to recipients at the date
of grant. Companies that do not adopt the fair value method of accounting
prescribed in SFAS No. 123 must, nonetheless, make annual pro forma disclosures
of the estimated effects on net income and earnings per share in their year-end
1996 financial statements as if the fair value method had been used for grants
after December 31, 1994.
F-54
<PAGE>
EDGE PETROLEUM CORPORATION AND SUBSIDIARY, A TEXAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
At September 30, 1996, Old Edge was obligated under a noncancelable operating
lease for office space. Following is a schedule of Old Edge's remaining future
minimum lease payments under this lease:
<TABLE>
<S> <C>
1997............................................................. $123,550
1998............................................................. 31,805
</TABLE>
Rent expense for the years ended December 31, 1993, 1994 and 1995 and the
nine month period ended September 30, 1996 was $156,207, $164,436, $165,317 and
$148,966, respectively, which is partially reimbursed by the Joint Venture.
Under the terms of a loan agreement entered into by and between the Joint
Venture and a shareholder of Old Edge, the shareholder reserves the right to
convert his interest in certain oil and gas properties into common stock of Old
Edge which is triggered by execution of certain transactions by the Joint
Venture, as defined by the loan agreement.
7. RELATED-PARTY TRANSACTIONS
Old Edge is the managing general partner of the Joint Venture. Old Edge
employs geologists, landmen, draftsmen, accountants and executives and provides
office facilities and related overhead in order to manage the affairs of the
Joint Venture. The principal business of Old Edge is to manage the affairs of
the Joint Venture, and, as a result, it invoices the Joint Venture for
substantially all of its expenses. Such expenses invoiced by Old Edge for the
years ended December 31, 1993, 1994 and 1995 and the nine month period ended
September 30, 1996 totaled $1,748,490, $2,215,895, $2,370,168 and $2,043,128,
respectively. At December 31, 1994 and 1995 and September 30, 1996, the Joint
Venture owed Old Edge $68,442, $46,295 and $742,930, respectively.
At December 31, 1994 and 1995 and September 30, 1996, included in advances to
shareholders was $30,982, $27,455 and $24,315, respectively, due from directors
of Old Edge. At December 31, 1995 and September 30, 1996, included in
receivable from related parties was $3,492, due from an employee. Old Edge
received revenue from various related parties for maintaining certain oil and
gas properties. Representation fees amounted to $23,372, $24,000, $24,000 and
$22,500 for the years ended December 31, 1993, 1994 and 1995, and the nine
month period ended September 30, 1996, respectively. At December 31, 1994 and
1995 and September 30, 1996, included in receivables from related parties was
$10,942, $3,306 and $7,356, respectively, for representation fees due Old Edge.
In 1991, Old Edge entered into a consulting agreement with a shareholder of
Old Edge whereby Old Edge is obligated to pay $40,000 annually for the
remainder of this individual's life in exchange for consulting services.
At December 31, 1994, included in payables to related parties was $2,488,
representing an amount owed to a director of Old Edge.
Old Edge entered into management agreements with Essex Royalty Joint Venture
I and Essex Royalty Joint Venture II (the "Essex Joint Ventures") on May 1,
1992 and September 1, 1994, respectively, whereby Old Edge will receive a
monthly management fee for managing the oil and gas joint ventures. For the
years ended December 31, 1993, 1994 and 1995 and the nine month period ended
September 30, 1996, Old Edge recorded management fee income in the amount of
$60,000, $80,000, $120,000 and $90,000, respectively. In addition, these
agreements stipulate that Old Edge is entitled to be reimbursed for certain
general and administrative expenses. Such expenses invoiced by Old Edge to the
Essex Joint Ventures for the years ended December 31, 1993, 1994 and 1995 and
the nine month period ended September 30, 1996 amounted to $36,750, $18,750,
F-55
<PAGE>
EDGE PETROLEUM CORPORATION AND SUBSIDIARY, A TEXAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$40,250 and $50,250, respectively. At December 31, 1994 and 1995 and September
30, 1996, Old Edge had a receivable from the Essex Joint Ventures of $63,600,
$115,000 and $147,375, respectively, relating to these expenses and management
fees.
8. INCOME TAXES
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts calculated for income tax purposes.
Significant components of Old Edge's deferred tax liabilities and assets as
of December 31, 1994 and 1995 and September 30, 1996 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Deferred tax liability:
Loss allowed for tax purposes in excess of
book loss from Old Edge's partnership
interest in the Joint Venture.............. $279,455 $784,789 $967,044
Other....................................... 651 538 538
-------- -------- --------
Total......................................... 280,106 785,327 967,582
-------- -------- --------
Deferred tax assets:
Net operating tax loss carryforwards........ 439,968 646,340 769,684
Other....................................... 49,725 51,951 36,582
Less valuation allowance.................... (209,587)
-------- -------- --------
Total deferred tax assets..................... 280,106 698,291 806,266
-------- -------- --------
Net deferred tax liability.................... $ -- $ 87,036 $161,316
======== ======== ========
</TABLE>
Old Edge's provision for income taxes differs from the amount computed by
applying the expected statutory rate. This difference is due to the utilization
of net operating loss carryforwards, the tax benefit of which was previously
unrecognized in the financial statements.
As of September 30, 1996, Old Edge had net operating tax loss carryforwards
of $2,199,096 which will begin to expire in the year 2007.
9. SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS EXPLORATION, DEVELOPMENT
AND PRODUCTION ACTIVITIES (UNAUDITED)
As discussed in Note 1, Old Edge records its investment in the Joint Venture
using the equity method of accounting. This footnote provides unaudited
information of Old Edge's share of the Joint Venture resulting from its
investment. This information is required by Statement of Financial Accounting
Standards No. 69, "Disclosures About Oil and Gas Producing Activities."
CAPITALIZED COSTS--Net capitalized costs relating to oil and natural gas
producing activities, all of which are conducted within the continental United
States, are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
-------- ---------- -------------
<S> <C> <C> <C>
Net capitalized costs..................... $557,944 $1,551,605 $2,349,318
======== ========== ==========
</TABLE>
F-56
<PAGE>
EDGE PETROLEUM CORPORATION AND SUBSIDIARY, A TEXAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
COSTS INCURRED--Total costs incurred in oil and gas property acquisition,
exploration and development activities are summarized below:
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDED
-------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Total costs incurred............. $1,008,127 $1,869,240 $2,191,766 $2,063,708
========== ========== ========== ==========
</TABLE>
RESERVES--Proved reserves are estimated quantities of oil and natural gas
which geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from known reservoirs under existing economic
and operating conditions. Proved developed reserves are proved reserves that
can reasonably be expected to be recovered through existing wells with existing
equipment and operating methods.
Proved oil and natural gas reserve quantities and the related discounted
future net cash flows for the periods presented are based on estimates prepared
by Ryder Scott Company, independent petroleum engineers. Such estimates have
been prepared in accordance with guidelines established by the Securities and
Exchange Commission.
Old Edge's share of the Joint Venture's net ownership interests in estimated
quantities of proved oil and natural gas reserves at year-end, all of which are
located in the continental United States, are summarized below:
<TABLE>
<CAPTION>
OIL, CONDENSATE
AND NATURAL GAS LIQUIDS
(BBLS)
-----------------------------------------
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- --------- --------- -------------
<S> <C> <C> <C> <C>
Proved developed and undeveloped
reserves............................ 49,393 107,002 206,044 241,638
======= ========= ========= =========
Proved developed reserves............ 49,393 71,044 189,742 229,443
======= ========= ========= =========
<CAPTION>
NATURAL GAS
(MCF)
-----------------------------------------
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- --------- --------- -------------
<S> <C> <C> <C> <C>
Proved developed and undeveloped
reserves............................ 741,132 1,067,521 2,563,735 3,942,241
======= ========= ========= =========
Proved developed reserves............ 741,132 1,031,191 1,944,963 3,192,680
======= ========= ========= =========
</TABLE>
STANDARDIZED MEASURE--The Standardized Measure of Discounted Future Net Cash
Flows relating to Old Edge's share of the Joint Venture's ownership interests
in proved oil and gas reserves as of year-end is shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Standardized measure of
discounted future net cash
flows......................... $1,679,337 $2,309,540 $5,069,521 $7,456,800
========== ========== ========== ==========
</TABLE>
A discount factor of 10% was used to reflect the timing of future net cash
flows. The standardized measure of discounted future net cash flows is not
intended to represent the replacement cost or fair market value of the oil and
gas properties.
F-57
<PAGE>
EDGE PETROLEUM CORPORATION AND SUBSIDIARY, A TEXAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair value of Old Edge's
share of the Joint Venture's oil and natural gas reserves. An estimate of fair
value would also take into account, among other things, the recovery of
reserves not presently classified as proved, anticipated future changes in
prices and costs, a discount factor more representative of the time value of
money and the risks inherent in reserve estimates.
* * * * *
F-58
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of Edge Group II Limited Partnership:
We have audited the accompanying consolidated balance sheets of Edge Group II
Limited Partnership ("Edge Group II") as of December 31, 1994, and 1995 and
September 30, 1996, and the related statements of operations, partners' capital
(deficit) and cash flows for each of the three years in the period ended
December 31, 1995 and the nine month period ended September 30, 1996. These
financial statements are the responsibility of Edge Group II's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Edge Group II as of December 31,
1994, and 1995 and September 30, 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1995 and the nine month period ended September 30, 1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
January 13, 1997
F-59
<PAGE>
EDGE GROUP II LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1994 1995 1996
----------- ----------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............ $ 194,607 $ 40,167 $ 267,022
Accounts receivable, trade........... 826,125 771,603 1,111,658
Accounts receivable, working interest
owners.............................. 80,990 224,647 729,980
Accounts receivable from related
parties............................. 750 750 750
Other current assets................. 25,346 18,539 75,908
----------- ----------- ------------
Total current assets............... 1,127,818 1,055,706 2,185,318
----------- ----------- ------------
PROPERTY AND EQUIPMENT, Net--full cost
method of accounting for oil and gas
property.............................. 2,771,494 5,317,479 8,334,175
DEFERRED OFFERING COSTS................ 505,125
OTHER ASSETS........................... 71,165 33,408 9,977
----------- ----------- ------------
TOTAL.................................. $ 3,970,477 $ 6,406,593 $ 11,034,595
=========== =========== ============
LIABILITIES AND PARTNERS' CAPITAL
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable, trade.............. $ 428,060 $ 718,414 $ 1,604,290
Payable to Old Edge.................. 46,096 31,180 500,363
Payable to related parties........... 1,000,969 1,267,460 1,334,083
Accrued Interest Payable............. 22,510 31,263 42,178
Accrued expenses..................... 121,623 67,999 247,403
Current portion of long-term debt.... 635,627 120,488 212,846
----------- ----------- ------------
Total current liabilities.......... 2,254,885 2,236,804 3,941,163
----------- ----------- ------------
LONG-TERM DEBT......................... 2,177,912 4,004,009 6,824,521
PARTNERS' CAPITAL (DEFICIT)............ (462,320) 165,780 268,911
----------- ----------- ------------
TOTAL.................................. $ 3,970,477 $ 6,406,593 $ 11,034,595
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-60
<PAGE>
EDGE GROUP II LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTH PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OIL AND NATURAL GAS
SALES.................. $ 968,383 $ 1,331,672 $ 1,357,931 $ 918,321 $3,424,128
---------- ----------- ----------- ---------- ----------
COST AND EXPENSES:
Oil and natural gas
operating expenses... 110,548 202,359 460,213 336,977 478,007
Depreciation,
depletion and
amortization......... 270,965 375,070 533,732 347,921 812,623
General and
administrative....... 1,027,177 1,247,855 1,503,586 1,312,655 1,515,670
Management fees....... 266,490 266,490 266,490 199,867 66,623
---------- ----------- ----------- ---------- ----------
Total cost and
expenses........... 1,675,180 2,091,774 2,764,021 2,197,420 2,872,923
---------- ----------- ----------- ---------- ----------
INCOME (LOSS) FROM
OPERATIONS............. (706,797) (760,102) (1,406,090) (1,279,099) 551,205
OTHER INCOME AND
EXPENSE:
Interest expense...... (427,119) (269,308) (213,331) (132,079) (448,074)
Gain on sale of proved
oil and gas
property............. 166,571 1,538,556 2,247,521 2,110,942
---------- ----------- ----------- ---------- ----------
NET INCOME (LOSS)....... $ (967,345) $ 509,146 $ 628,100 $ 699,764 $ 103,131
========== =========== =========== ========== ==========
Income (loss) per
Limited Partner unit... $ (5,067) $ 2,667 $ 3,290 $ 3,665 $ 540
========== =========== =========== ========== ==========
Weighted average limited
partner units
outstanding............ 189 189 189 189 189
========== =========== =========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-61
<PAGE>
EDGE GROUP II LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTH
DECEMBER 31, PERIOD ENDED
------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE, BEGINNING OF YEAR....... $ (4,121) $(971,466) $(462,320) $165,780
NET INCOME (LOSS)................ (967,345) 509,146 628,100 103,131
--------- --------- --------- --------
BALANCE, END OF PERIOD........... $(971,466) $(462,320) $ 165,780 $268,911
========= ========= ========= ========
</TABLE>
See notes to consolidated financial statements.
F-62
<PAGE>
EDGE GROUP II LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTH PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Net income (loss).... $ (967,345) $ 509,146 $ 628,100 $ 699,764 $ 103,131
Adjustments to recon-
cile net income
(loss) to net cash
provided (used) by
operating activi-
ties:
Depreciation, deple-
tion and amortiza-
tion................ 270,965 375,070 533,732 347,921 812,623
Gain on sale of oil
and gas property.... (166,571) (1,538,556) (2,247,521) (2,110,942)
Changes in assets and
liabilities:
Accounts receiv-
able, trade....... (222,289) (180,772) 54,522 417,645 (340,055)
Accounts
receivable,
working interest
owners............ (70,597) 36,572 (143,657) (460,565) (505,333)
Accounts receivable
from related par-
ties.............. (2,139) 32,885
Other current as-
sets.............. (470) (9,394) 6,807 (5,496) (57,369)
Other assets....... (27,997) (27,996)
Accounts payable,
trade............. 95,128 90,177 290,354 861,020 885,876
Payable to related
parties........... (294,370) 266,490 266,491 199,867 66,623
Payable to Old
Edge.............. 62,460 (36,365) (14,916) (13,510) 469,183
Accrued Interest
Payable........... (15,862) 21,686 8,753 (20,400) 10,915
Accrued liabili-
ties.............. 14,999 17,000 (53,624) 9,749 179,404
----------- ----------- ----------- ----------- -----------
Net cash provided
(used) by
operating
activities...... (1,296,091) (416,061) (698,956) (102,943) 1,624,998
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVEST-
ING ACTIVITIES:
Oil and gas property
and equipment
purchases........... (2,462,242) (4,582,506) (5,823,207) (3,734,827) (5,307,704)
Proceeds from sale of
oil and gas proper-
ty.................. 2,291,966 4,762,335 5,056,765 4,595,452 1,501,816
Purchase of note
receivable from
related party....... (20,205) (84,188)
Collection of notes
receivable from
related parties..... 104,393
Certificate of
deposit redemption.. 10,103
----------- ----------- ----------- ----------- -----------
Net cash provided
(used) by
investing
activities...... (180,378) 200,034 (766,442) 860,625 (3,805,888)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANC-
ING ACTIVITIES:
Proceeds from notes
payable............. 319,913 70,718 210,894 1,605,018 226,970
Payments on notes
payable............. (319,913) (326,443) (56,366) (2,458,474) (109,125)
Proceeds from long-
term debt........... 397,365 3,569,550 2,795,025
Payments on long-term
debt................ (284,735) (439,590) (2,413,120)
Accounts receivable
subscriptions....... 1,823,917 20,000
Deferred offering
cost................ (505,125)
----------- ----------- ----------- ----------- -----------
Net cash provided
(used) by
financing
activities...... 1,539,182 (277,950) 1,310,958 (853,456) 2,407,745
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... 62,713 (493,977) (154,440) (95,774) 226,855
CASH AND CASH
EQUIVALENTS BEGINNING
OF YEAR............... 625,871 688,584 194,607 194,607 40,167
----------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 688,584 $ 194,607 $ 40,167 $ 98,833 $ 267,022
=========== =========== =========== =========== ===========
SUPPLEMENTAL
DISCLOSURES TO CASH
FLOW INFORMATION:
Cash paid for inter-
est................. $ 257,212 $ 257,165 $ 207,108 $ 154,972 $ 443,677
</TABLE>
See notes to consolidated financial statements.
F-63
<PAGE>
EDGE GROUP II LIMITED PARTNERSHIP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--On January 1, 1990, Edge Group II Limited Partnership ("Edge
Group II") was formed to enter into a joint venture agreement with Edge
Petroleum Corporation, a Texas corporation ("Old Edge") and two other venturers
for the purpose of generating and selling oil and gas prospects in the
continental United States. Limited partnership interests in 189 units of
$70,500 each were sold to finance Edge Group II's interest in the Edge Joint
Venture II (the "Joint Venture"). The initial objective of the Joint Venture
was to (a) recoup its costs on the sale of undeveloped oil and gas prospects,
(b) make a cash profit on the sale and (c) retain a carried interest in the
exploratory well, and development wells, if any, drilled on the prospect.
The general partners of Edge Group II are John Sfondrini, individual general
partner, and Napamco (which is wholly owned by John Sfondrini), corporate
general partner (the "General Partners"). The Edge Group II limited partners
(the "Limited Partners") contributed 100% of the capital of Edge Group II to
the Joint Venture. Until such time as the Limited Partners have recovered 150%
of their capital contributions from distributions, income, gain, deductions,
and losses, distributions will be allocated 99% to the Limited Partners and 1%
to the General Partners. Thereafter, such distributive items will be allocated
75% to the Limited Partners and 25% to the General Partners. As stipulated
within the Limited Partnership Agreement of Edge Group II (the "Partnership
Agreement"), the General Partners are to receive an annual fee of $266,940 to
manage the activities of Edge Group II (see Note 4).
INTERIM FINANCIAL STATEMENTS--In the opinion of management, the unaudited
consolidated financial statements include all adjustments (consisting solely of
normally recurring adjustments) necessary for a fair presentation of the
results of operations and cash flows for the nine-month period ended September
30, 1995. Although management believes the disclosures in the financial
statements are adequate to make the information presented, certain information
and footnote disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted for the nine months ended September 30, 1995 pursuant to
the rules and regulations of the Securities and Exchange Commission. The
results of operations and cash flows for the nine-month period ended September
30, 1996 are not necessarily indicative of the results to be expected for the
full year.
INVESTMENT IN EDGE JOINT VENTURE II--On April 8, 1991, the Joint Venture, a
general partnership, was formed by Old Edge, Edge Group II, Edge Group
Partnership and Gulfedge Limited Partnership. The Joint Venture purchased the
assets and assumed the liabilities of a related entity, Edge Group Joint
Venture I. Certain partners of Edge Group II were entitled to receive the
proceeds of the sale and authorized the application of their portion of the
proceeds as their capital contribution to the Joint Venture. This flow of funds
was deemed to have occurred at closing as a part of the organization of the
Joint Venture and its acquisition of the indicated assets.
Old Edge is the managing venturer of the Joint Venture. Without the approval
of Edge Group II, Old Edge is restricted from creating debt or mortgages on
behalf of the Joint Venture, selling all or substantially all of the Joint
Venture's assets or taking additional action not in compliance with the Joint
Venture Agreement or that would restrict it from doing business. Edge Group II
has the right to approve all lease acquisitions, capital purchases and budgets
of the Joint Venture.
The term of the Joint Venture was to have expired on April 8, 1996 according
to the Joint Venture Agreement; however, the venturers extended the dissolution
date to December 31, 1996. The Joint Venture will continue to operate under the
terms of the original Joint Venture agreement, as amended, until the
dissolution is completed.
Edge Group II will continue in existence until December 31, 2025, unless
terminated earlier in accordance with the Partnership Agreement.
F-64
<PAGE>
EDGE GROUP II LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATED FINANCIAL STATEMENTS--Edge Group II has an initial 67.35%
interest in the Joint Venture. Edge Group II accounts for its investment in the
Joint Venture using the proportionate consolidation method of accounting.
Accordingly, the accompanying consolidated financial statements include the
accounts of Edge Group II and a pro-rata (67.35%) portion of the Joint
Venture's assets, liabilities and results of operations. All intercompany
balances have been eliminated in consolidation.
REVENUE RECOGNITION--The Company recognizes oil and gas revenue from its
interests in producing wells as oil and gas is produced and sold from those
wells. Oil and gas sold in production operations is not significantly different
from the Company's share of production.
PROPERTY & EQUIPMENT--Included in oil and gas property is Edge Group II's
proportionate share of the Joint Venture's oil and gas property. During 1996,
Edge Group II changed its method of accounting from the successful efforts
method to the full cost method of accounting for oil and gas properties and
adjusted all historical periods to reflect the change in accounting. Management
believes that the full cost method of accounting better reflects the results of
its oil and gas exploration activities.
The Joint Venture's investments in oil and gas properties are accounted for
using the full cost method of accounting. All costs associated with the
acquisition, exploration and development of oil and gas properties are
capitalized.
Oil and gas properties are amortized on the unit-of-production method using
estimates of proved reserve quantities. Investments in unproved properties are
not amortized until proved reserves associated with the projects can be
determined or until impairment occurs. If the results of an assessment indicate
that the properties are impaired, the amount of impairment is added to the
proved oil and gas property costs to be amortized. The amortizable base
includes estimated future development costs and, where significant,
dismantlement, restoration and abandonment costs, net of estimated salvage
values. The depletion rate per Mcfe for the year ended December 31, 1993, 1994
and 1995 and the nine month period ended September 30, 1996 was $0.43, $0.42,
$0.49 and $0.44, respectively.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments
would significantly alter the relationship between capitalized costs and proved
reserves. Abandonments of properties are accounted for as adjustments of
capitalized costs with no loss recognized.
In addition, the capitalized costs of oil and gas properties are subject to a
"ceiling test," which limits such costs to the estimated present value,
discounted at a 10% interest rate, of future net cash flows from proved
reserves, based on current economic and operating conditions, plus the cost of
unproved prospects. If capitalized costs exceed this limit, the excess is
charged to depreciation, depletion and amortization. For the nine-month period
ended September 30, 1996 and the years ended December 31, 1993, 1994 and 1995,
the nine-month period ended September 30, 1996, and no write-down of the Joint
Venture's oil and gas assets was necessary.
Depreciation of other property and equipment is provided using the straight-
line method based on estimated useful lives ranging from five to ten years.
DEFERRED LOAN AND ORGANIZATION COSTS--Deferred loan costs have been
capitalized as deferred assets and amortized over the term of the loan.
Organization costs have been capitalized and are amortized on a straight line
basis over five years.
HEDGING ACTIVITIES--The Joint Venture periodically uses derivative financial
instruments to manage price risk related to natural gas sales and not for
speculative purposes. For book purposes, gains and losses related to
F-65
<PAGE>
EDGE GROUP II LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the hedging of anticipated transactions are recognized in income when the
hedged transaction occurs. The natural gas swap agreements generally provide
for the Joint Venture to receive or make counterparty payments on the
differential between a fixed price and a variable indexed price for natural
gas. Total MCF's of natural gas purchased and sold by the Joint Venture, under
swap arrangements during the nine month period ended September 30, 1996 and
the year ended December 31, 1995 were 182,000 MCFs and 122,000 MCFs,
respectively. Edge Group II's share of these volumes were 122,577 MCFs, and
82,167, respectively. Gains (losses) realized by the Joint Venture under such
swap arrangements were $5,270 and $(15,720) for the nine month period ended
September 30, 1996 and the year ended December 31, 1995, respectively. Edge
Group II's share of these gains (losses) were $3,549 and $(10,587),
respectively. Outstanding hedges at December 31, 1995 were not material and
the Company had no existing hedging positions as of September 30, 1996. There
was no hedging activity in 1994 or 1993.
INCOME TAXES--Federal and state income taxes are the liability of the
individual partners and not of the Partnership. Therefore, no provision or
liability for federal and state income taxes has been provided in the
financial statements.
STATEMENTS OF CASH FLOWS--Edge Group II has presented its cash flows using
the indirect method and considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS--Edge Group II's financial instruments consist of
cash, receivables, payables, long-term debt and natural gas commodity hedges.
The carrying amount of cash, receivables and payables approximates fair value
because of the short-term nature of these items. The carrying amount of long-
term debt approximates fair value as the individual borrowings were negotiated
or renegotiated during or after 1993 and/or bear interest at floating market
interest rates. The carrying amount of natural gas commodity hedges
approximates fair value based on the expected settlement amounts of these
transactions in 1996.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from these estimates.
Significant estimates include depreciation, depletion and amortization of
proved producing oil and gas properties, estimates of proved oil and gas
reserve volumes; and discounted future net cash flows (see Note 5).
CONCENTRATION OF CREDIT RISK--Substantially all of Edge Group II's accounts
receivable result from oil and natural gas sales or joint interest billings to
third parties in the oil and natural gas industry. This concentration of
customers and joint interest owners may impact Edge Group II's overall credit
risk in that these entities may be similarly affected by changes in economic
and other conditions. Historically, Edge Group II has not experienced credit
losses on such receivables.
2. PROPERTY AND EQUIPMENT
At December 31, 1994 and 1995 and September 30, 1996, Edge Group II's share
of property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1994 1995 1996
---------- ----------- -------------
<S> <C> <C> <C>
Oil and gas property.................... $3,323,545 $ 6,081,568 $ 9,361,981
Computer equipment...................... 404,897 676,537 1,202,009
Other property and equipment............ 5,241 6,379 6,379
---------- ----------- -----------
Total property and equipment............ 3,733,683 6,764,484 10,570,369
Accumulated depreciation, depletion and
amortization........................... (962,189) (1,447,005) (2,236,194)
---------- ----------- -----------
Property and equipment, net............. $2,771,494 $ 5,317,479 $ 8,334,175
========== =========== ===========
</TABLE>
F-66
<PAGE>
EDGE GROUP II LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Oil and natural gas properties not subject to amortization consist of the
cost of undeveloped leaseholds, exploratory and developmental wells in
progress, and secondary recovery projects before the assignment of proved
reserves. These costs are reviewed periodically by management for impairment,
with the impairment provision included in the cost of oil and natural gas
properties subject to amortization. Factors considered by management in its
impairment assessment include drilling results by the Company and other
operators, the terms of oil and gas leases not held by production, production
response to secondary recovery activities and available funds for exploration
and development. The following table summarizes the cost of the properties not
subject to amortization by year the cost was incurred:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
Year cost incurred:
Remainder........................... $ 188,806 $ 152,870 $ 139,855
1993................................ 229,963 186,163 158,584
1994................................ 817,801 501,585 320,749
1995................................ -- 469,038 315,956
1996................................ 1,101,395
---------- ---------- ----------
$1,236,570 $1,309,656 $2,036,539
========== ========== ==========
</TABLE>
During 1994 the Joint Venture issued a note payable for $91,695 issued to the
seller of certain seismic data. Subsequently, the Joint Venture entered into a
sales agreement with the same entity to sell the Joint Venture's interest in an
unevaluated property for $1,491,695 resulting in a gain of $1,288,363. Edge
Group II's share of cash proceeds and gain was $942,900 and $867,712,
respectively. As a component of the sales agreement, the note payable was used
to reduce the proceeds from the sale.
3. LONG-TERM DEBT
In April 1991, the Joint Venture borrowed, in the aggregate, $4,500,000 from
the RIMCO Partnerships and another partnership of which RIMCO is the general
partner, at an annual interest rate of 15.5% (the "RIMCO Note"). The Joint
Venture and such partnerships agreed to reduce the interest rate of the RIMCO
Note from 15.5% to 10% for the period from October 1, 1993 through September
30, 1995. Pursuant to such agreement, the Joint Venture conveyed to such
partnerships a 0.4% after-payout royalty interest, in the aggregate, in all
prospects sold by the Joint Venture during such period. The RIMCO Note was
repaid in March 1995.
During July 1995, the Joint Venture entered into a revolving credit facility
(the "Revolving Credit Facility") with a bank to finance temporary working
capital requirements. The Revolving Credit Facility provides up to $20,000,000
in available borrowings limited by a borrowing base (as defined in the
Revolving Credit Facility) which was $4,500,000 and $10,225,000 at December 31,
1995 and September 30, 1996, respectively. At December 31, 1995 and September
30, 1996 the Joint Venture borrowed and has outstanding $4,500,000 and
$8,650,000, respectively, under this Revolving Credit Facility. The Revolving
Credit Facility provides for interest at the lender's prime rate plus 0.75%
(9.25% and 9.0% at December 31, 1995 and September 30, 1996, respectively).
Edge Group II's share of the Revolving Credit Facility was approximately
$3,030,750 and $5,825,775 at December 31, 1995 and September 30, 1996,
respectively. The borrowing base is subject to review by the bank at the close
of each quarter and may be adjusted subject to the provisions of the Revolving
Credit Facility.
In January 1995 the Joint Venture entered into a Subordinated Loan Agreement
(the "Subordinated Loan") with a shareholder of Old Edge. Such agreement
provides for a $1 million term loan and a $1 million line of
F-67
<PAGE>
EDGE GROUP II LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
credit. Drawdowns under the line of credit require 30 days notice. At December
31, 1994 and 1995 and September 30, 1996, the aggregate amount outstanding
under the Subordinated Loan was $500,000, $1.3 million and $1.3 million,
respectively, including $0.3 million outstanding under the line of credit. The
principal is due, unless retired earlier by the Joint Venture, upon the earlier
of April 8, 1998 or the conclusion of the Joint Venture's wind-up period.
Interest at 10% per annum is due monthly. The Subordinated Loan is secured by
certain oil and gas properties, equipment and other assets of the Joint
Venture, but is subordinate to the Revolving Credit Facility. The mortgage and
security agreement restricts the transfer of properties, creation of liens and
other matters. The Subordinated Loan is without recourse to the venturers.
Under the Subordinated Loan Agreement, the shareholder has a right to receive
specified reversionary and overriding royalty interests on prospects of the
Joint Venture and certain rights to convert such interests into Common Stock
which is triggered by the execution of certain transactions by the Joint
Venture as defined within the Subordinated Loan Agreement. Edge Group II's
share of this loan was $336,750 at December 31, 1994 and $875,550 at both
December 31, 1995 and September 30, 1996.
At December 31, 1994 and 1995, and September 30, 1996 Edge Group II's share
of the Joint Venture's notes payable and long-term debt consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
Credit facility payable, 9.25% interest,
interest payable monthly, maturing
June 1, 1998............................ $3,030,750 $5,825,775
RIMCO note payable, 10% interest,
interest payable monthly, repaid in
1995.................................... $2,222,550
RIMCO interest-deferred notes payable,
10% interest, interest payable
quarterly, repaid in 1995............... 190,570
Note payable, lenders' prime rate plus
0.75%, payable in monthly principal
installments of $5,051 plus accrued
interest, matures March 1, 1997......... 121,230 75,769
Note payable, lenders' prime rate plus
1.5%, payable in monthly principal
installments of $3,736 plus accrued
interest, matures March 1, 1997......... 56,040 22,416
Note payable, 9% interest, payable in
quarterly installments of $9,261 plus
interest, repaid in 1995................ 9,261
Note payable, 10.996% interest, payable
in monthly installments of principal and
interest of $1,567, matures June 22,
1998.................................... 54,408 40,927 29,802
Note payable, lenders' prime plus 0.75%,
payable in monthly principal
installments of $9,457 plus accrued
interest, matures July 1, 1998.......... 208,055
Subordinate note payable to a shareholder
of EPC, 10% interest, interest payable
monthly, matures April 8, 1996.......... 336,750 875,550 875,550
---------- ---------- ----------
Total.................................... 2,813,539 4,124,497 7,037,367
Current portion.......................... (635,627) (120,488) (212,846)
---------- ---------- ----------
Long-term portion........................ $2,177,912 $4,004,009 $6,824,521
========== ========== ==========
</TABLE>
Substantially all of the Joint Venture's property and equipment are pledged
as collateral on certain notes payable.
F-68
<PAGE>
EDGE GROUP II LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In future years ending September 30, Edge Group II's share of these notes
payable requires minimum principal payments as follows:
<TABLE>
<S> <C>
1997.......................................................... $ 212,846
1998.......................................................... 6,824,521
----------
Total....................................................... $7,037,367
==========
</TABLE>
The Revolving Credit Facility and certain other note agreements of the Joint
Venture provide for certain financial covenants and restrictions on the Joint
Venture including, but not limited to, limitations on additional borrowings,
sales of its oil and gas properties or other collateral, a prohibition of
dividends and certain distributions of cash or properties to the venturers, a
prohibition on certain liens, a limitation on annual lease payments, and other
financial ratios. For the quarters ended March 31, 1996 and June 30, 1996, the
Joint Venture was not in compliance with the original cash flow/debt service
ratio covenant. The Joint Venture has received a waiver from the bank for such
noncompliance for all periods affected. These covenants were amended in August
1996 to be less stringent.
4. RELATED PARTY TRANSACTIONS
Edge Group II incurred management fees of $266,490 for each of the three
years ended December 31, 1995 and $66,623 during the nine month period ended
September 30, 1996. Included in accrued expenses at December 31, 1994, 1995 and
September 30, 1996 is $999,337, $1,265,827 and $1,332,450 respectively,
representing accrued management fees due the General Partners.
The Joint Venture has agreed to reimburse the expenses incurred by its
managing venturer, Old Edge. This venturer employs geologists, landmen,
draftsmen, accountants and executives and provides office facilities and
related overhead. The principal business of Old Edge is to manage the
activities of the Joint Venture, and as a result, it invoices the Joint Venture
for substantially all of its expenses. Such expenses invoiced to the Joint
Venture for the years ended December 31, 1993, 1994, and 1995 and the nine
months period ended September 30, 1996 totaled $1,748,490, $2,215,895,
$2,370,168 and $2,043,128, respectively. Edge Group II's share of reimbursed
expenses was $1,177,608, $1,492,405 $1,596,308 and $1,376,047 for the years
ended December 31, 1993, 1994, and 1995 and the nine month period ended
September 30, 1996, respectively. At December 31, 1994, and 1995 and September
30, 1996 the Joint Venture owed Old Edge $68,442, $46,295 and $121,606,
respectively. Edge Group II's share of this payable to Old Edge was $46,096,
$31,180 and $81,902 at December 31, 1994, and 1995, and September 30, 1996,
respectively.
At December 31, 1994 and 1995 and September 30, 1996, the Joint Venture had a
receivable from a related party of $5,000. At December 31, 1994 the Joint
Venture owed a shareholder of Old Edge $2,965. Edge Group II's share of this
related party receivable and payable was $3,368 and $1,997, respectively.
Old Edge acts as operator of several wells owned by the Joint Venture. At
September 30, 1996 the Joint Venture owed Old Edge $621,324 for various joint
interest billings paid by Old Edge on behalf of the Joint Venture. Edge Group
II's share of this payable is $418,462.
At December 31, 1994 and 1995 and September 30, 1996, the Joint Venture was
liable for $500,000, $1.3 million and $1.3 million, respectively, of notes
payable to a shareholder of Old Edge and accrued interest of $3,205 and $11,041
at December 31, 1995 and 1994, respectively (see Note 3). Edge Group II's share
of the notes payable was $336,750 at December 31, 1994 and $875,550 at both
December 31, 1995 and September 30, 1996, and its share of accrued interest was
$2,159 and $7,436 at December 31, 1994 and 1995, respectively.
F-69
<PAGE>
EDGE GROUP II LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On May 1, 1992, the Joint Venture became the managing venturer of the Essex
Royalty Joint Venture ("Essex"). On December 17, 1993 the Joint Venture issued
a $30,000 note receivable to Essex. Edge Group II's share of this note
receivable was $20,205. This note receivable was collected during 1994.
On September 22, 1994, the Joint Venture became the managing venturer of
Essex Royalty Joint Venture II ("Essex II"). During 1994 the Joint Venture
loaned Essex II $125,000. Edge Group II's share of this loan was $84,188. This
loan, plus accrued interest, was repaid during 1994.
During 1994 the Joint Venture had sales of drilling prospects to a
partnership of which an officer of Old Edge is a partner. Such sales amounted
to $241,395 for the year ended December 31, 1994. Edge Group II's share of
such sales was $162,580.
During 1994 the Joint Venture sold drilling prospects to a stockholder of
Old Edge which amounted to $60,000. Edge Group II's share of such sales was
$40,410.
5. SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS EXPLORATION, DEVELOPMENT
AND PRODUCTION ACTIVITIES (UNAUDITED)
This footnote provides unaudited information required by Statement of
Financial Accounting Standards No. 69, "Disclosures About Oil and Gas
Producing Activities."
CAPITALIZED COSTS--Capitalized costs and accumulated depreciation, depletion
and amortization relating to the Partnership's oil and gas producing
activities, all of which are conducted within the continental United States,
are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1994 1995 1996
----------- ------------ -------------
<S> <C> <C> <C>
Proved producing oil and gas prop-
erties............................ $ 2,086,975 $ 4,771, 912 $ 7,325,442
Accumulated depreciation, depletion
and amortization.................. (605,139) (1,176,377) (1,881,367)
----------- ------------ -----------
Net capitalized costs.............. $1,481,836 $ 3,595,535 $ 5,444,075
=========== ============ ===========
</TABLE>
COSTS INCURRED--Costs incurred in oil and gas property acquisition,
exploration and development activities are summarized below:
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDING
-------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Property acquisition costs:
Unproved prospects............ $1,962,586 $3,701,969 $2,464,049 $2,228,565
Proved........................ 4,629 17,670 61,305 24,506
Exploration costs............. 355,065 451,427 1,779,404 1,374,308
Development costs............. 13,853 160,523 774,221 1,154,852
---------- ---------- ---------- ----------
Total costs incurred............ $2,336,133 $4,331,589 $5,078,979 $4,782,231
========== ========== ========== ==========
</TABLE>
RESERVES--Proved reserves are estimated quantities of crude oil and natural
gas which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions. Proved developed reserves are
proved reserves that can reasonably be expected to be recovered through
existing wells with existing equipment and operating methods.
F-70
<PAGE>
EDGE GROUP II LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Proved oil and gas reserve quantities and the related discounted future net
cash flows before income taxes for the periods presented are based on
estimates prepared by Ryder Scott Company, independent petroleum engineers.
Such estimates have been prepared in accordance with guidelines established by
the Securities and Exchange Commission.
Edge Group II's net ownership interests in estimated quantities of proved
oil and gas reserves and changes in net proved reserves, all of which are
located in the continental United States, are summarized below:
<TABLE>
<CAPTION>
CRUDE OIL, CONDENSATE
AND NATURAL GAS LIQUIDS
(BBLS)
-----------------------------------------------
NINE MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDED
-------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
--------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Proved developed and undevel-
oped reserves:
Beginning of year............ 117,731 114,459 247,955 477,465
Revisions of previous esti-
mates....................... (29,815) 18,851 105,004 28,539
Purchases of oil and gas
properties.................. 56,652 4,226
Extensions and discoveries... 43,623 98,474 187,413 108,290
Sales of oil and gas proper-
ties........................ (24,631)
Production................... (17,080) (40,481) (42,502) (54,347)
--------- --------- ---------- ----------
End of year.................. 114,459 247,955 477,465 559,947
========= ========= ========== ==========
Proved developed reserves at
end of year................... 114,459 164,631 439,690 531,688
========= ========= ========== ==========
<CAPTION>
NATURAL GAS
(MCF)
-----------------------------------------------
NINE MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDED
-------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
--------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Proved developed and
undeveloped reserves:
Beginning of year............ 872,796 1,717,425 2,473,766 5,940,945
Revisions of previous
estimates................... 402,407 986,899 182,623 126,599
Purchases of oil and gas
properties.................. 24,920 705,155
Extensions and discoveries... 746,344 137,394 4,207,355 4,112,391
Sales of oil and gas
properties.................. (1,287,033)
Production................... (304,122) (392,872) (340,921) (1,044,580)
--------- --------- ---------- ----------
End of year................ 1,717,425 2,473,766 5,940,945 9,135,355
========= ========= ========== ==========
Proved developed reserves at
end of year................... 1,717,425 2,389,578 4,507,062 7,398,398
========= ========= ========== ==========
</TABLE>
F-71
<PAGE>
EDGE GROUP II LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
STANDARDIZED MEASURE--The table of the Standardized Measure of Discounted
Future Net Cash Flows relating to the Partnership's ownership interests in
proved oil and gas reserves as of year end is shown below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------ SEPTEMBER 30,
1993 1994 1995 1996
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Future cash inflows........ $5,385,202 $ 8,852,087 $20,886,045 $29,884,582
Future oil and gas
operating expenses........ (631,777) (1,628,234) (3,978,041) (5,467,495)
Future development costs... (111,056) (432,033) (655,088)
---------- ----------- ----------- -----------
Future net cash flows...... 4,753,425 7,112,797 16,475,971 23,761,999
10% annual discount for
estimating timing of cash
flows..................... (861,897) (1,760,900) (4,728,371) (6,482,359)
---------- ----------- ----------- -----------
Standardized measure of
discounted future net cash
flows..................... $3,891,528 $ 5,351,897 $11,747,600 $17,279,640
========== =========== =========== ===========
</TABLE>
Future cash flows are computed by applying year end prices of oil and natural
gas to year end quantities of proved oil and natural gas reserves. Future
production and development costs are computed primarily by the Joint Venture's
petroleum engineers by estimating the expenditures to be incurred in developing
and producing the Edge Group II's indirect net proved oil and natural gas
reserves at the end of the year, based on year end costs and assuming the
continuation of existing economic conditions.
A discount factor of 10% was used to reflect the timing of future net cash
flows. The standardized measure of discounted future net cash flows is not
intended to represent the replacement cost or fair market value of the Edge
Group II's Partnership's indirect net oil and gas properties.
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair value of the Edge
Group II's indirect net oil and natural gas reserves. An estimate of fair value
would also take into account, among other things, the recovery of reserves not
presently classified as proved, anticipated future changes in prices and costs,
and a discount factor more representative of the time value of money, and the
risks inherent in reserve estimates.
CHANGES IN STANDARDIZED MEASURE--Changes in standardized measure of future
net cash flows relating to proved oil and gas reserves are summarized below:
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDED
------------------------------------ SEPTEMBER 30,
1993 1994 1995 1996
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Changes due to current year
operations:
Sales of oil and natural
gas, net of oil and
natural gas operating
expenses................ $ (857,835) $(1,129,313) $ (897,718) $ (2,946,121)
Sales of oil and gas
properties.............. (2,096,885)
Extensions and
discoveries............. 1,666,331 1,085,953 6,865,685 6,005,693
Purchases of oil and gas
properties.............. 327,058 363,922
Changes due to revisions in
standardized variables:
Prices and operating
expenses................ 122,271 (345,039) 275,056 1,112,076
Revisions of previous
quantity estimates...... 371,610 1,387,605 1,303,529 453,476
Estimated future
development costs....... (386) 42,255 (172,497)
Accretion of discount.... 238,515 389,153 535,190 1,174,760
Production rates (timing)
and other............... (34,514) (254,662) 4,669 (95,347)
---------- ----------- ----------- ------------
Net change................. 1,506,378 1,460,369 6,395,703 5,532,040
---------- ----------- ----------- ------------
Beginning of year.......... 2,385,150 3,891,528 5,351,897 11,747,600
---------- ----------- ----------- ------------
End of year................ $3,891,528 $ 5,351,897 $11,747,600 $17,279,640
========== =========== =========== ============
</TABLE>
Sales of oil and natural gas, net of oil and natural gas operating expenses,
are based on historical results. Sales of oil and gas properties, extensions
and discoveries, purchases of minerals in place and the changes due to
revisions in standardized variables are reported on a discounted basis.
* * * * * *
F-72
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners ofGulfedge Limited Partnership:
We have audited the accompanying balance sheets of Gulfedge Limited
Partnership ("Gulfedge") as of December 31, 1994 and 1995 and September 30,
1996, and the related statements of operations and partners' capital (deficit)
and cash flows for each of the three years in the period ended December 31,
1995 and the nine month period ended September 30, 1996. These financial
statements are the responsibility of Gulfedge's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Gulfedge as of December 31, 1994 and 1995
and September 30, 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 and the nine
month period ended September 30, 1996, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
January 13, 1997
F-73
<PAGE>
GULFEDGE LIMITED PARTNERSHIP
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................... $ 6,583 $ 1,354 $ 9,040
Accounts receivable, trade................... 27,921 26,073 37,595
Accounts receivable, working interest own-
ers......................................... 2,744 7,612 24,734
Other current assets......................... 859 628 2,572
-------- -------- --------
Total current assets....................... 38,107 35,667 73,941
-------- -------- --------
PROPERTY AND EQUIPMENT, Net-full cost method of
accounting for oil and gas property........... 93,906 180,171 282,385
DEFERRED OFFERING COSTS........................ 17,115
OTHER ASSETS................................... 2,525 1,246 452
-------- -------- --------
TOTAL.......................................... $134,538 $217,084 $373,893
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable, trade...................... $ 13,865 $ 23,703 $ 53,717
Payable to Old Edge.......................... 1,562 1,057 16,954
Accrued interest payable..................... 763 1,059 1,429
Accrued liabilities.......................... 5,706
Current portion of long-term debt............ 21,537 4,082 7,212
-------- -------- --------
Total current liabilities.................. 37,727 29,901 85,018
-------- -------- --------
LONG-TERM DEBT................................. 73,793 135,667 231,233
PARTNERS' CAPITAL.............................. 23,018 51,516 57,642
-------- -------- --------
TOTAL.......................................... $134,538 $217,084 $373,893
======== ======== ========
</TABLE>
See notes to financial statements.
F-74
<PAGE>
GULFEDGE LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------- --------------------
1993 1994 1995 1995 1996
-------- ------- ------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OIL AND NATURAL GAS SALES.... $ 32,811 $45,121 $46,010 $ 31,115 $116,019
-------- ------- ------- -------- --------
COST AND EXPENSES:
Oil and natural gas operat-
ing expenses.............. 3,746 6,856 15,593 11,418 16,196
General and administrative
expenses.................. 34,193 41,700 52,758 44,144 50,980
Depreciation, depletion and
amortization.............. 9,181 12,708 18,085 11,788 27,534
-------- ------- ------- -------- --------
Total cost and expenses.. 47,120 61,264 86,436 67,350 94,710
-------- ------- ------- -------- --------
INCOME (LOSS) FROM OPERA-
TIONS....................... (14,309) (16,143) (40,426) (36,235) 21,309
OTHER INCOME AND EXPENSES:
Interest expense, net...... (14,531) (9,128) (7,229) (4,476) (15,183)
Gain on sale of oil and gas
property.................. 5,644 52,130 76,153 71,524
-------- ------- ------- -------- --------
NET INCOME (LOSS)............ $(23,196) $26,859 $28,498 $ 30,813 $ 6,126
======== ======= ======= ======== ========
INCOME (LOSS) PER LIMITED
PARTNER UNIT................ $ (4,742) $ 3,837 $ 4,071 $ 4,402 $ 875
======== ======= ======= ======== ========
WEIGHTED AVERAGE LIMITED
PARTNER UNITS OUTSTANDING... 7 7 7 7 7
======== ======= ======= ======== ========
</TABLE>
See notes to financial statements.
F-75
<PAGE>
GULFEDGE LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
NINE MONTH
DECEMBER 31, PERIOD ENDED
-------------------------- SEPTEMBER 30,
1993 1994 1995 1996
-------- ------- ------- -------------
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR........... $ 19,355 $(3,841) $23,018 $51,516
NET INCOME (LOSS)...................... (23,196) 26,859 28,498 6,126
-------- ------- ------- -------
BALANCE AT END OF PERIOD............... $ (3,841) $23,018 $51,516 $57,642
======== ======= ======= =======
</TABLE>
See notes to financial statements.
F-76
<PAGE>
GULFEDGE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTH PERIOD
DECEMBER 31, ENDED SEPTEMBER 30
---------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) income....... $(23,196) $ 26,859 $ 28,498 $ 30,813 $ 6,126
Adjustments to reconcile
net income (loss) to
net cash (used)
provided by operating
activities:
Depreciation,
depletion and
amortization......... 9,181 12,708 18,085 11,788 27,534
Gain on sale of oil
and gas property..... (5,644) (52,130) (76,153) (71,524)
Changes in assets and
liabilities:
Accounts receivable,
trade................ (7,532) (6,125) 1,848 14,151 (11,522)
Accounts receivable,
working interest
owners............... (2,392) 1,239 (4,868) (15,605) (17,122)
Accounts receivable
from related party... (455) 455
Receivable from Old
Edge................. 383
Other current assets.. (16) (318) (718) (1,135) (1,954)
Accounts payable,
trade................ 3,223 3,144 9,838 29,174 30,014
Payable to Old Edge... 2,116 (554) (505) (458) 15,897
Accrued interest
payable.............. (537) 735 296 (691) 370
Accrued liabilities... 5,706
Liability to related
party................ (1,338)
-------- -------- -------- -------- --------
Net cash used by
operating
activities......... (26,207) (13,987) (23,679) (3,487) 55,049
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Oil and gas property and
equipment purchases.... (83,427) (155,262) (193,883) (126,545) (179,829)
Proceeds from the sale
of oil and gas
properties............. 77,658 161,361 167,914 155,706 50,886
Purchase of note
receivable from related
party.................. (685) (2,852)
Collection of notes
receivable from related
party.................. 3,537
Certificate of deposit
redemption............. 342
-------- -------- -------- -------- --------
Net cash provided
(used) provided by
investing
activities......... (6,112) 6,784 (25,969) 29,161 (128,943)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from notes
payable................ 10,840 2,396 7,146 54,382 7,690
Payments on notes
payable................ (10,840) (10,383) (1,910) (83,300) (3,698)
Proceeds from long-term
debt................... 13,464 120,946 94,703
Payments on long-term
debt................... (9,648) (14,895) (81,763)
Deferred offering cost.. (17,115)
Collections on
subscriptions
receivable............. 45,526
-------- -------- -------- -------- --------
Net cash provided
(used) by financing
activities......... 35,878 (9,418) 44,419 (28,918) 81,580
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS.............. 3,559 (16,621) (5,229) (3,244) 7,686
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR........ 19,645 23,204 6,583 6,583 1,354
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD............ $ 23,204 $ 6,583 $ 1,354 $ 3,339 $ 9,040
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES
TO CASH FLOW INFORMATION-
Cash paid for interest... $ 15,269 $ 8,713 $ 7,017 $ 5,251 $ 15,033
</TABLE>
See notes to financial statements.
F-77
<PAGE>
GULFEDGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--On April 1, 1991, Gulfedge Limited Partnership ("Gulfedge") was
formed to enter into a joint venture with Edge Petroleum Corporation, a Texas
corporation ("Old Edge"), Edge Group II Limited Partnership ("Edge Group II")
and Edge Group Partnership ("Edge Group") for the purpose of engaging in the
business of prospect generation and sales, and activities relating thereto,
within the continental United States and offshore state waters. Limited
partnership interests in seven units of $64,500 each, which included a $10,000
promissory note for each unit due on or before July 1, 1992, were sold to
finance Gulfedge's interest in Edge Joint Venture II (the "Joint Venture"). The
initial objective of the Joint Venture was to (i) recoup its cost in the sale
of prospects; (ii) make a cash profit on the sale; and (iii) retain a carried
interest in the exploratory well and development wells, if any, drilled on the
prospect.
INVESTMENT IN EDGE JOINT VENTURE II--On April 8, 1991, the Joint Venture, a
general partnership, was formed by Gulfedge, Old Edge, Edge Group II, and Edge
Group. The Joint Venture purchased the assets and assumed the liabilities of a
related entity, Edge Group Joint Venture I. Gulfedge contributed capital into
the Joint Venture to receive a capital account of $327,000. Gulfedge accounts
for its investment in the Joint Venture using the proportionate consolidation
method of accounting.
Old Edge is the managing venturer of the Joint Venture and general partner of
Gulfedge. Without the approval of Edge Group II, Old Edge is restricted from
creating debt or mortgages on the Joint Venture, selling all or substantially
all of the Joint Venture's assets or taking any additional action not in
compliance with the Joint Venture Agreement. Once the Joint Venture reaches
payout (as defined in the Joint Venture Agreement), Old Edge shall receive a
26.9% back-in interest on the other partners' interests.
The term of the Joint Venture was to have expired on April 8, 1996 according
to the Joint Venture Agreement; however, the venturers extended the dissolution
date to December 31, 1996. The Joint Venture will continue to operate under
terms of the original Joint Venture Agreement, as amended, until the
dissolution is completed.
Gulfedge will continue in existence until December 31, 2020, unless
terminated sooner pursuant to any provisions of the Texas Revised Limited
Partnership Act.
INTERIM FINANCIAL STATEMENTS--In the opinion of management, the unaudited
consolidated financial statements include all adjustments (consisting solely of
normally recurring adjustments) necessary for a fair presentation of the
results of operations and cash flows for the nine-month period ended September
30, 1995. Although management believes the disclosures in the financial
statements are adequate to make the information presented not misleading,
certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted for the nine months ended September
30, 1995 pursuant to the rules and regulations of the Securities and Exchange
Commission. The results of operations and cash flows for the nine-month period
ended September 30, 1996 are not necessarily indicative of the results to be
expected for the full year.
CONSOLIDATED FINANCIAL STATEMENTS--Gulfedge has an initial 2.282% interest in
the Joint Venture and exercises significant influence over its operations.
Gulfedge accounts for its investment in the Joint Venture using the
proportionate consolidation method of accounting. Accordingly, the accompanying
consolidated financial statements include the accounts of Gulfedge and the pro
rata (2.282%) portion of the Joint Venture's assets, liabilities and results of
operations. All intercompany balances have been eliminated in consolidation.
REVENUE RECOGNITION. The Company recognizes oil and gas revenue from its
interests in producing wells as oil and gas is produced and sold from those
wells. Oil and gas sold in production operations is not significantly different
from the Company's share of production.
F-78
<PAGE>
GULFEDGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OIL AND GAS PROPERTY--Included in oil and gas property is Gulfedge's
proportionate share of the Joint Venture's oil and gas property. During 1996,
Gulfedge changed its method of accounting from the successful efforts method to
the full cost method of accounting for oil and gas property and adjusted all
historical periods to reflect the change in accounting. Management believes
that the full cost method of accounting better reflects the results of its oil
and gas exploration activities.
Investments in oil and gas properties are accounted for using the full cost
method of accounting. All costs associated with the acquisition, exploration
and development of oil and gas properties are capitalized.
Oil and gas properties are amortized on the unit-of-production method using
estimates of proved reserve quantities. Investments in unproved properties are
not amortized until proved reserves associated with the projects can be
determined or until impairment occurs. If the results of an assessment indicate
that the properties are impaired, the amount of impairment is added to the
proved oil and gas property costs to be amortized. The amortizable base
includes estimated future development costs and, where significant,
dismantlement, restoration and abandonment costs, net of estimated salvage
values. The depletion rate per Mcfe for the years ended December 31, 1993, 1994
and 1995 and the nine month period ended September 30, 1996 was $0.43, $0.42,
$0.49, and $0.44, respectively.
Sales of proved and improved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments
would significantly alter the relationship between capitalized costs and proved
reserves. Abandonments of properties are accounted for as adjustments of
capitalized costs with no loss recognized.
In addition, the capitalized costs of oil and gas properties are subject to a
"ceiling test," which limits such costs to the estimated present value,
discounted at a 10% interest rate, of future net cash flows from proved
reserves, based on current economic and operating conditions, plus the cost of
unproved prospects. If capitalized costs exceed this limit, the excess is
charged to depreciation, depletion and amortization. From the nine month period
ended September 30, 1996 and the years ended December 31, 1995, 1994 and 1993,
no write-down of the Gulfedge's oil and gas assets was necessary.
Depreciation of other property and equipment is provided using the straight-
line method based on estimated useful lives ranging from five to ten years.
DEFERRED LOAN AND ORGANIZATION COSTS--Deferred loan costs are capitalized as
deferred assets and amortized over the term of the loan. Organization costs
have been capitalized and amortized on a straight-line basis over five years.
INCOME TAXES--Federal and state income taxes are the liability of the
individual partners and not of Gulfedge. Therefore, no provision or liability
for federal and state income taxes has been provided in the financial
statements.
STATEMENTS OF CASH FLOWS--Gulfedge has presented its cash flows using the
indirect method and considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS--Gulfedge's financial instruments consist of cash,
receivables, payables, long-term debt and natural gas commodity hedges. The
carrying amount of cash, receivables and payables approximates fair value
because of the short-term nature of these items. The carrying amount of long-
term debt approximates fair value as the individual borrowings were negotiated
or renegotiated during or after 1993 and/or bear interest at floating market
interest rates. The carrying amount of natural gas commodity hedges
approximates fair value
F-79
<PAGE>
GULFEDGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
based on the expected settlement amounts of these transactions in 1996.
Outstanding hedges at December 31, 1995 were not material, and the Company had
no existing hedging positions as of September 30, 1996.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from these estimates.
Significant estimates include depreciation, depletion and amortization,
estimates of proved oil and gas reserve volumes and discounted future net cash
flows (see Note 5).
CONCENTRATION OF CREDIT RISK--Substantially all of Gulfedge's accounts
receivable result from natural gas and oil sales or joint interest billings to
third parties in the oil and natural gas industry. This concentration of
customers and joint interest owners may impact Gulfedge's overall credit risk
in that these entities may be similarly affected by changes in economic and
other conditions. Historically, Gulfedge has not experienced credit losses on
such receivables.
2. PROPERTY AND EQUIPMENT
At December 31, 1994 and 1995 and September 30, 1996, Gulfedge's share of
property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Oil and gas property......................... $112,611 $206,060 $317,209
Computer equipment........................... 13,719 22,923 40,728
Other property and equipment................. 178 216 216
-------- -------- --------
Total property and equipment................. 126,508 229,199 358,153
Accumulated depreciation, depletion and
amortization................................ (32,602) (49,028) (75,768)
-------- -------- --------
Property and equipment, net.................. $ 93,906 $180,171 $282,385
======== ======== ========
</TABLE>
Oil and natural gas properties not subject to amortization consist of the
cost of undeveloped leaseholds, exploratory and developmental wells in
progress, and secondary recovery projects before the assignment of proved
reserves. These costs are reviewed periodically by management for impairment,
with the impairment provision included in the cost of oil and natural gas
properties subject to amortization. Factors considered by management in its
impairment assessment include drilling results by Gulfedge and other operators,
the terms of oil and gas leases not held by production, production response to
secondary recovery activities and available funds for exploration and
development. The following table summarizes the cost of the properties not
subject to amortization by year the cost was incurred.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------- ------- -------------
<S> <C> <C> <C>
Year cost incurred:
Remainder....................................... $ 6,397 $ 5,180 $ 4,997
1993............................................ 7,792 6,308 5,373
1994............................................ 27,709 16,995 10,868
1995............................................ -- 15,898 10,447
1996............................................ -- -- 37,318
------- ------- -------
$41,898 $44,381 $69,003
======= ======= =======
</TABLE>
F-80
<PAGE>
GULFEDGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During 1994 the Joint Venture entered into a note payable for $91,695 issued
to the seller of certain seismic data. Subsequently, the Joint Venture entered
into a sales agreement with the same entity to sell the Joint Venture's
interest in an unevaluated property for $1,491,695 resulting in a gain of
$1,288,363. As a component of the sales agreement the note payable was used to
reduce the proceeds from the sale. Gulfedge's share of cash proceeds and gain
was $34,000 and $29,400, respectively.
3. LONG-TERM DEBT
In April 1991, the Joint Venture borrowed, in the aggregate, $4,500,00 from
the RIMCO Partnerships and another partnership of which RIMCO is the general
partner, at an annual interest rate of 15.5% (the "RIMCO Note"). The Joint
Venture and such partnerships agreed to reduce the interest rate of the RIMCO
Note from 15.5% to 10% for the period from October 1, 1993 through September
30, 1995. Pursuant to such agreement, the Joint Venture conveyed to such
partnerships a 0.4% after-payout royalty interest, in the aggregate, in all
prospects sold by the Joint Venture during such period. The RIMCO Note was
repaid in March 1995.
During July 1995, the Joint Venture entered into a revolving credit facility
(the "Revolving Credit Facility") with a bank to finance temporary working
capital requirements. The Revolving Credit Facility provides up to $20,000,000
in available borrowings limited by a borrowing base (as defined by the
Revolving Credit Facility) which was $4,500,000 and $10,225,000 at December 31,
1995 and September 30, 1996, respectively. At December 31, 1995 and September
30, 1996 the Joint Venture borrowed and had outstanding $4,500,000 and
$8,650,000, respectively, under this Revolving Credit Facility. The Revolving
Credit Facility provides for interest at the lenders' prime rate plus 0.75%
(9.25% and 9.0% at December 31, 1995 and September 30, 1996, respectively).
Gulfedge's share of the Revolving Credit Facility was approximately $102,690
and $197,393 at December 31, 1995 and September 30, 1996, respectively. The
borrowing base is subject to review by the bank at the close of each quarter
and may be adjusted subject to the provisions of the Revolving Credit Facility.
In January 1995, the Joint Venture entered into a Subordinated Loan Agreement
(the "Subordinated Loan") with a shareholder of Old Edge. Such agreement
provides for a $1 million term loan and a $1 million line of credit. Drawdowns
under the line of credit require 30 days' notice. At December 31, 1994 and 1995
and September 30, 1996, the aggregate amount outstanding under the Subordinated
Loan was approximately $500,000, $1.3 million and $1.3 million, respectively,
including $0.3 million outstanding under the line of credit. The principal is
due, earlier unless retired by the Joint Venture, upon the earlier of April 8,
1998 or the conclusion of the Joint Venture's wind-up period. Interest at 10%
per annum is due monthly. The Subordinated Loan is secured by certain oil and
gas properties, equipment and other assets of the Joint Venture, but is
subordinate to the Revolving Credit Facility. The mortgage and security
agreement restricts the transfer of properties, creation of liens and other
matters. The Subordinated Loan is without recourse to the venturers. Under the
Subordinated Loan, the shareholder has a right to receive specified
reversionary and overriding royalty interests on prospects of the Joint Venture
and certain rights to convert such interests into common stock which is
triggered by the execution of certain transactions by the Joint Venture as
defined within the Subordinated Loan Agreement. Gulfedge's share of this loan
was $11,410 at December 31, 1994 and $29,666 at both December 31, 1995 and
September 30, 1996, respectively.
F-81
<PAGE>
GULFEDGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1994 and 1995 and September 30, 1996, Gulfedge's share of the
Joint Venture notes payable and long-term debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1994 1995 1996
------- -------- -------------
<S> <C> <C> <C>
Revolving credit facility payable, lenders'
prime rate plus 0.75%, interest payable
monthly, maturing June 1, 1998.............. $102,690 $197,393
RIMCO note payable, 10% interest, interest
payable monthly, repaid in 1995............. $75,306
RIMCO interest-deferred notes payable, 10%
interest, interest payable quarterly, repaid
in 1995..................................... 6,457
Note payable, lenders' prime rate plus 0.75%,
payable in monthly principal installments of
$7,500 plus accrued interest, matures March
1, 1997..................................... 4,108 2,567
Note payable, lenders' prime rate plus 1.5%,
payable in monthly principal installments of
$5,547 plus accrued interest, matures March
1, 1997..................................... 1,899 759
Note payable, 9% interest, payable in
quarterly installments of $13,750 plus
accrued interest, repaid in 1995............ 314
Note payable, 10.996% interest, payable in
monthly installments of principal and
interest of $2,326, matures June 22, 1998... 1,843 1,386 1,010
Note payable, lenders' prime plus 0.75%,
payable in monthly principal installments of
$320 plus accrued interest, matures
July 1, 1998................................ 7,050
Subordinate note payable to a shareholder of
Old Edge, 10% interest, interest payable
monthly, matures April 8, 1998.............. 11,410 29,666 29,666
------- -------- --------
Total........................................ 95,330 139,749 238,445
Current portion.............................. (21,537) (4,082) (7,212)
------- -------- --------
Long-term portion............................ $73,793 $135,667 $231,233
======= ======== ========
</TABLE>
Substantially all of the Joint Venture's property and equipment are pledged
as collateral on certain notes payable.
In future years ending September 30, Gulfedge's share of these notes payable
require minimum principal payments as follows:
<TABLE>
<S> <C>
1997............................................................. $ 7,212
1998............................................................. 231,233
--------
Total.......................................................... $238,445
========
</TABLE>
The Revolving Credit Facility and certain other note agreements provide for
certain financial covenants and restrictions on the Joint Venture including,
but not limited to, limitations on additional borrowings, sales of its oil and
gas properties or other collateral, a prohibition of dividends and certain
distributions of cash or properties to the venturers, a prohibition on certain
liens, a limitation on annual lease payments, and other financial ratios. For
the quarters ended March 31, 1996 and June 30, 1996 the Joint Venture was not
in compliance with certain Revolving Credit Facility covenants. Joint Venture
has received a waiver from the Bank for such noncompliance for all periods
affected, and the Joint Venture subsequently amended the covenants to be less
stringent.
F-82
<PAGE>
GULFEDGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. RELATED PARTY TRANSACTIONS
The Joint Venture has agreed to reimburse the expenses incurred by its
managing venturer, Old Edge. This venturer employs geologists, landmen,
draftsmen, accountants and executives and provides office facilities and
related overhead. The principal business of Old Edge is to manage the affairs
of the Joint Venture, and as a result, it invoices the Joint Venture for
substantially all of its expenses. Such expenses invoiced to the Joint Venture
for the years ended December 1993, 1994 and 1995 and the nine month period
ended September 30, 1996 totaled $1,748,490, $2,215,895, $2,370,168 and
$2,043,128, respectively. Gulfedge's share of reimbursed expenses was $39,916,
$50,587, $54,087 and $46,624 for the years ended December 31, 1993, 1994 and
1995 and the nine month period ended September 30, 1996 , respectively. At
December 31, 1994 and 1995 and September 30, 1996, the Joint Venture owed Old
Edge $68,442, $46,295 and $121,606, respectively. Gulfedge's share of this
payable to Old Edge was $1,562, $1,056 and $2,775 at December 31, 1994 and 1995
and September 30, 1996, respectively.
Old Edge acts as the operator of several wells owned by the Joint Venture. At
September 30, 1996, the Joint Venture owed Old Edge $621,324 for various joint
interest billings paid by Old Edge on behalf of the Joint Venture to operate
such wells. Gulfedge's share of this payable was $14,179.
At December 31, 1994 and 1995 and September 30, 1996, the Joint Venture had a
receivable from a related party of $5,000. At December 31, 1994, the Joint
Venture owed a shareholder $2,965. Gulfedge's share of this related party
receivable and payable was $114 and $68, respectively.
At December 31, 1994 and 1995 and September 30, 1996, the Joint Venture was
liable for $500,000, $1,300,000 and $1,300,000, respectively, of notes payable
and at December 31, 1994 and 1995 $11,041 and $3,205, respectively, of accrued
interest to a shareholder (see Note 3). The Joint Venture's share of the notes
payable was $11,410, $29,666 and $29,666 at December 31, 1994 and 1995 and
September 30, 1996, respectively and its share of accrued interest was $252 and
$73, respectively.
On May 1, 1992, the Joint Venture became the managing venturer of the Essex
Royalty Joint Venture ("Essex"). On December 17, 1993 the Joint Venture issued
a $30,000 note receivable to Essex. Gulfedge's share of this note receivable
was $685. This note receivable was collected during 1994.
On September 22, 1994, the Joint Venture became the managing venturer of
Essex Royalty Joint Venture II ("Essex II"). During 1994 the Joint Venture
loaned Essex II $125,000. Gulfedge's share of this loan was $2,853. This loan,
plus accrued interest, was repaid during 1994.
During 1994 the Joint Venture had sales of undeveloped oil and gas property
to a partnership of which an officer of EPC is a partner. Such sales amounted
to $241,395 for the year ended December 31, 1994. Gulfedge's share of such
sales was $5,509.
During 1994 the Joint Venture had sales of undeveloped oil and gas property
to a stockholder which amounted to $60,000. Gulfedge's share of such sales was
$1,369.
5. SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS EXPLORATION, DEVELOPMENT
AND PRODUCTION ACTIVITIES (UNAUDITED)
This footnote provides unaudited information required by Statement of
Financial Accounting Standards No. 69, "Disclosures About Oil and Gas Producing
Activities."
F-83
<PAGE>
GULFEDGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
CAPITALIZED COSTS--Capitalized costs and accumulated depreciation, depletion
and amortization relating to the Gulfedge's indirect net oil and natural gas
producing activities, all of which are conducted within the continental United
States, are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------- SEPTEMBER 30,
1994 1995 1996
----------- ------------ ------------- ---
<S> <C> <C> <C> <C>
Proved producing oil and gas
properties.................... $ 70,713 $ 161,679 $248,206
Accumulated depreciation,
depletion and amortization.... (26,905) (39,852) (63,746)
----------- ------------ --------
Net capitalized costs.......... $ 43,808 $ 121,827 $184,460
=========== ============ ========
</TABLE>
COSTS INCURRED--Gulfedge's share of the Joint Venture's costs incurred in
oil and gas property acquisition, exploration and development activities is
summarized below:
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDED
------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- -------- -------- -------------
<S> <C> <C> <C> <C>
Property acquisition costs:
Unproved.............................. $66,498 $125,433 $ 83,489 $ 75,510
Proved................................ 157 599 2,077 830
Exploration cost...................... 12,031 15,296 60,291 46,565
Development costs..................... 469 5,439 26,233 39,129
------- -------- -------- --------
Total costs incurred................ $79,155 $146,767 $172,090 $162,034
======= ======== ======== ========
</TABLE>
RESERVES--Proved reserves are estimated quantities of oil and natural gas
which geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from known reservoirs under existing economic
and operating conditions. Proved developed reserves are proved reserves that
can reasonably be expected to be recovered through existing wells with
existing equipment and operating methods.
Proved oil and natural gas reserve quantities and the related discounted
future net cash flows for the periods presented are based on estimates
prepared by Ryder Scott Company, independent petroleum engineers. Such
estimates have been prepared in accordance with guidelines established by the
Securities and Exchange Commission.
Gulfedge's indirect net ownership interests in estimated quantities of
proved oil and natural gas reserves and changes in net proved reserves, all of
which are located in the continental United States, are summarized below:
<TABLE>
<CAPTION>
OIL, CONDENSATE
AND NATURAL GAS LIQUIDS
(BBLS)
-------------------------------------
NINE MONTH
PERIOD ENDED
SEPTEMBER 30,
1993 1994 1995 1996
------ ------ ------ -------------
<S> <C> <C> <C> <C>
Proved developed and undeveloped
reserves:
Beginning of year...................... 3,989 3,878 8,402 16,178
Revisions of previous estimates........ (1,010) 639 3,557 967
Purchases of oil and gas properties.... 1,920 144
Extensions and discoveries............. 1,478 3,337 6,350 3,669
Sales of oil and gas properties........ (835)
Production............................. (579) (1,372) (1,440) (1,841)
------ ------ ------ ------
End of year............................ 3,878 8,402 16,178 18,973
------ ------ ------ ------
Proved developed reserves at end of
year.................................... 3,878 5,578 14,898 18,015
====== ====== ====== ======
</TABLE>
F-84
<PAGE>
GULFEDGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
NATURAL GAS (MCF)
----------------------------------------
NINE MONTH
PERIOD ENDED
SEPTEMBER 30,
1993 1994 1995 1996
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Proved developed and undeveloped re-
serves:
Beginning of year................... 29,573 58,191 83,817 201,294
Revisions of previous estimates..... 13,635 33,439 6,188 4,290
Purchases of oil and gas proper-
ties............................... 844 23,893
Extensions and discoveries.......... 25,288 4,655 142,557 139,339
Sales of oil and gas properties..... (43,608)
Production.......................... (10,305) (13,312) (11,553) (35,393)
------- ------- ------- -------
End of year......................... 58,191 83,817 201,294 309,530
------- ------- ------- -------
Proved developed reserves at end of
year................................. 58,191 80,965 152,711 250,678
======= ======= ======= =======
</TABLE>
STANDARDIZED MEASURE--The table of the Standardized Measure of Discounted
Future Net Cash Flows relating to Gulfedge's ownership interests in proved oil
and gas reserves as of year-end is shown below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------- SEPTEMBER 30,
1993 1994 1995 1996
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Future cash inflows................ $182,465 $299,935 $707,679 $1,012,570
Future oil and gas operating ex-
penses............................ (21,406) (55,169) (134,787) (185,254)
Future development costs........... (3,763) (14,638) (22,196)
-------- -------- -------- ----------
Future net cash flows.............. 161,059 241,003 558,254 805,120
10% annual discount for estimating
timing of cash flows.............. (29,203) (59,664) (160,210) (219,640)
-------- -------- -------- ----------
Standardized measure of discounted
future net cash flows............. $131,856 $181,339 $398,044 $ 585,480
======== ======== ======== ==========
</TABLE>
Future cash flows are computed by applying year end prices of oil and natural
gas to year end quantities of proved oil and natural gas reserves. Future
operating expenses and development costs are computed primarily by the Joint
Venture's petroleum engineers by estimating the expenditures to be incurred in
developing and producing Gulfedge's indirect net proved oil and natural gas
reserves at the end of the year, based on year end costs and assuming the
continuation of existing economic conditions.
A discount factor of 10% was used to reflect the timing of future net cash
flows. The standardized measure of discounted future net cash flows is not
intended to represent the replacement cost or fair market value of Gulfedge's
indirect net oil and gas properties.
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair value of Gulfedge's
indirect net oil and natural gas reserves. An estimate of fair value would also
take into account, among other things, the recovery of reserves not presently
classified as proved, anticipated future changes in prices and costs, a
discount factor more representative of the time value of money and the risks
inherent in reserve estimates.
F-85
<PAGE>
GULFEDGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
CHANGES IN STANDARDIZED MEASURE--Changes in standardized measure of future
net cash flows relating to Gulfedge's indirect net proved oil and natural gas
reserves are summarized below:
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDED
---------------------------- SEPTEMBER 30,
1993 1994 1995 1996
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Changes due to current year opera-
tions:
Sales of oil and natural gas, net
of oil and natural gas operating
expenses........................ $(29,066) $(38,264) $(30,417) $(99,823)
Sales of oil and gas properties.. (71,048)
Extensions and discoveries....... 56,460 36,795 232,628 203,489
Purchases of oil and gas
properties...................... 11,082 12,331
Changes due to revisions in stan-
dardized variables:
Prices and operating expenses.... 4,388 (11,691) 9,353 37,680
Revisions of previous quantity
estimates....................... 12,627 47,016 44,167 15,365
Estimated future development
costs........................... (13) 1,432 (5,844)
Accretion of discount............ 8,082 13,186 18,134 39,804
Production rates (timing) and
other........................... (1,450) (8,628) 125 (3,235)
-------- -------- -------- --------
Net change......................... 51,041 49,483 216,705 187,436
-------- -------- -------- --------
Beginning of year.................. 80,815 131,856 181,339 398,044
-------- -------- -------- --------
End of year........................ $131,856 $181,339 $398,044 $585,480
======== ======== ======== ========
</TABLE>
Sales of oil and natural gas, net of oil and natural gas operating expenses,
are based on historical results. Sales of oil and gas properties, extensions
and discoveries, purchases of minerals in place, and the changes due to
revisions in standardized variables are reported on a discounted basis.
* * * * * *
F-86
<PAGE>
APPENDIX A
THIS AMENDED AND RESTATED COMBINATION AGREEMENT (this "Agreement"), dated
as of January 13, 1997, is by and among (i) Edge Group II Limited Partnership, a
Connecticut limited partnership ("Edge Group II"), (ii) Gulfedge Limited
Partnership, a Texas limited partnership ("Gulfedge"), (iii) Edge Group
Partnership, a Connecticut general partnership ("Edge Group"), (iv) Edge
Petroleum Corporation, a Texas corporation ("Old Edge"), (v) Edge Mergeco, Inc.,
a Texas corporation ("Mergeco"), and (vi) Edge Petroleum Corporation, a Delaware
corporation (the "Company").
RECITALS
WHEREAS, Edge Group II, Gulfedge, Edge Group, Old Edge, Mergeco and the
Company (collectively, the "Parties") entered into the Combination Agreement
dated as of December 3, 1996 (the "Original Agreement"); and
WHEREAS, the Parties desire to amend and restate the Original Agreement in
its entirety as set forth herein to provide that, (a) a condition to each
Party's obligation to effect the Combination (as defined herein) be that no more
than 10% of the shareholders of Old Edge shall have exercised their dissenters'
rights as provided for under the Texas Business Corporation Act (the "TBCA")
with respect to the Merger (as defined herein), (b) the Registration Rights
Agreement (as defined herein) terminate no later than December 31, 1998 and (c)
the IPO Price (as herein defined) be at least equal to $14.50 per share; and
WHEREAS, the Company was formed for the purpose of combining (the
"Combination") certain of the oil and gas properties and exploration and
development operations owned and conducted by Old Edge, Edge Group II, Gulfedge
and Edge Group (collectively, the "Edge Entities") at or about the time of the
closing of the initial public offering (the "Offering") of shares of the
Company's common stock, par value $0.01 per share (the "Common Stock"), pursuant
to the Securities Exchange Act of 1933, as amended (the "Securities Act"), as
will be described in the Company's registration statement on Form S-1, to be
filed with the Securities and Exchange Commission (the "SEC"); and
WHEREAS, the Edge Entities own substantially all of their oil and gas
properties and conduct substantially all of their exploration and development
operations through their respective interests in Edge Joint Venture II, a Texas
general partnership (the "Joint Venture"); and
WHEREAS, to effect the Combination, the Company plans to complete (i) a
merger (the "Merger") of Old Edge with Mergeco, a wholly owned subsidiary of the
Company organized for this purpose, in which the shareholders of Old Edge (the
"Old Edge Shareholders") will receive Common Stock of the Company, (ii) an
exchange offer (the "Edge Group II Exchange Offer") to the general and limited
partners of Edge Group II in which such partners will have the opportunity to
exchange their interest in Edge Group II for Common Stock, (iii) an exchange
offer (the "Gulfedge Exchange Offer" and, together with the Edge Group II
Exchange Offer, the "Limited Partnership Exchange Offers") to the limited
partners of Gulfedge in which such partners will have the opportunity to
exchange their interest in Gulfedge for Common Stock, and (iv) an offer to
purchase (the "Edge
A-1
<PAGE>
Group Purchase Offer") from Edge Group its general partner interest in the Joint
Venture for consideration consisting of Common Stock (collectively, the Edge
Group Purchase Offer, the Merger and the Limited Partnership Exchange Offers are
referred to herein as the "Combination Agreement Transactions"); and
WHEREAS, the parties hereto intend that, if the Combination is completed
pursuant to the terms of this Agreement, the Company will succeed to ownership,
directly or indirectly, of substantially all of the interests in the Joint
Venture; and
WHEREAS, the parties hereto desire to set forth the terms and conditions of
the Combination and to provide for certain relationships and obligations among
the parties hereto following the Effective Time (as defined in Section 1.3):
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants set forth herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound hereby, the aforesaid parties hereto hereby agree as follows:
ARTICLE I. THE MERGER; CLOSING; EFFECTIVE TIME
SECTION 1.1 THE MERGER. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.3), Mergeco shall be
merged with and into Old Edge and the separate existence of Mergeco shall
thereupon cease. Old Edge shall be the surviving corporation in the Merger
(sometimes hereinafter referred to as the "Surviving Corporation") and shall
continue to be governed by the laws of the State of Texas, and the separate
existence of Old Edge with all its rights, privileges, immunities, and
franchises shall continue unaffected by the Merger. The Merger shall have the
effect specified in the TBCA with respect to Mergeco and with respect to the
Surviving Corporation.
SECTION 1.2 CLOSING. The closing of the Merger (the "Closing") shall take
place at the offices of Baker & Botts, L.L.P., 910 Louisiana, Houston, Texas
77002 (or at such other place as the parties hereto shall mutually agree), on
the same day (the "Closing Date") as the closing of the Offering, the Edge Group
II Exchange Offer, the Gulfedge Exchange Offer (if consummated) and the Edge
Group Purchase Offer (if consummated), provided that the conditions set forth in
Article XIII hereof shall have been fulfilled or waived in accordance with this
Agreement.
SECTION 1.3 EFFECTIVE TIME. At the Closing, Old Edge and Mergeco will
cause the articles of merger (the "Articles of Merger") attached hereto as
Exhibit A to be filed with the Secretary of State of the State of Texas as
- ---------
required by, and executed in accordance with, the TBCA. The Merger shall become
effective at the time (the "Effective Time") when the Secretary of State of the
State of Texas has issued a certificate of merger in respect of the Merger.
A-2
<PAGE>
SECTION 1.4 DEFINITIONS. As used herein, the following terms shall have
the meanings indicated:
"Edge Group Partnership Agreement" shall mean the Agreement of General
Partnership of Edge Group.
"The Edge Group II General Partners' Number of Shares" shall mean a number
of shares of Common Stock equal to the whole number nearest to the sum of
(i) the GP's 1% Shares (which shares are attributable to the general
partners' 1% interest in distributions before Edge Group II distributes to
its partners $20,188,636 (the "Payout Amount")), (ii) the GP's Management
Fee Shares (which shares are attributable to the general partners' accrued
but unpaid and future cash flow-based management fees), and (iii) the GP's
After Payout Shares (which shares are attributable to the general partners'
25% interest in distributions after Edge Group II distributes to its
partners the Payout Amount). The GP's 1% Shares are a number of shares of
Common Stock equal to the quotient of (i) $201,886 (which equals 1% of the
Payout Amount) divided by (ii) the initial public offering price in the
Offering per share of Common Stock (the "IPO price"). The GP's Management
Fee Shares are a number of shares of Common Stock equal to the quotient of
(i) the sum of (A) $1,332,450 (which equals the general partners' accrued
but unpaid management fees) plus (B) 3% multiplied by 2,209,306 (which
equals the total number of shares of Common Stock allocable to Edge Group
II) multiplied by the IPO price (which product in (B) is attributable to
the general partners' future cash flow-based management fees) (such sum in
(i) is referred to herein as the "Management Fee Amount") divided by (ii)
the IPO price. The GP's After Payout Shares are a number of shares of
Common Stock equal to the quotient of (i) 25% of the difference between (A)
the product of the IPO price multiplied by 2,209,306 and (B) the sum of (x)
the Payout Amount plus (y) the Management Fee Amount divided by (ii) the
IPO price.
"The Edge Group II GP Transfer Consent" shall mean the Consent of the
Partners (as defined in Section 2.1(d) of the Edge Group II Limited
Partnership Agreement), which requires the written consent or approval of
Partners (General and Limited) whose aggregate Capital Contributions
represent at least sixty percent (60%) of the aggregate Capital
Contributions as required for the transfer of the general partner interest
in Edge Group II.
"The Edge Group II Limited Partners' Number of Shares" shall mean a number
of shares of Common Stock equal to the difference between 2,209,306 (the
aggregate number of shares of Common Stock being offered in exchange for
all limited and general partner interests in Edge Group II) and the
aggregate number of the Edge Group II General Partners' Number of Shares.
A-3
<PAGE>
"Edge Group II Limited Partnership Agreement" shall mean the Agreement of
Limited Partnership of Edge Group II.
"Gulfedge Limited Partnership Agreement" shall mean the Agreement of
Limited Partnership of Gulfedge.
"Joint Venture Agreement" shall mean the Joint Venture Agreement of the
Joint Venture entered into as of April 8, 1991, as amended by the Extension
of Joint Venture Agreement dated as of April 8, 1996.
"Old Edge Common Stock" shall mean shares of common stock, par value $0.01
per share, of Old Edge.
"Old Edge Exchange Ratio" shall mean 22.307862, which is the number of
shares of Common Stock that is received for each share of Old Edge Common
Stock pursuant to Section 3.1(c).
ARTICLE II. ARTICLES OF INCORPORATION, BYLAWS,
AND DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
SECTION 2.1 THE ARTICLES OF INCORPORATION. The Articles of
Incorporation of Old Edge (the "Articles") in effect at the Effective Time shall
be the Articles of Incorporation of the Surviving Corporation, until duly
amended in accordance with the terms thereof and the TBCA, except for Article
One of the Articles, which shall be amended at the Effective Time to provide
that the name of the Surviving Corporation shall be Edge Petroleum Corporation
of Texas.
SECTION 2.2 BYLAWS. The Bylaws of Old Edge in effect at the Effective
Time shall be the Bylaws of the Surviving Corporation, until duly amended in
accordance with the terms thereof and the TBCA, except for Article Three of the
Bylaws, which shall be amended at the Effective Time to provide that the Board
of Directors of the Surviving Corporation shall be composed of four (4) members.
SECTION 2.3 DIRECTORS AND OFFICERS. The directors of the Surviving
Corporation shall be James E. Calaway, John D. Calaway, John Sfondrini and
Vincent Andrews. The officers of Old Edge in office immediately prior to the
Effective Time shall thereafter continue to be the officers of the Surviving
Corporation. Each such officer and director will hold office in accordance with
the Articles and Bylaws of the Surviving Corporation.
ARTICLE III. THE MERGER
SECTION 3.1 CONVERSION OF SHARES. At the Effective Time, by virtue
of the Merger and without any action on the part of the holder of any share of
Old Edge Common Stock:
A-4
<PAGE>
(a) each share of Old Edge Common Stock that is held by Old Edge or
any subsidiary thereof as treasury stock immediately prior to the Effective Time
shall be canceled, and no payment shall be made with respect thereto;
(b) each share of common stock of Mergeco outstanding immediately
prior to the Effective Time shall be converted into and become 100 shares of
common stock of the Surviving Corporation (all of which shall be held by the
Company) and shall constitute the only outstanding shares of capital stock of
the Surviving Corporation;
(c) subject to Section 3.3, each share of Old Edge Common Stock
outstanding immediately prior to the Effective Time (other than shares referred
to in Clause (a)) shall be converted into the right to receive 22.307862 shares
of Common Stock (the "Merger Consideration"), from the Company;
(d) each share of Common Stock of the Company outstanding immediately
prior to the Effective Time (all of which shares are owned by Old Edge) shall be
canceled, and no payment shall be made with respect thereto; and
(e) subject to and as more fully provided in Section 12.4 each
unexpired option to purchase Old Edge Common Stock that is outstanding at the
Effective Time, whether or not exercisable, shall automatically and without any
action on the part of the holder thereof be converted into an option to purchase
a number of shares of Common Stock equal to the number of shares of Old Edge
Common Stock that could be purchased under such option multiplied by the Old
Edge Exchange Ratio at a price per share of Common Stock equal to the per share
exercise price of such option divided by the Old Edge Exchange Ratio.
SECTION 3.2 SURRENDER AND EXCHANGE OF SHARES. (a) Promptly after the
Effective Time, the Surviving Corporation will send to each recordholder of
shares of Old Edge Common Stock immediately prior to the Effective Time, other
than Dissenting Shareholders (as defined in Section 3.3) (i) a letter of
transmittal for use in exchanging certificates representing shares of Old Edge
Common Stock for the Merger Consideration and (ii) instructions for use in
effecting the surrender of the certificates representing shares of Old Edge
Common Stock in exchange for certificates representing shares of Common Stock.
Upon surrender of certificates for Old Edge Common Stock for cancellation to the
Surviving Corporation, together with a duly executed letter of transmittal and
such other documents as the Surviving Corporation shall reasonably require, the
holder of such certificates shall be entitled to receive in exchange therefor a
certificate representing that number of whole shares of Common Stock into which
the shares of Old Edge Common Stock theretofore represented by the certificates
for Old Edge Common Stock so surrendered shall have been converted pursuant to
the provisions of Section 3.1, and the certificates for Old Edge Common Stock so
surrendered shall be canceled. The letter of transmittal shall (i) specify,
among other things, that delivery shall be effected, and risk of loss and title
to the Old Edge Common Stock shall pass, only upon actual delivery of the
certificates for shares of Old Edge Common Stock to the Surviving Corporation
and (ii) include provisions ensuring the rights of each party hereunder
including
A-5
<PAGE>
customary provisions and a statement that satisfies the requirements of Treas.
Reg. (S) 1.1445-2(b)(2) certifying that the holder submitting such letter of
transmittal is not a "foreign person" and provide that if such statement is not
made, appropriate tax withholding will be made from the Merger Consideration.
(b) Until surrendered in accordance with the terms hereof, each
certificate for shares of Old Edge Common Stock shall after the Effective Time
represent for all purposes only the right to receive the Merger Consideration.
Unless and until so surrendered, no dividends or other distributions payable to
the holders of Common Stock, as to any time on or after the Effective Time, will
be paid to the holder of such outstanding certificates.
(c) If any portion of the Merger Consideration is to be issued to a
person other than the registered holder of the shares of Old Edge Common Stock
represented by the certificate or certificates surrendered in exchange therefor,
it shall be a condition to such issuance that any certificate or certificates so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the person requesting such issuance shall pay to the Surviving
Corporation any transfer or other taxes required as a result of such issuance to
a person other than the registered holder of such shares of Old Edge Common
Stock or establish to the satisfaction of the Surviving Corporation that such
tax has been paid or is not payable.
(d) From and after the Effective Time, there shall be no further
registration of transfers on the books of Old Edge of shares of Old Edge Common
Stock that were outstanding immediately prior to the Effective Time.
(e) Notwithstanding the foregoing, neither the Company nor the
Surviving Corporation shall be liable to any holder of shares of Old Edge Common
Stock for any amount paid to a public official pursuant to applicable abandoned
property laws. Any amounts remaining unclaimed by holders of shares of Old Edge
Common Stock three years after the Effective Time (or such earlier date
immediately prior to such time as such amounts would otherwise escheat to or
become property of any governmental entity) shall, to the extent permitted by
applicable law, become the property of the Surviving Corporation free and clear
of any claims or interests of any person previously entitled thereto.
SECTION 3.3 DISSENTING SHARES. Notwithstanding Section 3.1, shares
of Old Edge Common Stock outstanding immediately prior to the Effective Time and
held by a holder who makes a written demand for the payment of the fair value of
such holder's shares in the manner provided under the TBCA (a "Dissenting
Shareholder") shall not be converted into the right to receive the Merger
Consideration, unless such holder shall have failed to perfect or shall have
effectively withdrawn or lost his right to payment of the fair value of his
shares of Old Edge Common Stock under the TBCA. If after the Effective Time such
holder shall have failed to perfect or shall have effectively withdrawn or lost
his right to payment of the fair value of his shares of Old Edge Common Stock
under the TBCA, such shares of Old Edge Common Stock shall be treated as if they
had been converted as of the Effective Time into the right to receive the Merger
Consideration. Old Edge
A-6
<PAGE>
shall give the Company prompt notice of any objections or demands received by
Old Edge from any shareholder exercising his right to dissent, and, prior to the
Effective Time, the Company shall have the right to participate in all
negotiations and proceedings with respect thereto. Prior to the Effective Time,
Old Edge shall not, except with the prior written consent of the Company, make
any payment with respect to, or settle or offer or agree to settle, any such
demands.
SECTION 3.4 NO FRACTIONAL SHARES. No fractional shares of Common
Stock shall be issued in the Merger. Each holder of Old Edge shares will be
issued a whole share of Common Stock in lieu of any fractional share interest to
which such holder would otherwise be entitled. For purposes of determining the
number of shares of Common Stock to be issued in the Merger, Old Edge Common
Stock held by one person in multiple accounts shall be aggregated.
ARTICLE IV. EDGE GROUP II EXCHANGE OFFER
SECTION 4.1 EXCHANGE OFFER. As soon as practicable after the
effective date of the Registration Statement (as defined in Section 7.6), the
Company shall make an offer (the "Edge Group II Exchange Offer") to the general
and limited partners of Edge Group II in which the limited partners will have
the opportunity to exchange their interest in Edge Group II for an aggregate
number of shares of Common Stock equal to the Edge Group II Limited Partners'
Number of Shares, and the general partners will have the opportunity to exchange
their interest in Edge Group II for an aggregate number of shares of Common
Stock equal to the Edge Group II General Partners' Number of Share. For
example, shares of Common Stock offered in exchange for all the outstanding
general and limited partner interests in Edge Group II would be allocated
between the limited and general partners of Edge Group II as follows: if the
IPO price were $15.00 per share, the limited partners would be entitled to
receive in the aggregate 1,863,666 shares and the general partners would be
entitled to receive in the aggregate 345,640 shares; If the IPO price were
$16.00 per share, the limited partners would be entitled to receive in the
aggregate 1,847,641 shares, and the general partners would be entitled to
receive in the aggregate 361,665 shares.
SECTION 4.2 CONSENT TO EDGE GROUP II EXCHANGE OFFER. By their
execution of this Agreement, John Sfondrini and Napamco, Ltd. hereby consent to
the transfer of any limited partner interest in Edge Group II to the Company or
its permitted assigns pursuant to the Edge Group II Exchange Offer.
SECTION 4.3 PAYMENT OF EDGE GROUP II PAYABLES. The Company will pay
at Closing $97,000 in payables for professional services rendered to Edge Group
II as follows: Collin Cody - $72,000 and J. Michael Gottesman - $25,000 (for
services rendered prior to April 8, 1996).
ARTICLE V. GULFEDGE EXCHANGE OFFER
SECTION 5.1 EXCHANGE OFFER. As soon as practicable after the
effective date of the Registration Statement, the Company shall make an offer
(the "Gulfedge Exchange Offer") to the
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limited partners of Gulfedge in which such partners will have the opportunity to
exchange their interest in Gulfedge for an aggregate of 74,317 shares of Common
Stock.
SECTION 5.2 CONSENT TO GULFEDGE EXCHANGE OFFER. By its execution of
this Agreement, Old Edge hereby consents to the transfer of any limited partner
interest in Gulfedge to the Company or its permitted assigns pursuant to the
Gulfedge Exchange Offer.
ARTICLE VI. EDGE GROUP PURCHASE OFFER
SECTION 6.1 EXCHANGE OFFER. As soon as practicable after the
effective date of the Registration Statement, the Company shall make an offer
(the "Edge Group Purchase Offer") to purchase from Edge Group its general
partner interest (the "Joint Venture GP Interest") in the Joint Venture for
consideration consisting of an aggregate of 42,896 shares of Common Stock.
Execution of this Agreement by Edge Group does not constitute acceptance of the
Edge Group Purchase Offer.
SECTION 6.2 CONSENT TO PURCHASE OFFER. By execution of this
Agreement, each of Old Edge, Edge Group II and Gulfedge, in their capacity as
general partners of the Joint Venture, hereby consent to Edge Group's sale of
the Joint Venture GP Interest to the Company or its permitted assigns pursuant
to the terms of the Edge Group Purchase Offer.
ARTICLE VII. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to each of the other
parties hereto as follows:
SECTION 7.1 ORGANIZATION; QUALIFICATION. The Company is a corporation
duly organized under the Delaware General Corporation Law (the "DGCL") and is
validly existing and in good standing under the laws of the State of Delaware.
Mergeco is a corporation duly organized under the TBCA and is validly existing
and in good standing under the laws of the State of Texas. The Company and
Mergeco have all requisite corporate power and authority to own, operate or
lease their properties and to carry on their business as now being conducted.
SECTION 7.2 CAPITALIZATION OF THE COMPANY. As of the Closing Date,
the authorized capital stock of the Company will consist solely of 40,000,000
shares of Common Stock and 10,000,000 shares of preferred stock, par value $0.01
per share. Immediately prior to the Effective Time, one share of Common Stock
and no shares of preferred stock will be outstanding. All outstanding shares of
capital stock of the Company are, and the shares of Common Stock to be issued
pursuant to this Agreement and the Offering, where issued in accordance with the
terms hereof and thereof, will be, validly issued, fully paid and nonassessable
and not subject to preemptive rights.
SECTION 7.3 CAPITALIZATION OF MERGECO. As of the Closing Date, the
authorized capital stock of Mergeco will consist solely of one share of common
stock, par value $0.01 per share. Immediately prior to the Effective Time, one
share of common stock will be outstanding.
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SECTION 7.4 NO CONFLICTS. Consummation of the transactions
contemplated hereby and compliance with the terms and provisions of this
Agreement will not conflict with, result in a breach of, require notice under or
constitute a default under either the Company's or Mergeco's Charter or Bylaws
or any judgment, order, injunction, decree or ruling of any court or
governmental authority or under any material agreement, indenture or instrument
to which the Company or Mergeco is a party. No consent, approval, order or
authorization of, or registration, declaration or filing with, any court or
governmental authority or other third party is required on the part of the
Company or Mergeco in connection with the execution and delivery of this
Agreement or for the consummation of the transactions contemplated by this
Agreement, other than as described in this Agreement other than the filing of
the Registration Statement with the SEC, filings with any blue sky or state
regulatory authorities and filings with the Secretary of State of the State of
Texas in connection with the Merger.
SECTION 7.5 AUTHORITY AND AUTHORIZATION; BINDING EFFECT. The Company
and Mergeco have all requisite corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company and Mergeco. This Agreement has been
duly executed and delivered by the Company and Mergeco and, assuming the due
authorization, execution and delivery hereof by the other parties hereto,
constitutes a valid and binding obligation of the Company and Mergeco
enforceable against each of them in accordance with its terms, subject to laws
of general application relating to bankruptcy, insolvency and the relief of
debtors and rules of law governing specific performance, injunctive relief or
other equitable remedies.
SECTION 7.6 REGISTRATION STATEMENT. The Company will file a
registration statement on Form S-4 in respect of the Common Stock to be issued
in the Combination Agreement Transactions ("Registration Statement") with the
SEC under the Securities Act of 1933, as amended (the "Securities Act"), which
shall include a joint proxy and consent solicitation/prospectus (the joint proxy
and consent solicitation statement/prospectus included in the Registration
Statement on its effective date is referred to herein as the "Joint Proxy and
Consent Solicitation Statement/Prospectus"). Such Joint Proxy and Consent
Solicitation Statement/Prospectus shall constitute a proxy statement under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), with respect
to the Special Meeting, a consent solicitation statement under the Exchange Act
with respect to the Edge Group II GP Transfer Consent, and a prospectus under
the Securities Act with respect to the Common Stock to be issued in the
Combination Agreement Transactions. As of the effective date of the
Registration Statement and any amendment thereto, the Registration Statement
will conform in all material respects to the requirements of the Securities Act
and the Exchange Act and the rules and regulations of the SEC thereunder. As of
the effective date of such Registration Statement, the time of mailing of the
Joint Proxy and Consent Solicitation Statement/Prospectus and as of the
Effective Time of the Merger, the Registration Statement and the Joint Proxy and
Consent Solicitation Statement/Prospectus will not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; provided,
however, that this representation and warranty shall not
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apply to any statements or omissions made or omitted in reliance upon and in
conformity with information furnished to the Company by any of the Edge
Entities.
SECTION 7.7 LITIGATION, ETC. (a) There is no action, claim or
proceeding pending or, to the knowledge of the Company, threatened to which the
Company is or would be party before any court or governmental authority acting
in an adjudicative capacity or any arbitration or arbitration tribunal with
respect to which there is a reasonable likelihood of a determination having, or
which, insofar as reasonably can be foreseen, in the future would have a
material adverse effect on the Company, (b) the Company is not subject to any
outstanding order, writ, injunction or decree having, or which, insofar as
reasonably can be foreseen, in the future would have a material adverse effect
on the Company, and (c) since its formation, there have been no claims made or
actions or proceedings brought against any officer or director of the Company
arising out of or pertaining to any action or omission within the scope of his
employment or position with the Company, which claim, action or proceeding is
material to the Company.
SECTION 7.8 NO OPERATIONS. The Company and Mergeco have not conducted
any operations since their respective dates of incorporation or incurred any
liabilities, except in connection with this Agreement, the Offering, the
Combination and that certain Purchase and Sale Agreement dated as of December 2,
1996 between the Company and James C. Calaway.
ARTICLE VIII. REPRESENTATIONS AND WARRANTIES OF OLD EDGE
Old Edge hereby represents and warrants to each of the parties hereto
as follows:
SECTION 8.1 ORGANIZATION; QUALIFICATION. Old Edge is a corporation
duly organized under the TBCA and is validly existing and in good standing under
the laws of the State of Texas. Old Edge has all requisite corporate power and
authority to own, operate or lease its properties and to carry on its business
as now being conducted.
SECTION 8.2 CAPITALIZATION. As of the Closing Date, the authorized
capital stock of Old Edge will consist solely of 150,000 shares of Common Stock,
par value $0.01 per share, of which 104,630.6 shares of Common Stock will be
outstanding. Old Edge does not, and will not as of the Closing Date, have any
outstanding subscriptions, options or other arrangements or commitments
obligating it to issue any additional shares of capital stock other than (i) the
following stock options: (a) an option to purchase 2,193 shares issued to James
D. Calaway; and (b) an option to purchase 2,193 shares issued to Richard S.
Dale, and (ii) under that Stock Purchase Agreement between Old Edge and each of
Rimco Partners, L.P. II, Rimco Partners, L.P. III and Rimco/MYL, L.P., as
subscribers effective as of April 1991, which enables such subscribers to
acquire shares of Old Edge Common Stock as necessary to enable them to retain
their percentage of common stock on a fully diluted basis. All outstanding
shares of capital stock of Old Edge are validly issued, fully paid and
nonassessable and not subject to preemptive rights.
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SECTION 8.3 NO CONFLICTS. Consummation of the transactions
contemplated hereby and compliance with the terms and provisions of this
Agreement will not conflict with, result in a breach of, require notice or
consent under or constitute a default under Old Edge's Articles of Incorporation
or Bylaws or any judgment, order, injunction, decree or ruling of any court or
governmental authority or under any material agreement, indenture or instrument
to which Old Edge is a party. No consent, approval, order or authorization of,
or registration, declaration or filing with, any court or governmental authority
or other third party is required on the part of Old Edge in connection with the
execution and delivery of this Agreement or for the consummation of the
transactions contemplated by this Agreement other than the filing of the
Registration Statement with the SEC, filings with any blue sky or state
regulatory authorities and filings with the Secretary of State of the State of
Texas in connection with the Merger.
SECTION 8.4 AUTHORITY AND AUTHORIZATION; BINDING EFFECT. Old Edge has
all requisite corporate power and authority to execute and deliver this
Agreement and, subject to Old Edge Shareholder Approval (as defined in Section
12.1), to consummate the transactions contemplated hereby. The Board of
Directors of Old Edge has at a meeting duly called and held and at which a
quorum was present and acting throughout, by the requisite affirmative vote of
the directors of Old Edge (i) determined that the Merger is in the best
interests of Old Edge and its shareholders and (ii) approved this Agreement and
the Merger. No other corporate proceedings on the part of Old Edge are
necessary to authorize the execution and delivery of this Agreement or, except
for Old Edge Shareholder Approval, the consummation of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by Old
Edge and, assuming the due authorization, execution and delivery hereof by the
other parties hereto, constitutes a valid and binding obligation of Old Edge
enforceable against Old Edge in accordance with its terms, subject to laws of
general application relating to bankruptcy, insolvency and the relief of debtors
and rules of law governing specific performance, injunctive relief or other
equitable remedies.
SECTION 8.5 REGISTRATION STATEMENT. To the extent that any statements
or omissions made in the Registration Statement or Joint Proxy and Consent
Solicitation Statement/Prospectus are made in reliance on and in conformity with
information furnished to the Company by Old Edge, such Registration Statement
and Joint Proxy and Consent Solicitation Statement/Prospectus on the effective
date and at the Effective Time of the Merger shall conform in all material
respects with the requirements of the Securities Act and Exchange Act and the
rules and regulations of the SEC thereunder, and do not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
SECTION 8.6 LITIGATION, ETC. (a) There is no action, claim, or
proceeding pending or, to the knowledge of Old Edge, threatened, to which Old
Edge is or would be a party before any court or governmental authority acting in
an adjudicative capacity or any arbitrator or arbitration tribunal with respect
to which there is a reasonable likelihood of a determination having, or which,
insofar as reasonably can be foreseen, in the future would have a material
adverse effect on Old Edge, (b) Old Edge is not subject to any outstanding
order, writ, injunction or decree having, or which, insofar as reasonably can be
foreseen, in the future would have a material adverse effect on Old Edge, and
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(c) there have been no claims made or actions or proceedings brought against any
officer or director of Old Edge arising out of or pertaining to any action or
omission within the scope of his employment or position with Old Edge, which
claim, action or proceeding is material to Old Edge.
SECTION 8.7 OWNERSHIP OF JOINT VENTURE INTEREST. Old Edge owns its
interest in the Joint Venture that is specified in the Joint Venture Agreement
free and clear of all liens, encumbrances and defects (together, "Liens") except
those Liens described in the Joint Venture Agreement.
SECTION 8.8 FINANCIAL STATEMENTS OF OLD EDGE. Each of the balance
sheets of Old Edge included in the Registration Statement (including the related
notes and schedules) fairly presents, in all material respects, the financial
position of Old Edge as of its date, and each of the statements of income and
changes in financial position included in the Registration Statement (including
any related notes and schedules) fairly presents the results of operations,
stockholders' equity, retained earning and changes in financial position, as the
case may be, of Old Edge for the periods set forth therein (subject, in the case
of unaudited statements, to normal year-end audit adjustments not material in
amount of effect), in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except as may be
noted therein. Since December 31, 1995, no dividends, distributions, repurchases
of interests or any other payment has been made to any equityholder of Old Edge
as such. Old Edge did not have on December 31, 1995 or the date of any
subsequent balance sheet of Old Edge, any material contingent liabilities,
liabilities for taxes, obligations, guarantees or unrealized or anticipated
losses from any unfavorable commitments, except as referred to or reflected or
provided for in the balance sheet, including the notes thereto, of Old Edge as
of said date. Since December 31, 1995, there has been no material adverse change
in the financial condition, assets or operation of the business of Old Edge from
that set forth in the preliminary joint proxy and consent solicitation
statement/prospectus to be filed with the SEC ("Preliminary Joint Proxy and
Consent Solicitation Statement/Prospectus").
SECTION 8.9 COMPLIANCE WITH LAWS. The operations of Old Edge do not
violate any federal, state, local or other laws or regulations or any order or
requirement of any court or governmental agency or authority in any material
respect, including without limitation those laws, regulations, orders or
requirements relating to environment or health. Such operations are not subject
to any existing, pending or, to the knowledge of Old Edge, threatened action,
suit, investigation, inquiry or proceeding by or before any court or
governmental agency or authority under any federal, state or local environmental
law, rule or regulation, except in each case for any matter that would not have
a material adverse effect on Old Edge.
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ARTICLE IX. REPRESENTATIONS AND WARRANTIES OF EDGE GROUP II
Edge Group II hereby represents and warrants to each of the parties
hereto as follows:
SECTION 9.1 FORMATION; QUALIFICATION. Edge Group II is a limited
partnership duly formed under Connecticut law and is validly existing and in
good standing under the laws of the State of Connecticut. Edge Group II has all
requisite partnership power and authority to own, operate or lease its
properties and to carry on its business as now being conducted.
SECTION 9.2 CAPITALIZATION. John Sfondrini and Napamco, Ltd. are the
sole general partners of Edge Group II and own all the general partner interests
in Edge Group II free and clear of all Liens, except those Liens described in
Schedule 9.2 hereto. All the outstanding limited and general partner interests
of Edge Group II are duly authorized, validly issued, and were issued free of
preemptive rights and not subject to requirements to make any capital
contributions that have not previously been made. There are no outstanding
subscriptions, options or other arrangements or commitments obligating Edge
Group II to issue any additional limited or general partner interests. As of the
Closing Date, 189 units (each unit representing a capital contribution of
$70,500) will be outstanding, and Edge Group II will not have any outstanding
subscriptions, options or other arrangements or commitments obligating it to
issue any additional limited or general partner interests.
SECTION 9.3 NO CONFLICTS. Except as described in Schedule 9.2 and
taking into account the consent granted in Section 4.2, and assuming receipt of
the Edge Group II GP Transfer Consent, as of the Closing Date, consummation of
the transactions contemplated hereby and compliance with the terms and
provisions of this Agreement will not materially conflict with, result in a
material breach of, require notice or consent under or constitute a material
breach under the Edge Group II Limited Partnership Agreement or Edge Group II's
certificate of limited partnership or any judgment, order, injunction, decree or
ruling of any court or governmental authority or under any material agreement,
indenture or instrument to which Edge Group or the general partners of Edge
Group II is a party. No consent, approval, order or authorization of, or
registration, declaration or filing with, any court or governmental authority or
other third party is required on the part of Edge Group II or the general
partners of Edge Group II in connection with the execution and delivery of this
Agreement or for the consummation of the transactions contemplated by this
Agreement, other than the GP Transfer Consent and as described in Section 4.2 of
this Agreement. There are no agreements or arrangements regarding the
management or internal governance of Edge Group II or relating to the allocation
of its assets, revenues or costs other than the Partnership Agreement of Edge
Group II.
SECTION 9.4 AUTHORITY AND AUTHORIZATION; BINDING EFFECT. Edge Group
II has all requisite partnership power and authority to enter into and perform
the provisions of this Agreement. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary partnership action on the part of Edge Group II,
subject to the receipt of the Edge Group II GP Transfer Consent. Subject to
such approval, this
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Agreement has been duly executed and delivered by Edge Group II and, assuming
the due authorization, execution and delivery hereof by the other parties
hereto, constitutes a valid and binding obligation of Edge Group II enforceable
against Edge Group II in accordance with its terms, subject to laws of general
application relating to bankruptcy, insolvency and the relief of debtors and
rules of law governing specific performance, injunctive relief or other
equitable remedies.
SECTION 9.5 REGISTRATION STATEMENT. To the extent that any statements
or omissions made in the Registration Statement or Joint Proxy and Consent
Solicitation Statement/Prospectus are made in reliance on and in conformity with
written information furnished to the Company by Edge Group II, such Registration
Statement and Joint Proxy and Consent Solicitation Statement/ Prospectus on the
effective date and at the Effective Time of the Combination conform in all
material respects with the requirement of the Securities Act and the Exchange
Act and the rules and regulations of the SEC thereunder, and do not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading.
SECTION 9.6 LITIGATION, ETC. (a) There is no action claim, or
proceeding pending or, to the knowledge of Edge Group II, threatened, to which
Edge Group II is or would be a party before any court or governmental authority
acting in an adjudicative capacity or any arbitrator or arbitration tribunal
with respect to which there is a reasonable likelihood of a determination
having, or which, insofar as reasonably can be foreseen, in the future would
have a material adverse effect on Edge Group II, (b) Edge Group II is not
subject to any outstanding order, writ, injunction or decree having, or which,
insofar as reasonably can be foreseen, in the future would have a material
adverse effect on Edge Group II, and (c) since December 31, 1995, there have
been no claims made or actions or proceedings brought against any officer or
director of the general partners of Edge Group II arising out of or pertaining
to any action or omission within the scope of his employment or position as an
officer or director of the general partner of Edge Group II, which claim, action
or proceeding is material to Edge Group II.
SECTION 9.7 OWNERSHIP OF JOINT VENTURE INTEREST. Edge Group II owns
its interest in the Joint Venture that is specified in the Joint Venture
Agreement free and clear of all Liens, except those Liens described in the Joint
Venture Agreement.
SECTION 9.8 FINANCIAL STATEMENTS OF EDGE GROUP II. Each of the
balance sheets of Edge Group II included in the Registration Statement
(including the related notes and schedules) fairly presents, in all material
respects, the financial position of Edge Group II as of its date, and each of
the statements of income and changes in financial position included in the
Registration Statement (including any related notes and schedules) fairly
presents the results of operations, partners' equity, retained earnings and
changes in financial position, as the case may be, of Edge Group II for the
periods set forth therein (subject, in the case of unaudited statements, to
normal year-end audit adjustments not material in amount or effect), in each
case in accordance with generally accepted accounting principles consistently
applied during the periods involved, except as may be noted therein. Since
December 31, 1995, no dividends, distributions, repurchases of interests or any
other
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payment has been made to any equityholder of Edge Group II as such. Edge Group
II did not have on December 31, 1995 or the date of any subsequent balance sheet
of Edge Group II, any material contingent liabilities, liabilities for taxes,
obligations, guarantees or unrealized or anticipated losses from any unfavorable
commitments, except as referred to or reflected or provided for in the balance
sheet, including the notes thereto, of Edge Group II as of said date. Since
December 31, 1995, there has been no material adverse change in the financial
condition, assets or operation of the business of Edge Group II from that set
forth in the Preliminary Joint Proxy and Consent Solicitation
Statement/Prospectus.
SECTION 9.9 COMPLIANCE WITH LAWS. The operations of Edge Group II do
not violate any federal, state, local or other laws or regulations or any order
or requirement of any court or governmental agency or authority in any material
respect, including without limitation those laws, regulations, orders or
requirements relating to environment or health. Such operations are not subject
to any existing, pending or, to the knowledge of Edge Group II, threatened
action, suit, investigation, inquiry or proceeding by or before any court or
governmental agency or authority under any federal, state or local environmental
law, rule or regulation, except in each case for any matter that would not have
a material adverse effect on Edge Group II.
ARTICLE X. REPRESENTATIONS AND WARRANTIES OF GULFEDGE
Gulfedge hereby represents and warrants to each of the parties hereto
as follows:
SECTION 10.1 FORMATION; QUALIFICATION. Gulfedge is a limited
partnership duly formed under the Texas Revised Limited Partnership Act and is
validly existing and in good standing under the laws of the State of Texas.
Gulfedge has all requisite partnership power and authority to own, operate or
lease its properties and to carry on its business as now being conducted.
SECTION 10.2 CAPITALIZATION. Old Edge is the sole general partner of
Gulfedge. All the outstanding limited or general partner interests of Gulfedge
are duly authorized, validly issued, free of preemptive rights and not subject
to requirements to make any capital contributions that have not previously been
made. There are no outstanding subscriptions, options or other arrangements or
commitments obligating Gulfedge to issue any additional limited or general
partner interests. As of the Closing Date, 7 units (each unit representing an
initial capital contribution of $64,500) will be outstanding, and Gulfedge will
not have any outstanding subscriptions, options or other arrangements or
commitments obligating it to issue any additional limited or general partner
interests.
SECTION 10.3 NO CONFLICTS. Consummation of the transactions
contemplated hereby and compliance with the terms and provisions of this
Agreement will not materially conflict with, result in a material breach of,
require notice or consent under or constitute a material breach under Gulfedge's
partnership agreement or certificate of limited partnership or any judgment,
order, injunction, decree or ruling of any court or governmental authority or
under any material agreement, indenture or instrument to which Gulfedge is a
party. No consent, approval, order or authorization
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of, or registration, declaration or filing with, any court or governmental
authority or other third party is required on the part of Gulfedge in connection
with the execution and delivery of this Agreement or for the consummation of the
transactions contemplated by this Agreement, other than as described in this
Agreement.
SECTION 10.4 AUTHORITY AND AUTHORIZATION; BINDING EFFECT. Gulfedge
has all requisite partnership power and authority to enter into and perform the
provisions of this Agreement. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by all necessary partnership action on the part of Gulfedge. This
Agreement has been duly executed and delivered by Gulfedge and, assuming the due
authorization, execution and delivery hereof by the other parties hereto,
constitutes a valid and binding obligation of Gulfedge enforceable against
Gulfedge in accordance with its terms, subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies.
SECTION 10.5 REGISTRATION STATEMENT. To the extent that any
statements or omissions made in the Registration Statement or Joint Proxy and
Consent Solicitation Statement/Prospectus are made in reliance on and in
conformity with written information furnished to the Company by Gulfedge, such
Registration Statement and Joint Proxy and Solicitation Statement/Prospectus on
the effective date and at the Effective Time of the Combination conform in all
material respects with the requirement of the Securities Act and the Exchange
Act and the rules and regulations of the SEC thereunder, and do not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading.
SECTION 10.6 LITIGATION, ETC. (a) There is no action, claim, or
proceeding pending or, to the knowledge of Gulfedge, threatened, to which
Gulfedge is or would be a party before any court or governmental authority
acting in an adjudicative capacity or any arbitrator or arbitration tribunal
with respect to which there is a reasonable likelihood of a determination
having, or which, insofar as reasonably can be foreseen, in the future would
have a material adverse effect on Gulfedge, (b) Gulfedge is not subject to any
outstanding order, writ, injunction or decree having, or which, insofar as
reasonably can be foreseen, in the future would have a material adverse effect
on Gulfedge, and (c) since December 31, 1995, there have been no claims made or
actions or proceedings brought against any officer or director of the general
partners of Gulfedge arising out of or pertaining to any action or omission
within the scope of his employment or position as an officer or director of the
general partner of Gulfedge, which claim, action or proceeding is material to
Gulfedge.
SECTION 10.7 OWNERSHIP OF JOINT VENTURE INTEREST. Gulfedge owns its
interest in the Joint Venture that is specified in the Joint Venture Agreement
free and clear of all Liens, except those Liens described in the Joint Venture
Agreement.
SECTION 10.8 FINANCIAL STATEMENTS OF GULFEDGE. Each of the balance
sheets of Gulfedge included in the Registration Statement (including the related
notes and schedules) fairly presents, in all material respects, the financial
position of Gulfedge as of its date, and each of the statements
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of income and changes in financial position included in the Registration
Statement (including any related notes and schedules) fairly presents the
results of operations, partners' equity, retained earnings and changes in
financial position, as the case may be, of Gulfedge for the periods set forth
therein (subject, in the case of unaudited statements, to normal year-end audit
adjustments not material in amount or effect), in each case in accordance with
generally accepted accounting principles consistently applied during the periods
involved, except as may be noted therein. Since December 31, 1995, no dividends,
distributions, repurchases of interests or any other payment has been made to
any equityholder of Gulfedge as such. Gulfedge did not have on December 31, 1995
or the date of any subsequent balance sheet of Gulfedge, any material contingent
liabilities, liabilities for taxes, obligations, guarantees or unrealized or
anticipated losses from any unfavorable commitments, except as referred to or
reflected or provided for in the balance sheet, including the notes thereto, of
Gulfedge as of said date. Since December 31, 1995, there has been no material
adverse change in the financial condition, assets or operation of the business
of Gulfedge from that set forth in the Preliminary Joint Proxy and Consent
Solicitation Statement/Prospectus.
SECTION 10.9 COMPLIANCE WITH LAWS. The operations of Gulfedge do not
violate any federal, state, local or other laws or regulations or any order or
requirement of any court or governmental agency or authority in any material
respect, including without limitation those laws, regulations, orders or
requirements relating to environment or health. Such operations are not subject
to any existing, pending or, to the knowledge of Gulfedge, threatened action,
suit, investigation, inquiry or proceeding by or before any court or
governmental agency or authority under any federal, state or local environmental
law, rule or regulation, except in each case for any matter that would not have
a material adverse effect on Gulfedge.
ARTICLE XI. REPRESENTATIONS AND WARRANTIES OF EDGE GROUP
Edge Group hereby represents and warrants to each of the parties
hereto as follows:
SECTION 11.1 FORMATION; QUALIFICATION. Edge Group is a general
partnership duly formed under Connecticut law and is validly existing under the
laws of the State of Connecticut. Edge Group has all requisite partnership
power and authority to own, operate or lease its properties and to carry on its
business as now being conducted. The partners of Edge Group are Edge Limited
Partnership, a Connecticut limited partnership ("Edge I"), Edge II Limited
Partnership, a Connecticut limited partnership ("Edge II"), and Edge III Limited
Partnership, a Connecticut limited partnership ("Edge III"), as its general
partners. John Sfondrini is the Authorized Person and as such is authorized to
act for and bind Edge Group.
SECTION 11.2 CAPITALIZATION. The authorized partner interests of Edge
Group are solely owned by the persons described in Section 11.1. As of the date
hereof and the Closing Date, Edge Group does not and will not have any
outstanding subscriptions, options or other arrangements or commitments obliging
it to issue any additional partner interest.
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<PAGE>
SECTION 11.3 NO CONFLICTS. If Edge Group determines to accept the Edge
Group Purchase Offer, consummation of the transactions contemplated hereby and
compliance with the terms and provisions of this Agreement will not materially
conflict with, result in a material breach of, require notice or consent under
or constitute a material default under the Edge Group Partnership Agreement or
any judgment, order, injunction, decree or ruling of any court or governmental
authority or under any material agreement, indenture or instrument to which Edge
Group is a party. No consent, approval, order or authorization of, or
registration, declaration or filing with, any court or governmental authority or
other third party is required on the part of Edge Group in connection with the
execution and delivery of this Agreement or, if Edge Group determines to accept
the Edge Group Purchase Offer, for the consummation of the transactions
contemplated by this Agreement, other than as described in this Agreement.
SECTION 11.4 AUTHORITY AND AUTHORIZATION; BINDING EFFECT. Edge Group
has all requisite partnership power and authority to enter into and perform the
provisions of this Agreement. The execution and delivery of this Agreement and,
if Edge Group determines to accept the Edge Group Purchase Offer, the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary partnership action on the part of Edge Group. This Agreement
has been duly executed and delivered by Edge Group and, assuming the due
authorization, execution and delivery hereof by the other parties hereto,
constitutes a valid and binding obligation of Edge Group enforceable against
Edge Group in accordance with its terms, subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies.
SECTION 11.5 REGISTRATION STATEMENT. To the extent that any
statements or omissions made in the Registration Statement or Joint Proxy and
Solicitation Statement/Prospectus are made in reliance on and in conformity with
information furnished to the Company by Edge Group, such Registration Statement
and Joint Proxy and Solicitation Statement/Prospectus on the effective date and
at the Effective Time of the Combination conform in all material respects with
the requirements of the Securities Act and Exchange Act and the rules and
regulations of the SEC thereunder, and do not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
SECTION 11.6 LITIGATION, ETC. (a) There is no action, claim or
proceeding pending or, to the knowledge of Edge Group, threatened, to which Edge
Group is or would be a party before any court or governmental authority acting
in an adjudicative capacity or any arbitrator or arbitration tribunal with
respect to which there is a reasonable likelihood as a determination having, or
which, insofar as reasonably can be foreseen, in the future would have a
material adverse effect on Edge Group, (b) Edge Group is not subject to any
outstanding order, writ, injunction or decree having, or which, insofar as
reasonably can be foreseen, in the future would have a material adverse effect
on Edge Group, and (c) since December 31, 1995, there have been no claims made
or actions or proceedings brought against any officer or director of a partner
of Edge Group arising out of or pertaining to any action or omission within the
scope of his employment or position as an officer or director of a partner of
Edge Group, which claim, action or proceeding is material to Edge Group.
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<PAGE>
SECTION 11.7 OWNERSHIP OF JOINT VENTURE INTEREST. Edge Group owns its
interest in the Joint Venture that is specified in the Joint Venture Agreement
free and clear of all Liens, except those Liens described in the Joint Venture
Agreement.
SECTION 11.8 FINANCIAL STATEMENTS OF EDGE GROUP. Each of the balance
sheets of Edge Group's interest in the Joint Venture included in the
Registration Statement (including the related notes and schedules) fairly
presents, in all material respects, the financial position of Edge Group's
interest in the Joint Venture as of its date, and each of the statements of
income and changes in financial position included in the Registration Statement
(including any related notes and schedules) fairly presents the results of
operations, partners' equity, retained earnings and changes in financial
position, as the case may be, of Edge Group's interest in the Joint Venture for
the periods set forth therein (subject, in the case of unaudited statements, to
normal year-end audit adjustments not material in amount or effect), in each
case in accordance with generally accepted accounting principles consistently
applied during the periods involved, except as may be noted therein. Edge
Group's interest in the Joint Venture did not have on December 31, 1995 or the
date of any subsequent balance sheet of Edge Group's interest in the Joint
Venture, any material contingent liabilities, liabilities for taxes,
obligations, guarantees or unrealized or anticipated losses from any unfavorable
commitments, except as referred to or reflected or provided for in the balance
sheet, including the notes thereto, of Edge Group's interest in the Joint
Venture as of said date. Since December 31, 1995, there has been no material
adverse change in the financial condition, assets or operation of the business
of Edge Group from that set forth in the Preliminary Joint Proxy and Consent
Solicitation Statement/Prospectus.
SECTION 11.9 COMPLIANCE WITH LAWS. The operations of Edge Group do
not violate any federal, state, local or other laws or regulations or any order
or requirement of any court or governmental agency or authority in any material
respect, including without limitation those laws, regulations, orders or
requirements relating to environment or health. Such operations are not subject
to any existing, pending or, to the knowledge of Edge Group, threatened action,
suit, investigation, inquiry or proceeding by or before any court or
governmental agency or authority under any federal, state or local environmental
law, rule or regulation, except in each case for any matter that would not have
a material adverse effect on Edge Group.
ARTICLE XII. COVENANTS AND AGREEMENTS
SECTION 12.1 EQUITYHOLDER APPROVAL. (a) Old Edge shall, as promptly
as practicable, submit this Agreement and the transactions contemplated hereby
for the approval of its shareholders at a meeting of shareholders (the "Special
Meeting") and, subject to the fiduciary duties of the Board of Directors of Old
Edge under applicable law, shall use its reasonable best efforts to obtain
shareholder approval and adoption (the "Old Edge Shareholder Approval") of this
Agreement and the transactions contemplated hereby. Such meeting of
shareholders shall be held as soon as practicable following the date upon which
the Registration Statement becomes effective. Subject to the fiduciary duties
of the Board of Directors of Old Edge under applicable law, Old Edge shall,
through
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<PAGE>
its Board of Directors, recommend to its shareholders approval of the
transactions contemplated by this Agreement.
(b) The Company has authorized and caused an officer of the Company to
vote the Company's shares of common stock of Mergeco for adoption and approval
of this Agreement and the transactions contemplated hereby and shall take all
additional actions as the sole stockholder of Mergeco necessary to adopt and
approve this Agreement and the transactions contemplated hereby.
(c) Subject to the fiduciary duties of the general partners under
applicable law, the general partners of Edge Group II and Gulfedge shall
recommend to their respective limited partners that they accept the Edge Group
II Exchange Offer and the Gulfedge Exchange Offer, respectively, and the Edge
Group II general partners shall vote in favor of the Edge Group II GP Transfer
Consent. The general partners of Edge Group II and Gulfedge, subject to the
fiduciary duties of such general partners under applicable law, shall use their
reasonable best efforts to assist the Company in obtaining such acceptance and
such consent.
SECTION 12.2 CONDUCT OF BUSINESS. The Company, Old Edge, Edge Group
II, Edge Group (solely with respect to its interest in the Joint Venture, as
applicable) and Gulfedge agree that prior to the Effective Time, and except as
otherwise contemplated herein or consented to in writing by the other parties,
each shall (a) conduct its business in the ordinary course and shall use
reasonable efforts to preserve intact its present business organization,
maintain the services of its present officers and employees and preserve the
relations with its customers, suppliers and others having business relations
with it; (b) except as explicitly provided herein, not pay or declare dividends
or other distributions, split, combine or otherwise reclassify its capital stock
or partnership interest or directly or indirectly repurchase or otherwise
acquire shares of its capital stock; (c) not issue any capital stock,
partnership interest or debt securities having voting rights for directors or
any rights, options, securities convertible or exchangeable therefor, except
under existing employee stock option plans or presently outstanding convertible
or exchangeable securities; and (d) not amend or modify its certificates or
articles of incorporation, by-laws, partnership agreements or other governing
documents.
SECTION 12.3 THIRD PARTY CONSENTS; SECTION 203 OF THE DGCL. Each of
the parties hereto will use its best efforts to obtain such consents of third
parties to agreements which would otherwise be violated by any provisions
hereof, to take all actions necessary to effect the transactions contemplated
hereby, and to make such filings with governmental authorities necessary to
consummate the transactions contemplated by this Agreement including, without
limitation, the execution and delivery of any additional instruments necessary
to consummate the transactions contemplated by this Agreement. In connection
with and without limiting the foregoing, the Company and its Board of Directors
shall take all action necessary to insure that Section 203 of the DGCL. does not
become applicable to the Combination or to any former partner or stockholder of
Old Edge, Edge Group II, Gulfedge or Edge Group (or any of their respective
affiliates) by reason of their receipt or ownership of Common Stock received in
the Combination.
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<PAGE>
SECTION 12.4 OPTION PLANS. Prior to the Effective Time, the Company
and Old Edge shall take such action as may be necessary to cause each unexpired
and unexercised option to purchase shares of Old Edge Common Stock (each an "Old
Edge Option") to be automatically converted at the Effective Time into an option
(each a "Company Option") to purchase a number of shares of Common Stock equal
to the number of shares of Old Edge Common Stock that could have been purchased
under the Old Edge Option multiplied by the Old Edge Exchange Ratio, at a price
per share of Common Stock equal to the option exercise price determined pursuant
to the Old Edge Option divided by the Old Edge Exchange Ratio and subject to the
same terms and conditions as the Old Edge Option. The date of grant of a
substituted Option shall be the date on which the corresponding Old Edge Option
was granted. At the Effective Time, all references in the stock option
agreement to Old Edge shall be deemed to refer to the Company. The Company
shall assume all of Old Edge's obligations with respect to Old Edge Options as
so amended and shall, from and after the Effective Time, make available for
issuance upon exercise of the Company Options all shares of Common Stock covered
thereby.
SECTION 12.5 REGISTRATION RIGHTS AGREEMENT. The Company hereby agrees
to enter into a registration rights agreement (the "Registration Rights
Agreement") with Edge Holding Company Limited Partnership, a Connecticut limited
partnership ("Edge Holding Company"), on reasonable and customary terms, which
terms will include a provision that, upon the request of Edge Holding Company,
the Company will file a registration statement under the Securities Act to
register the Common Stock being issued to Edge Holding Company pursuant to the
Merger for distribution to the partners of Edge Holding Company. This demand
registration may be effected at any time after six months after the Closing. The
Registration Rights Agreement will terminate on December 31, 1998, or earlier if
the securities subject to the Registration Rights Agreement have been (i)
distributed to the public pursuant to a registration statement covering such
securities that has been declared effective under the Securities Act or (ii)
distributed to the public in accordance with the provisions of Rule 144 (or any
similar provision then in force) under the Securities Act. An aggregate of
approximately 858,858 outstanding shares of Common Stock will be subject to the
Registration Rights Agreement. The Company shall pay all costs associated with
such registration (including, without limitation, all registration,
qualification, listing and filing fees, printing expenses, fees and expenses of
counsel for the Company, and the expense of any special audits incident to or
required by any such registration (and including the reasonable fees and
expenses of one legal counsel for any Edge Holding Company)) other than
underwriting commissions and transfer taxes, if any, attributable to the shares
distributed. The Company will indemnify Edge Holding Company, and Edge Holding
Company will indemnify the Company, against certain liabilities in respect of
any registration statement or offering covered by the Registration Rights
Agreement.
ARTICLE XIII. CONDITIONS
SECTION 13.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
COMBINATION. The respective obligations of each party to effect the Combination
shall be subject to the fulfillment (or waiver) at or prior to the Effective
Time of the following conditions:
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(a) INITIAL PUBLIC OFFERING. The Company shall have consummated the
Offering and the IPO price shall have been at least equal to $14.50 per share.
(b) MERGER APPROVAL. The Old Edge Shareholder Approval shall have been
obtained.
(c) MINIMUM TENDER OF EDGE GROUP II PARTNERSHIP INTERESTS. The
general partners and at least that number of limited partners of Edge Group II
holding 70% of the outstanding partnership interests in Edge Group II shall have
accepted the Company's exchange offer and tendered their partnership interests
in Edge Group II to be exchanged for shares of Common Stock.
(d) EDGE GROUP II GP TRANSFER CONSENT. Edge Group II shall have
obtained the Edge Group II GP Transfer Consent.
(e) COMBINATION AGREEMENT TRANSACTIONS. The Merger, the Edge Group
II Exchange Offer and the Offering all close simultaneously, and no more than
10% of the shareholders of Old Edge shall have exercised their dissenters'
rights as provided for under the TBCA with respect to the Merger.
(f) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of the parties contained in Articles VII, VIII, IX, X, and XI
shall be true and correct in all material respects on and as of the Effective
Time as if made on and as of such time (except for representations and
warranties made of as a specified date or time, which shall be true and correct
in all material respects as of such specified date or time); at the Closing each
of the parties hereto shall deliver a certificate signed by such party, or an
officer or general partner thereof (as applicable), certifying the foregoing.
(g) PERFORMANCE OF COVENANTS. Each party hereto shall have performed
and complied in all material respect with the covenants and agreements contained
in this Agreement that are required to be performed or complied with by it on or
prior to the Closing.
(h) NO ORDERS. There shall not be issued and in effect at the closing
any order restraining, prohibiting or delaying consummation of the transactions
contemplated by this Agreement.
ARTICLE XIV. TERMINATION
SECTION 14.1 TERMINATION. This Agreement may be terminated and the
Combination contemplated hereby may be abandoned at any time prior to the
Effective Time, whether before or after approval of the Merger by the Old Edge
Shareholders or approval of any other matter by any equityholder of the Parties:
(a) By mutual consent of the Company, Edge Group II, Gulfedge, Edge
Group, and Old Edge;
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(b) By any of the parties, (i) if the Effective Time has not occurred
by July 30, 1997, unless the Combination has not occurred due to the failure of
the party seeking to terminate this Agreement to perform its agreements and
covenants under this Agreement required to be performed by it at or prior to the
Effective Time or (ii) if a court of competent jurisdiction or governmental,
regulatory or administrative agency or commission shall have issued an order,
decree or ruling or taken any other action, in each case permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement; or
(c) By the Company, if the Company determines that there is a
reasonable probability that the Offering will not be consummated on terms that
satisfy the condition to Closing contained in Section 13.1(a), which
determination must be based upon written advice of the Underwriters of the
Offering to all the Parties.
SECTION 14.2 EFFECT OF TERMINATION. In the event of termination of
this Agreement by a party as provided in Section 14.1, written notice thereof
shall promptly be given to the other parties and this Agreement shall forthwith
terminate without further action of the parties hereto. If this Agreement is
terminated as provided, however, there shall be no liabilities or obligations
hereunder on the part of the parties, except that nothing herein shall relieve
any party hereto from liability for any breach of this Agreement that resulted
in the termination.
ARTICLE XV. MISCELLANEOUS AND GENERAL
SECTION 15.1 SURVIVAL. The representations and warranties in Articles
VII, VIII, IX, X and XI and any statement made in any certificate required under
Section 13.1 shall expire at the Effective Time. All other agreements contained
herein shall survive the consummation of the Combination.
SECTION 15.2 MODIFICATION OR AMENDMENT. At any time before or after
approval of the Merger by the Old Edge Shareholders, or approval of any other
matter by any equityholder of the parties, the parties hereto may modify or
amend this Agreement by written agreement executed and delivered by duly
authorized representatives of the respective parties.
SECTION 15.3 INDEMNIFICATION. (a) Whether or not any of the
Combination Agreement Transactions are consummated, the Company hereby agrees to
indemnify (i) the general partners of the partners of Edge Group and the general
partners of Edge Group II and Gulfedge (collectively, the "General Partners")
and (ii) the directors and officers of Old Edge, acting in their capacity as an
officer or director, as the case may be, of Old Edge in its corporate capacity
or in its capacity as the general partner of Gulfedge, (the "Old Edge Directors
and Officers"), and hold the General Partners and the Old Edge Directors and
Officers (each individually, an "Indemnitee") harmless from and against, and
shall reimburse them on demand for, any and all losses, damages, liabilities,
claims, demands, deficiencies, judgements, settlements, whether or not arising
out of third-party claims, including without limitation the reasonable fees and
expenses of counsel and other related costs and expenses ("Losses") resulting
from or arising out of the Combination Agreement Transactions, including but not
limited to (i) all liabilities of Edge Group, Edge Group II, Gulfedge and Old
Edge
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<PAGE>
in connection with the Combination Agreement Transactions and (ii) all
liabilities to the limited partners of Edge Group II, Gulfedge or the limited
partners of the partners of Edge Group in connection with the Combination
Agreement Transactions; provided that the Company shall not be required by this
Agreement to indemnify (1) the general partners of a breaching partnership or,
if Old Edge commits a breach, the officers and directors of Old Edge for
Termination Related Losses (as defined herein) in the event that this Agreement
shall be terminated by any party pursuant to Section 14.1(b)(i) due to the
failure of the Effective Time to occur by July 30, 1997 as a result of such
breach of this Agreement by such partnership or Old Edge, as applicable or (2)
any of the General Partners or any of the Old Edge Directors and Officers for
any Losses to an Indemnitee resulting from, arising out of or in such
Indemnitee's capacity as an equityholder of any of Edge Group II, Gulfedge, Edge
Group or Old Edge (such Losses in (2) are referred to herein as "Equityholder
Losses"). "Termination Related Losses" are Losses resulting from the
termination or breach of this Agreement.
(b) If a claim by a third party is made against a party indemnified
pursuant to this Section 15.3, and if such indemnified party intends to seek
indemnity with respect thereto under this Section 15.3, the indemnified party
shall promptly notify the indemnifying party of such claim; provided that the
failure of the indemnified party to notify the indemnifying party of any such
claim shall not relieve the indemnifying party of its obligations under this
Section 15.3, except to the extent the indemnifying party is actually prejudiced
by such failure. In case any action or proceeding including any such claim is
brought against the indemnified party, the indemnifying party shall be entitled
to participate therein and to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party to the extent it may wish: provided that
in the event the indemnifying party so assumes the defense, the indemnified
party shall still have the right to employ separate counsel at its own expense
in any such action and to participate in the defense thereof. Without the prior
written consent of the indemnified party, which consent shall not unreasonably
be withheld, the indemnifying party will not consent to the entry of any
judgment or enter into any settlement of any such claim which does not include
as an unconditional term thereof the giving by the claimant or plaintiff thereof
to such indemnified party of a release from any and all liability in respect of
such claim or litigation. The indemnified party will not enter into any
settlement or pay (except pursuant to a final court order or judgment) any such
claim without the prior written consent of the indemnifying party, which consent
shall not be unreasonably withheld. Notwithstanding the foregoing, the
indemnified party shall have the right to pay or settle any such claim, provided
that in such event it shall waive any right to indemnity therefor by the
indemnifying party or parties.
(c) Without limiting the generality of any other provision hereunder,
it is the express intent of this Agreement that the General Partners and the Old
Edge Directors and Officers be indemnified regardless of such General Partner's
or such Old Edge Director and Officer's acts of negligence or gross negligence,
to the extent that such indemnification is allowed pursuant to the terms of this
Agreement; provided, that, notwithstanding the foregoing or any other provision
hereof, the Company shall not indemnify any General Partner or any of the Old
Edge Directors and Officers under this Section 15.3 for any action taken or any
failure to act by such General Partner or such Old Edge Director and Officer,
regardless of whether acting in their individual or corporate capacity or
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<PAGE>
in their capacity as a general partner of Edge Group, Edge Group II or Gulfedge,
as the case may be, after the date of this Agreement if such action or failure
to act is in breach of any provision hereof or if such action or inaction
constituted intentional misconduct or a willful violation of law.
SECTION 15.4 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each such counterpart being deemed to be an original,
and all such counterparts taken together shall constitute the same agreement.
SECTION 15.5 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
SECTION 15.6 FURTHER ASSURANCES. The parties hereto without
additional consideration shall execute and deliver or shall cause to be executed
and delivered such further documents and certificates and to take such further
actions as may be reasonably required or desirable to carry out the provisions
of this Agreement and consummate the transactions contemplated hereby. In
particular, without limiting the generality of the foregoing sentence, at any
time after the Effective Time, any party hereto will execute and deliver or
shall cause to be executed and delivered any deeds, bills of sale, assignments,
assurances, or any other actions or things as are necessary or desirable to
vest, perfect, or confirm of record or otherwise in the Company or the Surviving
Corporation its rights, title, or interest in, to, or under any of the rights,
properties, or assets acquired or to be acquired by the Company or the Surviving
Corporation as a result of or in connection with the Combination Agreement
Transactions or otherwise to carry out this Agreement.
SECTION 15.7 ENTIRE AGREEMENT, ETC. This Agreement (a) constitutes
the entire agreement, and supersedes all other prior agreements and
understandings, both written and oral, among the parties, with respect to the
subject matter hereof, and (b) shall not be assignable by operation of law or
otherwise except that the Company may assign to a direct or indirect subsidiary
(including any entity that becomes a subsidiary as a result of the Combination
Agreement Transactions) its right to purchase (i) any interest in Edge Group II
or Gulfedge or (ii) Edge Group's interest in the Joint Venture; provided that
such assignment shall not relieve the Company of its obligations hereunder,
including the obligation to issue Common Stock in payment of any such interest
and (c) is not intended to create any obligations to, or rights in respect of,
any persons other than the parties hereto.
SECTION 15.8 CAPTIONS. The article, section and paragraph captions
herein are for convenience of reference only, do not constitute part of this
Agreement and shall not be deemed to limit or otherwise affect any of the
provisions hereof.
SECTION 15.9 NOTICES. Any notice or other communication required or
permitted under this Agreement shall be by facsimile actually received or in
writing and mailed by certified or registered mail, return receipt requested,
postage prepaid. Any such notice shall be deemed given upon its receipt at the
following address:
(a) If the Company:
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Edge Petroleum Corporation
Texaco Heritage Plaza
1111 Bagby, Suite 2100
Houston, Texas 77002
Tel: (713) 654-8960
Fax: (713) 654-7722
with a copy to:
Gene J. Oshman
Baker & Botts L.L.P.
3000 One Shell Plaza
910 Louisiana
Houston, Texas 77002
Tel: (713) 229-1178
Fax: (713) 229-1522
(b) If to Old Edge:
Edge Petroleum Corporation
Texaco Heritage Plaza
1111 Bagby, Suite 2100
Houston, Texas 77002
Tel: (713) 654-8960
Fax: (713) 654-7722
with a copy to:
Gene J. Oshman
Baker & Botts L.L.P.
3000 One Shell Plaza
910 Louisiana
Houston, Texas 77002
Tel: (713) 229-1178
Fax: (713) 229-1522
(c) If to Edge Group II:
John Sfondrini
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<PAGE>
36 Catoonah Street, Unit #16
P.O. Box 1248
Ridgefield, Connecticut 06875
Tel: (203) 894-8244
with a copy to:
J. Michael Gottesman
477 Madison Avenue
New York, New York 10002
Tel: (212) 308-2320
Fax: (212) 308-2323
(d) If to Gulfedge:
Gulfedge Limited Partnership
Texaco Heritage Plaza
1111 Bagby, Suite 2100
Houston, Texas 77002
Tel: (713) 654-8960
Fax: (713) 654-7722
(e) If to Edge Group:
John Sfondrini
36 Catoonah Street, Unit #16
P.O. Box 1248
Ridgefield, Connecticut 06875
Tel: (203) 894-8244
with a copy to:
J. Michael Gottesman
477 Madison Avenue
New York, New York 10002
Tel: (212) 308-2320
Fax: (212) 308-2323
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<PAGE>
Any party may, by notice given in accordance with this section to the other
parties, designate another address or person for receipt of notices hereunder.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the parties hereto on the date first hereinabove written.
EDGE PETROLEUM CORPORATION, EDGE PETROLEUM CORPORATION,
a Delaware corporation a Texas corporation
By:_____________________________ By:__________________________
Name: James D. Calaway Name: John E. Calaway
Title: President Title: President
EDGE GROUP II LIMITED GULFEDGE LIMITED PARTNERSHIP
PARTNERSHIP
By:_____________________________ By: Edge Petroleum Corporation,
Name: John Sfondrini a Texas corporation
Title: Managing General Partner Title: General Partner
and
By:__________________________
By: Napamco, Ltd. Name: John E. Calaway
Title: General Partner Title: President
By:___________________________
Name: John Sfondrini
Title: President
[Signature Page to Combination Agreement between Edge Group II Limited
Partnership, a Connecticut limited partnership, Gulfedge Limited Partnership,
a Texas limited partnership, Edge Group Partnership, a Connecticut general
partnership, Edge Petroleum Corporation, a Texas corporation, Edge Mergeco,
Inc., a Texas corporation and Edge Petroleum Corporation, a Delaware
corporation.]
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<PAGE>
EDGE MERGECO, INC.
By:_____________________________
Name: James D. Calaway
Title: President
EDGE GROUP PARTNERSHIP
By:_____________________________
Name: John Sfondrini
Title: Authorized Person
and
By: EDGE LIMITED PARTNERSHIP ("Edge I"),
EDGE II LIMITED PARTNERSHIP ("Edge
II") and EDGE III LIMITED PARTNERSHIP
("Edge III")
Title: General Partners
By:____________________________
Name: John Sfondrini
Title: General Partner of Edge I, Edge II and Edge III
and
By: Napamco, Ltd.
Title: General Partner of Edge I, Edge II and Edge III
By:______________________________
Name: John Sfondrini
Title: President
[Signature Page to Combination Agreement between Edge Group II Limited
Partnership, a Connecticut limited partnership, Gulfedge Limited Partnership, a
Texas limited partnership, Edge Group Partnership, a Connecticut general
partnership, Edge Petroleum Corporation, a Texas corporation, Edge Mergeco,
Inc., a Texas corporation and Edge Petroleum Corporation, a Delaware
corporation.]
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<PAGE>
Exhibit A
ARTICLES OF MERGER
MERGING
EDGE MERGECO, INC.
(A TEXAS CORPORATION)
WITH AND INTO
EDGE PETROLEUM CORPORATION
(A TEXAS CORPORATION)
THE SURVIVING CORPORATION OF SUCH MERGER TO BE:
EDGE PETROLEUM CORPORATION
(TO BE RENAMED EDGE PETROLEUM CORPORATION OF TEXAS)
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<PAGE>
ARTICLES OF MERGER
Pursuant to the provisions of Article 5.04 of the Texas Business Corporation Act
(the "TBCA"), the undersigned corporations adopt the following Articles of
Merger for the purpose of effecting a merger (the "Merger") in accordance with
the provisions of Article 5.01 of the TBCA.
1. The Combination Agreement (which contains the requisite elements of a Plan
of Merger as set forth in Article 5.01 of the TBCA), adopted in accordance with
the provisions of Article 5.04 of the TBCA and providing for the combination of
Edge Petroleum Corporation and Edge Mergeco, Inc. and resulting in Edge
Petroleum Corporation (renamed in the Merger to be Edge Petroleum Corporation of
Texas) being the surviving corporation is attached hereto as Exhibit A and is
incorporated herein by reference (the "Plan of Merger").
2. The name of each of the undersigned corporations and other entity or
entities, the type of such corporation or other entity and the laws under which
such corporation or other entity was organized are:
<TABLE>
<CAPTION>
Name of Corporation or Type of Entity State
---------------------- -------------- -----
Other Entity
-------------
<S> <C> <C>
Edge Petroleum Corporation corporation Texas
- ---------------------------------- -------------------------- ---------------------------
Edge Mergeco, Inc. corporation Texas
- ---------------------------------- -------------------------- ---------------------------
3. As to each of the undersigned domestic corporations, the approval of whose shareholders is required, the number of outstanding
shares of each class or series of stock of such corporation entitled to vote, with other shares or as a class, on the Plan of
Merger are as follows:
</TABLE>
<TABLE>
<CAPTION>
Number of Shares Class or Number of Shares
Name of Corporation ---------------- ----------------
------------------- Outstanding Series Entitled to Vote as
----------- -------- -------------------
a Class or Series
-----------------
<S> <C> <C> <C>
Edge Petroleum Corporation 104,630.6 N/A N/A
- ---------------------------- ---------------- ---------- -------------------
Edge Mergeco, Inc. 1,000 N/A N/A
- ---------------------------- ---------------- ---------- --------------------
</TABLE>
A-2
<PAGE>
4. As to each of the undersigned domestic corporations, the approval of whose
shareholders is required, the number of shares, not entitled to vote only as a
class, voted for and against the Plan of Merger, respectively, and, if the
shares of any class or series are entitled to vote as a class, the number of
shares of each such class or series voted for and against the Plan of Merger,
are as follows:
<TABLE>
<CAPTION>
Number of Shares
Total Total ----------------
Name of ----- ----- Class or Entitled to Vote as
------- Voted Voted -------- -------------------
----- ----- Series Class or Series
Corporation For Against ------ ---------------
----------- --- ------- Voted For Voted Against
--------- -------------
<S> <C> <C> <C> <C> <C>
Edge Petroleum Corporation N/A N/A N/A
- ---------------------------- ------- --------- -------- --------- -------------
Edge Mergeco, Inc. N/A N/A N/A
- ----------------------------- -------- --------- -------- --------- -------------
</TABLE>
5. The Plan of Merger and the performance of its terms were duly authorized by
all action required by the laws under which each foreign corporation or other
entity that is a party to the Plan of Merger was incorporated or organized and
by its constituent documents.
IN WITNESS WHEREOF, the undersigned have caused these Articles of
Merger to be executed this ______ day of _______________, 1997.
Edge Petroleum Corporation
By:_______________________________
John E. Calaway
President
Edge Mergeco, Inc.
By:_____________________________
James D. Calaway
President
A-3
<PAGE>
Schedule 9.2
Liens on General Partner Interests
in
Edge Group II
1. Loan Agreement dated April 7, 1991 between the General Partners of Edge
Group II and James C. Calaway as the lender and Southwest Minerals, Inc. Defined
Pension Plan, Calaway Petroleum, Inc., Mr. Michael Gottesman, Antwerp Diamond
Distributors, Inc., Ms. Marlin Geiger and Mr. Joel Davis as the participants;
2. Loan Agreement dated October 1, 1993 between the General Partners of Edge
Group II and James C. Calaway and the addendum thereto; and
3. Agreement between the General Partners of Edge Group II and David B.
Benedict.
<PAGE>
APPENDIX B
November 27, 1996
Edge Petroleum Corporation
2100 Texaco Heritage Plaza
Houston, Texas 77002
Gentlemen:
At your request, we have prepared an estimate of the reserves, future
production, and income attributable to certain combined leasehold and royalty
interests that are sought to be combined in Edge Petroleum Corporation, a
Delaware corporation, and which are currently held by Edge Joint Venture II
(Edge) and James C. Calaway as of September 30, 1996. The subject properties
are located in the states of Alabama, Louisiana, Mississippi, and Texas. The
income data were estimated using the Securities and Exchange Commission (SEC)
guidelines for future cost and price parameters.
The estimated reserves and future income amounts presented in this report
are related to hydrocarbon prices. September 1996 hydrocarbon prices were used
in the preparation of this report as required by SEC guidelines; however,
actual future prices may vary significantly from these prices. Therefore,
volumes of reserves actually recovered and amounts of income actually received
may differ significantly from the estimated quantities presented in this
report. A summary of the results of this study is shown below.
SEC PARAMETERS
ESTIMATED NET RESERVES AND INCOME DATA
CERTAIN LEASEHOLD AND ROYALTY INTERESTS OF
EDGE JOINT VENTURE II AND JAMES C. CALAWAY
AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PROVED
-----------------------------------------------
DEVELOPED
-----------------------
NON- TOTAL
PRODUCING PRODUCING UNDEVELOPED PROVED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET REMAINING RESERVES
Oil/Condensate--Barrels....... 438,829 269,232 41,961 750,022
Plant Products--Barrels....... 71,050 10,329 0 81,379
Gas--MMCF..................... 7,359 3,626 2,579 13,564
INCOME DATA
Future Gross Revenue.......... $23,669,314 $12,193,754 $5,449,802 $41,312,870
Deductions.................... 2,833,691 2,101,502 1,096,312 6,031,505
----------- ----------- ---------- -----------
Future Net Income (FNI)....... $20,835,623 $10,092,252 $4,353,490 $35,281,365
Discounted FNI @ 10%.......... $16,935,423 $ 6,088,764 $2,632,295 $25,656,482
</TABLE>
Liquid hydrocarbons are expressed in standard 42 gallon barrels. All gas
volumes are sales gas expressed in millions of cubic feet (MMCF) at the
official temperature and pressure bases of the areas in which the gas reserves
are located.
The proved developed non-producing reserves included herein are comprised of
behind-pipe and shut-in categories. A substantial portion of the proved
undeveloped reserves are associated with wells that have been drilled, but
require major expenditures for facilities, pipelines, and completions prior to
production. The various producing status categories are defined in the section
entitled "Definitions of Producing Status Categories" which is attached with
this report.
B-1
<PAGE>
The future gross revenue is after the deduction of production taxes. The
deductions are comprised of the normal direct costs of operating the wells
(including processing fees and ad valorem taxes), recompletion costs and
development costs. The future net income is before the deduction of state and
federal income taxes and general administrative overhead, and has not been
adjusted for outstanding loans that may exist nor does it include any
adjustment for cash on hand or undistributed income. No attempt was made to
quantify or otherwise account for any accumulated gas production imbalances
that may exist. Gas reserves account for approximately 61 percent and liquid
hydrocarbon reserves account for the remaining 39 percent of total future gross
revenue from proved reserves.
RESERVES INCLUDED IN THIS REPORT
The proved reserves included herein conform to the definition as set forth in
the Securities and Exchange Commission's Regulation S-X Part 210.4-10(a) as
clarified by subsequent Commission Staff Accounting Bulletins. Our definition
of proved reserves is included in the section entitled "Definitions of
Reserves" which is attached with this report.
ESTIMATES OF RESERVES
In general, the reserves included herein were predominantly estimated by the
volumetric method due to the limited production history of the wells considered
in this study. However, performance methods were used in certain cases where
characteristics of the data indicated this method was more appropriate in our
opinion. The reserves estimated by the performance method utilized
extrapolations of various historical data in those cases where such data were
definitive. Reserves were estimated by the volumetric method in those cases
where there were inadequate historical performance data to establish a
definitive trend or where the use of production performance data as a basis for
the reserve estimates was considered to be inappropriate.
The reserves included in this report are estimates only and should not be
construed as being exact quantities. They may or may not be actually recovered,
and if recovered, the revenues therefrom and the actual costs related thereto
could be more or less than the estimated amounts. Moreover, estimates of
reserves may increase or decrease as a result of future operations.
FUTURE PRODUCTION RATES
Initial production rates are based on the current producing rates for those
wells now on production. Test data and other related information were used to
estimate the anticipated initial production rates for those wells or locations
which are not currently producing. If no production decline trend has been
established, future production rates were held constant, or adjusted for the
effects of curtailment where appropriate, until a decline in ability to produce
was anticipated. An estimated rate of decline was then applied to depletion of
the reserves. If a decline trend has been established, this trend was used as
the basis for estimating future production rates. For reserves not yet on
production, sales were estimated to commence at an anticipated date furnished
by Edge.
In general, we estimate that future gas production rates will continue to be
the same as the average rate for the latest available 12 months of actual
production until such time that the well or wells are incapable of producing at
this rate. The well or wells were then projected to decline at their decreasing
delivery capacity rate. Our general policy on estimates of future gas
production rates is adjusted when necessary to reflect actual gas market
conditions in specific cases.
The future production rates from wells now on production may be more or less
than estimated because of changes in market demand or allowables set by
regulatory bodies. Wells or locations which are not currently producing may
start producing earlier or later than anticipated in our estimates of their
future production rates.
HYDROCARBON PRICES
Edge furnished us with prices in effect at September 30, 1996 and these
prices were held constant except for known and determinable escalations.
Product prices which were actually used for each property reflect
B-2
<PAGE>
adjustment for gravity, quality, local conditions, and/or distance from market.
In accordance with SEC guidelines, changes in liquid and gas prices subsequent
to September 30, 1996 were not taken into account in this report. Future prices
used in this report are discussed in more detail in the section entitled
"Hydrocarbon Pricing Parameters" which is attached with this report.
COSTS
Operating costs for the leases and wells in this report are based on the
operating expense reports of Edge and include only those costs directly
applicable to the leases or wells. When applicable, the operating costs include
a portion of general and administrative costs allocated directly to the leases
and wells under terms of operating agreements. Development costs were furnished
to us by Edge and are based on authorizations for expenditure for the proposed
work or actual costs for similar projects. The current operating and
development costs were held constant throughout the life of the properties. At
the request of Edge, their estimate of zero net abandonment costs after salvage
value was used in this report. Ryder Scott has not performed a detailed study
of the abandonment cost nor the salvage value and makes no warranty for Edge's
estimate. No deduction was made for indirect costs such as general
administration and overhead expenses, loan repayments, interest expenses, and
exploration and development prepayments that are not charged directly to the
leases or wells.
GENERAL
While it may reasonably be anticipated that the future prices received for
the sale of production and the operating costs and other costs relating to such
production may increase or decrease from existing levels, such changes were, in
accordance with the rules adopted by the SEC, omitted from consideration in
making this evaluation.
The estimates of reserves presented herein were based upon a detailed study
of the properties in which Edge owns an interest; however, we have not made any
field examination of the properties. No consideration was given in this report
to potential environmental liabilities which may exist nor were any costs
included for potential liability to restore and clean up damages, if any,
caused by past operating practices. Edge has informed us that they have
furnished us all of the accounts, records, geological and engineering data, and
reports and other data required for this investigation. The ownership
interests, prices, and other factual data furnished by Edge were accepted
without independent verification. The estimates presented in this report are
based on data available through September 1996.
Neither we nor any of our employees have any interest in the subject
properties and neither the employment to make this study nor the compensation
is contingent on our estimates of reserves and future income for the subject
properties.
This report was prepared for the exclusive use of Edge Petroleum Corporation.
The data, work papers, and maps used in the preparation of this report are
available for examination by authorized parties in our offices. Please contact
us if we can be of further service.
Very truly yours,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
/s/ Michael F. Stell
-------------------------------------
Michael F. Stell, P.E.
Petroleum Engineer
MFS/sw
Approved:
/s/ Don P. Roesle
- -------------------------------------
Don P. Roesle, P.E.
Senior Vice President
B-3
<PAGE>
DEFINITIONS OF RESERVES
PROVED RESERVES (SEC DEFINITION)
Proved reserves of crude oil, condensate, natural gas, and natural gas
liquids are estimated quantities that geological and engineering data
demonstrate with reasonable certainty to be recoverable in the future from
known reservoirs under existing operating conditions, i.e., prices and costs as
of the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalation based on future conditions.
Reservoirs are considered proved if economic producibility is supported by
either actual production or conclusive formation test. In certain instances,
proved reserves are assigned on the basis of a combination of core analysis and
electrical and other type logs which indicate the reservoirs are analogous to
reservoirs in the same field which are producing or have demonstrated the
ability to produce on a formation test. The area of a reservoir considered
proved includes (1) that portion delineated by drilling and defined by fluid
contacts, if any, and (2) the adjoining portions not yet drilled that can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of data on fluid contacts, the
lowest known structural occurrence of hydrocarbons controls the lower proved
limit of the reservoir.
Reserves that can be produced economically through the application of
improved recovery techniques are included in the proved classification when
these qualifications are met: (1) successful testing by a pilot project or the
operation of an installed program in the reservoir provides support for the
engineering analysis on which the project or program was based, and (2) it is
reasonably certain the project will proceed. Improved recovery includes all
methods for supplementing natural reservoir forces and energy, or otherwise
increasing ultimate recovery from a reservoir, including (1) pressure
maintenance, (2) cycling, and (3) secondary recovery in its original sense.
Improved recovery also includes the enhanced recovery methods of thermal,
chemical flooding, and the use of miscible and immiscible displacement fluids.
Proved natural gas reserves are comprised of non-associated, associated and
dissolved gas. An appropriate reduction in gas reserves has been made for the
expected removal of natural gas liquids, for lease and plant fuel, and for the
exclusion of non-hydrocarbon gases if they occur in significant quantities and
are removed prior to sale. Estimates of proved reserves do not include crude
oil, natural gas, or natural gas liquids being held in underground or surface
storage.
Proved reserves are estimates of hydrocarbons to be recovered from a given
date forward. They may be revised as hydrocarbons are produced and additional
data become available.
B-4
<PAGE>
RESERVE STATUS CATEGORIES
Reserve status categories define the development and producing status of
wells and/or reservoirs.
PROVED DEVELOPED (SEC DEFINITION)
Proved developed oil and gas reserves are reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery should be included as "proved
developed reserves" only after testing by a pilot project or after the
operation of an installed program has confirmed through production response
that increased recovery will be achieved.
Developed reserves may be subcategorized as producing or non-producing using
the SPE/SPEE Definitions:
Producing
Producing reserves are expected to be recovered from completion
intervals open at the time of the estimate and producing. Improved
recovery reserves are considered to be producing only after an
improved recovery project is in operation.
Non-Producing
Non-producing reserves include shut-in and behind pipe reserves.
Shut-in reserves are expected to be recovered from completion
intervals open at the time of the estimate, but which had not started
producing, or were shut-in for market conditions or pipeline
connection, or were not capable of production for mechanical reasons,
and the time when sales will start is uncertain. Behind pipe reserves
are expected to be recovered from zones behind casing in existing
wells, which will require additional completion work or a future
recompletion prior to the start of production.
PROVED UNDEVELOPED (SEC DEFINITION)
Proved undeveloped oil and gas reserves are reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on
undrilled acreage shall be limited to those drilling units offsetting
productive units that are reasonably certain of production when drilled. Proved
reserves for other undrilled units can be claimed only where it can be
demonstrated with reasonable certainty that there is continuity of production
from the existing productive formation. Under no circumstances should estimates
for proved undeveloped reserves be attributable to any acreage for which an
application of fluid injection or other improved technique is contemplated,
unless such techniques have been proved effective by actual tests in the area
and in the same reservoir.
B-5
<PAGE>
HYDROCARBON PRICING PARAMETERS
SEC PARAMETERS
OIL AND CONDENSATE
Edge furnished us with oil and condensate prices in effect at September 30,
1996 and these prices were held constant to depletion of the properties. In
accordance with Securities and Exchange Commission guidelines, changes in
liquid prices subsequent to September 30, 1996 were not considered in the
report.
PLANT PRODUCTS
Edge furnished us with plant product prices in effect at September 30, 1996
and these prices were held constant to depletion of the properties.
GAS
Edge furnished us with gas prices in effect at September 30, 1996 and with
its forecasts of future gas prices which take into account SEC guidelines,
current spot market prices, contract prices, and fixed and determinable price
escalations where applicable. In accordance with SEC guidelines, the future gas
prices used in this report make no allowances for future gas price increases
which may occur as a result of inflation nor do they make any allowance for
seasonal variations in gas prices which may cause future yearly average gas
prices to differ from September 1996 gas prices. For gas sold under contract,
the contract gas price including fixed and determinable escalations, exclusive
of inflation adjustments, was used until the contract expires and then was
adjusted to the current market price for the area and held at this adjusted
price to depletion of the reserves.
B-6
<PAGE>
APPENDIX C
TEXAS BUSINESS CORPORATION ACT
ART. 5.11. RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN CORPORATE
ACTIONS
A. Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if shareholder
approval is required by Article 5.03 or 5.16 of this Act and the shareholder
holds shares of a class or series that was entitled to vote thereon as a class
or otherwise;
(2) Any sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise provided in
the articles of incorporation) of all, or substantially all, the property and
assets, with or without good will, of a corporation requiring the special
authorization of the shareholders as provided by this Act;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in which the
shares of the corporation of the class or series held by the shareholder are to
be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in which
there is a single surviving or new domestic or foreign corporation, or from any
plan of exchange, if (1) the shares held by the shareholder are part of a class
shares of which are listed on a national securities exchange, or are held of
record by not less than 2,000 holders, on the record date fixed to determine the
shareholders entitled to vote on the plan of merger or the plan of exchange, and
(2) the shareholder is not required by the terms of the plan of merger or the
plan of exchange to accept for his shares any consideration other than (a)
shares of a corporation that, immediately after the effective time of the merger
or exchange, will be part of a class or series of shares of which are (i)
listed, or authorized for listing upon official notice of issuance, on a
national securities exchange, or (ii) held of record by not less than 2,000
holders, and (b) cash in lieu of fractional shares otherwise entitled to be
received.
ART. 5.12. PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE ACTIONS
A. Any shareholder of any domestic corporation who has the right to
dissent from any of the corporate actions referred to in Article 5.11 of this
Act may exercise that right to dissent only by complying with the following
procedures:
(1)(a) With respect to proposed corporate action that is submitted to a
vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action, setting
out that the shareholder's right to dissent will be exercised if the action is
effective and giving the shareholder's address, to which notice thereof shall be
delivered or mailed in that event. If the action is effected and the
shareholder shall not have voted in favor of the action, the corporation, in the
case of action other than a merger, or the surviving or new corporation (foreign
or domestic) or other entity that is liable to discharge the shareholder's right
of dissent, in the case of a merger, shall, within ten (10) days after the
action is effected, deliver or mail to the shareholder written notice that the
action has been effected, and the shareholder may, within ten (10) days from the
delivery or mailing of the notice, make written demand on the existing,
surviving, or new corporation (foreign or domestic) or other entity, as the case
may be, for payment of the fair value of the shareholder's shares. The fair
value of the shares shall be the value thereof as of the day immediately
preceding the meeting, excluding any appreciation or depreciation in
anticipation of the proposed action. The demand shall state the number and
class of the shares owned by the shareholder and the fair value of the shares as
estimated by the shareholder. Any shareholder failing to make demand within the
ten (10) day period shall be bound by the action.
(b) With respect to proposed corporate action that is approved pursuant to
Section A of Article 9.10 of this Act, the corporation, in the case of action
other than a merger, and the surviving or new corporation (foreign or domestic)
or other entity that is liable to discharge the shareholder's right of dissent,
in the case of a merger, shall, within ten (10) days after the date the action
is effected, mail to each shareholder of record as of the effective date of the
action notice of the fact and date of the action and that the shareholder may
exercise the shareholder's right to dissent from the action. The notice shall
be accompanied by a copy of this Article and any articles or documents filed by
the corporation with the Secretary of State to effect the action. If the
shareholder shall not have consented to the taking of the action, the
shareholder may, within twenty (20) days after the mailing of the notice, make
written demand on the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, for payment of the fair value of
the shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was delivered
to the corporation pursuant to Section A of Article 9.10 of this Act, excluding
any appreciation or depreciation in anticipation of the action. The demand
shall state the number and class of shares owned by the dissenting shareholder
and the fair value of the shares as estimated by the shareholder. Any
shareholder failing to make demand within the twenty (20) day period shall be
bound by the action.
C-1
<PAGE>
(2) Within twenty (20) days after receipt by the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, of a
demand for payment made by a dissenting shareholder in accordance with
Subsection (1) of this Section, the corporation (foreign or domestic) or other
entity shall deliver or mail to the shareholder a written notice that shall
either set out that the corporation (foreign or domestic) or other entity
accepts the amount claimed in the demand and agrees to pay that amount within
ninety (90) days after the date on which the action was effected, and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed, or shall contain an estimate by the corporation
(foreign or domestic) or other entity of the fair value of the shares, together
with an offer to pay the amount of that estimate within ninety (90) days after
the date on which the action was effected, upon receipt of notice within sixty
(60) days after that date from the shareholder that the shareholder agrees to
accept that amount and, in the case of shares represented by certificates, upon
the surrender of the certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporate action
was effected, the value of the shares is agreed upon between the shareholder and
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, payment for the shares shall be made within ninety
(90) days after the date on which the action was effected and, in the case of
shares represented by certificates, upon surrender of the certificates duly
endorsed. Upon payment of the agreed value, the shareholder shall cease to have
any interest in the shares or in the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The
appraisers shall have power to examine any of the books and records of the
corporation the shares of which they are charged with the duty of valuing, and
they shall make a determination of the fair value of the shares upon such
investigation as to them may seem proper. The appraisers shall also afford a
reasonable opportunity to the parties interested to submit to them pertinent
evidence as to the value of the shares. The appraisers shall also have such
power and authority as may be conferred on Masters in Chancery by the Rules of
Civil Procedure or by the order of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or pursuant to payment of the judgment entered for
the value of the shares, as in this Article provided, shall, in the case of a
merger, be treated as provided in the plan of merger and, in all other cases,
may be held and disposed of by the corporation as in the case of other treasury
shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
C-2
<PAGE>
G. In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action.
If the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
ART. 5.13. PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS
A. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to
vote or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder,
the corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
C. Any shareholder who has demanded payment for his shares in accordance with
either Article 5.12 or 5.16 of this Act may withdraw such demand at any time
before payment for his shares or before any petition has been filed pursuant to
Article 5.12 or 5.16 of this Act asking for a finding and determination of the
fair value of such shares, but no such demand may be withdrawn after such
payment has been made or, unless the corporation shall consent thereto, after
any such petition has been filed. If, however, such demand shall be withdrawn
as hereinbefore provided, or if pursuant to Section B of this Article the
corporation shall terminate the shareholder's rights under Article 5.12 or 5.16
of this Act, as the case may be, or if no petition asking for a finding and
determination of fair value of such shares by a court shall have been file
within the time provided in Article 5.12 or 5.16 of this Act, as the case may
be, or if after the hearing of petition filed pursuant to Article 5.12 or 5.16,
the court shall determine that such shareholder is not entitled to the relief
provided by those articles, then, in any such case, such shareholder and all
persons claiming under him shall be conclusively presumed to have approved and
ratified the corporate action from which he dissented and shall be bound
thereby, the right of such shareholder to be paid the fair value of his shares
shall cease, and his status as a shareholder shall be restored without prejudice
to any corporate proceedings which may have been taken during the interim, and
such shareholder shall be entitled to receive any dividends or other
distributions made to shareholders in the interim.
C-3
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Delaware General Corporation Law
Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement or conviction or upon a plea of nolo contendere or its
equivalent shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful.
Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he
is or was a director, officer, employee or agent of the corporation, or is
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including action or suit if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses that the Court
of Chancery or such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a director,
officer, employee or agent of a corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
Section 145(d) of the DGCL states that any indemnification under subsections
(a) and (b) of Section 145 (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in subsections (a) and (b). Such determination shall be made (1) by the board
of directors by a majority vote of a quorum consisting of directors who were
not parties to such action, suit or proceeding or (2) if such a quorum is not
obtainable or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion or (3) by the
stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an
II-1
<PAGE>
undertaking by or on behalf of such director or officer to repay such amount
if it ultimately is determined that he is not entitled to be indemnified by
the corporation as authorized in Section 145. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon
such terms and conditions, if any, as the board of directors deems
appropriate.
Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in this official capacity and as to action in
another capacity while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145.
Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who
has ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
Certificate of Incorporation
The Certificate of Incorporation of the Company provides that a director of
the Company shall not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. If the DGCL is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Company, in addition to the limitation on
personal liability described above, shall be limited to the fullest extent
permitted by the amended DGCL. Further, any repeal or modification of such
provision of the Restated Certificate of Incorporation by the stockholders of
the Company shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Company existing at
the time of such repeal or modification.
Bylaws
The Bylaws of the Company provide that each person who was or is made a
party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative,
by reason of the fact that he or she, or a person of whom he or she is the
legal representative, is or was or has agreed to become a director or officer
of the Company or is or was serving or has agreed to serve at the request of
the Company as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, whether the basis of such
proceeding is alleged action in an official capacity as a director or officer
or in any other capacity while serving or having agreed to serve as a director
or officer, shall be indemnified and held harmless by the Company to the
fullest extent authorized by the DGCL, as the same exists or may thereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Company to provide broader indemnification rights than
said law permitted the Company to provide prior to such amendment) against all
expense, liability and loss (including, without limitation, attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be
paid in settlement) reasonably incurred or suffered by such person in
connection therewith and such indemnification shall continue as to a person
who has ceased to serve in the
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<PAGE>
capacity which initially entitled such person to indemnity thereunder, and
shall inure to the benefit of his or her heirs, executors and administrators;
provided, however, that the Company shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
board of directors of the Company. The Bylaws further provide that the right
to indemnification conferred thereby shall be a contract right and shall
include the right to be paid by the Company the expenses incurred in defending
any such proceeding in advance of its final disposition; provided, however,
that, if the DGCL requires, the payment of such expenses incurred by a
current, former or proposed director or officer in his or her capacity as a
director or officer or proposed director or officer (and not in any other
capacity in which service was or is or has been agreed to be rendered by such
person while a director or officer, including, without limitation, service to
an employee benefit plan) in advance of the final disposition of a proceeding,
shall be made only upon delivery to the Company of an undertaking, by or on
behalf of such indemnified person, to repay all amounts so advanced if it
shall ultimately be determined that such indemnified person is not entitled to
be indemnified under the Bylaws or otherwise. In addition, the Bylaws provide
that the Company may, by action of its board of directors, provide
indemnification to employees and agents of the Company, individually or as a
group, with the same scope and effect as the indemnification to employees and
agents of the Company, individually or as a group, with the same scope and
effect as the indemnification of directors and officers provided for in the
Bylaws.
The Bylaws include related provisions meant to facilitate the indemnitee's
receipt of such benefits. These provisions cover, among other things: (i)
specification of the method of determining entitlement to indemnification and
the selection of independent counsel that will in some cases make such
determination; (ii) specification of certain time periods by which certain
payments or determinations must be made and actions must be taken; and (iii)
the establishment of certain presumptions in favor of an indemnitee. The
benefits of certain of these provisions are available to an indemnitee only if
there has been a change in control (as defined therein).
Indemnification Agreements
The Company has entered into Indemnification Agreements with each of its
directors. The Indemnification Agreements provide that the Company shall
indemnify the director and hold him harmless from any losses and expenses
which, in type or amount, are not insured under the directors and officers'
liability insurance maintained by the Company, and generally indemnifies the
director against losses and expenses as a result of a claim or claims made
against him for any breach of duty, neglect, error, misstatement, misleading
statement, omission or other act done or wrongfully attempted by the director
or any of the foregoing alleged by any claimant or any claim against the
director solely by reason of him being a director or officer of the Company,
subject to certain exclusions. The Indemnification Agreements also provide
certain procedures regarding the right to indemnification and for the
advancement of expenses.
Underwriting Agreement
The Underwriting Agreement to be entered into in connection with the related
public offering of the Common Stock of the Company provides for the
indemnification of the directors and officers of the Company in certain
circumstances.
Insurance
The Company intends to obtain a policy of liability insurance to insure its
officers and directors against losses resulting from certain acts committed by
them in their capacities as officers and directors of the Company.
II-3
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
+2.1 --Amended and Restated Combination Agreement by and among Edge Group
II Limited Partnership, Gulfedge Limited Partnership, Edge Group
Partnership, Old Edge, Edge Mergeco, Inc., and the Company, dated as
of January 13, 1997 (included as Appendix A to the Joint Proxy and
Consent Solicitation Statement/Prospectus that constitutes a part of
this Registration Statement).
3.1 --Restated Certificate of Incorporation of the Company.
3.2 --Bylaws of the Company.
4.1 --Form of certificate representing Common Stock.
+4.2 --Subordinated Promissory Note of the Joint Venture dated January 3,
1995 in the original principal amount of $2,000,000 payable to James
C. Calaway, and related agreement, as amended.
+4.3 --Credit Agreement, as amended, dated as of July 11, 1995, between
Edge Joint Venture II and Compass Bank--Houston, as lender.
+4.4 --Security Agreements, as amended, dated as of July 11, 1995 of Edge
Joint Venture II in favor of Compass Bank--Houston.
The Company is a party to several debt instruments under which the
total amount of securities authorized does not exceed 10% of the
total assets of the Company and its subsidiaries on a consolidated
basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation
S-K, the Company agrees to furnish a copy of such instruments to the
Commission upon request.
5.1 --Opinion of Baker & Botts, L.L.P.
8.1 --Opinion of Baker & Botts, L.L.P.
8.2 --Opinion of Brauner Baron Rosenzweig & Klein, L.L.P.
+9.1 --Agreement dated April 8, 1991 among the persons named therein, with
respect to the formation of Old Edge.
+10.1 --Joint Venture Agreement, as amended, dated April 8, 1991 among Edge
Group II Limited Partnership, New Edge Petroleum Corporation,
Gulfedge Limited Partnership and Edge Group Partnership.
+10.2 --Joint Venture Agreement between Edge Joint Venture II and Essex
Royalty Limited Partnership II, dated as of May 10, 1994.
+10.3 --Joint Venture Agreement between Edge Joint Venture II and Essex
Royalty Limited Partnership, dated as of April 11, 1992.
+10.4 --Agreement of Limited Partnership of Edge Group II Limited
Partnership among John Sfondrini, Napamco, Ltd. and the limited
partners named therein.
+10.5 --Agreement of Limited Partnership of Gulfedge Limited Partnership by
and among Edge Petroleum Corporation, a Texas corporation, as general
partner, and the limited partners named therein, dated as of April 1,
1991.
10.6 --Registration Rights Agreement between Edge Holding Company Limited
Partnership and the Company.
+10.7 --Form of Indemnification Agreement between the Company and each of
its directors.
+10.8 --Employment Agreement dated April 9, 1991 between Edge Petroleum
Corporation and John E. Calaway.
10.9 --Incentive Plan of Edge Petroleum Corporation.
10.10 --Employment Agreement between the Company and Michael G. Long.
+10.11 --Purchase Agreement between the Company and James C. Calaway dated as
of December 2, 1996.
+10.12 --Consulting Agreement of James C. Calaway dated March 18, 1989.
+10.13 --Stock Option Plan of Edge Petroleum Corporation, a Texas
corporation.
21.1 --Subsidiaries of the Company.
23.1 --Consent of Deloitte & Touche LLP.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.2 --Consent of Baker & Botts, L.L.P. (included in Exhibits 5.1 and 8.1).
+23.3 --Consent of Ryder Scott Company.
23.4 --Consent of Brauner Baron Rosenzweig & Klein, L.L.P. (included in
Exhibit 8.2).
+23.5 --Consent of Robert W. Shower, as nominee for director.
+24.1 --Power of Attorney
27.1 --Financial Data Schedule.
+99.1 --Articles of Incorporation, as amended, of Edge Petroleum
Corporation, a Texas corporation.
+99.2 --Bylaws of Edge Petroleum Corporation, a Texas corporation.
+99.3 --Form of Proxy Card.
99.4 --Form of Edge Group II Letter of Acceptance.
99.5 --Form of Gulfedge Letter of Acceptance.
99.6 --Form of Edge Group Letter of Acceptance.
</TABLE>
- --------
+ Previously filed.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the
required information is contained in the financial statements or notes thereto
included in this Registration Statement.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section (a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) of the Securities Act if,
in the aggregate, the changes in volume and price represent no more
than 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a
II-5
<PAGE>
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as a
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
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<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
HOUSTON, STATE OF TEXAS, ON THE 27TH DAY OF JANUARY, 1997.
EDGE PETROLEUM CORPORATION
/s/ James D. Calaway
By:__________________________________
James D. Calaway
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON JANUARY 27, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ John E. Calaway Chief Executive Officer and
____________________________________ Director (Principal Executive
John E. Calaway Officer)
/s/ Michael G. Long Chief Financial Officer
____________________________________ (Principal Financial Officer)
Michael G. Long
/s/ Richard S. Dale Controller, Treasurer and
____________________________________ Secretary (Principal Accounting
Richard S. Dale Officer)
/s/ James D. Calaway Director
____________________________________
James D. Calaway
* Director
____________________________________
Vincent Andrews
* Director
____________________________________
David B. Benedict
* Director
____________________________________
Nils Peterson
* Director
____________________________________
Stanley S. Raphael
* Director
____________________________________
</TABLE> John Sfondrini
/s/ James D. Calaway
*By:_________________________________
(James D. Calaway, Attorney-in-Fact)
II-7
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
of
EDGE PETROLEUM CORPORATION
Edge Petroleum Corporation (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "DGCL"), hereby adopts this Restated Certificate of Incorporation,
which accurately restates and integrates the provisions of the existing
Certificate of Incorporation of the Corporation and all amendments thereto that
are in effect on the date hereof (the "Certificate of Incorporation") and
further amends the provisions of the Certificate of Incorporation as described
below, and does hereby further certify that:
1. The name of the Corporation is Edge Petroleum Corporation and the
original certificate of incorporation of the Corporation was filed with the
Secretary of State of the State of Delaware on August 13, 1996.
2. The Board of Directors of the Corporation duly adopted a resolution
proposing and declaring advisable the amendments to the Certificate of
Incorporation as described herein, and the Corporation's sole stockholder duly
adopted such amendments, all in accordance with the provisions of Sections 228,
242 and 245 of the DGCL.
3. The Certificate of Incorporation is hereby restated and further amended
to read in its entirety as follows:
RESTATED CERTIFICATE OF INCORPORATION
FIRST: The name of the Corporation is Edge Petroleum Corporation
(hereinafter the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, in the City of Wilmington, County of
New Castle. The name of its registered agent at such address is The Corporation
Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware or any successor statute (the "DGCL").
FOURTH: The aggregate number of shares of capital stock that the
Corporation shall have authority to issue is Fifty Million (50,000,000), divided
into Forty Million (40,000,000) shares of common stock, par value $0.01 per
share ("Common Stock"), and Ten Million
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<PAGE>
(10,000,000) shares of preferred stock, par value $0.01 per share ("Preferred
Stock"). Shares of any class of capital stock of the Corporation may be issued
for such consideration and for such corporate purposes as the Board of Directors
of the Corporation (the "Board of Directors") may from time to time determine.
Each share of Common Stock shall be entitled to one vote.
The Preferred Stock may be divided into and issued from time to time in one
or more series as may be fixed and determined by the Board of Directors. The
relative rights and preferences of the Preferred Stock of each series shall be
such as shall be stated in any resolution or resolutions adopted by the Board of
Directors setting forth the designation of the series and fixing and determining
the relative rights and preferences thereof, any such resolution or resolutions
being herein called a "Directors' Resolution." The Board of Directors is hereby
authorized to fix and determine the powers, designations, preferences, and
relative, participating, optional or other rights (including, without
limitation, voting powers, full or limited, preferential rights to receive
dividends or assets upon liquidation, rights of conversion or exchange into
Common Stock, Preferred Stock of any series or other securities, any right of
the Corporation to exchange or convert shares into Common Stock, Preferred Stock
of any series or other securities, or redemption provisions or sinking fund
provisions) as between series and as between the Preferred Stock or any series
thereof and the Common Stock, and the qualifications, limitations or
restrictions thereof, if any, all as shall be stated in a Directors' Resolution,
and the shares of Preferred Stock or any series thereof may have full or limited
voting powers, or be without voting powers, all as shall be stated in a
Directors' Resolution.
No stockholder shall, by reason of the holding of shares of any class or
series of capital stock of the Corporation, have a preemptive or preferential
right to acquire or subscribe for any shares or securities of any class, whether
now or hereafter authorized, which may at any time be issued, sold or offered
for sale by the Corporation, unless specifically provided for in a Directors'
Resolution with respect to a series of Preferred Stock. Furthermore, Common
Stock is not convertible, redeemable or assessable, or entitled to the benefits
of any sinking fund.
Cumulative voting of shares of any class or series of capital stock having
voting rights is prohibited unless specifically provided for in a Directors'
Resolution with respect to a series of Preferred Stock.
FIFTH: (a) Directors. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors. In addition to the
authority and powers conferred upon the Board of Directors by the DGCL or by the
other provisions of this Restated Certificate of Incorporation, the Board of
Directors is hereby authorized and empowered to exercise all such powers and do
all such acts and things as may be exercised or done by the Corporation, subject
to the provisions of the DGCL, this Restated Certificate of Incorporation and
any Bylaws adopted by the stockholders of the Corporation; provided, however,
that no Bylaws hereafter adopted by the stockholders of the Corporation, or any
amendments thereto, shall invalidate any prior act of the Board of Directors
that would have been valid if such Bylaws or amendment had not been adopted.
(b) Number, Election and Terms of Directors. The number of directors that
shall constitute the whole Board of Directors shall be fixed from time to time
by a majority of the directors then in office, but shall not be less than three
nor more than twelve, except in the case of
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<PAGE>
an increase in the number of directors by reason of any provisions contained in
or established pursuant to Article Fourth. The directors, other than those who
may be elected by the holders of any series of Preferred Stock, shall be divided
into three classes, Class I, Class II and Class III. Each director shall serve
for a term ending on the third annual meeting following the annual meeting at
which such director was elected; provided, however, that Stanley S. Raphael is
hereby appointed to Class I and shall serve for a term expiring at the annual
meeting next following the end of the calendar year 1997, that each of Vincent
Andrews, David B. Benedict and Nils Peterson is hereby appointed to Class II and
shall serve for a term expiring at the annual meeting next following the end of
the calendar year 1998, and that each of John E. Calaway, James D. Calaway and
John Sfondrini is hereby appointed to Class III and shall serve for a term
expiring at the annual meeting next following the end of the calendar year 1999.
Each director shall hold office until the annual meeting at which such
director's term expires and, the foregoing notwithstanding, shall serve until
his successor shall have been duly elected and qualified or until his earlier
death, resignation or removal.
At each annual election, the directors chosen to succeed those whose terms
then expire shall be of the same class as the directors they succeed, unless, by
reason of any intervening changes in the authorized number of directors, the
Board of Directors shall designate one or more directorships whose term then
expires as directorships of another class in order more nearly to achieve
equality of number of directors among the classes.
In the event of any change in the authorized number of directors, each
director then continuing to serve as such shall nevertheless continue as a
director of the class of which he is a member until the expiration of his
current term, or his prior death, resignation or removal. The Board of
Directors shall specify the class to which a newly created directorship shall be
allocated.
Election of directors need not be by written ballot unless the Bylaws of
the Corporation shall so provide.
(c) Removal of Directors. No director of the Corporation shall be removed
from office as a director by vote or other action of the stockholders or
otherwise except for cause, and then only by the affirmative vote of the holders
of at least a majority of the voting power of all outstanding shares of capital
stock of the Corporation generally entitled to vote in the election of
directors, voting together as a single class. Except as may otherwise be
provided by law, cause for removal of a director shall be deemed to exist only
if: (i) the director whose removal is proposed has been convicted, or when a
director is granted immunity to testify when another has been convicted, of a
felony by a court of competent jurisdiction and such conviction is no longer
subject to direct appeal; (ii) such director has been found by the affirmative
vote of a majority of the entire Board of Directors at any regular or special
meeting of the Board of Directors called for that purpose or by a court of
competent jurisdiction to have been grossly negligent or guilty of misconduct in
the performance of his duties to the Corporation in a matter of substantial
importance to the Corporation; or (iii) such director has been adjudicated by a
court of competent jurisdiction to be mentally incompetent, which mental
incompetency directly affects his ability as a director of the Corporation.
(d) Vacancies. Except as provided in Article Fourth hereof, newly created
directorships resulting from any increase in the number of directors and any
vacancies on the Board of Directors resulting from death, resignation, removal
or other cause shall be filled by the
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affirmative vote of a majority of the remaining directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been elected and qualified or until his earlier death, resignation or removal.
No decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
SIXTH: From and after the first date of the closing of the initial
public offering of the Common Stock to the public for cash that has been
registered on a registration statement that has been filed with and declared
effective by the Securities and Exchange Commission, any action required or
permitted to be taken by the stockholders of the Corporation must be effected at
an annual or special meeting of stockholders of the Corporation and may not be
effected by any consent in writing by such stockholders. Except as otherwise
required by law, or as may be prescribed in a Directors' Resolution, special
meetings of stockholders of the Corporation may be called only by the Chairman
of the Board of Directors, or by the Chief Executive Officer of the Corporation
or by the President of the Corporation or by the Board of Directors pursuant to
a resolution approved by the affirmative vote of a majority of the entire Board
of Directors.
SEVENTH: No director of the Corporation shall be personally liable to the
Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director; provided, however, that the foregoing provisions
shall not eliminate or limit the liability of a director (i) for any breach of
such director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, as the same
exists or as such provision may hereafter be amended, supplemented or replaced,
or (iv) for any transactions from which such director derived an improper
personal benefit. If the DGCL is amended after the filing of this Certificate
of Incorporation to authorize corporate action further eliminating or limiting
the personal liability of directors, then the liability of a director of the
Corporation, in addition to the limitation on personal liability provided
herein, shall be limited to the fullest extent permitted by such law, as so
amended. Any repeal or modification of this Article Seventh by the stockholders
of the Corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
EIGHTH: In furtherance of, and not in limitation of, the powers conferred
by statute, the Board of Directors is expressly authorized to adopt, amend or
repeal the Bylaws of the Corporation, or adopt new Bylaws, without any action on
the part of the stockholders, except as may be otherwise provided by applicable
law or the Bylaws of the Corporation.
NINTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for the Corporation under
Section 291 of Title 8 of the Delaware Code, or on the application of trustees
in dissolution or of any receiver or receivers appointed for the Corporation
under Section 279 of Title 8 of the Delaware Code, order a meeting of the
creditors or class of creditors, and/or of the stockholders or class of
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stockholders of the Corporation, as the case may be, to be summoned in such
manner as the said court directs. If the majority in number representing three-
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders, of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of the
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed this 27th day of January, 1997.
EDGE PETROLEUM CORPORATION
By:/s/ James D. Calaway
---------------------------
James D. Calaway
President
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EXHIBIT 3.2
BYLAWS
OF
EDGE PETROLEUM CORPORATION
ARTICLE I
OFFICES
1.1 Registered Office. The registered office of Edge Petroleum Corporation (the
"Corporation") required by the General Corporation Law of the State of
Delaware or any successor statute (the "DGCL"), to be maintained in the
State of Delaware, shall be the registered office named in the Certificate
of Incorporation of the Corporation, as it may be amended or restated in
accordance with the DGCL from time to time (the "Certificate of
Incorporation"), or such other office as may be designated from time to
time by the Board of Directors of the Corporation (the "Board of
Directors") in the manner provided by law. Should the Corporation maintain
a principal office within the State of Delaware such registered office need
not be identical to such principal office of the Corporation.
1.2 Other Offices. The Corporation may also have offices at such other places
both within and without the State of Delaware as the Board of Directors may
determine from time to time or as the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 Place of Meetings. Meetings of stockholders shall be held at such place
within or without the State of Delaware as may be designated by the Board
of Directors or the officer calling the meeting.
2.2 Annual Meeting. An annual meeting of the stockholders, for the election of
directors to succeed those whose terms expire and for the transaction of
such other business as may properly come before the meeting, shall be held
at such place, within or without the State of Delaware, on such date, and
at such time as the Board of Directors shall fix and set forth in the
notice of the meeting, which date shall be within thirteen months
subsequent to the last annual meeting of stockholders. At the annual
meeting of the stockholders, only such business shall be conducted as shall
have been properly brought before the annual meeting as set forth in
Section 2.8 hereof. Failure to hold the annual meeting at the designated
time shall not work a dissolution of the Corporation.
2.3 Special Meetings. Special meetings of the stockholders may be called at any
time by the Chairman of the Board, the Chief Executive Officer, the
President or the Board of Directors pursuant to a resolution approved by
the affirmative vote of a majority of the
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entire Board of Directors. Upon written request of any person or persons
who have duly called a special meeting, it shall be the duty of the
Secretary of the Corporation to fix the date of the meeting to be held not
less than ten nor more than 60 days after the receipt of the request and to
give due notice thereof. If the Secretary shall neglect or refuse to fix
the date of the meeting and give notice thereof, the person or persons
calling the meeting may do so. Every special meeting of the stockholders
shall be held at such place within or without the State of Delaware as the
Board of Directors may designate, or, in the absence of such designation,
at the registered office of the Corporation in the State of Delaware.
2.4 Notice of Meeting. Written or printed notice of all meetings stating the
place, day and hour of the meeting and, in the case of a special meeting,
the purpose or purposes for which the meeting is called, shall be delivered
not less than ten nor more than 60 days before the date of the meeting,
either personally or by mail, by or at the direction of the Chairman of the
Board, Chief Executive Officer, President or Secretary of the Corporation,
to each stockholder entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered to a stockholder when deposited in
the United States mail addressed to such stockholder at such stockholder's
address as it appears on the stock transfer records of the Corporation,
with postage thereon prepaid.
2.5 Registered Holders of Shares; Closing of Share Transfer Records; and Record
Date.
(a) Registered Holders as Owners. Unless otherwise provided under Delaware
law, the Corporation may regard the person in whose name any shares
issued by the Corporation are registered in the stock transfer records
of the Corporation at any particular time (including, without
limitation, as of a record date fixed pursuant to paragraph (b) of
this Section 2.5) as the owner of those shares at that time for
purposes of voting those shares, receiving distributions thereon or
notices in respect thereof, transferring those shares, exercising
rights of dissent with respect to those shares, entering into
agreements with respect to those shares, or giving proxies with
respect to those shares; and neither the Corporation nor any of its
officers, directors, employees or agents shall be liable for regarding
that person as the owner of those shares at that time for those
purposes, regardless of whether that person possesses a certificate
for those shares.
(b) Record Date. For the purpose of determining stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to receive a distribution by the Corporation
(other than a distribution involving a purchase or redemption by the
Corporation of any of its own shares) or a share dividend, or in order
to make a determination of stockholders for any other proper purpose,
the Board of Directors may fix in advance a date as the record date
for any such determination of stockholders, such date in any case to
be not more than 60 days and, in the case of a meeting of
stockholders, not less than ten days, prior
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to the date on which the particular action requiring such
determination of stockholders is to be taken. The Board of Directors
shall not close the books of the Corporation against transfers of
shares during the whole or any part of such period.
If the Board of Directors does not fix a record date for any meeting of the
stockholders, the record date for determining stockholders entitled to
notice of or to vote at such meeting shall be at the close of business on
the day next preceding the day on which notice is given, or, if in
accordance with Section 7.3 of these Bylaws notice is waived, at the close
of business on the day next preceding the day on which the meeting is held.
2.6 Quorum of Stockholders; Adjournment. Unless otherwise provided in the
Certificate of Incorporation, a majority of the outstanding shares of
capital stock of the Corporation entitled to vote, present in person or
represented by proxy, shall constitute a quorum at any meeting of the
stockholders, and the stockholders present at any duly convened meeting may
continue to do business until adjournment notwithstanding any withdrawal
from the meeting of holders of shares counted in determining the existence
of a quorum. Unless otherwise provided in the Certificate of Incorporation
or these Bylaws, any meeting of the stockholders may be adjourned from time
to time by the chairman of the meeting or the holders of a majority of the
issued and outstanding stock, present in person or represented by proxy,
whether or not a quorum is present, without notice other than by
announcement at the meeting at which such adjournment is taken, and at any
such adjourned meeting at which a quorum shall be present any action may be
taken that could have been taken at the meeting originally called; provided
that if the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the adjourned meeting.
2.7 Voting by Stockholders.
(a) Voting on Matters Other than the Election of Directors. With respect
to any matters as to which no other voting requirement is specified by
the DGCL, the Certificate of Incorporation or these Bylaws, the
affirmative vote required for stockholder action shall be that of a
majority of the shares present in person or represented by proxy at
the meeting (as counted for purposes of determining the existence of a
quorum at the meeting). In the case of a matter submitted for a vote
of the stockholders as to which a stockholder approval requirement is
applicable under the stockholder approval policy of any stock exchange
or quotation system on which the capital stock of the Corporation is
traded or quoted, the requirements of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or any
provision of the Internal Revenue Code, in each case for which no
higher voting requirement is specified by the DGCL, the Certificate of
Incorporation or these Bylaws, the vote required for approval shall be
the requisite
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vote specified in such stockholder approval policy, Rule 16b-3 or
Internal Revenue Code provision, as the case may be (or the highest
such requirement if more than one is applicable). For the approval of
the appointment of independent public accountants (if submitted for a
vote of the stockholders), the vote required for approval shall be a
majority of the votes cast on the matter.
(b) Voting in the Election of Directors. Unless otherwise provided in the
Certificate of Incorporation or these Bylaws in accordance with the
DGCL, directors shall be elected by a plurality of the votes cast by
the holders of outstanding shares of capital stock of the Corporation
entitled to vote in the election of directors at a meeting of
stockholders at which a quorum is present.
2.8 Business to be Conducted.
(a) At an annual meeting of stockholders, only such business shall be
conducted, and only such proposals shall be acted upon, as shall have
been brought before the annual meeting (i) by or at the direction of
the Board of Directors or (ii) by any stockholder of the Corporation
who is a stockholder of record at the time of the giving of such
stockholder's notice provided for in this Section 2.8, who shall be
entitled to vote at such meeting and who complies with the
requirements of this Section 2.8 and as shall otherwise be proper
subjects for stockholder action and shall be properly introduced at
the meeting. For a proposal to be properly brought before an annual
meeting by a stockholder, in addition to any other applicable
requirements, the stockholder must have given timely advance notice
thereof in writing to the Secretary of the Corporation. To be timely,
a stockholder's notice must be delivered to, or mailed and received
at, the principal executive offices of the Corporation not later than
the close of business on the 45th day prior to the first anniversary
of the preceding year's annual meeting; provided, however, that in the
event that the date of the annual meeting is more than 30 days before
or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not later than the close
of business on the later of the 45th day prior to such annual meeting
or the 10th day following the day on which public announcement of the
date of such meeting is first made by the Corporation. Any such
stockholder's notice to the Secretary of the Corporation shall set
forth as to each matter the stockholder proposes to bring before the
annual meeting (i) a description of the proposal desired to be brought
before the annual meeting and the reasons for conducting such business
at the annual meeting, (ii) the name and address, as they appear on
the Corporation's books, of the stockholder proposing such business
and any other stockholders known by such stockholder to be supporting
such proposal, (iii) the class and number of shares of the
Corporation's stock that are beneficially owned by the stockholder on
the date of such notice, (iv) any financial interest of the
stockholder in such proposal and (v) a representation that the
stockholder intends to appear in person or by proxy at the
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meeting to bring the proposed business before the annual meeting. The
presiding officer of the annual meeting shall determine whether the
requirements of this paragraph (a) have been met with respect to any
stockholder proposal. If the presiding officer determines that a
stockholder proposal was not made in accordance with the terms of this
paragraph (a), he shall so declare at the meeting and any such
proposal shall not be acted upon at the meeting. At a special meeting
of stockholders, only such business shall be acted upon as shall have
been set forth in the notice relating to the meeting required by
Section 2.4 hereof or as shall constitute matters incident to the
conduct of the meeting as the presiding officer of the meeting shall
determine to be appropriate.
(b) Notwithstanding the foregoing provisions of this Section 2.8, a
stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to
the matters set forth in this Section 2.8.
2.9 Proxies. Each stockholder entitled to vote at a meeting of stockholders may
authorize another person or persons to act for him by proxy. Proxies for
use at any meeting of stockholders shall be filed with the Secretary, or
such other officer as the Board of Directors may from time to time
determine by resolution, before or at the time of the meeting. All proxies
shall be received and taken charge of and all ballots shall be received and
canvassed by the secretary of the meeting who shall decide all questions
relating to the qualification of voters, the validity of the proxies, and
the acceptance or rejection of votes, unless an inspector or inspectors
shall have been appointed by the chairman of the meeting, in which event
such inspector or inspectors shall decide all such questions.
2.10 Approval or Ratification of Acts or Contracts by Stockholders. The Board of
Directors in its discretion may submit any act or contract for approval or
ratification at any annual meeting of the stockholders, or at any special
meeting of the stockholders called for the purpose of considering any such
act or contract, and any act or contract that shall be approved or be
ratified by the vote of the stockholders holding a majority of the issued
and outstanding shares of stock of the Corporation entitled to vote and
present in person or by proxy at such meeting (provided that a quorum is
present), shall be as valid and as binding upon the Corporation and upon
all the stockholders as if it has been approved or ratified by every
stockholder of the Corporation.
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ARTICLE III
DIRECTORS
3.1 Number, Classification and Tenure and Composition.
(a) The powers of the Corporation shall be exercised by or under the
authority of, and the business and affairs of the Corporation shall be
managed under the direction of, the Board of Directors. The Board of
Directors shall be divided into three classes as provided in the
Certificate of Incorporation. Each director shall hold office for the
full term for which such director is elected and until such director's
successor shall have been duly elected and qualified or until his
earlier death or resignation or removal in accordance with the
Certificate of Incorporation or these Bylaws.
(b) Within the limits specified in the Certificate of Incorporation, the
number of directors that shall constitute the whole Board of Directors
shall be fixed by, and may be increased or decreased from time to time
by, the affirmative vote of a majority of the members at any time
constituting the Board of Directors. Except as provided in the
Certificate of Incorporation, newly created directorships resulting
from any increase in the number of directors and any vacancies on the
Board of Directors resulting from death, resignation,
disqualification, removal or other cause shall be filled by the
affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum of the Board of Directors. Any
director elected in accordance with the preceding sentence shall hold
office for the remainder of the full term of the class of directors in
which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified
or until his earlier death, resignation or removal. No decrease in the
number of directors constituting the Board of Directors shall shorten
the term of any incumbent director.
(c) At least a majority of the members of the Board of Directors shall be
persons who are not employees of the Corporation or a subsidiary
thereof (each a "Nonemployee Director"). If for any reason such a
majority ceases to exist, then, in order to achieve such a majority,
the Board of Directors shall appoint Nonemployee Directors to fill
such number of then existing vacancies on the Board of Directors as is
necessary to achieve such a majority, and if such majority continues
not to exist after all then existing vacancies on the Board of
Directors have been filled and subject to the limits specified in the
Certificate of Incorporation and this Section 3.1, the Board of
Directors shall increase the number of directors and appoint
Nonemployee Directors to fill such number of newly created positions
as is necessary to achieve such majority.
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3.2 Qualifications. Directors need not be residents of the State of Delaware
or stockholders of the Corporation.
3.3 Nomination of Directors. Subject to such rights of the holders of one or
more outstanding series of Preferred Stock of the Corporation to elect one
or more directors in case of arrearages in the payment of dividends or
other defaults as shall be prescribed in the Certificate of Incorporation
or in the resolutions of the Board of Directors providing for the
establishment of any such series, only persons who are nominated in
accordance with the procedures set forth in this Section 3.3 shall be
eligible for election as, and to serve as, directors. Nominations of
persons for election to the Board of Directors may be made at a meeting of
the stockholders at which Directors are to be elected (i) by or at the
direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is a stockholder of record at the time of the giving of
such stockholder's notice provided for in this Section 3.3, who shall be
entitled to vote at such meeting in the election of directors and who
complies with the requirements of this Section 3.3. Such nominations, other
than those made by or at the direction of the Board of Directors, shall be
preceded by timely advance notice in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice shall be delivered to, or
mailed and received at, the principal executive offices of the Corporation
(i) with respect to an election to be held at the annual meeting of the
stockholders of the Corporation, not later than the close of business on
the 45th day prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is more than 30 days before or more than 60 days after such
anniversary date, notice by the stockholder to be timely must be so
delivered not later than the close of business on the later of the 45th day
prior to such annual meeting or the 10th day following the day on which
public announcement of the date of such meeting is first made by the
Corporation; and (ii) with respect to an election to be held at a special
meeting of stockholders of the Corporation for the election of directors
not later than the close of business on the tenth day following the day on
which notice of the date of the special meeting was mailed to stockholders
of the Corporation as provided in Section 2.4 hereof or public disclosure
of the date of the special meeting was made, whichever first occurs. Any
such stockholder's notice to the Secretary of the Corporation shall set
forth (x) as to each person whom the stockholder proposes to nominate for
election or re-election as a director, (i) the name, age, business address
and residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the number of shares of each class of
capital stock of the Corporation beneficially owned by such person, (iv)
the written consent of such person to having such person's name placed in
nomination at the meeting and to serve as a director if elected and (v) any
other information relating to such person that is required to be disclosed
in solicitations of proxies for election of directors, or is otherwise
required, pursuant to Regulation 14A under the Exchange Act, and (y) as to
the stockholder giving the notice, (i) the name and address, as they appear
on the Corporation's books, of such stockholder and (ii) the number of
shares of each class of voting stock of the Corporation that are then
beneficially owned by such stockholder. The presiding officer of the
meeting of
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stockholders shall determine whether the requirements of this Section 3.3
have been met with respect to any nomination or intended nomination. If the
presiding officer determines that any nomination was not made in accordance
with the requirements of this Section 3.3, he shall so declare at the
meeting and the defective nomination shall be disregarded. Notwithstanding
the foregoing provisions of this Section 3.3, a stockholder shall also
comply with all applicable requirements of the Exchange Act and the rules
and regulations thereunder with respect to the matters set forth in this
Section 3.3.
3.4 Place of Meeting; Order of Business. Except as otherwise provided by law,
meetings of the Board of Directors, regular or special, may be held either
within or without the State of Delaware, at whatever place is specified by
the person or persons calling the meeting. In the absence of specific
designation, the meetings shall be held at the principal office of the
Corporation. At all meetings of the Board of Directors, business shall be
transacted in such order as shall from time to time be determined by the
Chairman of the Board (if any), or in his absence by the Chief Executive
Officer, or in his absence by the President, or by resolution of the Board
of Directors.
3.5 Regular Meetings. At least one regular meeting of the Board of Directors
shall be held during each quarter of the Corporation's fiscal year. Regular
meetings of the Board of Directors shall be held at such place or places
within or without the State of Delaware, at such hour and on such day as
may be fixed by resolution of the Board of Directors, without further
notice of such meetings. The time or place of holding regular meetings of
the Board of Directors may be changed by the Chairman of the Board, the
Chief Executive Officer or the President by giving written notice thereof
as provided in Section 3.7 hereof.
3.6 Special Meetings. Special meetings of the Board of Directors shall be held,
whenever called by the Chairman of the Board, the Chief Executive Officer,
the President or by a written notice signed by a majority of the members of
the Board of Directors, at such place or places within or without the State
of Delaware as may be stated in the notice of the meeting.
3.7 Attendance at and Notice of Meetings. Written notice of the time and place
of, and general nature of the business to be transacted at, all special
meetings of the Board of Directors, and written notice of any change in the
time or place of holding the regular meetings of the Board of Directors,
shall be given to each director and may be given by any of the following
methods: (a) by mail or telegram sent to the last known business address of
such director at least four days before the meeting, (b) by facsimile to
the business facsimile number of such director transmitted at least one day
before the meeting or (c) orally at least one day before the meeting. For
purposes of the foregoing sentence, notice shall be deemed given (i) by
mail, when deposited in the U.S. mail, postage prepaid, or by telegram,
when the telegram is delivered to the telegraph company for transmittal,
(ii) by facsimile, when transmittal is confirmed by the sending facsimile
machine and (iii)
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orally, when communicated in person or by telephone to the director or to a
person at the business telephone number of the director who may reasonably
be expected to communicate it to the director. In calculating the number of
days notice received by a director, the date the notice is given by any of
the foregoing methods shall be counted, but the date of the meeting to
which the notice relates shall not be counted. Notice of the time, place
and purpose of a meeting may be waived in writing before or after such
meeting, and shall be equivalent to the giving of notice. Participation in
a meeting of the Board of Directors shall constitute presence in person at
such meeting, except when a person participates in the meeting for the
express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened. Except as
otherwise herein provided, neither the business to be transacted at, not
the purpose of, any regular or special meeting of the Board of Directors
need be specified in the notice or waiver of notice of such meeting.
3.8 Quorum of and Action by Directors. A majority of the directors in office
shall constitute a quorum of the Board of Directors for the transaction of
business; but a lesser number may adjourn from day to day until a quorum is
present. Except as otherwise provided by law or in these Bylaws, all
questions shall be decided by the vote of a majority of the directors
present.
3.9 Board and Committee Action Without a Meeting. Unless otherwise restricted
by the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at a meeting of the Board of Directors or any
committee thereof may be taken without a meeting if a consent in writing,
setting forth the action so taken, is signed by all the members of the
Board of Directors or such committee, as the case may be, and shall be
filed with the Secretary of the Corporation.
3.10 Board and Committee Telephone Meetings. Subject to the provisions required
or permitted by the DGCL for notice of meetings, unless otherwise
restricted by the Certificate of Incorporation or these Bylaws, members of
the Board of Directors, or members of any committee designated by the Board
of Directors, may participate in and hold a meeting of such Board of
Directors or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to
this Section 3.10 shall constitute presence in person at such meeting,
except when a person participates in the meeting for the express purpose of
objecting to the transaction of any business on the ground that the meeting
is not lawfully called or convened.
3.11 Compensation. Directors shall receive such compensation for their services
as shall be determined by the Board of Directors.
3.12 Removal. No director of the Corporation shall be removed from office as a
director by vote or other action of the stockholders or otherwise except
for cause, and then only by
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the affirmative vote of the holders of at least a majority of the voting
power of all outstanding shares of capital stock of the Corporation
generally entitled to vote in the election of directors, voting together as
a single class. Cause for removal of a director shall be as provided by law
or in the Certificate of Incorporation. Any proposal by a stockholder to
remove a director of the Corporation, in order to be validly acted upon at
any meeting, shall comply with paragraph (a) of Section 2.8 hereof.
Notwithstanding the first paragraph of this Section 3.12, whenever
holders of outstanding shares of one or more series of Preferred Stock are
entitled to elect members of the Board of Directors pursuant to the
provisions applicable in the case of arrearages in the payment of dividends
or other defaults contained in the resolution or resolutions of the Board
of Directors providing for the establishment of any such series, any such
director of the Corporation so elected may be removed in accordance with
the provision of such resolution or resolutions.
3.13 Committees of the Board of Directors.
(a) The Board of Directors shall appoint and maintain a Compensation
Committee of the Board of Directors, with such powers and limitations
of authority as may be determined from time to time by resolution
adopted by the Board of Directors, whose members shall consist only of
Nonemployee Directors. The Board of Directors shall appoint and
maintain an Audit Committee of the Board of Directors, with such
powers and limitations of authority as may be determined from time to
time by resolution adopted by the Board of Directors, at least a
majority of whose members shall be Nonemployee Directors. The Board of
Directors shall appoint and maintain a Nominating Committee of the
Board of Directors, at least a majority of whose members shall be
Nonemployee Directors. The Nominating Committee shall make nonbinding
recommendations to the Board of Directors concerning the nominees to
be included in the slate of candidates for election to the Board of
Directors with respect to which proxies are to be solicited from
stockholders by and on behalf of the Board of Directors, and with such
other powers and limitations of authority as may be determined from
time to time by resolution adopted by the Board of Directors.
(b) The Board of Directors, by resolution adopted by the Board of
Directors, may designate from among its members one or more additional
committees, each of which shall be comprised of one or more of its
members, and may designate one or more of its members as alternate
members of any committee, who may, subject to any limitations by the
Board of Directors, replace absent or disqualified members at any
meeting of that committee.
(c) To the extent provided in these Bylaws, by resolution adopted by the
Board of Directors or in the Certificate of Incorporation, any
committee designated pursuant to (a) or (b) above shall have and may
exercise all of the authority of the Board of
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Directors to the extent permitted by the DGCL, including, without
limitation, the power and authority to declare a dividend, to
authorize the issuance of stock or to adopt a certificate of ownership
and merger pursuant to Section 253 of the DGCL. Any such committee may
authorize the seal of the Corporation to be affixed to all papers that
may require it. In addition to the above, such committee or committees
shall have such other powers and limitations of authority as may be
determined from time to time by resolution adopted by the Board of
Directors.
(d) The Board of Directors shall have the power at any time to change the
membership of any such committee and to fill vacancies in it. A
majority of the number of members of any such committee shall
constitute a quorum for the transaction of business unless a greater
number is required by a resolution adopted by the Board of Directors.
The act of the majority of the members of a committee present at any
meeting at which a quorum is present shall be the act of such
committee, unless the act of a greater number is required by a
resolution adopted by the Board of Directors. Each such committee may
elect a chairman and appoint such subcommittees and assistants as it
may deem necessary. Except as otherwise provided by the Board of
Directors, meetings of any committee shall be conducted in accordance
with Sections 3.5, 3.6, 3.7, 3.8, 3.9, 3.10 and 7.3 hereof. Any member
of any such committee elected or appointed by the Board of Directors
may be removed by the Board of Directors whenever in its judgment the
best interests of the Corporation will be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of
the person so removed. Election or appointment of a member of a
committee shall not of itself create contract rights.
(e) Any action taken by any committee of the Board of Directors shall
promptly be recorded in the minutes and filed with the Secretary of
the Corporation.
ARTICLE IV
OFFICERS
4.1 Designation. The officers of the Corporation shall consist of a Chairman of
the Board, Chief Executive Officer, President, Secretary, Treasurer and
such Executive, Senior or other Vice Presidents, Assistant Secretaries and
other officers as may be elected or appointed by the Board of Directors.
Any number of offices may be held by the same person.
4.2 Powers and Duties. The officers of the Corporation shall have such powers
and duties as generally pertain to their offices, except as modified herein
or by the Board of Directors, as well as such powers and duties as from
time to time may be conferred by the Board of Directors. The Chairman of
the Board shall have such duties as may be assigned to him
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by the Board of Directors and shall preside at meetings of the Board of
Directors and at meetings of the stockholders. The Chief Executive Officer
of the Corporation shall have general supervision over the business,
affairs and property of the Corporation. The President shall be the next
ranking officer of the Corporation and shall act under the direction of the
Board of Directors and the Chief Executive Officer.
4.3 Vacancies. Whenever any vacancies shall occur in any office by death,
resignation, increase in the number of offices of the Corporation, or
otherwise, the same shall be filled by the Board of Directors, and the
officer so elected shall hold office until such officer's successor is
elected or appointed or until his earlier death, resignation or removal.
4.4 Removal. Any officer or agent elected or appointed by the Board of
Directors may be removed by the Board of Directors whenever in its judgment
the best interests of the Corporation will be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the
person so removed. Election or appointment of an officer or agent shall not
of itself create contract rights.
4.5 Action with Respect to Securities of Other Corporations. Unless otherwise
directed by the Board of Directors, the Chairman of the Board, the Chief
Executive Officer, the President, any Vice President and the Treasurer of
the Corporation shall each have power to vote and otherwise act on behalf
of the Corporation, in person or by proxy, at any meeting of security
holders of or with respect to any action of security holders of any other
corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers that this Corporation may possess by
reason of its ownership of securities in such other corporation.
ARTICLE V
CAPITAL STOCK
5.1 Certificates for Shares. The certificates for shares of the capital stock
of the Corporation shall be in such form as may be approved by the Board of
Directors or any duly authorized committee thereof or may be uncertificated
shares. In the case of certificated shares, the Corporation shall deliver
certificates representing shares to which stockholders are entitled.
Certificates representing such certificated shares shall be signed by the
Chairman of the Board, the Chief Executive Officer, the President or a Vice
President and either the Secretary or an Assistant Secretary of the
Corporation, and may bear the seal of the Corporation or a facsimile
thereof. The signatures of such officers upon a certificate may be
facsimiles. The stock record books and the blank stock certificate books
shall be kept by the Secretary of the Corporation, or at the office of such
transfer agent or transfer agents as the Board of Directors may from time
to time by resolution determine. In case any officer who has signed or
whose facsimile signature has been placed upon such
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certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the Corporation with the same effect as if such
person were such officer at the date of its issuance.
5.2 Transfer of Shares. The shares of stock of the Corporation shall be
transferable only on the books of the Corporation by the holders thereof in
person or by their duly authorized attorneys or legal representatives upon
surrender and cancellation of certificates for a like number of shares.
5.3 Ownership of Shares. The Corporation shall be entitled to treat the holder
of record of any share or shares of capital stock of the Corporation as the
holder in fact thereof and, accordingly, shall not be bound to recognize
any equitable or other claim to or interest in such share or shares on the
part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Delaware.
5.4 Regulations Regarding Certificates. The Board of Directors shall have the
power and authority to make all such rules and regulations as they may deem
expedient concerning the issue, transfer and registration or the
replacement of certificates for shares of capital stock of the Corporation.
5.5 Lost or Destroyed Certificates. The Board of Directors may determine the
conditions upon which a new certificate of stock may be issued in place of
a certificate that is alleged to have been lost, stolen or destroyed; and
may, in its discretion, require the owner of such certificate or his legal
representative to give bond, with sufficient surety, to indemnify the
Corporation and each transfer agent and registrar against any and all
losses or claims that may arise by reason of the issue of a new certificate
in the place of the one so lost, stolen or destroyed.
5.6 Restrictions on Transfer of Combination Common Stock.
(a) Reference is made to (i) the Combination Agreement (the "Combination
Agreement"), dated as of December 3, 1996, by and among Edge Group II
Limited Partnership, a Connecticut limited partnership, Gulfedge
Limited Partnership, a Texas limited partnership, Edge Group
Partnership, a Connecticut general partnership, Edge Petroleum
Corporation, a Texas corporation, Edge Mergeco, Inc., a Texas
corporation and the Corporation, as it may from time to time be amended
and (ii) the Purchase and Sale Agreement (the "Purchase Agreement"),
dated as of December 2, 1996 between Mr. James C. Calaway and the
Corporation, as it may from time to time be amended. A stockholder that
receives shares of the Corporation's common stock pursuant to either of
(a) the Combination Agreement and the Combination Agreement
Transactions (as defined in the Combination Agreement) or (b) the
Purchase Agreement is referred to herein
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as a "Combination Stockholder" and such shares of common stock are
referred to herein as "Combination Common Stock."
(b) No Combination Stockholder may offer, sell, contract to sell, grant any
option to purchase or otherwise dispose of any Combination Common Stock
or any securities convertible into or exercisable or exchangeable for
such Combination Common Stock for a period of 180 days after the date
of the final prospectus for the Corporation's IPO (as defined in
Section 6.16) without the prior written consent of the Corporation.
(c) No Combination Stockholder may offer, sell, contract to sell, grant any
option to purchase or otherwise dispose of any Combination Common Stock
or any securities convertible into or exercisable or exchangeable for
such Combination Common Stock for a period of 180 days after the date
of the final prospectus for the Corporation's IPO without the prior
written consent of the lead managing underwriter for the Corporation's
IPO.
(d) Anything to the contrary contained herein notwithstanding, the
following transactions shall be exempt from the provisions of this
Section 5.6:
(1) A Combination Stockholder's transfer of any or all shares of
Combination Common Stock held either during such stockholder's lifetime
or on death by will or intestacy to such stockholder's immediate family
or to any custodian or trustee for the account of such stockholder or
such stockholder's immediate family. "Immediate family" as used herein
shall means spouse, lineal descendant, father, mother, brother or
sister of the stockholder making such transfer.
(2) A Combination Stockholder's bona fide pledge or mortgage of
any shares of Combination Common Stock with a commercial lending
institution, provided that any subsequent transfer of said shares by
said institution shall be conducted in the manner set forth in this
Section 5.6.
(3) A transfer by a Combination Stockholder which is a
corporation of any or all of its shares of Combination Common Stock to
any or all of its stockholders.
(4) A transfer by a Combination Stockholder which is a limited or
general partnership of any or all of its shares of Combination Common
Stock to any or all of its partners or former partners.
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In any such case, the transferee, assignee or other recipient shall
receive and hold such stock subject to the provisions of this Section
5.6, and there shall be no further transfer of such stock except in
accord with this Section 5.6.
(e) The provisions of this Section 5.6 (other than 5.6(c)) may be waived
with respect to any transfer either by the Corporation, by its Board of
Directors or by action of the Chairman of the Board or the President
and the provisions of Section 5.6(c) may be waived by any duly
authorized representative of the lead managing underwriter for the
Corporation's IPO.
(f) Any sale or transfer, or purported sale or transfer, of Combination
Common Stock shall be null and void unless the terms, conditions and
provisions of this Section 5.6 are strictly observed and followed.
(g) The certificates representing Combination Common Stock shall bear on
their face the following legend so long as the restrictions on transfer
set forth in Sections 5.6(b) and (c) remain in effect:
"The shares represented by this certificate are subject to a
restriction on transfer by the holder thereof and/or its
assignee(s), as provided in the bylaws of the Corporation."
(h) If any provision or provisions of this Section 5.6 shall be held to be
invalid, illegal or unenforceable for any reason whatsoever, the
validity, legality and enforceability of the remaining provisions shall
not in any way be affected or impaired thereby; and, to the fullest
extent possible, the provisions of this Section 5.6 shall be construed
so as to give effect to the intent manifested by the provision held
invalid, illegal or unenforceable.
ARTICLE VI
INDEMNIFICATION
6.1 General. The Corporation shall, to the fullest extent permitted by
applicable law in effect on the date of effectiveness of these Bylaws, and
to such greater extent as applicable law may thereafter permit, indemnify
and hold Indemnitee harmless from and against any and all losses,
liabilities, claims, damages and, subject to Section 6.2, Expenses (as this
and all other capitalized words used in this Article VI not previously
defined in these Bylaws are defined in Section 6.16 hereof), whatsoever
arising out of any event or occurrence related to the fact that Indemnitee
is or was a director or officer of the Corporation or is or was serving in
another Corporate Status.
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6.2 Expenses. If Indemnitee is, by reason of his Corporate Status, a party to
and is successful, on the merits or otherwise, in any Proceeding, he shall
be indemnified against all Expenses actually and reasonably incurred by him
or on his behalf in connection therewith. If Indemnitee is not wholly
successful in such Proceeding but is successful, on the merits or
otherwise, as to any Matter in such Proceeding, the Corporation shall
indemnify Indemnitee against all Expenses actually and reasonably incurred
by him or on his behalf relating to such Matter. The termination of any
Matter in such a Proceeding by dismissal, with or without prejudice, shall
be deemed to be a successful result as to such Matter. To the extent that
the Indemnitee is, by reason of his Corporate Status, a witness in any
Proceeding, he shall be indemnified against all Expenses actually and
reasonably incurred by him or on his behalf in connection therewith.
6.3 Advances. In the event of any threatened or pending action, suit or
proceeding in which Indemnitee is a party or is involved and that may give
rise to a right of indemnification under this Article VI, following written
request to the Corporation by Indemnitee, the Corporation shall promptly
pay to Indemnitee amounts to cover expenses reasonably incurred by
Indemnitee in such proceeding in advance of its final disposition upon the
receipt by the Corporation of (i) a written undertaking executed by or on
behalf of Indemnitee providing that Indemnitee will repay the advance if it
shall ultimately be determined that Indemnitee is not entitled to be
indemnified by the Corporation as provided in this Agreement and (ii)
satisfactory evidence as to the amount of such expenses.
6.4 Repayment of Advances or Other Expenses. Indemnitee agrees that Indemnitee
shall reimburse the Corporation for all expenses paid by the Corporation in
defending any civil, criminal, administrative or investigative action, suit
or proceeding against Indemnitee in the event and only to the extent that
it shall be determined pursuant to the provisions of this Article VI or by
final judgment or other final adjudication under the provisions of any
applicable law that Indemnitee is not entitled to be indemnified by the
Company for such expenses.
6.5 Request for Indemnification. To obtain indemnification, Indemnitee shall
submit to the Secretary of the Corporation a written claim or request. Such
written claim or request shall contain sufficient information to reasonably
inform the Corporation about the nature and extent of the indemnification
or advance sought by Indemnitee. The Secretary of the Corporation shall
promptly advise the Board of Directors of such request.
6.6 Determination of Entitlement; No Change of Control. If there has been no
Change of Control at the time the request for indemnification is submitted,
Indemnitee's entitlement to indemnification shall be determined in
accordance with Section 145(d) of the DGCL. If entitlement to
indemnification is to be determined by Independent Counsel, the Corporation
shall furnish notice to Indemnitee within 10 days after receipt of the
request for indemnification, specifying the identity and address of
Independent Counsel. The
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Indemnitee may, within 14 days after receipt of such written notice of
selection, deliver to the Corporation a written objection to such
selection. Such objection may be asserted only on the ground that the
Independent Counsel so selected does not meet the requirements of
Independent Counsel and the objection shall set forth with particularity
the factual basis for such assertion. If there is an objection to the
selection of Independent Counsel, either the Corporation or Indemnitee may
petition the Court for a determination that the objection is without a
reasonable basis and/or for the appointment of Independent Counsel selected
by the Court.
6.7 Determination of Entitlement; Change of Control. If there has been a Change
of Control at the time the request for indemnification is submitted,
Indemnitee's entitlement to indemnification shall be determined in a
written opinion by Independent Counsel selected by Indemnitee. Indemnitee
shall give the Corporation written notice advising of the identity and
address of the Independent Counsel so selected. The Corporation may, within
seven days after receipt of such written notice of selection, deliver to
the Indemnitee a written objection to such selection. Indemnitee may,
within five days after the receipt of such objection from the Corporation,
submit the name of another Independent Counsel and the Corporation may,
within seven days after receipt of such written notice of selection,
deliver to the Indemnitee a written objection to such selection. Any
objections referred to in this Section 6.7 may be asserted only on the
ground that the Independent Counsel so selected does not meet the
requirements of Independent Counsel and such objection shall set forth with
particularity the factual basis for such assertion. Indemnitee may petition
the Court for a determination that the Corporation's objection to the first
and/or second selection of Independent Counsel is without a reasonable
basis and/or for the appointment as Independent Counsel of a person
selected by the Court.
6.8 Procedures of Independent Counsel. If a Change of Control shall have
occurred before the request for indemnification is sent by Indemnitee,
Indemnitee shall be presumed (except as otherwise expressly provided in
this Article VI) to be entitled to indemnification upon submission of a
request for indemnification in accordance with Section 6.5 hereof, and
thereafter the Corporation shall have the burden of proof to overcome the
presumption in reaching a determination contrary to the presumption. The
presumption shall be used by Independent Counsel as a basis for a
determination of entitlement to indemnification unless the Corporation
provides information sufficient to overcome such presumption by clear and
convincing evidence or the investigation, review and analysis of
Independent Counsel convinces him by clear and convincing evidence that the
presumption should not apply.
Except in the event that the determination of entitlement to
indemnification is to be made by Independent Counsel, if the person or
persons empowered under Section 6.6 or 6.7 hereof to determine entitlement
to indemnification shall not have made and furnished to Indemnitee in
writing a determination within 60 days after receipt by the Corporation of
the request therefor, the requisite determination of entitlement to
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indemnification shall be deemed to have been made and Indemnitee shall be
entitled to such indemnification unless Indemnitee knowingly misrepresented
a material fact in connection with the request for indemnification or such
indemnification is prohibited by applicable law. The termination of any
Proceeding or of any Matter therein, by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its equivalent, shall not
(except as otherwise expressly provided in this Article VI) of itself
adversely affect the right of Indemnitee to indemnification or create a
presumption that Indemnitee did not act in good faith and in a manner that
he reasonably believed to be in or not opposed to the best interests of the
Corporation, or with respect to any criminal Proceeding, that Indemnitee
had reasonable cause to believe that his conduct was unlawful. A person who
acted in good faith and in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan
of the Corporation shall be deemed to have acted in a manner not opposed to
the best interests of the Corporation.
For purposes of any determination hereunder, a person shall be deemed
to have acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation, or, with respect
to any criminal action or Proceeding, to have had no reasonable cause to
believe his conduct was unlawful, if his action is based on the records or
books of account of the Corporation or another enterprise or on information
supplied to him by the officers of the Corporation or another enterprise in
the course of their duties or on the advice of legal counsel for the
Corporation or another enterprise or on information or records given or
reports made to the Corporation or another enterprise by an independent
certified public accountant or by an appraiser or other expert selected
with reasonable care by the Corporation or another enterprise. The term
"another enterprise" as used in this Section shall mean any other
corporation or any partnership, limited liability company, association,
joint venture, trust, employee benefit plan or other enterprise of which
such person is or was serving at the request of the Corporation as a
director, officer, employee or agent. The provisions of this paragraph
shall not be deemed to be exclusive or to limit in any way the
circumstances in which an Indemnitee may be deemed to have met the
applicable standards of conduct for determining entitlement to rights under
this Article.
6.9 Independent Counsel Expenses. The Corporation shall pay any and all
reasonable fees and expenses of Independent Counsel incurred acting
pursuant to this Article VI and in any proceeding to which it is a party or
witness in respect of its investigation and written report and shall pay
all reasonable fees and expenses incident to the procedures in which such
Independent Counsel was selected or appointed. No Independent Counsel may
serve if a timely objection has been made to his selection until a court
has determined that such objection is without a reasonable basis.
6.10 Adjudication. In the event that (i) a determination is made pursuant to
Section 6.6 or 6.7 hereof that Indemnitee is not entitled to
indemnification under this Article VI; (ii) advancement of Expenses is not
timely made pursuant to Section 6.3 hereof; (iii)
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Independent Counsel has not made and delivered a written opinion
determining the request for indemnification (a) within 90 days after being
appointed by the Court, (b) within 90 days after objections to his
selection have been overruled by the Court or (c) within 90 days after the
time for the Corporation or Indemnitee to object to his selection; or (iv)
payment of indemnification is not made within five days after a
determination of entitlement to indemnification has been made or deemed to
have been made pursuant to Section 6.6, 6.7 or 6.8 hereof, Indemnitee shall
be entitled to an adjudication in an appropriate court of the State of
Delaware, or in any other court of competent jurisdiction, of his
entitlement to such indemnification or advancement of Expenses. In the
event that a determination shall have been made that Indemnitee is not
entitled to indemnification, any judicial proceeding or arbitration
commenced pursuant to this Section 6.10 shall be conducted in all respects
as a de novo trial on the merits and Indemnitee shall not be prejudiced by
reason of that adverse determination. If a Change of Control shall have
occurred, in any judicial proceeding commenced pursuant to this Section
6.10, the Corporation shall have the burden of proving that Indemnitee is
not entitled to indemnification or advancement of Expenses, as the case may
be. If a determination shall have been made or deemed to have been made
that Indemnitee is entitled to indemnification, the Corporation shall be
bound by such determination in any judicial proceeding commenced pursuant
to this Section 6.10, or otherwise, unless Indemnitee knowingly
misrepresented a material fact in connection with the request for
indemnification, or such indemnification is prohibited by law.
The Corporation shall be precluded from asserting in any judicial
proceeding commenced pursuant to this Section 6.10 that the procedures and
presumptions of this Article VI are not valid, binding and enforceable and
shall stipulate in any such proceeding that the Corporation is bound by all
provisions of this Article VI. In the event that Indemnitee, pursuant to
this Section 6.10, seeks a judicial adjudication to enforce his rights
under, or to recover damages for breach of, this Article VI, Indemnitee
shall be entitled to recover from the Corporation, and shall be indemnified
by the Corporation against, any and all Expenses actually and reasonably
incurred by him in such judicial adjudication, but only if he prevails
therein. If it shall be determined in such judicial adjudication that
Indemnitee is entitled to receive part but not all of the indemnification
or advancement of Expenses sought, the Expenses incurred by Indemnitee in
connection with such judicial adjudication or arbitration shall be
appropriately prorated.
6.11 Participation by the Corporation. With respect to any such claim, action,
suit, proceeding or investigation as to which Indemnitee notifies the
Corporation of the commencement thereof: (a) the Corporation will be
entitled to participate therein at its own expense; (b) except as otherwise
provided below, to the extent that it may wish, the Corporation (jointly
with any other indemnifying party similarly notified) will be entitled to
assume the defense thereof, with counsel reasonably satisfactory to
Indemnitee. After receipt of notice from the Corporation to Indemnitee of
the Corporation's election so to assume the defense thereof, the
Corporation will not be liable to Indemnitee under this Article VI for
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any legal or other expenses subsequently incurred by Indemnitee in
connection with the defense thereof other than reasonable costs of
investigation or as otherwise provided below. Indemnitee shall have the
right to employ his own counsel in such action, suit, proceeding or
investigation but the fees and expenses of such counsel incurred after
notice from the Corporation of its assumption of the defense thereof shall
be at the expense of Indemnitee unless (i) the employment of counsel by
Indemnitee has been authorized by the Corporation, (ii) Indemnitee shall
have reasonably concluded that there is a conflict of interest between the
Corporation and Indemnitee in the conduct of the defense of such action or
(iii) the Corporation shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of
counsel employed by Indemnitee shall be subject to indemnification pursuant
to the terms of this Article VI. The Corporation shall not be entitled to
assume the defense of any action, suit, proceeding or investigation brought
in the name of or on behalf of the Corporation or as to which Indemnitee
shall have made the conclusion provided for in (ii) above; and (c) the
Corporation shall not be liable to indemnify Indemnitee under this Article
VI for any amounts paid in settlement of any action or claim effected
without its written consent, which consent shall not be unreasonably
withheld. The Corporation shall not settle any action or claim in any
manner that would impose any limitation or unindemnified penalty on
Indemnitee without Indemnitee's written consent, which consent shall not be
unreasonably withheld.
6.12 Nonexclusivity of Rights. The rights of indemnification and advancement of
Expenses as provided by this Article VI shall not be deemed exclusive of
any other rights to which Indemnitee may at any time be entitled to under
applicable law, the Certificate of Incorporation, the Bylaws, any
agreement, a vote of stockholders or a resolution of directors, or
otherwise. No amendment, alteration or repeal of this Article VI or any
provision hereof shall be effective as to any Indemnitee for acts, events
and circumstances that occurred, in whole or in part, before such
amendment, alteration or repeal. The provisions of this Article VI shall
continue as to an Indemnitee whose Corporate Status has ceased for any
reason and shall inure to the benefit of his heirs, executors and
administrators. Neither the provisions of this Article VI or those of any
agreement to which the Corporation is a party shall be deemed to preclude
the indemnification of any person who is not specified in this Article VI
as having the right to receive indemnification or is not a party to any
such agreement, but whom the Corporation has the power or obligation to
indemnify under the provisions of the DGCL.
6.13 Insurance and Subrogation. The Corporation shall not be liable under this
Article VI to make any payment of amounts otherwise indemnifiable hereunder
if, but only to the extent that, Indemnitee has otherwise actually received
such payment under any insurance policy, contract, agreement or otherwise.
In the event of any payment hereunder, the Corporation shall be
subrogated to the extent of such payment to all the rights of recovery of
Indemnitee, who shall execute all
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papers required and take all action reasonably requested by the Corporation
to secure such rights, including execution of such documents as are
necessary to enable the Corporation to bring suit to enforce such rights.
6.14 Severability. If any provision or provisions of this Article VI shall be
held to be invalid, illegal or unenforceable for any reason whatsoever, the
validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby; and, to the fullest extent
possible, the provisions of this Article VI shall be construed so as to
give effect to the intent manifested by the provision held invalid, illegal
or unenforceable.
6.15 Certain Actions For Which Indemnification Is Not Provided. Notwithstanding
any other provision of this Article VI, no person shall be entitled to
indemnification or advancement of Expenses under this Article VI with
respect to any Proceeding, or any Matter therein, brought or made by such
person against the Corporation.
6.16 Definitions. For purposes of this Article VI:
"Change of Control" means a change in control of the Corporation after both
the date of the closing of the initial public offering (the "IPO") of the
Corporation's Common Stock to the public for cash that has been registered
on a registration statement that has been filed with and declared effective
by the Securities and Exchange Commission and after the date Indemnitee
acquired his Corporate Status, which shall be deemed to have occurred in
any one of the following circumstances occurring after such date: (i) there
shall have occurred an event required to be reported with respect to the
Corporation in response to Item 6(e) of Schedule 14A of Regulation 14A (or
in response to any similar item on any similar schedule or form)
promulgated under the Exchange Act, whether or not the Corporation is then
subject to such reporting requirement; (ii) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act) shall have become the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Corporation representing 40%
or more of the combined voting power of the Corporation's then outstanding
voting securities without prior approval of at least two-thirds of the
members of the Board of Directors in office immediately prior to such
person attaining such percentage interest; (iii) the Corporation is a party
to a merger, consolidation, sale of assets or other reorganization, or a
proxy contest, as a consequence of which members of the Board of Directors
in office immediately prior to such transaction or event constitute less
than a majority of the Board of Directors thereafter; or (iv) during any
period of two consecutive years, individuals who at the beginning of such
period constituted the Board of Directors (including, for this purpose, any
new director whose election or nomination for election by the Corporation's
stockholders was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of such period)
cease for any reason to constitute at least a majority of the Board of
Directors.
21
<PAGE>
"Corporate Status" describes the status of Indemnitee as a director,
officer, employee, agent or fiduciary of the Corporation or of any other
corporation, partnership, limited liability company, association, joint
venture, trust, employee benefit plan or other enterprise that Indemnitee
is or was serving at the request of the Corporation.
"Court" means the Court of Chancery of the State of Delaware or any other
court of competent jurisdiction.
"Expenses" shall include all reasonable attorneys' fees, retainers, court
costs, transcript costs, fees of experts, witness fees, travel expenses,
duplicating costs, printing and binding costs, telephone charges, postage,
delivery service fees, and all other disbursements or expenses of the types
customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, or being or preparing to be a
witness in a Proceeding.
"Indemnitee" includes any officer or director of the Corporation who is, or
is threatened to be made, a witness in or a party to any Proceeding as
described in Section 6.1 or 6.2 hereof by reason of his Corporate Status.
"Independent Counsel" means a law firm, or a member of a law firm, that is
experienced in matters of corporation law and neither presently is, nor in
the five years previous to his selection or appointment has been, retained
to represent: (i) the Corporation or Indemnitee in any matter material to
either such party or (ii) any other party to the Proceeding giving rise to
a claim for indemnification hereunder.
"Matter" is a claim, a material issue or a substantial request for relief.
"Proceeding" includes any action, suit, arbitration, alternate dispute
resolution mechanism, investigation, administrative hearing or any other
proceeding, whether civil, criminal, administrative or investigative,
except one initiated by an Indemnitee pursuant to Section 6.10 hereof to
enforce his rights under this Article VI.
6.17 Notices. Promptly after receipt by Indemnitee of notice of the commencement
of any action, suit or proceeding, Indemnitee shall, if he anticipates or
contemplates making a claim for expenses or an advance pursuant to the
terms of this Article VI, notify the Corporation of the commencement of
such action, suit or proceeding; provided, however, that any delay in so
notifying the Corporation shall not constitute a waiver or release by
Indemnitee of rights hereunder and that any omission by Indemnitee to so
notify the Corporation shall not relieve the Corporation from any liability
that it may have to Indemnitee otherwise than under this Article VI. Any
communication required or permitted to the Corporation shall be addressed
to the Secretary of the Corporation and any such communication to
Indemnitee shall be addressed to Indemnitee's address as shown on the
Corporation's records unless he specifies otherwise and shall be personally
22
<PAGE>
delivered or delivered by overnight mail delivery. Any such notice shall be
effective upon receipt.
6.18 Contractual Rights. The right to be indemnified or to the advancement or
reimbursement of Expenses (i) is a contract right based upon good and
valuable consideration, pursuant to which Indemnitee may sue as if these
provisions were set forth in a separate written contract between Indemnitee
and the Corporation, (ii) is and is intended to be retroactive and shall be
available as to events occurring prior to the adoption of these provisions
and (iii) shall continue after any rescission or restrictive modification
of such provisions as to events occurring prior thereto.
6.19 Indemnification of Employees, Agents and Fiduciaries. The Corporation, by
adoption of a resolution of the Board of Directors, may indemnify and
advance expenses to a person who is an employee, agent or fiduciary of the
Corporation including any such person who is or was serving at the request
of the Corporation as a director, officer, employee, agent or fiduciary of
any other corporation, partnership, joint venture, limited liability
company, trust, employee benefit plan or other enterprise to the same
extent and subject to the same conditions (or to such lesser extent and/or
with such other conditions as the Board of Directors may determine) under
which it may indemnify and advance expenses to an Indemnitee under this
Article VI.
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 Bylaw Amendments. The Board of Directors shall have the power to adopt,
amend and repeal from time to time the Bylaws of the Corporation, subject
to the right of stockholders entitled to vote with respect thereto to amend
or repeal such Bylaws as adopted or amended by the Board of Directors.
Bylaws of the Corporation may be adopted, amended or repealed by the
affirmative vote of the holders of at least two-thirds of the combined
voting power of the outstanding shares of all classes of stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, at any annual meeting, or at any special
meeting if notice of the proposed amendment be contained in the notice of
said special meeting, or by the Board of Directors as specified in the
preceding sentence.
7.2 Books and Records. The Corporation shall keep books and records of account
and shall keep minutes of the proceedings of its stockholders, its Board of
Directors and each committee of its Board of Directors.
7.3 Waiver of Notice. Whenever any notice is required to be given to any
stockholder, director or committee member under the provisions of the DGCL
or under the Certificate
23
<PAGE>
of Incorporation, as amended, or these Bylaws, said notice shall be deemed
to be sufficient if given (i) by telegraphic, facsimile, cable or wireless
transmission or (ii) by deposit of the same in a post office box in a
sealed prepaid wrapper addressed to the person entitled thereto at his post
office address, as it appears on the records of the Corporation, and such
notice shall be deemed to have been given on the day of such transmission
or mailing, as the case may be.
Whenever any notice is required to be given to any stockholder,
director or committee member under the provisions of the DGCL or under the
Certificate of Incorporation, as amended, or these Bylaws, a waiver thereof
in writing signed by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be equivalent to the giving
of such notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting
for the express purpose of objecting, at the beginning of the meeting, to
the transaction of any business because the meeting is not lawfully called
or convened. Neither the business to be transacted at, nor the purpose of,
any regular or special meeting of the stockholders, directors, or members
of a committee of directors need be specified in any written waiver of
notice unless so required by the Certificate of Incorporation or these
Bylaws.
7.4 Resignations. Any director or officer may resign at any time. Such
resignations shall be made in writing and shall take effect at the time
specified therein, or, if no time be specified, at the time of its receipt
by the Chairman of the Board, the Chief Executive Officer, the President or
the Secretary of the Corporation. The acceptance of a resignation shall not
be necessary to make it effective, unless expressly so provided in the
resignation.
7.5 Seal. The seal of the Corporation shall be in such form as the Board of
Directors may adopt.
7.6 Fiscal Year. The fiscal year of the Corporation shall end on the 31st day
of December of each year or as otherwise provided by a resolution adopted
by the Board of Directors.
7.7 Facsimile Signatures. In addition to the provisions for the use of
facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any officer or officers of the Corporation may be
used whenever and as authorized by the Board of Directors.
7.8 Reliance upon Books, Reports and Records. Each director and each member of
any committee designated by the Board of Directors shall, in the
performance of his duties, be fully protected in relying in good faith upon
the books of account or reports made to the Corporation by any of its
officers, or by an independent certified public accountant, or by an
appraiser selected with reasonable care by the Board of Directors or by any
such committee, or in relying in good faith upon other records of the
Corporation.
24
<PAGE>
[LOGO OF EDGE PETROLEUM CORPORATION APPEARS HERE]
NUMBER SHARES
Incorporated Under the Laws of the State of Delaware
---------------------
| CUSIP 279882 10-8 |
---------------------
SEE REVERSE
FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
Is The Owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF $.01 PAR VALUE COMMON STOCK OF
EDGE PETROLEUM CORPORATION
transferable only on the books of the Corporation in person or by duly
authorized attorney upon surrender of this Certificate properly endorsed. This
Certificate is not valid unless countersigned by the Transfer Agent and
Registrar.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
executed by the facsimile signatures of its duly authorized officers and to be
sealed with the facsimile seal of the Corporation.
Dated:
/s/ Richard S. Dale [Corporate Seal of /s/ John E. Calaway
- ------------------------- Edge Petroleum -------------------------
Richard S. Dale appears here] John E. Calaway
Secretary Chairman of the Board
COUNTERSIGNED:
American Securities Transfer & Trust, Inc.
P.O. Box 1696
Denver, Colorado 80201
By
-----------------------------------------------
Transfer Agent & Registrar Authorized Signature
<PAGE>
EDGE PETROLEUM CORPORATION
The Corporation is authorized to issue Common Stock, par value $.01 per
share, and Preferred Stock, par value $.01 per share. The Board of Directors of
the Corporation has authority to fix the number of shares and the designation of
any series of Preferred Stock and to determine the powers, designations,
preferences and relative, participating, options or other special rights between
classes of stock or series thereof of the Corporation, and the qualifications,
limitations or restrictions of such preferences and/or rights. The Corporation
will furnish without charge to each stockholder who so requests a full statement
of the foregoing as established from time to time by the Restated Certificate of
Incorporation of the Corporation and by any certificate of designation. Any such
request should be made to the Secretary of the Corporation at the offices of the
Corporation.
The following abbreviations when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -as tenants in common UNIF GIFT MIN ACT-_____ Custodian _____
TEN ENT -as tenants by the (Cust) (Minor)
entireties under Uniform Gifts to Minors
JT TEN -as joint tenants with Act_________________________
right of survivorship (State)
and not as tenants in
common
Additional abbreviations may also be used though not in the above Set.
- -------------------------------------------------------------------------------
For Value Received, ____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------
| |
- ----------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
- -----------------------------------------------------------------------
of the Common Stock represented by the within Certificate, and do hereby
irrevocable constitute and appoint ____________________________ attorney-in-fact
to transfer the said stock on the books of the within-named Corporation, with
full power of substitution in the premises.
Dated __________________
----------------------------------------
----------------------------------------
NOTICE: THE SIGNATURE(S) OF THE ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed:
- ---------------------------
The signature(s) should be guaranteed by an eligible institution (Banks,
Stockbrokers, Savings and Loan Associations and Credit Unions with membership in
an approved signature guarantee Medallion Program), pursuant to S.E.C. Rule
17Ad-15.
<PAGE>
EXHIBIT 5.1
018868.0103 January 27, 1997
Edge Petroleum Corporation
Texaco Heritage Plaza
1111 Bagby, Suite 2100
Houston, Texas 77002
Ladies and Gentlemen:
As set forth in the Registration Statement on Form S-4, Registration
No. 333-17269 (the "Registration Statement"), filed by Edge Petroleum
Corporation, a Delaware corporation (the "Company"), with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, relating to
the shares (the "Combination Agreement Shares") of the Company's common stock,
par value $0.01 per share ("Common Stock"), issuable in connection with the
Combination Agreement Transactions (as defined in the Joint Proxy and Consent
Solicitation Statement/Prospectus which is a part of the Registration Statement
(the "Joint Proxy and Consent Solicitation Statement/Prospectus")), certain
legal matters in connection with the Combination Agreement Shares are being
passed upon for you by us. At your request, this opinion of counsel is being
furnished to you for filing as Exhibit 5.1 to the Registration Statement.
We understand that the Combination Agreement Shares are to be issued
pursuant to the terms of the Combination Agreement (and the Plan of Merger
included therein) attached as Appendix A to the Joint Proxy and Consent
Solicitation Statement/Prospectus.
In our capacity as your counsel in the connection referred to above,
we have examined the Certificate of Incorporation and Bylaws of the Company, the
Combination Agreement, the Plan of Merger included therein, each as amended to
date the originals, or copies certified or otherwise identified, of corporate
records of the Company, including minute books of the Company as furnished to us
by the Company, certificates of public officials and of representatives of the
Company, statutes and other instruments or documents as a basis for the
opinions hereinafter expressed. In giving such opinions, (a) we have relied upon
certificates of officers of the Company with respect to the accuracy of the
material factual matters contained in such certificates and (b) we have assumed
that prior to the Effective Time (as defined in the Joint Proxy and Consent
Solicitation Statement/Prospectus), the Combination Agreement (in a form
substantially similar to the form reviewed by us) will have been duly
authorized, executed and
<PAGE>
Edge Petroleum Corporation -2- January 27, 1997
delivered by each of Edge Mergeco, Inc., a Texas corporation, and Edge Petroleum
Corporation, a Texas corporation.
On the basis of the foregoing, and subject to the assumptions,
limitations and qualifications set forth herein, we are of the opinion that:
1. The Company is a corporation duly organized and validly existing
under the laws of the State of Delaware.
2. The Combination Agreement Shares have been duly authorized by all
necessary corporate action on the part of the Company and, upon issuance in
accordance with the terms and provisions of the Combination Agreement and
the Plan of Merger included therein and as described in the Registration
Statement, will be validly issued, fully paid and nonassessable.
The opinions set forth above are limited in all respects to the laws
of the State of Texas, the General Corporation Law of the State of Delaware and
federal securities laws, each as in effect on the date hereof.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to us under "Legal Matters" in the
Joint Proxy and Consent Solicitation Statement/Prospectus.
Very truly yours,
/s/ Baker & Botts, L.L.P.
<PAGE>
Exhibit 8.1
[LETTERHEAD OF BAKER & BOTTS, L.L.P.]
January 27, 1997
Edge Petroleum Corporation
Texaco Heritage Plaza
1111 Bagby, Suite 2100
Houston, Texas 77002
Ladies and Gentlemen:
We have acted as your counsel in connection with the transactions
contemplated by the Amended and Restated Combination Agreement among Edge
Petroleum Corporation, a Texas corporation ("Old Edge"), Edge Group II Limited
Partnership ("Edge Group II"), Edge Group Partnership ("Edge Group"), Gulfedge
Limited Partnership ("Gulfedge"), Edge Mergeco, Inc. ("Mergeco"), and Edge
Petroleum Corporation, a Delaware corporation (the "Company"), dated January 13,
1997 (the "Combination Agreement"). The Combination Agreement provides for (i)
a merger of Mergeco with and into Old Edge, (ii) an exchange offer to the
general and limited partners of Edge Group II, (iii) an exchange offer to the
limited partners of Gulfedge, and (iv) a purchase offer to Edge Group (such
transactions collectively referred to as the "Combination Agreement
Transactions"). In that connection, we have participated in the preparation of
a registration statement under the Securities Act of 1933, as amended, of the
Company on Form S-4 (Registration No. 333-17269) in the form thereof filed with
the Securities and Exchange Commission, as amended (the "Registration
Statement"), including a Joint Proxy and Consent Solicitation
Statement/Prospectus (the "Proxy Statement"). Capitalized terms not otherwise
defined herein shall have the meaning specified in the Proxy Statement.
We have examined the Combination Agreement, the Proxy Statement, the
certificates of the Company, Old Edge, Edge Group II, Edge Group, Gulfedge, and
Mergeco (the "Certificates") delivered to us for purposes of this opinion, and
such other documents and corporate records as we have deemed necessary or
appropriate for purposes of this opinion. In addition, we have assumed (i) the
Combination Agreement Transactions will be consummated in the manner
contemplated in the Proxy Statement and in accordance with the provisions of the
Combination Agreement, (ii) the statements concerning the Combination Agreement
Transactions set forth in the Proxy Statement are accurate and complete, and
(iii) the representations made to us in the Certificates are accurate and
complete.
<PAGE>
Edge Petroleum Corporation -2- January 27, 1997
Based on certain assumptions set forth therein, statements of legal
conclusion set forth under the heading "Material Federal Income Tax
Consequences" in the Proxy Statement, except for the statements of legal
conclusion regarding the tax consequences of the receipt of the GP's Management
Fee Shares, reflect our opinions on the material tax consequences of the
Combination Agreement Transactions to the Company, the U.S. holders of interests
in Edge Group II, the U.S. holders of Gulfedge Units, Edge Group, and the U.S.
holders of Old Edge Common Stock based on the Internal Revenue Code of 1986 and
applicable regulations thereunder, both as in effect on the date hereof, and on
reported judicial decisions.
We hereby consent to the filing of this opinion as Exhibit 8 to the
Registration Statement and to the references to this Firm in the sections
captioned "Material Federal Income Tax Consequences" and "Legal Matters" in the
Proxy Statement. In giving this consent, we do not thereby admit that we come
within the category of a person whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
BAKER & BOTTS, L.L.P.
<PAGE>
EXHIBIT 8.2
[LETTERHEAD OF BRAUNER BARON ROSENZWEIG & KLEIN, LLP APPEARS HERE]
January 24, 1997
Edge Petroleum Corporation
Texaco Heritage Plaza
1111 Bagby, Suite 2100
Houston, TX 77002
Ladies and Gentlemen:
The Combination Agreement among Old Edge Corporation ("Old Edge"), Edge
Group II Limited Partnership (Edge Group II), Edge Group Partnership ("Edge
Group"), Gulfedge Limited Partnership ("Gulfedge"), Edge Mergeco, Inc.
("Mergeco"), and Edge Petroleum Corporation (the "Company"), dated December 3,
1996, as amended (the "Combination Agreement") provides for (i) a merger of
Mergeco with and into Old Edge, (ii) an exchange offer to the general and
limited partners of Edge Group II, (iii) an exchange offer to the limited
partners of Gulfedge and (iv) a purchase offer to Edge Group (such transactions
collectively referred to as the "Combination Agreement Transactions").
We have examined the Combination Agreement, the Proxy Statement, the
certificates of the Company, Old Edge, Edge Group II, Edge Group, Gulfedge, and
Mergeco (the "Certificates") delivered for purposes of this opinion, and such
other documents and partnership records as we have deemed necessary or
appropriate for purposes of this opinion. In addition, we have assumed (i) the
Combination Agreement Transactions will be consummated in the manner
contemplated in the Proxy Statement and in accordance with the provisions of the
Combination Agreement, (ii) the statements concerning the Combination Agreement
Transactions set forth in the Joint Proxy and Consent Solicitation
Statement/Prospectus (the "Proxy Statement"), included in the Company's
Registration Statement on Form S-4, as amended (the "Registration Statement"),
filed with Securities and Exchange Commission under the Securities Act of 1933,
as amended, are accurate and complete, and (iii) the representations made to us
in the Certificates are accurate and complete.
Based on certain assumptions set forth therein, the statements of legal
conclusion set forth under the heading "Material Federal Income Tax
Consequences" in the Proxy Statement relating to the tax consequences to the
General Partners of Edge Group II of the
<PAGE>
receipt of the GP's Management Fee Shares (as defined in the Proxy Statement),
reflect our opinion on the material tax consequences to the General Partners of
Edge Group II from their receipt of the GP's Management Fee Shares based on the
Internal Revenue Code of 1986 and applicable regulations thereunder, both as in
effect on the data hereof, and on reported judicial decisions.
We hereby consent to the filing of this opinion as Exhibit 8 to the
Registration Statement and to the references to this Firm in the sections
captioned "Material Federal Income Tax Consequences" and "Legal Matters" in the
Proxy Statement. In giving this consent, we do not thereby admit that we come
within the category of a person whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Brauner Baron Rosenzweig & Klein, LLP
-----------------------------------------
Brauner Baron Rosenzweig & Klein, LLP
<PAGE>
EXHIBIT 10.6
EDGE PETROLEUM CORPORATION
a Delaware corporation
REGISTRATION RIGHTS AGREEMENT
January 13, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
<S> <C> <C>
1. Certain Definitions .............................................................. 1
2. Restrictions on Transferability .................................................. 3
3. Stop Transfer Instructions ....................................................... 3
4. [Intentionally Left Blank] ....................................................... 3
5. Registration Rights .............................................................. 3
5.1 Demand Registration Rights .................................................. 3
5.2 Expenses of Registration .................................................... 4
5.3 Registration Procedures ..................................................... 4
5.4 Indemnification ............................................................. 5
5.5 Certain Agreements of EHC ................................................... 8
5.6 Transfer of Registration Rights; Additional Grants of Registration Rights ... 9
5.7 Termination of Registration Rights .......................................... 9
6. Miscellaneous .................................................................... 9
6.1 GOVERNING LAW ............................................................... 9
6.2 Successors and Assigns ...................................................... 9
6.3 Effectiveness ............................................................... 9
6.4 Entire Agreement; Amendment; Termination .................................... 9
6.5 Notices, Etc. ............................................................... 9
6.6 Delays or Omissions ......................................................... 10
6.7 Understanding of Agreement .................................................. 10
6.8 Severability ................................................................ 10
6.9 Titles and Subtitles ........................................................ 10
6.10 Gender ...................................................................... 11
6.11 Headings .................................................................... 11
6.12 Counterparts ................................................................ 11
</TABLE>
-i-
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered into
as of the 13th day of January, 1997 by and among Edge Petroleum Corporation, a
Delaware corporation (the "Company"), and Edge Holding Company Limited
Partnership, a Connecticut limited partnership ("EHC").
Recitals
The Company has determined that it is in the best interests of the
Company to consummate an IPO (as defined below) and certain other transactions,
as contemplated in the Combination Agreement dated December 3, 1996 to which the
Company is a party (the "Combination Agreement"). The Combination Agreement
further provides for the merger (the "Merger") of Edge Mergeco, Inc., a Texas
corporation that is a wholly owned subsidiary of the Company with and into Edge
Petroleum Corporation, a Texas corporation ("Old Edge"), pursuant to which the
shareholders of Old Edge, including EHC, will receive common stock of the
Company in exchange for their common stock of Old Edge, as more fully described
in the Combination Agreement and the Plan of Merger included therein. To
promote the ability of the Company to consummate an IPO, the Company agreed
pursuant to the Combination Agreement to enter into a registration rights
agreement with EHC solely for the purpose of permitting EHC to distribute the
common stock of the Company that it receives pursuant to the Merger to its
partners and EHC wishes to enter into certain agreements with the Company as
more fully set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the common stock of the Company, par value
$.01 per share, and any other securities issued in respect of Common Stock upon
any stock split, stock dividend, recapitalization, merger, consolidation, share
exchange or similar event.
"Demand Registration" shall have the meaning specified in Section
5.1(a) of this Agreement.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
<PAGE>
"IPO" shall mean the first offering of the Company's securities to the
general public registered under a registration statement filed by the Company
with the Commission.
"Merger" shall have the meaning specified in the preamble to this
Agreement.
"Merger Time" shall mean the day that the Merger becomes effective in
accordance with the applicable provisions of the Texas Business Corporation Act.
"Outstanding Registrable Securities" means those Registrable
Securities that are then outstanding .
"Shares" shall mean the shares of Common Stock that were issued at the
Merger Time to EHC pursuant to the Merger.
"Person" means any individual, any foreign or domestic corporation,
general partnership, limited partnership, limited liability company, firm, joint
venture, association, individual retirement account, joint stock company, trust,
estate, unincorporated organization, governmental or regulatory body or other
entity.
"Registrable Securities" shall mean the Shares and any additional
shares of Common Stock or other securities of the Company issued or distributed
to EHC in respect of any other shares of Registrable Securities by way of any
stock split, stock dividend, recapitalization, merger, consolidation, share
exchange or similar event; provided, however, that securities shall be treated
as Registrable Securities only if and only for so long as they are held by EHC,
and (i) they have not been disposed of pursuant to a registration statement
declared effective by the Commission, so that all transfer restrictions and
restrictive legends with respect thereto are removed upon the consummation of
such sale, or (ii) they have not been distributed to EHC's partners or otherwise
sold in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act, so that all transfer restrictions and
restrictive legends with respect thereto are removed upon the consummation of
such distribution or sale, or (iii) the registration rights of EHC under this
Agreement have not expired pursuant to Section 5.7.
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses, other than Selling
Expenses (as defined below), incurred by the Company in complying with Section
5.1 hereof, including, without limitation, all registration, qualification,
listing and filing fees, printing expenses, fees and expenses of counsel for
the Company, the expense of any special audits incident to or required by any
such registration (any including the reasonable fees and expenses of one legal
counsel for EHC)..
-2-
<PAGE>
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all stock transfer taxes applicable to
the securities registered by EHC and, except as set forth above, all fees and
disbursements of counsel for any limited partner or for EHC not included as a
Registration Expense and any broker/dealer related expense.
"Termination Date" shall have the meaning specified in Section 5.7 of
this Agreement.
2. Restrictions on Transferability. The Registrable Securities
shall not be sold, assigned, transferred or pledged except under a registration
statement as contemplated by this Agreement, in accordance with Rule 145 or in a
transaction otherwise exempt from the Securities Act.
3. Stop Transfer Instructions. EHC consents to the Company making a
notation on its records and giving instructions to any transfer agent of the
Shares in order to implement the restrictions on transfer established in this
Agreement. The Company agrees to keep a copy of this Agreement (as it may from
time to time be amended) at its place of business and to make this Agreement
subject to the same right of examination by stockholders of the Company, in
person or by agent, attorney or accountant, as are the books and records of the
Company.
4. [Intentionally Left Blank].
5. Registration Rights.
5.1 Demand Registration Rights.
(a) Request for Registration. In case the Company shall receive
from EHC a written request that the Company effect any registration,
qualification or compliance with respect to all the shares of Registrable
Securities then outstanding (a "Demand Registration"), the Company will:
(i) as soon as practicable, use its reasonable best lawful
efforts to effect such registration, qualification or compliance (including,
without limitation, appropriate qualification under applicable blue sky or other
state securities laws and appropriate compliance with applicable regulations
issued under the Securities Act and any other governmental requirements or
regulations) as may be so requested and as would permit or facilitate the sale
and distribution of all the Registrable Securities; provided, however, that the
Company shall not be obligated to take any action to effect any such
registration, qualification or compliance pursuant to this Section 5.1:
(A) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration,
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qualification or compliance unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities Act;
(B) Prior to six months after the closing date of the
IPO;
(C) If the Company shall furnish to EHC a certificate
signed by the President of the Company stating that in the good faith judgment
of the Board of Directors it would be seriously detrimental to the Company or
its shareholders for a registration statement to be filed in the near future,
then the Company's obligation to use its reasonable best lawful efforts to
register, qualify or comply under this Section 5.1 shall be deferred once (with
respect to any demand for registration hereunder) for a period not to exceed
thirty (30) days from the date of receipt of written request from EHC, provided
that the Company cannot pursuant to this Section 5.1(a)(i)(C) delay
implementation of a demand for registration more than once.
Subject to the foregoing clauses (A) through (C), the Company shall
file a registration statement covering the Registrable Securities so requested
to be registered as soon as practicable, after receipt of the request or
requests of EHC, provided, however that the Company shall be obligated to effect
only one Demand Registration that is for the purpose of permitting EHC to
distribute the Registrable Securities to its partners pursuant to this Section
5.1. Notwithstanding the foregoing, a registration will not count as a Demand
Registration under this Section 5 until such registration has become effective
and unless EHC is able to register and distribute to its partners the shares
requested by it to be included in such registration.
(b) The Company may register securities for sale for its own
account or for the account of any other securities holder in the registration
requested pursuant to this Section 5.1.
5.2 Expenses of Registration. All Registration Expenses incurred
in connection with the registrations pursuant to Section 5.1 shall be borne by
the Company. Unless otherwise stated, all Selling Expenses relating to
securities registered on behalf of EHC shall be borne by EHC.
5.3 Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Agreement,
the Company will keep EHC advised in writing as to the initiation of each
registration, qualification and compliance and as to the completion thereof. At
its expense the Company will:
(a) use its best efforts to prepare and file with the
Commission a registration statement with respect to such securities and use its
best lawful efforts to cause such registration statement to become and remain
effective for a period until EHC has completed the distribution of the shares of
Common Stock registered thereunder to its partners (which must be accomplished
as promptly as practicable) as described in the registration statement relating
thereto,
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provided, however that notwithstanding the foregoing the Company shall not be
required to cause such registration statement to remain effective for a period
exceeding ten days;
(b) Prepare and file with the Commission such amendments
(including post-effective amendments) to such registration statement and
supplements to the related prospectus as may be necessary to comply with the
provisions of the Securities Act with respect to the distribution to EHC's
partners of all securities covered by such registration statement;
(c) Furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the prospectus, as
EHC from time to time may reasonably request and furnish a copy of each filing
with the Commission and all correspondence with the Commission with respect to
such filing;
(d) Notify EHC at any time when a prospectus relating to such
registration statement is required to be delivered under the Securities Act of
the happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or incomplete in the
light of the circumstances then existing, and at the request of any such seller,
prepare and furnish to such seller a reasonable number of copies of a supplement
to or an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the partners of EHC, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing;
(e) Cause all such Registrable Securities registered pursuant
hereto to be listed on each securities exchange or quoted on a quotation system
on which similar securities issued by the Company are then listed or quoted;
(f) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP number
for all such Registrable Securities, in each case not later than the effective
date of such registration;
(g) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission.
5.4 Indemnification.
(a) Indemnification by the Company. To the extent permitted by
law, the Company will indemnify EHC, each of its general partners and legal
counsel and each Person controlling EHC within the meaning of either Section 15
of the Securities Act or Section 20 of the Exchange Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Agreement, against all expenses, claims, losses, damages or liabilities (or
actions
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or proceedings in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement or alleged untrue statement of a material fact contained
in any registration statement, prospectus, offering circular or other document
relating to the Registrable Securities, or in any amendment or supplement
thereto, or based on any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, not misleading, or any violation by the Company of the Securities Act
or any rule or regulation promulgated under the Securities Act applicable to the
Company in connection with any such registration, qualification or compliance
relating to the Registrable Securities, and the Company will reimburse EHC, each
of its general partners and legal counsel and each Person controlling EHC for
any legal and any other expenses reasonably incurred in connection with
investigating, preparing, settling or defending any such claim, loss, damage,
liability or action, provided that the Company will not be liable in any such
case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by EHC or controlling Person and stated to
be specifically for use therein. Notwithstanding the foregoing, insofar as the
foregoing indemnity relates to any such untrue statement or alleged untrue
statement or omission or alleged omission made in the preliminary prospectus but
eliminated or remedied in the amended prospectus on file with the Commission at
the time the registration statement becomes effective or in the final prospectus
filed with the Commission pursuant to Rule 424(b) of the Commission, the
indemnity agreement herein shall not inure to the benefit of any party
indemnified pursuant to this Section 5.4(a) if a copy of the final prospectus
filed pursuant to Rule 424(b) was not furnished to the Person or entity
asserting the loss, liability, claim or damage at or prior to the time such
furnishing is required by the Securities Act.
(b) Indemnification by EHC. To the extent permitted by law,
EHC will indemnify the Company, each of its directors, officers and legal
counsel and each Person who controls the Company within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act against all
claims, losses, damages and liabilities or actions in respect thereof arising
out of or based on any untrue statement or alleged untrue statement of a
material fact contained in any such registration statement, prospectus, offering
circular or other document relating to the Registrable Securities, or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse the Company, such directors, officers, legal counsel, Persons or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by EHC and stated to be specifically for use therein.
In addition, insofar as the foregoing indemnity relates to any such untrue
statement or alleged untrue statement or omission or alleged omission made in
the preliminary prospectus but eliminated or remedied in the amended prospectus
on file with the Commission at the time the registration statement becomes
effective or in the final prospectus filed pursuant to Rule 424(b) of
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the Commission, the indemnity agreement herein shall not inure to the benefit
of the Company if a copy of the final prospectus filed pursuant to Rule 424(b)
was not furnished to the Person or entity asserting the loss, liability, claim
or damage at or prior to the time such furnishing is required by the Securities
Act.
(c) Each party entitled to indemnification under this Section
5.4 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement unless the failure to
give such notice is materially prejudicial to an Indemnifying Party's ability to
defend such action and provided further, that the Indemnifying Party shall not
assume the defense for matters as to which there is a conflict of interest or
separate and different defenses. No Indemnifying Party, in the defense of any
such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. No Indemnified Party shall consent to entry of any
judgment or enter into any settlement without the consent of each Indemnifying
Party (which consent shall not be unreasonably withheld). Each Indemnified Party
shall furnish such information regarding itself or the claim in question as an
Indemnifying Party may reasonably request in writing and as shall be reasonably
required in connection with defense of such claim and litigation resulting
therefrom.
(d) If the indemnification provided for in this Section 5.4 is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any losses, claims, damages, expenses or liabilities
referred to therein, then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages, expenses or
liabilities in such proportion as is appropriate to reflect the relative fault
of the Company on the one hand and EHC on the other in connection with the
statements or omissions which resulted in such losses, claims, damages, expenses
or liabilities, as well as any other relevant equitable considerations. The
relative fault of the Company on the one hand and EHC on the other shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or by EHC and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and EHC agree that it
would not be just and equitable if contribution pursuant to this Section 5.4(d)
were based solely upon the number of entities from whom contribution was
requested or by any other method of allocation which does not take account of
the equitable considerations referred to above in this Section 5.4(d). The
amount paid
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or payable by an Indemnified Party as a result of the losses, claims, damages,
expenses and liabilities referred to above in this Section 5.4(d) shall be
deemed to include any legal or other expenses reasonably incurred by such
Indemnified Party in connection with investigating or defending any such action
or claim, subject to the provisions of Section 5.4(c) hereof. No Person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.
5.5 Certain Agreements of EHC.
(a) In connection with any registration in which EHC is
participating, EHC shall furnish to the Company such information regarding EHC,
the Registrable Securities and the distribution to its partners proposed by EHC,
as the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance
referred to in Section 5.
(b) EHC agrees that, upon receipt of any notice from the
Company of the happening of any event requiring the preparation of a supplement
or amendment to a prospectus relating to Registrable Securities so that, as
thereafter delivered to the partners of EHC, such prospectus will not contain an
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading,
EHC will forthwith discontinue distribution of Registrable Securities to its
partners pursuant to the registration statement contemplated by this Agreement
until its receipt of copies of the supplemented or amended prospectus from the
Company and, if so directed by the Company, EHC shall deliver to the Company all
copies, other than permanent file copies then in EHC's possession, of the
prospectus covering such Registrable Securities that is current at the time of
receipt of such notice.
(c) EHC agrees to notify the Company, at any time when a
prospectus relating to the registration statement contemplated by this Agreement
is required to be delivered by it under the Act, of the occurrence of any event
relating to EHC which requires the preparation of a supplement or amendment to
such prospectus so that, as thereafter delivered to the partners of EHC, such
prospectus will not contain an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading relating to EHC, and EHC shall promptly make
available to the Company information necessary to enable the Company to prepare
any such supplement or amendment. EHC agrees not to take any action with respect
to any distribution deemed to be made pursuant to such registration statement
that constitutes a violation of Rule 10(b)6 under the Exchange Act or any other
applicable rule, regulation or law.
(d) EHC acknowledges and agrees that the plan of distribution
in the registration statement to be filed pursuant to this Agreement shall only
describe a distribution of Registrable Securities by EHC to its partners and
during the time the registration statement is effective the Registrable
Securities to be so transferred pursuant to such registration statement will
only be transferred by EHC in accordance with such plan of distribution (and the
parties specifically agree
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that the registration does not cover any resale of securities by EHC's partners
to third parties nor does it cover any sales by EHC to third parties).
5.6 Transfer of Registration Rights; Additional Grants of
Registration Rights. The registration rights granted to EHC under Section 5 may
not be transferred to any other person or entity. Nothing herein shall limit
the ability of the Company to grant to any person or entity any registration or
similar rights in the future with respect to Common Stock or other securities of
the Company.
5.7 Termination of Registration Rights. The registration rights
granted to EHC pursuant to this Agreement shall terminate on December 31, 1998
(the "Termination Date").
6. Miscellaneous.
6.1 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS
BY THE INTERNAL LAWS OF THE STATE OF DELAWARE.
6.2 Successors and Assigns. Except as otherwise provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
6.3 Effectiveness. This Agreement shall become effective upon its
execution by EHC and the Company.
6.4 Entire Agreement; Amendment; Termination. This Agreement, the
Rule 145 letter executed by EHC and the Combination Agreement constitute the
full and entire understanding and agreement between the parties with regard to
the subject hereof. Except as expressly provided herein, neither this Agreement
nor any term hereof may be amended, waived, discharged or terminated other than
by a written instrument signed by the party against whom enforcement of any such
amendment, waiver, discharge or termination is sought; provided further,
however, that any provisions hereof may be amended, waived, discharged or
terminated upon the written consent of the Company and EHC. The Company's
obligations hereunder except for the provisions of Section 5.4 (which shall
survive until the expiration of the applicable statute of limitations) and this
Section 6 shall terminate and be of no further force and effect on the
Termination Date.
6.5 Notices, Etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger,
including Federal Express or similar courier service, or by facsimile
transmission addressed (a) if to EHC, to Edge Holding Company Limited
Partnership, 36 Catoonah Street, #16, P.O. Box 1248, Ridgefield, Connecticut
06875, Attn: Mr. John Sfondrini; telefax number (203) 894-8372, or at such other
address as EHC shall have furnished to the Company in writing, or (b) if to the
Company, to Edge Petroleum Corporation, 1111 Bagby,
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Suite 2100, Houston, Texas 77002, Attn: President; telefax number
(713) 654-7722, or at such other address as the Company shall have furnished to
EHC.
Each such notice or other communication shall for all purposes of
this Agreement be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or five
days after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and mailed as aforesaid, or, if
sent by courier, on the next business day following the day of dispatch or sent
by facsimile transmission, on the date of such transmission if confirmation of
such transmission is received.
6.6 Delays or Omissions. Except as expressly provided herein, no
delay or omission to exercise any right, power or remedy accruing to any party
upon any breach or default of another party the Company under this Agreement
shall impair any such right, power or remedy of such party that is not in breach
or default nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any party of any breach or default under this Agreement, or any
waiver on the part of any party of any provisions or conditions of this
Agreement, must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement or by law or otherwise afforded to any party, shall be cumulative and
not alternative.
6.7 Understanding of Agreement. Each Person signing this Agreement
acknowledges:
(a) he was urged by the other parties to secure legal counsel in
connection with this Agreement;
(b) he has carefully read and understood the provisions of this
Agreement;
(c) he has given informed consent to this Agreement and was not
subjected to fraud, duress, or overreaching.
6.8 Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to any
party.
6.9 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not considered in construing or
interpreting this Agreement.
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6.10 Gender. As used herein, masculine pronouns shall include the
feminine and neuter, neuter pronouns shall include the masculine and the
feminine.
6.11 Headings. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise effect the meaning hereof.
6.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the undersigned or each of their respective duly
authorized officers or representatives have executed this agreement effective
upon the date first set forth above.
EDGE PETROLEUM CORPORATION
By: /s/ John E. Calaway
------------------------------
Name: John E. Calaway
------------------------------
Title: Chief Executive Officer
------------------------------
EDGE HOLDING COMPANY
LIMITED PARTNERSHIP
By: /s/ John Sfondrini
--------------------------------
Name: John Sfondrini
--------------------------------
Title: General Partner
------------------------------
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EXHIBIT 10.9
INCENTIVE PLAN
OF
EDGE PETROLEUM CORPORATION
1. Plan. This Incentive Plan of Edge Petroleum Corporation (the "Plan")
was adopted by Edge Petroleum Corporation to reward certain corporate officers
and key employees of Edge Petroleum Corporation and certain independent
consultants by enabling them to acquire shares of common stock of Edge Petroleum
Corporation.
2. Objectives. This Plan is designed to attract and retain key employees
of the Company and its Subsidiaries (as hereinafter defined), to attract and
retain qualified directors of the Company, to attract and retain consultants and
other independent contractors, to encourage the sense of proprietorship of such
employees, directors and independent contractors and to stimulate the active
interest of such persons in the development and financial success of the Company
and its Sub sidiaries. These objectives are to be accomplished by making Awards
(as hereinafter defined) under this Plan and thereby providing Participants (as
hereinafter defined) with a proprietary interest in the growth and performance
of the Company and its Subsidiaries.
3. Definitions. As used herein, the terms set forth below shall have the
following respective meanings:
"Annual Director Award Date" means, for each year beginning on or after the
IPO Closing Date, the first business day of the month next succeeding the date
upon which the annual meeting of stockholders of the Company is held in such
year.
"Authorized Officer" means the Chairman of the Board or the Chief Executive
Officer of the Company (or any other senior officer of the Company to whom
either of them shall delegate the authority to execute any Award Agreement).
"Award" means an Employee Award, a Director Award or an Independent
Contractor Award.
"Award Agreement" means any Employee Award Agreement, Director Award
Agreement or Independent Contractor Award Agreement.
"Board" means the Board of Directors of the Company.
"Cash Award" means an award denominated in cash.
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"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" means the Compensation Committee of the Board or such other
committee of the Board as is designated by the Board to administer the Plan.
"Common Stock" means the Common Stock, par value $.01 per share, of the
Company.
"Company" means Edge Petroleum Corporation, a Delaware corporation.
"Director" means an individual serving as a member of the Board.
"Director Award" means the grant of a Director Option or Director
Restricted Stock.
"Director Award Agreement" means a written agreement between the Company
and a Participant who is a Nonemployee Director setting forth the terms,
conditions and limitations applicable to a Director Award.
"Director Restricted Stock" means Common Stock granted to Nonemployee
Directors pursuant to the applicable terms, conditions and limitations specified
in paragraph 9(b) hereof.
"Disability" means, with respect to a Nonemployee Director, the inability
to perform the duties of a Director for a continuous period of more than three
months by reason of any medically determinable physical or mental impairment.
"Dividend Equivalents" means, with respect to shares of Restricted Stock
that are to be issued at the end of the Restriction Period, an amount equal to
all dividends and other distributions (or the economic equivalent thereof) that
are payable to stockholders of record during the Restriction Period on a like
number of shares of Common Stock.
"Employee" means an employee of the Company or any of its Subsidiaries and
an individual who has agreed to become an Employee of the Company or any of its
Subsidiaries and actually becomes such an Employee within the following six
months.
"Employee Award" means the grant of any Option, SAR, Stock Award, Cash
Award or Performance Award, whether granted singly, in combination or in tandem,
to a Participant who is an Employee pursuant to such applicable terms,
conditions and limitations as the Committee may establish in order to fulfill
the objectives of the Plan.
"Employee Award Agreement" means a written agreement between the Company
and a Participant who is an Employee setting forth the terms, conditions and
limitations applicable to an Employee Award.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time.
"Fair Market Value" of a share of Common Stock means, as of a particular
date, (i) if shares of Common Stock are listed on a national securities
exchange, the mean between the highest and lowest sales price per share of
Common Stock on the consolidated transaction reporting system for the principal
national securities exchange on which shares of Common Stock are listed on that
date, or, if there shall have been no such sale so reported on that date, on the
last preceding date on which such a sale was so reported, (ii) if shares of
Common Stock are not so listed but are quoted on the Nasdaq National Market, the
mean between the highest and lowest sales price per share of Common Stock
reported by the Nasdaq National Market on that date, or, if there shall have
been no such sale so reported on that date, on the last preceding date on which
such a sale was so reported, (iii) if the Common Stock is not so listed or
quoted, the mean between the closing bid and asked price on that date, or, if
there are no quotations available for such date, on the last preceding date on
which such quotations shall be available, as reported by the Nasdaq Stock
Market, or, if not reported by the Nasdaq Stock Market, by the National
Quotation Bureau Incorporated or (iv) if shares of Common Stock are not publicly
traded, the most recent value determined by an independent appraiser appointed
by the Company for such purpose.
"Incentive Option" means an Option that is intended to comply with the
requirements set forth in Section 422 of the Code.
"Independent Contractor" means a person providing services to the Company
or any of its Subsidiaries except an Employee or Nonemployee Director.
"Independent Contractor Award" means the grant of any Nonqualified Stock
Option, SAR, Stock Award, Cash Award or Performance Award, whether granted
singly, in combination or in tandem, to a Participant who is an Independent
Contractor pursuant to such applicable terms, conditions and limitations as the
Committee may establish in order to fulfill the objectives of the Plan.
"Independent Contractor Award Agreement" means a written agreement between
the Company and a Participant who is an Independent Contractor setting forth the
terms, conditions and limitations applicable to an Independent Contractor Award.
"IPO" means the first time a registration statement filed under the
Securities Act of 1933 and respecting an underwritten primary offering by the
Company of shares of Common Stock is declared effective under that Act and the
shares registered by that registration statement are issued and sold by the
Company (otherwise than pursuant to the exercise of any overallotment option).
"IPO Closing Date" means the date on which the Company first receives
payment for the shares of Common Stock it sells in the IPO.
"Nonemployee Director" has the meaning set forth in paragraph 4(b) hereof.
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"Nonqualified Stock Option" means an Option that is not an Incentive
Option.
"Option" means a right to purchase a specified number of shares of Common
Stock at a specified price.
"Participant" means an Employee, Director or Independent Contractor to whom
an Award has been made under this Plan.
"Performance Award" means an award made pursuant to this Plan to a
Participant who is an Employee or Independent Contractor who is subject to the
attainment of one or more Performance Goals.
"Performance Goal" means a standard established by the Committee, to
determine in whole or in part whether a Performance Award shall be earned.
"Restricted Stock" means any Common Stock that is restricted or subject to
forfeiture provisions.
"Restriction Period" means a period of time beginning as of the date upon
which an Award of Restricted Stock is made pursuant to this Plan and ending as
of the date upon which the Common Stock subject to such Award is no longer
restricted or subject to forfeiture provisions.
"Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act, or any
successor rule.
"SAR" means a right to receive a payment, in cash or Common Stock, equal to
the excess of the Fair Market Value or other specified valuation of a specified
number of shares of Common Stock on the date the right is exercised over a
specified strike price, in each case, as determined by the Committee.
"Stock Award" means an award in the form of shares of Common Stock or units
denominated in shares of Common Stock.
"Subsidiary" means (i) in the case of a corporation, any corporation of
which the Company directly or indirectly owns shares representing more than 50%
of the combined voting power of the shares of all classes or series of capital
stock of such corporation which have the right to vote generally on matters
submitted to a vote of the stockholders of such corporation and (ii) in the case
of a partnership or other business entity not organized as a corporation, any
such business entity of which the Company directly or indirectly owns more than
50% of the voting, capital or profits interests (whether in the form of
partnership interests, membership interests or otherwise).
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4. Eligibility.
(a) Employees. Key Employees eligible for Employee Awards under this Plan
are those who hold positions of responsibility and whose performance, in the
judgment of the Committee, can have a significant effect on the success of the
Company and its Subsidiaries, including those individuals who are expected to
become Employees within six months.
(b) Directors. Directors eligible for Director Awards under this Plan are
those who are not employees of the Company or any of its Subsidiaries
("Nonemployee Directors").
(c) Independent Contractors. Independent Contractors eligible for
Independent Contractor Awards under this Plan are those Independent Contractors
providing services to, or who will provide services to, the Company or any of
its Subsidiaries.
5. Common Stock Available for Awards. Subject to the provisions of
paragraph 15 hereof, there shall be available for Awards under this Plan granted
wholly or partly in Common Stock (including rights or options that may be
exercised for or settled in Common Stock) an aggregate of 1,000,000 shares of
Common Stock, all of which shall be available for Incentive Options. The number
of shares of Common Stock that are the subject of Awards under this Plan, that
are forfeited or terminated, expire unexercised, are settled in cash in lieu of
Common Stock or in a manner such that all or some of the shares covered by an
Award are not issued to a Participant or are exchanged for Awards that do not
involve Common Stock, shall again immediately become available for Awards
hereunder. The Committee may from time to time adopt and observe such
procedures concerning the counting of shares against the Plan maximum as it may
deem appropriate. The Board and the appropriate officers of the Company shall
from time to time take whatever actions are necessary to file any required
documents with governmental authorities, stock exchanges and transaction
reporting systems to ensure that shares of Common Stock are available for
issuance pursuant to Awards.
6. Administration.
(a) This Plan, as it applies to Participants who are Employees or
Independent Contractors but not with respect to Participants who are
Nonemployee Directors, shall be administered by the Committee. To the extent
required in order for Employee Awards to be exempt from Section 16 of the
Exchange Act by virtue of the provisions of Rule 16b-3, the Committee shall
consist of at least two members of the Board who meet the requirements of the
definition of "non-employee director" set forth in Rule 16b-3(b)(3)(i)
promulgated under the Exchange Act.
(b) Subject to the provisions hereof, insofar as this Plan relates to the
Employee Awards or Independent Contractor Awards, the Committee shall have
full and exclusive power and authority to administer this Plan and to take all
actions that are specifically contemplated hereby or are necessary or
appropriate in connection with the administration hereof. Insofar as this Plan
relates to Employee Awards or Independent Contractor Awards,
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the Committee shall also have full and exclusive power to interpret this Plan
and to adopt such rules, regulations and guidelines for carrying out this Plan
as it may deem necessary or proper, all of which powers shall be exercised in
the best interests of the Company and in keeping with the objectives of this
Plan. The Committee may, in its discretion, provide for the extension of the
exercisability of an Employee Award or Independent Contractor Award,
accelerate the vesting or exercisability of an Employee Award or Independent
Contractor Award, eliminate or make less restrictive any restrictions
contained in an Employee Award or Independent Contractor Award, waive any
restriction or other provision of this Plan (insofar as such provision relates
to Employee Awards or to Independent Contractor Awards) or an Employee Award
or Independent Contractor Award or otherwise amend or modify an Employee Award
or Independent Contractor Award in any manner that is either (i) not adverse
to the Participant to whom such Employee Award or Independent Contractor Award
was granted or (ii) consented to by such Participant. The Committee may make
an award to an individual who it expects to become an Employee of the Company
or any of its Subsidiaries within the next six months, with such award being
subject to the individual's actually becoming an Employee within such time
period, and subject to such other terms and conditions as may be established
by the Committee. The Committee may correct any defect or supply any omission
or reconcile any inconsistency in this Plan or in any Employee Award or
Independent Contractor Award in the manner and to the extent the Committee
deems necessary or desirable to further the Plan purposes. Any decision of the
Committee in the interpretation and administration of this Plan shall lie
within its sole and absolute discretion and shall be final, conclusive and
binding on all parties concerned.
(c) No member of the Committee or officer of the Company to whom the
Committee has delegated authority in accordance with the provisions of
paragraph 7 of this Plan shall be liable for anything done or omitted to be
done by him or her, by any member of the Committee or by any officer of the
Company in connection with the performance of any duties under this Plan,
except for his or her own willful misconduct or as expressly provided by
statute.
7. Delegation of Authority. The Committee may delegate to the Chief
Executive Officer and to other senior officers of the Company its duties under
this Plan pursuant to such conditions or limitations as the Committee may
establish, except that the Committee may not delegate to any person the
authority to grant Awards to, or take other action with respect to, Participants
who are subject to Section 16 of the Exchange Act.
8. Employee and Independent Contractor Awards.
(a) The Committee shall determine the type or types of Employee Awards to
be made under this Plan and shall designate from time to time the Employees
who are to be the recipients of such Awards. Each Employee Award may be
embodied in an Employee Award Agreement, which shall contain such terms,
conditions and limitations as shall be determined by the Committee in its sole
discretion and shall be signed by the Participant to whom the Employee Award
is made and by an Authorized Officer for and on behalf of the Company.
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Employee Awards may consist of those listed in this paragraph 8(a) hereof and
may be granted singly, in combination or in tandem. Employee Awards may also
be made in combination or in tandem with, in replacement of, or as
alternatives to, grants or rights under this Plan or any other employee plan
of the Company or any of its Subsidiaries, including the plan of any acquired
entity. An Employee Award may provide for the grant or issuance of additional,
replacement or alternative Employee Awards upon the occurrence of specified
events, including the exercise of the original Employee Award granted to a
Participant. All or part of an Employee Award may be subject to conditions
established by the Committee, which may include, but are not limited to,
continuous service with the Company and its Subsidiaries, achievement of
specific business objectives, increases in specified indices, attainment of
specified growth rates and other comparable measurements of performance. Upon
the termination of employment by a Participant who is an Employee, any
unexercised, deferred, unvested or unpaid Employee Awards shall be treated as
set forth in the applicable Employee Award Agreement.
(i) Stock Option. An Employee Award may be in the form of an Option. An
Option awarded pursuant to this Plan may consist of an Incentive Option or a
Nonqualified Option. The price at which shares of Common Stock may be
purchased upon the exercise of an Incentive Option shall be not less than
the Fair Market Value of the Common Stock on the date of grant. The price at
which shares of Common Stock may be purchased upon the exercise of a
Nonqualified Option shall be not less than the Fair Market Value of the
Common Stock on the date of grant. Subject to the foregoing provisions, the
terms, conditions and limitations applicable to any Options awarded pursuant
to this Plan, including the term of any Options and the date or dates upon
which they become exercisable, shall be determined by the Committee.
(ii) Stock Appreciation Right. An Employee Award may be in the form of an
SAR. The terms, conditions and limitations applicable to any SARs awarded
pursuant to this Plan, including the term of any SARs and the date or dates
upon which they become exercisable, shall be determined by the Committee.
(iii) Stock Award. An Employee Award may be in the form of a Stock
Award. The terms, conditions and limitations applicable to any Stock Awards
granted pursuant to this Plan shall be determined by the Committee.
(iv) Cash Award. An Employee Award may be in the form of a Cash Award.
The terms, conditions and limitations applicable to any Cash Awards granted
pursuant to this Plan shall be determined by the Committee.
(v) Performance Award. Without limiting the type or number of Employee
Awards that may be made under the other provisions of this Plan, an Employee
Award may be in the form of a Performance Award. A Performance Award shall
be paid, vested or otherwise deliverable solely on account of the
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attainment of one or more pre-established, objective Performance Goals
established by the Committee prior to the earlier to occur of (x) 90 days
after the commencement of the period of service to which the Performance
Goal relates and (y) the lapse of 25% of the period of service (as scheduled
in good faith at the time the goal is established), and in any event while
the outcome is substantially uncertain. A Performance Goal is objective if a
third party having knowledge of the relevant facts could determine whether
the goal is met. Such a Performance Goal may be based on one or more
business criteria that apply to the individual, one or more business units
of the Company, or the Company as a whole, and may include one or more of
the following: increased revenue, net income, stock price, market share,
earnings per share, return on equity, return on assets or decrease in costs.
Unless otherwise stated, such a Performance Goal need not be based upon an
increase or positive result under a particular business criterion and could
include, for example, maintaining the status quo or limiting economic losses
(measured, in each case, by reference to specific business criteria). In
interpreting Plan provisions applicable to Performance Goals and Performance
Awards, it is the intent of the Plan to conform with the standards of
Section 162(m) of the Code and Treasury Regulation (S) 1.162-27(e)(2)(i),
and the Committee in establishing such goals and interpreting the Plan shall
be guided by such provisions. Prior to the payment of any compensation based
on the achievement of Performance Goals, the Committee must certify in
writing that applicable Performance Goals and any of the material terms
thereof were, in fact, satisfied. Subject to the foregoing provisions, the
terms, conditions and limitations applicable to any Performance Awards made
pursuant to this Plan shall be determined by the Committee.
(b) Notwithstanding anything to the contrary contained in this Plan, the
following limitations shall apply to any Employee Awards made hereunder:
(i) no Participant may be granted, during any one-year period, Employee
Awards consisting of Options or SARs that are exercisable for more than
135,000 shares of Common Stock;
(ii) no Participant may be granted, during any one-year period, Stock
Awards covering or relating to more than 135,000 shares of Common Stock (the
limitation set forth in this clause (ii), together with the limitation set
forth in clause (i) above, being hereinafter collectively referred to as the
"Stock Based Awards Limitations"); and
(iii) no Participant may be granted Employee Awards consisting of cash
or in any other form permitted under this Plan (other than Employee Awards
consisting of Options or SARs or otherwise consisting of shares of Common
Stock or units denominated in such shares) in respect of any one-year period
having a value determined on the date of grant in excess of $500,000.
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(c) The Committee shall have the sole responsibility and authority to
determine the type or types of Independent Contractor Awards to be made under
this Plan and may make any such Awards as could be made to an Employee, other
than Incentive Options; provided that the limitations described in paragraph
8(b) shall be inapplicable to Independent Contractor Awards.
9. Director Awards. Each Nonemployee Director of the Company shall be
granted Director Awards in accordance with this paragraph 9 and subject to the
applicable terms, conditions and limitations set forth in this Plan and the
applicable Director Award Agreement. Notwithstanding anything to the contrary
contained herein, Director Awards shall not be made in any year in which a
sufficient number of shares of Common Stock are not available to make such
Awards under this Plan.
(a) Director Options. On the IPO Closing Date, each Nonemployee Director
shall be automatically awarded a Director Option number of shares of Common
Stock determined in the following table:
Years of Service With the Number of Shares
Company or its Predecessors Subject to Option
--------------------------- -----------------
4 years or greater 8,000
3 to 4 years 6,000
2 to 3 years 4,000
2 years or less 2,000
Effective upon the IPO Closing Date, on the date of his or her first
appointment or election to the Board of Directors, a Nonemployee Director
shall automatically be granted a Director Option that provides for the
purchase of 5,000 shares of Common Stock. In addition, on each Annual Director
Award Date, each Nonemployee Director shall automatically be granted a
Director Option that provides for the purchase of 3,000 shares of Common
Stock. Each Director Option shall have a term of ten years from the date of
grant, notwithstanding any earlier termination of the status of the holder as
a Nonemployee Director. The purchase price of each share of Common Stock
subject to a Director Option shall be equal to the Fair Market Value of the
Common Stock on the date of grant. All Director Options shall vest and become
exercisable in increments of one-third of the total number of shares of Common
Stock that are subject thereto (rounded up to the nearest whole number) on the
first and second anniversaries of the date of grant and of all remaining
shares of Common Stock that are subject thereto on the third anniversary of
the date of grant. All unvested Director Options shall be forfeited if the
Nonemployee Director resigns as a Director without the consent of a majority
of the other Directors.
Any Award of Director Options shall be embodied in a Director Award
Agreement, which shall contain the terms, conditions and limitations set forth
above and shall be signed
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by the Participant to whom the Director Options are granted and by an
Authorized Officer for and on behalf of the Company.
(b) Director Restricted Stock. On the Annual Director Award Date, each
Nonemployee Director who was serving as such on the date immediately preceding
the most recent annual meeting of stockholders, shall automatically be awarded
a number of shares of Restricted Stock, in lieu of one-half of the annual
retainer to be paid to the Nonemployee Director for the preceding twelve
months in cash. A number of shares of Director Restricted Stock (rounded up to
the nearest whole number) having a Fair Market Value equal to 50% of the
annual retainer otherwise to be paid to the Nonemployee Director for the
preceding twelve months shall be awarded.
Any Award of Director Restricted Stock shall be embodied in a Director
Award Agreement, which shall contain the terms, conditions and limitations set
forth above and shall be signed by the Participant to whom the Director
Restricted Stock is granted and by an Authorized Officer for and on behalf of
the Company.
10. Payment of Awards.
(a) General. Payment of Employee Awards or Independent Contractor Awards
may be made in the form of cash or Common Stock, or a combination thereof, and
may include such restrictions as the Committee shall determine, including, in
the case of Common Stock, restrictions on transfer and forfeiture provisions.
If payment of an Employee Award or Independent Contractor Award is made in the
form of Restricted Stock, the applicable Award Agreement relating to such
shares shall specify whether they are to be issued at the beginning or end of
the Restriction Period. In the event that shares of Restricted Stock are to be
issued at the beginning of the Restriction Period, the certificates evidencing
such shares (to the extent that such shares are so evidenced) shall contain
appropriate legends and restrictions that describe the terms and conditions of
the restrictions applicable thereto. In the event that shares of Restricted
Stock are to be issued at the end of the Restricted Period, the right to
receive such shares shall be evidenced by book entry registration or in such
other manner as the Committee may determine.
(b) Deferral. With the approval of the Committee, amounts payable in
respect of Employee Awards or Independent Contractor Awards may be deferred
and paid either in the form of installments or as a lump-sum payment. The
Committee may permit selected Participants to elect to defer payments of some
or all types of Employee Awards or Independent Contractor Awards in accordance
with procedures established by the Committee. Any deferred payment of an
Employee Award or Independent Contractor Award, whether elected by the
Participant or specified by the Award Agreement or by the Committee, may be
forfeited if and to the extent that the Award Agreement so provides.
(c) Dividends and Interest. Rights to dividends or Dividend Equivalents may
be extended to and made part of any Employee Award or Independent Contractor
Award
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<PAGE>
consisting of shares of Common Stock or units denominated in shares of Common
Stock, subject to such terms, conditions and restrictions as the Committee may
establish. The Committee may also establish rules and procedures for the
crediting of interest on deferred cash payments and Dividend Equivalents for
Employee Awards or Independent Contractor Awards consisting of shares of
Common Stock or units denominated in shares of Common Stock.
(d) Substitution of Awards. At the discretion of the Committee, a
Participant who is an Employee or Independent Contractor may be offered an
election to substitute an Employee Award or Independent Contractor Award for
another Employee Award or Independent Contractor Award or Employee Awards or
Independent Contractor Awards of the same or different type.
11. Stock Option Exercise. The price at which shares of Common Stock may
be purchased under an Option shall be paid in full at the time of exercise in
cash or, if elected by the optionee, the optionee may purchase such shares by
means of tendering Common Stock or surrendering another Award, including
Restricted Stock or Director Restricted Stock, valued at Fair Market Value on
the date of exercise, or any combination thereof. The Committee shall determine
acceptable methods for Participants who are Employees or Independent Contractors
to tenderCommon Stock or other Employee Awards or Independent Contractor Awards;
provided that any Common Stock that is or was the subject of an Employee Award
or Independent Contractor Award may be so tendered only if it has been held by
the Participant for six months. The Committee may provide for procedures to
permit the exercise or purchase of such Awards by use of the proceeds to be
received from the sale of Common Stock issuable pursuant to an Employee Award or
Independent Contractor Award. Unless otherwise provided in the applicable Award
Agreement, in the event shares of Restricted Stock are tendered as consideration
for the exercise of an Option, a number of the shares issued upon the exercise
of the Option, equal to the number of shares of Restricted Stock or Director
Restricted Stock used as consideration therefor, shall be subject to the same
restrictions as the Restricted Stock or Director Restricted Stock so submitted
as well as any additional restrictions that may be imposed by the Committee.
12. Taxes. The Company shall have the right to deduct applicable taxes
from any Employee Award payment and withhold, at the time of delivery or vesting
of cash or shares of Common Stock under this Plan, an appropriate amount of cash
or number of shares of Common Stock or a combination thereof for payment of
taxes required by law or to take such other action as may be necessary in the
opinion of the Company to satisfy all obligations for withholding of such taxes.
The Committee may also permit withholding to be satisfied by the transfer to the
Company of shares of Common Stock theretofore owned by the holder of the
Employee Award with respect to which withholding is required. If shares of
Common Stock are used to satisfy tax withholding, such shares shall be valued
based on the Fair Market Value when the tax withholding is required to be made.
The Committee may provide for loans, on either a short term or demand basis,
from the Company to a Participant who is an Employee or Independent Contractor
to permit the payment of taxes required by law.
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13. Amendment, Modification, Suspension or Termination. The Board may
amend, modify, suspend or terminate this Plan for the purpose of meeting or
addressing any changes in legal requirements or for any other purpose permitted
by law, except that (i) no amendment or alteration that would adversely affect
the rights of any Participant under any Award previously granted to such
Participant shall be made without the consent of such Participant and (ii) no
amendment or alteration shall be effective prior to its approval by the
stockholders of the Company to the extent such approval is then required
pursuant to Rule 16b-3 in order to preserve the applicability of any exemption
provided by such rule to any Award then outstanding (unless the holder of such
Award consents) or to the extent stockholder approval is otherwise required by
applicable legal requirements.
14. Assignability. Unless otherwise determined by the Committee and
provided in the Award Agreement, no Award or any other benefit under this Plan
constituting a derivative security within the meaning of Rule 16a-1(c) under the
Exchange Act shall be assignable or otherwise transferable except by will or the
laws of descent and distribution or pursuant to a qualified domestic relations
order as defined by the Code or Title I of the Employee Retirement Income
Security Act, or the rules thereunder. The Committee may prescribe and include
in applicable Award Agreements other restrictions on transfer. Any attempted
assignment of an Award or any other benefit under this Plan in violation of this
paragraph 14 shall be null and void.
15. Adjustments.
(a) The existence of outstanding Awards shall not affect in any manner the
right or power of the Company or its stockholders to make or authorize any or
all adjustments, recapitalizations, reorganizations or other changes in the
capital stock of the Company or its business or any merger or consolidation of
the Company, or any issue of bonds, debentures, preferred or prior preference
stock (whether or not such issue is prior to, on a parity with or junior to
the Common Stock) or the dissolution or liquidation of the Company, or any
sale or transfer of all or any part of its assets or business, or any other
corporate act or proceeding of any kind, whether or not of a character similar
to that of the acts or proceedings enumerated above.
(b) In the event of any subdivision or consolidation of outstanding shares
of Common Stock, declaration of a dividend payable in shares of Common Stock
or other stock split, then, except with respect to the Existing Options, (i)
the number of shares of Common Stock reserved under this Plan, (ii) the number
of shares of Common Stock covered by outstanding Awards in the form of Common
Stock or units denominated in Common Stock, (iii) the exercise or other price
in respect of such Awards, (iv) the appropriate Fair Market Value and other
price determinations for such Awards, (v) the number of shares of Common Stock
covered by Director Options automatically granted pursuant to paragraph 9(a)
hereof and (vi) the Stock Based Awards Limitations shall each be
proportionately adjusted by the Board to reflect such transaction. In the
event of any other recapitalization or capital reorganization of the Company,
any consolidation or merger of the Company with another corporation or entity,
the adoption by the Company of any plan of exchange affecting the
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Common Stock or any distribution to holders of Common Stock of securities or
property (other than normal cash dividends or dividends payable in Common
Stock), the Board shall make appropriate adjustments to (i) the number of
shares of Common Stock covered by Awards in the form of Common Stock or units
denominated in Common Stock, (ii) the exercise or other price in respect of
such Awards, (iii) the appropriate Fair Market Value and other price
determinations for such Awards, (iv) the number of shares of Common Stock
covered by Director Options automatically granted pursuant to paragraph 9(a)
hereof and (v) the Stock Based Awards Limitations to give effect to such
transaction shall each be proportionately adjusted by the Board to reflect
such transaction; provided that such adjustments shall only be such as are
necessary to maintain the proportionate interest of the holders of the Awards
and preserve, without exceeding, the value of such Awards. In the event of a
corporate merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation, the Board shall be authorized to issue or
assume Awards by means of substitution of new Awards, as appropriate, for
previously issued Awards or to assume previously issued Awards as part of such
adjustment.
16. Restrictions. No Common Stock or other form of payment shall be
issued with respect to any Award unless the Company shall be satisfied based on
the advice of its counsel that such issuance will be in compliance with
applicable federal and state securities laws. It is the intent of the Company
that grants of Awards under this Plan comply with Rule 16b-3 with respect to
persons subject to Section 16 of the Exchange Act unless otherwise provided
herein or in an Award Agreement, that any ambiguities or inconsistencies in the
construction of such an Award or this Plan be interpreted to give effect to such
intention. Certificates evidencing shares of Common Stock delivered under this
Plan (to the extent that such shares are so evidenced) may be subject to such
stop transfer orders and other restrictions as the Committee may deem advisable
under the rules, regulations and other requirements of the Securities and
Exchange Commission, any securities exchange or transaction reporting system
upon which the Common Stock is then listed or to which it is admitted for
quotation and any applicable federal or state securities law. The Committee may
cause a legend or legends to be placed upon such certificates (if any) to make
appropriate reference to such restrictions.
17. Unfunded Plan. Insofar as it provides for Awards of cash, Common
Stock or rights thereto, this Plan shall be unfunded. Although bookkeeping
accounts may be established with respect to Participants who are entitled to
cash, Common Stock or rights thereto under this Plan, any such accounts shall be
used merely as a bookkeeping convenience. The Company shall not be required to
segregate any assets that may at any time be represented by cash, Common Stock
or rights thereto, nor shall this Plan be construed as providing for such
segregation, nor shall the Company, the Board or the Committee be deemed to be a
trustee of any cash, Common Stock or rights thereto to be granted under this
Plan. Any liability or obligation of the Company to any Participant with
respect to an Award of cash, Common Stock or rights thereto under this Plan
shall be based solely upon any contractual obligations that may be created by
this Plan and any Award Agreement, and no such liability or obligation of the
Company shall be deemed to be secured by any pledge or other encumbrance on any
property of the Company. Neither the Company nor the Board
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nor the Committee shall be required to give any security or bond for the
performance of any obligation that may be created by this Plan.
18. Governing Law. This Plan and all determinations made and actions
taken pursuant hereto, to the extent not otherwise governed by mandatory
provisions of the Code or the securities laws of the United States, shall be
governed by and construed in accordance with the laws of the State of Delaware.
19. Effectiveness. The Plan shall be effective as set forth herein as of
the IPO Closing Date (the "Amendment Effective Date").
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EXHIBIT 10.10
EMPLOYMENT AGREEMENT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
1. Employment Period 1
2. Terms of Employment 1
(a) Position and Duties 1
(b) Compensation 2
(i) Base Salary 2
(ii) Annual Bonus 2
(iii) Incentive, Savings and Retirement Plans 2
(iv) Welfare Benefit Plans 2
(v) Expenses 3
(vi) Vacation 3
(vii) Stock Option Grants 3
3. Termination of Employment 3
(a) Death or Disability 3
(b) Cause 4
(c) Good Reason 4
(d) Notice of Termination 4
(e) Date of Termination 5
4. Obligations of the Company upon Termination 5
(a) Disability or Good Reason; Other than for Cause or Death 5
(b) Death 6
(c) Cause; Other than for Disability or Good Reason 6
5. Non-exclusivity of Rights 6
6. Full Settlement 6
7. Confidential Information 6
8. Change of Control; Potential Change of Control 7
9. Covenant Not to Compete 11
10. Successors 13
11. Miscellaneous 13
</TABLE>
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EMPLOYMENT AGREEMENT
This AGREEMENT (the "Agreement") by and between Edge Petroleum
Corporation, a Delaware corporation (the "Company"), and Michael G. Long (the
"Executive"), dated as of the 19th day of December, 1996 and to be effective as
of the Agreement Effective Date (as defined in Section 11(h) hereof).
In entering into this Agreement, the Board of Directors of the Company
(the "Board") desires to provide the Executive with incentives to serve the
Company as one of its executives.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Employment Period. As of the Agreement Effective Date
(hereinafter defined), the Company hereby agrees to employ the Executive and the
Executive hereby agrees to accept employment with the Company, in accordance
with, and subject to, the terms and provisions of this Agreement, for the period
(the "Employment Period") commencing on the Agreement Effective Date and ending
on the second anniversary of the Agreement Effective Date; provided, on the
second anniversary of the Agreement Effective Date and each second anniversary
of the Agreement Effective Date thereafter, the Employment Period shall
automatically renew for an additional two years without any further action by
either the Company or the Executive.
2. Terms of Employment.
(a) Position and Duties.
(i) During the Employment Period, (A) the Executive's position (including
status, offices, titles and reporting requirements), authority, duties and
responsibilities shall be as the Company's chief financial officer and (B) the
Executive's services shall be performed in the county where the Executive was
employed on the Agreement Effective Date.
(ii) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive agrees to
devote his full attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the
Executive's reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period, it shall not be a violation of
this Agreement for the Executive to (A) serve on civic or charitable boards or
committees, (B) deliver lectures or fulfill speaking engagements and (C)
manage personal investments, so long as such activities do not interfere with
the performance of the Executive's responsibilities as an employee of the
Company in accordance with this Agreement.
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(b) Compensation.
(i) Base Salary. During the Employment Period, the Executive shall receive
an annual base salary equal to $125,000 ("Annual Base Salary"), which shall be
paid on a semimonthly basis. During the Employment Period, the Annual Base
Salary shall be reviewed on June 30, 1997 and in December 1998 and thereafter
annually. Executive's salary shall be increased to $150,000 as of July 1, 1997
if (i) the IPO is successfully implemented, (ii) an investor relations system
has been established and is operational, (iii) there has been designed and
implemented the first version of a financial reporting system and reports,
(iv) a price/risk management policy has been developed and adopted by the
Company and a comprehensive employee benefits plan has been implemented,
including a Section 401(k) Plan. Any increase in Annual Base Salary shall not
serve to limit or reduce any other obligation to the Executive under this
Agreement. Annual Base Salary shall not be reduced after any such increase and
the term "Annual Base Salary," as utilized in this Agreement, shall refer to
Annual Base Salary as so increased. As used in this Agreement, the term
"affiliated companies" shall include, when used with reference to the Company,
any company controlled by, controlling or under common control with the
Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall
be awarded, for each fiscal year or portion thereof during the Employment
Period, an Annual Bonus (the "Annual Bonus"), in cash and stock determined
based on the Company's growth in each of the Company's reserves per share and
audited annual net cash flow per share relative to Company's reserves and the
audited net cash flow of the Company for the prior calendar year with the
maximum Annual Bonus to be for the period up to and including December 31,
1997 and for calendar years thereafter to be up to 50% of Annual Base Salary
(for the period ending December 31, 1997 to be calculated on the basis of
$137,500 total Base Salary for such period), with a maximum payable if the
Company achieves the top 25% of the range of its annual performance goals
established at the outset of the year, and in each case any Annual Bonus shall
be paid approximately 25% in cash and 75% in shares of Company Common Stock.
(iii) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all incentive,
savings and retirement plans that are tax-qualified under Section 401(a) of
the Internal Revenue Code of 1986, as amended ("Code"), and all plans that are
supplemental to any such tax-qualified plans, in each case to the extent that
such plans are applicable generally to other executives of the Company and its
affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive
and/or the Executive's family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company or its affiliated
companies (including, without limitation, medical,
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prescription, dental, vision, disability, salary continuance, group life and
supplemental group life, accidental death and travel accident insurance plans
and programs) to the extent applicable generally to other executives of the
Company or its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred
by the Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies.
(vi) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation of two weeks per year beginning in 1997 and each
period of December 24 to January 2.
(vii) Stock Option Grants. Upon consummation of the IPO, Executive shall
be granted stock options on .5 of 1% (one-half of one percent), determined on
a fully diluted basis (excluding any overallotment option to the extent not
exercised at the initial closing date of the IPO, restricted stock or stock
options granted in connection with the IPO), shares of Company common stock,
par value $.01 per share ("Common Stock"), at an exercise price equal to the
IPO Price ("Initial Stock Option"). The Initial Stock Option has a term of 10
years and is exercisable in cumulative annual increments of one-fifth of the
total number of shares subject to the option, beginning on the first
anniversary of the Date of Grant. "IPO" shall mean the initial public offering
of Common Stock pursuant to which the Company receives payment in cash for
shares of its Common Stock that it sells pursuant to a registration statement
on Form S-1 filed and declared effective under the Securities Act of 1933.
"IPO Price" shall mean the per share price to the public for the Common Stock
sold in the IPO, as set forth on the cover page of the final prospectus for
the IPO.
3. Termination of Employment.
(a) Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 11(d) of this Agreement of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company shall
terminate effective on the 30th day after receipt of such notice by the
Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 120 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the
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Company or its insurers and acceptable to the Executive or the Executive's legal
representative (such agreement as to acceptability not to be withheld
unreasonably).
(b) Cause. The Company may terminate the Executive's employment
during the Employment Period for Cause. For purposes of this Agreement, "Cause"
shall mean for the Company's termination of the Executive's employment means:
(i) the Executive's final conviction of a felony crime that enriched the
Executive at the expense of the Company; or (ii) the Executive's continuing
failure to substantially perform his duties and responsibilities hereunder
(except by reason of the Executive's incapacity due to physical or mental
illness or injury) for a period of 45 days after the Company has delivered to
the Executive a written demand for substantial performance hereunder ; or (iii)
the Executive's serious or willful misconduct or a serious or willful neglect of
duties which, in either case, has resulted, or in all probability is likely to
result, in material economic damage to the Company.
(c) Good Reason. The Executive's employment may be terminated during
the Employment Period by the Executive for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean the occurrence of one of the following but
only after the occurrence of a Change of Control.
(i) any material failure by the Company to substantially comply with
any of the provisions of this Agreement, other than a failure which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive;
(ii) the Company's requiring the Executive to be based at any location
other than that described in Section 2(a)(i)(B) hereof;
(iii) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement;
(iv) any failure by the Company to comply with and satisfy the
requirements of Section 10 of this Agreement, provided that (A) the successor
described in Section 10(c) has received, at least 10 days prior to the Date of
Termination (as defined in subparagraph (e) below), written notice from the
Company or the Executive of the requirements of such provision and (B) such
failure to be in compliance and satisfy the requirements of Section 10 shall
continue as of the Date of Termination; or
(d) Notice of Termination. Any termination by the Company for Cause,
or by the Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 11(d) of
this Agreement. The failure by the Executive or the Company to set forth in the
Notice of Termination any fact or circumstance which contributes to a showing of
Good Reason or Cause shall not waive any right of the Executive or the Company
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hereunder or preclude the Executive or the Company from asserting such fact or
circumstance in enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. For purposes of this Agreement, the term
"Date of Termination" means (i) if the Executive's employment is terminated by
the Company for Cause, or by the Executive for Good Reason, the date of receipt
of the Notice of Termination or any later date specified therein, as the case
may be, (ii) if the Executive's employment is terminated by the Company other
than for Cause or Disability, the Date of Termination shall be the date on which
the Company notifies the Executive of such termination and (iii) if the
Executive's employment is terminated by reason of death or Disability, the Date
of Termination shall be the date of death of the Executive or the Disability
Effective Date, as the case may be.
4. Obligations of the Company upon Termination.
(a) Disability or Good Reason; Other than for Cause or Death. If,
during the Employment Period, the Company shall terminate the Executive's
employment other than for Cause, including a termination by reason of Disability
but not by reason of death, or the Executive shall terminate employment for Good
Reason, or by reason of death:
(i) the Company shall pay or provide to or in respect of the Executive the
following amounts and benefits:
A. in a lump sum in cash, within 10 days after the Date of
Termination, an amount equal to the sum of (1) the Executive's Annual Base
Salary through the Date of Termination, (2) any deferred compensation
earned and vested by the Executive (together with any accrued interest or
earnings thereon) and (3) any compensation for accrued, earned and unused
vacation time for which the Executive is eligible in accordance with the
practices of the Company, in each case to the extent not theretofore paid
(the sum of the amounts described in clauses (1), (2) and (3) shall be
hereinafter referred to as the "Accrued Obligation");
B. in a lump sum in cash, undiscounted, within 10 days after the Date
of Termination, an amount equal to the Annual Base Salary;
C. effective as of the Date of Termination, immediate vesting and
exercisability of, and termination of any restrictions on sale or transfer
(other than any such restriction arising by operation of law) with respect
to, each and every stock option, restricted stock award, restricted stock
unit award and other equity-based award and performance award (each, a
"Compensatory Award") that is outstanding as of a time immediately prior to
the Date of Termination;
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(b) Death. If the Executive's employment is terminated by reason of
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than (i) the payment of Accrued Obligations (which
shall be paid to the Executive's estate or beneficiary, as applicable, in a lump
sum in cash within 30 days of the Date of Termination), and (ii) the payment of
an amount equal to one-half of his Annual Salary in a cash lump sum within 30
days of the Date of Termination.
(c) Cause; Other than for Disability or Good Reason. If the
Executive's employment shall be terminated for Cause during the Employment
Period, this Agreement shall terminate without further obligations to the
Executive other than for Accrued Obligations. If the Executive terminates
employment during the Employment Period, excluding a termination for any of
Disability or Good Reason, this Agreement shall terminate without further
obligations to the Executive, other than for the payment of Accrued Obligations.
In such case, all Accrued Obligations shall be paid to the Executive in a lump
sum in cash within 30 days of the Date of Termination.
5. Non-exclusivity of Rights. Except as provided in Section 4 of
this Agreement, nothing in this Agreement shall prevent or limit the Executive's
continuing or future participation in any plan, program, policy or practice
provided by the Company or any of its affiliated companies and for which the
Executive may qualify, nor shall anything herein limit or otherwise affect such
rights as the Executive may have under any contract or agreement with the
Company or any of its affiliated companies. Amounts which are vested benefits
or which the Executive is otherwise entitled to receive under any plan, policy,
practice or program of or any contract or agreement with the Company or any of
its affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract or
agreement except as such plan, policy, practice or program is superseded by this
Agreement.
6. Full Settlement. The Company's obligation to make payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any setoff, counterclaim, recoupment,
defense, mitigation or other claim, right or action which the Company may have
against the Executive or others.
7. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement) (referred to herein as "Confidential Information"). After
termination of the Executive's employment with the Company, the Executive shall
not, without the prior written consent of the Company or as may otherwise be
required by law or legal process, communicate or divulge any such information,
knowledge or data
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to anyone other than the Company and those designated by it. In no event shall
an asserted violation of the provisions of this Section 7 constitute a basis for
deferring or withholding any amounts otherwise payable to the Executive under
this Agreement. Also, within 14 days of the termination of Executive's
employment for any reason, Executive shall return to Company all documents and
other tangible items of or containing Company information which are in
Executive's possession, custody or control.
8. Change of Control; Potential Change of Control.
As used in this Agreement, the terms set forth below shall have the
following respective meanings:
"Affiliate" shall have the meaning ascribed to such term in Rule 12b-2
of the General Rules and Regulations under the Exchange Act, as in effect on the
date of this Agreement.
"Associate" shall mean, with reference to any Person, (a) any
corporation, firm, partnership, association, unincorporated organization or
other entity (other than the Company or a subsidiary of the Company) of which
such Person is an officer or general partner (or officer or general partner of a
general partner) or is, directly or indirectly, the Beneficial Owner of 10% or
more of any class of equity securities, (b) any trust or other estate in which
such Person has a substantial beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity and (c) any relative or
spouse of such Person, or any relative of such spouse, who has the same home as
such Person.
"Beneficial Owner" shall mean, with reference to any securities, any
Person if:
(a) such Person or any of such Person's Affiliates and Associates, directly
or indirectly, is the "beneficial owner" of (as determined pursuant to Rule
13d-3 of the General Rules and Regulations under the Exchange Act, as in
effect on the date of this Agreement) such securities or otherwise has the
right to vote or dispose of such securities, including pursuant to any
agreement, arrangement or understanding (whether or not in writing); provided,
however, that a Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," any security under this subsection (a) as a result of an
agreement, arrangement or understanding to vote such security if such
agreement, arrangement or understanding: (i) arises solely from a revocable
proxy or consent given in response to a public (i.e., not including a
solicitation exempted by Rule 14a-2(b)(2) of the General Rules and Regulations
under the Exchange Act) proxy or consent solicitation made pursuant to, and in
accordance with, the applicable provisions of the General Rules and
Regulations under the Exchange Act and (ii) is not then reportable by such
Person on Schedule 13D under the Exchange Act (or any comparable or successor
report);
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(b) such Person or any of such Person's Affiliates and Associates, directly
or indirectly, has the right or obligation to acquire such securities (whether
such right or obligation is exercisable or effective immediately or only after
the passage of time or the occurrence of an event) pursuant to any agreement,
arrangement or understanding (whether or not in writing) or upon the exercise
of conversion rights, exchange rights, other rights, warrants or options, or
otherwise; provided, however, that a Person shall not be deemed the Beneficial
Owner of, or to "beneficially own," (i) securities tendered pursuant to a
tender or exchange offer made by such Person or any of such Person's
Affiliates or Associates until such tendered securities are accepted for
purchase or exchange or (ii) securities issuable upon exercise of Exempt
Rights; or
(c) such Person or any of such Person's Affiliates or Associates (i) has
any agreement, arrangement or understanding (whether or not in writing) with
any other Person (or any Affiliate or Associate thereof) that beneficially
owns such securities for the purpose of acquiring, holding, voting (except as
set forth in the proviso to subsection (a) of this definition) or disposing of
such securities or (ii) is a member of a group (as that term is used in Rule
13d-5(b) of the General Rules and Regulations under the Exchange Act) that
includes any other Person that beneficially owns such securities;
provided, however, that nothing in this definition shall cause a Person engaged
in business as an underwriter of securities to be the Beneficial Owner of, or to
"beneficially own," any securities acquired through such Person's participation
in good faith in a firm commitment underwriting until the expiration of 40 days
after the date of such acquisition. For purposes hereof, "voting" a security
shall include voting, granting a proxy, consenting or making a request or demand
relating to corporate action (including, without limitation, a demand for a
stockholder list, to call a stockholder meeting or to inspect corporate books
and records) or otherwise giving an authorization (within the meaning of Section
14(a) of the Exchange Act) in respect of such security.
The terms "beneficially own" and "beneficially owning" shall have
meanings that are correlative to this definition of the term "Beneficial Owner."
"Change of Control" shall mean any of the following occurring on or
after the Agreement Effective Date except that the transactions contemplated by
the Combination Agreement dated as of December 3, 1996, by and among the
Company, Edge Petroleum Corporation, a Texas corporation, Edge Mergeco, Inc.,
Gulfedge Limited Partnership, Edge Group II Limited Partnership and Edge Group
Partnership shall not constitute a Change of Control:
(a) any Person (other than an Exempt Person) shall become the Beneficial
Owner of [___%] or more of the shares of Common Stock then outstanding or
[___%] or more of the combined voting power of the Voting Stock of the Company
then outstanding; provided, however, that no Change of Control shall be deemed
to occur for purposes of this subsection (a) if such Person shall become a
Beneficial Owner of [___%] or more of the shares of
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Common Stock or [___%] or more of the combined voting power of the Voting
Stock of the Company solely as a result of (i) an Exempt Transaction or (ii)
an acquisition by a Person pursuant to a reorganization, merger or
consolidation, if, following such reorganization, merger or consolidation, the
conditions described in clauses (i), (ii) and (iii) of subsection (c) of this
definition are satisfied;
(b) individuals who, as of the Agreement Effective Date, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to the Agreement Effective Date whose election, or
nomination for election by the Company's shareholders, was approved by a vote
of at least a majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of the Incumbent
Board; provided, further, that there shall be excluded, for this purpose, any
such individual whose initial assumption of office occurs as a result of any
actual or threatened election contest that is subject to the provisions of
Rule 14a-11 under the Exchange Act;
(c) approval by the shareholders of the Company of a reorganization, merger
or consolidation, in each case, unless, following such reorganization, merger
or consolidation, (i) more than [___%] of the then outstanding shares of
common stock of the corporation resulting from such reorganization, merger or
consolidation and the combined voting power of the then outstanding Voting
Stock of such corporation beneficially owned, directly or indirectly, by all
or substantially all of the Persons who were the Beneficial Owners of the
outstanding Common Stock immediately prior to such reorganization, merger or
consolidation in substantially the same proportions as their ownership,
immediately prior to such reorganization, merger or consolidation, of the
outstanding Common Stock, (ii) no Person (excluding any Exempt Person or any
Person beneficially owning, immediately prior to such reorganization, merger
or consolidation, directly or indirectly, [___%] or more of the Common Stock
then outstanding or [___%] or more of the combined voting power of the Voting
Stock of the Company then outstanding) beneficially owns, directly or
indirectly, [___%] or more of the then outstanding shares of common stock of
the corporation resulting from such reorganization, merger or consolidation or
the combined voting power of the then outstanding Voting Stock of such
corporation and (iii) at least a majority of the members of the board of
directors of the corporation resulting from such reorganization, merger or
consolidation were members of the Incumbent Board at the time of the execution
of the initial agreement or initial action by the Board providing for such
reorganization, merger or consolidation; or
(d) approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company unless such liquidation or
dissolution is approved as part of a plan of liquidation and dissolution
involving a sale or disposition of all or substantially all of the assets of
the Company to a corporation with respect to which, following such sale or
other disposition, all of the requirements of clauses (ii)(A), (B) and (C) of
this subsection (d)
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are satisfied, or (ii) the sale or other disposition of all or substantially
all of the assets of the Company, other than to a corporation, with respect to
which, following such sale or other disposition, (A) more than [___%] of the
then outstanding shares of common stock of such corporation and the combined
voting power of the Voting Stock of such corporation is then beneficially
owned, directly or indirectly, by all or substantially all of the Persons who
were the Beneficial Owners of the outstanding Common Stock immediately prior
to such sale or other disposition in substantially the same proportion as
their ownership, immediately prior to such sale or other disposition, of the
outstanding Common Stock, (B) no Person (excluding any Exempt Person and any
Person beneficially owning, immediately prior to such sale or other
disposition, directly or indirectly, [___%] or more of the Common Stock then
outstanding or [___%] or more of the combined voting power of the Voting Stock
of the Company then outstanding) beneficially owns, directly or indirectly,
[___%] or more of the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding Voting Stock
of such corporation and (C) at least a majority of the members of the board of
directors of such corporation were members of the Incumbent Board at the time
of the execution of the initial agreement or initial action of the Board
providing for such sale or other disposition of assets of the Company.
The blank percentages in this definition shall be the same as the
correlative percentages in employment contracts between James and John Calaway
and the Company that define Change of Control.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exempt Person" shall mean the Company, any subsidiary of the Company,
any employee benefit plan of the Company or any subsidiary of the Company, and
any Person organized, appointed or established by the Company for or pursuant to
the terms of any such plan.
"Exempt Rights" shall mean any rights to purchase shares of Common
Stock or other Voting Stock of the Company if at the time of the issuance
thereof such rights are not separable from such Common Stock or other Voting
Stock (i.e., are not transferable otherwise than in connection with a transfer
of the underlying Common Stock or other Voting Stock) except upon the occurrence
of a contingency, whether such rights exist as of the Agreement Effective Date
or are thereafter issued by the Company as a dividend on shares of Common Stock
or other Voting Securities or otherwise.
"Exempt Transaction" shall mean an increase in the percentage of the
outstanding shares of Common Stock or the percentage of the combined voting
power of the outstanding Voting Stock of the Company beneficially owned by any
Person solely as a result of a reduction in the number of shares of Common Stock
then outstanding due to the repurchase of Common Stock or Voting Stock by the
Company, unless and until such time as (a) such Person or any Affiliate or
Associate of such Person shall purchase or otherwise become the Beneficial Owner
of additional
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shares of Common Stock constituting 1% or more of the then outstanding shares of
Common Stock or additional Voting Stock representing 1% or more of the combined
voting power of the then outstanding Voting Stock, or (b) any other Person (or
Persons) who is (or collectively are) the Beneficial Owner of shares of Common
Stock constituting 1% or more of the then outstanding shares of Common Stock or
Voting Stock representing 1% or more of the combined voting power of the then
outstanding Voting Stock shall become an Affiliate or Associate of such Person.
"Person" shall mean any individual, firm, corporation, partnership,
association, trust, unincorporated organization or other entity.
"Potential Change of Control" shall mean any of the following
occurring on or after the Agreement Effective Date except that the transactions
contemplated by the Combination Agreement dated as of December 3, 1996, by and
among the Company, Edge Petroleum Corporation, a Texas corporation, Edge
Mergeco, Inc., Gulfedge Limited Partnership, Edge Group II Limited Partnership
and Edge Group Partnership shall not constitute a Potential Change of Control:
(a) the commencement of a tender or exchange offer for the Company's Common
Stock that, if consummated, would result in a Change of Control; or
(b) the Company enters into an agreement which, if consummated, would
constitute a Change of control; or
(c) the commencement of a contested election contest subject to the
provisions of Rule 14a-11 under the Exchange Act; or
(d) the occurrence of any other event that the Company's Board determines
could result in a Change of Control.
"Voting Stock" shall mean, with respect to a corporation, all
securities of such corporation of any class or series that are entitled to vote
generally in the election of directors of such corporation (excluding any class
or series that would be entitled so to vote by reason of the occurrence of any
contingency, so long as such continency has not occurred).
9. Covenant Not to Compete.
(a) Executive recognizes that in each of the highly competitive
businesses in which the Company is engaged, personal contact is of primary
importance in securing new customers and in retaining the accounts and goodwill
of present customers and protecting the business of the Company. The Executive,
therefore, agrees that during the Employment Period and, if the Date of
Termination occurs by reason of the Executive terminating his employment for
reasons other than Disability or Good Reason, for a period of one year after the
Date of Termination, he will
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not, either within 75 miles of any geographic location with respect to which he
has devoted substantial attention to the material business interests of the
Company (other than the Company's home office) or any of its affiliated
companies or with respect to any immediate geologic trends in which the Company
or any of its affiliated companies is active as of the Date of Termination
without regard in either case to whether Executive has worked at such location
(the "Relevant Geographic Area"), (i) accept employment or render service to any
Person that is engaged in a business directly competitive with the business then
engaged in by the Company or any of its affiliated companies or (ii) enter into
or take part in or lend his name, counsel or assistance to any business, either
as proprietor, principal, investor, partner, director, officer, executive,
consultant, advisor, agent, independent contractor, or in any other capacity
whatsoever, for any purpose that would be competitive with the business of the
Company or any of its affiliated companies (all of the foregoing activities are
collectively referred to as the "Prohibited Activity").
(b) In addition to all other remedies at law or in equity which the
Company may have for breach of a provision of this Section 9 by the Executive,
it is agreed that in the event of any breach or attempted or threatened breach
of any such provision, the Company shall be entitled, upon application to any
court of proper jurisdiction, to a temporary restraining order or preliminary
injunction (without the necessity of (i) proving irreparable harm, (ii)
establishing that monetary damages are inadequate or (iii) posting any bond with
respect thereto) against the Executive prohibiting such breach or attempted or
threatened breach by proving only the existence of such breach or attempted or
threatened breach. If the provisions of this Section 9 should ever be deemed to
exceed the time, geographic or occupational limitations permitted by the
applicable law, the Executive and the Company agree that such provisions shall
be and are hereby reformed to the maximum time, geographic or occupational
limitations permitted by the applicable law.
(c) The covenants of the Executive set forth in this Section 9 are
independent of and severable from every other provision of this Agreement; and
the breach of any other provision of this Agreement by the Company or the breach
by the Company of any other agreement between the Company and the Executive
shall not affect the validity of the provisions of this Section 9 or constitute
a defense of the Executive in any suit or action brought by the Company to
enforce any of the provisions of this Section 9 or seek any relief for the
breach thereof by Executive.
(d) The Executive acknowledges, agrees and stipulates that: (i) the
terms and provisions of this Agreement are reasonable and constitute an
otherwise enforceable agreement to which the terms and provisions of this
Section 9 are ancillary or a part of as contemplated by Tex. Bus. & Com. Code
Ann. (S)(S) 15.50-15.52; (ii) the consideration provided by the Company under
this Agreement is not illusory; and (iii) the consideration given by the Company
under this Agreement, including, without limitation, the provision by the
Company of Confidential Information to the Executive as contemplated by Section
7, gives rise to the Company's interest in restraining and prohibiting the
Executive from engaging in the Prohibited Activity within the Relevant
Geographic Area as provided under this Section 9, and the Executive's covenant
not to engage in the Prohibited Activity within the Relevant Geographic Area
pursuant to this Section 9 is designed to enforce the
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Executive's consideration (or return promises), including, without limitation,
the Executive's promise to not disclose Confidential Information under this
Agreement.
10. Successors.
(a) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's heirs,
executors and other legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and may only be assigned to a successor described in Section 10(c).
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
11. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Texas, without reference to principles of conflict
of laws that would require the application of the laws of any other state or
jurisdiction.
(b) The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect.
(c) This Agreement may not be amended or modified otherwise than by a
written agreement executed by the parties hereto or their respective successors
and heirs, executors and other legal representatives.
(d) All notices and other communications hereunder shall be in writing
and shall be given, if by the Executive to the Company, by telecopy or facsimile
transmission at the telecommunications number set forth below and, if by either
the Company or the Executive, either by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
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If to the Executive:
-------------------
Michael G. Long
6728 Brompton Road
Houston, Texas 77005
Telecommunications Number: (713) 664-6537
If to the Company:
-----------------
Edge Petroleum Corporation
Attention: John Calaway
1111 Bagby, Suite 2100
Houston, Texas 77002
Telecommunications Number: (713) 654-8960
Attention: Corporate Secretary
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(e) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(f) The Company may withhold from any amounts payable under this
Agreement such federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(g) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Executive or the Company may have hereunder,
including, without limitation, the right of the Executive to terminate
employment for Good Reason or during a Window Period pursuant to Section 3(c) of
this Agreement, shall not be deemed to be a waiver of such provision or right or
any other provision or right of this Agreement.
(h) This Agreement shall become effective as of the date on which both
the Company and the Executive have executed the Agreement (the "Agreement
Effective Date").
IN WITNESS WHEREOF, the Executive has hereunto set his hand and,
pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
/s/ John Calaway
Date:___________________ -----------------------------
John Calaway
Chief Executive Officer
/s/ Michael G. Long
Date:___________________ -----------------------------
Michael G. Long
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EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY*
Edge Petroleum Corporation (a Texas corporation)
Edge Group II Limited Partnership (a Connecticut limited partnership)
- -------------------------
* Assumes the consummation (with 100% acceptance) of the Combination
Transactions as described in the Company's Registration Statement on Form S-4,
as amended (which will occur simultaneously with the closing of the Offering
described in the Company's Registration Statement on Form S-1, as amended).
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Edge Petroleum
Corporation, a Delaware corporation, on Amendment No. 2 to Form S-4 of our
reports dated January 13, 1997, relating to the supplementally combined
financial statements of Edge Petroleum Corporation, a Texas corporation, the
consolidated financial statements of Edge Petroleum Corporation, a Texas
corporation, and subsidiary, and the financial statements of Edge Group II and
Gulfedge and our report dated December 3, 1996, relating to the balance sheet
of Edge Petroleum Corporation, a Delaware corporation, appearing in the Joint
Proxy and Consent Solicitation Statement/Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Joint Proxy and Consent Solicitation Statement/Prospectus.
DELOITTE & TOUCHE LLP
Houston, Texas
January 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 SEP-30-1996
<PERIOD-END> DEC-31-1995 DEC-31-1995
<CASH> 201 931
<SECURITIES> 0 0
<RECEIVABLES> 1,320 4,209
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,889 5,278
<PP&E> 10,218 15,869
<DEPRECIATION> 2,307 3,485
<TOTAL-ASSETS> 9,858 18,435
<CURRENT-LIABILITIES> 2,836 6,879
<BONDS> 5,945 10,133
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 1,031 1,413
<TOTAL-LIABILITY-AND-EQUITY> 9,858 18,435
<SALES> 0 0
<TOTAL-REVENUES> 2,040 5,105
<CGS> 0 0
<TOTAL-COSTS> 711<F1> 686
<OTHER-EXPENSES> 3,339<F2> (40)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 657 315
<INCOME-PRETAX> 398 1,079
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 398 1,079
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 398 1,079
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<FN>
<F1>Includes oil and natural gas operating expenses only.
<F2>Includes other operating expenses and gain on sale of oil and gas property.
</FN>
</TABLE>
<PAGE>
Exhibit 99.4
LETTER OF ACCEPTANCE
FOR GENERAL AND LIMITED PARTNER INTERESTS
IN
EDGE GROUP II LIMITED PARTNERSHIP
A CONNECTICUT LIMITED PARTNERSHIP
PURSUANT TO THE EXCHANGE OFFER OF
EDGE PETROLEUM CORPORATION
A DELAWARE CORPORATION
Capitalized terms used but not defined herein have the meanings given to
them in the Joint Proxy and Consent Solicitation Statement/Prospectus dated
_______________, 1997, of Edge Petroleum Corporation, a Delaware corporation
(the "Company"), as supplemented or amended (the "Joint Proxy and Consent
Solicitation Statement/Prospectus"). Reference to any gender herein includes a
reference to all genders and to the neuter.
This Letter of Acceptance must be received by the Company by 12:00
midnight, New York City Time, on _______________, 1997, or if the Edge Group II
Exchange Offer is extended, by that extended time and date (the "Expiration
Date"). Please execute this Letter of Acceptance in the SIGNATURE BOX and
indicate your approval or disapproval of the Change of Edge Group II General
Partners. Exchanging Offerees who disapprove of the Change of Edge Group II
General Partners may not participate in the Edge Group II Exchange Offer unless
such requirement with respect to this Letter of Acceptance is waived by the
Company. Send or deliver the completed Letter of Acceptance to the Company at
the following address:
Edge Petroleum Corporation
Texaco Heritage Plaza
1111 Bagby, Suite 2100
Houston, Texas 77002
DELIVERY OF THIS LETTER OF ACCEPTANCE IS AT THE RISK OF THE OFFEREE. IF SENT
BY U.S. MAIL, IT IS RECOMMENDED THAT AN OFFEREE USE REGISTERED MAIL, RETURN
RECEIPT REQUESTED.
PART I
ACCEPTANCE OF THE EDGE GROUP II EXCHANGE OFFER, REPRESENTATIONS, WARRANTIES,
COVENANTS, APPOINTMENT OF PROXIES AND POWER OF ATTORNEY
The offeree signing in the SIGNATURE BOX below (the "Exchanging Offeree")
hereby accepts the Edge Group II Exchange Offer on the terms and subject to the
conditions set forth in this Letter of Acceptance and in the Joint Proxy and
Consent Solicitation Statement/ Prospectus, receipt of a copy of which is hereby
acknowledged and
(a) with respect to all the Exchanging Offeree's Edge Group II Units described
in Part III below, if any, (i) tenders to the Company all those Edge Group II
Units, (ii) subject to acceptance of the tender made hereby, sells, transfers
and assigns to the Company all right, title and interest in each Edge Group II
Unit tendered hereby (including without limitation all rights to receive
distributions with respect thereto) and (iii) unless such Exchanging Offeree has
appropriately indicated his or her disapproval of the Change of Edge Group II
General Partners, consents to the Change of Edge Group II General Partners; and
1
<PAGE>
(b) with respect to all the Exchanging Offeree's general partner
interests in Edge Group II listed in Part III below, if any, (i) tenders to the
Company all those general partner interests in Edge Group II and (ii) subject to
acceptance of such tender, sells, transfers and assigns to the Company all
right, title and interest in all those general partner interests in Edge Group
II so tendered (including without limitation all rights to receive distributions
thereon).
The Company reserves the rights to transfer or assign, in whole or from time
to time in part, to one or more entities directly or indirectly wholly owned by
the Company the right to purchase interests in Edge Group II tendered pursuant
to the Edge Group II Exchange Offer, but any such transfer or assignment shall
not relieve the Company of its obligations under the Edge Group II Exchange
Offer, or prejudice the rights of Exchanging Offerees to receive shares of
Common Stock for interests in Edge Group II properly tendered and accepted for
exchange.
This Letter of Acceptance may be withdrawn by written notice to the Company at
any time on or before ______________, 1997.
The Exchanging Offeree, by executing this Letter of Acceptance, represents and
warrants to the Company that (a) he or she has, and as of the Closing Date will
have, the right and authority to transfer all his or her interests in Edge Group
II, (b) he or she has, and as of the Closing Date will have, the right and
authority to consent to the adoption of the Change of Edge Group II General
Partners, (c) all his or her general partner interests, if any, in Edge Group
II and all his or her Edge Group II Units, if any, are, and as of the Closing
Date will be, free and clear of all liens, restrictions, charges, encumbrances
and adverse claims and (d) the general partner interests and the Edge Group II
Units described in Part III below constitute all of his or her interests in Edge
Group II. THE EXCHANGING OFFEREE CONSENTS TO, APPROVES AND RATIFIES THE TERMS
OF THE EDGE GROUP II EXCHANGE OFFER AND THE OTHER COMBINATION TRANSACTIONS,
INCLUDING THE NUMBER OF SHARES OF COMMON STOCK THAT WILL BE ISSUED TO THE
GENERAL PARTNERS. ACCORDINGLY, BY TENDERING EDGE GROUP II UNITS, THE EXCHANGING
OFFEREE APPROVES THE OVERALL TERMS AND STRUCTURE OF THE EDGE GROUP II EXCHANGE
OFFER AND GIVES UP ANY RIGHT TO CHALLENGE ANY ASPECT OF THE GENERAL PARTNERS'
AND THEIR AFFILIATES' (INCLUDING OLD EDGE AND ITS MANAGEMENT) ACTIONS REGARDING
THE COMBINATION TRANSACTIONS, INCLUDING, WITHOUT LIMITATION, THE ALLOCATION OF
SHARES AMONG ANY PARTIES RECEIVING SHARES IN THE COMBINATION TRANSACTIONS AND
FURTHER SPECIFICALLY INCLUDING ANY DECISIONS REGARDING THE SHARES OF COMMON
STOCK BEING OFFERED BY THE COMPANY FOR THE GENERAL PARTNER INTERESTS IN EDGE
GROUP II. All representations, warranties and covenants contained herein shall
survive the Closing Date and all other transactions contemplated by this Letter
of Acceptance or by the Joint Proxy and Consent Solicitation
Statement/Prospectus.
The Exchanging Offeree, by executing this Letter of Acceptance, irrevocably
appoints the Company or any designee of the Company, with full power of
substitution as his or her true and lawful agent and attorney-in-fact, in his or
her name, place and stead (a) to execute, acknowledge, swear to, deliver,
record, file and send (i) any instruments amending the partnership agreement or
certificate of limited partnership of Edge Group II necessary or desirable to
effect the transactions contemplated by and described in the Joint Proxy and
Consent Solicitation Statement/Prospectus and any other instruments, documents,
certificates, or notices that such agent and attorney-in-fact determines are
necessary or desirable under the laws of the United States of America (including
without limitation the Internal Revenue Code), any state or any political
subdivision or agency thereof to continue the valid existence of Edge Group II
as a limited partnership or to begin or continue its rights to do business in
any jurisdiction and (ii) any other instruments, documents, agreements,
certificates or notices that agent and attorney-in-fact determines are necessary
or desirable to effect the transactions contemplated by this Letter of
Acceptance or the Joint Proxy and Consent Solicitation Statement/Prospectus and
(b) to receive all benefits and otherwise exercise all rights of beneficial
ownership of interests in Edge Group II tendered hereby, all in accordance with
the terms of the Edge Group II Exchange Offer. The power of attorney contained
in this paragraph shall become effective upon acceptance by the Company of this
Letter of Acceptance, shall be deemed coupled with an interest, shall be
irrevocable, shall survive the death, incapacity, dissolution or termination of
existence of the Exchanging Offeree and shall be binding upon the Exchanging
Offeree's heirs, legal representatives, successors and assigns.
The Exchanging Offeree obligates himself or herself and his or her heirs,
legal representatives, successors and assigns to execute and deliver, or procure
and furnish from third parties, all additional instruments and documents that
the Company may require to evidence his or her title to the interests in Edge
Group II described in part III hereof to transfer to and vest in the Company
the tendered partner interests in Edge Group II, and to effect any other
transaction contemplated by the Joint Proxy and Consent Solicitation
Statement/Prospectus. Without limiting or prejudicing any
2
<PAGE>
remedies that the Company may have hereunder at law or in equity, the
obligations of the Exchanging Offeree hereunder may be specifically enforced.
This Letter of Acceptance shall be governed by and construed in accordance
with the substantive laws of the State of Texas without regard to its choice of
law rules. Any term or provision of this Letter of Acceptance that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity, legality or enforceability by the Company of the remainder of this
Letter of Acceptance.
PART II
NAME AND ADDRESS OF OFFEREE
Name:
-----------------------------
Address:
--------------------------
- ----------------------------------
- ----------------------------------
3
<PAGE>
PART III
DESCRIPTION OF INTERESTS
Set forth below is the number or Edge Group II Units and the general partner
interests in Edge Group II that the Exchanging Offeree owns. An Exchanging
Offeree must execute and deliver this Letter of Acceptance with respect to all
interests he or she owns in Edge Group II.
NUMBER OF EDGE GROUP II GENERAL PARTNER
UNITS INTERESTS
- ------------------------- ----------------
4
<PAGE>
SIGNATURE BOX
(PLEASE ALSO COMPLETE THE SUBSTITUTE FORM W-9
AND THE CERTIFICATION OF NON-FOREIGN STATUS BELOW)
<TABLE>
<CAPTION>
<S> <C>
Please sign exactly as your name is printed in Part II
above, unless printed incorrectly. Signatures in ----------------------------------------------
Letters of Acceptance from trusts, joint ventures, Full Name of Exchanging Offeree (Please Print)
corporations, limited partnerships, general
partnerships and other such entities must be
accompanied by evidence or an opinion of counsel ----------------------------------------------
acceptable to the Company that the entity has met all Full Name of Co-Owner, if any
requirements of its governing instruments. Each
joint owner of a general or limited partner interest
must sign. By signing in this SIGNATURE BOX, ----------------------------------------------
the Exchanging Offeree hereby agrees to all of the Signature of Exchanging Offeree
provisions contained in Part I of this Letter of
Acceptance.
----------------------------------------------
Signature of Co-Owner, if any
Business Telephone:
( )
----------------------------------------------
Home Telephone:
( )
----------------------------------------------
Dated:____________, 1997
To approve the Change of Edge Group II General Partners (check one box):
[ ] FOR [ ] AGAINST [ ] ABSTAIN
IF NO BOX IS CHECKED, THE EXCHANGING OFFEREE WILL BE DEEMED TO HAVE VOTED FOR THE APPROVAL OF
THE CHANGE OF EDGE GROUP II GENERAL PARTNERS.
</TABLE>
5
<PAGE>
*IMPORTANT TAX INFORMATION*
Please be advised that, regardless of whether you have previously
furnished a taxpayer identification number (social security number for
individual, or employer identification number for corporation(s)) (a "TIN") or
the certification on Form W-9, you must again furnish this number, certified to
be correct under penalties of perjury, to assure that backup withholding of 31%
will not be implemented. Certification should be made to the Company on the
Substitute Form W-9 below. If the certificates representing shares of Common
Stock covered by this Letter of Acceptance will be registered in more than one
name or will not be registered in the name of the actual holder, consult the
enclosed Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 for additional guidance on which number to report.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN THE Social Security Number or
FORM W-9 BOX AT THE RIGHT AND CERTIFY BY SIGNING AND Employer Identification Number
Please fill in your Name DATING BELOW, OR IF A TIN HAS NOT BEEN
and Address: ISSUED TO YOU, PLEASE CHECK THE BOX IN PART
___________________ 3 BELOW.
___________________
___________________
- -----------------------------------------------------------------------------------------------------------------------------------
DEPARTMENT OF TREASURY PART 2 -- For payees exempt from backup withholding, see the
PAYER'S REQUEST FOR TAXPAYER enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute
IDENTIFICATION NUMBER (TIN) Form W-9
- -----------------------------------------------------------------------------------------------------------------------------------
CERTIFICATION -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number
to be issued to me) and
(2) I am not subject to backup withholding under the provisions of Section 3406 of the Internal Revenue Code of 1986, as amended,
either because (i) I am exempt from backup withholding, (ii) I have not been notified by the Internal Revenue Service ("IRS")
that I am subject to backup withholding as a result of a failure to report all interest or dividends or (iii) the IRS has
notified me that I am no longer subject to backup withholding.
CERTIFICATION INSTRUCTIONS -- You must cross out item (2) above if you have been notified by the IRS that you are subject to backup
withholding because of under reporting interest or dividends on your tax return. However, if after being notified by the IRS that
you were subject to backup withholding you received another notification from the IRS that you are no longer subject to backup
withholding, do not cross out item (2).
- -----------------------------------------------------------------------------------------------------------------------------------
PART 3
SIGNATURE__________________________________ DATE ___________________, 199__ Awaiting TIN [ ]
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU
CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed an application to receive a
taxpayer identification number to the appropriate Internal Revenue Service
Center or Social Security Administration Office or (b) I intend to mail or
deliver an application in the near future. I understand that, notwithstanding
that I have checked the box in Part 3 (and have completed this Certificate of
Awaiting Taxpayer Identification Number), all reportable payments made to me
prior to the time I provide the Company with a properly certified taxpayer
identification number may be subject to a 31% backup withholding tax.
SIGNATURE _______________________________ DATE ________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU.
7
<PAGE>
Substitute Form W-9. Federal income tax law generally requires that the
Exchanging Offeree must provide the Company (as payor) with his correct Taxpayer
Identification Number ("TIN") and make certain certifications on Substitute Form
W-9 above, which in the case of an Exchanging Offeree who is an individual is
his or her social security number. If the shares of Common Stock of the Company
relating to this Letter of Acceptance will be held in more than one name or will
not be held in the name of the actual owner, consult the enclosed Guidelines for
Certification of Taxpayer's Identification Number on Substitute Form W-9 (the
"W-9 Guidelines") for additional instructions. If the Company is not provided
with the correct TIN, or if any other information is not correctly provided,
such Exchanging Offeree may be subject to up to a $500 penalty imposed by the
Internal Revenue Service (plus additional penalties if an Exchanging Offeree
makes a false certification). In addition, the Exchanging Holder may be subject
to 31% backup withholding on reportable payments (including dividends) made by
the Company. Backup withholding is not an additional federal income tax. Rather,
the federal income tax liability of persons subject to backup withholding will
be reduced by the amount of tax withheld. If backup withholding results in an
overpayment of taxes, a refund may be obtained provided that the required
information is furnished to the Internal Revenue Service.
Exempt holders of Common Stock of the Company (including, among others,
corporations and certain foreign individuals) are not subject to these backup
withholding and reporting requirements. (In order to satisfy the Company that a
foreign individual qualifies as an exempt recipient, that holder must submit a
statement, signed under penalties of perjury, attesting to that individual's
exempt status. Such statements can be obtained from the Company). See the
enclosed W-9 Guidelines for additional instructions.
To prevent backup withholding, each Exchanging Offeree must provide his
correct TIN by completing the Substitute Form W-9 set forth above, certifying
that the TIN provided is correct and that (i) the Exchanging Offeree is exempt
from backup withholding, (ii) the Exchanging Offeree has not been notified by
the Internal Revenue Service that Exchanging Offeree is subject to backup
withholding as a result of a failure to report all interest or dividends or
(iii) the Internal Revenue Service has notified the Exchanging Offeree that he
is no longer subject to backup withholding. Notwithstanding that the box in
Part 3 is checked (and the Certificate of Awaiting Taxpayer Identification
Number is completed) the Company may withhold 31% of any dividends paid prior to
the time it is provided with a properly certified TIN. Backup withholding will
continue until such Exchanging Offeree furnishes his TIN to the Company.
8
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Guidelines for Determining the Proper Identification Number to Give the Payor --
Social Security numbers have nine digits separated by two hyphens: i.e., 000-00-
0000. Employer identification numbers have nine digits separated by only one
hyphen: i.e., 00-0000000. The table below will help determine the number to
give the payor.
<TABLE>
<CAPTION>
Give the EMPLOYER
Give the SOCIAL IDENTIFICATION
For this type of account: SECURITY number of -- For this type of account: number of --
- ------------------------------ ----------------------------- ----------------------------- --------------------------------
<S> <C> <C> <C>
1. An individual's account The individual 9. A valid trust, estate, Legal entity (Do not furnish
or pension trust the identifying number of the
2. Two or more individuals The actual owner of the personal representative or
(joint account) account or, if combined trustee unless the legal entity
funds, the first individual itself is not designated in the
on the account/1/ account title.)/5/
3. Husband and wife (joint The actual owner of the 10. Corporate account The corporation
account) account or, if joint funds,
the first individual on the
account/1/
4. Custodian account of a The minor/2/ 11. Association, club, The organization
minor (Uniform Gift to religious, charitable,
Minors Act) educational, or other tax-
exempt organization
5. Adult and minor (joint The adult or, if the minor 12. Partnership account The partnership
acccount) is the only contributor, the held in the name of
minor/1/ the business
6. Account in the name of The ward, minor or 13. A broker or registered The broker or nominee
guardian or committee incompetent person/3/ nominee
for a designated ward,
minor, or incompetent
person
7. (a) The usual revocable The grantor person/1/ 14. Account with the The public entity
savings trust account Department of
(grantor is also Agriculture in the name
trustee) of a public entity (such
(b) So-called trust The actual owner/1/ as a state or local
account that is not a government, school
legal or valid trust district, or prison) that
under state law receives agricultural
program payments
- -------------------------------------
/1/ List first and circle the name of the person whose number your furnish.
/2/ Circle the minor's name and furnish the minor's social security number.
/3/ Circle the ward's, minor's or incopetent person's name and furnish such person's social security number.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Give the EMPLOYER
Give the SOCIAL IDENTIFICATION
For this type of account: SECURITY number of -- For this type of account: number of --
- ------------------------------ ----------------------------- ----------------------------- --------------------------------
<S> <C> <C> <C>
8. Sole proprietorship
account The owner/4/
</TABLE>
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service (IRS) and apply
for a number.
PAYEES AND PAYMENT EXEMPT FROM BACKUP WITHHOLDING -- The following is a
list of payees exempt from backup withholding and for which no information
reporting is required. For interest and dividends, all listed payees are
exempt except item (9). For broker transactions, payees listed in items (1)
through (13), and a person registered under the Investment Advisers Act of 1940
who regularly acts as a broker are exempt. Payments subject to reporting under
sections 6041 and 6041A are generally exempt from backup withholding only if
made to payees described in items (1) through (7), except that a corporation
that provides medical and health care services or bills and collects payments
for such services is not exempt from withholding or information reporting:
(1) A corporation.
(2) An organization exempt from tax under section 501(a), or an individual
retirement plan (IRA), or a custodial account under section 403(b)(7).
(3) The United States or any of its agencies or instrumentalities.
(4) A state, the District of Columbia, a possession of the United States, or
any of their political subdivisions or instrumentalities.
(5) A foreign government or any of its political subdivisions, agencies or
instrumentalities.
(6) An international organization or any of its agencies or instrumentalities.
(7) A foreign central bank of issue.
(8) A dealer in securities or commodities required to register in the U.S. or a
possession of the U.S.
(9) A futures commission merchant registered with the Commodity Futures Trading
Commission.
(10) A real estate investment trust.
(11) An entity registered at all times during the tax year under the Investment
Company Act of 1940.
(12) A common trust fund operated by a bank under section 584(a).
- -------------------------------
/4/ Show the name of the owner.
/5/ List first and circle the name of the legal trust, estate, or pension
trust.
Notes: If no name is circle when there is more than one name, the number will
be considered to be that of the first name listed.
10
<PAGE>
(13) A financial institution.
(14) A middleman known in the investment community as a nominee or listed in the
most recent publication of the American Society of Corporate Secretaries,
Inc., Nominee List.
(15) A trust exempt from tax under section 664 or described in section 4947.
Payments of dividends and patronage dividends not generally subject to
backup withholding include the following: (i) payments to nonresident aliens
subject to withholding under section 1441; (ii) payments to partnerships not
engaged in a trade or business in the United States and that have at least one
nonresident partner; (iii) payments of patronage dividends not paid in money,
and (iv) payments made by certain foreign organizations.
Exempt payees described above should complete substitute Form W-9 to avoid
possible erroneous backup withholding. FILE THIS FORM WITH THE PAYOR, FURNISH
YOUR TAXPAYER IDENTIFICATION NUMBER IN PART 1, WRITE "EXEMPT" ON THE FACE OF THE
FORM, AND SIGN AND DATE THE FORM.
Payments that are not subject to information reporting are also not subject
to backup withholding. For details, see the regulations under sections 6041,
6041(A)(a), 6042, 6044, 6045, 6049, 6050A, and 6050N.
PRIVACY ACT NOTICE -- Section 6109 requires you to furnish your correct
taxpayer identification number (TIN) to persons who must file information
returns with IRS to report interest, dividends, and certain other income paid to
you, mortgage interest you paid, the acquisition or abandonment of secured
property, or contribution you made to an individual retirement arrangement
(IRA). IRS uses the numbers for identification purposes and to help verify the
accuracy of your tax return. You must provide your TIN whether or not you are
required to file a tax return. Payors must generally withhold 31% of taxable
interest, dividend, and certain other payments to a payee who does not furnish a
TIN to a payor. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER -- If you
fail to furnish your correct taxpayer identification number to a payor, you
are subject to a penalty of $50 for each such failure unless your failure
is due to reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING -- If you
make a false statement with no reasonable basis that results in no
imposition of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION -- Willfully falsifying
certifications or affirmations may subject you to criminal penalties
including fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR
TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE
11
<PAGE>
PART IV
CERTIFICATION OF NON-FOREIGN STATUS
Section 1445 of the Internal Revenue Code provides that the Company, as
transferee of a U.S. real property interest, must withhold tax if the Exchanging
Offeree is a foreign person. In general, a foreign person is a nonresident
alien individual, foreign corporation, foreign partnership, foreign trust, or
foreign estate, but not a resident alien individual.
To inform the Company that withholding of tax is not required under Section
1445, Section 1 below must be completed by each Exchanging Offeree who is an
individual, and Section 2 below must be completed on behalf of each Exchanging
Offeree that is an entity.
SECTION 1 - CERTIFICATION BY INDIVIDUALS [to be completed ONLY by an Exchanging
Offeree who is an individual]
I, _____________________________________ [name of Exchanging Offeree]
hereby certify the following:
1. I am not a nonresident alien for purposes of U.S. income taxation;
2. My social security number is _____________________; and
3. My home address is__________________________________________________.
I understand that this certification may be disclosed to the Internal
Revenue Service by the Company and that any false statement I have made here
could be punished by fine, imprisonment, or both.
Under penalties of perjury I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct,
and complete.
_____________________________________ _______________
Signature of Exchanging Offeree Date
12
<PAGE>
SECTION 2 - CERTIFICATION BY ENTITIES [to be completed ONLY on behalf of an
Exchanging Offeree that is an entity]
The undersigned (who is a responsible officer in the case of a corporation,
a general partner in the case of a partnership, or a trustee, executor, or
equivalent fiduciary in the case of a trust or estate) hereby certifies the
following on behalf of ______________________ [name of Exchanging Offeree]:
1. _________________________ [name of Exchanging Offeree] is not a foreign
corporation, foreign partnership, foreign trust, or foreign estate (as those
terms are defined in the Internal Revenue Code and Income Tax Regulations);
2. The U.S. employer identification number of _________________________[name of
Exchanging Offeree] is ______________________.
3. The office address of ______________________________[name of Exchanging
Offeree] is
___________________________________________________________________________.
_____________________________[name of Exchanging Offeree] understands that
this certification may be disclosed to the Internal Revenue Service by the
Company and that any false statement contained herein could be punished by fine,
imprisonment, or both.
Under penalties of perjury I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete, and I further declare that I have authority to sign this document on
behalf of ________________________ [name of Exchanging Offeree].
_______________________________ _____________
Signature Date
_______________________________
Title
13
<PAGE>
Exhibit 99.5
LETTER OF ACCEPTANCE
FOR LIMITED PARTNER INTERESTS
IN
GULFEDGE LIMITED PARTNERSHIP
A TEXAS LIMITED PARTNERSHIP
PURSUANT TO THE EXCHANGE OFFER OF
EDGE PETROLEUM CORPORATION
A DELAWARE CORPORATION
Capitalized terms used but not defined herein have the meanings given to
them in the Joint Proxy and Consent Solicitation Statement/Prospectus dated
_______________, 1997, of Edge Petroleum Corporation, a Delaware corporation
(the "Company"), as supplemented or amended (the "Joint Proxy and Consent
Solicitation Statement/Prospectus"). Reference to any gender herein includes a
reference to all genders and to the neuter.
This Letter of Acceptance must be received by the Company by 12:00
midnight, New York City Time, on _______________, 1997, or if the Gulfedge
Exchange Offer is extended, by that extended time and date (the "Expiration
Date"). Please execute this Letter of Acceptance in the SIGNATURE BOX and send
or deliver the completed Letter of Acceptance to the Company at the following
address:
Edge Petroleum Corporation
Texaco Heritage Plaza
1111 Bagby, Suite 2100
Houston, Texas 77002
DELIVERY OF THIS LETTER OF ACCEPTANCE IS AT THE RISK OF THE OFFEREE. IF SENT
BY U.S. MAIL, IT IS RECOMMENDED THAT AN OFFEREE USE REGISTERED MAIL, RETURN
RECEIPT REQUESTED.
PART I
ACCEPTANCE OF THE GULFEDGE EXCHANGE OFFER, REPRESENTATIONS, WARRANTIES,
COVENANTS, APPOINTMENT OF PROXIES AND POWER OF ATTORNEY
The offeree signing in the SIGNATURE BOX below (the "Exchanging Offeree")
hereby accepts the Gulfedge Exchange Offer on the terms and subject to the
conditions set forth in this Letter of Acceptance and in the Joint Proxy and
Consent Solicitation Statement/ Prospectus, receipt of a copy of which is hereby
acknowledged, and with respect to all his or her Gulfedge Units described in
Part III below, if any, (i) tenders to the Company all those Gulfedge Units and
(ii) subject to acceptance of the tender made hereby, sells, transfers and
assigns to the Company all right, title and interest in each Gulfedge Unit
tendered hereby (including without limitation all rights to receive
distributions with respect thereto).
The Company reserves the rights to transfer or assign, in whole or from time
to time in part, to one or more entities directly or indirectly wholly owned by
the Company the right to purchase interests in Gulfedge tendered pursuant to the
Gulfedge, but any such transfer or assignment shall not relieve the Company of
its obligations under the Gulfedge Exchange Offer, or prejudice the rights of
Exchanging Offerees to receive shares of Common Stock for interests in Gulfedge
properly tendered and accepted for exchange.
1
<PAGE>
This Letter of Acceptance may be withdrawn by written notice to the Company at
any time on or before ____________, 1997.
The Exchanging Offeree, by executing this Letter of Acceptance, represents and
warrants to the Company that (a) he or she has, and as of the Closing Date will
have, the right and authority to transfer all his or her interests in Gulfedge,
(b) all his or her Gulfedge Units are, and as of the Closing Date will be, free
and clear of all liens, restrictions, charges, encumbrances and adverse claims
and (c) the Gulfedge Units described in Part III below constitute all of his or
her interests in Gulfedge. THE EXCHANGING OFFEREE CONSENTS TO, APPROVES AND
RATIFIES THE TERMS OF THE GULFEDGE EXCHANGE OFFER AND THE OTHER COMBINATION
TRANSACTION. ACCORDINGLY, BY TENDERING GULFEDGE UNITS, THE EXCHANGING OFFEREE
APPROVES THE OVERALL TERMS AND STRUCTURE OF THE GULFEDGE EXCHANGE OFFER AND
GIVES UP ANY RIGHT TO CHALLENGE ANY ASPECT OF OLD EDGE'S AND ITS OFFICERS',
DIRECTORS', AND OTHER AFFILIATES' ACTIONS REGARDING THE COMBINATION
TRANSACTIONS, INCLUDING, WITHOUT LIMITATION, THE ALLOCATION OF SHARES AMONG ANY
PARTIES RECEIVING SHARES IN THE COMBINATION TRANSACTIONS. All representations,
warranties and covenants contained herein shall survive the Closing Date and all
other transactions contemplated by this Letter of Acceptance or by the Joint
Proxy and Consent Solicitation Statement/Prospectus.
The Exchanging Offeree, by executing this Letter of Acceptance, irrevocably
appoints the Company or any designee of the Company, with full power of
substitution as his or her true and lawful attorney-in-fact, in his or her name,
place and stead (a) to execute, acknowledge, swear to, deliver, record, file and
send (i) any instruments amending the partnership agreement or certificate of
limited partnership of Gulfedge necessary or desirable to effect the
transactions contemplated by and described in the Joint Proxy and Consent
Solicitation Statement/Prospectus and any other instruments, documents,
certificates, or notices that such agent and attorney-in-fact determines are
necessary or desirable under the laws of the United States of America (including
without limitation the Internal Revenue Code), any state or any political
subdivision or agency thereof to continue the valid existence of Gulfedge as a
limited partnership or to begin or continue its rights to do business in any
jurisdiction and (ii) any other instruments, documents, agreements, certificates
or notices that agent and attorney-in-fact determines are necessary or desirable
to effect the transactions contemplated by this Letter of Acceptance or the
Joint Proxy and Consent Solicitation Statement/Prospectus and (b) to receive all
benefits and otherwise exercise all rights of beneficial ownership of interests
in Gulfedge tendered hereby, all in accordance with the terms of the Gulfedge
Exchange Offer. The power of attorney contained in this paragraph shall become
effective upon acceptance by the Company of this Letter of Acceptance, shall be
deemed coupled with an interest, shall be irrevocable, shall survive the death,
incapacity, dissolution or termination of existence of the Exchanging Offeree
and shall be binding upon the Exchanging Offeree's heirs, legal representatives,
successors and assigns.
The Exchanging Offeree obligates himself or herself and his or her heirs,
legal representatives, successors and assigns to execute and deliver, or procure
and furnish from third parties, all additional instruments and documents that
the Company may require to evidence his or her title to the interests in
Gulfedge described in Part III hereof to transfer to and vest in the Company
the tendered partner interests in Gulfedge, and to effect any other transaction
contemplated by the Joint Proxy and Consent Solicitation Statement/Prospectus.
Without limiting or prejudicing any remedies that the Company may have hereunder
at law or in equity, the obligations of the Exchanging Offeree hereunder may be
specifically enforced.
This Letter of Acceptance shall be governed by and construed in accordance
with the substantive laws of the State of Texas without regard to its choice of
law rules. Any term or provision of this Letter of Acceptance that is invalid
of unenforceable in any situation in any jurisdiction shall not affect the
validity, legality or enforceability by the Company of the remainder of this
Letter of Acceptance.
2
<PAGE>
PART II
NAME AND ADDRESS OF OFFEREE
Name:
-----------------------------
Address:
--------------------------
- ----------------------------------
- ----------------------------------
3
<PAGE>
PART III
DESCRIPTION OF INTERESTS
Set forth below is the number of Gulfedge Units the Exchanging Offeree owns.
An Exchanging Offeree must execute and deliver this Letter of Acceptance with
respect to all interests he or she owns in Gulfedge.
NUMBER OF GULFEDGE UNITS
------------------------
4
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
SIGNATURE BOX
(PLEASE ALSO COMPLETE THE SUBSTITUTE FORM W-9
AND THE CERTIFICATION OF NON-FOREIGN STATUS BELOW)
<S> <C>
Please sign exactly as your name is printed in Part II
above, unless printed incorrectly. Signatures in ----------------------------------------------
Letters of Acceptance from trusts, joint ventures, Full Name of Exchanging Offeree (Please Print)
corporations, limited partnerships, general
partnerships and other such entities must be
accompanied by evidence or an opinion of counsel ----------------------------------------------
acceptable to the Company that the entity has met all Full Name of Co-Owner, if any
requirements of its governing instruments. Each
joint owner of a general or limited partner interest
must sign. By signing in this SIGNATURE BOX, ----------------------------------------------
the Exchanging Offeree hereby agrees to all of the Signature of Exchanging Offeree
provisions contained in Part I of this Letter of
Acceptance.
----------------------------------------------
Signature of Co-Owner, if any
Business Telephone:
( )
----------------------------------------------
Home Telephone:
( )
----------------------------------------------
Dated:_________________, 1997
----------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
*IMPORTANT TAX INFORMATION*
Please be advised that, regardless of whether you have previously
furnished a taxpayer identification number (social security number for
individual, or employer identification number for corporation(s)) (a "TIN") or
the certification on Form W-9, you must again furnish this number, certified to
be correct under penalties of perjury, to assure that backup withholding of 31%
will not be implemented. Certification should be made to the Company on the
Substitute Form W-9 below. If the certificates representing shares of Common
Stock covered by this Letter of Acceptance will be registered in more than one
name or will not be registered in the name of the actual holder, consult the
enclosed Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 for additional guidance on which number to report.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN THE Social Security Number or
FORM W-9 BOX AT THE RIGHT AND CERTIFY BY SIGNING AND Employer Identification Number
Please fill in your Name DATING BELOW, OR IF A TIN HAS NOT BEEN
and Address: ISSUED TO YOU, PLEASE CHECK THE BOX IN PART
___________________ 3 BELOW.
___________________
___________________
- ------------------------------------------------------------------------------------------------------------------------------------
DEPARTMENT OF TREASURY PART 2 -- For payees exempt from backup withholding, see
PAYER'S REQUEST FOR TAXPAYER the enclosed Guidelines for Certification of Taxpayer
IDENTIFICATION NUMBER (TIN) Identification Number on Substitute Form W-9
- ------------------------------------------------------------------------------------------------------------------------------------
CERTIFICATION -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number
to be issued to me) and
(2) I am not subject to backup withholding under the provisions of Section 3406 of the Internal Revenue Code of
1986, as amended, either because (i) I am exempt from backup withholding, (ii) I have not been notified by the
Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of a failure to report all
interest or dividends or (iii) the IRS has notified me that I am no longer subject to backup withholding.
CERTIFICATION INSTRUCTIONS -- You must cross out item (2) above if you have been notified by the IRS that you are subject to backup
withholding because of under reporting interest or dividends on your tax return. However, if after being notified by the IRS that
you were subject to backup withholding you received another notification from the IRS that you are no longer subject to backup
withholding, do not cross out item (2).
- ------------------------------------------------------------------------------------------------------------------------------------
PART 3
SIGNATURE__________________________________ DATE_________________, 199__ Awaiting TIN [ ]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU
CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed an application to receive a
taxpayer identification number to the appropriate Internal Revenue Service
Center or Social Security Administration Office or (b) I intend to mail or
deliver an application in the near future. I understand that, notwithstanding
that I have checked the box in Part 3 (and have completed this Certificate of
Awaiting Taxpayer Identification Number), all reportable payments made to me
prior to the time I provide the Company with a properly certified taxpayer
identification number may be subject to a 31% backup withholding tax.
SIGNATURE _______________________________ DATE ________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU.
7
<PAGE>
Substitute Form W-9 Federal income tax law generally requires that a
holder of Gulfedge Units who receives shares of Common Stock of the Company must
provide the Company (as payor) with such holder's correct Taxpayer
Identification Number ("TIN") and make certain certifications on Substitute
Form W-9 above, which in the case of an Exchanging Offeree who is an individual
is his or her social security number. If the shares of Common Stock of the
Company relating to this Letter of Acceptance will be held in more than one name
or will not be held in the name of the actual owner, consult the enclosed
Guidelines for Certification of Taxpayer's Identification Number on Substitute
Form W-9 (the "W-9 Guidelines") for additional instructions. If the Company is
not provided with the correct TIN, or if any other information is not correctly
provided, such Exchanging Offeree may be subject to up to a $500 penalty imposed
by the Internal Revenue Service (plus additional penalties if an Exchanging
Offeree makes a false certification). In addition, the Exchanging Holder may be
subject to 31% backup withholding on reportable payments(including dividends)
made by the Company. Backup withholding is not an additional federal income tax.
Rather, the federal income tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If backup withholding
results in an overpayment of taxes, a refund may be obtained provided that the
required information is furnished to the Internal Revenue Service.
Exempt holders of Common Stock of the Company (including, among others,
corporations and certain foreign individuals) are not subject to these backup
withholding and reporting requirements. (In order to satisfy the Company that a
foreign individual qualifies as an exempt recipient, that holder must submit a
statement, signed under penalties of perjury, attesting to that individual's
exempt status. Such statements can be obtained from the Company). See the
enclosed W-9 Guidelines for additional instructions.
To prevent backup withholding, each Exchanging Offeree must provide his
correct TIN by completing the Substitute Form W-9 set forth above, certifying
that the TIN provided is correct and that (i) the Exchanging Offeree is exempt
from backup withholding, (ii) the Exchanging Offeree has not been notified by
the Internal Revenue Service that he is subject to backup withholding as a
result of a failure to report all interest or dividends or (iii) the Internal
Revenue Service has notified the Exchanging Offeree that he is no longer subject
to backup withholding. Notwithstanding that the box in Part 3 is checked (and
the Certificate of Awaiting Taxpayer Identification Number is completed) the
Company may withhold 31% of any dividends paid prior to the time it is provided
with a properly certified TIN. Backup withholding will continue until such
Exchanging Offeree furnishes his TIN to the Company.
8
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Guidelines for Determining the Proper Identification Number to Give the Payor --
Social Security numbers have nine digits separated by two hyphens: i.e., 000-00-
0000. Employer identification numbers have nine digits separated by only one
hyphen: i.e., 00-0000000. The table below will help determine the number to
give the payor.
<TABLE>
<CAPTION>
Give the EMPLOYER
Give the SOCIAL IDENTIFICATION
For this type of account: SECURITY number of -- For this type of account: number of --
- ------------------------------ ----------------------------- ----------------------------- --------------------------------
<S> <C> <C> <C>
1. An individual's account The individual 9. A valid trust, estate, Legal entity (Do not furnish
or pension trust the identifying number of the
2. Two or more individuals The actual owner of the personal representative or
(joint account) account or, if combined trustee unless the legal entity
funds, the first individual itself is not designated in the
on the account/5/ account title.)/5/
3. Husband and wife (joint The actual owner of the 10. Corporate account The corporation
account) account or, if joint funds,
the first individual on the
account/1/
4. Custodian account of a The minor/6/ 11. Association, club, The organization
minor (Uniform Gift to religious, charitable,
Minors Act) educational, or other tax-
exempt organization
5. Adult and minor (joint The adult or, if the minor 12. Partnership account The partnership
account) is the only contributor, the held in the name of
minor/1/ the business
6. Account in the name of The ward, minor or 13. A broker or registered The broker or nominee
guardian or committee incompetent person/7/ nominee
for a designated ward,
minor, or incompetent
person
7. (a) The usual revocable The grantor person/1/ 14. Account with the The public entity
savings trust account Department of
(grantor is also Agriculture in the name
trustee) of a public entity (such
(b) So-called trust The actual owner/1/ as a state or local
account that is not a government, school
legal or valid trust district, or prison) that
under state law receives agricultural
program payments
- ---------------------------------------
/5/ List first and circle the name of the person whose number your furnish.
/6/ Circle the minor's name and furnish the minor's social security number.
/7/ Circle the ward's, minor's or incompetent person's name and furnish such person's social security number.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Give the EMPLOYER
Give the SOCIAL IDENTIFICATION
For this type of account: SECURITY number of -- For this type of account: number of --
- ------------------------------ ----------------------------- ----------------------------- --------------------------------
<S> <C> <C> <C>
8. Sole proprietorship
account The owner/8/
</TABLE>
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service (IRS) and apply
for a number.
PAYEES AND PAYMENT EXEMPT FROM BACKUP WITHHOLDING -- The following is a
list of payees exempt from backup withholding and for which no information
reporting is required. For interest and dividends, all listed payees are exempt
except item (9). For broker transactions, payees listed in items (1) through
(13), and a person registered under the Investment Advisers Act of 1940 who
regularly acts as a broker are exempt. Payments subject to reporting under
sections 6041 and 6041A are generally exempt from backup withholding only if
made to payees described in items (1) through (7), except that a corporation
that provides medical and health care services or bills and collects payments
for such services is not exempt from withholding or information reporting:
(1) A corporation.
(2) An organization exempt from tax under section 501(a), or an individual
retirement plan (IRA), or a custodial account under section 403(b)(7).
(3) The United States or any of its agencies or instrumentalities.
(4) A state, the District of Columbia, a possession of the United States, or
any of their political subdivisions or instrumentalities.
(5) A foreign government or any of its political subdivisions, agencies or
instrumentalities.
(6) An international organization or any of its agencies or instrumentalities.
(7) A foreign central bank of issue.
(8) A dealer in securities or commodities required to register in the U.S. or a
possession of the U.S.
(9) A futures commission merchant registered with the Commodity Futures Trading
Commission.
(10) A real estate investment trust.
(11) An entity registered at all times during the tax year under the Investment
Company Act of 1940.
(12) A common trust fund operated by a bank under section 584(a).
(13) A financial institution.
(14) A middleman known in the investment community as a nominee or listed in the
most recent publication of the American Society of Corporate Secretaries,
Inc., Nominee List.
(15) A trust exempt from tax under section 664 or described in section 4947.
Payments of dividends and patronage dividends not generally subject to
backup withholding include the following: (i) payments to nonresident aliens
subject to withholding under section 1441; (ii) payments to partnerships not
engaged in a trade or business in the United States and that have at least one
nonresident partner; (iii) payments of patronage dividends not paid in money,
and (iv) payments made by certain foreign organizations.
Exempt payees described above should complete substitute Form W-9 to avoid
possible erroneous backup withholding. FILE THIS FORM WITH THE PAYOR, FURNISH
YOUR TAXPAYER IDENTIFICATION NUMBER IN PART 1, WRITE "EXEMPT" ON THE FACE OF THE
FORM, AND SIGN AND DATE THE FORM.
Payments that are not subject to information reporting are also not subject
to backup withholding. For details, see the regulations under sections 6041,
6041(A)(a), 6042, 6044, 6045, 6049, 6050A, and 6050N.
- --------------------------------
/8/ Show the name of the owner.
/5/ List first and circle the name of the legal trust, estate, or pension
trust.
Notes: If no name is circle when there is more than one name, the number will
be considered to be that of the first name listed.
10
<PAGE>
PRIVACY ACT NOTICE -- Section 6109 requires you to furnish your correct
taxpayer identification number (TIN) to persons who must file information
returns with IRS to report interest, dividends, and certain other income paid to
you, mortgage interest you paid, the acquisition or abandonment of secured
property, or contribution you made to an individual retirement arrangement
(IRA). IRS uses the numbers for identification purposes and to help verify the
accuracy of your tax return. You must provide your TIN whether or not you are
required to file a tax return. Payors must generally withhold 31% of taxable
interest, dividend, and certain other payments to a payee who does not furnish a
TIN to a payor. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER -- If you
fail to furnish your correct taxpayer identification number to a payor, you
are subject to a penalty of $50 for each such failure unless your failure
is due to reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING -- If you
make a false statement with no reasonable basis that results in no
imposition of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION -- Willfully falsifying
certifications or affirmations may subject you to criminal penalties
including fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR
TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE
11
<PAGE>
PART IV
CERTIFICATION OF NON-FOREIGN STATUS
Section 1445 of the Internal Revenue Code provides that the Company, as
transferee of a U.S. real property interest, must withhold tax if the Exchanging
Offeree is a foreign person. In general, a foreign person is a nonresident
alien individual, foreign corporation, foreign partnership, foreign trust, or
foreign estate, but not a resident alien individual.
To inform the Company that withholding of tax is not required under Section
1445, Section 1 below must be completed by each Exchanging Offeree who is an
individual, and Section 2 below must be completed on behalf of each Exchanging
Offeree that is an entity.
SECTION 1 - CERTIFICATION BY INDIVIDUALS [to be completed ONLY by an Exchanging
Offeree who is an individual]
I, _____________________________________ [name of Exchanging Offeree]
hereby certify the following:
1. I am not a nonresident alien for purposes of U.S. income taxation;
2. My social security number is _____________________; and
3. My home address is _________________________________________________.
I understand that this certification may be disclosed to the Internal
Revenue Service by the Company and that any false statement I have made here
could be punished by fine, imprisonment, or both.
Under penalties of perjury I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct,
and complete.
____________________________________ __________________
Signature of Exchanging Offeree Date
12
<PAGE>
SECTION 2 - CERTIFICATION BY ENTITIES [to be completed ONLY on behalf of an
Exchanging Offeree that is an entity]
The undersigned (who is a responsible officer in the case of a corporation,
a general partner in the case of a partnership, or a trustee, executor, or
equivalent fiduciary in the case of a trust or estate) hereby certifies the
following on behalf of ______________________ [name of Exchanging Offeree]:
1. _________________________ [name of Exchanging Offeree] is not a foreign
corporation, foreign partnership, foreign trust, or foreign estate (as those
terms are defined in the Internal Revenue Code and Income Tax Regulations);
2. The U.S. employer identification number of _________________________[name of
Exchanging Offeree] is ______________________.
3. The office address of ______________________________[name of Exchanging
Offeree] is
___________________________________________________________________________.
_____________________________[name of Exchanging Offeree] understands that
this certification may be disclosed to the Internal Revenue Service by the
Company and that any false statement contained herein could be punished by fine,
imprisonment, or both.
Under penalties of perjury I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete, and I further declare that I have authority to sign this document on
behalf of ________________________ [name of Exchanging Offeree].
_______________________________ ________________
Signature Date
_______________________________
Title
13
<PAGE>
Exhibit 99.6
LETTER OF ACCEPTANCE
FOR PARTNER INTERESTS
IN
EDGE JOINT VENTURE II PARTNERSHIP
A TEXAS GENERAL PARTNERSHIP
PURSUANT TO THE PURCHASE OFFER OF
EDGE PETROLEUM CORPORATION
A DELAWARE CORPORATION
Capitalized terms used but not defined herein have the meanings given to
them in the Joint Proxy and Consent Solicitation Statement/Prospectus dated
_______________, 1997, of Edge Petroleum Corporation, a Delaware corporation
(the "Company"), as supplemented or amended (the "Joint Proxy and Consent
Solicitation Statement/Prospectus"). Reference to any gender herein includes a
reference to all genders and to the neuter.
This Letter of Acceptance must be received by the Company by 12:00
midnight, New York Time, on _______________, 1997, or if the Edge Group Purchase
Offer is extended, by that extended time and date (the "Expiration Date").
Please execute this Letter of Acceptance in the SIGNATURE BOX and send or
deliver the completed Letter of Acceptance to the Company at the following
address:
Edge Petroleum Corporation
Texaco Heritage Plaza
1111 Bagby, Suite 2100
Houston, Texas 77002
DELIVERY OF THIS LETTER OF ACCEPTANCE IS AT THE RISK OF THE OFFEREE. IF SENT
BY U.S. MAIL, IT IS RECOMMENDED THAT AN OFFEREE USE REGISTERED MAIL, RETURN
RECEIPT REQUESTED.
PART I
ACCEPTANCE OF THE EDGE GROUP PURCHASE OFFER, REPRESENTATIONS, WARRANTIES,
COVENANTS, APPOINTMENT OF PROXIES AND POWER OF ATTORNEY
Edge Group, by signing in the SIGNATURE BOX below, hereby accepts the Edge
Group Purchase Offer on the terms and subject to the conditions set forth in
this Letter of Acceptance and in the Joint Proxy and Consent Solicitation
Statement/ Prospectus, receipt of a copy of which is hereby acknowledged, and
with respect to all Edge Group's Joint Venture Interest described in Part III
below (i) tenders to the Company all Edge Group's Joint Venture Interest and
(ii) subject to acceptance of the tender made hereby, sells, transfers and
assigns to the Company all right, title and interest in Edge Group's Joint
Venture Interest tendered hereby (including without limitation all rights to
receive distributions with respect thereto).
The Company reserves the rights to transfer or assign, in whole or from time
to time in part, to one or more entities directly or indirectly wholly owned by
the Company the right to purchase interests in the Joint Venture tendered
pursuant to the Edge Group Purchase Offer, but any such transfer or assignment
shall not relieve the Company of its obligations under the Edge Group Purchase
Offer, or prejudice the rights of Edge Group to receive shares of Common Stock
for interests in the Joint Venture properly tendered and accepted for exchange.
1
<PAGE>
This Letter of Acceptance may be withdrawn by written notice to the Company at
any time on or before _______________, 1997.
The Exchanging Offeree, by executing this Letter of Acceptance, represents and
warrants to the Company that (a) it has, and as of the Closing Date will have,
the right and authority to transfer all its interests in the Joint Venture, (b)
all its partner interests in the Joint Venture are, and as of the Closing Date
will be, free and clear of all liens, restrictions, charges, encumbrances and
adverse claims and (c) the partner interests described in Part III below
constitute all of its interests in the Joint Venture. All representations,
warranties and covenants contained herein shall survive the Closing Date and all
other transactions contemplated by this Letter of Acceptance or by the Joint
Proxy and Consent Solicitation Statement/Prospectus.
Edge Group, by executing this Letter of Acceptance, irrevocably appoints the
Company or any designee of the Company, with full power of substitution as its
true and lawful agent and attorney-in-fact, in its name, place and stead, (a) to
execute, acknowledge, swear to, deliver, record, file and send (i) any
instruments amending the partnership agreement or certificate of general
partnership of the Joint Venture necessary or desirable to effect the
transactions contemplated by and described in the Joint Proxy and Consent
Solicitation Statement/Prospectus and any other instruments, documents,
certificates, or notices that such agent and attorney-in-fact determines are
necessary or desirable under the laws of the United States of America (including
without limitation the Internal Revenue Code), any state or any political
subdivision or agency thereof to continue the valid existence of the Joint
Venture as a general partnership or to begin or continue its rights to do
business in any jurisdiction and (ii) any other instruments, documents,
agreements, certificates or notices that agent and attorney-in-fact determines
are necessary or desirable to effect the transactions contemplated by this
Letter of Acceptance or the Joint Proxy and Consent Solicitation
Statement/Prospectus and (b) to receive all benefits and otherwise exercise all
rights of beneficial ownership of interests in the Joint Venture tendered
hereby, all in accordance with the terms of the Edge Group Purchase Offer. The
power of attorney contained in this paragraph shall become effective upon
acceptance by the Company of this Letter of Acceptance, shall be deemed coupled
with an interest, shall be irrevocable, shall survive the death, incapacity,
dissolution or termination of existence of the Exchanging Offeree and shall be
binding upon the Exchanging Offeree's legal representatives, successors and
assigns.
The Exchanging Offeree obligates itself and its legal representatives,
successors and assigns to execute and deliver, or procure and furnish from third
parties, all additional instruments and documents that the Company may require
to evidence its title to the interests in the Joint Venture described in Part
III hereof to transfer to and vest in the Company the tendered partner
interests in the Joint Venture, and to effect any other transaction contemplated
by the Joint Proxy and Consent Solicitation Statement/Prospectus. Without
limiting or prejudicing any remedies that the Company may have hereunder at law
or in equity, the obligations of the Exchanging Offeree hereunder may be
specifically enforced.
This Letter of Acceptance shall be governed by and construed in accordance
with the substantive laws of the State of Texas without regard to its choice of
law rules. Any term or provision of this Letter of Acceptance that is invalid
of unenforceable in any situation in any jurisdiction shall not affect the
validity, legality or enforceability by the Company of the remainder of this
Letter of Acceptance.
PART II
NAME AND ADDRESS OF OFFEREE
Name:
-----------------------------
Address:
--------------------------
- ----------------------------------
- ----------------------------------
2
<PAGE>
PART III
DESCRIPTION OF INTERESTS
Set forth below is the partner interests in the Joint Venture that the
Exchanging Offeree owns. Edge Group must execute and deliver this Letter of
Acceptance with respect to all interests it owns in the Joint Venture.
Partner Interests
-----------------
3
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
SIGNATURE BOX
(PLEASE ALSO COMPLETE THE SUBSTITUTE FORM W-9
AND THE CERTIFICATION OF NON-FOREIGN STATUS BELOW)
<S> <C>
Please sign exactly as your name is printed in Part
II
above, unless printed incorrectly. Signatures in ----------------------------------------------
Letters of Acceptance from trusts, joint ventures, Full Name of Exchanging Offeree (Please Print)
corporations, limited partnerships, general
partnerships and other such entities must be
accompanied by evidence or an opinion of counsel ----------------------------------------------
acceptable to the Company that the entity has met all Full Name of Co-Owner, if any
requirements of its governing instruments. Each
joint owner of a general or limited partner interest
must sign. By signing in this SIGNATURE BOX, ----------------------------------------------
the Exchanging Offeree hereby agrees to all of the Signature of Exchanging Offeree
provisions contained in Part I of this Letter of
Acceptance.
----------------------------------------------
Signature of Co-Owner, if any
Business Telephone:
( )
----------------------------------------------
Home Telephone:
( )
---------------------------------------------
Dated:__________________________, 1997
- ----------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
*IMPORTANT TAX INFORMATION*
Please be advised that, regardless of whether you have previously
furnished a taxpayer identification number (social security number for
individual, or employer identification number for corporation(s)) (a "TIN") or
the certification on Form W-9, you must again furnish this number, certified to
be correct under penalties of perjury, to assure that backup withholding of 31%
will not be implemented. Certification should be made to the Company on the
Substitute Form W-9 below. If the certificates representing shares of Common
Stock covered by this Letter of Acceptance will be registered in more than one
name or will not be registered in the name of the actual holder, consult the
enclosed Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 for additional guidance on which number to report.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN THE Social Security Number or
FORM W-9 BOX AT THE RIGHT AND CERTIFY BY SIGNING AND Employer Identification Number
Please fill in your Name DATING BELOW, OR IF A TIN HAS NOT BEEN
and Address: ISSUED TO YOU, PLEASE CHECK THE BOX IN PART
___________________ 3 BELOW.
___________________
___________________
- -----------------------------------------------------------------------------------------------------------------------------------
DEPARTMENT OF TREASURY PART 2 -- For payees exempt from backup withholding, see
PAYER'S REQUEST FOR TAXPAYER the enclosed Guidelines for Certification of Taxpayer
IDENTIFICATION NUMBER (TIN) Identification Number on Substitute Form W-9
- -----------------------------------------------------------------------------------------------------------------------------------
CERTIFICATION -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number
to be issued to me) and
(2) I am not subject to backup withholding under the provisions of Section 3406 of the Internal Revenue Code of
1986, as amended, either because (i) I am exempt from backup withholding, (ii) I have not been notified by the
Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of a failure to report all
interest or dividends or (iii) the IRS has notified me that I am no longer subject to backup withholding.
CERTIFICATION INSTRUCTIONS -- You must cross out item (2) above if you have been notified by the IRS that you are subject to backup
withholding because of under reporting interest or dividends on your tax return. However, if after being notified by the IRS that
you were subject to backup withholding you received another notification from the IRS that you are no longer subject to backup
withholding, do not cross out item (2).
- ------------------------------------------------------------------------------------------------------------------------------------
PART 3
SIGNATURE___________________________________ DATE _______________, 199__ Awaiting TIN [ ]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU
CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed an application to receive a
taxpayer identification number to the appropriate Internal Revenue Service
Center or Social Security Administration Office or (b) I intend to mail or
deliver an application in the near future. I understand that, notwithstanding
that I have checked the box in Part 3 (and have completed this Certificate of
Awaiting Taxpayer Identification Number), all reportable payments made to me
prior to the time I provide the Company with a properly certified taxpayer
identification number may be subject to a 31% backup withholding tax.
SIGNATURE _______________________________ DATE ________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU.
6
<PAGE>
Substitute Form W-9. Federal income tax law generally requires that if
Edge Group accepts the Edge Group Purchase Offer, it must provide the Company
(as payor) with its correct Taxpayer Identification Number ("TIN") and make
certain certifications on Substitute Form W-9 above. If the shares of Common
Stock of the Company relating to this Letter of Acceptance will be held in more
than one name or will not be held in the name of the actual owner, consult the
enclosed Guidelines for Certification of Taxpayer's Identification Number on
Substitute Form W-9 (the "W-9 Guidelines") for additional instructions. If the
Company is not provided with the correct TIN, or if any other information is not
correctly provided, Edge Group may be subject to up to a $500 penalty imposed by
the Internal Revenue Service (plus additional penalties if Edge Group makes a
false certification). In addition, Edge Group may be subject to 31% backup
withholding on reportable payments (including dividends) made by the Company.
Backup withholding is not an additional federal income tax. Rather, the federal
income tax liability of persons subject to backup withholding will be reduced by
the amount of tax withheld. If backup withholding results in an overpayment of
taxes, a refund may be obtained provided that the required information is
furnished to the Internal Revenue Service.
Exempt holders of Common Stock of the Company (including, among others,
corporations and certain foreign individuals) are not subject to these backup
withholding and reporting requirements. (In order to satisfy the Company that a
foreign individual qualifies as an exempt recipient, that holder must submit a
statement, signed under penalties of perjury, attesting to that individual's
exempt status. Such statements can be obtained from the Company). See the
enclosed W-9 Guidelines for additional instructions.
To prevent backup withholding, Edge Group must provide its correct TIN by
completing the Substitute Form W-9 set forth above, certifying that the TIN
provided is correct and that (i) it is exempt from backup withholding, (ii) it
has not been notified by the Internal Revenue Service that it is subject to
backup withholding as a result of a failure to report all interest or dividends
or (iii) the Internal Revenue Service has notified Edge Group that it is no
longer subject to backup withholding. Notwithstanding that the box in Part 3
is checked (and the Certificate of Awaiting Taxpayer Identification Number is
completed) the Company may withhold 31% of any dividends paid prior to the time
it is provided with a properly certified TIN. Backup withholding will continue
until Edge Group furnishes its TIN to the Company.
7
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Guidelines for Determining the Proper Identification Number to Give the Payor --
Social Security numbers have nine digits separated by two hyphens: i.e., 000-00-
0000. Employer identification numbers have nine digits separated by only one
hyphen: i.e., 00-0000000. The table below will help determine the number to
give the payor.
<TABLE>
<CAPTION>
Give the EMPLOYER
Give the SOCIAL IDENTIFICATION
For this type of account: SECURITY number of -- For this type of account: number of --
- ------------------------------ ----------------------------- ----------------------------- --------------------------------
<S> <C> <C> <C>
1. An individual's account The individual 9. A valid trust, estate, Legal entity (Do not furnish
or pension trust the identifying number of the
2. Two or more individuals The actual owner of the personal representative or
(joint account) account or, if combined trustee unless the legal entity
funds, the first individual itself is not designated in the
on the account/9/ account title.)/5/
3. Husband and wife (joint The actual owner of the 10. Corporate account The corporation
account) account or, if joint funds,
the first individual on the
account/1/
4. Custodian account of a The minor/10/ 11. Association, club, The organization
minor (Uniform Gift to religious, charitable,
Minors Act) educational, or other tax-
exempt organization
5. Adult and minor (joint The adult or, if the minor 12. Partnership account The partnership
account) is the only contributor, the held
minor/1/ in the name of the
business
6. Account in the name of The ward, minor or 13. A broker or registered The broker or nominee
guardian or committee incompetent person/11/ nominee
for a designated ward,
minor, or incompetent
person
7. (a) The usual revocable The grantor person/1/ 14. Account with the The public entity
savings trust account Department of
(grantor is also Agriculture in the name
trustee) of a public entity (such
(b) So-called trust The actual owner/1/ as a state or local
account that is not a government, school
legal or valid trust district, or prison) that
under state law receives agricultural
program payments
</TABLE>
- --------------------------------------
/9/ List first and circle the name of the person whose number your furnish.
/10/ Circle the minor's name and furnish the minor's social security number.
/11/ Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
8
<PAGE>
<TABLE>
<CAPTION>
Give the EMPLOYER
Give the SOCIAL IDENTIFICATION
For this type of account: SECURITY number of -- For this type of account: number of --
- ------------------------------ ----------------------------- ----------------------------- --------------------------------
<S> <C> <C> <C>
8. Sole proprietorship
account The owner/12/
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service (IRS) and apply
for a number.
PAYEES AND PAYMENT EXEMPT FROM BACKUP WITHHOLDING -- The following is a
list of payees exempt from backup withholding and for which no information
reporting is required. For interest and dividends, all listed payees are exempt
except item (9). For broker transactions, payees listed in items (1) through
(13), and a person registered under the Investment Advisers Act of 1940 who
regularly acts as a broker are exempt. Payments subject to reporting under
sections 6041 and 6041A are generally exempt from backup withholding only if
made to payees described in items (1) through (7), except that a corporation
that provides medical and health care services or bills and collects payments
for such services is not exempt from withholding or information reporting:
(1) A corporation.
(2) An organization exempt from tax under section 501(a), or an individual
retirement plan (IRA), or a custodial account under section 403(b)(7).
(3) The United States or any of its agencies or instrumentalities.
(4) A state, the District of Columbia, a possession of the United States, or
any of their political subdivisions or instrumentalities.
(5) A foreign government or any of its political subdivisions, agencies or
instrumentalities.
(6) An international organization or any of its agencies or instrumentalities.
(7) A foreign central bank of issue.
(8) A dealer in securities or commodities required to register in the U.S. or a
possession of the U.S.
(9) A futures commission merchant registered with the Commodity Futures Trading
Commission.
(10) A real estate investment trust.
(11) An entity registered at all times during the tax year under the Investment
Company Act of 1940.
(12) A common trust fund operated by a bank under section 584(a).
(13) A financial institution.
(14) A middleman known in the investment community as a nominee or listed in the
most recent publication of the American Society of Corporate Secretaries,
Inc., Nominee List.
(15) A trust exempt from tax under section 664 or described in section 4947.
Payments of dividends and patronage dividends not generally subject to
backup withholding include the following: (i) payments to nonresident
aliens subject to withholding under section 1441; (ii) payments to
partnerships not engaged in a trade or business in the United States and
that have at least one nonresident partner; (iii) payments of patronage
dividends not paid in money, and (iv) payments made by certain foreign
organizations.
Exempt payees described above should complete substitute Form W-9 to avoid
possible erroneous backup withholding. FILE THIS FORM WITH THE PAYOR, FURNISH
YOUR TAXPAYER IDENTIFICATION NUMBER IN PART 1, WRITE "EXEMPT" ON THE FACE OF THE
FORM, AND SIGN AND DATE THE FORM.
Payments that are not subject to information reporting are also not subject
to backup withholding. For details, see the regulations under sections 6041,
6041(A)(a), 6042, 6044, 6045, 6049, 6050A, and 6050N.
PRIVACY ACT NOTICE -- Section 6109 requires you to furnish your correct
taxpayer identification number (TIN) to persons who must file information
returns with IRS to report interest, dividends, and certain other income paid to
you, mortgage interest you paid, the acquisition or abandonment of secured
property, or contribution you made to an individual retirement arrangement
(IRA). IRS uses the numbers for identification purposes and to help verify the
accuracy of your tax return. You must provide your TIN whether or not you are
required to file a tax return. Payors must generally withhold 31% of taxable
interest, dividend, and certain other payments to a payee who does not furnish a
TIN to a payor. Certain penalties may also apply.
- ------------------------------
/12/ Show the name of the owner.
/5/ List first and circle the name of the legal trust, estate, or pension
trust.
Notes: If no name is circle when there is more than one name, the number will
be considered to be that of the first name listed.
9
<PAGE>
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER -- If you
fail to furnish your correct taxpayer identification number to a payor, you
are subject to a penalty of $50 for each such failure unless your failure
is due to reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING -- If you
make a false statement with no reasonable basis that results in no
imposition of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION -- Willfully falsifying
certifications or affirmations may subject you to criminal penalties
including fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR
TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE
10
<PAGE>
PART IV
CERTIFICATION OF NON-FOREIGN STATUS
Section 1445 of the Internal Revenue Code provides that the Company, as
transferee of a U.S. real property interest, must withhold tax if Edge Group is
a foreign partnership. To inform the Company that withholding of tax is not
required under Section 1445, the undersigned (who is a general partner of Edge
Group) hereby certifies the following on behalf of Edge Group:
1. Edge Group is not a foreign corporation, foreign partnership, foreign trust,
or foreign estate (as those terms are defined in the Internal Revenue Code and
Income Tax Regulations);
2. The U.S. employer identification number of Edge Group is
______________________.
3. Edge Group's office address
is__________________________________________________.
Edge Group understands that this certification may be disclosed to the
Internal Revenue Service by the Company and that any false statement contained
herein could be punished by fine, imprisonment, or both.
Under penalties of perjury I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct and
complete, and I further declare that I have authority to sign this document on
behalf of Edge Group.
_______________________________ _________________________
Signature Date
_______________________________
Title
11
