<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 15, 1997
REGISTRATION NO. 333-17269
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
----------------
AMENDMENT NO. 1
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,
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
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 15, 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 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, 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
ii
<PAGE>
with the Combination Transactions--Effect of the Edge 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 Combined 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
Selected Historical Financial and Operating Data.......................... 59
The Company............................................................. 59
The Joint Venture....................................................... 60
Old Edge................................................................ 61
Edge Group II........................................................... 62
Gulfedge................................................................ 63
Edge Group's Joint Venture Interest..................................... 64
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 65
The Company............................................................. 65
Old Edge................................................................ 73
The Joint Venture, Edge Group II, Gulfedge and Edge Group............... 78
Business of the Company................................................... 86
Management................................................................ 108
Information Concerning the Joint Venture.................................. 117
Information Concerning Old Edge........................................... 120
Information Concerning Edge Group II...................................... 121
Information Concerning Gulfedge........................................... 121
Security Ownership of Certain Beneficial Owners and Management............ 122
The Company............................................................. 122
Old Edge................................................................ 124
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Edge Group II........................................................... 126
Gulfedge................................................................ 127
Certain Transactions...................................................... 128
Material Federal Income Tax Consequences.................................. 132
Introduction............................................................ 132
Holders of Interests in Edge Group II................................... 132
Holders of Gulfedge Units............................................... 135
Edge Group.............................................................. 137
Holders of Old Edge Common Stock........................................ 139
The Company............................................................. 140
Foreign Exchanging Holders.............................................. 140
Other Taxation.......................................................... 141
Comparison of Securityholder Rights....................................... 141
Introduction............................................................ 141
Federal Income Taxation................................................. 141
Management.............................................................. 142
Voting Rights........................................................... 144
Special Meetings........................................................ 145
Amendments to Organizational Documents.................................. 145
Mergers and Other Fundamental Transactions.............................. 145
Dividends and Distributions............................................. 146
Liquidation Rights...................................................... 147
Limited Liability....................................................... 147
Continuity of Existence................................................. 147
Financial Reporting..................................................... 148
Redemption.............................................................. 148
Conversion Rights....................................................... 148
Right to Compel Dissolution............................................. 148
Liquidity, Marketability and Restrictions on Transfer................... 148
Certain Legal Rights of Securityholders and Limitations on Liability of
Management............................................................. 149
Right to List of Holders; Inspection of Books and Records............... 151
Dissenters' Rights of Appraisal......................................... 151
Description of Capital Stock of the Company............................... 152
Plan of Distribution...................................................... 155
Legal Matters............................................................. 156
Experts................................................................... 156
Available Information..................................................... 157
Glossary of Certain Industry Terms........................................ 158
Financial Statements...................................................... F-1
The Company............................................................. F-3
The Joint Venture....................................................... F-27
Old Edge................................................................ F-41
Edge Group II........................................................... F-54
Gulfedge................................................................ F-68
Appendices
The Amended and Restated Combination Agreement.......................... A
Edge Group II Letter of Acceptance...................................... B
Gulfedge Letter of Acceptance........................................... C
Edge Group Letter of Acceptance......................................... D
Ryder Scott Report...................................................... E
Rights of Dissenting Shareholders, Articles 5.11, 5.12 and 5.13 of the
Texas Business Corporation Act......................................... F
</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 4,682,000 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
1
<PAGE>
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 has 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
2
<PAGE>
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"). Assuming an IPO price of $16.00 per share and
that the 1996 Valuation Shares are higher in number than the 1997 Valuation
Shares, Mr. James C. Calaway would be entitled to receive 21,669 shares of
Common Stock. 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 49.8% 34.9%
Shares to be issued in the Edge Group
II Exchange Offer................... 2,209,306 47.2 33.1
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)................ 21,669 0.5 0.3
Shares to be issued in the Offering.. 2,000,000 -- 29.9
--------- ---- ----
Total................................ 6,682,273 100% 100%
========= ==== ====
</TABLE>
- --------
(1) Calculated based on the 1996 Valuation Shares 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 "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.
3
<PAGE>
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 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."
4
<PAGE>
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 2,414,893 shares of
Common Stock and the granting of 250,585 restricted shares of Common Stock and
of options to purchase an aggregate of 393,135 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 84,760 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 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. 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 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."
10
<PAGE>
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 p.m., Houston 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."
11
<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 p.m., Houston 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 p.m., Houston 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
The Combination Transactions will be accounted for as a reorganization of
entities under common control because of the high degree of common control of
the stockholders of the Company and by virtue of their direct ownership of the
entities and interests exchanged. Accordingly, the net assets acquired in the
Combination Transactions will be recorded at the historical cost basis of the
affiliated predecessor owners.
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
12
<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
13
<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.
14
<PAGE>
SUMMARY HISTORICAL COMBINED FINANCIAL AND OPERATING DATA OF THE COMPANY
The following table sets forth summary historical 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," "Selected
Historical Combined Financial and Operating Data--The Company," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--The
Company" and the audited 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 2,126
------- ------- ------- -------- ------- ------- -------
Total operating
expenses............ 1,954 2,771 2,342 2,924 3,983 3,097 4,050
------- ------- ------- -------- ------- ------- -------
Operating income (loss).. (1,531) (2,199) (887) (930) (1,943) (1,720) 1,055
Interest expense......... (448) (679) (635) (385) (315) (195) (657)
Gain on sale of oil and
gas property............ 115 -- 247 2,284 3,337 3,135 --
------- ------- ------- -------- ------- ------- -------
Net income (loss)........ (1,864) (2,878) (1,275) 969 1,079 1,219 398
Pro forma provision in
lieu of income taxes
(unaudited).............
------- ------- ------- -------- ------- ------- -------
Pro forma net income
(loss) (unaudited).......$(1,864).$(2,878) $(1,275) $ 969 $ 1,079 $ 1,219 $ 398
======= ======= ======= ======== ======= ======= =======
Pro forma net income
(loss) per share
(unaudited) (1)......... $ (0.40) $ (0.61) $ (0.27) $ 0.21 $ 0.23 $ 0.26 $ 0.09
======= ======= ======= ======== ======= ======= =======
Pro forma weighted
average shares
outstanding
(unaudited)............. 4,682 4,682 4,682 4,682 4,682 4,682 4,682
STATEMENT OF CASH FLOW
DATA:
Net cash (used) provided
by operating activities
........................ (743) (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) 1,932 (1,281) 3,559
OTHER OPERATING DATA:
EBITDA (2)............... $(1,091) $(1,732) $ (197) $ 1,947 $ 2,207 $ 1,939 $ 2,268
Operating cash flow (3).. (1,654) (2,411) (1,080) (722) (1,445) (1,390) 1,611
Capital expenditures..... 6,597 3,823 3,660 6,809 8,512 5,407 7,881
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------
ACTUAL AS ADJUSTED(4)
------------ ----------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................ $ (1,601) $ 19,543
Property and equipment, net.................... 12,384 12,384
Total assets................................... 18,435 37,247
Long-term debt, including current maturities... 10,449 499
Equity......................................... 1,413 31,756
</TABLE>
- -------
(1) Pro forma net income (loss) per share has been computed assuming the
estimated 4,682,000 shares of Common Stock which may be issued in
connection with the Combination Transactions were outstanding since the
beginning of each period presented. See "Certain Transactions--The
Combination Transactions."
(2) EBITDA represents earnings before interest expense, income taxes,
depreciation, depletion and amortization. Management of the Company
believes that EBITDA may provide additional information about the Company's
ability to meet its future requirements for debt service, capital
expenditures and working capital. EBITDA is a financial measure 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 may vary among
companies, the EBITDA presented above may not be comparable to similarly
titled measures of other companies.
(3) Operating cash flow represents cash flows from operating activities prior
to changes in assets and liabilities. Operating cash flow is a financial
measure 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 operating cash flow excludes changes in assets and
liabilities, the operating cash flow presented above may not be comparable
to similarly titled measures of other companies.
(4) Assumes the issuance in the Offering of 2,000,000 shares of Common Stock at
$16.00 per share and the application of the net proceeds therefrom.
15
<PAGE>
SUMMARY HISTORICAL COMBINED OPERATING DATA OF THE COMPANY
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PRODUCTION VOLUMES:
Oil and condensate
(MBbls)................ 5 5 26 61 64 47 81
Natural gas (MMcf)...... 189 273 457 588 513 337 1,557
Natural gas equivalent
(MMcfe)................ 219 303 613 954 897 619 2,043
AVERAGE SALES PRICES:
Oil and condensate ($
per Bbls).............. $18.75 $19.52 $17.52 $17.66 $16.90 $ 16.61 $ 19.49
Natural gas ($ per Mcf). 1.69 1.77 2.20 1.57 1.87 1.79 2.26
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 $ 0.77 $ 0.81 $ 0.35
Depreciation, depletion
and amortization....... 0.08 0.09 0.24 0.27 0.35 0.19 0.40
Oil and natural gas
operating profit....... 1.63 1.56 1.89 1.50 1.16 1.23 1.75
NUMBER OF WELLS DRILLED:
Gross................... -- 6 12 13 35 19 34
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 E 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
30.1% Public
32.7% Former Edge Group II Partners
0.7% Edge Group
0.3% 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: 34.9%; Former Edge Group II Partners:
33.1%; Former Gulfedge Partners: 1.1%; Edge Group 0.7%; J.C. Calaway: 0.3%
(assuming an IPO price of $16.00 per share); and Public: 29.9%.
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.
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
25
<PAGE>
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 Mcf and 62,000 Mcf, 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 .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 will be 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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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
The Combination Transactions will be accounted for as a reorganization of
entities under common control because of the high degree of common control of
the stockholders of the Company and by virtue of their direct ownership of the
entities and interests exchanged. Accordingly, the net assets acquired in the
Combination Transactions will be recorded at the historical cost basis of the
affiliated predecessor owners.
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 F 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 Company has applied for the inclusion of shares of Common Stock 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 Combination Agreement Transactions
(assuming 100% acceptance) will be as set forth below:
<TABLE>
<S> <C>
Filing fees.........................................................
Legal fees and expenses.............................................
Accounting fees and expenses........................................
Engineering fees and expenses.......................................
Printing costs......................................................
Nasdaq listing fee..................................................
Miscellaneous expenses..............................................
Total.............................................................
</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 of 1933, as amended, and the Securities Exchange Act of 1934,
as amended, 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 84,760 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 sum of (A) the Management Fee
Amount (which equals $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. 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 all of the outstanding Edge Group II Units, which
represent limited partner interests in Edge Group II, the number of shares of
Common Stock equal to the whole number nearest to the difference between (A)
2,209,306 and (B) the aggregate number of GP Exchange Shares. 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. The number of shares of Common
Stock to be issued in exchange for each Edge Group II Unit will be determined
by dividing (i) the 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
the GP Exchange Shares by (ii) 189 (the total number of Edge Group II Units
outstanding).
Each limited partner of Edge Group II must tender all of his or her Edge
Group II Units if her 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 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
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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 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
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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 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 the
Expiration Date 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 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.
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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., Houston 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 the Expiration
Date 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 p.m., Houston 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 the Expiration Date 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
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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 p.m., Houston 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.
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CAPITALIZATION
The following table sets forth (i) the historical 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 4,682,000 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 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
----------------------------------
PRO FORMA
HISTORICAL FOR PRO FORMA
COMBINED COMBINATION AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................... $ 930 $ 931 $20,492
======= ======= =======
Current portion of long-term debt........... 316 316 316
======= ======= =======
Long-term debt.............................. 10,133 10,133 183
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; 4,682,000 shares
issued
and outstanding pro forma; 6,682,000
shares issued and outstanding pro forma
as adjusted.............................. -- 47 67
Additional paid in capital................ -- 2,699 31,689
Retained earnings......................... -- -- --
Combined equity........................... 1,413 -- --
------- ------- -------
Total stockholders' equity.................. 1,413 2,746 31,756
------- ------- -------
Total capitalization........................ $11,546 $12,879 $31,939
======= ======= =======
</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>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
THE COMPANY
The following table sets forth selected historical 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 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 2,126
------- ------- ------- ------ ------ ------- ------
Total operating
expenses.......... 1,954 2,771 2,342 2,924 3,983 3,097 4,050
------- ------- ------- ------ ------ ------- ------
Operating income
(loss)................ (1,531) (2,199) (887) (930) (1,943) (1,720) 1,055
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 1,219 398
Pro forma provision in
lieu of income taxes
(unaudited)........... -- -- -- -- -- -- --
Pro forma net income
(loss) (unaudited).... -- -- -- -- -- -- --
------- ------- ------- ------ ------ ------- ------
$(1,864) $(2,878) $(1,275) $ 969 $1,079 $ 1,219 $ 398
======= ======= ======= ====== ====== ======= ======
Pro forma net income
(loss) per share
(unaudited) (1)....... $ (0.40) $ (0.61) $ (0.27) $ 0.21 $ 0.23 $ 0.26 $ 0.09
======= ======= ======= ====== ====== ======= ======
Pro forma weighted
average shares
outstanding
(unaudited)........... 4,682 4,682 4,682 4,682 4,682 4,682 4,682
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)............. $(1,091) $(1,732) $ (197) $1,947 $2,207 $ 1,939 $2,268
Operating cash flow
(3)................... (1,654) (2,411) (1,080) (722) (1,445) (1,390) 1,611
Capital expenditures... 6,597 3,823 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........... $4,099 $1,205 $ (862) $ (973) $ (947) $ (1,601)
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).......... 3,162 285 (991) (34) 1,031 1,413
</TABLE>
- --------
(1) Pro forma net income (loss) per share has been computed assuming the
estimated 4,682,000 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. Management of the Company
believes that EBITDA may provide additional information about the
Company's ability to meet its future requirements for debt service,
capital expenditures and working capital. EBITDA is a financial measure
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 may vary
among companies, the EBITDA presented above may not be comparable to
similarly titled measures of other companies.
(3) Operating cash flow represents cash flows from operating activities prior
to changes in assets and liabilities. Operating cash flow is a financial
measure 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 operating cash flow excludes changes in assets and
liabilities, the operating cash flow presented above may not be comparable
to similarly titled measures of other companies.
59
<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) 2,662
Net cash (used)
provided by investing
activities............ (1,669) (145) (267) 297 (1,138) 1,278 (5,650)
Net cash (used)
provided by financing
activities............ 4,891 230 1,572 (413) 1,946 (1,267) 3,324
OTHER OPERATING DATA:
EBITDA (1)............. $ (801) $(1,507) $ 23 $2,134 $ 2,358 $ 2,063 $2,140
Operating cash flow
(2)................... (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 $ 663 $ 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. Management of the Company
believes that EBITDA may provide additional information about the Joint
Venture's ability to meet its future requirements for debt service,
capital expenditures and working capital. EBITDA is a financial measure
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 may vary
among companies, the EBITDA presented above may not be comparable to
similarly titled measures of other companies.
(2) Operating cash flow represents cash flows from operating activities prior
to changes in assets and liabilities. Operating cash flow is a financial
measure 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 operating cash flow excludes changes in assets and
liabilities, the operating cash flow presented above may not be comparable
to similarly titled measures of other companies.
60
<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)............. $(455) $(710) $(236) $434 $487 $ 474 $ 211
Operating cash flow
(2)................... (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.................. $ (117) $(66) $ 9 $129 $ 193 $ 283
Property and equipment, net...... 123 87 52 21 16 10
Total assets..................... 1,273 487 228 596 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. Management of the Company
believes that EBITDA may provide additional information about the Old
Edge's ability to meet its future requirements for debt service, capital
expenditures and working capital. EBITDA is a financial measure 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 may vary
among companies, the EBITDA presented above may not be comparable to
similarly titled measures of other companies.
(2) Operating cash flow represents cash flows from operating activities prior
to changes in assets and liabilities. Operating cash flow is a financial
measure 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 operating cash flow excludes changes in assets and
liabilities, the operating cash flow presented above may not be comparable
to similarly titled measures of other companies.
61
<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)............. $ (824) $(1,300) $ (269) $1,153 $ 1,375 $ 1,180 $1,363
Operating cash flow
(2)................... (1,187) (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. Management of the Company
believes that EBITDA 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 is a financial measure
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 may vary
among companies, the EBITDA presented above may not be comparable to
similarly titled measures of other companies.
(2) Operating cash flow represents cash flows from operating activities prior
to changes in assets and liabilities. Operating cash flow is a financial
measure 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 operating cash flow excludes changes in assets and
liabilities, the operating cash flow presented above may not be comparable
to similarly titled measures of other companies.
62
<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)..................... $(18) $(34) $ 2 $48 $ 53 $ 47 $ 49
Operating cash flow (2)........ (31) (50) (20) (13) (23) (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 $ 54 $ 15 $ -- $ 6 $ (11)
Property and equipment, net....... 59 53 59 94 180 282
Total assets...................... 205 143 114 135 217 374
Long-term debt, including current
maturities....................... 105 106 97 95 140 231
Equity............................ 79 19 (4) 23 52 58
</TABLE>
- --------
(1) EBITDA represents earnings before interest expense income taxes,
depreciation, depletion and amortization. Management of the Company
believes that EBITDA may provide additional information about Gulfedge's
ability to meet its future requirements for debt service, capital
expenditures and working capital. EBITDA is a financial measure 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 may vary
among companies, the EBITDA presented above may not be comparable to
similarly titled measures of other companies.
(2) Operating cash flow represents cash flows from operating activities prior
to changes in assets and liabilities. Operating cash flow is a financial
measure 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 operating cash flow excludes changes in assets and
liabilities, the operating cash flow presented above may not be comparable
to similarly titled measures of other companies.
63
<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.............. (17) (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)............... $(11) $(19) $ -- $28 $(31) $ 27 $ 28
Operating cash flow (2).. (17) (28) (11) (23) 27 24 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. Management of the Company
believes that EBITDA may provide additional information about Edge Group's
ability to meet its future requirements for debt service, capital
expenditures and working capital. EBITDA is a financial measure 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 may vary
among companies, the EBITDA presented above may not be comparable to
similarly titled measures of other companies.
(2) Operating cash flow represents cash flows from operating activities prior
to changes in assets and liabilities. Operating cash flow is a financial
measure 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 operating cash flow excludes changes in assets and
liabilities, the operating cash flow presented above may not be comparable
to similarly titled measures of other companies.
64
<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.
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. Old Edge was required to pay such taxes on its
share of Joint Venture income. Accordingly, the Combined Financial Statements
of the Company set forth elsewhere in this Joint Proxy and Consent
Solicitation Statement/Prospectus are prepared on the basis of a combination
of the Joint Venture, Old Edge, Edge Group II and Gulfedge. Upon the
consummation of the Combination Transactions, the Company will be required to
record its deferred taxes, if any, in accordance with SFAS No. 109,
"Accounting for Income Taxes." If the Combination Transactions had been
consummated at September 30, 1996 a deferred tax asset of approximately $1.2
million would have been available for future use to offset future tax
liabilities of the Company subject to any limitations imposed by the
Combination Transactions. The ultimate amount of the deferred tax asset and
its future utilization is dependent upon a number of factors and cannot be
determined until consummation of the Combination Transactions.
65
<PAGE>
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 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 Mcf and 62,000 Mcf 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 17% 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 26% increase in
average gas prices increased revenues by $732,000. The increase in oil and
natural gas production was due to new wells being successfully drilled and
completed during 1996, which was partially offset by normal production
declines from existing wells. Increases in average oil and gas prices were
directly attributable to the general improved market conditions.
66
<PAGE>
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
nine months ended September 30, 1995 and 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED 1996 PERIOD COMPARED
SEPTEMBER 30, TO 1995 PERIOD
----------------- ---------------------
INCREASE % INCREASE
1995 1996 (DECREASE) (DECREASE)
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
PRODUCTION VOLUMES:
Oil and condensate (MBbls)............ 47 81 34 74%
Natural gas (MMcf).................... 337 1,557 1,220 362%
AVERAGE SALES PRICES:
Oil and condensate ($ per Bbl)........ $ 16.61 $ 19.49 $ 2.88 17%
Natural gas ($ per Mcf)............... 1.79 2.26 0.47 26%
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
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.
Net income for the nine months ended September 30, 1996 was $398,000 as
compared to $1.2 million for the 1995 period, as a result of the factors
described above.
67
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Oil and natural gas revenues remained relatively unchanged at approximately
$2.0 million in both 1994 and 1995. Production volumes for oil increased 5%
from 61 MBbls in 1994 to 64 MBbls in 1995. Increased production was partially
offset by a 4% decrease in average oil prices. Production volumes for natural
gas decreased 13% from 588 MMcf in 1994 to 513 MMcf in 1995. The decrease in
natural gas production was offset by an 19% increase in average natural gas
prices. Oil and natural gas revenues were impacted by the addition of four new
wells, the sale of a property and declining production experienced at South
Mermentau and one other property caused by workovers that required the wells
to be shut in for a portion of the year.
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
years ended December 31, 1994 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995 COMPARED TO 1994
------------- ---------------------
INCREASE % INCREASE
1994 1995 (DECREASE) (DECREASE)
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
PRODUCTION VOLUMES:
Oil and condensate (MBbls)................ 61 64 3 5%
Natural gas (MMcf)........................ 588 513 (75) (13%)
AVERAGE SALES PRICES:
Oil and condensate ($ per Bbl)............ $17.66 $16.90 $(.76) (4%)
Natural gas ($ per Mcf)................... 1.57 1.87 0.30 19%
OPERATING REVENUES:
Oil and condensate (in thousands)......... $1,071 $1,079 $ 9 1%
Natural gas (in thousands)................ 923 961 38 4%
------ ------ -----
Total (in thousands).................... $1,994 $2,040 $ 47 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 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.
68
<PAGE>
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.
Net income in 1995 was approximately $1.1 million, compared to $969,000 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 $272,000 in revenues. The increases were offset by the shutting
in of a well on the South Maurice Field during 1993 and normal declining
production on various properties.
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
years ended December 31, 1993 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994 COMPARED TO 1993
------------- ---------------------
INCREASE % INCREASE
1993 1994 (DECREASE) (DECREASE)
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
PRODUCTION VOLUMES:
Oil and condensate (MBbls)................ 26 61 35 136%
Natural gas (MMcf)........................ 457 588 131 29%
AVERAGE SALES PRICE:
Oil and condensate ($ 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.
69
<PAGE>
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.
Net income increased from a net loss of $1.3 million in 1993 to a net income
of $969,000 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 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.
70
<PAGE>
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 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.
71
<PAGE>
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 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.
72
<PAGE>
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 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 17% 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
73
<PAGE>
increase in natural gas production increased revenues by $5,592. In addition a
26% 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 19.49 2.88 17%
Natural gas ($ per MMcfs)............... $ 1.79 $ 2.26 $ 0.47 26%
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.
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.
74
<PAGE>
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 4% 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 19% 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 16.90 (.76) (4%)
Natural gas ($ per Mcf)................. $ 1.57 $ 1.87 $ 0.30 19%
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 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.
75
<PAGE>
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.
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.
76
<PAGE>
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.
77
<PAGE>
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 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.
78
<PAGE>
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.
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 17% 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 26% increase in average gas
prices increased revenues by $729,000. The increase in oil and natural gas
production was due to new wells being successfully drilled and completed
during 1996, which was partially offset by normal production declines from
existing wells. Increases in average oil and gas prices were directly
attributable to the general improved market conditions.
79
<PAGE>
The following table summarizes production volumes average sales prices and
operating revenues for the Joint Venture's oil and natural gas operations for
the nine months ended September 30, 1995 and 1996 (in thousands except sales
price amounts).
<TABLE>
<CAPTION>
NINE MONTHS ENDED 1996 PERIOD COMPARED
SEPTEMBER 30, TO 1995 PERIOD
----------------- ---------------------
INCREASE % INCREASE
1995 1996 (DECREASE) (DECREASE)
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
PRODUCTION VOLUME:
Oil and condensate (Mbbls)............ 46 81 35 75%
Natural gas (MMcfs) .................. 334 1,551 1,217 364%
AVERAGE SALES PRICE:
Oil and condensate ($ per MMbls)...... 16.61 19.49 2.88 17%
Natural gas ($ per MMcfs)............. $ 1.79 $ 2.26 $ 0.47 26%
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.
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.
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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
$2.0 million in both 1994 and 1995. Production volumes for oil increased 5%
from 60 MBbls in 1994 to 63 MBbls in 1995. Increased production was partially
offset by a 4% decrease in average oil prices. Production volumes for natural
gas decreased 4% from 583 MMcf in 1994 to 507 MMcf in 1995. The decrease in
natural gas production was offset by an 19% increase in average natural gas
price. Oil and natural gas revenues were impacted by the addition of four new
wells, the sale of a property and declining production experienced at South
Mermentau and one other property caused by workovers that required the wells
to be shut in for a portion of the year.
The following table summarizes production volumes, average sales prices and
operating revenues for the Joint Venture's oil and natural gas operations for
the years ended December 31, 1994 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 30, 1995 COMPARED TO 1994
------------- ---------------------
INCREASE % INCREASE
1994 1995 (DECREASE) (DECREASE)
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
PRODUCTION VOLUME:
Oil and condensate (MBbl)................. 60 63 3 5%
Natural gas (MMcf)........................ 583 507 (76) (13%)
AVERAGE SALES PRICE:
Oil and condensate ($ per MBbls).......... $17.66 $16.90 $(.76) (4%)
Natural gas ($ per MMcfs)................. 1.57 1.87 0.30 19%
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
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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 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)................ $ 993 $ 916 $ (78) (8%)
------ ------ ------
Total (in thousands).................... $1,437 $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.
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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.
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
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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 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.
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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 18.6 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
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seismic data volume, as compared to the limited number of two dimensional
profiles covering a small percentage 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
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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.
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.
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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 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 2 10 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 35 85 120 124,231
===== === === === =======
</TABLE>
- --------
* 3-D seismic data is currently being acquired in the project area.
(1) Consists of identified drill sites that are fully evaluated, leased and
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
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<PAGE>
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 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 seven drill sites, one of which is currently
being drilled, with the remaining six to be drilled in the first half of 1997.
Two additional wells may be drilled in 1997, depending upon the results of the
eight 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 58
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). Seven of these
prospects have been drilled (five Frio prospects and two Vicksburg), resulting
in six new field discoveries and one field extension. These discoveries have
resulted in additional net proved reserves to the Company of 3.8 Bcf of gas
and 47 MBbls of oil. 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 42 prospects. The Company also believes that continuing interpretation
91
<PAGE>
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 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 attempted to make 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 average 80% working interest and
an 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 Yegua 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.
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<PAGE>
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 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 is currently acquiring an approximately 20
square mile 3-D seismic survey of the area. 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
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<PAGE>
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 well was completed in January 1997. Two
additional wells are currently scheduled to be drilled during 1997. The
Company has identified at least 10 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 is currently
producing 470 Mcf/d of gas and 10 Bbls/d of oil net to the Company's interest
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.
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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.
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.
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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.
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 of
approximately $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.
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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 A 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 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.
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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).................. 613 954 897 2,043
AVERAGE SALES PRICE:
Oil and condensate ($ per
MBbl)......................... $ 17.52 $ 17.66 $ 16.90 $19.49
Gas ($ per MMcf)............... 2.20 1.57 1.87 2.26
Average Oil & 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.
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.
<TABLE>
<CAPTION>
COST TO
FIND AND
RESERVES DEVELOP
CAPITALIZED ADDED (PER
COSTS(1) (MCFE)(2) MCFE)
----------- --------- --------
(IN THOUSANDS)
<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)............... 3,792 7,071 0.54
------ ------
January 1, 1993 through September 30,
1996..................................... $9,165 17,565 $0.52
====== ======
</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.
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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 2,052
Development..................... 21 238 1,150 297 1,714
------- ------- ------- -------- --------
Total capitalized costs..... $ 3,469 $ 6,431 $ 7,542 $ 5,205 $ 7,111
======= ======= ======= ======== ========
</TABLE>
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).
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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>
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.
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<PAGE>
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 Mcf and 62,000 Mcf, 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 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
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<PAGE>
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 (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)
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<PAGE>
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
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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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.
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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 this 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 summary of these agreements, which will be effective on
the closing of this Offering, does not purport to be complete and is qualified
by reference to them, copies of which have been filed as exhibits to the
Registration Statement of which this Joint Proxy and Consent Solicitation
Statement/Prospectus is a part. Each of these agreements provides 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 entitles the
employee to participate in all the Company's compensation plans (as defined)
in which other executive officers of the Company participate. The agreement
for Mr. John E. Calaway's employment provides 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. The agreements of each of Mr. John E.
Calaway and Mr. James D. Calaway provide for restricted stock awards pursuant
to the Incentive Plan of (a) 66,823 and 58,470 shares of Common Stock,
respectively, that 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 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 has 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 is subject to the right of the Company and the
employee to terminate the employee's employment at any time. Upon termination
of employment on account of death, disability or if employment is terminated
by the Company without cause (as defined) or by the employee subsequent to a
change of control (as defined) or with good reason (as defined), the employee
will be entitled to (i) payment(s) equal to his annual base salary and, in the
case of
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Mr. John E. Calaway his 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 two years), for the remainder of the term of the applicable agreement,
(ii) continued participation in all the Company's compensation plans (other
than the granting of new awards under the Incentive Plan or any other
performance-based plan) 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
provides 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 33,411 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) payment(s) equal to his annual base salary for the
remainder of the term of the applicable agreement 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.
Each of the employment agreements of Messrs. John E. Calaway, James D.
Calaway and 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. Each agreement provides 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 two years thereafter
in the case of each of Messrs. John E. Calaway and James D. Calaway, and for
one year thereafter in the case of Mr. Long.
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.
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
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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 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
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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, 33,411 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 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
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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
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the Joint Venture's regional information database without payment to the Joint
Venture or the other venturers. 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
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Old Edge a pro rata share of a one-time administrative fee of $18,750, in the
aggregate. Decisions regarding 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."
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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."
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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 10.28% 8.87%
James D. Calaway(3)..... 195,498 4.13% 4.48%
Michael G. Long......... -- -- --
Richard S. Dale(4)...... 48,922 1.03% *
Vincent Andrews(5)...... 206,814 4.42% 2.98%
David B. Benedict(6).... 36,338 * *
Nils Peterson(7)........ 14,664 * *
Stanley S. Raphael(8)... 274,853 5.87% 3.96%
John Sfondrini(9)....... 1,254,110 26.78% 18.09%
Robert W. Shower........ -- -- --
Edge Holding Company.... 858,853 18.34% 12.39%
36 Catoonah St., #16
Ridgefield, Connecticut
06877
All directors and
executive officers as a
group (10
persons)(1)(10)........ 2,512,740 53.66% 39.30%
</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.
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<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, 43,060 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.
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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)..................................... 9,785.6 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)................................... 9,691.53 9.26
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
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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.
(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
89,462.20 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) 632.4 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 Mr. Andrews, 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 1,054 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 50,962.2 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
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<PAGE>
exclusive right to vote such shares and Ms. Calaway has the exclusive
right to require the disposition of such shares by the partnership.
(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."
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<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."
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<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
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<PAGE>
such time as the cash and property distributed to Essex II L.P. is equivalent
to 111.3% of its capital contribution, 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
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<PAGE>
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 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 $346,697. 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 $350,000 and $400,000 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
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<PAGE>
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. 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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<PAGE>
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 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 may recognize ordinary income
with respect to the GP's Management Fee Shares received in the Edge Group
II Exchange Offer attributable to the future cash flow based management
fee. 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, 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 between the
amount realized on such sale and his tax basis in the shares sold. Although
definitive Treasury
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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.
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:
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(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 each
holder's holding period in the shares of Common Stock received would begin
on the day after the closing of Gulfedge Exchange Offer.
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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 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.
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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 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.
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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 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
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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. 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.
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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 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.
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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.
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
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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.
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
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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 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.
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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 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
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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 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."
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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 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
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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. Old Edge has an option
to purchase 842.8 shares of Old Edge Common Stock on January 15, 1997 at a
price of approximately $135.26 per share. Another 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 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
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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 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
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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 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.
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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.
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
6,682,000 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
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based on all material information reasonably available to them. Absent the
limitations authorized by Delaware 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
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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) 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.
EXPERTS
The Combined Financial Statements of Old Edge, affiliated entities and
direct interests 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.
156
<PAGE>
The letter report of Ryder Scott included as Annex E 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 Securities Exchange Act of 1934, as amended. 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
<PAGE>
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.
158
<PAGE>
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.
159
<PAGE>
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.
160
<PAGE>
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
Notes to Unaudited Pro Forma Combined Financial Statements.............. F-5
EDGE PETROLEUM CORPORATION (A DELAWARE CORPORATION):
Independent Auditors' Report............................................ F-8
Balance Sheet, December 3, 1996......................................... F-9
Notes to Balance Sheet.................................................. F-10
EDGE PETROLEUM CORPORATION (A TEXAS CORPORATION), AFFILIATED ENTITIES AND
DIRECT INTERESTS:
Independent Auditors' Report............................................ F-11
Combined Balance Sheets, September 30, 1996, December 31, 1995 and 1994. F-12
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-13
Combined Statements of Equity for the Nine Month Period Ended September
30, 1996 and the Years Ended
December 31, 1995, 1994 and 1993....................................... F-14
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-15
Notes to Combined Financial Statements.................................. F-16
EDGE JOINT VENTURE II (JOINT VENTURE)
Independent Auditors' Report............................................ F-27
Balance Sheets, September 30, 1996, December 31, 1995 and 1994.......... F-28
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-29
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-30
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-31
Notes to the Financial Statements....................................... F-32
EDGE PETROLEUM CORPORATION, A TEXAS CORPORATION (OLD EDGE)
Independent Auditors' Report............................................ F-41
Consolidated Balance Sheets, September 30, 1996, December 31, 1995 and
1994................................................................... F-42
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-43
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-44
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-45
Notes to the Consolidated Financial Statements.......................... F-46
EDGE GROUP II LIMITED PARTNERSHIP (EDGE GROUP II)
Independent Auditors' Report............................................ F-54
Consolidated Balance Sheets, September 30, 1996, December 31, 1995 and
1994................................................................... F-55
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-56
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-57
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-58
Notes to the Consolidated Financial Statements.......................... F-59
GULFEDGE LIMITED PARTNERSHIP (GULFEDGE)
Independent Auditors' Report............................................ F-68
Balance Sheets, September 30, 1996, December 31, 1995 and 1994.......... F-69
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-70
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-71
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-72
Notes to the Financial Statements....................................... F-73
</TABLE>
F-1
<PAGE>
EDGE PETROLEUM CORPORATION
(A RECENTLY FORMED DELAWARE CORPORATION)
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited Pro Forma Combined Balance Sheet and notes to
unaudited Pro Forma Combined Financial Statements are presented to show the
pro forma effects of the proposed Combination (as defined in Note 2) hereto
and Offering in which Edge Petroleum Corporation, a recently formed Delaware
corporation (the "Company"), will issue up to 4,682,273 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 will
issue 2,000,000 shares of previously unissued common stock in a public
offering of shares. For a more complete description of these transactions see
Note 2 hereto.
Pro forma data are based on assumptions and include adjustments as explained
in the notes to the unaudited Pro Forma Combined Financial Statements. The
unaudited Pro Forma Combined Balance Sheet of the Company was prepared
utilizing the combined historical financial statements of the combined
predecessor entities as described in Note 2 hereto. Note 3 to the unaudited
Pro Forma Combined Financial Statements discloses the pro forma effects of the
Combination and the Offering on the historical income statement of the
combined predecessor entities. 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 combined
financial statements of Old Edge, affiliated entities and direct interests
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 COMBINED PRO FORMA PRO FORMA
DECEMBER 3, PREDECESSOR PRO FORMA FOR THE PRO FORMA FOR THE
ASSETS 1996 ENTITIES ADJUSTMENTS COMBINATION ADJUSTMENTS OFFERING
------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents.......... $1,000 $ 930,581 $ 931,581 $19,560,010 (4) $20,491,591
Accounts receivable,
trade................ 1,649,557 1,649,557 1,649,557
Accounts receivable,
joint interest
owners............... 2,375,953 2,375,953 2,375,953
Receivables from
related parties...... 183,288 183,288 183,288
Other current assets.. 134,967 134,967 134,967
Advance to
stockholder.......... 3,371 3,371 3,371
------ ----------- ------- ----------- ----------- -----------
Total current assets. 1,000 5,277,717 5,278,717 19,560,010 24,838,727
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 $18,810,010 $37,246,507
====== =========== ======= =========== =========== ===========
</TABLE>
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 COMBINED PRO FORMA PRO FORMA
LIABILITIES AND DECEMBER 3, PREDECESSOR PRO FORMA FOR THE PRO FORMA FOR THE
STOCKHOLDERS' EQUITY 1996 ENTITIES 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... 342,652 342,652 $ (250,041)(4) 92,611
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......... 6,878,609 (1,332,450) 5,546,159 (250,041) 5,296,118
NOTES PAYABLE........... 10,132,919 10,132,919 (9,949,949)(4) 182,970
LONG-TERM LIABILITY..... 11,462 11,462 11,462
------ ----------- ------------ ----------- ----------- -----------
Total liabilities.... 17,022,990 (1,332,450) 15,690,540 (10,199,990) 5,490,550
Common stock, $.01 par
value; 40,000,000
shares authorized;
4,682,273 shares
issued and
outstanding pro forma
for the combination;
6,682,000 shares
issued outstanding
pro forma for the
offering............. $ 10 46,820 (1) 46,830 20,000 (4) 66,830
Additional paid-in
capital.............. 990 1,365,687 (1) 2,699,127 29,740,000 (4) 31,689,127
1,332,450 (2) (750,000)(3)
Retained earnings.....
Combined equity of
predecessor entities. 1,412,507 (1,412,507)(1)
------ ----------- ------------ ----------- ----------- -----------
Total stockholders'
equity.............. 1,000 1,412,507 1,332,450 2,745,957 29,010,000 31,755,957
------ ----------- ------------ ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY... $1,000 $18,435,497 $ 0 $18,436,497 $18,810,010 $37,246,507
====== =========== ============ =========== =========== ===========
</TABLE>
See notes to unaudited pro forma combined financial statements.
F-4
<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 control of the
stockholders of the Company 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. BALANCE SHEET PRO FORMA ADJUSTMENTS
The Pro Forma Combined Balance Sheet is based on the unaudited combined
balance sheet of Edge Petroleum Corporation, a Texas corporation, affiliated
entities and direct interests (collectively, the "Combined Predecessor
Entities") as of September 30, 1996, and gives effect to the consummation of
the Combination and the Offering as if such transactions had occurred on
September 30, 1996 reflecting the adjustments and assumptions described below:
(1) Reflects the proposed issuance of up to 4,682,273 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 combined equity
of the Combined Predecessor Entities 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
Predecessor Affiliated Entities which will be reimbursed by the Company
from proceeds received from the Offering.
(4) Reflects the receipt of the net proceeds from the Offering and the
application thereof to repay approximately $8.6 million of indebtedness
incurred on the revolving credit facility, approximately $1.3 million of
subordinated indebtedness and approximately $250,000 of accrued offering
costs. It is assumed the remaining proceeds will be used to increase
working capital until used for oil and gas exploration activities.
F-5
<PAGE>
EDGE PETROLEUM CORPORATION
(A RECENTLY FORMED DELAWARE CORPORATION)
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. INCOME STATEMENT PRO FORMA ADJUSTMENTS
The net proceeds to the Company from this Offering at an assumed initial
public offering price of $16.00 per share are estimated to be approximately
$29.0 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 be used 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 and approximately
$1.3 million of subordinated indebtedness that currently bears interest at 10%
and matures on April 8, 1998. 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 this Offering, the
Company anticipates that its only long-term indebtedness will consist of an
aggregate of approximately $441,000 principal amount of equipment loans.
Assuming this Offering had been completed at the beginning of the respective
periods, interest expense would have been reduced by $320,506 and $674,949 for
the year ended December 31, 1995 and the nine month period ended September 30,
1996. As a result, pro forma net income and earnings per share would have been
$1,399,286 and $0.26, respectively, for the year ended December 31, 1995 and
$1,072,614 and $0.20, respectively, for the nine month period ended September
30, 1996.
4. ACCEPTANCE OF THE OFFER
The following table shows the Pro Forma Combined Balance Sheet and Statement
of Operations amounts assuming varying levels of acceptance of the exchange
offer by limited partnership unit holders in Edge Group II:
PRO FORMA COMBINED BALANCE SHEET, SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ASSETS 70% 80% 90%
------ ----------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................ $ 836,269 $ 862,971 $ 889,673
Accounts receivable, trade............... 1,275,543 1,386,709 1,497,875
Accounts receivable, joint interest
owners.................................. 2,099,530 2,172,528 2,245,526
Accounts receivable from related parties. 183,063 183,138 183,138
Advances to stockholders................. 3,371 3,371 3,371
Other current assets..................... 108,153 115,744 123,334
----------- ----------- -----------
Total current assets................... 4,505,929 4,724,461 4,942,917
PROPERTY AND EQUIPMENT, Net--full cost
method of accounting for oil and gas
property.................................. 9,440,070 10,273,528 11,106,950
DEFERRED OFFERING COSTS.................... 571,568 622,080 672,593
OTHER ASSETS............................... 21,680 22,678 23,676
----------- ----------- -----------
TOTAL...................................... $14,539,247 $15,642,747 $16,746,136
=========== =========== ===========
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable, trade.................. $ 1,893,866 $ 2,054,295 $ 2,214,649
Accounts payable, joint interests owners. 2,325,342 2,325,342 2,325,342
Accounts payable to related party........ 797,142 980,592 1,164,042
Accrued interest payable................. 18,201 18,201 18,201
Accrued liabilities...................... 317,990 346,948 375,906
Current portion of notes payable......... 240,843 262,128 283,412
----------- ----------- -----------
Total current liabilities.............. 5,593,384 5,987,506 6,381,552
NOTES PAYABLE.............................. 7,722,196 8,404,648 9,087,100
LONG-TERM LIABILITY........................ 11,462 11,462 11,462
COMMITMENTS AND CONTINGENCIES.............. -- -- --
----------- ----------- -----------
Total liabilities...................... 13,327,042 14,403,616 15,480,114
EQUITY..................................... 1,212,205 1,239,131 1,266,022
----------- ----------- -----------
TOTAL...................................... $14,539,247 $15,642,747 $16,746,136
=========== =========== ===========
</TABLE>
F-6
<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>
70% 80% 90%
---------- ---------- -----------
<S> <C> <C> <C>
Oil and natural gas sales.............. $3,895,526 $4,237,938 $4,580,351
---------- ---------- -----------
Operating expenses:
Oil and natural gas operating
expenses............................ 542,577 590,378 638,179
Depreciation, depletion and
amortization........................ 925,684 1,006,946 1,088,208
General and administrative........... 1,643,711 1,801,940 1,960,169
---------- ---------- -----------
Total operating expenses 3,111,972 3,399,264 3,686,556
---------- ---------- -----------
Net income............................. 783,554 838,674 893,795
Pro forma provision in lieu of taxes...
---------- ---------- -----------
Pro forma net income................... $ 783,554 $ 838,674 $ 893,795
========== ========== ===========
Net income per share................... $0.20 $0.20 $0.21
========== ========== ===========
Average common share outstanding (in
thousands)............................ 3,881 4,102 4,322
========== ========== ===========
<CAPTION>
PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
70% 80% 90%
---------- ---------- -----------
<S> <C> <C> <C>
Oil and natural gas sales.............. $1,560,765 $1,696,558 $1,832,351
Operating Expenses:
Oil and natural gas operating
expenses............................ 523,871 569,892 615,914
Depreciation, depletion and
amortization........................ 624,864 678,238 731,611
General and administrative........... 1,808,008 1,985,016 2,162,023
---------- ---------- -----------
Total operating expenses........... 2,956,743 3,233,146 3,509,548
Loss from operations................... (1,395,978) (1,536,588) (1,677,197)
Other income and expenses:.............
Gain on sale of oil and gas property. 2,543,152 2,767,905 2,992,657
---------- ---------- -----------
Net income............................. 1,147,174 1,231,317 1,315,460
Pro forma provision in lieu of income
taxes.................................
---------- ---------- -----------
Pro forma net income................... $1,147,174 $1,231,317 $1,315,460
========== ========== ===========
Net income per share................... $0.30 $0.30 $0.30
========== ========== ===========
Average common shares outstanding (in
thousands)............................ 3,881 4,102 4,322
========== ========== ===========
</TABLE>
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. Holders of at least 70% of the outstanding Edge Group II limited
partnership units must tender their interests for the Combination to occur.
F-7
<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-8
<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-9
<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 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 of Directors 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-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Edge Petroleum Corporation,
a Texas corporation
We have audited the accompanying combined balance sheets of Edge Petroleum
Corporation, a Texas corporation ("Old Edge"), affiliated entities and direct
interests (collectively, the "Company") as of December 31, 1994 and, 1995 and
September 30, 1996, and the related 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 entities' 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 combined financial position of the Company at December 31, 1994
and, 1995 and September 30, 1996, and the combined results of their 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-11
<PAGE>
EDGE PETROLEUM CORPORATION, AFFILIATED ENTITIES AND DIRECT INTERESTS
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 1,649,535
Accounts receivable, joint interest
owners................................. 120,252 333,552 2,375,953
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 interests
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..................... 109,675 160,493 342,652
Current portion of notes payable........ 943,767 178,898 316,030
---------- ---------- -----------
Total current liabilities............. 2,850,352 2,836,044 6,878,609
NOTES PAYABLE............................. 3,233,722 5,945,076 10,132,919
LONG-TERM LIABILITY....................... 77,802 46,245 11,462
COMMITMENTS AND CONTINGENCIES............. -- -- --
---------- ---------- -----------
Total liabilities..................... 6,161,876 8,827,365 17,022,990
EQUITY (DEFICIT).......................... (33,938) 1,030,842 1,412,507
---------- ---------- -----------
TOTAL..................................... $6,127,938 $9,858,207 $18,435,497
========== ========== ===========
</TABLE>
See notes to combined financial statements.
F-12
<PAGE>
EDGE PETROLEUM CORPORATION, AFFILIATED ENTITIES AND DIRECT INTERESTS
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 2,125,827
------------ ---------- ----------- ---------- ----------
Total operating
expenses........... 2,342,476 2,924,524 3,983,400 3,097,163 4,049,995
------------ ---------- ----------- ---------- ----------
OPERATING INCOME (LOSS). (887,038) (930,728) (1,942,954) (1,720,258) 1,055,084
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)....... (1,275,255) 968,764 1,078,780 1,218,929 397,665
PRO FORMA PROVISION IN
LIEU OF INCOME TAXES
(UNAUDITED)(Note 5)....
------------ ---------- ----------- ---------- ----------
PRO FORMA NET INCOME
(LOSS) (UNAUDITED)..... ($1,275,255) $ 968,764 $ 1,078,780 $1,218,929 $ 397,665
============ ========== =========== ========== ==========
</TABLE>
See notes to combined financial statements.
F-13
<PAGE>
EDGE PETROLEUM CORPORATION, AFFILIATED ENTITIES AND DIRECT INTERESTS
COMBINED STATEMENTS OF EQUITY
<TABLE>
<S> <C>
BALANCE, JANUARY 1, 1993........................................... $ 284,553
Net loss......................................................... (1,275,255)
-----------
BALANCE, DECEMBER 31, 1993......................................... (990,702)
Net income....................................................... 968,764
Treasury stock acquired.......................................... (24,000)
Treasury stock reissued.......................................... 12,000
-----------
BALANCE, DECEMBER 31, 1994......................................... (33,938)
Net income....................................................... 1,078,780
Treasury stock acquired.......................................... (28,000)
Treasury stock reissued.......................................... 14,000
-----------
BALANCE, DECEMBER 31, 1995......................................... 1,030,842
Net income....................................................... 397,665
Treasury stock acquired.......................................... (32,000)
Treasury stock reissued.......................................... 16,000
-----------
BALANCE, SEPTEMBER 30, 1996........................................ $ 1,412,507
===========
</TABLE>
See notes to combined financial statements.
F-14
<PAGE>
EDGE PETROLEUM CORPORATION, AFFILIATED ENTITIES AND DIRECT INTERESTS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS 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)..... $(1,275,255) $ 968,764 $1,078,780 $ 1,218,929 $ 397,665
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)
Changes in assets and
liabilities:
Accounts receivable,
trade............... (323,787) (268,785) 60,098 619,957 (481,637)
Accounts receivable,
working interest
owners.............. (104,821) 54,302 (213,300) (683,838) (2,042,401)
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 24,924 182,159
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 combined financial statements.
F-15
<PAGE>
EDGE PETROLEUM CORPORATION, AFFILIATED ENTITIES AND DIRECT INTERESTS
NOTES TO 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.
PRINCIPLES OF COMBINATION--The accompanying combined financial statements
include the accounts of Old Edge and the combined affiliated interests of the
limited partnerships in the Joint Venture all of which share common ownership
and management (collectively, the "Company"). The Combination Transactions
allows Limited Partnership holders and Edge Group the option to "stand pat";
therefore, all of the interests may not be acquired in the Combination
Transaction. Consequently, these financial statements may not reflect the
financial results or financial condition of the Company. The Combination will
be accounted for as a reorganization of entities under common control because
of the high degree of common control of the stockholders of the Company and by
virtue of their direct ownership of the entities and interest exchanged.
Accordingly, the combined accounts are prepared using the historical costs and
results of operations of the affiliated entities as if such entities had
always been combined. All intercompany balances have been eliminated.
INTERIM FINANCIAL STATEMENTS--In the opinion of management, the unaudited
consolidated 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 is focusing 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
F-16
<PAGE>
EDGE PETROLEUM CORPORATION, AFFILIATED ENTITIES AND DIRECT INTERESTS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
continue to operate under the terms of the original Joint Venture Agreement,
as amended, until the dissolution is completed.
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 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 $0.51, 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 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
Company 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 under swap arrangements during the nine month
period ended September 30, 1996 and the
F-17
<PAGE>
EDGE PETROLEUM CORPORATION, AFFILIATED ENTITIES AND DIRECT INTERESTS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
year ended December 31, 1995 were 182,000 MCF and 62,000 MCF, 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 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 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 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 $ 9,029,777 $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 10,218,304 15,869,230
Accumulated depreciation, depletion and
amortization.......................... (1,566,484) (2,307,236) (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-18
<PAGE>
EDGE PETROLEUM CORPORATION, AFFILIATED ENTITIES AND DIRECT INTERESTS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.............................. $ 280,335 $ 226,979 $ 207,651
1993................................... 341,445 276,411 235,463
1994................................... 1,214,255 744,744 476,243
1995................................... -- 696,677 469,125
1996................................... 1,635,330
---------- ---------- ----------
$1,836,035 $1,944,811 $3,023,812
========== ========== ==========
</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 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 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-19
<PAGE>
EDGE PETROLEUM CORPORATION, AFFILIATED ENTITIES AND DIRECT INTERESTS
NOTES TO 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 ending 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
The Company is, from time to time, 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-20
<PAGE>
EDGE PETROLEUM CORPORATION, AFFILIATED ENTITIES AND DIRECT INTERESTS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
expect these matters to have a materially adverse effect on the financial
condition, results of operations or cash flows of the Company.
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.PRO FORMA INCOME TAXES (UNAUDITED)
The following pro forma (provision) benefit in lieu of income tax amounts
have been presented for disclosure purposes only. These amounts represent the
companies' 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>
Statutory federal income
taxes.................... $ -- $ 339,067 $ 377,573 $139,183
Recognition of net
operating loss
carryforwards............ -- (339,067) (377,573) (139,183)
---------- --------- --------- --------
Pro forma (provision)
benefit in lieu of income
taxes.................... $ -- $ -- $ -- $ --
========== ========= ========= ========
</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-21
<PAGE>
EDGE PETROLEUM CORPORATION, AFFILIATED ENTITIES AND DIRECT INTERESTS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 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. 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 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 remain exercisable at September 30, 1996.
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.
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 September 30, 1996. Included in accounts payable to related party
at December 31, 1994 and 1995 and September 30, 1996 is $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
F-22
<PAGE>
EDGE PETROLEUM CORPORATION, AFFILIATED ENTITIES AND DIRECT INTERESTS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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
$2,488 to one of its directors 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
$11,014 of accrued interest (see Note 3).
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, included in receivables
from related parties, was $10,492, $3,306 and $7,356, respectively, of
representation fees due Old Edge.
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, 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 expense. 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 amounted to $36,750, $18,750 and $40,250 and $50,250
respectively. At December 31, 1994 and 1995, 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 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....................... $3,098,692 $ 7,085,225 $10,876,678
Accumulated depreciation,
depletion and amortization....... (1,178,985) (1,746,643) (2,793,420)
---------- ----------- -----------
Net capitalized costs............. $1,919,707 $ 5,338,582 $ 8,083,258
========== =========== ===========
</TABLE>
F-23
<PAGE>
EDGE PETROLEUM CORPORATION, AFFILIATED ENTITIES AND DIRECT INTERESTS
NOTES TO 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 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 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:
<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.... (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................................ 169,947 261,327 652,843 789,440
======= ======= ======= =======
</TABLE>
F-24
<PAGE>
EDGE PETROLEUM CORPORATION, AFFILIATED ENTITIES AND DIRECT INTERESTS
NOTES TO 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 1,465,329 271,155 187,972
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
year end..................... 2,550,000 3,548,000 6,992,000 10,985,000
========= ========= ========== ==========
</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) (1,962,963) (5,883,983) (8,945,210)
---------- ----------- ----------- -----------
Future net cash flows...... 6,084,370 8,597,983 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 $ 6,872,479 $13,945,632 $19,983,732
========== =========== =========== ===========
</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
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 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.
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, and a
discount factor more representative of the time value of money, and the risks
inherent in reserve estimates.
F-25
<PAGE>
CHANGE 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............ (112,909) (561,999) (2,423,065) (2,175,769)
Accretion of discount... 354,143 577,807 794,640 1,744,261
Production rates
(timing) and other..... (180,370) (372,114) 28,026 (149,097)
----------- ----------- ----------- -----------
Net change................ 1,991,973 1,606,329 7,073,153 6,038,100
----------- ----------- ----------- -----------
Beginning of year......... 3,274,177 5,266,150 6,872,479 13,945,632
----------- ----------- ----------- -----------
End of year............... $ 5,266,150 $ 6,872,479 $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-26
<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-27
<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-28
<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-29
<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-30
<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) (85,180)
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) 2,412,763
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Oil and gas property
and equipment
purchases............ (3,655,889) (6,803,716) (8,496,185) (5,545,404) (7,880,777)
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 (5,650,909)
----------- ----------- ----------- ----------- -----------
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-31
<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
is focusing 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 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.
F-32
<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 $0.51, 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
MCF's 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 MCF and 62,000 MCF 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-33
<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 by year the cost was incurred.
F-34
<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................................... 341,445 276,411 233,463
1994................................... 1,214,255 744,744 476,243
1995................................... -- 696,677 469,125
1996................................... 1,635,530
---------- ---------- ----------
$1,836,035 $1,944,811 $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-35
<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 ending 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-36
<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,
accrued interest of $3,205 and $11,041, respectively (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......................... $ 3,098,692 $ 7,085,225 $10,876,678
Accumulated depreciation, depletion
and amortization................... 1,178,985 (1,746,643) (2,793,420)
----------- ------------ -----------
Net capitalized costs............... $ 1,919,707 $ 5,338,582 $ 8,083,258
=========== ============ ===========
</TABLE>
F-37
<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................................. 169,947 261,327 652,843 789,440
======= ======= ======= =======
</TABLE>
F-38
<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 6,992,000 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 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-39
<PAGE>
Change 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-40
<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-41
<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-42
<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
incomes 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-43
<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-44
<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-45
<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 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 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 and the
F-46
<PAGE>
EDGE PETROLEUM CORPORATION AND SUBSIDIARY, A TEXAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 the 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-47
<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-48
<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-49
<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,
F-50
<PAGE>
EDGE PETROLEUM CORPORATION AND SUBSIDIARY, A TEXAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1993, 1994 and 1995 and the nine month period ended September 30, 1996
amounted to $36,750, $18,750, $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 36,402
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 has 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..................... $666,128 $1,551,608 $2,349,318
======== ========== ==========
</TABLE>
F-51
<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 75,952 189,742 188,092
======= ========= ========= =========
<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 2,032,155 2,377,435
======= ========= ========= =========
</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>
F-52
<PAGE>
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.
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, and a discount factor more representative of the time value
of money, and the risks inherent in reserve estimates.
* * * * *
F-53
<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-54
<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 related parties........... 1,047,065 1,298,640 1,834,446
Accrued expenses..................... 144,133 99,262 289,581
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-55
<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,
net.................. (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-56
<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-57
<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........... (231,910) 230,125 251,575 186,357 535,856
Accrued liabili-
ties.............. (863) 38,686 (44,871) (10,651) 190,319
----------- ----------- ----------- ----------- -----------
Net cash provided
(used) by
operating
activities...... (1,296,091) (416,061) (698,956) (102,943) 1,625,048
----------- ----------- ----------- ----------- -----------
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) (5,307,754)
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 (3,805,938)
----------- ----------- ----------- ----------- -----------
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-58
<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 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.
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
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-59
<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 and exercises significant influence over its
operations. 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 $0.51, 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 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 the
hedging of anticipated transactions are recognized in income when the hedged
transaction occurs. The natural
F-60
<PAGE>
EDGE GROUP II LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 62,000 MCFs, respectively. Edge Group II's share of these volumes
were 122,577 MCFs, and 41,757, 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-61
<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................................ -- 469,212 315,956
1996................................ 1,101,395
---------- ---------- ----------
$1,236,570 $1,309,830 $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 is
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-62
<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 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 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 is $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-63
<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 require 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 ending 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 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-64
<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 had sales of 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............................ $ 2,086,969 $ 4,771, 906 $ 7,325,443
Accumulated depreciation, depletion
and amortization.................. (543,350) (1,176,364) (1,881,368)
----------- ------------ -----------
Net capitalized costs.............. $1,543,619 $ 3,595,542 $ 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 17,700 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 $4,331,619 $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
F-65
<PAGE>
EDGE GROUP II LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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................... 114,459 176,004 439,690 435,864
========= ========= ========== ==========
<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 4,709,112 5,509,230
========= ========= ========== ==========
</TABLE>
F-66
<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 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.
Change 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) $(1,129,314) $ (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 (396,956) 275,056 1,112,076
Revisions of previous
quantity estimates...... 371,610 1,596,388 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) (411,527) 4,669 (95,346)
---------- ----------- ----------- ------------
Net change................. 1,506,378 1,460,369 6,395,703 5,532,041
---------- ----------- ----------- ------------
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 $17,279,641
========== =========== =========== ============
</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-67
<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-68
<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-69
<PAGE>
GULFEDGE LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, 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) (15,182)
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 $ 6,127
======== ======= ======= ======== ========
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-70
<PAGE>
GULFEDGE LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- 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-71
<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 (690) 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 54,382 102,393
Payments on notes
payable................ (10,840) (10,383) (1,910) (83,300) (3,698)
Proceeds from long-term
debt................... 13,464 120,946 102,393
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-72
<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 includes 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' interest.
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 sooner
terminated 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 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.
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 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-73
<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 $0.51, 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
F-74
<PAGE>
GULFEDGE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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. 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-75
<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 is
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, 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 Agreement. Gulfedge's share of
this loan is $11,410 at December 31, 1994 and $29,666 at both December 31,
1995 and September 30, 1996, respectively.
F-76
<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 ending 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 non-compliance for all periods
affect and the Joint Venture subsequently amended the covenants to be less
stringent.
F-77
<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 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-78
<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.................... $ 70,712 $ 164,161 $248,206
Accumulated depreciation,
depletion and amortization.... (18,410) (29,046) (63,746)
----------- ------------ --------
Net capitalized costs.......... $ 52,302 $ 135,115 $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 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.............................. $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 3,598 967
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) (1,481) (1,841)
------ ------ ------ ------
End of year............................ 3,878 8,402 16,178 18,973
------ ------ ------ ------
Proved developed reserves at end of
year.................................... 3,878 5,963 14,898 14,768
====== ====== ====== ======
</TABLE>
F-79
<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 26,390 4,290
Purchases of oil and gas proper-
ties............................... 844 4,883
Extensions and discoveries.......... 25,288 4,655 142,557 139,339
Sales of oil and gas properties..... (43,608)
Production.......................... (10,305) (13,312) (12,745) (35,393)
------- ------- ------- -------
End of year......................... 58,191 83,817 201,294 309,530
------- ------- ------- -------
Proved developed reserves at end of
year................................. 58,191 80,965 159,557 186,668
======= ======= ======= =======
</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 $707,675 $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 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, and a discount factor more representative of the time value of money,
and the risks inherent in reserve estimates.
F-80
<PAGE>
Change 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 (11,545) 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) (8,774) 125 (3,234)
-------- -------- -------- --------
Net change......................... 51,041 49,483 216,705 187,437
-------- -------- -------- --------
Beginning of year.................. 80,815 131,856 181,339 398,044
-------- -------- -------- --------
End of year........................ $131,856 $181,339 $398,044 $585,481
======== ======== ======== ========
</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-81
<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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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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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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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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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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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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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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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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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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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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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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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
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 5:00 p.m.,
Central 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
B-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 the Expiration Date.
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
B-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:
--------------------------
- ----------------------------------
- ----------------------------------
B-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
- ------------------------- ----------------
B-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>
B-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>
B-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.
B-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.
B-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>
B-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.
B-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
B-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
B-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
B-13
<PAGE>
APPENDIX C
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 5:00 p.m.,
Central 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.
C-1
<PAGE>
This Letter of Acceptance may be withdrawn by written notice to the Company at
any time on or before the Expiration Date.
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.
C-2
<PAGE>
PART II
NAME AND ADDRESS OF OFFEREE
Name:
-----------------------------
Address:
--------------------------
- ----------------------------------
- ----------------------------------
C-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
------------------------
C-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>
C-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>
C-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.
C-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.
C-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>
C-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.
C-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
C-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
C-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
C-13
<PAGE>
APPENDIX D
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 5:00 p.m.,
Central 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.
D-1
<PAGE>
This Letter of Acceptance may be withdrawn by written notice to the Company at
any time on or before the Expiration Date.
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:
--------------------------
- ----------------------------------
- ----------------------------------
D-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
-----------------
D-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>
D-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>
D-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.
D-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.
D-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.
D-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.
D-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
D-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
D-11
<PAGE>
APPENDIX E
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.
E-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
E-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
E-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.
E-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.
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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.
E-6
<PAGE>
APPENDIX F
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.
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(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.
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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.
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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
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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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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.
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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 --Employment Agreement between the Company and James D. Calaway.
*10.10 --Employment Agreement between the Company and John E. Calaway.
+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.
*10.14 --Incentive Plan of Edge Petroleum Corporation.
*10.15 --Employment Agreement between the Company and Michael G. Long.
*11.1 --Computation of Net Income Per Common and Common Equivalent Share.
*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.
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.
</TABLE>
- --------
+ Previously filed.
* To be filed by amendment.
(b) Financial Statement Schedules.
Schedule I--Condensed Financial Information of Registrant
All other 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.
II-6
<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 14TH DAY OF JANUARY, 1997.
EDGE PETROLEUM CORPORATION
By: /s/ James D. Calaway
__________________________________
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 14, 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
------------------------------------
John Sfondrini
</TABLE>
*By: /s/ James D. Calaway
-----------------------------------------
(James D. Calaway, Attorney-in-Fact)
II-7
<PAGE>
Exhibit 4.2
ADDENDUM TO MEMORANDUM OF TERM LOAN AGREEMENT
This shall amend the Memorandum of Term Loan Agreement ("Memorandum
Agreement") between James C. Calaway ("Calaway") and Edge Joint Venture II
("Edge") dated December 20, 1994 which sets forth the terms and provisions of a
$2,000,000.00 loan/line of credit between Calaway and Edge ("the Loan").
1. With respect to the Western 3-D Grid, Buckeye Project Area, Spartan,
Spartan Extension, Belco (BTA1 and BTA2) Hiawatha and any other 3-D grid
areas identified and developed by Edge prior to the Change of Interest
Date (the "3-D Grids"), Calaway shall receive a .1% of 8/8ths overriding
royalty interest ("ORRI") and a 1% of 8/8ths reversionary working
interest after payout ("RWI") in all wells (and the associated leases
and/or unit) located in Prospects within such areas where the well is
proposed (either by Edge or its working interest partners) prior to the
date of the Change of Interest Date. In all Prospects which are subject
to the Memorandum Agreement and which cover lands located outside of
such 3-D Grid areas, Calaway shall receive his .2% of 8/8ths ORRI and 1%
of 8/8ths RWI on all wells and related leases in such Prospects where
the well is proposed prior to the Change of Interest Date. The "Change
of Interest Date" is defined as the date the Loan is paid in full, but
if the loan is paid in full prior to the date of an event causing
dissolution of the Joint Venture, the Change of Interest Date shall be
the date of dissolution of the Joint Venture. Calaway's ORRI, however,
will only apply to Prospects that have not been marketed as of December
20, 1994 or which were not subject to a prior loan agreement between
Calaway and Edge (ie. for example, Tyler). On Prospects which were
marketed by Edge prior to December 20, 1994, Calaway's RWI shall apply,
but the ORRI shall not apply, in accordance with the terms of the
December 20, 1994 Memorandum Agreement.
2. At the Change of Interest Date, Calaway and Edge shall create an AMI
(the "3-D AMI") consisting of all acreage in which Edge or its partners
as of the Change of Interest Date (a) have shot or acquired 3-D
geophysical data, or (b) have a firm contractual commitment to permit
or shoot 3-D geophysical data. A separate 3-D AMI shall be created for
each such 3-D area. From and after the Change of Interest Date, Calaway
shall be entitled to receive (i) .1% of 8/8ths ORRI and 1/2 of 1% of
8/8ths RWI in all wells and leases in all geological Prospects located
within each such 3-D AMI area where the well is proposed after the
Change of Interest Date (except for the wells and leases in which
Calaway's interests have vested pursuant to Paragraph No. 1 above), and
(ii) 1/2 of .2% ORRI and 1/2 of 1% RWI on all such wells in all
Prospects and leases which are subject to the Memorandum Agreement and
which cover lands located outside of such 3-D AMI areas (except for the
wells and leases in which Calaway's interests have vested pursuant to
Paragraph No. 1 above). Calaway's rights in each such 3-D AMI and
Prospect shall continue in perpetuity as long as Edge owns any interest
therein.
3. Notwithstanding the foregoing, on any Prospect located entirely outside
of the 3-D Grids described in Paragraph 1 above and the 3-D AMIs
described in Paragraph 2 above, where Edge promotes a third-party
investor by retaining a reversionary, carried or other promoted
interest, then Calaway's ORRI shall be his full, regular .2% ORRI (as
set forth
1
<PAGE>
in the Memorandum Agreement) with respect to wells proposed prior to the
Change of Interest Date and 1/2 of .2% ORRI with regard to wells
proposed thereafter with respect to such Prospect. On all Prospects
located inside such 3-D AMI's and 3-D Grids, the ORRI of Calaway shall
be .1% notwithstanding any promote by Edge of a third party.
4. After the Change of Interest Date, Calaway shall not be entitled to any
additional interests in any other Edge Prospects or 3-D areas other than
those described in the Memorandum Agreement, as herein amended, and in
the AMIs created pursuant to Paragraph 2 hereof.
5. In cases where Edge acquires less than 100% of the outstanding working
interest due to the existence of a pre-existing, outstanding, non-
promoted leasehold owner, the Calaway ORRI and RWI shall be reduced
proportionately to the working interest acquired by Edge in each lease
in such Prospect. The ORRI and RWI of Calaway shall be subject to
pooling, unitization and farmout by Edge in the same manner as Edge's
other internal ORRI's and RWI's.
6. With respect to the Nita Shallow Prospect and Four Sisters Prospect,
Calaway shall be entitled to receive one-half of his regular interests,
or .1% overriding royalty interest and .5% reversionary working
interest, on a prospect-by-prospect basis for each shallow Prospect
developed by Edge. In all other respects such interests in such shallow
Prospects shall be computed in the same manner as set forth herein.
7. "Payout" for purposes of Calaway's RWI shall be computed separately on
each Prospect. "Prospect" as used herein means a separate reservoir area
that contains, or based on the application of sound geological and/or
geophysical principles is reasonably believed to have the potential to
contain, a reservoir of oil and/or gas, and will be limited in depth to
the base of the particular strata or formation involved. For purposes of
calculating payout, Edge shall attempt to allocate the cost to acquire
the 3-D seismic data for each 3-D Grid or AMI equally between the first
ten (10) successful prospects drilled in each 3-D Grid or 3-D AMI. By
"successful prospect" it is meant a prospect which is drilled and with
respect to which the initial test well is capable of producing oil or
gas in commercial quantities. However, Edge reserves the right to adjust
and reallocate the 3-D seismic costs in any manner it deems reasonable
so that all such costs are recovered prior to the Calaway RWI becoming
effective as regards and Prospects and production therefrom situated
inside of the applicable 3-D Grid or AMI. Payout will be calculated by
Edge in the usual manner taking into account the allocated cost of
seismic, the costs of acquiring leases, and brokerage together with the
cost of drilling, testing, completing and operating each prospect until
payout, and shall occur when Edge has recouped all such costs from all
sources related to the prospect including, without limitations, any
prospects sales.
8. By way of clarification of Calaway's rights as set forth in Paragraph 7
of the December 20, 1994 Memorandum Term Loan Agreement, in any
transaction which involves a public offering and in which the assets of
Edge Petroleum Corporation or Edge Group II Limited Partnership are
combined, Calaway shall have the right to sell his proved producing
(both proved developed producing and proved developed non-producing)
reserves in return for stock of Edge Petroleum Corporation or the new
entity based on
2
<PAGE>
the value of such proved reserves net to Calaway's interest as
determined by the same June 30, 1996 Ryder Scott report or other similar
independent petroleum engineering evaluation report as is used to value
Edge Joint Venture II's reserves. Such valuation will be made at the
same time as Edge Petroleum Corporation's interests are valued.
Calaway's interests in possible reserves or non-producing properties
including AMI rights shall not be contributed to the new entity, and
Calaway will receive no value therefor. Calaway will be given the option
to receive a number of shares of stock in the new entity equal to the
value of his proved reserves (which shall be the present value of
estimated future net revenues after income tax discounted at 10% as
determined by the above Ryder Scott report) contributed to the new
entity divided by the per share offering price to the public. Edge
Petroleum Corporation or the new entity may offer the securities to
Calaway by means of a private placement under relevant securities laws.
9. Calaway's ORRI and RWI in any 3-D area or Prospect covered hereby which
are subject to this Agreement must vest, if at all, prior to the last to
die of all of the presently living descendants of Joseph P. Kennedy,
father of the late President of the United States, plus a period of
twenty-one (21) years.
In all other respects the Memorandum Agreement as previously amended and
as amended hereby, shall remain in full force and effect in accordance with its
terms. This Agreement is binding on the successors and assigns of the parties
hereto, and may be executed in counterparts.
EXECUTED THIS __________ DAY OF ___________, 1996.
EDGE JOINT VENTURE II
BY EDGE PETROLEUM CORPORATION,
MANAGING PARTNER
By /s/ John E. Calaway
_____________________________________
John E. Calaway
President/C.E.O.
By /s/ James C. Calaway
_____________________________________
James C. Calaway
AGREED:
EDGE GROUP II LIMITED PARTNERSHIP
By: /s/ John Sfondrini
______________________________
John Sfondrini
General Partner
3
<PAGE>
TERMS OF PROPOSED $2,000,000 LOAN/LINE OF CREDIT
BETWEEN JAMES C. CALAWAY AND EDGE JOINT VENTURE II
1. Existing balance of $350,000 loan rolled up into new loan.
2. $650,000 new advance to be funded by February 1, 1995.
3. $1,000,000 line of credit during term of loan agreement. Requires 30
day notice to drawdown. Partial drawdowns are permitted.
4. Interest Rate: 10% per annum payable monthly in arrears on outstanding
principal amount. Interest payments due on first of each month or the
next day that is not a Saturday, Sunday or legal holiday.
5. Term of Loan: Due in full on April 8, 1996. At Edge Joint Venture II's
option, it may extend the due date to coincide with the end of the
"Windup Period" of the Edge Joint Venture II, not to exceed two years
from April 8, 1996. The loan can be prepaid, but James C. Calaway will
be entitled to receive the RWI and ORRI set forth herein on any
prospects which are leased or commenced to be leased during the term of
the Edge Joint Venture II and including the "Windup Period", but with
regard to any prospect which Edge Joint Venture II transfers to Edge
Petroleum Corporation, Edge Group II L.P. or any other party during the
"Windup Period", James C. Calaway's RWI and ORRI will only apply to the
leases and interests in leases in such prospects which Edge Joint
Venture II owned as of the date of such transfer, and if such leases
cover less than 100% of the leasehold estate in the tracts included in
the prospect, James C. Calaway's interest shall be reduced
proportionately.
6. Security: A lien on all assets of Edge Joint Venture II subject to the
rights of RIMCO or any party who succeeds to RIMCO's position as a first
lienholder.
7. James C. Calaway will have the option to participate, on a net basis, up
to the amount of his loan balance in any new permanent debt financing
that occurs before the termination of the Joint Venture or within 6
months after the termination. By "net" basis it is meant that James C.
Calaway's participation will not be diluted by any brokerage or
underwriting fees or expenses associated with any such new debt
financing. If as a result of the termination of the Edge Joint Venture
II, Edge Petroleum Corporation elects to enter into a transaction
whereby the oil and gas interests attributable to the limited partner
interests of Edge Group II L.P. are rolled up into Edge Petroleum
Corporation or another entity in return for stock, James C. Calaway
shall have the option to roll in his oil and gas interests on the same
valuation basis as the limited partners. Such
<PAGE>
Terms of Proposed $2,000,000 Loan/Line of Credit
between James C. Calaway and Edge Joint Venture II
Page 2
valuation will be based on the same independent engineering evaluation
report (ie., Ryder Scott or other independent petroleum valuation
consultant) as is used to value the Edge Group II L.P. limited partner
oil and gas interests.
8. James C. Calaway will earn the following in all prospects undrilled as
of the date hereof that are leased or commenced to be leased during the
term of the Edge Joint Venture II and including the "Windup Period":
a. 1% of 8/8ths reversionary working interest; and
b. .2% of 8/8ths overriding royalty interest on all prospects that
have not yet been marketed as of the date hereof.
James C. Calaway understands that his right to receive an assignment of
his interests will be subject to obtaining any necessary consents or
approvals. If Edge is unable to obtain the necessary consents or
approvals to the assignments of the Calaway interest, Edge will account
to James C. Calaway monthly, on a net profits basis or other mutually
agreeable arrangement for the equivalent economic interest that James C.
Calaway would be entitled to receive had such assignments been approved.
9. The reversionary working interest in any particular respect will be
reduced proportionately in the event Edge retains, net to its interest
in the prospect, less than 18.75% working interest (regardless of
whether such 18.75% working interest consists of reversionary interest,
working interest, carried interest or other type of working interest) or
a combination of any of the foregoing. In any prospect in which Edge
participates on an arms-length initial joint venture basis with a third
party partner whose interest is not promoted by Edge, and, as a result
of such joint venture participation receives an initial assignment in
the prospect leases of less than 100%, then the .2% ORRI of James C.
Calaway shall be reduced proportionately to the percentage interest in
the prospect leases which Edge receives. The interests earned by James
C. Calaway will be assigned on Edge's usual form and will be subject to
pooling, unitization and farmout by Edge in the same manner as other
interests in the prospect leases are. Payout of the James C. Calaway 1%
RWI will be computed in the same manner as payout of Edge Joint Venture
II's reversionary interest. In cases where Edge acquires a working
interest, payout of the James C. Calaway 1% RWI will occur when Edge
recovers 100% of the costs of acquiring such working interest.
On any prospect where Edge acquires an interest in existing production
or proven reserves, James C. Calaway shall be entitled to receive his 1%
RWI and .2% ORRI in such existing production and/or proved reserves
reduced proportionately to the interest which Edge acquires therein. The
James C. Calaway RWI will be effective after Edge recovers all of its
costs in connection with the acquisition of such interests.
<PAGE>
Terms of Proposed $2,000,000 Loan/Line of Credit
between James C. Calaway and Edge Joint Venture II
Page 3
10. James C. Calaway will be entitled to have access to all of Edge's
records, well reports, engineering and accounting information relating
to the properties in which he has an interest. In addition, Edge will
furnish James C. Calaway at least quarterly a copy of its well status
report.
11. Edge Joint Venture II will be the sole obligor on the Note.
12. This memorandum shall exclude and not apply to any prospects in which
James C. Calaway currently has an interest by virtue of his prior
contracts with Edge, any prospects which are currently producing or
drilling or have been drilled, and including the AMI's for such
prospects. Such excluded prospects consist of but are not limited to the
those prospects set forth in Exhibit "A" attached hereto.
13. Effective date of this memorandum of understanding is December 20, 1994.
References in this memorandum to "Edge" shall refer to Edge Joint
Venture II. This memorandum shall be subject to the terms and provisions
of the formal Note, Deed of Trust and other security agreements entered
into in connection with this loan.
/s/ JOHN E. CALAWAY /s/ JAMES C CALAWAY
-------------------------- -------------------------------
John E. Calaway James C. Calaway
<PAGE>
SUBORDINATE PROMISSORY NOTE
---------------------------
$2,000,000.00 January 3,1995
FOR VALUE RECEIVED, the undersigned, Edge Joint Venture II ("Maker")
promises to pay to the order of James C. Calaway ("Payee"), at his address 811
Dallas, Suite 1214, Houston, Texas 77002, the aggregate principal sum from time
to time outstanding hereunder, not to exceed the lesser of (a) principal sum of
Two Million and No/100 Dollars ($2,000,000.00), and (b) the aggregate amount of
advances made hereunder as recorded by Payee on Schedule I attached hereto,
together, in each case, with interest on said principal equal to ten percent
(10%) per annum.
This Note shall be due and payable as follows:
Monthly payments of interest only, at 10% per annum are payable in
arrears on the outstanding principal balance hereunder and are due and
payable on the first day of each month, commencing with February 1, 1995
and monthly thereafter, or if the first day of each month is a Saturday,
Sunday, or legal holiday, then the next day that is not a Saturday,
Sunday, or legal holiday. The entire unpaid principal balance and
accrued interest shall be due and payable in full on April 8, 1996. At
Maker's option, however, Maker may extend the due date of this Note to
coincide with the end of the "Wind-up Period" of the Edge Joint
Venture II partnership, but such extended due date shall not be later
than April 8, 1998.
Interest charges will be calculated on amounts advanced hereunder on the
actual number of days said amounts are outstanding on the basis of a 365/366 day
year, as the case may be. It is the intention of Maker and Payee to conform
strictly to all applicable usury laws. It is therefore agreed that (i) in the
event that the maturity hereof is accelerated by reason of an election by Payee,
all unearned interest shall be canceled automatically or, if theretofore paid,
shall either be refunded to Maker or credited on the unpaid principal amount of
this Note, whichever remedy is chosen by Payee, (ii) the aggregate of all
interest and other charges constituting interest under applicable law and
contracted for, chargeable or receivable under this Note or otherwise in
connection with the transaction for which this Note is given shall never exceed
the maximum amount of interest, nor produce a rate in excess of the maximum rate
of interest that Payee may charge Maker under applicable law and in regard to
which Maker may not successfully assert the claim or defense of usury, and (iii)
if any excess interest is provided for, it shall be deemed a mistake and the
same shall either be refunded to Maker or credited on the unpaid principal
amount hereof and this Note shall be automatically deemed reformed so as to
permit only the collection of the maximum legal non-usurious rate and amount of
interest. All sums paid or agreed to be paid to the holder of this Note for the
use, forbearance or detention of the indebtedness evidenced hereby to the full
extent allowed by applicable law, shall be amortized, prorated, allocated and
spread through the full term of this Note.
In the event of default in the payment of any installment of principal
or interest when due hereunder, or upon the occurrence of any event of default
under any document or instrument executed in connection with or as security for
this Note, or upon failure in performance of any covenant, agreement, or
obligation to be performed under any documents executed in connection with or as
security for this Note, subject to the terms and provisions of that certain
Subordination Agreement between Payee and RIMCO Partners, L.P. II and RIMCO
Partners, L.P. III (the "Subordination Agreement"), Payee may declare the
entirety of this Note, principal and interest, immediately due and payable
Page 1 of 3
<PAGE>
without any notice, and failure to exercise said option shall not constitute a
waiver on the part of Payee of the right to exercise the same at any other time.
All past due principal and interest on this Note shall bear interest
from maturity of such principal or interest (in whatever manner same may be
brought about) until paid at the lesser of 18% per annum or the highest
non-usurious rate allowed by applicable law. To the extent such highest
non-usurious interest rate chargeable hereunder is determined by reference to
the laws of the State of Texas, same shall be determined by reference to the
indicated (weekly) rate ceiling (as defined and described in Texas Revised Civil
Statutes, Article 069-1.04, as amended) at the applicable time in effect. In
the event default is made in the payment of this Note in whatever manner its
maturity may be brought about, and it is placed in the hands of an attorney for
collection, or is collected through probate, bankruptcy or other proceedings,
Maker promises to pay all costs and reasonable attorneys' fees incurred by Payee
as a result thereof.
Maker and every surety, endorser and guarantor of this Note waive grace,
notice, demand, presentment for payment, notice of non-payment, protest, notice
of protest, notice of intention to accelerate, notice of acceleration of the
indebtedness due hereunder and all other notice, filing of suit and diligence in
collecting this Note, and the enforcing of any of the security rights of Payee,
and consent and agree that the time of payment hereof may be extended without
notice at any time and from time to time, and for periods of time whether or not
for a term or terms in excess of the original term hereof, without notice or
consideration to, or consent from, any of them.
Subject to the terms and provisions of the Subordination Agreement, this
Note may be prepaid, in whole or in part, at any time without penalty.
Any such amounts so paid and received by Payee or other holder hereof
shall be applied to any indebtedness of Maker to Payee in such order as Payee
shall elect in its sole discretion.
The indebtedness evidenced by this Note is secured by a Mortgage, Deed
of Trust, Assignment of Production, Security Agreement and Financing Statement
on all of the oil and gas properties and other assets of Maker as described in a
deed of trust of even date herewith between Maker and Payee. Pursuant to the
Subordination Agreement, the principal and interest on this Note and the liens
securing this Note are junior, subordinate, and subject to (a) the indebtedness
owning to RIMCO Partners, L.P. II, RIMCO Partners, L.P. III, and RIMCO/NYL, L.P.
and their successors and assigns (collectively, the "Purchasers") pursuant to
their Note Purchase Agreement with Maker (15.5% Senior Secured Notes) dated
effective April 8, 1991 as amended from time to time and (b) all liens, security
interests, assignments and other rights and interests granted to the Purchasers
under or in connection with such Note Purchase Agreement.
This Note is made pursuant to a memorandum of understanding between
Maker and Payee dated December 20, 1994, as amended by Addendum dated January 3,
1995. The initial principal advance under this Note in the amount of $500,000
was made on December 23, 1994 (advanced by James C. Calaway, individually), and
the second principal advance in the amount of $483,727.33 (advanced by James C.
Calaway IRA) was made on January 10, 1995. Additional drawdowns of principal
may be requested by Maker and will be funded by Payee within 30 days after Maker
delivers to Payee at the address set forth above a funding drawdown request. If
Payee has not sold his stock in Pinpoint Communications, the last $500,000 of
principal amount to be advanced hereunder will be advanced at Payee's option.
Notwithstanding any other provision of this Note, the obligation to pay
the indebtedness represented by this Note shall be nonrecourse to and without
personal liability of the partners in Maker, and their successors and assigns
for all purposes. The Payee and its successors and assigns agree to look only
to Maker and its assets for
Page 2 of 3
<PAGE>
repayment of any and all of the indebtedness herein and not to any partner of
Maker or their successors or assigns.
The terms and provisions hereof shall be binding upon and inure to the
benefit of Maker and Payee and their respective successors and assigns.
EXECUTED EFFECTIVE the day and year first written above.
"Maker":
----
EDGE JOINT VENTURE II
BY: EDGE PETROLEUM CORPORATION,
its Managing Partner
By: /s/ JOHN E. CALAWAY
______________________________
John E. Calaway, President
Page 3 of 3
<PAGE>
EXHIBIT 4.3
FIRST AMENDMENT AND SUPPLEMENT TO CREDIT AGREEMENT
--------------------------------------------------
THIS FIRST AMENDMENT AND SUPPLEMENT TO CREDIT AGREEMENT (this "First
Amendment") is made and entered into as of the 21st day of June, 1996, but
effective as of June 7, 1996 (the "First Amendment Effective Date"), among EDGE
JOINT VENTURE II, as Borrower ("Borrower"), and COMPASS BANK-HOUSTON, as Lender
("Lender").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, on July 11, 1995, Borrower and Lender entered into a certain
Credit Agreement (the "Credit Agreement") whereby, upon the terms and conditions
therein stated, Lender agreed to make certain loans and extend certain credit to
Borrower; and
WHEREAS, Borrower and Lender mutually desire to amend certain aspects of
the Credit Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, Borrower and Lender hereby agree that the Credit Agreement
shall be amended as follows:
Section 1. Certain Definitions. As used in this First Amendment, the
terms "Borrower," "Credit Agreement," "First Amendment," "First Amendment
Effective Date," and "Lender," shall have the meanings indicated above; and
unless otherwise defined herein, all terms beginning with a capital letter which
are defined in the Credit Agreement shall have the same meanings herein as
therein, unless the context hereof otherwise requires.
Section 2. Amendments to Credit Agreement.
Section 2.1. Defined Terms. The following terms, which are defined in
Section 1.02 of the Credit Agreement, are hereby amended as follows:
(a) The term "Agreement" is hereby amended to mean the Credit
Agreement, as amended and supplemented by this First Amendment and as
the same may from time to time be further amended or supplemented.
(b) The term "Note" is hereby amended to mean the Note being in
the form of Exhibit A attached to the Credit Agreement, as modified and
extended by the Modification Agreement, together with any and all future
renewals, extensions for any period, increases, rearrangements,
substitutions or modifications thereof.
(c) The term "Revolving Credit Note" is hereby deleted.
<PAGE>
(d) The term "Revolving Credit Termination Date" is hereby
amended to mean June 1, 1998.
Section 2.2. Additional Defined Terms. Section 1.02 of the Credit
Agreement is hereby further amended by adding the following new definitions,
which read in their entirety as follows:
"First Amendment" shall mean that certain First Amendment and
Supplement to Credit Agreement dated effective as of June 7, 1996,
between the Borrower and the Lender.
"Modification Agreement" shall mean that certain Note
Modification and Extension Agreement dated effective as of June 7, 1996,
between the Borrower and the Lender.
Section 3. Amendments to the Credit Agreement. The following
provisions of the Credit Agreement shall be amended as follows:
(a) Section 2.04 Fees. Section 2.04 of the Credit Agreement is
hereby amended by adding thereto a new subsection (d) to read as follows:
"(d) Facility Fee. The Borrower shall pay a facility fee of
$7,500 to the Lender on the First Amendment Effective Date."
(b) Section 2.07 Borrowing Base. Pursuant Section 2.07 of the
Credit Agreement, the Borrowing Base shall be $9,500,000 for the period from and
after the First Amendment Effective Date, up to but excluding August 1, 1996.
(c) Section 9.12 Cash Flow to Debt Service Coverage Ratio. Section
9.12 of the Credit Agreement is hereby amended in its entirety to read as
follows:
"Section 9.12 Cash Flow to Debt Service Coverage Ratio.
The Borrower will not permit its Cash Flow to Debt Service Ratio
as at the end of any fiscal quarter of the Borrower to be less than 1.25
to 1.00. For purposes of this Section 9.12, "Cash Flow to Debt Service
Ratio" shall mean the ratio of (i) net income plus depreciation,
depletion, amortization and any other non-cash expenses less non-cash
income for such fiscal quarter ending on such date to (ii) cash payments
made for principal on debt or capital leases for such fiscal quarter of
the Borrower."
3. Default. Any default under this First Amendment shall
constitute a default under the Credit Agreement.
4. Representations and Warranties. The Borrower represents and
warrants to the Lender that:
<PAGE>
(i) There exists no default or event of default, or any condition or
act which constitutes, or with notice or lapse of time or both
would constitute, an Event of Default under the Credit
Agreement, as hereby amended;
(ii) The Borrower has performed and complied with all covenants,
agreements and conditions contained in the Credit Agreement, as
hereby amended, required to be performed or complied with by it;
and
(iii) The representations and warranties of the Borrower contained in
the Credit Agreement, as hereby amended, were true and correct
when made and are true and correct in all material respects at
and as of the time of delivery of this First Amendment.
5. Extent of Amendments. Except as expressly herein set forth, all
of the terms, conditions, defined terms, covenants, representations, warranties
and all other provisions of the Credit Agreement are herein ratified and
confirmed and shall remain in full force and effect.
6. Counterparts. This First Amendment may be executed in two or
more counterparts, and it shall not be necessary that the signatures of all
parties hereto be contained on any one counterpart hereof; each counterpart
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
7. References. On and after the First Amendment Effective Date,
the terms "Agreement", "hereof," "herein," "hereunder," and terms of like import
when used in the Credit Agreement shall, except where the context otherwise
requires, refer to the Credit Agreement, as supplemented and amended by this
First Amendment.
NOTICE. THIS WRITTEN FIRST AMENDMENT, THE CREDIT AGREEMENT, AS
SUPPLEMENTED AND AMENDED HEREBY, THE NOTE, AS MODIFIED AND EXTENDED BY THE
MODIFICATION AGREEMENT, AND THE OTHER SECURITY INSTRUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OR PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
This First Amendment shall benefit and bind the parties hereto, as well
as their respective assigns, successors, heirs and legal representatives.
<PAGE>
EXECUTED as of the First Amendment Effective Date.
BORROWER:
--------
EDGE JOINT VENTURE II
By: Edge Petroleum Corporation,
Managing Venturer
By: /s/ John E. Calaway
________________________
John E. Calaway
President
LENDER:
------
COMPASS BANK-HOUSTON
By: /s/ Dorothy Marchand Wilson
____________________________
Dorothy Marchand Wilson
Vice President
<PAGE>
CREDIT AGREEMENT
DATED AS OF JULY 11, 1995
BETWEEN
EDGE JOINT VENTURE II
AS BORROWER
AND
COMPASS BANK-HOUSTON,
AS LENDER
$20,000,000 Revolving Credit
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
Section 1.01 Terms Defined Above ................................... 1
Section 1.02 Certain Defined Terms ................................. 1
Section 1.03 Accounting Terms and Determinations ................... 10
ARTICLE II
COMMITMENTS
Section 2.01 Loans ................................................ 11
Section 2.02 Borrowings ........................................... 11
Section 2.03 Changes of Revolving Credit Commitment ............... 11
Section 2.04 Fees ................................................. 12
Section 2.05 Note ................................................. 12
Section 2.06 Prepayments .......................................... 12
Section 2.07 Borrowing Base ....................................... 13
Section 2.08 Nonrecourse Obligations .............................. 14
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 Repayment of Loans ................................... 14
Section 3.02 Interest ............................................. 14
ARTICLE IV
PAYMENTS; COMPUTATIONS; ETC.
Section 4.01 Payments ............................................. 15
Section 4.02 Computations ......................................... 15
Section 4.03 Set-off .............................................. 15
Section 4.04 Disposition of Proceeds .............................. 15
ARTICLE V
Intentionally Left Blank ........................................... 16
<PAGE>
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 Initial Funding ...................................... 16
Section 6.02 Initial and Subsequent Loans ......................... 17
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
Section 7.01 Existence ............................................ 18
Section 7.02 Financial Condition .................................. 18
Section 7.03 Litigation ........................................... 19
Section 7.04 No Breach ............................................ 19
Section 7.05 Authority ............................................ 19
Section 7.06 Approvals ............................................ 19
Section 7.07 Use of Loans ......................................... 19
Section 7.08 ERISA ................................................ 20
Section 7.09 Taxes ................................................ 20
Section 7.10 Titles, Etc. ......................................... 20
Section 7.11 No Material Misstatements ............................ 20
Section 7.12 Investment Company Act ............................... 21
Section 7.13 Public Utility Holding Company Act ................... 21
Section 7.14 Subsidiaries and Partnerships ........................ 21
Section 7.15 Location of Business and Offices ..................... 21
Section 7.16 Defaults ............................................. 21
Section 7.17 Environmental Matters ................................ 21
Section 7.18 Compliance with the Law .............................. 22
Section 7.19 Insurance ............................................ 23
Section 7.20 Hedging Agreements ................................... 23
Section 7.21 Restriction on Liens ................................. 24
Section 7.22 Material Agreements .................................. 24
Section 7.23 Gas Imbalances ....................................... 24
Section 7.24 Partnership Agreement ................................ 24
Section 7.25 Remittances .......................................... 24
ARTICLE VIII
AFFIRMATIVE COVENANTS
Section 8.01 Financial Statements ................................. 24
Section 8.02 Litigation ........................................... 25
Section 8.03 Maintenance, Etc. .................................... 26
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<PAGE>
Section 8.04 Environmental Matters ................................ 27
Section 8.05 Further Assurances ................................... 27
Section 8.06 Performance of Obligations ........................... 28
Section 8.07 Engineering Reports .................................. 28
Section 8.08 Title Information .................................... 29
Section 8.09 Additional Collateral ................................ 29
Section 8.10 Change in Management ................................. 30
Section 8.12 Operating Accounts ................................... 30
ARTICLE IX
NEGATIVE COVENANTS
Section 9.01 Debt ................................................. 30
Section 9.02 Liens ................................................ 31
Section 9.03 Investments, Loans and Advances ...................... 31
Section 9.04 Dividends, Distributions and Redemptions ............. 32
Section 9.05 Sales and Leasebacks ................................. 33
Section 9.06 Nature of Business ................................... 33
Section 9.07 Limitation on Leases ................................. 33
Section 9.08 Mergers, Etc. ........................................ 33
Section 9.09 Proceeds of Note ..................................... 33
Section 9.10 Sale or Discount of Receivables ...................... 33
Section 9.11 Tangible Venturer's Capital .......................... 33
Section 9.12 Cash Flow to Debt Service Coverage Ratio ............. 34
Section 9.13 Sale of Oil and Gas Properties ....................... 34
Section 9.14 Environmental Matters ................................ 34
Section 9.15 Transactions with Affiliates ......................... 34
Section 9.16 Subsidiaries and Partnerships ........................ 35
Section 9.17 Negative Pledge Agreements ........................... 35
Section 9.18 Gas Imbalances, Take-or-Pay or Other Prepayments ..... 35
Section 9.19 Partnership Agreement ................................ 35
Section 9.20 Subordinated Note .................................... 35
ARTICLE X
EVENTS OF DEFAULT; REMEDIES
Section 10.01 Events of Default ................................... 35
Section 10.02 Remedies ............................................ 37
ARTICLE XI
MISCELLANEOUS
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<PAGE>
Section 11.01 Waiver .............................................. 38
Section 11.02 Letters in Lieu ..................................... 38
Section 11.03 Notices ............................................. 38
Section 11.04 Payment of Expenses, Indemnities, Etc. .............. 38
Section 11.05 Amendments, Etc. .................................... 41
Section 11.06 Successors and Assigns .............................. 41
Section 11.07 Assignments and Participations ...................... 41
Section 11.08 Invalidity .......................................... 42
Section 11.09 Counterparts ........................................ 42
Section 11.10 References .......................................... 42
Section 11.11 Survival ............................................ 42
Section 11.12 Captions ............................................ 42
Section 11.13 NO ORAL AGREEMENTS .................................. 42
Section 11.14 GOVERNING LAW; SUBMISSION TO JURISDICTION ........... 43
Section 11.15 Interest ............................................ 43
Section 11.16 Confidentiality ..................................... 44
Section 11.17 Effectiveness ....................................... 45
Section 11.18 EXCULPATION PROVISIONS .............................. 45
Exhibit A - Form of Note
Exhibit B - Form of Borrowing Request
Exhibit C - Form of Compliance Certificate
Exhibit D - Form of Letter in Lieu
Exhibit E - List of Security Instruments
Exhibit F - Copy of Subordinated Note
Schedule 7.02 - Liabilities
Schedule 7.03 - Litigation
Schedule 7.09 - Taxes
Schedule 7.10 - Titles, Etc.
Schedule 7.14 - Subsidiaries and Partnerships
Schedule 7.17 - Environmental Matters
Schedule 7.19 - Insurance
Schedule 7.20 - Hedging Agreements
Schedule 7.22 - Material Agreements
Schedule 7.23 - Gas Imbalances
Schedule 9.01 - Debt
Schedule 9.02 - Liens
Schedule 9.03 - Investments, Loans and Advances
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<PAGE>
THIS CREDIT AGREEMENT dated as of July 11, 1995 is between: EDGE JOINT
VENTURE II, a joint venture formed under the laws of the State of Texas, (the
"Borrower") among the Venturers (hereinafter defined) with Edge Petroleum
Corporation as Managing Venturer, and COMPASS BANK-HOUSTON, a Texas State
Chartered Banking Institution (the "Lender").
R E C I T A L S
A. The Borrower has requested that the Lender provide certain loans to the
Borrower.
B. The Lender has agreed to make such loans subject to the terms and
conditions of this Agreement.
C. In consideration of the mutual covenants and agreements herein
contained and of the loans and commitments hereinafter referred to, the parties
hereto agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING MATTERS
Section 1.01 Terms Defined Above. As used in this Agreement, the
terms "Borrower" and "Lender" shall have the meanings indicated above.
Section 1.02 Certain Defined Terms. As used herein, when capitalized
the following terms shall have the following meanings (all terms defined in this
Article I or in other provisions of this Agreement in the singular to have the
same meanings when used in the plural and vice versa):
"Affiliate" of any Person shall mean any Person directly or indirectly
controlled by, controlling or under common control with such first Person.
As used in this definition, "control" (including, with its correlative
meanings, "controlled by" and "under common control with") shall mean any
Person, excluding Venturers, which owns directly or indirectly 10% or more
of the securities having ordinary voting power for the election of
directors or other governing body of a corporation or 10% or more of the
partnership or other ownership interests of any other Person (other than as
a limited partner of such other Person) will be deemed to control such
corporation or other Person.
"Agreement" shall mean this Credit Agreement, as the same may from
time to time be amended or supplemented.
"Applicable Margin" shall mean 3/4 of 1% per annum.
<PAGE>
"Base Rate" shall mean for any day, the higher of (i) the Federal
Funds Rate for any such day plus 1/2 of 1% or (ii) the Index Rate for such
day. Each change in any interest rate provided for herein based upon the
Base Rate resulting from a change in the Base Rate shall take effect at the
time of such change in the Base Rate.
"Borrowing Base" shall mean at any time an amount equal to the amount
determined in accordance with Section 2.07.
"Business Day" shall mean any day other than a day on which commercial
banks are authorized or required to close in Houston, Texas.
"Closing Date" shall mean July 11, 1995.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time and any successor statute.
"Commitment" shall mean the Lender's obligation to make the Loans
pursuant to Section 2.01.
"Debt" shall mean, for any Person the sum of the following (without
duplication): (i) all obligations of such Person for borrowed money or
evidenced by bonds, debentures, notes or other similar instruments
(including principal, interest, fees and charges); (ii) all obligations of
such Person (whether contingent or otherwise) in respect of bankers'
acceptances, letters of credit, surety or other bonds and similar
instruments; (iii) all obligations of such Person to pay the deferred
purchase price of Property or services (other than for borrowed money);
(iv) all obligations under leases which shall have been, or should have
been, in accordance with GAAP, recorded as capital leases in respect of
which such Person is liable (whether contingent or otherwise); (v) all
obligations under leases which require such Person or its Affiliate to make
payments over the term of such lease, including payments at termination,
which are substantially equal to at least eighty percent (80%) of the
purchase price of the Property subject to such lease plus interest as an
imputed rate of interest; (vi) all Debt and other obligations of others
secured by a Lien on any asset of such Person, whether or not such Debt is
assumed by such Person; (vii) all Debt and other obligations of others
guaranteed by such Person or in which such Person otherwise assures a
creditor against loss of the Debtor or obligations of others; (viii) all
obligations or undertakings of such Person to maintain or cause to be
maintained the financial position or covenants of others; (ix) the
undischarged balance of any production payment created by such Person or
for the creation of which such Person directly or indirectly received
payment; (x) all obligations of such Person under Hedging Agreements; and
(xi) obligations to deliver goods or services including Hydrocarbons in
consideration of advance payments.
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<PAGE>
"Default" shall mean an Event of Default or an event which with notice
or lapse of time or both would become an Event of Default, provided that
such definition shall not expand the rights of Lender to declare an Event
of Default without giving notice as required by the Loan Documents.
"Dollars" and "$" shall mean lawful money of the United States of
America.
"Effective Date" shall have the meaning assigned such term in Section
11.17.
"Engineering Reports" shall have the meaning assigned such term in
Section 2.07.
"Environmental Laws" shall mean any and all Governmental Requirements
pertaining to health or the environment in effect in any and all
jurisdictions in which the Borrower is conducting or at any time has
conducted business, or where any Property of the Borrower is located,
including without limitation, the Oil Pollution Act of 1990 ("OPA"), the
Clean Air Act, as amended, the Comprehensive Environmental, Response,
Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Federal
Water Pollution Control Act, as amended, the Occupational Safety and Health
Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976
("RCRA"), as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, the Hazardous Materials
Transportation Act, as amended, and other environmental conservation or
protection laws. The term "oil" shall have the meaning specified in OPA,
the terms "hazardous substance" and "release" (or "threatened release")
have the meanings specified in CERCLA, and the terms "solid waste" and
"disposal" (or "disposed") have the meanings specified in RCRA; provided,
however, that (i) in the event either OPA, CERCLA or RCRA is amended so as
to broaden the meaning of any term defined thereby, such broader meaning
shall apply subsequent to the effective date of such amendment and (ii) to
the extent the laws of the state in which any Property of the Borrower is
located establish a meaning for "oil," "hazardous substance," "release,"
"solid waste" or "disposal" which is broader than that specified in either
OPA, CERCLA or RCRA, such broader meaning shall apply.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, and any successor statute.
"Event of Default" shall have the meaning assigned such term in
Section 10.01.
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<PAGE>
"Excepted Liens" shall mean: (i) Liens for taxes, assessments or
other governmental charges or levies not yet due or which are being
contested in good faith by appropriate action and for which appropriate
reserves have been maintained; (ii) Liens in connection with workers
compensation, unemployment insurance or other social security, old age
pension or public liability obligations not yet due or which are being
contested in good faith by appropriate action and for which appropriate
reserves have been maintained in accordance with GAAP; (iii) operators',
vendors', carriers', warehousemen's, repairmen's, mechanics', workmen's,
materialmen's, construction or other like Liens arising by operation of law
in the ordinary course of business or incident to the exploration,
development, operation and maintenance of Oil and Gas Properties or
statutory landlord's liens, each of which is in respect of obligations that
have not been outstanding more than 90 days or which are being contested in
good faith by appropriate proceedings and for which appropriate reserves
have been maintained in accordance with GAAP; (iv) any Liens reserved in
leases or farmout agreements for rent or royalties and for compliance with
the terms of the farmout agreements or leases in the case of leasehold
estates, to the extent that any such Lien referred to in this clause does
not materially impair the use of the Property covered by such Lien for the
purposes for which such Property is held by the Borrower or materially
impair the value of such Property subject thereto; (v) encumbrances (other
than to secure the payment of borrowed money or the deferred purchase price
of Property or services), easements, restrictions, servitudes, permits,
conditions, covenants, exceptions or reservations in any rights of way or
other Property of the Borrower for the purpose of roads, pipelines,
transmission lines, transportation lines, distribution lines for the
removal of gas, oil, coal or other minerals or timber, and other like
purposes, or for the joint or common use of real estate, rights of way,
facilities and equipment, and defects, irregularities, zoning restrictions
and deficiencies in title of any rights of way or other Property which in
the aggregate do not materially impair the use of such rights of way or
other Property for the purposes of which such rights of way and other
Property are held by the Borrower or materially impair the value of such
Property subject thereto; (vi) deposits of cash or securities to secure the
performance of bids, trade contracts, leases, statutory obligations and
other obligations of a like nature incurred in the ordinary course of
business; and (vii) Liens permitted by the Security Instruments, including
without limitation the Subordinated Note and Liens in favor of the operator
arising under operating agreements.
"Federal Funds Rate" shall mean, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the
weighted average of the rates on overnight federal funds transactions with
a member of the Federal Reserve System arranged by federal funds brokers on
such day, as published by the Federal Reserve Bank of New York on the
Business Day next succeeding such day, provided that (i) if the date for
which such rate is to be determined is not a Business Day, the Federal
Funds Rate for such day shall be such rate on such
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<PAGE>
transactions on the next preceding Business Day as so published on the next
succeeding Business Day, and (ii) if such rate is not so published for any
day, the Federal Funds Rate for such day shall be the average rate charged
to the Lender on such day on such transactions.
"Financial Statements" shall mean the financial statement or
statements of the Borrower described or referred to in Section 7.02.
"GAAP" shall mean generally accepted accounting principles in the
United States of America in effect from time to time.
"Governmental Authority" shall include the country, the state, county,
city and political subdivisions in which any Person or such Person's
Property is located or which exercises valid jurisdiction over any such
Person or such Person's Property, and any court, agency, department,
commission, board, bureau or instrumentality of any of them including
monetary authorities which exercises valid jurisdiction over any such
Person or such Person's Property. Unless otherwise specified, all
references to Governmental Authority herein shall mean a Governmental
Authority having jurisdiction over, where applicable, the Borrower and its
Property or the Lender.
"Governmental Requirement" shall mean any law, statute, code,
ordinance, order, determination, rule, regulation, judgment, decree,
injunction, franchise, permit, certificate, license, authorization or other
directive or requirement (whether or not having the force of law),
including, without limitation, Environmental Laws, energy regulations and
occupational, safety and health standards or controls, of any Governmental
Authority.
"Hedging Agreements" shall mean any commodity, interest rate or
currency swap, rate cap, rate floor, rate collar, forward agreement or
other exchange or rate protection agreements or any option with respect to
any such transaction.
"Highest Lawful Rate" shall mean the maximum nonusurious interest
rate, if any, that at any time or from time to time may be contracted for,
taken, reserved, charged or received on the Note or on other Indebtedness
under laws applicable to the Lender which are presently in effect or, to
the extent allowed by law, under such applicable laws which may hereafter
be in effect and which allow a higher maximum nonusurious interest rate
than applicable laws now allow.
"Hydrocarbon Interests" shall mean all rights, titles, interests and
estates now or hereafter acquired in and to oil and gas leases, oil, gas
and mineral leases, or other liquid or gaseous hydrocarbon leases, mineral
fee interests, overriding royalty and royalty interests, net profit
interests and production payment interests, including any reserved or
residual interests of whatever nature.
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<PAGE>
"Hydrocarbons" shall mean oil, gas, casinghead gas, drip gasoline,
natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous
hydrocarbons and all products refined or separated therefrom, which
Hydrocarbons are produced from the Mortgaged Property.
"Indebtedness" shall mean any and all amounts owing or to be owing by
the Borrower to the Lender in connection with the Loan Documents and all
renewals, extensions and/or rearrangements of any of the above.
"Indemnified Parties" shall have the meaning assigned such term in
Section 11.04(b).
"Indemnity Matters" shall mean any and all actions, suits, proceedings
(including any investigations, litigation or inquiries), claims, demands
and causes of action made or threatened against a Person and, in connection
therewith, all losses, liabilities, damages (including, without limitation,
consequential damages) or reasonable costs and expenses of any kind or
nature whatsoever incurred by such Person whether caused by the sole or
concurrent negligence of such Person seeking indemnification.
"Index Rate" shall mean, on any day, the prime rate as published in
The Wall Street Journal's "Money Rates" table for such day. If multiple
prime rates are quoted in such table, then the highest prime rate quoted
therein shall be the Index Rate. In the event that a prime rate is not
published in The Wall Street Journal's "Money Rates" table, the Lender will
choose a substitute Index Rate, for purposes of calculating the Base Rate,
which is based on comparable information, until such time as a prime rate
is published in The Wall Street Journal's "Money Rates" tables.
"Initial Funding" shall mean the funding of the initial Loans pursuant
to Section 6.01 hereof.
"Initial Reserve Report" shall mean the report of Ryder-Scott Co.,
dated as of January 1, 1995, as revised in the reports dated April 11, 1995
and May 4, 1995, with respect to the Oil and Gas Properties of the
Borrower, a copy of which has been delivered to the Lender.
"Letter in Lieu" shall mean the letter in lieu referred to on
Exhibit D.
"Lien" shall mean any interest in Property securing an obligation owed
to, or a claim by, a Person other than the owner of the Property, whether
such interest is based on the common law, statute or contract, and whether
such obligation or claim is fixed or contingent, and including but not
limited to (i) the lien or security interest arising from a mortgage,
encumbrance, pledge, security agreement,
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<PAGE>
conditional sale or trust receipt or a lease, consignment or bailment for
security purposes or (ii) production payments and the like payable out of
Oil and Gas Properties. The term "Lien" shall include reservations,
exceptions, encroachments, easements, rights of way, covenants, conditions,
restrictions, leases and other title exceptions and encumbrances affecting
Property. For the purposes of this Agreement, the Borrower shall be deemed
to be the owner of any Property which it has acquired or holds subject to a
conditional sale agreement, or leases under a financing lease or other
arrangement pursuant to which title to the Property has been retained by or
vested in some other Person in a transaction intended to create a
financing.
"Loan Documents" shall mean this Agreement, the Note and the Security
Instruments.
"Loans" shall mean the loans as provided for by Section 2.01(a).
"Managing Venturer" shall mean Edge Petroleum Corporation, a Texas
corporation and managing venturer of the Borrower.
"Material Adverse Effect" shall mean any material and adverse effect,
as determined by the Lender, on (i) the assets, liabilities, financial
condition, business, operations, affairs or circumstances of the Borrower
different from those reflected in the Financial Statements or from the
facts represented or warranted in this Agreement or any Security
Instrument, or (ii) the ability of the Borrower to carry out their business
as at the Closing Date or as proposed as of the Closing Date to be
conducted or meet its obligations under the Loan Documents on a timely
basis.
"Maximum Credit Amount" at any time shall equal $20,000,000.
"Mortgaged Property" shall mean the Property owned by the Borrower and
which is subject to the Liens existing and to exist under the terms of the
Security Instruments.
"Note" shall mean the Note provided for by Section 2.05, together with
any and all renewals, extensions for any period, increases, rearrangements,
substitutions or modifications thereof.
"Oil and Gas Properties" shall mean Hydrocarbon Interests; the
Properties now or hereafter pooled or unitized with Hydrocarbon Interests;
all presently existing or future unitization, pooling agreements and
declarations of pooled units and the units created thereby (including
without limitation all units created under orders, regulations and rules of
any Governmental Authority) which may affect all or any portion of the
Hydrocarbon Interests; all operating agreements, contracts
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and other agreements which relate to any of the Hydrocarbon Interests or
the production, sale, purchase, exchange or processing of Hydrocarbons from
or attributable to such Hydrocarbon Interests; all Hydrocarbons in and
under and which may be produced and saved or attributable to the
Hydrocarbon Interests, including all oil in tanks, the lands covered
thereby and all rents, issues, profits, proceeds, products, revenues and
other incomes from or attributable to the Hydrocarbon Interests; all
tenements, hereditaments, appurtenances and Properties in any manner
appertaining, belonging, affixed or incidental to the Hydrocarbon
Interests; and all Properties, rights, titles, interests and estates
described or referred to above, including any and all Property, real or
personal, now owned or hereinafter acquired and situated upon, used, held
for use or useful in connection with the operating, working or development
of any of such Hydrocarbon Interests or Property (excluding drilling rigs,
automotive equipment or other personal property which may be on such
premises for the purpose of drilling a well or for other similar temporary
uses) and including any and all oil wells, gas wells, injection wells or
other wells, buildings, structures, fuel separators, liquid extraction
plants, plant compressors, pumps, pumping units, field gathering systems,
tanks and tank batteries, fixtures, valves, fittings, machinery and parts,
engines, boilers, meters, apparatus, equipment, appliances, tools,
implements, cables, wires, towers, casing, tubing and rods, surface leases,
rights-of-way, easements and servitudes together with all additions,
substitutions, replacements, accessions and attachments to any and all of
the foregoing.
"Partnership Agreement" shall mean the written Joint Venture Agreement
among the Venturers dated April 8, 1991, as may be amended hereafter.
"Person" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated organization
or government or any agency, instrumentality or political subdivision
thereof, or any other form of entity.
"Post-Default Rate" shall mean, in respect of any principal of any
Loan or any other amount payable by the Borrower under this Agreement or
the Note which is not paid when due (whether at stated maturity, by
acceleration or otherwise), a rate per annum during the period commencing
on the due date until such amount is paid in full or the default is cured
or waived equal to 5% per annum above the Base Rate as in effect from time
to time plus the Applicable Margin (if any), but in no event to exceed the
Highest Lawful Rate.
"Principal Office" shall mean the principal office of the Lender,
presently located at 24 Greenway Plaza, Suite 1401, Houston, Texas 77046.
"Property" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
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"Quarterly Dates" shall mean the first day of each April, July,
October, and January, in each year, the first of which shall be October 1,
1995; provided, however, that if any such day is not a Business Day, such
Quarterly Date shall be the next succeeding Business Day.
"Redetermination Date" shall have the meaning assigned such term in
Section 2.07(a).
"Reserve Report" shall mean a report, in form and substance
satisfactory to the Lender, setting forth, as of each January 1 (for the
Reserve Report due each April 1 pursuant to Section 8.07(a) and July 1 (for
the Reserve Report due each October 1 pursuant to Section 8.07(b)) (or such
other date in the event of an unscheduled redetermination); (i) the oil and
gas reserves attributable to the Oil and Gas Properties together with a
projection of the rate of production and future net income, taxes,
operating expenses and capital expenditures with respect thereto as of such
date, based upon the pricing assumptions consistent with SEC reporting
requirements at the time and (ii) such other information as the Lender may
reasonably request.
"Responsible Officer" shall mean, as to any Person, the Chief
Executive Officer, the President or any Vice President of such Person and,
with respect to financial matters, the term "Responsible Officer" shall
include the Chief Financial Officer of such Person. Unless otherwise
specified, all references to a Responsible Officer herein shall mean a
Responsible Officer of the Managing Venturer of the Borrower.
"Revolving Credit Commitment" shall mean the obligation of the Lender
to make Loans to the Borrower under Section 2.01 hereof, up to the lesser
of the Borrowing Base or $20,000,000.
"Revolving Credit Loan" shall mean Loans made pursuant to Section 2.01
hereof.
"Revolving Credit Note" shall mean the promissory note or notes
(whether one or more) of the Borrower described in Section 2.05 hereof and
being in the form of Exhibit A hereto.
"Revolving Credit Period" shall mean the period from the Closing Date
to and ending on the Revolving Credit Termination Date.
"Revolving Credit Termination Date" shall mean, unless the Commitment
is sooner terminated pursuant to Sections 10.02 hereof, June 1, 1997.
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"Scheduled Redetermination Dates" shall have the meaning assigned such
term in Section 2.07(d).
"SEC" shall mean the Securities and Exchange Commission or any
successor Governmental Authority.
"Security Instruments" shall mean the agreements or instruments
described or referred to in Exhibit E, and any and all other agreements or
instruments now or hereafter executed and delivered by the Borrower or any
other Person (other than participation or similar agreements between the
Lender and any other lender or creditor with respect to any Indebtedness
pursuant to this Agreement) in connection with, or as security for the
payment or performance of the Note or this Agreement, as such agreements
may be amended, supplemented or restated from time to time.
"Subordinated Note" shall mean the subordinated promissory note dated
January 3, 1995, executed by the Borrower payable to the order of James
Calaway, Sr., in the original principal amount of $2,000,000, a copy of
which is attached hereto as Exhibit F.
"Subordination Agreement" shall mean the Subordination Agreement of
even date herewith among the Borrower, James Calaway, Sr., and the Lender,
relating to the Subordinated Note.
"Subsidiary" shall mean any corporation of which at least a majority
of the outstanding shares of stock having by the terms thereof ordinary
voting power to elect a majority of the board of directors of such
corporation (irrespective of whether or not at the time stock of any other
class or classes of such corporation shall have or might have voting power
by reason of the happening of any contingency) is at the time directly or
indirectly owned or controlled by the Borrower or one or more of its
Subsidiaries or by the Borrower and one or more of its Subsidiaries.
"Venturers" shall mean Edge Petroleum Corporation, Edge Group II
Limited Partnership, Gulfedge Limited Partnership and Edge Group
Partnership.
Section 1.03 Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
determinations with respect to accounting matters hereunder shall be made, and
all financial statements and certificates and reports as to financial matters
required to be furnished to the Lender hereunder shall be prepared, in
accordance with GAAP, applied on a basis consistent with the audited financial
statements of the Borrower referred to in Section 7.02 (except for changes
concurred with by the Borrower's independent public accountants).
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ARTICLE II
COMMITMENTS
Section 2.01 Loans.
Revolving Credit Loans. The Lender agrees, on the terms of this
Agreement, to make Loans to the Borrower during the period from and
including the Closing Date to and up to, but excluding, the Revolving
Credit Termination Date in an aggregate principal amount at any one time
outstanding up to but not exceeding the amount of the Revolving Credit
Commitment as then in effect; provided, however, that the aggregate
principal amount of all such Loans by the Lender hereunder at any one time
outstanding shall not exceed the Revolving Credit Commitment. Subject to
the terms of this Agreement, during the period from the Closing Date to and
up to, but excluding, the Revolving Credit Termination Date, the Borrower
may borrow, repay and reborrow the amount described in this Section 2.01.
Section 2.02 Borrowings.
(a) Borrowings. The Borrower shall give the Lender advance notice as
hereinafter provided of each borrowing hereunder, which shall specify the
aggregate amount of such borrowing, and the date (which shall be a Business
Day) of the Loans to be borrowed.
(b) Minimum Amounts. All borrowings shall be in amounts of at least
$250,000 or the remaining balance of the Revolving Credit Commitment, if
less, or any whole multiple of $50,000 in excess thereof, with such
borrowings to be advanced by Lender and deposited in Borrower's account
maintained with Lender.
(c) Notices. All borrowings shall require written notice, including
via facsimile, to the Lender in the form of Exhibit B hereto by a
Responsible Officer of Borrower, which in each case shall be irrevocable,
from the Borrower to be received by the Lender not later than 10:00 a.m.
Houston, Texas, time on the date of such borrowing.
Section 2.03 Changes of Revolving Credit Commitment.
The Revolving Credit Commitment shall at all times be equal to the
lesser of (i) the Maximum Credit Amount or (ii) the Borrowing Base as
determined from time to time.
Section 2.04 Fees.
(a) Commitment Fee. The Borrower shall pay to the Lender a commitment
fee on the daily average unused amount of the Revolving Credit Commitment
for the period
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from and including the Closing Date up to but excluding the earlier of the
date the Commitment is terminated or the Revolving Credit Termination Date,
at a rate per annum equal to 1/2 of 1%. Accrued commitment fees shall be
payable quarterly in arrears on each Quarterly Date and on the earlier of
the date the Commitment is terminated or the Revolving Credit Termination
Date.
(b) Facility Fee. The Borrower shall pay on the Closing Date to the
Lender a facility fee of $8,750.
(c) Engineering Fee. The Borrower shall pay to the Lender $5,000 for
each regularly scheduled semi-annual redetermination of the Borrowing Base
and for each redetermination made at the Borrower's request.
Section 2.05 Note. The Revolving Credit Loans shall be evidenced by a
single promissory note of the Borrower in substantially the form of Exhibit A
hereto, dated the Closing Date, payable to the order of the Lender in a
principal amount equal to the Revolving Credit Commitment and otherwise duly
completed. The date, amount of each Loan and all payments made on account of the
principal thereof, shall be recorded by the Lender on its books for the Note,
and, prior to any transfer, endorsed by the Lender on the schedule attached to
such Note or any continuation thereof. Such records shall be deemed conclusive
absent manifest error.
Section 2.06 Prepayments.
(a) The Borrower may prepay the Loans upon prior notice to the Lender,
which notice shall specify the prepayment date (which shall be a Business
Day) and the amount of the prepayment (which shall be at least $50,000 or
the remaining principal balance outstanding on the Note) and shall be
irrevocable and effective only upon receipt by the Lender.
(b) Upon any redetermination of the amount of the Borrowing Base in
accordance with Section 2.07, if the redetermined Borrowing Base is less
than the aggregate outstanding principal amount of the Loans, then the
Borrower shall within thirty (30) days of receipt of written notice thereof
prepay the Loans in an aggregate principal amount equal to such excess,
together with interest on the principal amount paid accrued to the date of
such prepayment.
(c) The Borrower shall prepay the Loans, including principal, interest
and all fees outstanding prior to termination of the Borrower.
(d) Prepayments permitted or required under this Section 2.06 shall be
without premium or penalty. Any prepayments on the Revolving Credit Loan
may be reborrowed subject to the then effective Revolving Credit
Commitment.
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Section 2.07 Borrowing Base.
(a) The Borrowing Base shall be determined in accordance with Section
2.07(b) by the Lender and is subject to redetermination in accordance with
Section 2.07(d). Upon any redetermination of the Borrowing Base, such
redetermination shall remain in effect until the next successive
Redetermination Date. "Redetermination Date" shall mean the date that the
redetermined Borrowing Base becomes effective subject to the notice
requirements specified in Section 2.07(e) both for scheduled
redeterminations and unscheduled redeterminations. So long as the
Commitment is in effect or Loans are outstanding hereunder, this facility
shall be governed by the then effective Borrowing Base. During the period
from and after the Closing Date until the Borrowing Base is redetermined
pursuant to Section 2.07(d) or adjusted pursuant to Section 8.08(c), the
amount of the Borrowing Base shall be $3,500,000.
(b) Upon receipt of the reports required by Section 8.07 and such
other reports, data and supplemental information as may from time to time
be reasonably requested by the Lender (the "Engineering Reports"), the
Lender will redetermine the Borrowing Base in its sole and exclusive
judgment. Such redetermination will be in accordance with its normal and
customary procedures for evaluating oil and gas reserves and other related
assets as such exist at that particular time. The Lender may at any time
(regardless of whether or not reports were submitted under Section 8.07),
in it sole discretion, (i) make adjustments to the rates, volumes and
prices and other assumptions set forth therein in accordance with its
normal and customary procedures for evaluating oil and gas reserves and
other related assets as such exist at that particular time and (ii)
redetermine the Borrowing Base.
(c) The Lender may exclude any Oil and Gas Property or portion of
production therefrom or any income from any other Property from the
Borrowing Base, at any time, because title information is not reasonably
satisfactory, such Property is not Mortgaged Property or such Property is
not assignable.
(d) So long as the Commitment is in effect and until payment in full
of all Loans hereunder, on or around the first Business Day of each May and
November, commencing November 1, 1995 (each being a "Scheduled
Redetermination Date"), or more frequently as requested by the Borrower the
Lender shall redetermine the amount of the Borrowing Base in accordance
with Section 2.07(b), provided, however, the Lender will not be obligated
to respond to Borrower's request for a redetermination of the Borrowing
Base more than two (2) times per year and not more than one time per
quarter, including quarters that contain a scheduled Redetermination Date.
In addition, the Lender may initiate a redetermination of the Borrowing
Base at any other time as it elect, provided that such redetermination is
at the cost and expense of Lender, unless such redetermination follows an
Event of Default.
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(e) The Lender shall promptly notify the Borrower orally and confirm
promptly in writing of the new Borrowing Base. Any redetermination of the
Borrowing Base shall be in effect at such time oral notification is
received by the Borrower.
Section 2.08 Nonrecourse Obligations. Notwithstanding any other
document, instrument, or other part of the Loan Documents, any and all
liabilities and obligations created and evidenced hereby and thereby, shall be
nonrecourse to, and without personal liability of, the Venturers, and their
successors, and assigns, for all purposes, except for the amount of damage, if
any, caused by such Venturer's fraud, willful misrepresentation or interference
with foreclosure actions or any exercise of Lender's rights in connection with
this Agreement, the Note, Security Instruments, or any other document,
instrument, or other part of the Loan Documents. The holders of the Note, and
all obligees and beneficiaries under such Loan Documents, their successors and
assigns, agree to look only to the Borrower and its assets for repayment of any
and all amounts at any time owing or due hereunder and thereunder or arising
under any provision of this Agreement or any other Loan Document and not to any
Venturer or their successors and assigns. Nothing in this Section 2.08 shall be
construed so as to prevent Lender from commencing any action, suit or proceeding
with respect to Borrower or causing legal papers to be served upon any Venturer
for the purpose of obtaining jurisdiction over the Borrower. Borrower covenants
and agrees that it will not permit any Venturers to contest any foreclosure
action commenced by the Lender or to interfere with any exercise of Lender's
rights in connection with this Agreement, the Note, Security Instruments, or any
other document, instrument, or other part of the Loan Documents.
ARTICLE III
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.01 Repayment of Loans. The Borrower will pay to the
Lender, the principal payments required by this Section 3.01. On the Revolving
Credit Termination Date the Borrower shall repay the outstanding principal
amount of the Note.
Section 3.02 Interest. The Borrower will pay to the Lender interest
on the unpaid principal amount of each Loan for the period commencing on the
date such Loan is made to but excluding the date such Loan shall be paid in
full, at the Base Rate (as in effect from time to time) plus the Applicable
Margin, but in no event to exceed the Highest Lawful Rate.
Notwithstanding the foregoing, the Borrower will pay to the Lender interest
at the applicable Post-Default Rate on any principal of any Loan, and (to the
fullest extent permitted by law) on any other amount payable by the Borrower
hereunder, under any Security Instrument or under the Note which shall not be
paid in full when due (whether at stated maturity, by acceleration or
otherwise), for the period commencing on the due date thereof until the same is
paid in full.
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Accrued interest on the Loans shall be payable monthly commencing on August
1, 1995.
Promptly after the determination of any interest rate provided for herein
or any change therein, the Lender shall notify the Borrower thereof. Each
determination by the Lender of an interest rate or fee hereunder shall, except
in cases of manifest error, be final, conclusive and binding on the parties.
ARTICLE IV
PAYMENTS; COMPUTATIONS; ETC.
Section 4.01 Payments. Except to the extent otherwise provided
herein, all payments of principal, interest and other amounts to be made by the
Borrower under this Agreement and the Note shall be made in Dollars, in
immediately available funds, to the Lender at such account as the Lender shall
specify by notice to the Borrower from time to time, not later than 2:00 p.m.
Houston, Texas, time on the date on which such payments shall become due (each
such payment made after such time on such due date to be deemed to have been
made on the next succeeding Business Day). Such payments shall be made without
(to the fullest extent permitted by applicable law) defense, set-off or
counterclaim. Each payment to be made to the Lender under this Agreement or the
Note shall be paid promptly to the Lender, in immediately available funds. If
the due date of any payment under this Agreement or the Note would otherwise
fall on a day which is not a Business Day such date shall be extended to the
next succeeding Business Day and interest shall be payable for any principal so
extended for the period of such extension.
Section 4.02 Computations. Interest shall be computed on the basis
of a year of 365 or 366 days, as the case may be, and actual days elapsed
(including the first day but excluding the last day) occurring in the period for
which payable.
Section 4.03 Set-off. The Borrower agrees that, in addition to (and
without limitation of) any right of set-off, bankers' lien or counterclaim the
Lender may otherwise have, the Lender shall have the right and be entitled, at
its option, to offset balances held by it or by any of its Affiliates for
account of the Borrower at any of its offices, in Dollars or in any other
currency, against any principal of or interest on any of the Loans or any other
amount payable to the Lender hereunder, which is not paid when due (regardless
of whether such balances are then due to the Borrower), in which case it shall
promptly notify the Borrower thereof, provided that Lender's failure to give
such notice shall not affect the validity thereof.
Section 4.04 Disposition of Proceeds. The Security Instruments
contain an assignment by the Borrower unto and in favor of the Lender of all
production and all proceeds attributable thereto which may be produced from or
allocated to the Mortgaged Property, and the Security Instruments further
provide in general for the application of such proceeds to the satisfaction of
the Indebtedness and other obligations described therein and secured thereby.
Notwithstanding the assignment contained in such Security Instruments, until the
occurrence of
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an Event of Default, the Lender agrees that it will neither notify the purchaser
or purchasers of such production nor take any other action to cause such
proceeds to be remitted to the Lender, but the Lender will instead permit such
proceeds to be paid to the Borrower.
ARTICLE V
Intentionally Left Blank.
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.01 Initial Funding. The obligation of the Lender to make
the Initial Funding is subject to its receipt by the Lender of all fees payable
pursuant to Section 2.04 on or before the Closing Date and the receipt by the
Lender of the following documents and satisfaction of the other conditions
provided in this Section 6.01, each of which shall be satisfactory to the Lender
in form and substance:
(a) A certificate of the Managing Venturer setting forth (i)
resolutions of its board of directors with respect to the authorization of
the Borrower to execute and deliver the Loan Documents to which it is a
party and to enter into the transactions contemplated in those documents,
(ii) the officers of the Managing Venturer (y) who are authorized to sign
the Loan Documents to which Borrower is a party and (z) who will, until
replaced by another officer or officers duly authorized for that purpose,
act as its representative for the purposes of signing documents and giving
notices and other communications in connection with this Agreement and the
transactions contemplated hereby, (iii) specimen signatures of the
authorized officers, and (iv) the Partnership Agreement, certified as being
true and complete. The Lender may conclusively rely on such certificate
until it receives notice in writing from the Borrower to the contrary.
(b) Certificate issued by the Secretary of State for Louisiana stating
that the Borrower is registered to do business in such state.
(c) A compliance certificate which shall be substantially in the form
of Exhibit C, duly and properly executed by a Responsible Officer and dated
as of the date of the Initial Funding.
(d) The Note, duly completed and executed.
(e) The Security Instruments described on Exhibit E, duly completed
and executed in sufficient number of counterparts for recording, if
necessary.
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(f) An opinion of Robert Thomas, general counsel of the Borrower, in
form and substance reasonably satisfactory to Lender.
(g) A certificate of insurance coverage of the Borrower evidencing
that the Borrower is carrying insurance in accordance with Section 7.19
hereof.
(h) Copies of the most recent title opinions setting forth the status
of title to the Borrower's interest in the Mortgaged Property.
(i) Letters in Lieu executed in blank by the Borrower which may be
sent by Lender to each of the purchasers of the Hydrocarbons of the
Borrower produced from the Oil and Gas Properties pursuant to Section
11.02.
(j) The Lender shall have been furnished with appropriate UCC search
certificates reflecting the filing of all financing statements required to
perfect the security interests granted by the Security Instruments and
reflecting no prior liens or security interests.
(k) Lender's satisfactory review of (i) title opinions described in
(h) above; (ii) the Borrower's in-house land records as to the Mortgaged
Properties; and (iii) any material contracts, as Lender may require
concerning the title to and operations of the Oil and Gas Properties.
(l) A copy of the Initial Reserve Report.
(m) A list of remitters or purchasers of production from Oil and Gas
Properties, together with addresses of same.
(n) Evidence of consent of Edge Group II Limited Partnership.
(o) Such other documents as the Lender or special counsel to the
Lender may reasonably request.
Upon the Initial Funding, it shall be conclusively presumed that the Borrower
has satisfactorily complied by items (a) through (o) above, except as may be
communicated to Borrower by Lender in writing contemporaneously with the Initial
Funding.
Section 6.02 Initial and Subsequent Loans. The obligation of the
Lender to make Loans to the Borrower upon the occasion of each borrowing
hereunder (including the Initial Funding) is subject to the further conditions
precedent that, as of the date of such Loans and after giving effect thereto:
(i) no Default shall have occurred and be continuing; (ii) no Material Adverse
Effect shall have occurred; and (iii) the representations and warranties made by
the Borrower in Article VII and in the Security Instruments shall be true on and
as of the date of the making of such Loans with the same force and effect as if
made on and as of such date and
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following such new borrowing, except to the extent such representations and
warranties are expressly limited to an earlier date or the Lender may expressly
consent in writing to the contrary. Each request for a borrowing by the Borrower
hereunder shall constitute a certification by the Borrower to the effect set
forth in the preceding sentence (both as of the date of such notice and, unless
the Borrower otherwise notifies the Lender prior to the date of and immediately
following such borrowing as of the date thereof).
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender that (each
representation and warranty herein is given as of the Closing Date and shall be
deemed repeated and reaffirmed on the dates of each borrowing as provided in
Section 6.02):
Section 7.01 Existence. The Borrower: (i) is a partnership duly
organized, legally existing and in good standing under the laws of the
jurisdiction of its formation; (ii) has all requisite power, and has all
material governmental licenses, authorizations, consents and approvals necessary
to own its assets and carry on its business as now being or as proposed to be
conducted; and (iii) is qualified to do business in all jurisdictions in which
the nature of the business conducted by it makes such qualification necessary
and where failure so to qualify would have a Material Adverse Effect.
Section 7.02 Financial Condition. The audited balance sheet of the
Borrower as at December 31, 1994, and the related statement of income,
venturer's capital and cash flow of the Borrower for the fiscal year ended on
said date, with the opinion thereon of Deloitte and Touche L.L.P. heretofore
furnished to the Lender and the balance sheet of the Borrower as at March 31,
1995 and the related statements of income, venturer's capital and cash flow of
the Borrower for the three-month period ended on such date heretofore furnished
to the Lender, are complete and correct and fairly present the financial
condition of the Borrower as at said dates and the results of its operations for
the fiscal year and the three-month period on said dates, all in accordance with
GAAP, as applied on a consistent basis (subject, in the case of the interim
financial statements, to normal year-end adjustments). The Borrower does not
have on the Closing Date any material Debt, contingent liabilities, liabilities
for taxes, unusual forward or long-term commitments or unrealized or anticipated
losses from any unfavorable commitments, except as referred to or reflected or
provided for in the Financial Statements or in Schedule 7.02. Since March 31,
1995, there has been no change or event having a Material Adverse Effect. Since
the date of the Financial Statements, neither the business nor the Properties of
the Borrower have been materially and adversely affected as a result of any
fire, explosion, earthquake, flood, drought, windstorm, accident, strike or
other labor disturbance, embargo, requisition or taking of Property or
cancellation of contracts, permits or concessions by any Governmental Authority,
riot, activities of armed forces or acts of God or of any public enemy.
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Section 7.03 Litigation. Except as disclosed to the Lender in
Schedule 7.03 hereto, at the Closing Date there is no litigation, legal,
administrative or arbitral proceeding, investigation or other action of any
nature pending or, to the knowledge of the Borrower threatened against or
affecting the Borrower which involves the possibility of any judgment or
liability against the Borrower not fully covered by insurance (except for normal
deductibles).
Section 7.04 No Breach. Neither the execution and delivery of the
Loan Documents, nor compliance with the terms and provisions hereof will
conflict with or result in a breach of, or require any consent which has not
been obtained as of the Closing Date under, the Partnership Agreement of the
Borrower, or any Governmental Requirement or any agreement or instrument to
which the Borrower is a party or by which it is bound or to which it or its
Properties are subject, or constitute a default under any such agreement or
instrument, or result in the creation or imposition of any Lien upon any of the
revenues or assets of the Borrower pursuant to the terms of any such agreement
or instrument other than the Liens created by the Loan Documents.
Section 7.05 Authority. The Borrower has all necessary power and
authority to execute, deliver and perform its obligations under the Loan
Documents to which it is a party; and the execution, delivery and performance by
the Borrower of the Loan Documents to which it is a party, have been duly
authorized by all necessary action on its part; and the Loan Documents
constitute the legal, valid and binding obligations of the Borrower, enforceable
in accordance with their terms, except as such terms may be subject to
limitations relating to bankruptcy, insolvency, moratorium, equity and other
laws relating to creditors' and debtors' rights.
Section 7.06 Approvals. No authorizations, approvals or consents of,
and no filings or registrations with, any Governmental Authority are necessary
for the execution, delivery or performance by the Borrower of the Loan Documents
to which it is a party or for the validity or enforceability thereof, except for
the recording and filing of the Security Instruments as required by this
Agreement.
Section 7.07 Use of Loans. The proceeds of the Loans shall be used
for general joint venture purposes, including reserve acquisitions, development
drilling, and working capital needs. The Borrower is not engaged principally,
or as one of its important activities, in the business of extending credit for
the purpose, whether immediate, incidental or ultimate, of buying or carrying
margin stock (within the meaning of Regulation G, U or X of the Board of
Governors of the Federal Reserve System) and no part of the proceeds of any Loan
hereunder will be used to buy or carry any margin stock.
Section 7.08 ERISA. The Borrower does not maintain any employee
pension plan as defined in Section 3(2) of ERISA.
Section 7.09 Taxes. Except as set out in Schedule 7.09, the Borrower
has filed all United States Federal income tax returns and all other tax returns
which are required to be filed by them and have paid all material taxes due
pursuant to such returns or pursuant to any
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assessment received by the Borrower. The charges, accruals and reserves on the
books of the Borrower in respect of taxes and other governmental charges are, in
the opinion of the Borrower, adequate. No tax lien has been filed and, to the
knowledge of the Borrower, no claim is being asserted with respect to any such
tax, fee or other charge.
Section 7.10 Titles, Etc.
(a) Except as set out in Schedule 7.10, the Borrower has good and
defensible title to its material (individually or in the aggregate)
Properties, free and clear of all Liens except Liens permitted by Section
9.02. Except as set forth in Schedule 7.10, after giving full effect to the
Excepted Liens, the Borrower owns the net interests in production
attributable to the lands and leases reflected in the most recently
delivered Reserve Report and the ownership of such Properties shall not in
any material respect obligate the Borrower to bear the costs and expenses
relating to the maintenance, development and operations of each such
Property in an amount in excess of the working interest of each Property
set forth in the Initial Reserve Report. Further, upon delivery of each
Reserve Report, the statements made in the preceding sentence shall be true
with respect to such furnished Reserve Reports including the ownership of
the units and wells set forth therein. All information contained in the
Initial Reserve Report is true and correct in all material respects as of
the date thereof.
(b) All leases and agreements necessary for the conduct of the
business of the Borrower are valid and subsisting, in full force and effect
and there exists no default or event or circumstance which with the giving
of notice or the passage of time or both would give rise to a default under
any such lease or leases, which would affect in any material respect the
conduct of the business of the Borrower.
(c) The rights, properties and other assets presently owned, leased or
licensed by the Borrower including, without limitation, all easements and
rights of way, include all rights, Properties and other assets necessary to
permit the Borrower to conduct their business in all material respects in
the same manner as its business has been conducted prior to the Closing
Date.
(d) All of the assets and Properties of the Borrower which are
reasonably necessary for the operation of its business are in good working
condition and are maintained in accordance with prudent business standards.
Section 7.11 No Material Misstatements. To the best knowledge of the
Borrower, no written information, statement, exhibit, certificate, document or
report furnished to the Lender by the Borrower in connection with the
negotiation of this Agree ment contained any material misstatement of fact or
omitted to state a material fact or any fact necessary to make the statement
contained therein not materially misleading in the light of the circumstances in
which made and with respect to the Borrower. To the best knowledge of the
Borrower, there is no fact peculiar to the Borrower which has a Material Adverse
Effect or in the future is reasonably likely to have
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(so far as the Borrower can now foresee) a Material Adverse Effect and which has
not been set forth in this Agreement or the other documents, certificates and
statements furnished to the Lender by or on behalf of the Borrower prior to, or
on, the Closing Date in connection with the transactions contemplated hereby.
Section 7.12 Investment Company Act. The Borrower is not an
"investment company" or a company "controlled" by an "investment company,"
within the meaning of the Investment Company Act of 1940, as amended.
Section 7.13 Public Utility Holding Company Act. The Borrower is not
a "holding company," or a "subsidiary company" of a "holding company," or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company," or a "public utility" within the meaning of the Public Utility Holding
Company Act of 1935, as amended.
Section 7.14 Subsidiaries and Partnerships. Except as set forth on
Schedule 7.14, the Borrower has no Subsidiaries and has no interest in any
partnerships, except for special purpose tax partnerships and/or partnerships
created as a result of joint operating agreements.
Section 7.15 Location of Business and Offices. The Borrower's
principal place of business and chief executive offices are located at the
address stated on the signature page of this Agreement.
Section 7.16 Defaults. The Borrower is not in default nor has any
event or circumstance occurred which, but for the expiration of any applicable
grace period or the giving of notice, or both, would constitute a default under
any material agreement or instrument to which the Borrower is a party or by
which the Borrower is bound which default would have a Material Adverse Effect.
No Default under this Agreement has occurred and is continuing.
Section 7.17 Environmental Matters. Except (i) as provided in
Schedule 7.17 or (ii) as would not have a Material Adverse Effect (or with
respect to (c), (d) and (e) below, where the failure to take such actions would
not have a Material Adverse Effect):
(a) To the best knowledge of Borrower, neither any Property of the
Borrower nor the operations conducted thereon violate any order or
requirement of any court or Governmental Authority or any Environmental
Laws;
(b) Without limitation of clause (a) above, no Property of the
Borrower nor the operations currently conducted thereon or, to the best
knowledge of the Borrower, by any prior owner or operator of such Property
or operation, are in violation of or subject to any existing, pending or
threatened action, suit, investigation, inquiry or proceeding by or before
any court or Governmental Authority or to any remedial obligations under
Environmental Laws;
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(c) To the best knowledge of Borrower, all notices, permits, licenses
or similar authorizations, if any, required to be obtained or filed in
connection with the operation or use of any and all Property of the
Borrower, including without limitation past or present treatment, storage,
disposal or release of a hazardous substance or solid waste into the
environment, have been duly obtained or filed, and the Borrower is in
compliance with the terms and conditions of all such notices, permits,
licenses and similar authorizations;
(d) To the best knowledge of Borrower, all hazardous substances, solid
waste, and oil and gas exploration and production wastes, if any, generated
at any and all Property of the Borrower have in the past been transported,
treated and disposed of in accordance with Environmental Laws and so as not
to pose an imminent and substantial endangerment to public health or
welfare or the environment, and, to the best knowledge of the Borrower, all
such transport carriers and treatment and disposal facilities have been and
are operating in compliance with Environmental Laws and so as not to pose
an imminent and substantial endangerment to public health or welfare or the
environment, and are not the subject of any existing, pending or threatened
action, investigation or inquiry by any Governmental Authority in
connection with any Environmental Laws;
(e) The Borrower has taken all steps reasonably necessary to determine
and have determined that no hazardous substances, solid waste, or oil and
gas exploration and production wastes, have been disposed of or otherwise
released and there has been no threatened release of any hazardous
substances on or to any Property of the Borrower except in compliance with
Environmental Laws and so as not to pose an imminent and substantial
endangerment to public health or welfare or the environment;
(f) To the extent applicable, all Property of the Borrower currently
satisfies all design, operation, and equipment requirements imposed by the
OPA or scheduled as of the Closing Date to be imposed by OPA during the
term of this Agreement, and the Borrower does not have any reason to
believe that such Property, to the extent subject to OPA, will not be able
to maintain compliance with the OPA requirements during the term of this
Agreement; and
(g) The Borrower does not have any known contingent liability in
connection with any release or threatened release of any oil, hazardous
substance or solid waste into the environment.
Section 7.18 Compliance with the Law. To the best knowledge of
Borrower, the Borrower has not violated any Governmental Requirement or failed
to obtain any license, permit, franchise or other governmental authorization
necessary for the ownership of any of its Properties or the conduct of its
business, which violation or failure would have (in the event such violation or
failure were asserted by any Person through appropriate action) a Material
Adverse Effect. Except for such acts or failures to act as would not have a
Material Adverse Effect to the best knowledge of Borrower, the Oil and Gas
Properties (and properties unitized therewith) have been maintained, operated
and developed in a good and workmanlike manner and in conformity with
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all applicable laws and all rules, regulations and orders of all duly
constituted authorities having jurisdiction and in conformity with the
provisions of all leases, subleases or other contracts comprising a part of the
Hydrocarbon Interests and other contracts and agreements forming a part of the
Oil and Gas Properties; specifically in this connection, (i) after the Closing
Date, no Oil and Gas Property is subject to having allowable production reduced
below the full and regular allowable (including the maximum permissible
tolerance) because of any overproduction (whether or not the same was
permissible at the time) prior to the Closing Date and (ii) none of the wells
comprising a part of the Oil and Gas Properties (or properties unitized
therewith) are deviated from the vertical more than the maximum permitted by
applicable laws, regulations, rules and orders, and such wells are, in fact,
bottomed under and are producing from, and the well bores are wholly within, the
Oil and Gas Properties (or in the case of wells located on properties unitized
therewith, such unitized properties).
Section 7.19 Insurance. Schedule 7.19 attached hereto contains an
accurate and complete description of all material policies of fire, liability,
workmen's compensation and other forms of insurance owned or held by the
Borrower. All such policies are in full force and effect, all premiums with
respect thereto covering all periods up to and including the date of the closing
have been paid, and no notice of cancellation or termination has been received
with respect to any such policy. Such policies are sufficient for compliance
with all requirements of law and of all agreements to which the Borrower is a
party; are valid, outstanding and enforceable policies; provide adequate
insurance coverage in at least such amounts and against at least such risks (but
including in any event public liability) as are usually insured against in the
same general area by companies engaged in the same or a similar business for the
assets and operations of the Borrower; will remain in full force and effect
through the respective dates set forth in Schedule 7.19 without the payment of
additional premiums; and will not in any way be affected by, or terminate or
lapse by reason of, the transactions contemplated by this Agreement. Schedule
7.19 identifies all material risks, if any, which the Borrower and its Board of
Directors or officers have designated as being self insured. The Borrower has
not been refused any insurance with respect to its assets or operations, nor has
its coverage been limited below usual and customary policy limits, by an
insurance carrier to which it has applied for any such insurance or with which
it has carried insurance during the last three years.
Section 7.20 Hedging Agreements. Schedule 7.20 sets forth, as of the
Closing Date, a true and complete list of all Hedging Agreements (including
commodity price swap agreements, forward agreements or contracts of sale which
provide for prepayment for deferred shipment or delivery of oil, gas or other
commodities) of the Borrower, the material terms thereof (including the type,
term, effective date, termination date and notional amounts or volumes), the net
mark to market value thereof, all credit support agreements relating thereto
(including any margin required or supplied), and the counterparty to each such
agreement.
Section 7.21 Restriction on Liens. The Borrower is not a party to
any agreement or arrangement (other than this Agreement and the Security
Instruments), or subject to any order, judgment, writ or decree, which either
restricts or purports to restrict its ability to grant Liens to other Persons on
or in respect of their respective assets of Properties.
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Section 7.22 Material Agreements. Set forth on Schedule 7.22 hereto
is a complete and correct list of all material credit agreements, indentures,
purchase agreements, obligations in respect of letters of credit, guarantees,
joint venture agreements, and other instruments in effect or to be in effect as
of the Closing Date (other than Hedging Agreements) providing for, evidencing,
securing or otherwise relating to any Debt of the Borrower or, and all
obligations of the Borrower to issuers of surety or appeal bonds issued for
account of the Borrower, and such list correctly sets forth the names of the
debtor or lessee and creditor or lessor with respect to the Debt or lease
obligations outstanding or to be outstanding and the property subject to any
Lien securing such Debt or lease obligation.
Section 7.23 Gas Imbalances. As of the Closing Date, except as set
forth on Schedule 7.23 or on the most recent certificate delivered pursuant to
Section 8.07(c), on a net basis there are no gas imbalances, take or pay or
other prepayments with respect to the Oil and Gas Properties which would require
the Borrower to deliver Hydrocarbons produced from the Oil and Gas Properties at
some future time without then or thereafter receiving full payment therefor.
Section 7.24 Partnership Agreement. The Partnership Agreement has
not been terminated, is in full force and effect as of the date hereof and no
default has occurred and is in continuance thereunder which would have a
Material Adverse Effect.
Section 7.25 Remittances. All remittances to Borrower from
purchasers of Hydrocarbons are in the form of a check.
ARTICLE VIII
AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that, so long as the Commitment is in
effect and until payment in full of all Loans hereunder, all interest thereon
and all other amounts payable by the Borrower hereunder:
Section 8.01 Financial Statements. The Borrower shall deliver, or
shall cause to be delivered, to the Lender:
(a) As soon as available and in any event within 120 days after the
end of each fiscal year of the Borrower, the audited statements of income,
venturer's capital, and cash flow of the Borrower for such fiscal year, and
the related balance sheets of the Borrower and as at the end of such fiscal
year, and setting forth in each case in comparative form the corresponding
figures for the preceding fiscal year, and accompanied by the related
opinion of independent public accountants of recognized national standing
acceptable to the Lender which opinion shall state that said financial
statements fairly present the financial condition and results of operations
of the Borrower as at the end of, and for, such fiscal year and that such
financial statements have been prepared in accordance with GAAP
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except for such changes in such principles with which the independent
public accountants shall have concurred and such opinion shall not contain
a "going concern" or like qualification or exception.
(b) As soon as available and in any event within 45 days after the end
of each of the first three fiscal quarterly periods of each fiscal year of
the Borrower, statements of income, venturer's capital, cash flow of the
Borrower for such period and for the period from the beginning of the
respective fiscal year to the end of such period, and the related balance
sheets as at the end of such period, accompanied by a certificate of a
Responsible Officer which certificate shall state that said financial
statements fairly present the financial condition and results of operations
of the Borrower in accordance with GAAP, as at the end of, and for, such
period (subject to normal year-end audit adjustments).
(c) Promptly after the Borrower knows that any Default or any Material
Adverse Effect has occurred, a notice of such Default or Material Adverse
Effect, describing the same in reasonable detail and the action the
Borrower proposes to take with respect thereto.
(d) Promptly upon receipt thereof, a copy of each other report or
letter submitted to the Borrower by independent accountants in connection
with any annual, interim or special audit made by them of the books of the
Borrower and a copy of any response by the Borrower or the Board of
Directors of the Managing Venturer of the Borrower to such letter or
report.
The Borrower will furnish to the Lender, at the time it furnishes each set
of financial statements pursuant to paragraph (a) or (b) above, a certificate
substantially in the form of Exhibit C hereto executed by a Responsible Officer
(i) certifying as to the matters set forth therein and stating that no Default
has occurred and is continuing (or, if any Default has occurred and is
continuing, describing the same in reasonable detail), and (ii) setting forth in
reasonable detail the computations necessary to determine whether the Borrower
is in compliance with Sections 9.11 and 9.12 as of the end of the respective
fiscal quarter or fiscal year.
Section 8.02 Litigation. The Borrower shall promptly give to the
Lender notice of: (i) all legal or arbitral proceedings, and of all proceedings
before any Governmental Authority affecting the Borrower, except proceedings
which, if adversely determined, would not have a Material Adverse Effect, and
(ii) of any litigation or proceeding affecting the Borrower in which the amount
involved is not covered by insurance, or in which injunctive or similar relief
is sought. The Borrower will promptly notify the Lender of any claim, judgment,
Lien or other encumbrance affecting any Property of the Borrower if the value of
the claim, judgment, Lien, or other encumbrance affecting such Property shall
exceed $250,000.
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Section 8.03 Maintenance, Etc.
(a) The Borrower shall: preserve and maintain its existence and all of
its material rights, privileges and franchises; keep books of record and
account in which full, true and correct entries will be made of all
dealings or transactions in relation to its business and activities; comply
with all Governmental Requirements if failure to comply with such
requirements will have a Material Adverse Effect; pay and discharge all
taxes, assessments and governmental charges or levies imposed on it or on
its income or profits or on any of its Property prior to the date on which
penalties attach thereto, except for any such tax, assessment, charge or
levy the payment of which is being contested in good faith and by proper
proceedings and against which adequate reserves are being maintained; upon
reasonable notice, permit representatives of the Lender, during normal
business hours, to examine, copy and make extracts from its books and
records, to inspect its Properties, and to discuss its business and affairs
with its officers, all to the extent reasonably requested by the Lender;
and keep, or cause to be kept, insured by financially sound and reputable
insurers all Property of a character usually insured by Persons engaged in
the same or similar business similarly situated against loss or damage of
the kinds and in the amounts customarily insured against by such Persons
and carry such other insurance as is usually carried by such Persons
including, without limitation, environmental risk insurance to the extent
reasonably available.
(b) Contemporaneously with the delivery of the financial statements
required by Section 8.01(a) to be delivered for each year, the Borrower
will furnish or cause to be furnished to the Lender a certificate of
insurance coverage from the insurer in form and substance satisfactory to
the Lender and, if requested, will furnish the Lender copies of the
applicable policies.
(c) The Borrower will operate its Properties or cause such Properties
to be operated in a careful and efficient manner in accordance with the
practices of the industry and in compliance with all applicable contracts
and agreements and in compliance in all material respects with all
Governmental Requirements.
(d) The Borrower will at its own expense, do or cause to be done all
things reasonably necessary to preserve and keep in good repair, working
order and efficiency all of its Oil and Gas Properties and other material
Properties including, without limitation, all equipment, machinery and
facilities, and from time to time will make all the reasonably necessary
repairs, renewals and replacements so that at all times the state and
condition of its Oil and Gas Properties and other material Properties will
be fully preserved and maintained, except to the extent a portion of such
Properties is no longer capable of producing Hydrocarbons in economically
reasonable amounts. The Borrower will promptly: (i) pay and discharge or
make reasonable and customary efforts to cause to be paid and discharged
all delay rentals, royalties, expenses and indebtedness accruing under the
leases or other agreements affecting or pertaining to its Oil and Gas
Properties, (ii) perform or make reasonable and customary efforts to cause
to be performed in
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accordance with industry standards, the obligations required by each and
all of the assignments, deeds, leases, sub-leases, contracts and agreements
affecting its interests in its Oil and Gas Properties and other material
Properties and (iii) will do all other things necessary to keep unimpaired,
except for Liens described in Section 9.02, its rights with respect thereto
and prevent any forfeiture thereof or a default thereunder, except to the
extent a portion of such Properties is no longer capable of producing
Hydrocarbons in economically reasonable amounts and except for dispositions
permitted by Section 9.14 hereof. The Borrower will operate its Oil and Gas
Properties and other material Properties or cause or make reasonable and
customary efforts to cause such Oil and Gas Properties and other material
Properties to be operated in a careful and efficient manner in accordance
with the practices of the industry and in compliance with all applicable
contracts and agreements and in compliance in all material respects with
all Governmental Requirements.
Section 8.04 Environmental Matters.
(a) The Borrower will establish and implement such procedures as may
be reasonably necessary to continuously determine and assure that any
failure of the following does not have a Material Adverse Effect: (i) all
Property of the Borrower and the operations conducted thereon and other
activities of the Borrower are in compliance with and do not violate the
requirements of any Environmental Laws, (ii) no oil, hazardous substances
or solid wastes are disposed of or otherwise released on or to any Property
owned by any such party except in compliance with Environmental Laws, (iii)
no hazardous substance will be released on or to any such Property in a
quantity equal to or exceeding that quantity which requires reporting
pursuant to Section 103 of CERCLA, and (iv) no oil, oil and gas exploration
and production wastes or hazardous substance is released on or to any such
Property so as to pose an imminent and substantial endangerment to public
health or welfare or the environment.
(b) The Borrower will promptly notify the Lender in writing of any
threatened action, investigation or inquiry by any Governmental Authority
of which the Borrower has knowledge in connection with any Environmental
Laws, excluding routine testing and corrective action.
Section 8.05 Further Assurances. The Borrower will cure promptly any
defects in the creation and issuance of the Note and the execution and delivery
of the Security Instruments and this Agreement. The Borrower at its expense
will promptly execute and deliver to the Lender upon request all such other
documents, agreements and instruments to comply with or accomplish the covenants
and agreements of the Borrower in the Security Instruments and this Agreement,
or to further evidence and more fully describe the collateral intended as
security for the Note, or to correct any omissions in the Security Instruments,
or state more fully the security obligations set out herein or in any of the
Security Instruments, or to perfect, protect or preserve any Liens created
pursuant to any of the Security Instruments, or to make any recordings, to file
any notices, or obtain any consents, all as may be necessary or appropriate in
connection therewith.
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Section 8.06 Performance of Obligations. The Borrower will pay the
Note according to the reading, tenor and effect thereof; and the Borrower will
do and perform every act and discharge all of the obligations provided to be
performed and discharged by them under the Security Instruments and this
Agreement, at the time or times and in the manner specified.
Section 8.07 Engineering Reports.
(a) On or before April 1 of each year, the Borrower shall furnish to
the Lender a Reserve Report prepared by certified independent petroleum
engineers or other independent petroleum consultant(s) acceptable to the
Lender, which Reserve Report shall evaluate the Oil and Gas Properties of
the Borrower as of January 1 of such year.
(b) On or before October 1 of each year, the Borrower shall furnish to
the Lender a Reserve Report prepared by or under the supervision of the
chief engineer of the Borrower who shall certify such Reserve Report to be
true and accurate and to have been furnished pursuant to Section 8.07(a)
which shall evaluate the oil and Gas Properties of the Borrower as
appropriate as of the immediately preceding July 1.
(c) With the delivery of each Reserve Report, the Borrower shall
provide to the Lender, a certificate from the Responsible Officer
certifying that, to the best of his knowledge and in all material respects:
(i) the information contained in the Reserve Report and any other
information delivered in connection therewith is true and correct, (ii) the
Borrower owns good and defensible title to its Oil and Gas Properties
evaluated in such Reserve Report and such Properties are free of all Liens
except for Liens permitted by Section 9.02, (iii) except as set forth on an
exhibit to the certificate, on a net basis there are no gas imbalances,
take or pay or other prepayments with respect to its Oil and Gas Properties
evaluated in such Reserve Report which would require the Borrower to
deliver Hydrocarbons produced from such Oil and Gas Properties at some
future time without then or thereafter receiving full payment therefor,
(iv) none of its Oil and Gas Properties have been sold since the date of
the last Borrowing Base determination except as set forth on an exhibit to
the certificate, which certificate shall list all of its Oil and Gas
Properties sold and in such detail as reasonably required by the Lender,
(v) attached to the certificate is a list of its Oil and Gas Properties
added to and deleted from the immediately prior Reserve Report and a list
of all Persons disbursing proceeds to the Borrower from its Oil and Gas
Properties, (vi) except as set forth on a schedule attached to the
certificate all of the Oil and Gas Properties evaluated by such Reserve
Report are Mortgaged Property and (vii) any change in working interest or
net revenue interest in its Oil and Gas Properties occurring and the reason
for such change.
Section 8.08 Title Information.
(a) On or before the delivery to the Lender of each Reserve Report
required by Section 8.07(a), the Borrower will deliver title information in
form and substance acceptable to the Lender covering enough of the Oil and
Gas Property evaluated by such
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Reserve Report that was not included in the immediately preceding Reserve
Report, so that the Lender shall have received together with title
information previously delivered to the Lender, satisfactory title
information on the Oil and Gas Properties evaluated by such Reserve Report
which are satisfactory to the Lender.
(b) The Borrower shall cure any title defects or exceptions which are
not Excepted Liens raised by such information, or substitute acceptable
Mortgaged Properties with no title defects or exceptions except for
Excepted Liens covering Mortgaged Properties of an equivalent value, within
45 days after a request by the Lender to cure such defects or exceptions.
(c) If the Borrower is unable to cure any title defect requested by
the Lender to be cured within the 45-day period or the Borrower does not
comply with the requirements to provide title information of the Oil and
Gas Properties evaluated in the most recent Reserve Report acceptable to
Lender, such default shall not be a Default or an Event of Default, but
instead the Lender shall have the right to exercise the following remedy in
its sole discretion from time to time, and any failure to so exercise this
remedy at any time shall not be a waiver as to future exercise of the
remedy by the Lender. To the extent that the Lender is not satisfied with
title to any Mortgaged Property after the time period in Section 8.08(b)
has elapsed, such unacceptable Mortgaged Property shall not count towards
the Borrowing Base and the Lender may send a notice to the Borrower that
the then outstanding Borrowing Base shall be reduced by an amount
attributable to such unacceptable Mortgaged Property. This new Borrowing
Base shall become effective immediately after receipt of such notice. At
such time Lender, upon the request of Borrower, shall execute appropriate
documentation to release any lien it may have on such unacceptable
Mortgaged Property. All such releases shall be prepared by Lender at the
reasonable expense of Borrower.
Section 8.09 Additional Collateral.
(a) Should the Borrower acquire any additional Oil and Gas Properties
and desire to add the benefit of the value of same to the Borrowing Base,
the Borrower will grant to the Lender as security for the Indebtedness a
first-priority Lien interest (subject only to Excepted Liens) on the
Borrower's interest in any Oil and Gas Properties not already subject to a
Lien of the Security Instruments, which Lien will be created and perfected
by and in accordance with the provisions of deeds of trust, security
agreements and financing statements, or other Security Instruments, all in
form and substance satisfactory to the Lender in its sole discretion and in
sufficient executed (and acknowledged where necessary or appropriate)
counterparts for recording purposes.
(b) Concurrently with the granting of the Lien or other action
referred to in Section 8.07(a) above, the Borrower will provide to the
Lender title information in form and substance satisfactory to the Lender
in its sole discretion with respect to the Borrower's interests in such Oil
and Gas Properties.
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(c) Also, promptly after the filing of any new Security Instrument,
upon the reasonable request of the Lender, the Borrower will provide to the
Lender an opinion addressed to the Lender in form and substance reasonably
satisfactory to the Lender in its sole discretion from counsel acceptable
to Lender.
Section 8.10 Change in Management. The Borrower shall notify Lender
in the event there is a change in the senior management of the Borrower.
Section 8.12 Operating Accounts. At all times the Borrower shall
maintain all principal operating accounts of the Borrower with the Lender until
all the Indebtedness under this Agreement is paid in full and this Agreement is
terminated.
Section 8.13 Remittances. The Borrower shall notify Lender in the
event purchasers of Hydrocarbons remit payment to Borrower by means of wire
transfer.
ARTICLE IX
NEGATIVE COVENANTS
The Borrower covenants and agrees that, so long as the Commitment is in
effect and until payment in full of all Loans hereunder, all interest thereon
and all other amounts payable by the Borrower hereunder, without the prior
written consent of the Lender:
Section 9.01 Debt. The Borrower will not incur, create, assume or
suffer to exist any Debt, except:
(a) the Note or other Indebtedness or any guaranty of or suretyship
arrangement for the Note or other Indebtedness;
(b) Debt of the Borrower existing on the Closing Date which is
reflected in the Financial Statements or is disclosed in Schedule 9.01, and
any renewals or extensions (but not increases) thereof;
(c) accounts payable (for the deferred purchase price of Property or
services) from time to time incurred in the ordinary course of business
which, if greater than 90 days past the invoice or billing date, are being
contested in good faith by appropriate proceedings if reserves adequate
under GAAP shall have been established therefor;
(d) Debt under capital leases (as required to be reported on the
financial statements of the Borrower pursuant to GAAP) not to exceed
$100,000;
(e) Debt of the Borrower under Hedging Agreements provided (i) the
Hedging Agreements do not encompass more than 75% of projected production
from proved,
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developed, producing reserves (ii) the strike price is not less than the
Lender's energy product pricing guidelines and (iii) the Lender has
approved the counterparty;
(f) Bonds or surety obligations required by government agencies in
connection with the operation of the Oil and Gas Properties; and
(g) Debt in connection with the Subordinated Note.
Section 9.02 Liens. The Borrower will not create, incur, assume or
permit to exist any Lien on any of its Properties (now owned or hereafter
acquired), except:
(a) Liens securing the payment of any Indebtedness;
(b) Excepted Liens;
(c) Liens securing leases allowed under Section 9.01(d) but only on
the Property under lease;
(d) Liens disclosed on Schedule 9.02;
(e) Liens on cash or securities of the Borrower securing the Debt
described in Section 9.01(f); and
(f) Liens securing the Subordinated Note to the extent, and only to
the extent, such Liens are permitted pursuant to the Subordination
Agreement.
Section 9.03 Investments, Loans and Advances. The Borrower will not
make or permit to remain outstanding any loans or advances to or investments in
any Person, except that the foregoing restriction shall not apply to:
(a) investments, loans or advances reflected in the Financial
Statements or which are disclosed to the Lender in Schedule 9.03;
(b) accounts receivable arising in the ordinary course of business;
(c) direct obligations of the United States or any agency thereof, or
obligations guaranteed by the United States or any agency thereof, in each
case maturing within one year from the date of creation thereof and
repurchase agreements with respect to such types of securities contracted
with entities having a net worth of not less than $100,000,000.00 (as of
the date of such bank or trust company's most recent financial reports);
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(d) commercial paper maturing within one year from the date of
creation thereof rated in the highest grade by Standard & Poors Corporation
or Moody's Investors Service, Inc.;
(e) deposits maturing within one year from the date of creation
thereof with, including certificates of deposit issued by, the Lender or
any office located in the United States of any other bank or trust company
which is organized under the laws of the United States or any state
thereof, has capital, surplus and undivided profits aggregating at least
$100,000,000.00 (as of the date of the Lender's or bank or trust company's
most recent financial reports) and has a short term deposit rating of no
lower than A2 or P2, as such rating is set forth from time to time, by
Standard & Poors Corporation or Moody's Investors Service, Inc.,
respectively;
(f) deposits in money market funds;
(g) investments, loans or advances made by the Borrower in any other
person, company or other entity, not to exceed at any one time outstanding
$10,000 in the aggregate;
(h) investments by the Borrower in direct ownership interests in
additional Oil and Gas Properties and gas gathering systems related
thereto;
(i) investments in Eurodollars purchased through and maintained at
entities having a net worth of not less than $100,000,000.00 (as the date
of such bank or trust company's most recent financial reports); and
(j) banker's acceptances maturing within one year from the date of
creation.
Section 9.04 Dividends, Distributions and Redemptions. The Borrower
will not declare or pay any dividend, purchase, redeem or otherwise acquire for
value any of its partnership interests now or hereafter outstanding, return any
capital to the Venturers or make any distribution of its assets to the
Venturers, except that so long as no Default or Event of Default has occurred
and is continuing or would be caused by any of same, distributions may be made
provided that such distributions are made on a quarterly basis and are not
cumulative; and do not exceed 50% of cash flow in excess of that amount which is
required to comply with Section 9.12.
Section 9.05 Sales and Leasebacks. The Borrower will not enter into
any arrangement, directly or indirectly, with any Person whereby the Borrower
shall sell or transfer any of its Property, whether now owned or hereafter
acquired, and whereby the Borrower shall then or thereafter rent or lease as
lessee such Property or any part thereof or other Property which the Borrower
intends to use for substantially the same purpose or purposes as the Property
sold or transferred.
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Section 9.06 Nature of Business. The Borrower will not allow any
material change to be made in the character of its business as an independent
oil and gas exploration and production company.
Section 9.07 Limitation on Leases. The Borrower will not create,
incur, assume or suffer to exist any obligation for the payment of rent or hire
of Property of any kind whatsoever (real or personal including capital leases
but excluding leases of Hydrocarbon Interests), under leases or lease agreements
which would cause the aggregate amount of all payments made by the Borrower
pursuant to such leases or lease agreements to exceed $300,000 in any period of
twelve consecutive calendar months during the life of such leases.
Section 9.08 Mergers, Etc. The Borrower will not merge into or with
or consolidate with any other Person, or sell, lease or otherwise dispose of
(whether in one transaction or in a series of transactions) all or substantially
all of its Property or assets to any other Person, without the prior written
consent of the Lender, which consent will not be unreasonably withheld.
Section 9.09 Proceeds of Note. The Borrower will not permit the
proceeds of the Note to be used for any purpose other than those permitted by
Section 7.07. Neither the Borrower nor any Person acting on behalf of the
Borrower has taken or will take any action which might cause any of the Loan
Documents to violate Regulation G, U or X or any other regulation of the Board
of Governors of the Federal Reserve System or to violate Section 7 of the
Securities Exchange Act of 1934 or any rule or regulation thereunder, in each
case as now in effect or as the same may hereinafter be in effect.
Section 9.10 Sale or Discount of Receivables. The Borrower will not
discount or sell (with or without recourse) any of its notes receivable or
accounts receivable.
Section 9.11 Tangible Venturer's Capital. The Borrower will not
permit its tangible venturer's capital to be less than $4,000,000 plus 50% of
positive net income and 100% of equity raised for all quarterly periods
subsequent to March 31, 1995, at any time. As used in this Section 9.11,
"tangible venturer's capital" shall mean (i) total assets as would in accordance
with GAAP be reflected on the balance sheet of Borrower exclusive of
intellectual property, experimental or organizational expenses, franchises,
licenses, permits, good will, and other intangible assets minus (ii) total
liabilities as would in accordance with GAAP be reflected in Borrower's balance
sheet.
Section 9.12 Cash Flow to Debt Service Coverage Ratio. The Borrower
will not permit its Cash Flow to Debt Service Ratio as of the end of any fiscal
quarter of the Borrower (calculated on a rolling four-quarter basis) to be less
than 1.25 to 1.00. For purposes of this Section 9.12, "Cash Flow to Debt
Service Ratio" shall mean the ratio of (i) net income plus depreciation,
depletion, amortization and any other non-cash expenses less non-cash income for
the four fiscal quarters ending on such date to (ii) cash payments made for
principal on debt,
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excluding payments to RIMCO, or capital leases other than the Loan for such four
fiscal quarters of the Borrower, plus 1/3rd of the sum of the balance of the
Loans at the end of such quarter.
Section 9.13 Sale of Oil and Gas Properties. The Borrower will not
sell, assign, farm-out, convey or otherwise transfer any Oil and Gas Property or
any interest in any Oil and Gas Property upon which the Lender has a Lien except
(i) the sale of Hydrocarbons in the ordinary course of business and Oil and Gas
Property for which the Borrower has given the Lender at least thirty (30) days
prior written notice of the proposed transfer; (ii) the sale or disposition of
assets which are not material to the operations of Borrower when taken as a
whole; (iii) the sale or disposition of any Oil and Gas Property constituting
not more than 10% of the Borrowing Base, as determined by Lender, in the
aggregate during the term of this Agreement, in which event the Borrowing Base
shall be adjusted by the Lender, and provided that any mandatory prepayment
required as a result thereof is made at the time of such sale or disposition;
and (iv) sale of oil and gas prospects in the normal course of business. So
long as no Event of Default has occurred and is continuing or would be
occasioned by the following, the Borrower may sell, assign, farm-out, convey or
otherwise transfer any Oil and Gas Property, any other interest in any Oil and
Gas Property, and other assets of Borrower which are not subject to a Lien in
favor of Lender.
Section 9.14 Environmental Matters. The Borrower will not cause or
permit any of its Property to be in violation of, or do anything or permit
anything to be done which will subject any such Property to any remedial
obligations under any Environmental Laws, assuming disclosure to the applicable
Governmental Authority of all relevant facts, conditions and circumstances, if
any, pertaining to such Property where such violations or remedial obligations
would have a Material Adverse Effect.
Section 9.15 Transactions with Affiliates. The Borrower will not
enter into any transaction, including, without limitation, any purchase, sale,
lease or exchange of Property or the rendering of any service, with any
Affiliate unless such transactions are otherwise permitted under this Agreement,
are in the ordinary course of its business and are upon fair and reasonable
terms no less favorable to it than it would obtain in a comparable arm's length
transaction with a Person not an Affiliate; provided, however, that the term
Affiliate as used in this Section 9.15 shall also include (i) any member of the
immediate family (including parents, spouse and children) or any director or
officer of any Person directly or indirectly controlled by, controlling or under
common control with such first Person, and (ii) any trust whose principal
beneficiary is one or more members of such immediate family and any Person who
is controlled by any such member or trust.
Section 9.16 Subsidiaries and Partnerships. The Borrower shall not
create any Subsidiaries or additional partnerships except for special purpose
tax partnerships created to explore for oil and gas or partnerships created as a
result of joint operating agreements. The Borrower shall not and shall not
permit any Subsidiary to sell any stock of a Subsidiary or any interest in a
partnership. The Borrower shall not permit any Subsidiary to issue any stock
except to the Borrower and except in compliance with Section 9.03.
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Section 9.17 Negative Pledge Agreements. The Borrower will not
create, incur, assume or suffer to exist any contract, agreement or
understanding (other than this Agreement and the Security Instruments) which in
any way prohibits or restricts the granting, conveying, creation or imposition
of any Lien on any of its Property or which requires the consent of or notice to
other Persons in connection therewith.
Section 9.18 Gas Imbalances, Take-or-Pay or Other Prepayments. The
Borrower will not allow gas imbalances, take-or-pay or other prepayments with
respect to the Oil and Gas Properties of the Borrower which would require the
Borrower to deliver Hydrocarbons produced on Oil and Gas Properties at some
future time without then or thereafter receiving full payment therefor to exceed
10% of deliveries of gas production for the preceding month.
Section 9.19 Partnership Agreement. The Borrower will not amend or
permit to be amended the Partnership Agreement without the prior written consent
of the Lender.
Section 9.20 Subordinated Note. The Borrower will not pay (i) any
interest in connection with the Subordinated Note, except for so long as no
Event of Default has occurred and is continuing or would be caused by the
payment of such interest payment; and (ii) any principal payments except with
Lender's consent.
ARTICLE X
EVENTS OF DEFAULT; REMEDIES
Section 10.01 Events of Default. One or more of the following
events shall constitute an "Event of Default":
(a) the Borrower shall default in the payment or prepayment when due
of any principal of or interest on any Loan or any fees or other amount
payable by it hereunder or under any Security Instrument and such default,
other than a default of a payment or prepayment of principal, shall
continue unremedied for a period of three (3) Business Days; or
(b) the Borrower shall default in the payment when due of any
principal of or interest on any of its other Debt, or any event specified
in any note, agreement, indenture or other document evidencing or relating
to any Debt aggregating $200,000 or more shall occur if the effect of such
event is to cause, or (with the giving of any notice or the lapse of time
or both) to permit the holder or holders of such Debt (or a trustee or
agent on behalf of such holder or holders) to cause, such Debt to become
due prior to its stated maturity; or
(c) any representation, warranty or certification made or deemed made
herein or in any Security Instrument by the Borrower, or any certificate
furnished to the Lender
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pursuant to the provisions hereof or any Security Instrument, shall prove
to have been false or misleading as of the time made or furnished in any
material respect; or
(d) the Borrower shall default in the performance of any of its
obligations under Article IX or any other Article of this Agreement other
than under Article VIII; or the Borrower shall default in the performance
of any of its obligations under Article VIII or any Security Instrument
(other than the payment of amounts due which shall be governed by Section
10.01(a)) and such default shall continue unremedied for a period of thirty
(30) days after the earlier to occur of (i) notice thereof to the Borrower
by the Lender or (ii) the Borrower otherwise becoming aware of such
default; or
(e) the Borrower shall admit in writing its inability to, or be
generally unable to, pay its debts as such debts become due; or
(f) the Borrower shall (i) apply for or consent to the appointment of,
or the taking of possession by, a receiver, custodian, trustee or
liquidator of itself or of all or a substantial part of its property, (ii)
make a general assignment for the benefit of its creditors, (iii) commence
a voluntary case under the Federal Bankruptcy Code (as now or hereafter in
effect), (iv) file a petition seeking to take advantage of any other law
relating to bankruptcy, insolvency, reorganization, winding-up, or
composition or readjustment of debts, (v) fail to controvert in a timely
and appropriate manner, or acquiesce in writing to, any petition filed
against it in an involuntary case under the Federal Bankruptcy Code, or
(vi) take any action for the purpose of effecting any of the foregoing; or
(g) a proceeding or case shall be commenced, without the application
or consent of the Borrower, in any court of competent jurisdiction, seeking
(i) its liquidation, reorganization, dissolution or winding-up, or the
composition or readjustment of its debts, (ii) the appointment of a
trustee, receiver, custodian, liquidator or the like of the Borrower of all
or any substantial part of its assets, or (iii) similar relief in respect
of the Borrower under any law relating to bankruptcy, insolvency,
reorganization, winding-up, or composition or adjustment of debts, and such
proceeding or case shall continue undismissed, or an order, judgment or
decree approving or ordering any of the foregoing shall be entered and
continue unstayed and in effect, for a period of 90 days; or (iv) an order
for relief against the Borrower shall be entered in an involuntary case
under the Federal Bankruptcy Code; or
(h) a judgment or judgments for the payment of money in excess of
$250,000 in the aggregate shall be rendered by a court against the Borrower
and the same shall not be discharged (or provision shall not be made for
such discharge), or a stay of execution thereof shall not be procured,
within thirty (30) days from the date of entry thereof and the Borrower
shall not, within said period of 30 days, or such longer period during
which execution of the same shall have been stayed, appeal therefrom and
cause the execution thereof to be stayed during such appeal; or
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(i) the Security Instruments after delivery thereof shall for any
reason, except to the extent permitted by the terms thereof, cease to be in
full force and effect and valid, binding and enforceable in accordance with
their terms, or cease to create a valid and perfected Lien of the priority
required thereby on any of the collateral purported to be covered thereby,
except to the extent permitted by the terms of this Agreement, or the
Borrower shall so state in writing; or
(j) the Borrower discontinues its usual business or suffers to exist
any material change in its ownership, control or management; provided,
however, Borrower may commence dissolution on or after April 8, 1996, in
accordance with the Partnership Agreement so long as no Event of Default
has occurred and is continuing or would be occasioned by such action.
Section 10.02 Remedies.
(a) In the case of an Event of Default other than one referred to in
clauses (e), (f) or (g) of Section 10.01, the Lender may, by notice to the
Borrower, cancel the Commitment and/or declare the principal amount then
outstanding of, and the accrued interest on, the Loans and all other
amounts payable by the Borrower hereunder and under the Note to be
forthwith due and payable, whereupon such amounts shall be immediately due
and payable without presentment, demand, protest, notice of intent to
accelerate, notice of acceleration or other formalities of any kind, all of
which are hereby expressly waived by the Borrower, except for the notice
required by line two of this subsection 10.02(a).
(b) In the case of the occurrence of an Event of Default referred to
in clauses (e), (f) or (g) of Section 10.01, the Commitment shall be
automatically cancelled and the principal amount then outstanding of, and
the accrued interest on, the Loans and all other amounts payable by the
Borrower hereunder and under the Note shall become automatically
immediately due and payable without presentment, demand, protest, notice of
intent to accelerate, notice of acceleration or other formalities of any
kind, all of which are hereby expressly waived by the Borrower.
(c) All proceeds received after maturity of the Note, whether by
acceleration or otherwise shall be applied first to reimbursement of
expenses and indemnities provided for in this Agreement and the Security
Instruments; second to accrued interest on the Note; third to fees; fourth
to principal outstanding on the Note; and, to the extent of any excess to
be paid to the Borrower or as otherwise required by any Governmental
Requirement.
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ARTICLE XI
MISCELLANEOUS
Section 11.01 Waiver. No failure on the part of the Lender to exercise
and no delay in exercising, and no course of dealing with respect to, any right,
power or privilege under any of the Loan Documents shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power or
privilege under any of the Loan Documents preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The remedies
provided herein are cumulative and not exclusive of any remedies provided by
law.
Section 11.02 Letters in Lieu. Borrower has executed and left with
Lender numerous Letters in Lieu which Lender is authorized to complete and mail
to purchasers of production in the event that a Event of Default has occurred
and is continuing. Lender shall use reasonable efforts to notify Borrower that
Letters in Lieu have been completed and mailed to purchasers of production;
provided, however, failure to give such notice shall not affect the Lender's
rights to take such action or the validity thereof. In the event the Letters in
Lieu are not used and the indebtedness has been paid in full, Lender shall
return Letters in Lieu to Borrower.
Section 11.03 Notices. All notices and other communications provided
for herein and in the Security Instructions (including, without limitation, any
modifications of, or waivers or consents under, this Agreement or the Security
Instruments) shall be given or made by telex, telecopy, telegraph, cable,
courier or U.S. Mail or in writing and telexed, telecopied, telegraphed, cabled,
mailed or delivered to the intended recipient at the "Address for Notices"
specified below its name on the signature pages hereof or in the Security
Instruments; or, as to any party, at such other address as shall be designated
by such party in a notice to each other party. Except as otherwise provided in
this Agreement or in the Security Instruments, all such communications shall be
deemed to have been duly given when transmitted by telex or telecopier,
delivered to the telegraph or cable office or personally delivered or, in the
case of a mailed notice, three (3) Business Days after the date deposited in the
mails, postage prepaid, in each case given or addressed as aforesaid.
Section 11.04 Payment of Expenses, Indemnities, etc. The Borrower
agrees:
(a) whether or not the transactions hereby contemplated are
consummated, to pay all reasonable expenses of the Lender in the
administration (both before and after the execution hereof and including
advice of counsel as to the rights and duties of the Lender with respect
thereto) of, and in connection with the negotiation, syndication,
investigation, preparation, execution and delivery of, recording or filing
of, preservation of rights under, enforcement of, and refinancing,
renegotiation or restructuring of, the Loan Documents and any amendment,
waiver or consent relating thereto (including, without limitation, travel,
photocopy, mailing, courier, telephone and other similar expenses of the
Lender, the cost of environmental audits, surveys and appraisals at
reasonable intervals, the reasonable fees and disbursements of counsel for
the Lender and in the case of
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enforcement for the Lender); and promptly reimburse the Lender for all
amounts expended, advanced or incurred by the Lender to satisfy any
obligation of the Borrower under this Agreement or any Security Instrument;
(b) TO INDEMNIFY THE LENDER AND ITS AFFILIATES AND EACH OF THEIR
OFFICERS, DIRECTORS, EMPLOYEES, REPRESENTATIVES, AGENTS, ATTORNEYS,
ACCOUNTANTS AND EXPERTS ("INDEMNIFIED PARTIES") FROM, HOLD EACH OF THEM
HARMLESS AGAINST AND PROMPTLY UPON DEMAND PAY OR REIMBURSE EACH OF THEM
FOR, THE INDEMNITY MATTERS WHICH MAY BE INCURRED BY OR ASSERTED AGAINST OR
INVOLVE ANY OF THEM (WHETHER OR NOT ANY OF THEM IS DESIGNATED A PARTY
THERETO) AS A RESULT OF, ARISING OUT OF OR IN ANY WAY RELATED TO (I) ANY
ACTUAL OR PROPOSED USE BY THE BORROWER OF THE PROCEEDS OF ANY OF THE LOANS,
(II) THE EXECUTION, DELIVERY AND PERFORMANCE OF THE LOAN DOCUMENTS, (III)
THE OPERATIONS OF THE BUSINESS OF THE BORROWER, (IV) THE FAILURE OF THE
BORROWER TO COMPLY WITH THE TERMS OF ANY SECURITY INSTRUMENT OR THIS
AGREEMENT, OR WITH ANY GOVERNMENTAL REQUIREMENT, (V) ANY INACCURACY OF ANY
REPRESENTATION OR ANY BREACH OF ANY WARRANTY OF THE BORROWER SET FORTH IN
ANY OF THE LOAN DOCUMENTS, (VI) ANY ASSERTION THAT THE LENDER WAS NOT
ENTITLED TO RECEIVE THE PROCEEDS RECEIVED PURSUANT TO THE SECURITY
INSTRUMENTS OR (VII) ANY OTHER ASPECT OF THE LOAN DOCUMENTS, INCLUDING,
WITHOUT LIMITATION, THE REASONABLE FEES AND DISBURSEMENTS OF COUNSEL AND
ALL OTHER EXPENSES INCURRED IN CONNECTION WITH INVESTIGATING, DEFENDING OR
PREPARING TO DEFEND ANY SUCH ACTION, SUIT, PROCEEDING (INCLUDING ANY
INVESTIGATIONS, LITIGATION OR INQUIRIES) OR CLAIM AND INCLUDING ALL
INDEMNITY MATTERS ARISING BY REASON OF THE ORDINARY NEGLIGENCE OF ANY
INDEMNIFIED PARTY, BUT EXCLUDING ALL INDEMNITY MATTERS ARISING SOLELY BY
REASON OF CLAIMS OF THE LENDER'S SHAREHOLDERS AGAINST THE LENDER OR BY
REASON OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT ON THE PART OF THE
INDEMNIFIED PARTY; AND
(c) TO INDEMNIFY AND HOLD HARMLESS FROM TIME TO TIME THE INDEMNIFIED
PARTY FROM AND AGAINST ANY AND ALL LOSSES, CLAIMS, COST RECOVERY ACTIONS,
ADMINISTRATIVE ORDERS OR PROCEEDINGS, DAMAGES AND LIABILITIES TO WHICH ANY
SUCH PERSON MAY BECOME SUBJECT (I) UNDER ANY ENVIRONMENTAL LAW APPLICABLE
TO THE BORROWER OR ANY OF ITS PROPERTIES, INCLUDING WITHOUT LIMITATION, THE
TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON ANY OF THEIR PROPERTIES,
(II) AS A RESULT OF THE BREACH OR NON-COMPLIANCE BY THE BORROWER WITH ANY
ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER, (III) DUE TO PAST OWNERSHIP
BY THE BORROWER OF ANY OF THEIR PROPERTIES OR PAST ACTIVITY ON ANY OF ITS
PROPERTIES WHICH, THOUGH LAWFUL AND FULLY PERMISSIBLE AT THE TIME, COULD
RESULT IN PRESENT LIABILITY, (IV) THE PRESENCE, USE, RELEASE, STORAGE,
TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON OR AT ANY OF THE
PROPERTIES OWNED OR OPERATED BY THE BORROWER, OR (V) ANY OTHER
ENVIRONMENTAL, HEALTH OR SAFETY CONDITION IN CONNECTION WITH THE LOAN
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DOCUMENTS, PROVIDED, HOWEVER, NO INDEMNITY SHALL BE AFFORDED UNDER
THIS SECTION 11.03(C) IN RESPECT OF ANY PROPERTY FOR ANY OCCURRENCE ARISING
FROM THE ACTS OR OMISSIONS OF THE LENDER DURING THE PERIOD AFTER WHICH SUCH
PERSON, ITS SUCCESSORS OR ASSIGNS SHALL HAVE OBTAINED POSSESSION OF SUCH
PROPERTY (WHETHER BY FORECLOSURE OR DEED IN LIEU OF FORECLOSURE, AS
MORTGAGEE-IN-POSSESSION OR OTHERWISE).
(d) No Indemnified Party may settle any claim to be indemnified
without the consent of the indemnitor, such consent not to be unreasonably
withheld; provided, that the indemnitor may not reasonably withhold consent
to any settlement that an Indemnified Party proposes, if the indemnitor
does not have the financial ability to pay all its obligations outstanding
and asserted against the indemnitor at that time, including the maximum
potential claims against the Indemnified Party to be indemnified pursuant
to this Section 11.04.
(e) In the case of any indemnification hereunder, the Lender shall
give notice to the Borrower of any such claim or demand being made against
an Indemnified Party and the Borrower shall have the non-exclusive right to
join in the defense against any such claim or demand provided that if the
Borrower provides a defense, the Indemnified Party shall bear its own cost
of defense unless there is a conflict between the Borrower and such
Indemnified Party.
(f) THE FOREGOING INDEMNITIES SHALL EXTEND TO THE INDEMNIFIED PARTIES
NOTWITHSTANDING THE SOLE OR CONCURRENT NEGLIGENCE OF EVERY KIND OR
CHARACTER WHATSOEVER, WHETHER ACTIVE OR PASSIVE, WHETHER AN AFFIRMATIVE ACT
OR AN OMISSION, INCLUDING WITHOUT LIMITATION, ALL TYPES OF NEGLIGENT
CONDUCT IDENTIFIED IN THE RESTATEMENT (SECOND) OF TORTS OF ONE OR MORE OF
THE INDEMNIFIED PARTIES OR BY REASON OF STRICT LIABILITY IMPOSED WITHOUT
FAULT ON ANY ONE OR MORE OF THE INDEMNIFIED PARTIES. TO THE EXTENT THAT AN
INDEMNIFIED PARTY IS FOUND TO HAVE COMMITTED AN ACT OF GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT, THIS CONTRACTUAL OBLIGATION OF INDEMNIFICATION SHALL
CONTINUE BUT SHALL ONLY EXTEND TO THE PORTION OF THE CLAIM THAT IS DEEMED
TO HAVE OCCURRED BY REASON OF EVENTS OTHER THAN THE GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF THE INDEMNIFIED PARTY.
(g) The Borrower's obligations under this Section 11.04 shall survive
any termination of this Agreement and the payment of the Note and shall
continue thereafter in full force and effect.
(h) The Borrower shall pay any amounts due under this Section 11.04
within thirty (30) days of the receipt by the Borrower of notice of the
amount due.
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Section 11.05 Amendments, Etc. Any provision of this Agreement or
any Security Instruments may be amended, modified or waived with the Borrower's
and the Lender's prior written consent.
Section 11.06 Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
Section 11.07 Assignments and Participations.
(a) The Borrower may not assign its rights or obligations hereunder or
under the Note without the prior consent of the Lender.
(b) The Lender may transfer, grant or assign participations in all or
any part of its interests hereunder pursuant to this Section 11.07(b) to
any Person, provided that: (i) the Lender shall remain the "Lender" for all
purposes of this Agreement and the transferee of such participation shall
not constitute a "Lender" hereunder; and (ii) no participant under any such
participation shall have rights to approve any amendment to or waiver of
any of the Loan Documents except to the extent such amendment or waiver
would (x) extend the Revolving Credit Termination, (y) reduce the interest
rate (other than as a result of waiving the applicability of any post-
default increases in interest rates) or fees applicable to any of the
Commitment or Loans in which such participant is participating, or postpone
the payment of any thereof, or (z) release all or substantially all of the
collateral (except as expressly provided in the Security Instruments)
supporting any of the Commitment or Loans in which such participant is
participating. In the case of any such participation, the participant shall
not have any rights under this Agreement or any of the Security
Instruments (the participant's rights against the Lender in respect of
such participation to be those set forth in the agreement creating such
participation), and all amounts payable by the Borrower hereunder shall be
determined as if the Lender had not sold such participation, provided that
such participant shall be entitled to be indemnified under Section 11.04 as
if it were a Lender. In addition, each agreement creating any participation
must include an agreement by the participant to be bound by the provisions
of Section 11.16.
(c) The Lender may furnish any information concerning the Borrower in
its possession from time to time to assignees and participants (including
prospective assignees and participants); provided that, such Persons agree
to be bound by the provisions of Section 11.16 hereof.
(d) Notwithstanding anything in this Section 11.07 to the contrary,
the Lender may assign and pledge the Note to any Federal Reserve Bank or
the United States Treasury as collateral security pursuant to Regulation A
of the Board of Governors of the Federal Reserve System and any operating
circular issued by such Federal Reserve System and/or such Federal Reserve
Bank. No such assignment and/or pledge shall release the Lender from its
obligations hereunder.
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<PAGE>
(e) Notwithstanding any other provisions of this Section 11.07, no
transfer or assignment of the interests or obligations of the Lender or any
grant of participations therein shall be permitted if such transfer,
assignment or grant would require the Borrower to file a registration
statement with the SEC or to qualify the Loans under the "Blue Sky" laws of
any state.
Section 11.08 Invalidity. In the event that any one or more of the
provisions contained in any of the Loan Documents or shall, for any reason, be
held invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision of any of
the other Loan Documents.
Section 11.09 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and any of the parties hereto may execute this Agreement by
signing any such counterpart.
Section 11.10 References. The words "herein," "hereof," "hereunder"
and other words of similar import when used in this Agreement refer to this
Agreement as a whole, and not to any particular article, section or subsection.
Any reference herein to a Section shall be deemed to refer to the applicable
Section of this Agreement unless otherwise stated herein. Any reference herein
to an exhibit or schedule shall be deemed to refer to the applicable exhibit or
schedule attached hereto unless otherwise stated herein.
Section 11.11 Survival. The obligations of the parties under Sections
11.04 and 11.16 shall survive the repayment of the Loans and the termination of
the Commitment. To the extent that any payments on the Indebtedness or proceeds
of any collateral are subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to a trustee, debtor in
possession, receiver or other Person under any bankruptcy law, common law or
equitable cause, then to such extent, the Indebtedness so satisfied shall be
revived and continue as if such payment or proceeds had not been received and
the Lender's Liens, security interests, rights, powers and remedies under this
Agreement and each Security Instrument shall continue in full force and effect.
In such event, each Security Instrument shall be automatically reinstated and
the Borrower shall take such action as may be reasonably requested by the Lender
to effect such reinstatement.
Section 11.12 Captions. Captions and section headings appearing
herein are included solely for convenience of reference and are not intended to
affect the interpretation of any provision of this Agreement.
Section 11.13 NO ORAL AGREEMENTS. THE LOAN DOCUMENTS EMBODY THE
ENTIRE AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES AND SUPERSEDE ALL OTHER
AGREEMENTS AND UNDERSTANDINGS BETWEEN SUCH PARTIES RELATING TO THE SUBJECT
MATTER HEREOF AND THEREOF. THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
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<PAGE>
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Section 11.14 GOVERNING LAW; SUBMISSION TO JURISDICTION.
(A) THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS EXCEPT TO THE EXTENT THAT
UNITED STATES FEDERAL LAW PERMITS THE LENDER TO CHARGE INTEREST AT THE RATE
ALLOWED BY THE LAWS OF THE STATE WHERE THE LENDER IS LOCATED. TEX. REV.
CIV. STAT. ANN. ART. 5069, CH. 15 (WHICH REGULATES CERTAIN REVOLVING CREDIT
LOAN ACCOUNTS AND REVOLVING TRI-PARTY ACCOUNTS) SHALL NOT APPLY TO THIS
AGREEMENT OR THE NOTES.
(B) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THE LOAN DOCUMENTS
SHALL BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED
STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, AND, BY EXECUTION AND
DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY ACCEPTS FOR ITSELF AND (TO
THE EXTENT PERMITTED BY LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE BORROWER
HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY
OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON
CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH
ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS. THIS SUBMISSION TO
JURISDICTION IS NON-EXCLUSIVE AND DOES NOT PRECLUDE THE LENDER FROM
OBTAINING JURISDICTION OVER THE BORROWER IN ANY COURT OTHERWISE HAVING
JURISDICTION.
(C) NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE LENDER OR ANY HOLDER
OF THE NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY
OTHER JURISDICTION.
Section 11.15 Interest. It is the intention of the parties hereto
that Lender shall conform strictly to usury laws applicable to it. Accordingly,
if the transactions contemplated hereby would be usurious as to the Lender under
laws applicable to it (including the laws of the United States of America and
the State of Texas, or any other jurisdiction whose laws may be mandatorily
applicable to the Lender notwithstanding the other provisions of this
Agreement), then, in that event, notwithstanding anything to the contrary in the
Loan Documents or any agreement entered into in connection with or as security
for the Note, it is agreed as follows: (i) the aggregate of all consideration
which constitutes interest under law applicable to the Lender that is contracted
for, taken, reserved, charged or received by the Lender under the Note, this
Agreement or under any of the other aforesaid Security Instruments or agreements
or otherwise in connection with the Note shall under no circumstances exceed the
maximum amount allowed by such applicable law, and any excess shall be cancelled
automatically and if theretofore paid
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<PAGE>
shall be credited by the Lender on the principal amount of the Indebtedness (or,
to the extent that the principal amount of the Indebtedness shall have been or
would thereby be paid in full, refunded by the Lender to the Borrower); and (ii)
in the event that the maturity of the Note is accelerated by reason of an
election of the holder thereof resulting from any Event of Default under this
Agreement or otherwise, or in the event of any required or permitted prepayment,
then such consideration that constitutes interest under law applicable to the
Lender may never include more than the maximum amount allowed by such applicable
law, and excess interest, if any, provided for in this Agreement or otherwise
shall be cancelled automatically by the Lender as of the date of such
acceleration or prepayment and, if theretofore paid, shall be credited by the
Lender on the principal amount of the Indebtedness (or, to the extent that the
principal amount of the Indebtedness shall have been or would thereby be paid in
full, refunded by the Lender to the Borrower). All sums paid or agreed to be
paid to the Lender for the use, forbearance or detention of sums due hereunder
shall, to the extent permitted by law applicable to the Lender, be amortized,
prorated, allocated and spread throughout the full term of the Loans evidenced
by the Note until payment in full so that the rate or amount of interest on
account of any Loans hereunder does not exceed the maximum amount allowed by
such applicable law. If at any time and from time to time (i) the amount of
interest payable to the Lender on any date shall be computed at the Highest
Lawful Rate applicable to the Lender pursuant to this Section 11.15 and (ii) in
respect of any subsequent interest computation period the amount of interest
otherwise payable to the Lender would be less than the amount of interest
payable to the Lender computed at the Highest Lawful Rate applicable to the
Lender, then the amount of interest payable to the Lender in respect of such
subsequent interest computation period shall continue to be computed at the
Highest Lawful Rate applicable to the Lender until the total amount of interest
payable to the Lender shall equal the total amount of interest which would have
been payable to the Lender if the total amount of interest had been computed
without giving effect to this Section 11.15. To the extent that Article 5069-
1.04 of the Texas Revised Civil Statutes is relevant for the purpose of
determining the Highest Lawful Rate, the Lender elects to determine the
applicable rate ceiling under such Article by the indicated weekly rate ceiling
from time to time in effect.
Section 11.16 Confidentiality. In the event that the Borrower
provides to the Lender written confidential information belonging to the
Borrower, the Lender shall thereafter maintain such information in confidence in
accordance with the standards of care and diligence that each utilizes in
maintaining its own confidential information. This obligation of confidence
shall not apply to such portions of the information which (i) are in the public
domain, (ii) hereafter become part of the public domain without the Lender
breaching its obligation of confidence to the Borrower, (iii) are previously
known by the Lender from some source other than the Borrower, (iv) are hereafter
developed by the Lender without using the Borrower's information, (v) are
hereafter obtained by or available to the Lender from a third party who owes no
obligation of confidence to the Borrower with respect to such information or
through any other means other than through disclosure by the Borrower, (vi) are
disclosed with the Borrower's consent, (vii) must be disclosed either pursuant
to any Governmental Requirement or to Persons regulating the activities of the
Lender, or (viii) as may be required by law or regulation or order of any
Governmental Authority in any judicial, arbitration or governmental proceeding.
Further, the Lender may disclose any such information to any independent
petroleum engineers or consultants,
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<PAGE>
any independent certified public accountants, any legal counsel employed by such
Person in connection with this Agreement or any Security Instrument, including
without limitation, the enforcement or exercise of all rights and remedies
thereunder, or any assignee or participant (including prospective assignees and
participants) in the Loans; provided, however, that the Lender imposes on the
Person to whom such information is disclosed the same obligation to maintain the
confidentiality of such information as is imposed upon it hereunder.
Notwithstanding anything to the contrary provided herein, this obligation of
confidence shall cease three (3) years from the date the information was
furnished, unless the Borrower requests in writing at least thirty (30) days
prior to the expiration of such three year period, to maintain the
confidentiality of such information for an additional three year period. The
Borrower waives any and all other rights it may have to confidentiality as
against the Lender arising by contract, agreement, statute or law except as
expressly stated in this Section 11.16.
Section 11.17 Effectiveness. This Agreement shall be effective on
the Closing Date (the "Effective Date").
Section 11.18 EXCULPATION PROVISIONS. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE SECURITY
INSTRUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS
OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS; THAT IT HAS IN FACT READ THIS
AGREEMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS,
CONDITIONS AND EFFECTS OF THIS AGREEMENT; THAT IT HAS BEEN REPRESENTED BY
INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING
ITS EXECUTION OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS; AND HAS RECEIVED
THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS AGREEMENT AND THE SECURITY
INSTRUMENTS; AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS AGREEMENT
AND THE SECURITY INSTRUMENTS RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT
IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS
RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES AND COVENANTS THAT
IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION
OF THIS AGREEMENT AND THE SECURITY INSTRUMENTS ON THE BASIS THAT THE PARTY HAD
NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT
"CONSPICUOUS."
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<PAGE>
The parties hereto have caused this Agreement to be duly executed as
of the day and year first above written.
BORROWER: EDGE JOINT VENTURE II
By: EDGE PETROLEUM
CORPORATION, Managing Venturer
By: /s/ John E. Calaway
-----------------------------
John E. Calaway
President
Address for Notices:
1111 Bagby
2100 Texaco Heritage Plaza
Houston, Texas 77002
Telecopier No.: (713) 654-7722
Telephone No.: (713) 654-8960
Attention: Mr. Richard S. Dale
LENDER: COMPASS BANK-HOUSTON
By: /s/ Dorothy Marchand Wilson
------------------------------
Dorothy Marchand Wilson
Vice President
Address for Notices:
24 Greenway Plaza
Suite 1401
Houston, Texas 77046
Telecopier No.: (713) 968-8222
Telephone No.: (713) 968-8272
Attention: Dorothy Marchand Wilson
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<PAGE>
EXHIBIT A
FORM OF NOTE
$20,000,000.00 July ___, 1995
FOR VALUE RECEIVED, EDGE JOINT VENTURE II, a joint venture formed under the
laws of the State of Texas (the "Borrower") hereby promises to pay to the order
of COMPASS BANK- HOUSTON (the "Lender"), at its Principal Office at 24 Greenway
Plaza, P.O. Box 4444, Houston, Texas, 77210-4444, the principal sum of TWENTY
MILLION AND NO/100 Dollars ($20,000,000.00) (or such lesser amount as shall
equal the aggregate unpaid principal amount of the Loans made by the Lender to
the Borrower under the Credit Agreement, as hereinafter defined), in lawful
money of the United States of America and in immediately available funds, on the
dates and in the principal amounts provided in the Credit Agreement, and to pay
interest on the unpaid principal amount of each such Loan, at such office, in
like money and funds, for the period commencing on the date of such Loan until
such Loan shall be paid in full, at the rates per annum and on the dates
provided in the Credit Agreement.
The date, amount, and maturity of each Loan made by the Lender to the
Borrower, and each payment made on account of the principal thereof, shall be
recorded by the Lender on its books and, prior to any transfer of this Note,
endorsed by the Lender on the schedule attached hereto or any continuation
thereof.
This Note is the Note referred to in the Credit Agreement dated on even date
herewith between the Borrower and the Lender and evidences Loans made by the
Lender thereunder (such Credit Agreement as the same may be amended or
supplemented from time to time, the "Credit Agreement"). Capitalized terms used
in this Note have the respective meanings assigned to them in the Credit
Agreement.
This Note is issued pursuant to the Credit Agreement and is entitled to the
benefits provided for in the Credit Agreement and the Security Instruments. The
Credit Agreement provides for the acceleration of the maturity of this Note upon
the occurrence of certain events, for prepayments of Loans upon the terms and
conditions specified therein and other provisions relevant to this Note.
Notwithstanding any other provision of this Note, the Credit Agreement,
Security Instruments, or any other document, instrument, or other part of the
Loan Documents, any and all liabilities and obligations created and evidenced
hereby and thereby, shall be nonrecourse to, and without personal liability of,
the Venturers, and their successors, and assigns, for all purposes, except for
the amount of damage, if any, caused by such Venturer's fraud, willful
misrepresentation or interference with foreclosure actions or any exercise of
Lender's rights in connection with this Note, the Credit Agreement, Security
Instruments, or any other document,
A-1
<PAGE>
instrument, or other part of the Loan Documents. The holders of this Note, and
all obligees and beneficiaries under such Loan Documents, their successors and
assigns, agree to look only to the Borrower and its assets for repayment of any
and all amounts at any time owing or due hereunder and thereunder or arising
under any provision of this Note, the Credit Agreement or any other Loan
Document and not to any Venturer or their successors and assigns. Nothing in
this Note shall be construed so as to prevent Lender from commencing any action,
suit or proceeding with respect to Borrower or causing legal papers to be served
upon any Venturer for the purpose of obtaining jurisdiction over the Borrower.
Borrower covenants and agrees that it will not permit any Venturers to contest
any foreclosure action commenced by the Lender or to interfere with any exercise
of Lender's rights in connection with this Agreement, the Note, Security
Instruments, or any other document, instrument, or other part of the Loan
Documents.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF TEXAS.
EDGE JOINT VENTURE II
By: EDGE PETROLEUM CORPORATION,
Managing Venturer
By: _______________________________
Name:
Title:
A-2
<PAGE>
EXHIBIT B
FORM OF BORROWING REQUEST
_____________________, 199__
EDGE JOINT VENTURE II, a joint venture formed under the laws of the State of
Texas (the "Borrower"), pursuant to the Credit Agreement dated as of July ___,
1995, between the Borrower and COMPASS BANK - HOUSTON (the "Lender") (the
"Credit Agreement") hereby requests loans on the date and in the amounts as
follows:
LOANS:
(A) AGGREGATE AMOUNT OF NEW LOANS TO BE $______________________;
(B) REQUESTED FUNDING DATE IS _________________, 199__;
(C) FUNDS SHOULD BE DISTRIBUTED TO THE FOLLOWING ACCOUNT OF BORROWER
MAINTAINED WITH LENDER: ___________________________________.
The undersigned certifies that he is the _____________________ of the
Borrower, and that as such he is authorized to execute this certificate on
behalf of the Borrower. The undersigned further certifies, represents and
warrants on behalf of the Borrower that the Borrower is entitled to receive
the requested borrowing under the terms and conditions of the Credit
Agreement.
EDGE JOINT VENTURE II
By: EDGE PETROLEUM CORPORATION,
Managing Venturer
By: _______________________________
Name:
Title:
B-1
<PAGE>
EXHIBIT C
FORM OF COMPLIANCE CERTIFICATE
The undersigned hereby certifies that he is the ________________ of EDGE
JOINT VENTURE II, a joint venture formed under the laws of the State of Texas
(the "Borrower") and that as such he is authorized to execute this certificate
on behalf of the Borrower. With reference to the Credit Agreement dated as of
July __, 1995 (together with all amendments or supplements thereto being the
"Agreement") between the Borrower and COMPASS BANK - HOUSTON (the "Lender"), the
undersigned represents and warrants as follows (each capitalized term used
herein having the same meaning given to it in the Agreement unless otherwise
specified):
(a) The representations and warranties of the Borrower contained in
Article VII of the Agreement and in the Security Instruments and otherwise
made in writing by or on behalf of the Borrower pursuant to the Agreement
and the Security Instruments were true and correct when made, and are
repeated at and as of the time of delivery hereof and are true and correct
at and as of the time of delivery hereof, except as such representations
and warranties are modified to give effect to the transactions expressly
permitted by the Agreement.
(b) The Borrower has performed and complied with all agreements and
conditions contained in the Agreement and in the Security Instruments
required to be performed or complied with by it prior to or at the time of
delivery hereof.
(c) The Borrower has not incurred any material liabilities, direct or
contingent, since _________________, except those set forth in Schedule
9.01 to the Agreement and except those allowed by the terms of the
Agreement or consented to by the Lender in writing.
(d) Since __________________, no change has occurred, either in any
case or in the aggregate, in the condition, financial or otherwise, of the
Borrower which would have a Material Adverse Effect.
(e) There exists, and, after giving effect to the loan or loans with
respect to which this certificate is being delivered, will exist, no
Default under the Agreement or any event or circumstance which constitutes,
or with notice or lapse of time (or both) would constitute, an event of
default under any loan or credit agreement, indenture, deed of trust,
security agreement or other agreement or
C-1
<PAGE>
instrument evidencing or pertaining to any Debt of the Borrower, or under
any material agreement or instrument to which the Borrower is a party or by
which the Borrower is bound.
EXECUTED AND DELIVERED this ____ day of ______________.
EDGE JOINT VENTURE II
By: EDGE PETROLEUM CORPORATION,
Managing Venturer
By: _______________________________
Name: John E. Calaway
Title: President
C-2
<PAGE>
EXHIBIT D
[Letterhead of Borrower]
________________, 19___
[Purchaser of Hydrocarbons] VIA REGISTERED MAIL
RETURN RECEIPT REQUESTED
Re: [Descriptions of Field and Division Order Identification Number]
Gentlemen:
You are currently paying for purchases of hydrocarbons from Edge Joint
Venture II ("Borrower") with respect to the above property. Borrower has
mortgaged its interest in this property to Compass Bank-Houston ("Lender").
Borrower and Lender have agreed that the proceeds from this property shall be
collected through Lender. Henceforth, please have all checks for payment of the
hydrocarbons from these properties paid to the order of Borrower and mail such
checks to:
Compass Bank - Houston
P.O. Box 4444
Houston, Texas 77210-4444
Attn: Dorothy Marchand Wilson
D-1
<PAGE>
You are directed to continue to make checks payable and to mail checks as
set forth above unless and until you should receive contrary instructions in
writing from Lender or from Borrower and Lender.
EDGE JOINT VENTURE II
By: EDGE PETROLEUM
CORPORATION, Managing Venturer
By: _______________________________
John E. Calaway
President
COMPASS BANK - HOUSTON
By: ___________________________________
Dorothy Marchand Wilson
Vice President
D-2
<PAGE>
EXHIBIT E
SECURITY INSTRUMENTS
1. Mortgage, Deed of Trust, Assignment of Production, Security Agreement and
Financing Statement from Edge Joint Venture II ("Borrower") covering
property in Texas, Mississippi and Alabama.
2. Financing Statement relating to Document No. 1 for Borrower.
3. Mortgage, Assignment of Production, Security Agreement and Financing
Statement from Borrower covering property in Louisiana.
4. Financing Statement relating to Document No. 4 for Borrower.
5. Subordination Agreement between James Calaway, Sr. and Compass Bank -
Houston.
6. Letters in Lieu.
<PAGE>
EXHIBIT 4.4
SECURITY AGREEMENT
(Equipment)
Between
EDGE JOINT VENTURE II
and
COMPASS BANK-HOUSTON
July ____, 1996
<PAGE>
SECURITY AGREEMENT
Equipment
THIS SECURITY AGREEMENT (this "Agreement") is made as of July ____, 1996,
between EDGE JOINT VENTURE II, a joint venture formed under the laws of the
State of Texas with principal offices at 1111 Bagby, 2100 Texaco Heritage Plaza,
Houston, Texas 77002 ("Debtor"); and COMPASS BANK-HOUSTON, a Texas State
Chartered Banking Institution with offices at 24 Greenway Plaza, Suite 1401,
Houston, Texas 77046 ("Secured Party").
RECITALS
A. WHEREAS, Secured Party has made a loan to Debtor in the original
principal amount of THREE HUNDRED THIRTY-SEVEN THOUSAND AND NO/100 DOLLARS
($337,000.00) as evidenced by that certain promissory note of even date herewith
(together with all extensions for any period, renewals, rearrangements and/or
increases thereof, the "Note"), executed by Debtor and payable to the order of
Secured Party with interest as provided therein.
B. Secured Party has agreed to the same upon certain terms and conditions,
one of which is the execution and delivery by Debtor of this Agreement, and
Debtor has agreed to enter into this Agreement.
C. Therefore, in order to secure the Obligations, as hereinafter defined,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Debtor hereby agrees with Secured Party as
follows:
ARTICLE 1
SECURITY INTEREST
Section 1.01 Grant of Security Interest. Debtor hereby assigns and grants
to Secured Party a security interest in and right of set-off against the assets
referred to in Section 1.02 (the "Collateral") to secure the prompt payment and
performance of the "Obligations" (as defined in Section 2.02) and the
performance by Debtor of this Agreement.
Section 1.02 Collateral. The Collateral consists of the following types
or items of property (including property hereafter acquired by Debtor as well as
property which Debtor now owns or in which Debtor has rights):
(a) The equipment or other goods described or referred to in Exhibit A
attached hereto and made a part hereof.
<PAGE>
(b) (i) Any related or additional property from time to time delivered
to or deposited with Secured Party by or for the account of Debtor; (ii)
all certificates of title or other documents evidencing ownership or
possession of or otherwise relating to any property referred to in this
Section 1.02; (iii) all property used or usable in connection with any
property referred to in this Section 1.02; (iv) all policies of insurance
(whether or not required by Secured Party) covering any property referred
to in this Section 1.02; (v) all proceeds, products, replacements,
additions to, substitutions for, accessions of, and property necessary for
the operation of any of the property referred to in this Section 1.02,
including, without limitation, insurance payable as a result of loss or
damage to any of the property referred to in this Section 1.02, refunds of
unearned premiums of any such insurance policy and claims against third
parties; and (vi) all books and records related to any of the property
referred to in this Section 1.02.
(c) All general intangibles related to any property referred to in
this Section 1.02, including, without limitation, all (i) contractual
rights to performance, and claims for damages, refunds (including tax
refunds) or other monies due or to become due; (ii) orders, franchises,
permits, certificates, licenses, consents, exemptions, variances,
authorizations or other approvals by any governmental agency or court;
(iii) consulting, engineering and technological information and
specifications, design data, patent rights, trade secrets, literary rights,
copyrights, trademarks, labels, trade names and other intellectual
property; (iv) business records, computer tapes and computer software; (v)
goodwill; and (vi) other intangible personal property, whether similar or
dissimilar to the property referred to in this Section 1.02.
It is expressly contemplated that additional property may from time to time be
pledged, assigned or granted to Secured Party as additional security for the
Obligations, and the term "Collateral" as used herein shall be deemed for all
purposes hereof to include all such additional property, together with all other
property of the types described above related thereto.
Section 1.03 Location of Collateral. The Collateral is located or (except
as otherwise permitted by Section 4.01 or Section 4.14) shall be located only in
the following place (provided that the Collateral shall be subject to the
security interest created by this Agreement irrespective of whether or not the
Collateral is located in the following places): 1111 Bagby, 2100 Texaco
Heritage Plaza, Houston, Texas 77002.
ARTICLE 2
DEFINITIONS
Section 2.01 Terms Defined Above. As used in this Agreement, the terms
defined above shall have the meanings respectively assigned to them.
Section 2.02 Certain Definitions. As used in this Agreement, the
following terms shall have the following meanings, unless the context otherwise
requires:
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<PAGE>
"Agreement" means this Security Agreement, as the same may from time to
time be amended or supplemented.
"Code" means the Uniform Commercial Code as presently in effect in the
State of Texas, Business and Commerce Code, Chapters 1 through 9. Unless
otherwise indicated by the context herein, all uncapitalized terms which are
defined in the Code shall have their respective meanings as used in Chapter 9 of
the Code.
"Event of Default" means any event specified in Section 6.01.
"Highest Lawful Rate" means the maximum rate of nonusurious interest
allowed from time to time by applicable law.
"Obligations" means the promissory note of Debtor dated July ____, 1996
payable to the order of Secured Party in the principal amount of $337,000.00,
and any and all renewals, extensions for any period, rearrangements or
enlargements. The Obligations shall also include all interest, charges,
expenses, attorneys' or other fees and any other sums payable to or incurred by
Secured Party in connection with the execution, administration or enforcement of
Secured Party's rights and remedies hereunder or any other agreement with
Debtor.
"Obligor" means any person or entity, other than Debtor, liable (whether
directly or indirectly, primarily or secondarily) for the payment or performance
of any of the Obligations whether as maker, co-maker, endorser, guarantor,
accommodation party, general partner or otherwise.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
In order to induce Secured Party to accept this Agreement, Debtor
represents and warrants to Secured Party (which representations and warranties
will survive the creation and payment of the Obligations) that:
Section 3.01 Ownership of Collateral; Encumbrances; Valid and Binding
Agreement. Debtor is the legal and beneficial owner of the Collateral free and
clear of any adverse claim, lien, security interest, option or other charge or
encumbrance except for the security interest created by this Agreement, and
Debtor has full right, power and authority to assign and grant a security
interest in the Collateral to Secured Party. This Agreement constitutes a
legal, valid and binding obligation of Debtor enforceable against Debtor in
accordance with its terms. The execution, delivery and performance of this
Agreement will not violate the terms of any contract, agreement, law,
regulation, order, injunction, judgment, decree or writ to which Debtor is
subject and does not require the consent or approval of any other person or
entity.
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Section 3.02 No Required Consent. No authorization, consent, approval or
other action by, and no notice to or filing with, any governmental authority or
regulatory body (other than the filing of financing statements) is required for
(i) the due execution, delivery and performance by Debtor of this Agreement,
(ii) the grant by Debtor of the security interest granted by this Agreement,
(iii) the perfection of such security interest or (iv) the exercise by Secured
Party of its rights and remedies under this Agreement.
Section 3.03 First Priority Security Interest. The grant of the security
interest in the Collateral pursuant to this Agreement creates a valid and
perfected first priority security interest in the Collateral, enforceable
against Debtor and all third parties and securing payment of the Obligations.
Section 3.04 No Filings By Third Parties. No financing statement or other
public notice or recording covering the Collateral is on file in any public
office (other than any financing statement or other public notice or recording
naming Secured Party as the secured party therein), and Debtor will not execute
any such financing statement or other public notice or recording so long as any
of the Obligations are outstanding.
Section 3.05 No Name Changes. Debtor has not, during the preceding five
years, entered into any contract, agreement, security instrument or other
document using a name other than, or been known by or otherwise used any name
other than, the name used by Debtor herein.
Section 3.06 Location of Debtor and Collateral. Debtor's chief executive
office and Debtor's records concerning the Collateral are located at the address
or location set forth in the opening paragraph hereof. The Collateral is
located at Debtor's address set forth in the opening paragraph hereof or at the
location(s), if any, specified in Section 1.02 or 1.03. Any Collateral not at
such location(s) nevertheless remains subject to Secured Party's security
interest.
Section 3.07 Financial Statements; Collateral.
(a) All financial statements of Debtor provided by Debtor to Secured
Party in connection with this Agreement or the Obligations fairly present,
in conformity with generally accepted accounting principles, Debtor's
financial position and results of operations as of the dates and for the
periods stated therein (on a consolidated basis where so indicated). Except
such changes which have been disclosed in writing to Secured Party, there
has been no material adverse change from the financial position or results
of operations reflected by the most recent of such financial statements, or
any action, suit or proceeding pending against Debtor before any court or
arbitrator or any governmental body, agency or official in which there is a
reasonable possibility of an adverse decision which could have any such
material adverse effect, or which could draw into question the validity of
this Agreement or the attachment, perfection or priority of the security
interests or liens created hereunder.
(b) All statements or other information provided by Debtor to Secured
Party describing or with respect to the Collateral is or (in the case of
subsequently furnished information) will be when provided correct and
complete in all material respects. The delivery at any time by Debtor
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to Secured Party of additional Collateral or of additional descriptions of
Collateral shall constitute a representation and warranty by Debtor to
Secured Party hereunder that the representations and warranties of this
Article 3 are correct insofar as they would pertain to such Collateral or
the descriptions thereof.
Section 3.08 Delivery of Documents. With respect to any Collateral
covered by one or more certificates of title or other documents evidencing
ownership or possession thereof, each of such certificates or documents has been
delivered to Secured Party (provided that all certificates and documents
referred to in Section 1.02 shall be subject to the security interest created by
this Agreement irrespective of whether or not such delivery shall have been
made).
ARTICLE 4
COVENANTS AND AGREEMENTS
Debtor will at all times comply with the covenants and agreements contained
in this Article 4, from the date hereof and for so long as any part of the
Obligations are outstanding.
Section 4.01 Change in Location of Collateral or Debtor. Debtor will
notify Secured Party on or before the date of any change in location of the
Collateral. Debtor will give Secured Party 30 days' prior written notice of (i)
the opening or closing of any place of Debtor's business or (ii) any change in
the location of Debtor's chief executive office or address.
Section 4.02 Change in Debtor's Name or Corporate Structure. Debtor will
not change its name, identity or corporate structure (including, without
limitation, any merger, consolidation or sale of substantially all of its
assets) without notifying Secured Party of such change in writing at least 30
days prior to the effective date of such change. Without the express written
consent of Secured Party, however, Debtor will not engage in any other business
or transaction under any name other than Debtor's name hereunder.
Section 4.03 Documents; Collateral in Possession of Third Parties. If
certificates of title or other documents evidencing ownership or possession of
the Collateral are issued or outstanding, Debtor will cause the interest of
Secured Party to be properly noted thereon and will, forthwith upon receipt,
deliver same to Secured Party. If any Collateral is at any time in the
possession or control of any warehouseman, bailee, agent or independent
contractor, Debtor shall notify such person or entity of Secured Party's
security interest in such Collateral. Upon Secured Party's request, Debtor
shall instruct any such person or entity to hold all such Collateral for Secured
Party's account subject to Debtor's instructions, or, if an Event of Default
shall have occurred, subject to Secured Party's instructions.
Section 4.04 Maintenance of Existence. Debtor will maintain its existence
as a partnership in its form as of the date hereof.
Section 4.05 Sale, Disposition or Encumbrance of Collateral. Debtor will
not in any way encumber any of the Collateral (or permit or suffer any of the
Collateral to be encumbered) or
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sell, assign, lend, rent, lease or otherwise dispose of or transfer any of the
Collateral to or in favor of any person or entity other than Secured Party.
Section 4.06 Proceeds of Collateral. Debtor will deliver to Secured Party
promptly upon receipt all proceeds delivered to Debtor from the sale or
disposition of any Collateral. If chattel paper, documents or instruments are
received as proceeds, they will be, immediately upon receipt, properly endorsed
or assigned and delivered to Secured Party as Collateral. This Section 4.06
shall not be construed to permit sales or dispositions of Collateral except as
may be elsewhere expressly permitted by this Agreement.
Section 4.07 Additional Collateral. If Secured Party should at any time
be of the opinion that the Collateral is no longer sufficient to collateralize
the Obligations (including, without limitation, a determination based upon such
ratio of the cost or value of Collateral to the amount of Obligations as may be
established by Secured Party), or if Secured Party anticipates such
insufficiency, then Secured Party may request and Debtor agrees to furnish
forthwith such additional security as may be necessary to cure Secured Party's
insecurity regarding the Obligations.
Section 4.08 Payment of Taxes and Liens. Debtor will pay prior to
delinquency all taxes, charges, liens and assessments against the Collateral.
Section 4.09 Records and Information. Debtor shall keep accurate and
complete records of the Collateral (including proceeds). Secured Party may at
any time have access to, examine, audit, make extracts from and inspect without
hindrance or delay Debtor's records, files and the Collateral. Debtor will
promptly provide written notice to Secured Party of all information which in any
way relates to or affects the filing of any financing statement or other public
notices or recordings, or the delivery and possession of items of Collateral for
the purpose of perfecting a security interest in the Collateral. Debtor will
also promptly furnish such information as Secured Party may from time to time
reasonably request regarding (i) the business, affairs or financial condition of
Debtor or (ii) the Collateral or Secured Party's rights or remedies with respect
thereto. Any balance sheets or financial statements requested by Secured Party
pursuant to this Section 4.09 shall conform to generally accepted accounting
principles.
Section 4.10 Performance of Obligations. Debtor will promptly and
properly perform all of its obligations under this Agreement and any other
agreement or contract of any kind now or hereafter existing as security for or
in connection with the payment of the Obligations.
Section 4.11 Reimbursement of Expenses. Debtor will pay to Secured Party
all advances, charges, costs and expenses (including, without limitation, all
costs and expenses of holding, preparing for sale and selling, collecting or
otherwise realizing upon the Collateral if an Event of Default occurs and all
attorneys' fees, legal expenses and court costs) incurred by Secured Party in
connection with the exercise of Secured Party's rights and remedies hereunder.
Debtor hereby assumes all liability for the Collateral, the security interests
created hereunder and any use, possession, maintenance, management, enforcement
or collection of any or all of the Collateral. Debtor agrees to indemnify and
hold Secured Party harmless from and against and
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covenants to defend Secured Party against any and all losses, damages, claims,
costs, penalties, liabilities and expenses, including, without limitation, court
costs and attorneys' fees, incurred because of, incident to, or with respect to
the Collateral (including, without limitation, any use, possession, maintenance
or management thereof, or any injuries to or deaths of persons or damage to
property). All amounts for which Debtor is liable pursuant to this Section 4.11
shall be due and payable by Debtor to Secured Party upon demand. If Debtor
fails to make such payment upon demand (or if demand is not made due to an
injunction or stay arising from bankruptcy or other proceedings) and Secured
Party pays such amount, the same shall be due and payable by Debtor to Secured
Party, plus interest thereon from the date of Secured Party's demand (or from
the date of Secured Party's payment if demand is not made due to such
proceedings) at the Highest Lawful Rate.
Section 4.12 Further Assurances. Upon the request of Secured Party,
Debtor shall (at Debtor's expense) execute and deliver all such assignments,
certificates, financing statements or other documents and give further
assurances and do all other acts and things as Secured Party may reasonably
request to perfect Secured Party's interest in the Collateral or to protect,
enforce or otherwise effect Secured Party's rights and remedies hereunder.
Section 4.13 Insurance. Debtor shall maintain, with financially sound and
reputable insurers, insurance satisfactory in all respects to Secured Party
covering all insurable risks with respect to the Collateral, including standard
extended coverage, in an amount at least equal to the value of the Collateral.
Policies evidencing any such insurance shall contain a standard mortgagee's
endorsement providing for payment of any loss to Secured Party, and such
policies shall further provide for 30 days' minimum written cancellation notice
to Secured Party. Debtor shall furnish evidence satisfactory to Secured Party
of compliance with these insurance provisions.
Section 4.14 Removal of Collateral. Except for temporary removal in
connection with its ordinary use, Debtor shall not remove the Collateral from
its present address or location without obtaining prior written consent from
Secured Party.
Section 4.15 Condition of Collateral. Debtor will maintain all the
Collateral in good condition, repair and working order, and in accordance with
any manufacturer's manual. Debtor will not misuse, abuse, waste, destroy or
endanger the Collateral or allow it to deteriorate, except for ordinary wear and
tear from its intended use. Debtor will repair, replace or otherwise improve
the Collateral as may be necessary. Debtor will not use any Collateral in
violation of any law, statute, ordinance, regulation or administrative order, or
suffer it to be so used.
Section 4.16 Collateral Attached to Other Property. In the event that the
Collateral is to be attached or affixed to any real property, Debtor hereby
agrees that this Agreement may be filed for record in any appropriate real
estate records as a financing statement which is a fixture filing. In
connection therewith, Debtor will take whatever action is required by Section
4.12. If Debtor is not the record owner of such real property, Debtor will
provide Secured Party with any additional security agreements or financing
statements necessary for the perfection of Secured Party's security interest in
the Collateral. If the Collateral is wholly or partly affixed to real estate or
installed in or affixed to other goods, Debtor will, on demand of Secured Party,
furnish
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Secured Party with a disclaimer (including landlord's or other lien waivers or
releases, if applicable), signed by all persons or entities having an interest
in the real estate or other goods to which the Collateral may have become
affixed, of any prior interest to Secured Party's interest in the Collateral.
Section 4.17 Collateral Separate and Distinct. Debtor shall at all times
keep the Collateral, including proceeds, or cause it to be kept (when in the
possession of warehousemen, bailees, agents, independent contractors or other
third parties), separate and distinct from other property.
ARTICLE 5
RIGHTS, DUTIES AND POWERS OF SECURED PARTY
The following rights, duties and powers of Secured Party are applicable
irrespective of whether an Event of Default occurs and is continuing:
Section 5.01 Non-judicial Enforcement. Secured Party may enforce its
rights hereunder without prior judicial process or judicial hearing, and to the
extent permitted by law Debtor expressly waives any and all legal rights which
might otherwise require Secured Party to enforce its rights by judicial process.
Section 5.02 Discharge Encumbrances. Secured Party may, at its option,
discharge any taxes, liens, security interests or other encumbrances at any time
levied or placed on the Collateral, may pay for insurance on the Collateral and
may pay for the maintenance and preservation of the Collateral. Debtor agrees
to reimburse Secured Party upon demand for any payment so made, plus interest
thereon from the date of Secured Party's demand at the Highest Lawful Rate.
Section 5.03 Attorney-in-Fact. Debtor hereby irrevocably appoints Secured
Party as Debtor's attorney-in-fact, with full authority in the place and stead
of Debtor and in the name of Debtor or otherwise, from time to time in Secured
Party's discretion, but at Debtor's cost and expense and without notice to
Debtor to:
(a) obtain, adjust, sell and cancel any insurance with respect to the
Collateral and endorse any draft drawn by insurers of the Collateral, and
Secured Party may apply any proceeds or unearned premiums of such insurance
to the Obligations (whether or not due);
(b) take any action and to execute any assignment, certificate,
financing statement, notification, document or instrument which Secured
Party may deem necessary or advisable to accomplish the purposes of this
Agreement, including, without limitation, to receive, endorse and collect
all instruments made payable to Debtor representing any payment or other
distribution in respect of the Collateral or any part thereof and to give
full discharge for the same; and
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(c) receive, change the address for delivery, open and dispose of mail
addressed to Debtor, and to execute, assign and endorse negotiable and
other instruments for the payment of money, documents of title or other
evidences of payment, shipment or storage for any form of Collateral on
behalf of and in the name of Debtor.
Section 5.04 Transfer of Collateral. Secured Party may transfer any or
all of the Obligations, and upon any such transfer Secured Party may transfer
its interest in any or all of the Collateral and shall be fully discharged
thereafter from all liability therefor. Any transferee of the Collateral shall
be vested with all rights, powers and remedies of Secured Party hereunder.
Section 5.05 Licenses and Rights to Use Collateral. In connection with
any transfer or sale (to Secured Party or any other person or entity) of the
Collateral, Secured Party is hereby granted a transferable license or other
right to use, without any charge, any of Debtor's labels, patents, copyrights,
trade names, trade secrets, trademarks or other similar property in completing
production, advertising or selling such Collateral. Debtor's rights under all
licenses and franchise agreements shall inure to the benefit of Secured Party
and any transferee of all or any part of the Collateral.
Section 5.06 Cumulative and Other Rights. The rights, powers and remedies
of Secured Party hereunder are in addition to all rights, powers and remedies
given by law or in equity. The exercise by Secured Party of any one or more of
the rights, powers and remedies herein shall not be construed as a waiver of any
other rights, powers and remedies, including, without limitation, any other
rights of set-off. If any of the Obligations are given in renewal, extension
for any period or rearrangement, or applied toward the payment of debt secured
by any lien, Secured Party shall be, and is hereby, subrogated to all the
rights, titles, interests and liens securing the debt so renewed, extended,
rearranged or paid.
Section 5.07 Purchase Money Financing. To the extent that Secured Party
has advanced or will advance funds to or for the account of Debtor to enable
Debtor to purchase or otherwise acquire specific types or items of Collateral,
Secured Party may at its option pay such funds (i) directly to the person or
entity from whom Debtor will make such purchase or acquire such rights or (ii)
to Debtor, in which case Debtor covenants promptly to pay the same to such
person or entity and forthwith furnish to Secured Party, on request, evidence
satisfactory to Secured Party that such payment has been made from the funds so
provided by Secured Party for such payment.
Section 5.08 Disclaimer of Certain Duties. The powers conferred upon
Secured Party by this Agreement are to protect its interest in the Collateral
and shall not impose any duty upon Secured Party to exercise any such powers.
Debtor hereby agrees that Secured Party shall not be liable for, nor shall the
indebtedness evidenced by the Obligations be diminished by, Secured Party's
delay or failure to collect upon, foreclose, sell, take possession of or
otherwise obtain value for the Collateral.
Section 5.09 Waiver of Notice; Demand and Presentment. Debtor hereby
waives any demand, notice of default, notice of acceleration of the maturity of
the Obligations, notice of intention to accelerate the maturity of the
Obligations, presentment, protest and notice of dishonor
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as to any action taken by Secured Party in connection with this Agreement, or
any instrument or document.
ARTICLE 6
EVENTS OF DEFAULT
Section 6.01 Events. Any of the following events shall constitute an
Event of Default under this Agreement:
(a) Payments - Debtor or any Obligor defaults in any payment due and
owing pursuant to the Obligations;
(b) Representations and Warranties - any representation or warranty
made by Debtor or any Obligor to Secured Party proves to have been
incorrect in any material respect as of the date thereof;
(c) Covenants - default is made by Debtor or any Obligor in the
performance of any covenant or agreement contained in this Agreement or in
any other document now or hereafter executed in connection with or as
security for the Obligations;
(d) Legal Compliance - the violation by Debtor or any Obligor of, or
the failure of the Collateral to comply with, any applicable law, statute,
ordinance, regulation or administrative order if, as a result of such
violation or noncompliance, the value of the Collateral or the perfection
or priority of Secured Party's security interests therein may be, in the
sole opinion of Secured Party, materially impaired;
(e) Loss, Damage or Destruction of Collateral - the loss, theft,
substantial damage to or destruction of the Collateral or of any material
portion thereof (whether or not covered by insurance);
(f) Judgments, etc. - the entry of a judgment, issuance of an
injunction, order of attachment, or any other process against Debtor or any
Obligor or the Collateral which in the sole opinion of Secured Party
impairs Debtor's (or any such Obligor's) ability to pay or perform the
Obligations;
(g) Termination, Insolvency, etc. - Debtor or any Obligor shall
respectively: (i) dissolve or otherwise terminate its existence in its form
as of the date hereof, (ii) become insolvent or suffer a business failure,
(iii) have a custodian, receiver or agent appointed or authorized to take
charge of its properties, (iv) make an assignment for the benefit of
creditors or call a meeting of creditors for the composition of debts, or
(v) be subject to the commencement of any proceeding in bankruptcy or under
other insolvency laws;
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(h) Material Adverse Change - in the sole opinion of Secured Party,
there is any deterioration, impairment, decline in character or value, or
material adverse change (whether actual or reasonably anticipated) in (i)
the assets, operations or conditions of, or the ability to pay or perform
the Obligations by, Debtor or any Obligor, or (ii) any part of the
Collateral or any other property subject to a lien in favor of Secured
Party securing the Obligations that causes the Collateral or such other
property to become unsatisfactory as to character or value;
(i) Termination of Guaranties or Letters of Credit - any guaranty or
surety executed in connection with the Obligations shall be terminated or
revoked, or payment shall be refused under any letter of credit securing
any or all of the Obligations, or any such letter of credit shall expire
without the written consent of Secured Party; or
(j) Defaults on Other Obligations - default by Debtor or any Obligor
(i) in any payment of principal of or interest on any other indebtedness,
guaranty or other obligation (whether to Secured Party or others) beyond
any period of grace provided with respect thereto, or (ii) in the
performance of any other agreement, term or condition if the effect of such
default is to cause such obligation to become due on demand or before its
stated maturity or to permit the holder(s) of such obligation or the
trustee(s) under any such agreement or instrument to cause such obligation
to become due on demand or prior to its stated maturity, whether or not
such default or failure to perform should be waived by the holder(s) of
such obligation or such trustee(s).
Section 6.02 Remedies. Upon the occurrence and during the continuance of
any Event of Default, Secured Party may take any or all of the following actions
without notice (except where expressly required below) or demand to Debtor:
(a) Declare all or part of the indebtedness pursuant to the
Obligations immediately due and payable and enforce payment of the same by
Debtor or any Obligor.
(b) Take possession of the Collateral, or at Secured Party's request
Debtor shall, at Debtor's cost, assemble the Collateral and make it
available at a location to be specified by Secured Party which is
reasonably convenient to Debtor and Secured Party. Secured Party may, at
its option, render any equipment unusable that may be included in the
Collateral, or, at Secured Party's request, Debtor will render it unusable.
In any event, Debtor shall bear the risk of accidental loss or damage to or
diminution in value of the Collateral, and Secured Party shall have no
liability whatsoever for failure to obtain or maintain insurance, nor to
determine whether any insurance ever in force is adequate as to amount or
as to risk insured.
(c) Sell or lease, in one or more sales or leases and in one or more
parcels, or otherwise dispose of any or all of the Collateral in its then
condition or in any other commercially reasonable manner as Secured Party
may elect, in a public or private transaction, at any location as deemed
reasonable by Secured Party (including, without limitation, Debtor's
premises), either for cash or credit or for future delivery at such price
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as Secured Party may deem fair, and (unless prohibited by the Code, as
adopted in any applicable jurisdiction) Secured Party may be the purchaser
of any or all Collateral so sold and may apply upon the purchase price
therefor any Obligations secured hereby. Any such sale or transfer by
Secured Party either to itself or to any other person or entity shall be
absolutely free from any claim of right by Debtor, including any equity or
right of redemption, stay or appraisal which Debtor has or may have under
any rule of law, regulation or statute now existing or hereafter adopted.
Upon any such sale or transfer, Secured Party shall have the right to
deliver, assign and transfer to the purchaser or transferee thereof the
Collateral so sold or transferred. It shall not be necessary that the
Collateral or any part thereof be present at the location of any such sale
or transfer. Secured Party may, at its discretion, provide for a public
sale, and any such public sale shall be held at such time or times within
ordinary business hours and at such place or places as Secured Party may
fix in the notice of such sale. Secured Party shall not be obligated to
make any sale pursuant to any such notice. Secured Party may, without
notice or publication, adjourn any public or private sale by announcement
at any time and place fixed for such sale, and such sale may be made at any
time or place to which the same may be so adjourned. In the event any sale
or transfer hereunder is not completed or is defective in the opinion of
Secured Party, such sale or transfer shall not exhaust the rights of
Secured Party hereunder, and Secured Party shall have the right to cause
one or more subsequent sales or transfers to be made hereunder. In the
event that any of the Collateral is sold or transferred on credit, or to be
held by Secured Party for future delivery to a purchaser or transferee, the
Collateral so sold or transferred may be retained by Secured Party until
the purchase price or other consideration is paid by the purchaser or
transferee thereof, but in the event that such purchaser or transferee
fails to pay for the Collateral so sold or transferred or to take delivery
thereof, Secured Party shall incur no liability in connection therewith. If
only part of the Collateral is sold or transferred such that the
Obligations remain outstanding (in whole or in part), Secured Party's
rights and remedies hereunder shall not be exhausted, waived or modified,
and Secured Party is specifically empowered to make one or more successive
sales or transfers until all the Collateral shall be sold or transferred
and all the Obligations are paid. In the event that Secured Party elects
not to sell the Collateral, Secured Party retains its rights to lease or
otherwise dispose of or utilize the Collateral or any part or parts thereof
in any manner authorized or permitted by law or in equity, and to apply the
proceeds of the same towards payment of the Obligations. Each and every
method of disposition of the Collateral described in this subsection or in
subsection (f) shall constitute disposition in a commercially reasonable
manner.
(d) Take possession of all books and records of Debtor pertaining to
the Collateral. Secured Party shall have the authority to enter upon any
real property or improvements thereon in order to obtain any such books or
records, or any Collateral located thereon, and remove the same therefrom
without liability.
(e) Apply proceeds of the disposition of the Collateral to the
Obligations in any manner elected by Secured Party and permitted by the
Code or otherwise permitted by law or in equity. Such application may
include, without limitation, the reasonable expenses
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of retaking, holding, preparing for sale or other disposition, and the
reasonable attorneys' fees and legal expenses incurred by Secured Party.
(f) Appoint any person or entity as agent to perform any act or acts
necessary or incident to any sale or transfer by Secured Party of the
Collateral. Additionally, any sale or transfer hereunder may be conducted
by an auctioneer or any officer or agent of Secured Party.
(g) Apply and set-off (i) any deposits of Debtor now or hereafter held
by Secured Party; (ii) all claims of Debtor against Secured Party, now or
hereafter existing; (iii) any other property, rights or interests of Debtor
which come into the possession or custody or under the control of Secured
Party; and (iv) the proceeds of any of the foregoing as if the same were
included in the Collateral. Secured Party agrees to notify Debtor promptly
after any such set-off or application; provided, however, the failure of
Secured Party to give any notice shall not affect the validity of such set-
off or application.
(h) Exercise all other rights and remedies permitted by law or in
equity.
Section 6.03 Liability for Deficiency. If any sale or other disposition
of Collateral by Secured Party or any other action of Secured Party hereunder
results in reduction of the Obligations, such action will not release Debtor
from its liability to Secured Party for any unpaid Obligations, including costs,
charges and expenses incurred in the liquidation of Collateral, together with
interest thereon, and the same shall be immediately due and payable to Secured
Party at Secured Party's address set forth in the opening paragraph hereof.
Section 6.04 Reasonable Notice. If any applicable provision of any law
requires Secured Party to give reasonable notice of any sale or disposition or
other action, Debtor hereby agrees that five days' prior written notice shall
constitute reasonable notice thereof. Such notice, in the case of public sale,
shall state the time and place fixed for such sale and, in the case of private
sale, the time after which such sale is to be made.
ARTICLE 7
MISCELLANEOUS PROVISIONS
Section 7.01 Notices. Any notice required or permitted to be given under
or in connection with this Agreement shall be in writing and shall be mailed by
first class or express mail, postage prepaid, or sent by telex, telegram,
telecopy or other similar form of rapid written transmission or personally
delivered to the receiving party. All such communications shall be mailed, sent
or delivered at the address respectively indicated in the opening paragraph
hereof or at such other address as either party may have furnished the other
party in writing. Any communication so addressed and mailed shall be deemed to
be given when so mailed, any notice so sent by rapid written transmission shall
be deemed to be given when receipt of such transmission is acknowledged by the
receiving operator or equipment, and any communication so
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delivered in person shall be deemed to be given when receipted for or actually
received by Debtor or Secured Party, as the case may be.
Section 7.02 Amendments and Waivers. Secured Party's acceptance of
partial or delinquent payments or any forbearance, failure or delay by Secured
Party in exercising any right, power or remedy hereunder shall not be deemed a
waiver of any obligation of Debtor or any Obligor, or of any right, power or
remedy of Secured Party; and no partial exercise of any right, power or remedy
shall preclude any other or further exercise thereof. Secured Party may remedy
any Event of Default hereunder or in connection with the Obligations without
waiving the Event of Default so remedied. Debtor hereby agrees that if Secured
Party agrees to a waiver of any provision hereunder, or an exchange of or
release of the Collateral, or the addition or release of any Obligor or other
person or entity, any such action shall not constitute a waiver of any of
Secured Party's other rights or of Debtor's obligations hereunder. This
Agreement may be amended only by an instrument in writing executed jointly by
Debtor and Secured Party and may be supplemented only by documents delivered or
to be delivered in accordance with the express terms hereof.
Section 7.03 Copy as Financing Statement. A photocopy or other
reproduction of this Agreement or any financing statement covering the
Collateral is sufficient as a financing statement, and the same may be filed
with any appropriate filing authority for the purpose of perfecting Secured
Party's security interest in the Collateral.
Section 7.04 Possession of Collateral. Secured Party shall be deemed to
have possession of any Collateral in transit to it or set apart for it (or, in
either case, any of its agents, affiliates or correspondents).
Section 7.05 Redelivery of Collateral. If any sale or transfer of
Collateral by Secured Party results in full satisfaction of the Obligations, and
after such sale or transfer and discharge there remains a surplus of proceeds,
Secured Party will deliver to Debtor such excess proceeds in a commercially
reasonable time; provided, however, that Secured Party shall not be liable for
any interest, cost or expense in connection with any delay in delivering such
proceeds to Debtor.
Section 7.06 Interest. It is the intention of the parties hereto to
conform strictly to usury laws applicable to Secured Party. Accordingly, if the
transactions contemplated hereby would be usurious under applicable state or
federal law, then, notwithstanding anything to the contrary in this Agreement or
in any other agreement entered into in connection with or as security for the
Obligations, it is agreed as follows: (i) the aggregate of all consideration
which constitutes interest under law applicable to Secured Party that is
contracted for, taken, reserved, charged or received under the Obligations, this
Agreement or under any of such other agreements or otherwise in connection with
the Obligations shall under no circumstances exceed the maximum amount allowed
by such applicable law, (ii) in the event that the maturity of the Obligations
is accelerated for any reason, or in the event of any required or permitted
prepayment, then such consideration that constitutes interest under law
applicable to Secured Party may never include more than such maximum amount, and
(iii) excess interest, if any, provided for in this Agreement or otherwise shall
be cancelled automatically and, if theretofore paid, shall be credited by
Secured
-14-
<PAGE>
Party on the principal amount of the Obligations (or, to the extent that the
principal amount of the Obligations shall have been or would thereby be paid in
full, refunded by Secured Party to Debtor). The right to accelerate the
maturity of the Obligations does not include the right to accelerate any
interest which has not otherwise accrued on the date of such acceleration, and
Secured Party does not intend to collect any unearned interest in the event of
acceleration. All sums paid or agreed to be paid to Secured Party for the use,
forbearance or detention of sums included in the initial Obligations shall, to
the extent permitted by applicable law, be amortized, prorated, allocated and
spread throughout the full term of the Obligations until payment in full so that
the rate or amount of interest on account of the initial Obligations does not
exceed the applicable usury ceiling, if any. To the extent that Article 5069-
1.04 of the Texas Revised Civil Statutes is relevant to Secured Party for the
purpose of determining the Highest Lawful Rate, Secured Party hereby elects to
determine the applicable rate ceiling under such Article by the indicated
(weekly) rate ceiling from time to time in effect, subject to Secured Party's
right subsequently to change such method in accordance with applicable law.
Section 7.07 Governing Law; Jurisdiction. This Agreement and the security
interest granted hereby shall be construed in accordance with and governed by
the laws of the State of Texas (except to the extent that the laws of any other
jurisdiction govern the perfection and priority of the security interests
granted hereby). Debtor consents to and submits to in personam jurisdiction and
venue in the state district and county courts of the county wherein Secured
Party's offices are located at the address specified in the opening paragraph
hereof, and in the Federal District Courts of the district wherein such offices
of Secured Party are located. This submission to jurisdiction is nonexclusive
and does not preclude Secured Party from obtaining jurisdiction over Debtor or
the Collateral in any court otherwise having jurisdiction.
Section 7.08 Subrogation. Until all indebtedness in connection with the
Obligations shall have been paid in full, Debtor shall have no right to
subrogation or to enforce any remedy or participate in any Collateral or
security whatsoever now or hereafter held by Secured Party.
Section 7.09 Continuing Security Agreement.
(a) This Agreement shall constitute a continuing security agreement,
and all representations and warranties, covenants and agreements shall, as
applicable, apply to all future as well as existing transactions.
Provisions of this Agreement, unless by their terms exclusive, shall be in
addition to other agreements between the parties.
(b) Except as may be expressly applicable pursuant to Section 9.505 of
the Code, no action taken or omission to act by Secured Party hereunder,
including, without limitation, any action taken or inaction pursuant to
Section 6.02, shall be deemed to constitute a retention of the Collateral
in satisfaction of the Obligations or otherwise to be in full satisfaction
of the Obligations, and the Obligations shall remain in full force and
effect, until Secured Party shall have applied payments (including, without
limitation, collections from Collateral) towards the Obligations in the
full amount then outstanding or until such subsequent time as is
hereinafter provided in subsection (c) below.
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<PAGE>
(c) To the extent that any payments on the Obligations or proceeds of
the Collateral are subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to a trustee, debtor in
possession, receiver or other person or entity under any bankruptcy law,
common law or equitable cause, then to such extent the Obligations so
satisfied shall be revived and continue as if such payment or proceeds had
not been received by Secured Party, and Secured Party's security interests,
rights, powers and remedies hereunder shall continue in full force and
effect. In such event, this Agreement shall be automatically reinstated if
it shall theretofore have been terminated pursuant to Section 7.10.
(d) In the event that the Obligations are structured such that there
are times when no Indebtedness is owing thereunder, this Agreement shall
remain valid and in full force and effect as to all subsequent indebtedness
included in the Obligations, provided Secured Party has not in the interim
period executed a written release or termination statement or returned
possession of or reassigned the Collateral to Debtor.
Section 7.10 Termination. The grant of a security interest hereunder and
all of Secured Party's rights, powers and remedies in connection therewith shall
remain in full force and effect until Secured Party has retransferred and
delivered all Collateral in its possession to Debtor, and executed a written
release or termination statement and reassigned to Debtor without recourse or
warranty any remaining Collateral and all rights conveyed hereby. Upon the
complete payment of the Obligations and the compliance by Debtor with all
covenants and agreements hereof, Secured Party, at the written request and
expense of Debtor, will release, reassign and transfer the Collateral to Debtor
and declare this Agreement to be of no further force or effect. Notwithstanding
the foregoing, the reimbursement and indemnification provisions of Section 4.11
and the provisions of subsection 7.09(c) shall survive the termination of this
Agreement.
Section 7.11 Counterparts, Effectiveness. This Agreement may be executed
in two or more counterparts. Each counterpart is deemed an original, but all
such counterparts taken together constitute one and the same instrument. This
Agreement becomes effective upon the execution hereof by Debtor and delivery of
the same to Secured Party, and it is not necessary for Secured Party to execute
any acceptance hereof or otherwise signify or express its acceptance hereof.
DEBTOR: EDGE JOINT VENTURE II
By: Edge Petroleum Corporation,
Managing Venturer
By: /s/ John E. Calaway
------------------------------
John E. Calaway
President
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<PAGE>
EXHIBIT A
EQUIPMENT OR OTHER GOODS
See attached.
<PAGE>
FINANCING STATEMENT
This Financing Statement is presented to a filing officer for filing
pursuant to the Uniform Commercial Code.
1. The name and address of the Debtor is:
EDGE JOINT VENTURE II
1111 Bagby, 2100 Texaco Heritage Plaza
Houston, Texas 77002
2. The name and address of the Secured Party is:
COMPASS BANK-HOUSTON
24 Greenway Plaza, Suite 1401
Houston, Texas 77046
3. This Financing Statement covers the following Collateral:
(a) The equipment or other goods described or referred to in Exhibit A
attached hereto and made a part hereof.
(b) (i) All documents evidencing ownership or possession of or
otherwise relating to any property referred to in this paragraph 3; (ii)
all property used or usable in connection with any property referred to in
this paragraph 3; (iii) all policies of insurance (whether or not required
by Secured Party) covering any property referred to in this paragraph 3;
all proceeds, products, replacements, additions to, substitutions for,
accessions of, and property necessary for the operation of any of the
property described or referred to in this paragraph 3, including, without
limitation, insurance payable as a result of loss or damage to the property
described or referred to in this paragraph 3 and any proceeds thereunder,
refunds of unearned premiums of any such insurance policy and claims
against third parties; and (iv) all books and records related to any of the
property described or referred to in this paragraph 3.
(c) All general intangibles related to any property referred to in
this paragraph 3, including, without limitation, all (i) contractual rights
to performance, and claims for damages, refunds (including tax refunds) or
other monies due or to become due; (ii) orders, franchises, permits,
certificates, licenses, consents, exemptions, variances, authorizations or
other approvals by any governmental agency or court; (iii) consulting,
engineering and technological information and specifications, design data,
patent rights, trade secrets, literary rights, copyrights, trademarks,
labels, trade names and other intellectual property; (iv) business records,
computer tapes and computer software; (v) goodwill; and (vi) all other
intangible personal property, whether similar or dissimilar to the
foregoing.
<PAGE>
DEBTOR: EDGE JOINT VENTURE II
By: Edge Petroleum Corporation,
Managing Venturer
By: ______________________________
John E. Calaway
President
-2-
<PAGE>
Exhibit 9.1
AGREEMENT
THIS AGREEMENT (this "Agreement") is entered by and among New Edge
Petroleum Corporation, a Texas corporation (the "Company" or "New Edge"), Edge
Petroleum Corporation, a Texas corporation ("EPC"), and the undersigned persons
and entities who are either to become owners of issued and outstanding shares of
Common Stock of the Company, partners of Edge Petroleum Partnership ("EPP"), a
Texas general partnership, or other interested Persons. This Agreement also
constitutes authorization by the Board of Directors and Shareholders of the
Company authorizing certain actions and matters as more fully hereafter set
forth.
W I T N E S S E T H :
WHEREAS, the Articles of Incorporation for the Company ("Articles of
Incorporation") were filed in the office of the Secretary of State of Texas on
March 29, 1991 (a true and correct copy of such Articles are attached hereto as
Exhibit H); and
WHEREAS, at the date of this Agreement, the authorized capital of the
Company consists of one hundred fifty thousand (150,000) shares of common stock,
par value $0.01 per share (the "Common Stock"), none of which has been issued;
and
WHEREAS, John E. Calaway, James D. Calaway, Joel Davis, Pherl Brossman,
John Sfondrini, Vincent Andrews and Christopher Taylor are indicated in the
Articles of Incorporation of the Company as the initial directors of the
Company, and such initial directors wish to complete the organization of the
Company; and
WHEREAS, the Subscribers wish to subscribe for shares of Common Stock of
the Company in the amounts and on the terms and conditions hereinafter set
forth; and
WHEREAS, the Company wishes to sell the shares of Common Stock to the
Subscribers, on the terms and conditions hereinafter set forth; and
WHEREAS, the Subscribers and the Company and others indicated, wish to
enter into certain agreements relating to the ownership, voting, and
transferability rights pertaining to all Common Stock of the Company they may
now own or hereafter acquire, among other things, as well as other matters
regarding or affecting the Company; and
WHEREAS, the partners of EPP wish to terminate EPP and enter into
certain agreements in connection therewith;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
<PAGE>
1. Definitions. For purposes of this Agreement:
"Affiliate" means as to any Subscriber:
(i) if such Subscriber is a corporation, partnership or other
business entity, any corporation, partnership or other business entity
which is directly or indirectly controlled by or under common control
with such Subscriber or any officer, director or key employee of such
Subscriber and also any of the shareholders or partners (general or
limited) of such Subscriber;
(ii) if such Subscriber is an individual Subscriber, any spouse
or descendant of such individual Subscriber, and any trust created for
the benefit of such individual Subscriber or for the benefit of any
spouse or descendant of such individual Subscriber, and any Person whom
shall upon the death of an individual Subscriber be an heir or legal
devisee.
"Agreement of Sale" shall mean an agreement pursuant to which the JV
Assets and Liabilities will be purchased by the Edge Joint Venture II.
"Brossman" shall mean Pherl E. Brossman.
"Calaway" shall mean John E. Calaway.
"J.C. Calaway" shall mean James C. Calaway.
"J.D. Calaway" shall mean James D. Calaway.
"COG" shall mean Calaway Oil and Gas Corporation, a Texas corporation,
all of the stock of which is owned by Calaway.
"Common Stock" shall mean the Common Stock, par value $0.01 per share,
of the Company as identified and described in the Company's Articles of
Incorporation.
"Davis" shall mean Joel R. Davis.
"Edge Group Joint Venture" shall mean that certain joint venture between
EPP and Edge Group I, evidenced by that certain operating agreement dated July
1, 1987.
"Edge Group I" shall mean the Edge Group general partnership, John
Sfondrini, authorized person, the partners of which are Edge I Limited
Partnership, Edge II Limited Partnership and Edge III Limited Partnership.
"Edge Group II" shall mean Edge Group II Limited Partnership, a
Connecticut limited partnership, whose general partners are John Sfondrini and
Napamco, Inc.
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<PAGE>
"EHCLP" shall mean Edge Holding Company Limited Partnership, a
Connecticut partnership, whose general partners are John Sfondrini and Napamco,
Inc.
"Edge Joint Venture II" shall mean a proposed Texas joint venture by and
between the Company and Edge Group II Limited Partnership, and others.
"Jamtex" shall mean Jamtex, Inc., a Connecticut corporation, all of the
Stock of which is owned by James Magliana.
"Joint Venture partnerships" shall mean as follows:
(a) Joint Venture Agreement between Edge Limited Partnership
and EPC pursuant to a partnership agreement dated March 23, 1983;
(b) Joint Venture Agreement between Edge II Limited Partnership
and EPC pursuant to a partnership agreement dated May 5, 1985;
(c) Operating Agreement between EPP and Edge Group partnership
pursuant to a partnership agreement dated July 1, 1987; and
(d) Any extension, renewal or successor partnership or other
entity to either of the two above described Joint Venture partnerships,
or any other entity of any type the funding of which is wholly or
partially from the same source as the funding for the above described
Joint Venture partnerships, or where any of the principals are the same
as any of the principals of the Joint Venture partnerships.
"JV Assets and Liabilities" shall mean certain assets of the Edge Group
Joint Venture to be sold to the Edge Joint Venture II, consisting primarily of
prospects, advanced leads, leads, cash and accounts receivable, and liabilities
associated therewith, all as set forth in the Agreement of Sale.
"KPC" shall mean KPC Interest, Inc., a Texas corporation, all of the
Stock of which is owned by J.D. Calaway.
"Lawford" shall mean Lawford Energy, Inc., a Texas corporation, all of
the shares of which are owned by Brossman.
"Loan Documents" shall mean, collectively, a note purchase agreement,
any promissory note or notes, any interest-deferred notes, a pledge agreement
whereby the partners of the Edge Joint Venture II pledge their partnerships
interest and rights to RIMCO, and any security agreements, mortgages,
guaranties, instruments, financing
3
<PAGE>
statements or other documents which RIMCO may request or require be executed by
the Edge Joint Venture II to secure or evidence the obligation of the Edge Joint
Venture II with respect to the borrowing by the Edge Joint Venture II of
$4,500,000.
"Northedge" shall mean Northedge Corp., a Texas corporation, all of the
shares of which are owned by Davis.
"Partnership" shall mean Gulfedge Limited Partnership, a Texas limited
partnership, with the Company as the corporate general partner.
"Person" means an individual, a corporation, a trust, a partnership, a
joint stock association, a business trust or a government, or agency or
subdivision thereof, and shall include the singular and the plural.
"Raphael" shall mean Stanley Raphael, a resident of the State of
Florida.
"RIMCO Purchasers" means all of RIMCO II, RIMCO III and RIMCO/NYL.
"RIMCO II" means RIMCO Partners, L.P. II.
"RIMCO III" means RIMCO Partners, L.P. III.
"RIMCO/NYL" MEANS RIMCO/NYL, L.P.
"Sfondrini" means John Sfondrini.
"Special Assets" means those certain assets identified in Section 2.3 of
the Agreement of Sale.
"Subscribers" means COG, KPC, Lawford, Northedge, Texedge, Jamtex,
Raphael and EHCLP.
"Stock" shall mean all Common Stock now or hereafter owned by any
Subscriber.
"Texedge" shall mean Texedge Energy Corporation, a Texas corporation.
2. Contribution of Assets to New EPC and Issuance of Stock.
Each Subscriber subscribes for and agrees to purchase the following number of
shares of Stock for and in consideration of the transfer and conveyance to the
Company of the assets and properties indicated on Exhibits A-1, A-2, and A-3,
such assets and properties having values being greater than the par value of
the shares being issued, which subscriptions are accepted by the Company and its
Board of Directors, in the following amounts from the following persons:
4
<PAGE>
Subscriber No. of Shares
---------- -------------
COG 41,057
KPC 5,306
Lawford 5,269
Northedge 5,269
EHCLP 38,500
Texedge 2,044
Jamtex 1,022
Raphael 1,533
--------
Total 100,000
========
It is agreed that the conveyances of property identified on Exhibit A-1
shall be by appropriate stock power, in the form of the stock power attached
hereto as Exhibit C, which each transferor agrees to execute. It is further
agreed that the conveyances of property identified on Exhibits A-2 and A-3 shall
be by the Master Conveyance and Assignment, in the form of that attached hereto
as Exhibit B, which each indicated transferor and transferee agrees to execute.
Upon receipt by the Company of the appropriate evidences of transfer for
the assets indicated on Exhibits A-1, A-2, and A-3, the President and Secretary
of the Company (as hereafter elected) are authorized and empowered to issue and
deliver to each of the aforementioned Subscribers certificates of Stock of the
Company evidencing the number of shares to which such Subscribers are entitled,
which shares when so issued will be duly authorized, validly issued and
outstanding shares of capital stock of the Company, fully paid and nonassessable
for all purposes. The form of stock certificate approved by the President as
he in his sole discretion shall determine shall be adopted as the form of stock
certificate for the Company.
All Subscribers hereby ratify such stock issuances made by the Company.
3. Additional Transfers. As of the date hereof, the prospects indicated on
Exhibit A-4 are "partially committed" or fully committed prospects and thus are
Special Assets. Each Person who is a partner of EPP (as set forth in Section 15
hereto) agrees to and does hereby contribute to the Company, as an additional
capital contribution, one-half of all reversionary rights or interests in such
prospects which such partner may ultimately receive as a result of the
subsequent resale of such prospect by the Edge Joint Venture II. Based on the
present status of commitments and assuming that no commitments fail, the
Assignment shall be in the percentages as set forth in Exhibit A-4. Each partner
agrees (a) to execute any necessary special warranty deeds to further evidence
the conveyance herein made or agreed to be made, as requested by the Company,
and (b) until such special warranty deeds have been duly and properly executed,
not to sell, assign, convey or otherwise dispose of any interest in such
5
<PAGE>
prospects, or in residual rights in and to such prospects (such as those hereby
conveyed).
As of the date hereof, the prospects indicated on Exhibit A-5,
paragraph 1, are "partially sold" which means that Edge Group Joint Venture has
conveyed a portion of the Prospect to third parties, reserving for itself a
reversionary in the portion so conveyed. Title to such assets shall be held in
trust by EPC to be assigned in accordance with this paragraph. If Edge Joint
Venture II completes the sale of the Prospect, EPC shall execute appropriate
special warranty deeds substantially in the form of Exhibit B hereto,
transferring (x) the interests indicated on Exhibit A-5, paragraph 1 to New
Edge; (y) the interests indicated on Exhibit A-5, paragraph 2 to the partners of
EPP as indicated in such provision; and (z) the interests indicated on Exhibit
A-5, paragraph 3 to the Edge Group. In the event one or more of such prospects
is not subsequently resold by the Edge Joint Venture II, and the Edge Joint
Venture II shall make a refund to the purchasers of the consideration paid for
the Prospect, then EPC shall convey by special warranty deed the interests
listed on Exhibit A-5 for the Prospect in their entirety to the Edge Joint
Venture II.
4. Representations and Warranties of Subscribers. Each of the
Subscribers severally (not jointly) represents and warrants to and agrees with
the Company and with each other, as follows:
(a) Investment Purposes. The Stock to be acquired by the
Subscribers pursuant to this Agreement is being acquired for investment
for such Subscriber's own account and not with a view to, or for resale
in connection with, any distribution of such Stock within the meaning of
the Securities Act of 1933 (the "Securities Act"), and such Stock will
not be sold, transferred or otherwise disposed of without registration
under the Securities Act or exemption therefrom. Each Subscriber agrees
that the certificate or certificates representing any shares of Stock
purchased or previously held by such Subscribers may be inscribed with a
legend to the foregoing effect.
Each Subscriber agrees that the Company may place a stop
transfer order with its transfer agent, if any, with respect to the
certificates representing any shares of Stock. Each Subscriber
represents that it or he is an "accredited investor" within the meaning
of Regulation D under the Securities Act and agrees to provide to the
Company, on or before the execution hereof, such evidence of such fact
as the Company may reasonably require. Each Subscriber acknowledges that
the shares of Stock acquired or being acquired hereunder have not been
registered by the Company pursuant to the registration provisions of the
Securities Act or the securities laws of any state in reliance upon the
availability of exemptions from such registration which depend in part
on such Subscriber's representations contained herein.
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<PAGE>
(b) Authority. If such Subscriber is a partnership or
corporation, such Subscriber represents that its partners or directors
and shareholders have taken all action required by law, its partnership
agreement, corporate charter or bylaws, or otherwise, to authorize the
execution, delivery and performance of this Agreement, and the
acquisition of the Stock to be acquired by such Subscriber pursuant
hereto. All Subscribers represent that this Agreement is the valid and
binding obligation of such Subscriber enforceable against such
Subscriber in accordance with its terms. The execution and delivery of
this Agreement does not and will not violate any order, writ, injunction
or decree of any court, administrative agency or governmental body, or
any material contract, lease, note or other agreement to which any such
Subscriber is a party or by which any of them is bound, the effect of
which violation would be materially adverse to the Company.
(c) Title. Each Subscriber indicated on Exhibit A-1 represents
severally for himself or itself (and not for any other transferor) that
(i) with respect to the assets indicated on Exhibit A-1, he or it, as
the case may be, holds good title to such property indicated on Exhibit
A-1, free and clear of any and all liens, claims or encumbrances of any
kind or character, and upon the execution and delivery of the
appropriate stock power indicated on Exhibit C in favor of the Company,
the Company will own such asset free and clear of the claims of any
other Persons and (ii) with respect to the assets indicated on Exhibits
A-2, A-3, and A-4, each Subscriber makes the representations set forth
in Exhibit B.
(d) Evaluating Merits. Each Subscriber represents that it or he
is capable of evaluating the merits and risks of an investment in the
Stock to be acquired by such Subscriber.
(e) Opportunity for Information. Each Subscriber has had the
opportunity to ask questions of and receive answers from all other
Subscribers and the Company concerning the Company, the proposed
business of the Company, the terms and conditions of the offering of the
Stock, and the proposed joint venture with Edge Joint Venture II.
(f) Additional Information. The Company has given each
Subscriber the opportunity to obtain any additional information which
the Company possesses or can acquire without unreasonable effort or
expense that is necessary to verify the accuracy of the information
furnished to such Subscriber pursuant to subparagraph (e) above.
(g) Capability of Bearing Risks. Each Subscriber represents that
it or he is able to bear the economic risk of an investment in the Stock
to be purchased by such Subscriber, including without limitation the
risk of losing part or all of such Subscriber's investment and the
possible inability to
7
<PAGE>
sell or transfer the Stock to be purchased by such Subscriber for an
indefinite period of time.
(h) Tax Consequences. Each Subscriber has been advised to
procure their own tax counsel as to the tax consequences to such
Subscriber of an investment in the Stock to be purchased by such
Subscriber, and the ramifications of the transactions herein
contemplated, and each Subscriber represents he or it has done so and is
not relying on the Company or any other Person for tax advice.
(i) No Regulatory Approval. Each Subscriber understands that no
federal or state agency has made any finding or determination as to the
fairness of the offering of the Stock to be purchased by such
Subscriber or any recommendation or endorsement of such Stock.
(j) No Brokers. With respect to their respective purchases of
the Stock, no Subscriber has made any agreement with any broker or
finder which might give rise to any valid claim against the Company for
a finder's fee, brokerage commission or other like payment.
(k) Restriction on Transfer. The Stock to be acquired by the
Subscribers pursuant to this Agreement has not been registered under the
Securities Act of 1933, as amended, or the securities laws of any state
pursuant to one or more exemptions therefrom, and such Stock may not be
sold, transferred, assigned or otherwise disposed of unless and until
the Stock is first registered under such Securities Act and all
applicable state securities laws and rules and regulations promulgated
thereunder, or unless and until the holder of the Stock provides to the
Company either (i) information satisfactory to the Company that such
registration is not required, or (ii) an opinion of counsel acceptable
to the Company to the effect that such registration is not required.
Each Subscriber agrees that the Company may place a stop transfer order
with its transfer agent, if any, with respect to the certificates
representing any shares of Stock purchased. Each Subscriber represents
that it or he is an "accredited investor" within the meaning of
Regulation D under the Securities Act and agrees to provide to the
Company, on or before the Closing Date, such evidence of such fact as
the Company may reasonably require. Each Subscriber acknowledges that
the Stock herein subscribed has not been registered by the Company
pursuant to the registration provisions of the Securities Act or the
securities laws of any state in reliance upon the availability of
exemptions from such registration which depend in part on such
Subscriber's representations contained herein.
(1) Each Subscriber represents and warrants that they are
entitled to and do not hold or have rights to any other securities,
subscriptions, options, calls or any capital stock
8
<PAGE>
of the Company, and is not a party to any agreement or commitment relating
thereto, except as expressly herein set forth.
(m) Calaway and COG represent and warrant that Calaway is the sole
shareholder of COG; J.D. Calaway and KPC represent and warrant that J.D.
Calaway is the sole shareholder of KPC; Brossman and Lawford represent and
warrant that Brossman is the sole shareholder of Lawford; and Davis and
Northedge represent and warrant that Davis is the sole shareholder of
Northedge.
(5) Election of Officers. Effective immediately upon the Effective Date,
the following persons be and hereby are elected as officers of the Company, to
serve in the capacities set forth below until their successors have been duly
elected and qualified or their resignation or removal in the manner authorized
by the Bylaws (to be hereafter adopted):
Name Office
---- ------
John E. Calaway Chairman of the Board,
President and Chief Executive
Officer
Pherl E. Brossman Vice President--Land
Joel R. Davis Vice President
Richard S. Dale Secretary, Treasurer and
Controller
Robert C. Thomas General Counsel
6. Adoption of Bylaws. The directors of the Company hereby adopt the
proposed Bylaws attached hereto as Exhibit D as the Bylaws of the Company.
7. Certain Matters Regarding EPC. Effective after the completion of the
matters contemplated by Section 2, EPC shall be a wholly-owned subsidiary of New
Edge. Thereupon,
(a) The directors of EPC shall be the same persons as are the initial
directors of New Edge.
(b) EPC and the Company will use and cause to be used any seismic
contracts and other items within the Regional Information Base exclusively
for the benefit of the Edge Joint Venture II, without charge, as a result
of the benefits arising to EPC from the transactions referenced in this
Agreement, including, without limitation, the release by the Edge Group of
its encumbrances on significant assets of EPC.
9
<PAGE>
(c) All signatories hereto agree that any and all voting agreements
among any such signatories, and any other restrictions or agreements which
any signatories may have had with each other or with EPC, regarding the
ownership, operation or any other matter affecting EPC, are automatically
and without further action terminated, including without limitation that
certain agreement between Calaway and Sfondrini, dated March 18, 1989.
(d) The directors and Shareholders of EPC unanimously agree and
approve that the Articles of Incorporation of EPC shall be amended, as
follows:
Name. The name of the Company shall be changed from "Edge Petroleum
Corporation" to "Old EPC, Inc."
Furthermore, the officers of EPC are empowered and directed to execute and
file appropriate Articles of Amendment with the Secretary of State, and pay
any fees incurred in connection with such filing, and do any and all other
such acts as may be necessary to accomplish the foregoing.
(e) It is understood and agreed that EPC does hereby assign its rights
and delegate its duties (but only those arising after the Effective Date),
arising under certain drilling program agreements dated May 1, 1990, by and
between EPC and RIMCO and certain RIMCO affiliates (the "RIMCO Drilling
Agreements"), to the Company, and the Company accepts such assignment and
delegation and agrees to fully discharge any and all duties and obligations
arising after the Effective Date under such RIMCO Drilling Agreements.
(f) It is understood and agreed that EPC does hereby assign its rights
and delegate its duties (but only those arising after the Effective Date,
and only to the extent EPC has any rights to assign) arising under that
certain agreement with J.C. Calaway, dated February 2, 1989, to the
Company, and the Company accepts such assignments and delegation of duties
and agrees to fully discharge and end all duties and obligations arising
thereunder after the Effective Date.
(g) The Company does hereby agree to pay to EPC the sum of $40,000 per
year to cover amounts owing J.C. Calaway under that certain agreement dated
March 18, 1989, for so long as EPC shall owe this amount to J.C. Calaway.
(h) All shareholders of EPC and partners of EPP hereby approve and
ratify the prior sales of Stock of EPC and partnership interests of EPP and
reserves heretofore made to Raphael, Texedge and Jamtex, and waive any
rights including without limitation any preferential purchase rights, with
respect thereto. Further, such parties waive any such rights upon a
transfer of stock of EPC, partnership interest in EPP,
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<PAGE>
and reserves, to J.C. Calaway, by Calaway, in the event the transactions
contemplated hereby do not for any reason occur. This provision shall be
valid once agreed to by all relevant persons notwithstanding that the
Agreement may not be executed by all indicated parties.
(i) The directors of EPC desire to make a distribution of the assets
shown on Exhibit M to the Company. The directors have reviewed the
financial information of Old EPC, which has been prepared in accordance
with the requirements of Article 2.38-3 of the Texas Business Corporation
Act, and have determined that the value of the distribution does not exceed
the surplus (net assets less stated capital) of the Company. Accordingly,
the assets shown on Exhibit M are distributed to the Company as a dividend.
(j) At the time of formation of EHCLP, Sfondrini offered to Brossman,
Davis and Richard Dale a right to participate in a portion of his general
partner's interest in EHCLP. Brossman and Davis declined personally to
accept any interest offered. Richard Dale accepted such, and has been
granted certain rights as are more particularly set forth in that certain
letter agreement between Richard Dale and Sfondrini dated February 16,
1989. EPC agrees with Sfondrini to rescind and release such interest, if
any, which EPC has in such, save and except for such interests which have
heretofore been granted to Richard Dale. Sfondrini agrees that if any
employees of EPC should later assert a claim or commence litigation
challenging such release and rescission, EPC will notify Sfondrini and
permit Sfondrini to designate counsel to answer and defend against such
claim, and will indemnify EPC, its officers, directors, employees, agents
and affiliates, for EPC's release and rescission hereof and hold EPC, and
its officers, directors, employees, agents and affiliates, harmless as a
result of any such decision and action taken in this regard.
8. Formation of Edge Joint Venture II. The Board of Directors of the
Company hereby authorize and empower the Company to enter into a joint venture
with the Edge Group II, and to do any and all things necessary to fully organize
the Edge Joint Venture II. In connection therewith, the following is agreed,
authorized and approved.
(a) The President of the Company is authorized and empowered for the
Company to execute a joint venture agreement with Edge Group II
substantially in the form of the draft agreement attached hereto as Exhibit
E, with any changes, deletions, additions, modifications or alterations as
such officer shall deem necessary or proper, the execution by such officer
of such agreement being conclusive evidence of such determination; and
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<PAGE>
(b) The President, Secretary and any other officer of the Company are
authorized and empowered to convey and contribute to the Joint Venture II
the sum of $500,000 (said $500,000 to be received from the consideration
paid by the RIMCO Purchasers for their shares, as referenced in Section 17
hereof) and the assets indicated on Exhibit F, such assets to be conveyed
by deed substantially in the form of the Master Conveyance and Assignment
set forth on Exhibit B, with appropriate changes thereto as such officers
shall determine, which deed such officers are authorized to execute; and
(c) The President and any other officers of the Company are authorized
and empowered to convey and contribute any and all other oil and gas
reserves which they in their judgment deem to be prudent to the Joint
Venture II, and in connection therewith make such representations,
warranties, and covenants as they deem necessary or proper.
(d) The officers of the Company are authorized and empowered to pay
all fees and expenses incurred by the Company, or EPC, in connection with
the formation and completion of the Edge Joint Venture II.
All of the Subscribers of Stock ratify and approve these actions and matters.
(9) Formation of the Partnership. The Board of the Company hereby
authorizes and empowers the Company to form the Partnership. In connection
therewith, the following is agreed, authorized and approved:
(a) The President of the Company is authorized and empowered for the
Company to prepare and execute an agreement of limited partnership in such
form and on such terms as such officer in his sole discretion shall
approve, with such Persons as limited partners as such officer shall
determine; and
(b) The President shall be authorized to set in his sole judgment the
terms, conditions and considerations on which all partners, general or
limited, shall be admitted into the Partnership, his determination being
conclusive for all purposes; and
(c) The President shall be authorized and empowered to take any and
all other steps, acts and actions, and execute such further agreements,
certificates and instruments, as shall be necessary and proper in his
judgment to accomplish the formation of the Partnership, and to cause the
Partnership to invest in the Edge Joint Venture II on any and all terms and
conditions as he shall approve in his sole judgment, the taking of such
action or execution of such document being conclusive evidence of such
determination.
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<PAGE>
(d) The President and the Treasurer of the Company are each hereby
authorized and directed to establish banking relations with any state or
national banking institutions as the officers of the Company shall choose
(the "Bank"), for and on behalf of the Partnership and to establish such
checking accounts and borrowing accounts with such institutions as the
President or Treasurer of the Company shall deem necessary and appropriate.
Any resolutions which such Bank may require be adopted by the Board of this
Company in order to establish such accounts are hereby approved in their
entirety, and the Secretary is authorized to certify that the Board has
approved such resolutions as of the date such resolutions are stated by the
President or the Treasurer to be so approved.
All of the Subscribers of Stock ratify and approve these actions and matters.
10. Edge Joint Venture II Matters. Upon execution of the Joint Venture
Agreement by the Company and Edge Group II, respectively, the Company shall be
and become the Managing General Partner of the Edge Joint Venture II. In
connection with such joint venture, the Board of Directors agree, authorize and
approve the following:
(a) The President and other officers of the Company are authorized by
the Company to cause the Edge Joint Venture II to borrow from the RIMCO
Purchasers or their affiliated companies the sum of $4,500,000 generally on
terms and conditions as set forth in Exhibit J hereto, with any changes,
additions or deletions therein as such officers shall deem are necessary or
prudent in connection with such borrowing, and to cause the Joint Venture
II to pledge or mortgage any and all of the present or future assets of the
Joint Venture II to secure such loan, as the RIMCO Purchasers may request
and the officers of the Company may determine in their sole discretion to
be prudent or necessary to procure such loan; and to execute any and all
Loan Documents, including, without limitation, note purchase agreements,
promissory notes, interest deferral notes, mortgages, security agreements,
collateral mortgages, collateral mortgage notes (up to $10,000,000) and
other certificates and agreements and to take all steps and actions,
including without limitation the pledge of any collateral mortgage note,
which such officers deem in their sole discretion to be necessary or proper
to cause the Edge Joint Venture II to borrow from the RIMCO Purchasers or
their affiliated companies such $4,500,000, the execution of such items
being conclusive evidence of such determination.
(b) The President and other officers of the Company are authorized for
the Company to execute any security and pledge agreements necessary to
cause the Company to pledge its partnerships interest in the Edge Joint
Venture II to the RIMCO Purchasers or their affiliated companies who shall
loan such $4,500,000, such agreements to be in the form which such
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<PAGE>
officers deem in their sole discretion to be necessary or proper to cause
or permit such borrowing by the Edge Joint Venture II, the execution of
such agreements being conclusive evidence of such determination.
Furthermore, the President and other officers of the Company are authorized
to cause the Company to issue to the RIMCO Purchasers a guaranty of the
amounts and matters referenced in subparagraph (a), up to the amount of
$500,000, such guarantee to be on the terms and conditions as such officers
shall in their sole discretion determine, the execution thereof being
conclusive evidence of such determination.
(c) The President and other officers of the Company are authorized for
the Edge Joint Venture II to cause the Edge Joint Venture II to (i) execute
an Agreement of Sale purchasing the JV Assets and Liabilities,
substantially in the form of the draft agreement attached hereto as Exhibit
I, with any changes, deletions, additions, modifications or alterations as
such officer shall deem necessary or proper, the execution by such officer
of such agreement being conclusive evidence of such determination, as well
as any and all other documents or agreements necessary or proper in the
judgment of such officer to effectuate the acquisition by the Edge Joint
Venture II of the JV Assets and Liabilities, and (ii) pay any and all sums
due third parties by the Edge Joint Venture II, including without
limitation any sums due the Edge Group Joint Venture pursuant to any
Agreement of Sale.
(d) The President and the Treasurer of the Company are each hereby
authorized and directed to establish banking relations with any state or
national banking institutions as the officers of the Company shall choose
(the "Bank"), for and on behalf of the Edge Joint Venture II and to
establish such checking accounts and borrowing accounts with such
institutions as the President or Treasurer of the Company shall deem
necessary and appropriate. Any resolutions which such Bank may require be
adopted by the Board of this Company in order to establish such accounts
are hereby approved in their entirety, and the Secretary is authorized to
certify that the Board has approved such resolutions as of the date such
resolutions are stated by the President or the Treasurer to be so approved.
All of the Subscribers of Stock ratify and approve these actions and matters.
11. Certain Matters Regarding Voting of Shares of Stock.
(a) Voting Agreement between COG and EHCLP.
(i) Rights of COG and Obligations of EHCLP. In any matters
involving the election of directors of New Edge, EHCLP (for itself and
its assigns) agrees that all shares of Stock issued to it in
connection with this Agreement,
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<PAGE>
and any additional shares which it acquires hereafter will be voted
for a total of five of the nine total directorship positions which the
Company shall have at any time, as designated by COG. Additionally,
EHCLP shall not vote to remove any directors which COG shall have
designated, except on the written instruction of COG, in which case,
EHCLP (for itself and its assigns) agrees to vote for the removal of
such director and to vote for his or her replacement, as designated in
writing by COG, subject to certain restrictions regarding the removal
of COG's designated "independent" director, set forth below. The
foregoing notwithstanding, COG agrees that no less than one such
director designated by COG shall be a person who is (x) not an
employee of the Company or an affiliated company, (y) not a relative
of Calaway to the third degree of consanguinity, and (z) free of any
relationship that would interfere with the exercise of independent
judgment. In connection with the designation by COG of the
"independent" director, COG shall in advance of any vote, designate
such proposed independent Board member in writing to EHCLP,
identifying all relationships which COG, or its officers and
directors, have with such candidate. Failure to deliver a written
objection to the independence of such Board candidate within five (5)
days of receipt of the designation thereof shall waive the ability of
EHCLP to later object based upon a relationship described in the
original designation. Regarding such independent Board member, COG may
select new proposed independent candidates annually, but may not
remove any independent Board member it shall have designated more
frequently than annually, except for good cause.
(ii) Rights of EHCLP and Obligations of COG. In any matters
involving the election of directors of New Edge, COG (for itself and
its assigns) agrees that all shares of Stock issued to it in
connection with this Agreement, and any additional shares which it
acquires hereafter will be voted for a total of three of the nine
total directorship positions which the Company shall have at any time,
as designated by EHCLP. Additionally, COG (for itself and its assigns)
shall not vote to remove any directors which EHCLP shall have
designated, except on the written instruction of EHCLP, in which case,
COG (for itself and its assigns) agrees to vote for the removal of
such director and to vote for his or her replacement, as designated in
writing by EHCLP.
(iii) Rights and Obligations of EHCLP and COG. Furthermore, (A)
on any matter brought to the shareholders of the Company for a vote or
for approval, which Texas law requires be approved by the affirmative
vote or approval of 66-2/3 percent of the shareholders of the Company,
and (B) on any shareholder vote to amend,
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<PAGE>
alter, repeal or add to, the Bylaws of the Company, EHCLP and COG
shall in advance of such vote discuss such matter to be voted on, and
unless EHCLP and COG agree in writing to vote their shares in a
certain way, both shall vote their shares against such measure.
(iv) The provisions of subsection (iii) shall terminate seven (7)
years from the Effective Date. All of the provisions of subsection (a)
shall terminate on the earlier to occur of (x) ten (10) years or (y)
at such time as any common stock of the Company shall be traded on a
national securities exchange or a reputable regional or international
exchange, or in the over-the-counter market and reported on the
National Association of Securities Dealers Automated Quotation System.
In the event that EHCLP shall for any reason distribute shares of the
Company to its partners (general or limited) and not retain all voting
rights with respect to all such distributed shares, then the
provisions of subsection (a) (ii) shall terminate. Additionally, on
the occurrence of any of the following: (i) the death of Calaway; (ii)
COG shall cease to own (either itself or through Affiliates) at least
forty percent (40%) of the number of shares subscribed herein; (iii)
Calaway shall be legally adjudicated to be a mentally ill person, as
that term is defined in Tex. Rev. Civ. Stat. Ann. art. 5547-4(9),
(Vernon 1958, Supp. 1991) as amended, or if a guardian has been
appointed for him pursuant to the provisions of the Texas Probate
Code; (iv) a merger or consolidation of New Edge, with another entity
(except between New Edge and EPC) and as a result of which transaction
James D. Calaway and John E. Calaway, taken together, lose "control,"
as such term is used in the Securities and Exchange Act of 1934, as
amended; then for a period of ten days from the occurrence of any such
event and notice thereof to Sfondrini of such circumstance, EHCLP
shall have the right to terminate all voting provisions set forth in
this Section (a) by written notice. Failure to give such notice shall
constitute a waiver of the right so to terminate for the event which
gave rise to such right.
(b) Voting Agreement between COG and Northedge. For any and all
questions, resolutions, consents, or other matters presented for action to
the shareholders of the Company, including, without limitation, the
election of directors of the Company and amendment of Articles of
Incorporation of the Company, the shares of Stock of the Company herein
purchased by Northedge (for itself and its assigns) shall be voted or
consents executed on such questions, resolutions or other matters by
Northedge for itself and its assigns in accordance with the instructions of
COG. Northedge for itself and its assigns shall vote or consent in the
manner so directed by COG within twenty-four (24) hours after Northedge has
received
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<PAGE>
voting or consent instructions. In exercising the powers and authority
hereunder conveyed to direct the voting and consent of the Stock of the
Company, COG shall be free to act or not act, to direct a vote for or
against, to direct a vote to consent or to withhold consent, on any basis
it shall choose, including, without limitation, its own interests, and
shall not be obligated, among other things, to act for the best interest of
Northedge or otherwise account or explain any such action to Northedge or
any other Person. Such voting agreement shall extend perpetually unless
Texas law shall mandate a shorter termination period, in which case the
term shall be as long as is permitted by Texas law. The foregoing
notwithstanding, the voting agreement set forth in this subsection (b)
shall terminate on the occurrence of any of the following: (i) the death of
Calaway; (ii) Calaway shall cease to be the active President of the Company
for greater than six consecutive and successive months without
interruption; (iii) COG shall cease to own (either itself or through
Affiliates) at least forty percent (40%) of the number of shares subscribed
herein; (iv) Calaway shall be legally adjudicated to be a mentally ill
person, as that term is defined in Tex. Rev. Civ. Stat. Ann. art. 5547-
4(9), (Vernon 1958, Supp. 1991) as amended, or if a guardian has been
appointed for him pursuant to the provisions of the Texas Probate Code; (v)
a merger or consolidation of New Edge, with another entity (except between
New Edge and EPC) and as a result of which transaction James D. Calaway and
John E. Calaway, taken together, lose "control," as such term is used in
the Securities and Exchange Act of 1934, as amended; (vi) any common stock
of New Edge shall be traded on a national securities exchange or in the
over-the-counter market and reported on the National Association of
Securities Dealers Automated Quotation System.
(c) Voting Agreement between COG and Lawford. For any and all
questions, resolutions, consents, or other matters presented for action to
the shareholders of the Company, including, without limitation, the
election of directors of the Company and amendment of Articles of
Incorporation of the Company, the shares of Stock of the Company herein
purchased by Lawford (for itself and its assigns) shall be voted or
consents executed on such questions, resolutions or other matters by
Lawford (for itself and its assigns), in accordance with the instructions
of COG. Lawford (for itself and its assigns) shall vote or consent in the
manner so directed by COG within twenty-four (24) hours after Lawford has
received voting or consent instructions. In exercising the powers and
authority hereunder conveyed to direct the voting and consent of the Stock
of the Company, COG shall be free to act or not act, to direct a vote for
or against, to direct a vote to consent or to withhold consent, on any
basis it shall choose, including, without limitation, its own interests,
and shall not be obligated, among other things, to act for the best
interest of Lawford or otherwise account or explain any such
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<PAGE>
action to Lawford or any other Person. Such voting agreement shall extend
perpetually unless Texas law shall mandate a shorter termination period, in
which case the term shall be as long as is permitted by Texas law. The
foregoing notwithstanding, the voting agreement set forth in this
subsection (b) shall terminate on the occurrence of any of the following:
(i) the death of Calaway; (ii) Calaway shall cease to be the active
President of the Company for greater than six consecutive and successive
months without interruption; (iii) COG shall cease to own (either itself or
through Affiliates) at least forty percent (40%) of the number of shares
subscribed herein; (iv) Calaway shall be legally adjudicated to be a
mentally ill person, as that term is defined in Tex. Rev. Civ. Stat. Ann.
art. 5547-4(9) (Vernon 1958, Supp. 1991), as amended, or if a guardian has
been appointed for him pursuant to the provisions of the Texas Probate
Code; (v) a merger or consolidation of New Edge, with another entity
(except between New Edge and EPC) as a result of which transaction James D.
Calaway and John E. Calaway, taken together, lose "control," as such term
is used in the Securities and Exchange Act of 1934, as amended; (vi) any
common stock of New Edge shall be traded on a national securities exchange
or in the over-the-counter market and reported on the National Association
of Securities Dealers Automated Quotation System.
(d) Voting Agreement between COG and Texedge. Texedge (for itself and
its assigns) agrees that with respect to any and all questions presented
for action to the shareholders of New Edge, including without limitation,
the election of directors, and amendment of Articles of Incorporation of
New Edge, all shares of stock now owned or hereafter acquired by Texedge
(for itself and its assigns) shall be voted on such questions by Texedge
(for itself and its assigns) in accordance with the instructions of COG.
Such voting agreement shall terminate on the occurrence of any of the
following: (i) a merger or consolidation of New Edge, with another entity
(except between New Edge and EPC) as a result of which transaction James D.
Calaway and John E. Calaway, taken together, lose "control", as such term
is used in the Securities and Exchange Act of 1934, as amended; (ii)
Northedge and Lawford, shareholders of New Edge, receive voting rights on
the shares of New Edge Stock they own which are otherwise subject to the
voting restrictions herein set forth; or (iii) any common stock of New Edge
shall be traded on a national securities exchange or in the over-the-
counter market and reported on the National Association of Securities
Dealers Automated Quotation System.
(e) Voting Agreement between COG and Raphael. Raphael (for himself and
his assigns) agrees that with respect to any and all questions presented
for action to the shareholders of New Edge, including without limitation,
the election of directors, and amendment of Articles of incorporation of
New
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Edge, all shares of stock now owned or hereafter acquired by Raphael (for
himself and his assigns) shall be voted on such questions by Raphael (for
himself and his assigns) in accordance with the instructions of COG. Such
voting agreement shall terminate on the occurrence of any of the following:
(i) a merger or consolidation of New Edge, with another entity (except
between New Edge and EPC) as a result of which transaction James D. Calaway
and John E. Calaway, taken together, lose "control", as such term is used
in the Securities and Exchange Act of 1934, as amended; (ii) Northedge and
Lawford, shareholders of New Edge, receive voting rights on the shares of
New Edge Stock they own which are otherwise subject to the voting
restrictions herein set forth; or (iii) any common stock of New Edge shall
be traded on a national securities exchange or in the over-the-counter
market and reported on the National Association of Securities Dealers
Automated Quotation System.
(f) Voting Agreement between KPC and Jamtex. Jamtex (for itself and
its assigns) agrees that with respect to any and all questions presented
for action to the shareholders of New Edge, including without limitation,
the election of directors, and amendment of Articles of incorporation of
New Edge, all shares of stock now owned or hereafter acquired by Jamtex
(for itself and its assigns) shall be voted on such questions by Jamtex
(for itself and its assigns) in accordance with the instructions of KPC.
Such voting agreement shall terminate on the occurrence of any of the
following: (i) a merger or consolidation of New Edge, with another entity
(except between New Edge and EPC) as a result of which transaction James D.
Calaway and John E. Calaway, taken together, lose "control", as such term
is used in the Securities and Exchange Act of 1934, as amended; (ii)
Northedge and Lawford, shareholders of New Edge, receive voting rights on
the shares of New Edge Stock they own which are otherwise subject to the
voting restrictions herein set forth; or (iii) any common stock of New Edge
shall be traded on a national securities exchange or in the over-the-
counter market and reported on the National Association of Securities
Dealers Automated Quotation System.
(g) Voting Agreement between A11 Subscribers and the RIMCO Purchasers.
For so long as the RIMCO Purchasers shall own the shares of Stock herein
subscribed, in any matters involving the election of directors of New EPC,
all Subscribers agree that all shares of Stock issued to them in connection
with this Agreement, and any additional shares which any of them hereafter
acquires, will be voted for one directorship position as designated by the
RIMCO Purchasers who shall own 51% of the Stock held by all RIMCO
Purchasers. Additionally, all Subscribers agree not to vote to remove any
director which the RIMCO Purchasers shall have designated, except on the
written instruction of the RIMCO Purchasers who shall own 51% of the Stock
held by all RIMCO Purchasers, in
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which case, the Subscribers agree to vote for the removal of such director
and to vote for his or her replacement, as designated in writing by the
RIMCO Purchasers who shall own 51% of the Stock held by all RIMCO
Purchasers. In the event a Subscriber has granted voting rights to anyone
else herein, the Person exercising the voting rights of another shall cause
such shares to be voted so as to fulfill the commitments herein made. All
Subscribers expressly acknowledge and agree that the RIMCO Purchasers are
third-party beneficiaries of the provisions of this Subsection (g).
(h) General. All terms of the voting agreements contained in this
Section 11 shall be binding on all assigns and transferees of the shares of
Stock herein burdened with such voting requirements. All obligors under
this Section 11 agree to deliver prior to any meeting or vote of
Shareholders, a proxy in favor of the proper obligee, in advance of such
meeting or vote, as requested by the obligee.
12. Employment Agreement between Calaway and the Company. The Board of
Directors of the Company hereby designates John Sfondrini and Vincent Andrews as
special agents of the Company for the limited purposes set forth in this
Section. Such persons are authorized and empowered for and on behalf of the
Company to enter into an employment agreement with Calaway on terms and
conditions deemed by such persons to be reasonable and proper, the execution
thereof by such persons being conclusive evidence of such determination.
13. Employment Agreement between Davis and the Company. The Board of
Directors of the Company hereby authorize and empower the President of the
Company to enter into an employment agreement with Davis on terms and conditions
deemed by such officer to be reasonable and proper, the execution thereof by
such officer being conclusive evidence of such determination.
14. Amendment of Articles of Incorporation. Upon the completion of the sale
of shares of Stock to the Subscribers, the directors and Shareholders of the
Company unanimously agree and approve that the Articles of Incorporation of the
Company shall be amended, as follows:
Name. The name of the Company shall be changed from "New Edge
Petroleum Corporation" to "Edge Petroleum Corporation."
Furthermore, the officers of the Company are empowered and directed to
execute and file appropriate Articles of Amendment with the Secretary of State,
and pay any fees incurred in connection with such filing, and do any and all
other such acts as may be necessary to accomplish the foregoing.
15. Certain Matters Regarding EPP.
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(a) Representations. Each of the following persons represents
for themselves, severally, that they own the percentage indicated in EPP
as of the date hereof, and to their best knowledge and belief, without
any independent inquiry, the other persons own the percentage indicated
of EPP as of the date hereof:
Name Percentage
---- ----------
EHCLP 34.50%
COG 40.30
KPC 5.25
Northedge 5.25
Lawford 5.25
Jamtex 1.00
Raphael 1.50
Texedge 2.00
EPC 5.00
------
100.00%
(b) Each indicated partner represents that he or it, as the
case may be, has not granted any rights or options, fixed or
contingent, to any person to acquire any interest in EPP, not shown
above, except that COG has granted a right to J.C. Calaway to purchase
interests under certain conditions which, upon the effectiveness of this
agreement, shall be moot. Each indicated partner represents that he or
it, as the case may be, owns the indicated interest set forth above,
free and clear of all liens, security interests, mortgages, charges and
encumbrances. Each indicated partner represents that he or it, as the
case may be, is aware of no actions, suits, proceedings or claims
pending or threatened with respect to, or in any manner affecting, such
partner's ownership interests in EPP as set forth above.
(c) Termination. All the partners of EPP hereby elect to
terminate and dissolve EPP for all purposes. EPP shall not enter into
any new business or operations after the Effective Date. EPP shall not
conduct any further business or operations after the Effective Date
except as same are necessary to preserve the value of the assets and
property to be distributed by EPP to the Partners on final distribution.
(d) Liquidating Agent.
(i) Designation. The partners hereby designate EPC as the
liquidating agent to wind-up and terminate the business and
affairs of EPP (the "Liquidating Agent").
(ii) Responsibilities. The winding-up of the affairs of EPP
and the termination of EPP shall be performed by the Liquidating
Agent in accordance with the Texas General partnership Laws and
the Articles of
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partnership of EPP, as amended. The partners of EPP hereby designate, appoint
and authorize the Liquidating Agent to take all actions necessary or
appropriate to wind-up and terminate the business and operations of EPP. Any
reversionary working interests, overriding royalties, or other forms of
promoted interest, and also any cash amounts to be distributed, in either case
with respect to EPP's interest in any Joint Venture partnership shall be
promptly and forthwith delivered to the partners of EPP in accordance with
their respective percentage ownership interest set forth in subsection (a)
hereof.
(iii) Payment of Liabilities of EPP. In paying the liabilities of EPP, the
Liquidating Agent shall pay such liabilities in the following order of
priority:
(A) first, amounts owing to creditors other than partners;
(B) second, amounts owing to partners other than for capital and
profits;
(C) third, amounts owing to partners in respect of capital; and
(D) fourth, amounts owing to partners in respect of profits, which
shall be based on the percentages set forth in subparagraph (a) hereof.
(iv) The Liquidating Agent may take all such action and is hereby granted
such powers as may appear necessary or proper to comply with the laws of the
appropriate jurisdictions and to effectuate and carry out the terms and purposes
of the transactions contemplated in this Agreement with respect to EPP. The
Liquidating Agent shall have the following specific powers, and the enumeration
of such powers shall not be considered in any way to limit or control the power
of the Liquidating Agent to act as specifically authorized in any other section
or provision of this Agreement:
(A) To sell or otherwise convert into cash or cash equivalents all
assets of EPP, and to pay, discharge and satisfy all remaining
obligations, liabilities and expenses of EPP with the right to prosecute
or defend litigation (in the name of EPP, or otherwise), and to pay,
discharge or otherwise satisfy claims, liabilities, and expenses and to
pay all expenses incurred in connection therewith, and to distribute to
the partners all such net proceeds remaining in the hands of the
Liquidating Agent as soon as practicable.
22
<PAGE>
(B) While serving as the Liquidating Agent to employ legal counsel,
accountants and other professionals for the benefit of EPP and to pay the
fees and expenses of such professionals from the assets of EPP.
(C) If necessary, to borrow funds for winding-up and liquidation
purposes.
(D) To file with the appropriate city, state or other governmental
offices all documents necessary to wind-up and terminate EPP, including
notices of termination, if necessary.
(v) Limitations on Liquidating Agent's Powers. The investment powers of
the Liquidating Agent with respect to EPP shall be limited to demand and time
deposits in federally insured banks or savings institutions, or short-term
certificates of deposits or Treasury bills. No other reinvestment powers are
given to the Liquidating Agent.
(vi) Acceptance By Liquidating Agent. The Liquidating Agent hereby accepts
its appointment made in this Agreement subject to the conditions enumerated
below and agrees to act as liquidating agent pursuant to the terms hereof.
(A) The Liquidating Agent shall in no case or event be liable for any
damage caused by the exercise of its discretion as authorized in this
Agreement in any particular manner, or for any other reason, except gross
negligence or wilful misconduct with reference to the Agreement, and shall
not be liable or responsible for its failure to ascertain the terms or
conditions, or to comply with any of the provisions of any agreement,
contract or other document referred to herein, nor shall it be liable or
responsible for forgeries or false personation.
(B) If any controversy arises, between the parties hereto or with any
third person with respect to the subject matter of the Agreement or its
terms or conditions, the Liquidating Agent shall not be required to
determine the same or take any action, but may await the settlement of any
such controversy by final appropriate legal proceedings or otherwise as it
may reasonably require.
(c) Notwithstanding any other provision of this Agreement, the
Liquidating Agent's responsibility for payment of or provision for any
23
<PAGE>
claims against, liabilities of, or expenses of EPP, shall be limited to the
property and assets of EPP and shall be dischargeable only therefrom.
(vii) Liquidating Agent Resignation. The Liquidating Agent shall
have the right to resign at any time, and upon resignation the partners
holding two-thirds (2/3) or more of the ownership interests of EPP shall
appoint a successor Liquidating Agent.
(viii) Removal of Liquidating Agent. The Liquidating Agent may be
removed and its duties terminated at any time and his successor appointed
by partners holding two-thirds (2/3) or more of the ownership interests of
EPP.
(e) Termination of Edge Group Joint Venture. The Partners of EPP hereby
authorize and appoint the Liquidating Agent to take all actions necessary or
appropriate on behalf of EPP to wind-up and terminate the Edge Group Joint
Venture. Without limiting the generality of the foregoing, the Liquidating
Agent, in the name, and on behalf, of the Edge Group Joint Venture, EPP and each
partner of EPP, shall have the right, power and duty to:
(i) negotiate for and on behalf of the Edge Group Joint Venture an
Agreement of Sale pursuant to which the JV Assets and Liabilities shall be
sold to the Edge Joint Venture II, all on such terms and conditions, and
for such considerations, as the Liquidating Agent shall determine, and any
and all other instruments, certificates, documents and agreements as shall
be necessary or expedient to accomplish the consummation of the Agreement
of Sale, all as determined by the Liquidating Agent in its sole judgment;
(ii) in connection with such Agreement of Sale, to grant indemnity to
third parties, including, without limitation, the Edge Joint Venture II as
regards the condition of the JV Assets and Liabilities and any other
matters as requested by Edge Joint Venture II, all in the name, place and
stead of the Edge Group Joint Venture, EPP and each partner of EPP. The EPP
partners agree that any liability which EPP or any of them individually
shall have arising out of the foregoing indemnity, shall be shared, and
limited among themselves, as follows: Old EPC shall be unlimitedly liable
first and primarily to indemnify and hold harmless all the remaining
partners of EPP, but only to the extent of its assets. Thereafter, as to
any balance owing, each other partner shall be liable for the following
percentage: EHCLP, 39.47%; COG, 42.42%; KPC, 5.53%; Northedge, 5.53%;
Lawford, 5.53%; Jamtex, 1.05%; Raphael, 1.58%; and Texedge, 2.1% (such
percentage being its "ratable share"). If any partner
24
<PAGE>
shall make a payment (whether voluntarily or involuntarily) on account of
the foregoing indemnities in excess of its ratable share of liability then
each partner which has not already paid its ratable share of liability
shall immediately pay to those partners who have so paid, their ratable
share of liability in such a manner that all payments made on account of
such indemnity shall be borne by each partner in accordance with its
ratable share. If within ten (10) days after the payment referred to in the
preceding sentence has been requested, any partner has not made this
payment in full, the amount owed by the non-performing partners pursuant to
the preceding sentence shall be determined (the "defaulted payment") and
immediately upon request the other partners shall reimburse any partners
who have paid more than their ratable share in such a manner so that the
defaulted payment shall be borne by the other partners ratably. This,
however, shall not absolve any partner from the obligations to bear its
indicated ratable share of liabilities; and
(iii) in connection with the termination of the Edge Group Joint
Venture, and each EPP partner agrees (subject to the restrictions set forth
below) to indemnify the Edge Group I against any claim or liability arising
out of or connected with (A) representations or warranties made by the Edge
Group Joint Venture in the Agreement of Sale or any conveyance documents
conveying assets to the Edge Joint Venture II, or any failure of title with
respect to the JV Assets and Liabilities, or (B) the operation of the Edge
Group Joint Venture (excluding, however, any and all claims and liabilities
being assumed by the Edge Joint Venture II in the Agreement of Sale, any
claim arising under a working interest or reversionary working interest
held by, through or under the Edge Joint Venture, or the Edge Group I, or
any liability for income taxes arising out of or connected with the Edge
Group Joint Venture, including without limitation, those associated with
the Agreement of Sale); provided that Edge Group I agrees that any
liability which EPP or any of the partners thereof individually shall have
arising out of the foregoing indemnity, shall be shared, and limited among
the EPP partners, but only in the following manner: Old EPC shall be
unlimitedly liable first and primarily to Edge Group I, but only to the
extent of its assets. Thereafter, as to any balance owing, each other
partner shall be liable severally (not jointly) only for the following
percentage: EHCLP, 39.47%; COG, 42.42%; KPC, 5.53%; Northedge, 5.53%;
Lawford, 5.53%; Jamtex, 1.05%; Raphael, 1.58%; and Texedge, 2.1%. No other
provision herein to the contrary withstanding, Stanley Raphael shall have
no liability to Edge Group I, or any other person, and his wholly-owned
corporation, Trade
25
<PAGE>
Consultants, Inc. ("Trade Consultants") shall have any such liability, and
does herewith furnish such indemnity.
(iv) in the event that pursuant to the Agreement of Sale, any
reversionary working interests, or working interests are received back from
the Edge Joint Venture II, to distribute those to the partner in accordance
with their percentages as set forth in subparagraph (a), or to the Persons
designated by such partners, including the designation as set forth in
Section 3 of this Agreement; and
(v) each Partner authorizes the Liquidating Agent to execute an
Agreement of Termination and Consent to Action with respect to the
termination of the Edge Group Joint Venture, in the form of the agreement
attached hereto as Exhibit O.
(f) Notwithstanding any other term, provision, or agreement in any writing
or contract, all partners consent and agree that Raphael shall have no liability
to them for any cause or reason, whatsoever, whether primary, or in contribution
or indemnity, all such persons agreeing to look only to the wholly-owned company
of Raphael, Trade Consultants, for any such liability, or damage, which company
expressly assumes such indemnity.
(g) EPP and all of its partners without the necessity of any further act
or execution of any further documents, do hereby release and relinquish their
rights and interests in any regional seismic data, and any and all of the
information comprising a regional information base (which includes without
limitation, proprietary regional maps, seismic data, and geological data
including logs, well files, synthetic seismogram, and velocity surveys).
(h) Amendment. The provision of this section may be hereafter amended,
altered, changed, deleted or added to, by the affirmative approval of partner
owning two-thirds (2/3's) or more interests in EPP as set forth in subsection
(a) hereof.
(i) Regarding the Edge Group Joint Venture. The partners of EPP authorize
EPC and /or COG to execute on behalf of the Edge Group Joint Venture a
promissory note in the principal amount of $250,000, plus interest, payable to
Calaway and John Sfondrini, jointly, representing funds loaned by such persons
to the Edge Group Joint Venture, such note to bear terms as set forth in
Exhibit K, together with such changes therein as the officers of EPC and/or COG,
as the case may be, determine to be reasonable or necessary in their sole
judgments.
26
<PAGE>
16. Approval of Sale to J. C. Calaway. After giving effect to all of the
transactions, agreements and matters herein set forth, but prior to the sale of
shares to the RIMCO Purchasers and election of additional directors, each
Subscriber does hereby agree to the sale by COG of one thousand (1,000) shares
of Stock herein subscribed for by COG to J. C. Calaway, waiving any preferential
purchase rights (preferential and otherwise) thereto which any Subscriber may
have, provided that he executes an agreement by which he agrees to abide by and
hold his shares subject to the buy-sell provisions set forth in Exhibit G
hereof. For purposes of such buy-sell rights, J. C. Calaway shall be deemed to
be a Calaway Purchaser for all purposes of such Exhibit G. Such shares are to
be held pursuant to a voting agreement between Calaway and J. C. Calaway.
17. Certain Banking Matters. The President and the Treasurer of the
Company are each hereby authorized and directed to establish banking relations
with any state or national banking institutions as the officers of the Company
shall choose (the "Bank"), and to establish such checking accounts and borrowing
accounts with such institutions as the President or Treasurer of the Company
shall deem necessary and appropriate. Any resolutions which such Bank may
require be adopted by the Board of this Company in order to establish such
accounts are hereby approved in their entirety, and the Secretary is authorized
to certify that the Board has approved such resolutions as of the date such
resolutions are stated by the President or the Treasurer to be so approved.
18. Issuance of Stock to the RIMCO Purchasers. Effective immediately
after the consummation of all matters contemplated by this Agreement, except
those set forth in Section 19, a subscription to purchase a total of 5,263
shares of Stock for a total consideration of $500,000 from the RIMCO Purchasers
(in the precise share amounts to each as set forth on Exhibit L), the same being
greater than the par value thereof, is accepted by the Company and its Board of
Directors. Furthermore, the President and the Secretary of the Company are
authorized and empowered to issue and deliver to each RIMCO Purchaser
certificates of Stock of the Company evidencing the number of shares to which
such RIMCO Purchaser is entitled, which shares, when so issued, will be duly
authorized, validly issued and outstanding shares of capital stock of the
Company, fully paid and nonassessable for all purposes. Additionally, the
President and any Vice President are authorized and empowered by the Company to
enter into any additional agreements with the RIMCO Purchasers which they, or
any of them, shall request in connection with or as a part of their subscription
of Stock, such agreement to be in the form of agreement attached hereto as
Exhibit N, together with such additions, deletions, changes or modifications as
such officers determine in their sole discretion to be reasonable and prudent,
the execution of such agreement or agreements being conclusive evidence of such
determination.
27
<PAGE>
19. Election of Directors. Effective after the completion of all matters
contemplated by this Agreement, including the issuance of shares to the RIMCO
Purchasers, the size of the Board of Directors shall be increased to nine (9)
members, and the following persons shall be elected as directors of the Company,
such persons to serve until their successors have been duly elected and
qualified or their resignation or removal in the manner authorized by the
Bylaws:
John E. Calaway
James D. Calaway
Pherl E. Brossman
Joel R. Davis
John Sfondrini
Vincent Andrews
D. Christopher Taylor
Steven Mikel
Furthermore, within 24 hours after receipt of a request from John E. Calaway,
the Company shall send out notice of a special telephone shareholders meeting,
for the purpose of electing one additional director, said meeting to occur as
soon as possible pursuant to the Company's Bylaws (as hereinafter adopted).
20. Legends on Share Certificates. Each of the Subscribers hereby agree
that the following legends shall be written, printed or stamped on all
certificates representing shares of Stock:
All Subscribers and the RIMCO Purchasers
"The shares represented by this certificate have
not been registered under the Securities Act of
1933, as amended, or the securities laws of any
state pursuant to one or more exemptions therefrom
and such Shares may not be sold, transferred,
assigned or otherwise disposed of unless and until
they are first registered under such Act and all
applicable state securities laws and rules and
regulations promulgated thereunder or unless and
until the holder hereof provides either (i) information
satisfactory to the Company that such registration is
not required or (ii) an opinion of counsel acceptable
to the Company to the effect that such registration
is not required.
"The shares represented by this certificate are subject
to provisions restricting the transfer of the shares.
Such agreement restricting the transfer of shares is
contained in the Articles of Incorporation as amended
of the Company, which are on file in the office of the
Secretary of State of the
28
<PAGE>
State of Texas. The Company will furnish a copy
of such Articles without charge upon written request
to the Company at its principal place of business or
registered office.
"The preemptive right of shareholders to acquire
unissued or treasury shares of the Company by reason
of holding shares has been denied by a statement
contained in the Articles of Incorporation of the
Company that are on file in the office of the
Secretary of State of Texas. The Company will
furnish a copy of such Articles of Incorporation
without charge upon request therefor to the
Company at its principal place of business or
registered office."
All Subscribers Burdened with Voting Agreements
(excluding the RIMCO Purchasers)
"The voting of the shares of Stock is subject
to and restricted by a voting agreement dated
effective April 8, 1991, in favor of other persons
designated in such agreement. A copy of such
agreement is on file at the principal place of
business of the Company and relevant portions
thereof will be furnished without charge upon
written request to the Company at its principal
place of business or registered office."
21. Miscellaneous Provisions.
(a) Governing Law. This Agreement shall be subject to and governed
by the laws of the State of Texas.
(b) Binding Effect. This Agreement shall be binding upon the
Company, the Subscribers and their successors and assigns until terminated.
This Agreement shall apply to, and be binding upon, all Stock owned by any
Subscriber or signatory hereto regardless of the method or manner that such
Stock was acquired or obtained.
(c) Amendment. Except as otherwise hereafter set forth, this
Agreement may be amended from time to time by an instrument in writing
signed by the Company and ninety percent (90%) of the Subscribers who are
parties to this Agreement at the time of such amendment. The foregoing
notwithstanding, the provisions of Section 11 may be amended only on the
written consent of the specific parties who are obligees and obligors
thereunder, without the necessity of consent from any other Person.
29
<PAGE>
(d) Notices. Except as otherwise provided herein, all notices and
notices accepting or rejecting offers made, requests, consents and other
communications under this Agreement shall be in writing and shall be deemed to
have been delivered on the date mailed, postage prepaid, by certified mail,
return receipt requested, or on the date personally delivered or telegraphed and
confirmed:
(i) If to the Company, to:
New Edge Petroleum Corporation
1111 Bagby, Suite 2100
Houston, Texas 77002
Attn: Mr. John E. Calaway, President
(ii) If to any executing Person, to the
address of such Person as it appears
at the end of this Agreement.
Any party hereto may designate a different address by notice to the
other parties.
(e) Invalid Provisions. If any provision of this Agreement is held to
be illegal, invalid or unenforceable under present or future laws effective
during the term of this Agreement, such provision shall be fully severable; this
Agreement shall be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part of this Agreement; and the
remaining provisions of this Agreement shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision or by
its severance from this Agreement. Furthermore, in lieu of each such illegal,
invalid, or unenforceable provision, there shall be added automatically as a
part of this Agreement a provision as similar in terms to such illegal, invalid
or unenforceable provision as may be possible and be legal, valid and
enforceable.
(f) Counterparts. This Agreement may be executed in counterparts,
each of which for all purposes is deemed to be an original, and all of which
constitute, collectively, one agreement; in making proof of this Agreement, it
shall not be necessary to produce or account for more than one such counterpart.
(g) Further Assurances. Each Person executing this Agreement agrees
to promptly and/or execute deliver upon request all such other and further
information, documents, agreements and instruments in compliance with or
accomplishment of the covenants and agreements herein made.
(h) No Other Agreements. The parties hereto agree that there are no
agreements or understandings between or among any of them regarding the
ownership of shares of the Company, the
30
<PAGE>
voting of shares of the Company, the operations of the Company, except as set
forth herein, or any other matter affecting, dealing with or relating to the
ownership or operation of the Company. Any such agreements, understandings or
commitments, except as set forth in this Agreement, are hereby terminated.
(i) Board and Shareholder Approvals. This Agreement when executed shall
constitute the unanimous consent, resolution, ratification and agreement of all
of the Subscribers, who are all of the initial shareholders of the Company,
except the RIMCO Purchasers, who shall purchase their shares after the
effectiveness of all other matters contemplated in this Agreement, except the
expansion of the Board as set forth in Section 19 hereof. On April 8, 1991 at
10:40 P.M. (CDT), all of the persons indicated as the initial Board of Directors
of the Company assembled in person for a meeting of the initial Board of
Directors of the Company in Houston, Texas, except Christopher Taylor who
participated therein by telephone conference call pursuant to which all persons
participating in the meeting could hear each other and fully participate. The
execution hereof by all persons indicated as members of the initial Board of the
Company indicates their approval of the matters addressed, and also certifies
that Christopher Taylor approved all such measures. The subsequent execution
hereof by Christopher Taylor shall constitute this document further as a
unanimous consent of directors as well, all as of the Effective Date.
(j) The Secretary of the Company is authorized to extract any of the
resolutions and actions herein taken and present them separately in certificate
form, as acts, actions, and matters approved and adopted by the Company.
(k) It is intended that either the Company itself or the Edge Joint
Venture II or another affiliate may raise capital to fund a new royalty program
("Royalty Program"), pursuant to which one of the afore-named raises capital to
finance the purchase of landowners' royalty in the properties or prospects owned
by the Edge Joint Venture II. The Company agrees to cause the entity who
ultimately conducts such Royalty Program to negotiate with Sfondrini in good
faith the terms of such a Royalty Program and the terms upon which Sfondrini or
his assignee or designee shall be authorized to raise the necessary capital to
finance the program. In the event such Royalty Program has not been commenced
on or before twelve months from the date hereof, any right which Sfondrini has
hereunder shall terminate. The foregoing notwithstanding, in the event that
Sfondrini and the Company are unable to agree upon the terms of such Royalty
Program within such twelve-month period, and either the Company or the Edge
Joint Venture II proposes to engage any third party to raise capital to fund
such Royalty Program, Sfondrini shall be given thirty (30) days' notice of the
terms and conditions on which such third
31
<PAGE>
party proposes to raise such funds and may within such time-frame elect to
raise such capital on the same terms as proposed for such third party. If
Sfondrini, within such time period, does not affirmatively notify the
Company in writing of his willingness to accept such engagement, Sfondrini
shall be deemed to have declined.
(1) The parties acknowledge that consistent with Section 4, Raphael
may transfer his shares in New Edge to Trade Consultants, which he
represents to be a New York Corporation wholly owned by him. Upon such
transfer, Trade Consultants shall execute an acknowledgement that it and
the shares conveyed to it are bound by the terms and provisions of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
multiple counterparts, each of which shall be deemed an original, to be
effective as of April 8, 1991 (the "Effective Date").
NAME ADDRESS
- ---- -------
NEW EDGE PETROLEUM CORPORATION 1111 Bagby, Suite 2100
Houston, Texas 77002
By:/s/ JOHN E. CALAWAY
-------------------------------------
John E. Calaway, President
EDGE PETROLEUM CORPORATION 1111 Bagby, Suite 2100
Houston, Texas 77002
By: /s/ JOHN E. CALAWAY
-------------------------------------
John E. Calaway, President
/s/ JOHN E. CALAWAY
- ---------------------------------------- 1111 Bagby, Suite 2100
John E. Calaway Houston, Texas 77002
CALAWAY OIL AND GAS CORPORATION 1111 Bagby, Suite 2100
Houston, Texas 77002
By: /s/ JOHN E. CALAWAY
-------------------------------------
John E. Calaway, President
32
<PAGE>
/s/ PHERL E. BROSSMAN
- ----------------------------------------
PHERL E. BROSSMAN 1111 Bagby, Suite 2100
Houston, Texas 77002
LAWFORD ENERGY, INC. 1111 Bagby, Suite 2100
Houston, Texas 77002
By: /s/ PHERL E. BROSSMAN
-------------------------------------
Pherl E. Brossman, President
/s/ JOEL R. DAVIS
- ---------------------------------------- One Energy Square
JOEL R. DAVIS 4925 Greenville Avenue
Suite 825
Dallas, Texas 75206
NORTHEDGE CORP. 825 One Energy Square
4925 Greenville Avenue
Suite 825
By: /s/ JOEL R. DAVIS Dallas, Texas 75206
-------------------------------------
Joel R. Davis, President
/s/ JAMES D. CALAWAY
- ---------------------------------------- 712 Main, Suite 1500 East
JAMES D. CALAWAY Houston, Texas 77002
KPC INTERESTS, INC. 712 Main, Suite 1500 East
Houston, Texas 77002
By: /s/ JAMES D. CALAWAY
-------------------------------------
James D. Calaway, President
/s/ VINCENT ANDREWS
- ---------------------------------------- 19 Old Kings Highway
VINCENT ANDREWS Darien, Connecticut 06820
33
<PAGE>
TEXEDGE ENERGY CORPORATION 19 Old Kings Highway
Darien, Connecticut 06820
By: /s/ VINCENT ANDREWS
-------------------------------------
Vincent Andrews, President
JAMTEX, INC. 41 Bergenline Avenue
Westwood, New Jersey 07675
By: /s/ JAMES D. CALAWAY
-------------------------------------
James D. Calaway,
Special Vice President
/s/ STANLEY RAPHAEL
- ---------------------------------------- 4000 Towerside Terrace
STANLEY RAPHAEL Apartment 611
Miami, Florida 33138
TRADE CONSULTANTS, INC. 4000 Towerside Terrace
Apartment 611
Miami, Florida 33138
By: /s/ STANLEY RAPHAEL
-------------------------------------
Stanley Raphael, President
/s/ JOHN SFONDRINI
- ---------------------------------------- One Landmark Square
JOHN SFONDRINI Suite 611
Stanford, Connecticut 06901
34
<PAGE>
EDGE HOLDING COMPANY LIMITED
PARTNERSHIP One Landmark Square
Suite 611
Stanford, Connecticut 06901
By: /s/ JOHN SFONDRINI
-------------------------------------
John Sfondrini,
General Partner
and
By: NAPAMCO, LTD., One Landmark Square
General Partner Suite 611
Stanford, Connecticut 06901
By: /s/ JOHN SFONDRINI
-----------------------------
John Sfondrini, President
- ---------------------------------------- 2 Pickwick Plaza, Suite 110
D. CHRISTOPHER TAYLOR Greenwich, Connecticut 06831
35
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit Description
- ------- -----------
A-1 Number of shares of EPC transferred to New Edge
A-2 Reversionary and working interests and rights
transferred to New Edge in certain properties
A-3 Reversionary and working interests and rights
transferred to New Edge in other properties
A-4 Partially Committed Prospects
A-5 Partially Sold Prospects
B Form of Master Conveyance and Assignment
C Stock powers pursuant to which stock of
EPC will be transferred to New Edge
D Bylaws
E Joint Venture Agreement
F Assets to be contributed to the Edge
Joint Venture II by the Company
G Intentionally Omitted
H Original Articles of Incorporation
I Agreement of Sale
J RIMCO Letter of Intent
K Terms of Note to Calaway and Sfondrini
L Number of Shares and Consideration
Paid by the RIMCO Purchasers
M Reserves to be Dividended to New EPC
by Old EPC
N RIMCO Stock Purchase Agreement
O Agreement of Termination of Edge
Joint Venture and Consent to Action
36
<PAGE>
EXHIBIT 10.1
EDGE JOINT VENTURE II
Dated: April 8th, 1991
---
<PAGE>
TABLE OF CONTENTS
JOINT VENTURE AGREEMENT
Page
----
ARTICLE I.
ORGANIZATIONAL MATTERS
1.1 Formation.............................................. 1
1.2 Name................................................... 1
1.3 Principal Place of Business............................ 1
1.4 Filings................................................ 1
1.5 Term................................................... 1
1.6 Representations, Warranties and Agreements............. 2
ARTICLE II.
DEFINITIONS.................................................... 3
ARTICLE III.
PURPOSE........................................................ 10
ARTICLE IV.
CAPITAL CONTRIBUTIONS
4.1 Initial Capital Contributions.......................... 10
4.2 Additional Capital Contributions....................... 10
4.3 Capital Accounts....................................... 11
4.4 Interest on Contributions.............................. 13
4.5 No Withdrawal of Capital Contributions................. 13
4.6 Obligation to Restore Negative Capital Accounts........ 13
ARTICLE V.
ALLOCATIONS OF INCOME AND LOSS
5.1 Income and Loss........................................ 13
5.2 Precontribution Gain................................... 13
5.3 Corrective Allocations................................. 14
5.4 Minimum Gain Chargeback................................ 14
5.5 Transfer of Interest................................... 14
i
<PAGE>
ARTICLE VI.
CURRENT DISTRIBUTIONS AND RELATED MATTERS
6.1 Cash Distributions....................................... 15
6.2 Distribution of Carried Interests........................ 15
6.3 Valuation of Carried Interests........................... 16
6.4 Property Distributions................................... 17
6.5 Repayment of Venturer Loans.............................. 17
6.6 Matters Regarding Loan Documents......................... 17
6.7 Pro Rata Distributions................................... 17
ARTICLE VII.
RIGHTS, POWERS AND DUTIES OF THE VENTURERS
7.1 General.................................................. 18
7.2 Formation Authority...................................... 18
7.3 Authority and Duties of the Managing Venturer............ 19
7.4 Reliance by Third Parties................................ 21
7.5 Personnel................................................ 21
7.6 Authority of Managing Venturer to Act as Nominee......... 22
7.7 Restrictions of the Authority of the Managing
Venturer............................................... 22
7.8 Authority, Rights and Duties of the EG II Venturer....... 23
7.9 Compensation and Reimbursement of Managing Venturer...... 24
7.10 Compensation and Reimbursement of EG II Venturer......... 25
7.11 Outside Activities....................................... 25
7.12 Joint Venture Funds...................................... 29
7.13 Other Matters Concerning Managing Venturer............... 29
ARTICLE VIII.
BUDGETARY AND FINANCIAL MATTERS
8.1 General.................................................. 30
8.2 Initial Budget........................................... 30
8.3 Indirect Costs Budget.................................... 30
8.4 Capital Item............................................. 31
8.5 Direct Costs Budget...................................... 31
8.6 Indirect Research and Development Costs.................. 32
8.7 Reserve Costs............................................ 32
ARTICLE IX.
TRANSFERABILITY OF VENTURER'S INTEREST........................... 32
ii
<PAGE>
ARTICLE X.
INCOME TAX MATTERS
10.1 Preparation of Tax Returns............................... 32
10.2 Organizational Expenses.................................. 33
10.3 Taxation as a Partnership................................ 33
10.4 Tax Matters Partner...................................... 33
ARTICLE XI.
ACCOUNTING PROCEDURES; REPORTS AND INFORMATION
11.1 Fiscal Year.............................................. 33
11.2 Financial Records........................................ 33
11.3 Financial Reports........................................ 33
11.4 Tax Reports.............................................. 34
ARTICLE XII.
DISSOLUTION, LIQUIDATION AND TERMINATION
12.1 Events Causing Dissolution............................... 34
12.2 Liquidating Agent........................................ 34
12.3 Rights as Regards Prospects, Etc......................... 35
12.4 Rights as Regards Seismic Information, Etc............... 37
12.5 Terminating Distributions................................ 38
12.6 Distribution of the Retained Carried Interests, Etc...... 39
12.7 Indemnification of the Liquidating Agent................. 39
12.8 Certain Powers and Rights of the Liquidating Agent....... 40
12.9 Complete Distribution.................................... 40
ARTICLE XIII.
AMENDMENTS AND CONSENTS
13.1 Amendments............................................... 40
13.2 Method of Giving Consent................................. 41
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ARTICLE XIV.
INDEMNIFICATION AND LIABILITY
14.1 Indemnification.......................................... 41
14.2 Indemnity Limitations.................................... 44
14.3 Limitations on Liability................................. 44
14.4 Procedure for Indemnification............................ 44
14.5 Contribution of Net Proceeds from any Claim.............. 45
14.6 Reimbursement............................................ 45
14.7 Third Party Beneficiaries................................ 45
ARTICLE XV.
EFFECTIVE DATE AND GENERAL PROVISIONS
15.1 Effective Date........................................... 45
15.2 Scope.................................................... 45
15.3 Binding Effect........................................... 45
15.4 Headings................................................. 45
15.5 Waiver of Rights to Partition............................ 46
15.6 Violation................................................ 46
15.7 Severability............................................. 46
15.8 Counterparts............................................. 46
15.9 Applicable Laws.......................................... 46
15.10 Notices.................................................. 46
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JOINT VENTURE AGREEMENT
This Joint Venture Agreement (the "Agreement") is entered into as of the
date indicated on the signature page hereto by and between New Edge Petroleum
Corporation (herein called "EPC" or "Managing Venturer"), Edge Group II Limited
Partnership, a Connecticut limited partnership ("Edge Group II"), and the
parties identified on Exhibit A hereto (EPC, Edge Group II and the parties
identified on Exhibit A hereto shall be referred to collectively as the
"Venturers" and each separately as a "Venturer").
ARTICLE I.
ORGANIZATIONAL MATTERS
1.1 FORMATION. The Venturers hereby associate themselves in the
formation of a joint venture (the "Joint Venture"), pursuant to the provisions
of the Texas Uniform Partnership Act, Tex. Rev. Civ. Stat. Ann. Art. 6132b, as
from time to time amended (the "Act").
1.2 NAME. The name of the Joint Venture shall be the EDGE JOINT VENTURE
II. Moreover, the Joint Venture's business may be conducted under any other
name or names deemed advisable by the Managing Venturer. It is acknowledged and
agreed that neither any Venturer nor the Joint Venture have or will have any
rights or interests in the name "Edge" and each agrees upon reasonable notice
received from EPC to change the names of such entities to remove the term "Edge"
therefrom, if ever requested so to do.
1.3 PRINCIPAL PLACE OF BUSINESS. The principal place of business of the
Joint Venture shall be Houston, Texas.
1.4 FILINGS. The Venturers agree to immediately execute all such
certificates and other documents as may be necessary for the Managing Venturer
to accomplish all filing, recording, publishing and other acts as may be
necessary or appropriate to comply with all requirements for the formation,
preservation and operation of the Joint Venture as a general partnership (or
equivalent business organization) in all states of the United States in which
the Joint Venture may conduct its business prior to the actual conduct of such
business in any such state.
1.5 TERM. The Joint Venture shall be effective as of the date hereof
for all purposes, and shall continue in full force and effect for a period of
five (5) years from the Effective Date hereof, unless sooner dissolved and
terminated pursuant to the terms hereof (the "Term"). Thereafter, during the
Wind-Up Period, the Joint Venture shall engage in Winding Up its business and
affairs.
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1.6 Representations, Warranties and Agreements.
(a) EPC represents and warrants that it is a Texas corporation
which has been duly formed, and is validly existing and in good standing
with all requisite corporate power to carry on its business.
(b) Edge Group II represents that it is a limited partnership,
which has been formed under the laws of the State of Connecticut, with
Napamco, Ltd., a New York corporation, and John Sfondrini as the general
partners, and that it is validly existing and in good standing with all
requisite power to carry on its business.
(c) Gulfedge represents that it is a limited partnership which has
been formed under the laws of the State of Texas, with New Edge
Petroleum Corporation, a Texas corporation, as its general partner, and
that it is validly existing and in good standing with all requisite
power to carry on its business.
(d) Edge Group Partnership represents that it is a general
partnership which has been formed under the laws of the State of
Connecticut, with Edge Limited Partnership, a Connecticut limited
partnership ("Edge I"), Edge II Limited Partnership, a Connecticut
limited partnership ("Edge II"), and Edge II Limited Partnership, a
Connecticut limited partnership ("Edge III"), as its general partners,
and John Sfondrini as the Authorized Person, and that it is validly
existing and in good standing with all requisite power to carry on its
business.
(e) Each Venturer represents and agrees to furnish the other with
any and all information which shall be reasonably requested, and to
afford the other the opportunity to ask questions of and receive answers
from the other and to obtain any additional information (to the extent
such information is accessible or can be obtained without unreasonable
effort or expense).
(f) Each Venturer agrees to pledge its interest in the Joint
Venture to RIMCO to secure the obligations of the Joint Venture as set
forth in the Loan Agreement, on terms which are acceptable to both
Venturers and RIMCO, which terms shall include that the debt evidenced
by the Loan Agreement is non-recourse to the Venturers.
(g) Each Venturer agrees that the Joint Venture shall assume and
discharge and perform the obligations (but only those arising after the
occurrence of the Effective Date) under that certain agreement by and
between the Old Joint
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Venture and James C. Calaway dated February 2, 1989 (herein referred to
as the "Two Percent Agreement").
(h) Each Venturer respectively represents and warrants for itself
that (i) the execution and delivery by it of this Agreement, and
consummation of the transactions contemplated herein have been duly
authorized by all necessary corporate or partnership action as the case
may be, and (ii) this Agreement constitutes the valid and binding
obligation of each respective Venturer enforceable against it in
accordance with its terms, subject to (x) the principles of equity; and
(y) bankruptcy, insolvency, and other laws relating to creditors'
rights.
(i) Edge Group II represents, warrants and covenants that (a) it
has requested from its prospective limited partners appropriate
information in the form of investor certifications for the purpose of
verifying that such investors are "accredited investors" as defined in
SEC Reg D; (b) it has used its best efforts to assure that its offering
of limited partnership interests in the Edge Group II is in compliance
with Reg D, or with Section 4(2) or 3(b) of the Securities Act of 1933,
as amended, and any applicable state blue sky laws; and (c) it has
imposed upon the holders of limited partnership interests in the Edge
Group II, sufficient transfer limitations on the interests in order that
the offering of limited partnership interests in the Edge Group II
complies with Reg D.
(j) Each Venturer agrees and acknowledges that the Joint Venture
shall assume and discharge and perform the obligations (but only those
arising after the occurrence of the Effective Date) to RIMCO as set
forth in that certain agreement (the "RIMCO Agreement") between RIMCO
and EPC dated May 1, 1990, wherein EPC agreed, among other things, to
allow RIMCO to purchase up to twenty percent (20%) of any EPC prospect.
ARTICLE II.
DEFINITIONS
When used herein, the following words shall have the meaning assigned to
them:
"ADDITIONAL CAPITAL CONTRIBUTION" means the amount of additional cash
the Venturers agree to contribute to the capital of the Joint Venture, including
amounts provided in Section 4.2.
"AFFILIATE" means, when used with reference to a specified Venturer, (a)
any Person directly or indirectly controlling,
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controlled by, or under common control with such Venturer; (b) any officer,
director or partner of such Venturer; and (c) any Person in which a Venturer is
a general partner.
"AGREEMENT OF SALE" means a certain agreement of purchase and sale, in
form and substance satisfactory to EPC and the EG II Venturer pursuant to which
the Joint Venture will purchase from the Old Joint Venture the assets and assume
certain liabilities of the Old Joint Venture, as more fully set forth in Section
7.2(b) hereof.
"AVAILABLE CASH" means, at the time of determination, all Joint Venture
cash, from whatever source derived, including operating profits and insurance
proceeds, whether held in the form of cash, checking accounts, demand deposits
or short-term marketable securities.
"CAPITAL CONTRIBUTIONS" means for any Venturer the Initial Capital
Contribution and Additional Capital Contribution of such Venturers (or the
predecessor holder of the Interest of such Venturer).
"CARRIED INTERESTS" means any interests, including without limitation,
reversionary working interests, royalty interests, and any other forms of
promoted or carried interests, in and to Leases, retained or received by the
Joint Venture upon or in connection with the sale by or on behalf of the Joint
Venture of a Prospect. "Carried Interests" as used herein shall be subject to
the provisions of Section 1.6(e) herein. For purposes of this Agreement, the
term "carried Interests" shall also indicate Reserves owned by the Joint
Venture, however acquired.
"CODE" means the Internal Revenue Code of 1986, as amended (or any
corresponding provisions of succeeding law).
"CONTRIBUTED RESERVES" means the reserves and assets indicated on
Exhibit A hereto which have an agreed value as set forth on Exhibit A.
"DIRECT COSTS" shall mean all amounts paid, incurred or proposed to be
incurred, whether by the Joint Venture or the Managing Venturer for the Joint
Venture for the acquisition, holding, development, and marketing of specific
Leases or Prospects. Direct Costs shall include, without limitation, all of the
items set forth below, all subject to the foregoing definition: amounts for
lease bonuses to landowners or others; commissions paid to lease brokers; costs
of title opinions; fees paid to and expenses of project managers and land
persons or scouts who acquire leases; recording fees; costs of abstracts; fees
and salaries (including advances) of geologists, landmen, engineers, draftsmen,
geophysicists, project managers or any other persons who perform
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similar services together with all social security taxes, health insurance
benefits, professional dues, log library costs, parking and worker's
compensation costs; costs of performing or acquiring seismic data (but not to
include seismic which is an Indirect Research and Development Cost), seismic
exploration rights and options (but only to the extent permitted by this
Agreement); accounting and legal fees relating to the acquisition, holding,
development and marketing of specific Leases or Prospects; consideration paid to
others for acquisitions or assignments of leasehold interests or rights to
acquire or retain interests; all costs of the offering for sale and sale of
specific Leases or Prospects; any transfer taxes; printing, drafting or
duplication of project materials, costs incurred in the acquisition,
assimilation, and recording of geological and geophysical data, the cost of data
processing services, computer software, travel and out-of-pocket expenses of
employees of EPC incurred in connection with specific Leases or Prospects.
Direct Costs shall also include any and all other charges similar to the
foregoing, whether mentioned herein or not, which in the reasonable and good
faith opinions of both Venturers are properly classified as Direct Costs,
provided that the cost falls within the definition of Direct Costs expressed in
the first sentence of this paragraph. Direct Costs shall not include any costs
which are Indirect Research and Development Costs.
"EDGE GROUP I" means the Edge Group Partnership, a general partnership
with Edge Limited Partnership, Edge II Limited Partnership and Edge III Limited
Partnership, as the general partners thereof, and John Sfondrini, as the
managing partner.
"EFFECTIVE DATE" means the date when this Agreement is executed by all
Venturers.
"EXCESS NET CASH FLOW" means the annual net income of the Joint Venture
computed in accordance with generally accepted accounting principles as set
forth in the statements delivered pursuant to Section 11.3 hereof from which
shall be deducted: (i) twenty percent (20%) of the amount which the Joint
Venture shall initially list on its books for any intangible assets acquired by
the Joint Venture from the Old Joint Venture; and (ii) amounts paid or
anticipated to be paid for the twelve (12) month period following the date of
the most recent computation of Net Income on account of principal and interest
under the Loan Agreement, or any other indebtedness incurred with the approval
of both Participating Venturers. For purposes of subprovision (i), if any
portion of the acquisition by the Joint Venture of the assets to be acquired
pursuant to the Agreement of Sale is required by the independent auditors for
the Joint Venture to be accounted for as a "rollover" or some similar
classification whereby no new consideration is deemed to have been given, then
for purposes of subprovision (i), the Joint Venture shall be deemed to have an
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amount of intangible assets, such amount determined by multiplying the total
purchase price for the assets purchased pursuant to the Agreement of Sale by the
percentage which is deemed to be a rollover, as aforesaid.
"INCAPACITY" or "INCAPACITATED" means, with respect to any Venturer,
(i) the filing of a petition in bankruptcy, or (ii) the dissolution or
termination (other than by merger or consolidation), as the case may be, unless,
in the case of a dissolution, such Venturer is reconstituted and its business
continued as provided in its organizational documents.
"INDIRECT COSTS" means any and all costs or amounts paid, incurred or
proposed to be incurred directly or indirectly, whether by the Joint Venture or
the Managing Venturer and for the benefit of and allocable to the Joint Venture,
which are neither Direct Costs, Reserve Costs, Indirect Research and Development
Costs or costs of Capital Items, including, without limitation, the $40,000
annual consulting fee due James C. Calaway under the agreement dated March 18,
1989 between James C. Calaway and EPC.
"INDIRECT RESEARCH AND DEVELOPMENT COSTS" means all costs incurred for
regional seismic and other research and development data which costs are not, in
the exercise of the Managing Venturer's reasonable judgment, allocable as a
Direct Cost of the Joint Venture. It shall not include any Nonproprietary
Seismic or other seismic acquired by the Joint Venture from the Old Joint
Venture.
"INITIAL CAPITAL CONTRIBUTIONS" means the cash amounts, and the agreed
value of the Contributed Reserves, contributed to the Joint Venture by the
Venturers as provided in Section 4.1.
"INTEREST" means the entire ownership interest of a Venturer in the
Joint Venture at any particular time, including the rights and obligations of
such Venturer under this Agreement and the Act.
"LEASES" means full or partial interests in oil and gas leases,oil and
gas mineral rights, including applications for federal and state leases, fee
rights, licenses, concessions or other rights authorizing the owner to explore
for, drill, produce and sell oil, gas and other hydrocarbons, as well as rights
to share in revenues from such activities and interests, and contractual rights
to acquire any such interest.
"LOAN DOCUMENTS" means any loan agreement, promissory notes, interest
deferral notes, mortgages, security agreements, collateral mortgages, collateral
mortgage notes and any and all other agreements, instruments, certificates or
undertakings executed in connection with a borrowing by the Joint Venture of up
to $4,500,000 from RIMCO or other source acceptable to the Venturers,
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on which loan the Venturers shall have no liability, other than their interests
in the Joint Venture.
"NONPROPRIETARY SEISMIC" means seismic data purchased or obtained from
third parties where the purchaser obtains the right to use such data, but may
not sell it.
"NOTIFICATION" means a writing containing the information required by
this Agreement to be communicated to any Person, sent by registered or
certified United States mail, return receipt requested, postage prepaid, to such
Person at the last known address of such Person, the date of the mailing being
deemed the date of the giving of Notification; provided, however, that any
communication containing the information sent or delivered to the Person and
actually received by the Person shall constitute Notification for all purposes
of this Agreement.
"OLD EPC" means old Edge Petroleum Corporation, a wholly-owned
subsidiary of EPC.
"OLD JOINT VENTURE" means the old Edge Joint Venture between Edge
Petroleum Partnership and Edge Group I, evidenced by that certain Operating
Agreement dated July 1, 1987.
"PARTICIPATION AGREEMENTS" means an agreement whereby the Joint Venture,
or the Managing Venturer for the benefit of the Joint Venture, agrees, as the
owner of relevant Leases, or working interests, to sell and assign its interest
in certain Leases to one or more Persons.
"PARTICIPATING VENTURERS" means EPC and Edge Group II.
"PERSON" means any individual, partnership, corporation, trust or other
entity.
"PROPRIETARY SEISMIC" means seismic data other than Nonproprietary
Seismic.
"PROSPECT" means a geographical and/or geological area deemed by the
Managing Venturer to be prospective for the accumulation of production of oil,
gas, condensate, or other hydrocarbons, or an interest therein, including,
without limitation, any Leases acquired or considered for acquisition by the
Joint Venture.
"RESERVE COSTS" means any and all expenditures and costs incurred by the
Joint Venture or the Managing Venturer on behalf of the Joint Venture with
respect to the Contributed Reserves, any retained Carried Interests and any
working interests retained by the Joint Venture in Prospects which it sells or
offers for sale, including, without limitation, amounts to be paid with respect
to any operating agreements that may pertain thereto, as well as
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intangible drilling costs, lease operating expenses, production and severance
taxes, ad valorem taxes, lease and well equipment, pipelines and gathering
systems, and any costs similar to the forgoing, whether mentioned herein or not.
"RESERVES" means the rights to ownership of oil and gas or other
hydrocarbon interests, whether by virtue of a working interest, royalty
interest, net profits interest, production payment right, back in, carried
interests, and any other similar type rights.
"RIMCO" means collectively RIMCO Partners, L.P. II, RIMCO Partners, L.P.
III and RIMCO/NYC, L.P.
"SHARING RATIOS" means initially as to each Venturer as set forth
on Exhibit B. After the occurrence of Sharing Ratio Shift A, and Sharing Ratio
Shift B, the Sharing Ratios of the Venturers will be as set forth on Exhibit B.
"SHARING RATIO SHIFT A" is that point in time, whether such occurs
during the Term hereof, or during the Wind-Up Period, when the total amount
of (i) cash, (ii) the value of Carried Interests actually distributed to the
Venturers (with values being determined as set forth in Section 6.3) and (iii)
the value of any other property distributed to the Venturers, pursuant to
Section 12.5 hereof, equals the Sharing Ratio Shift A Amount. Upon the
occurrence of Sharing Ratio Shift A, all subsequent distributions based upon
Sharing Ratios shall be made based upon the Sharing Ratios after the occurrence
of Sharing Ratios Shift A, regardless of any other subsequent factors,
including, without limitation, whether the value of any Carried Interests
distributed to the Venturers shall decrease or diminish to an amount below the
Sharing Ratio Shift A Amount. The foregoing notwithstanding in the event that
there shall be a title failure with respect to any Carried Interest previously
distributed, the value which was attributed to the Carried Interest when
distributed shall be adjusted to reflect the diminished valuation which the
Carried Interest would have received at the time it was distributed, if such
title failure had been known, and if as a result of such change a Sharing Ratio
Shift which had otherwise occurred would not have occurred at the time the
Sharing Shift did occur, then 100% of future distributions will be made to the
Venturers other than EPC in an amount equal to the amount of any distributions
made to EPC which would not have been made to it had the Carried Interest been
valued at the diminished value and the Sharing Ratio shall revert to what it was
before the Sharing Ratio Shift. The 100% distributions will not be applied for
purposes of determining a subsequent Sharing Ratio Shift. Further, if any such
decrease occurs, no prior distribution (either of cash or Carried Interests)
shall be affected by such subsequent change in value, such affecting only future
distributions.
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"SHARING RATIO SHIFT A AMOUNT" shall mean the amount for each Venturer
set forth on Exhibit B, subject to the adjustments set forth on Exhibit B.
"SHARING RATIO SHIFT B" is that point in time, whether such occurs
during the Term hereof, or during the Wind-Up Period, when the total amount of
(i) cash, (ii) the value of Carried Interests actually distributed to the
Venturers (with value being determined as set forth in Section 6.3), and (iii)
the value of any other property distributed to the Venturers, pursuant to
Sections 12.5 hereof, equals the Sharing Ratio Shift B Amount. Upon the
occurrence of Sharing Ratio Shift B, all subsequent distributions based upon
Sharing Ratios shall be made based upon the Sharing Ratios after the occurrence
of Sharing Ratio Shift B, regardless of any other subsequent factors, including,
without limitation, whether the value of any Carried Interests distributed to
any Venturer shall decrease or diminish to an amount below the Sharing Ratio
Shift B Amount. Furthermore, if any such decrease occurs, no prior distribution
(either of cash or Carried Interests) shall be affected by such subsequent
change in value.
"SHARING RATIO SHIFT B AMOUNT" means an amount six times the Sharing
Ratio Shift A Amount.
"SIMULATED DEPLETION DEDUCTIONS" means the simulated depletion allowance
computed by the Joint Venture with respect to each oil and gas property by using
either the cost depletion method or the percentage depletion method (computed in
accordance with Code Section 613 at the rates specified in Section 613(c)(5)
without regard to the limitation of Section 613A, which theoretically could
apply to any partner) for each taxable year that the property is owned by the
Joint Venture and subject to depletion, in accordance with Treas. Reg. Section
1.704-1(b)(2)(iv)(k).
"SIMULATED GAINS" and "SIMULATED LOSSES" means, respectively, the
simulated gains or simulated losses computed by the Joint Venture with respect
to its oil and gas properties pursuant to Treas. Reg. Section
1.704-1(b)(2)(iv)(k).
"EG II VENTURER" means the Edge Group II.
"TAXABLE PERIOD" means each calendar year which begins hereafter.
"WINDING-UP" means the period during which the affairs of the Joint
Venture are terminated and the liquidation and sale of the assets of the Joint
Venture is accomplished, such process commencing when the Joint Venture is
dissolved for any reason.
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"WIND-UP PERIOD" means a period not to exceed two (2) years during which
Winding-Up of the affairs of the Joint Venture shall occur.
ARTICLE III.
PURPOSE
The purpose of the Joint Venture is to engage in the business of
Prospect generation and sales, and activities related thereto, within the
domestic United States and offshore state waters. Without limiting the
generality of the foregoing, the Joint Venture shall (a) conduct geological and
geophysical research for the purpose of subsequently acquiring oil and gas
leasehold interests covering oil and gas Prospects, all within the domestic
United States and offshore state waters; (b) acquire oil and gas leasehold
interests, all within the domestic United States and offshore state waters; (c)
prepare the oil and gas Prospects for market; and (d) sell such Prospects by
means of Participation Agreements, and other means, for, among other things,
cash consideration, plus Carried Interests. In connection with this purpose, the
Joint Venture shall engage in any other activities related or incidental
thereto, including, without limitation, the purchase, lease or license of
seismic data. The Joint Venture may also retain and manage working interests in
Prospects which it sells or offers for sale. Further, the Joint Venture shall
manage the oil and gas interests transferred into the Joint Venture by EPC, any
generated or received during its operations, and any Carried Interests, prior to
their distribution to the Venturers. The Joint Venture shall not engage in any
other business activity.
ARTICLE IV.
CAPITAL CONTRIBUTIONS
4.1 INITIAL CAPITAL CONTRIBUTIONS. Upon the execution of this
Agreement, the Venturers shall make the contributions indicated on Exhibit A
hereto.
4.2 ADDITIONAL CAPITAL CONTRIBUTIONS.
--------------------------------
(A) NATURE OF CONTRIBUTIONS.
-----------------------
(i) Venturers EPC and Edge Group I agree to contribute to the
Joint Venture as Additional Capital Contributions on or before
July 1, 1992 the amounts indicated on Exhibit C.
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(ii) Venturer Edge Group II does hereby sell and assign to the
Joint Venture, without recourse, those certain promissory notes due
January 8, 1993, more particularly identified on Exhibit D hereto, as
its Additional Capital Contribution.
(iii) Venturer Gulfedge does hereby sell and assign to the Joint
Venture, without recourse, those certain promissory notes due January 8,
1993, more particularly identified on Exhibit E hereto, as its
Additional Capital Contribution.
(b) Certain Defaults.
(i) In the event that any maker of a note delivered to the Joint
Venture by Edge Group II shall fail to pay such note as and when due,
Edge Group II agrees to cooperate fully with the Joint Venture in
collecting such note, and agrees to use its best efforts to implement at
its expense any of the remedies available to Edge Group II as set forth
in Section 6.3 of the Edge Group II Agreement of Limited Partnership,
all as the Joint Venture shall designate, for the benefit of the Joint
Venture to the extent of what is owed on such note, and only to the
extent not inconsistant with what the Joint Venture is doing to collect
such note.
(ii) In the event that any maker of a note delivered to the
Joint Venture by Gulfedge shall fail to pay such note as and when due,
Gulfedge agrees to cooperate fully with the Joint Venture in collecting
such note, and agrees to implement at its expense any of the remedies
available to Gulfedge as set forth in Section 6.3 of the Gulfedge
Agreement of Limited Partnership, all as the Joint Venture shall
designate, for the benefit of the Joint Venture.
Other than the foregoing, there shall be no obligation on the part of any
Venturer to make any additional capital contributions to the Joint Venture.
4.3 Capital Accounts.
(a) A capital account shall be established for each Venturer which shall
consist of the cash amount of such Venturer's Initial Capital Contribution
plus the agreed value of the Contributed Reserves contributed to the Joint
Venture by EPC, and the agreed value of any other property contributed by
any other Venturer, increased by (i) the cash amount of any Additional
Capital Contributions made by such Venturer to the Joint Venture pursuant to
this Agreement, and (ii) all net
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income and gains allocated to such Venturer pursuant to Sections 5.1, 5.3
and 5.4; and decreased by (i) the cash or fair market value of property
distributed to such Venturer pursuant to this Agreement, and (ii) all net
losses and deductions, allocated to such Venturer pursuant to Sections 5.1
and 5.3.
(b) A Venturer's Capital Account shall be increased by the amount of
Simulated Gains allocated to such Venturer, and decreased by the amount of
simulated Depletion Deductions and Simulated Losses allocated to such
Venturer. Simulated Depletion shall be allocated to the Venturer in the same
proportion as such Venturers were properly allocated the adjusted tax basis
of such property. The aggregate Capital Account adjustments for simulated
percentage depletion allowances with respect to an oil and gas property of
the Joint Venture shall not exceed the aggregate adjusted tax basis
allocated to the Venturer with respect to such property. The Capital
Accounts of the Venturers shall be adjusted upward by the amount of any
Simulated Gain in proportion to such Venturer's allocable shares of the
portion of the total amount realized from the disposition of such property
that exceeds the Joint Venture's simulated adjusted basis in such property.
The Capital Accounts of such Venturers shall be adjusted downward by the
amount of any Simulated Loss in proportion to such Venturers' allocable
shares of the total amount realized from the disposition of such property
that represents recovery of the Joint Venture's simulated adjusted basis in
such property.
(c) Upon the occurrence of a Sharing Ratio Shift, the contribution of
additional money or property to the Joint Venture (other than in accordance
with the then Sharing Ratios of the Venturers), the admittance of an
additional Venturer, distribution of property to a Venturer (other than in
accordance with the then Sharing Ratios of the Venturers), or upon
liquidation, the Venturers' Capital Accounts shall be adjusted to reflect a
revaluation of Joint Venture property. The adjustment shall be based on the
fair market value of the property as of the adjustment date as determined in
Section 6.3. Any such adjustments shall be allocated among the Venturers as
provided in Sections 5.1 and 5.3. Capital Accounts shall be adjusted in
accordance with Treas. Reg. Section 1.704-1(b)(2)(iv)(g) for allocation of
depreciation, depletion, amortization, and gains or loss as computed for
book purposes with respect to such property. The Joint Venture's
distributive shares of depreciation, depletion, amortization, and gain or
loss, as computed for tax purposes with respect to such property shall take
account of the variation between the adjusted tax basis and book value of
such property in the same manner as required by Code Section 704(c) with
respect to contribution property.
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(d) The foregoing provisions and the other provisions of this
Agreement relating to the maintenance of Capital Accounts are intended
to comply with Regulations Section 1.704-1(b)(2)(iv), and shall be
interpreted and applied in a manner consistent with such Regulations.
The Venturers also shall make any adjustments that are necessary or
appropriate to maintain equality between the Capital Accounts of the
Venturer and the amount of Joint Venture capital reflected on the Joint
Venture's balance sheet, as computed for book purposes in accordance
with Regulations Section 1.704-1(b)(2)(iv)(q).
4.4 INTEREST ON CONTRIBUTIONS. The Venturers shall receive no interest
on their contributions to the capital of the Joint Venture.
4.5 NO WITHDRAWAL OF CAPITAL CONTRIBUTIONS. No Venturer shall be
entitled to withdraw any part of its Capital Contribution or its Capital Account
or to receive any distribution from the Joint Venture, except as provided in
Articles VI and XII.
4.6 NO OBLIGATION TO RESTORE NEGATIVE CAPITAL ACCOUNTS. No Venturer
shall be obligated following the liquidation of its Interest in the Joint
Venture, upon the liquidation of the Joint Venture, or otherwise, to restore to
the Joint Venture (or to pay to the other Venturers) any negative Capital
Account it may have in the Joint Venture. In light of the allocations of income
and loss pursuant to Article V, the current distributions of cash or property
pursuant to Article VI and the distributions of cash or property in liquidation
of the Joint Venture pursuant to Article XII, the Venturers do not contemplate
that any Venturer will have a negative Capital Account upon the liquidation of
the Joint Venture.
ARTICLE V.
ALLOCATIONS OF INCOME AND LOSS
5.1 INCOME AND LOSS. Except as provided in Sections 5.3 or 5.4, all net
income, gains, losses and deductions (or items thereof) for each Taxable Period
shall be allocated to the Venturers in accordance with their respective Sharing
Ratios.
5.2 PRECONTRIBUTION GAIN. In accordance with Section 704(c) of the Code
and the regulations thereunder, gain, loss and deduction (but not revenue
resulting from the sale of oil and gas production and not lease operating
expenses) with respect to the Contributed Reserves that have been contributed to
the capital of the Joint Venture by EPC pursuant to Section 4.1(b) shall, for
federal income tax purposes, be allocated between the Venturers so as to take
account of the variation between the adjusted basis of such
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reserves to the Joint Venture for federal income tax purposes and its agreed
value as set forth in Exhibit A. Consistent with the purposes of Section 704(c),
deductions for tax purposes with respect to the Contributed Reserves shall be
allocated entirely to the Venturers other than EPC and gain for tax purposes
with respect to the Contributed Reserves shall be allocated to EPC, until the
precontribution gain (Section 704(c) gain) has been eliminated. The allocations
contained in this Section 5.2 are intended to comply with the provisions of
Section 704(c) of the Code.
5.3 CORRECTIVE ALLOCATIONS. Notwithstanding Section 5.1 and commencing
at the start of the Wind-Up Period, allocations of income (including gross
income, if necessary), gain, loss or deduction (or items thereof) shall be made
in a reasonable manner to the Venturers, as applicable and to the extent
necessary, to realign the Capital Accounts of the Venturers, to the greatest
extent possible, so that such accounts will be in accordance with the Sharing
Ratios of the Venturers at the time of the liquidation of the Joint Venture.
5.4 MINIMUM GAIN CHARGEBACK. Notwithstanding any other provision of
this Article V, if there is a net decrease in Joint Venture minimum gain, as
defined in Temp. Reg. Section 1.704-1T(b)(4)(iv)(c), during any Joint Venture
fiscal year, the Venturers shall be allocated items of Joint Venture income and
gain in accordance with Temp. Reg. Section 1.704-1T(b)(4)(iv)(e). This
Section 5.4 is intended to comply with the minimum gain chargeback requirement
in such Section of the Regulations and shall be interpreted consistently
therewith.
5.5 TRANSFER OF INTEREST. All net income, gains, losses, and deductions
(or items thereof) of the Joint Venture allocable to any Interest which may have
been transferred during a Taxable Period shall be allocated between the
transferor and the transferee based upon that portion of the particular calendar
year during which each was recognized as owning such Interest, without regard to
the results of Joint Venture operations during particular portions of the
calendar year and without regard to whether cash distributions were made to the
transferor or transferee during such calendar year. In the event any Interest in
the Joint Venture is transferred in accordance with the terms of this Agreement,
the transferee shall succeed to the Capital Account of the transferor to the
extent it relates to the transferred Interest.
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ARTICLE VI.
CURRENT DISTRIBUTIONS AND RELATED MATTERS
6.1 CASH DISTRIBUTIONS. The Managing Venturer shall, upon the demand of
the EG II Venturer, as soon as practicable but in any event no less frequently
than annually, make distributions of one-half of the Excess Net Cash Flow to the
Venturers in accordance with their respective Sharing Ratios, subject to any
restrictions on distributions in the Loan Documents. In making any demand for
distributions hereunder, the EG II Venturer shall be entitled to use its own
discretion, but shall in the exercise of such discretion take into account the
then financial condition of the Joint Venture, the anticipated future needs of
the Joint Venture, and the interests of the Edge Group II and shall additionally
consult with the Managing Venturer regarding such matters. In all events,
subject to any restrictions thereon in the Loan Documents, the Joint Venture
will make minimum annual distributions of Available Cash to the Venturers in an
amount which will provide to each Venturer cash to pay federal income taxes on
the taxable income allocated to such Venturer for federal income tax purposes
pursuant to Article V. If in the judgment of the Managing Venturer there is
sufficient cash to make distributions pro rata (and such is not otherwise
precluded by the Loan Documents), such distributions shall be made in accordance
with Sharing Ratios. If in the judgment of the Managing Venturer pro rata
distributions should not be made, given the financial position and needs of the
Joint Venture, such distributions may be disproportionate, as stated above
(i.e., in accordance with each Venturer's taxable income from the Joint
Venture), subject to the recoupment provisions hereafter set forth. The Joint
Venture shall assume that all such taxable income of each Venturer would be
subject to no other offset, credit or deduction, and taxed at the then-highest
corporate rate. In the event the Joint Venture has distributed to the Venturers
sums to pay federal income taxes, then at such time as the Joint Venture is able
to make distributions to the Venturers pursuant to the terms of the Loan
Documents, distributions shall be made in amounts, to the extent of the
Available Cash (together with interest [treated in accordance with Section
707(c) of the Code] thereon at the prime rate as indicated from time to time in
the Wall Street Journal from the date of the disproportionate distribution to
the other Venturers), which the Managing Venturer shall determine is not
required for the operations of the Joint Venture and which will cause the prior
distributions to be equal to an amount that would have been distributed to each
Venturer if all distributions had been made in accordance with the Sharing
Ratios of each Venturer, at the time of the earlier disproportionate
distribution.
6.2 DISTRIBUTION OF CARRIED INTEREST. All Carried Interests shall be
retained by the Joint Venture for distribution on the
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terms herein set forth. At such time during the Term as a distribution thereof
is permitted by the Loan Documents, the Managing Venturer may in its absolute
discretion determine to distribute to the Venturers any retained Carried
Interests, in accordance with their Sharing Ratios, if, but only if, upon the
distribution thereof, taking the distribution into account, Sharing Ratio Shift
A would occur. Notwithstanding the foregoing, there shall be no distributions of
Carried Interests during the Term until any prior disproportionate cash
distributions shall have been equalized, as set forth in Section 6.1.
Thereafter, all Carried Interests received or retained by the Joint Venture may,
if the Managing Venturer in its absolute discretion determine, be distributed to
the Venturers in accordance with their Sharing Ratios.
6.3 VALUATION OF CARRIED INTERESTS. Carried Interests which are to be
distributed to the Venturers shall be valued as of a date within sixty (60) days
of distribution, at the Joint Venture's expense, by DeGolyer & MacNaughton. Any
cash which the Joint Venture shall receive arising from a Carried Interest which
the Managing Venturer shall have designated for distribution, which cash is
received after the valuation date, but prior to distribution, shall be
distributed to the Venturers in the same proportion as the Carried Interest is
to be distributed. In such case, the value of the Carried Interest shall be as
set forth in such report for purposes of determining Sharing Ratio Shifts, but
the cash so distributed shall not be included for purposes of computing any
Sharing Ratios Shifts. Such evaluation should be based on the present value of
future net revenues from 100% of proved and 40% of probable oil and gas reserves
included therein. In connection with such valuation, Carried Interests shall not
be valued unless the operator shall have issued the initial division order with
respect thereto; additionally, there shall be no price or cost escalations, and
the reserves shall be subject to a ten percent (10%) discount, compounded
monthly over the expected period of realization. Further, in reserve
evaluations, the reserve report will take into consideration the timing of
payments and costs associated with bringing reserves on line. Prices used by the
evaluator at valuation dates shall be the average monthly price for the previous
six (6) months. EPC may on behalf of the Joint Venture, at its discretion,
engage a different, reputable petroleum engineering firm (such firm being
subject to the EG II Venturer's approval, which may be withheld for any reason)
to make such estimates. No revaluation of Carried Interests (or reserves
underlying Carried Interests) will, however, cause any Sharing Ratio Shift
theretofore reached to be lost, or otherwise affect any distributions
theretofore made. Additionally, the Joint Venture shall at its expense cause all
Carried Interests to be valued on the same terms as set forth above, on an
annual basis, unless otherwise agreed by the Participating Venturers.
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6.4 PROPERTY DISTRIBUTIONS. Except as specifically provided to the
contrary herein, no Venturer shall be entitled to demand and receive property
other than cash and Carried Interests in return for its Capital Contributions to
the Joint Venture. The Joint Venture will not make any distributions of property
other than cash and Carried Interests during the Term.
6.5 REPAYMENT OF VENTURER LOANS. Notwithstanding the foregoing, and
subject to the provisions of Section 7.7(a) hereof, if, with the written
approval of both Participating Venturers, any Venturer advances any funds or
makes any other payment to or on behalf of the Joint Venture, unless otherwise
agreed, such advance or payment shall for all purposes be deemed a loan to the
Venture by such Venturer bearing interest from the date thirty (30) days
following the date such advance or payment was made until such loan is repaid at
a floating rate per annum equal to the lesser of (i) the prime rate as indicated
from time to time in the Wall Street Journal or (ii) the highest nonusurious
interest rate allowed by applicable law. No distributions of (excluding,
however, minimum annual distributions of cash to the Venturers to pay income
taxes which shall be paid in all events) Excess Net Cash Flow shall be made to
the Venturers until all such loans have been repaid to such Venturers, together
with interest thereon, as above provided, unless otherwise agreed or agreed in
any document evidencing such loan. If distributions of Excess Net Cash Flow are
insufficient to repay and return all such loans as provided above, the funds
available from time to time shall first be applied pro rata to repay and retire
the oldest loans first and, if any funds thereafter remain available, such funds
shall be applied in a similar manner to remaining loans in accordance with the
order of the dates on which they were made; however, as to loans made on the
same date, each such loan shall be repaid in the proportion that such loan bears
to the total loans made on said date.
6.6 MATTERS REGARDING LOAN DOCUMENTS. The foregoing paragraph
notwithstanding, it is understood and agreed that in the event the Joint Venture
fails to make an interest or principal payment when due on the Loan Documents
and in the event any Venturer pays any amounts owing on the Loan Documents such
payments shall be deemed a loan to the Joint Venture under Section 6.5.
Notwithstanding Section 6.5, such loan shall bear interest at the lower of
fifteen percent (15%) per annum, or the highest nonusurious interest rate
allowed by applicable law, and shall be non-recourse to the other Venturers,
except the Joint Venture shall be fully liable thereon.
6.7 PRO RATA DISTRIBUTIONS. Notwithstanding any other provision herein
to the contrary, all distributions, whether of cash, or Carried Interests or
otherwise shall be made pro rata among all Venturers in accordance with their
Sharing Ratios,
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excepting only the distributions made with respect to taxes, as referenced in
Section 6.1 hereof, which may not be pro rata.
ARTICLE VII.
RIGHTS, POWERS AND DUTIES OF THE VENTURERS
7.1 General. The parties hereto hereby designate EPC as the Managing
Venturer of the Joint Venture, and EPC accepts such appointment. All matters to
be performed by the Managing Venturer shall be performable by it in its
reasonable discretion, subject to its duty of loyalty, unless otherwise
expressly stated.
7.2 Formation Authority. Upon the Effective Date hereof, the Managing
Venturer shall be authorized and empowered for and on behalf of the Joint
Venture to execute and deliver the following and take in connection therewith
the indicated steps and actions:
(a) to cause the Joint Venture to borrow from RIMCO the sum of
$4,500,000 generally on terms and conditions as the Managing Venturer
shall deem necessary, desirable or prudent in connection with such
borrowing, and to cause the Joint Venture to pledge or mortgage any and
all of the present or future assets of the Joint Venture to secure such
loan, as RIMCO may request and the Managing Venturer may determine to be
necessary, desirable or prudent to procure such loan; and to execute any
and all Loan Documents, including without limitation note purchase
agreements, promissory notes, interest deferral notes, mortgages,
security agreements, collateral mortgages, collateral mortgage notes (up
to $10,000,000) and other certificates and agreements and to take all
steps and actions, including without limitation the pledge of any
collateral mortgage note, or note received by the Joint Venture pursuant
to Section 4.2 hereof which the Managing Venturer deems to be necessary,
desirable or prudent to cause the Joint Venture to borrow from RIMCO
such $4,500,000, the execution of such items being conclusive evidence
of such determination;
(b) to cause the Joint Venture to (i) execute an Agreement of
Sale purchasing the assets and assuming the liabilities therein
indicated from the Old Joint Venture on such terms as the Managing
Venturer shall deem necessary, desirable or prudent, the execution by
the Managing Venturer of such agreement being conclusive evidence of
such determination, as well as any and all other documents or agreements
necessary, desirable or prudent in the judgment of the Managing Venturer
to effectuate the acquisition by the Joint Venture of the assets and
liabilities, as set forth in the Agreement of Sale, and (ii) pay any and
all sums due third
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parties by the Joint Venture, including without limitation any sums due
the Old Joint Venture pursuant to the Agreement of Sale; and
(c) no other provision herein contained to the contrary, it is
understood and agreed that the EG II Venturer and the Managing Venturer
shall not execute any of the Loan Documents unless both concur that the
Loan Documents contain terms and conditions satisfactory to them both.
7.3 Authority and Duties of the Managing Venturer. The Managing
Venturer shall, at the Joint Venture's expense, conduct, direct and exercise
full control over all activities of the Joint Venture. Except as otherwise
expressly provided herein, or otherwise in this Agreement, all management powers
over the business and affairs of the Joint Venture shall be vested in the
Managing Venturer. Without limiting the generality of the foregoing, the
Managing Venturer shall, subject to the limitations set forth herein, perform
the duties set forth below:
(a) provide all general day-to-day management functions for the Joint
Venture, and without limiting the generality of the foregoing, the
authority for and on behalf of the Joint Venture to (i) maintain the books
and records of the Joint Venture and pay or cause to be paid all lawful
debts of the Joint Venture, (ii) provide all accounting and billing
functions, and (iii) expend all Joint Venture funds necessary to proper
operations of the Joint Venture;
(b) purchase for and on behalf of the Joint Venture Leases and any
and all seismic data deemed necessary or prudent for the proper operation
of the Joint Venture;
(c) purchase or lease on behalf of the Joint Venture all furniture,
equipment, office equipment, including computers and computer software, and
other assets necessary in connection with the operation of the Joint
Venture;
(d) manage and operate the Contributed Reserves, any retained Carried
Interests and any working interests in oil and gas properties retained or
purchased by the Joint Venture pursuant to the terms of the RIMCO
Agreement;
(e) determine the terms and conditions of sale of any and all
Prospects of the Joint Venture, including the cash portions and any Carried
Interests to be received in connection with the sale thereof, and to enter
into any and all so-called Participation Agreements and other agreements
for the sale of Prospects of the Joint Venture, on any terms which the
Managing Venturer shall deem prudent under the
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circumstances for any considerations which the Managing Venturer shall
determine;
(f) execute for and on behalf of the Joint Venture any and all
agreements purchasing or retaining working interests in any and all of the
Prospects which the Joint Venture may offer for sale from time to time (as
well as working interests which may be offered by others);
(g) designate the bank of banks at which accounts shall be opened and
maintained and shall designate the signatories on such bank accounts and
the removal and replacement of such signatories;
(h) deposit Joint Venture funds which, from time to time, are not
required, in the opinion of the Managing Venturer, for the operation of the
Joint Venture in the Joint Venture bank account, in interest-bearing
accounts, certificates of deposit, or invest such funds in securities
issued or guaranteed as to principal and interest by the United States or
by a person or entity controlled or supervised by and acting as an
instrumentality of the government of the United States which have
maturities of less than one year from the date of investment of similar
securities, including, but not limited to, bank repurchase agreements, so
long as such bank repurchase agreements are for such securities or short-
term tax-exempt securities and are fully collateralized and secured;
(i) purchase insurance, and extend such insurance to cover the
Venturers, and any of their Affiliates, at the Joint Venture's expense
(without allocation), to protect the Joint Venture's properties, assets and
business against loss, including liability to third parties arising out of
Joint Venture activities in such amounts and in such kinds as the Managing
Venturer shall determine;
(j) take all reasonable action that may be necessary or appropriate
for the continuation of the Joint Venture's valid existence as a
partnership and for the acquisition and holding in accordance with the
provisions of this Agreement and applicable laws and regulations, of the
Joint Venture's assets;
(k) use its best efforts to cause the Joint Venture to be formed,
reformed, qualified to do business, or registered under any applicable
assumed or fictitious name, statute or similar law in any state in which
the Joint Venture then owns property or transacts business, if such
formation, reformation, qualification or registration is necessary in order
to permit the Joint Venture lawfully to own property or transact business
in such state; and
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(l) from time to time, prepare and file all certificates (or
amendments thereto) and other similar documents that are required by law to
be filed and recorded for any reason, in the office or offices that are
required under the laws of the State of Texas or any state in which the
Joint Venture is then qualified. The Managing Venturer shall do all other
acts and things (including making publications or periodic filings of this
Agreement or any certificates of the Joint Venture or amendments thereto or
other similar documents) that may now or hereafter be required, or deemed
by the Managing Venturer to be necessary, (i) for the perfection and
continued maintenance of the Joint Venture as a partnership under the laws
of each state in which the Joint Venture is then qualified and (ii) to
cause such certificates or other documents to reflect accurately the
agreement of the Venturers, the identity of the Venturers and the amounts
of their respective Capital Contributions.
7.4 RELIANCE BY THIRD PARTIES. Any Person dealing with the Joint Venture
or the Managing Venturer may rely upon a certificate signed by the Managing
Venturer, as to:
(a) the identity of the Managing Venturer or any other Venturer;
(b) the existence or nonexistence of any fact or facts that
constitute conditions to acts by the Managing Venturer or in any other
manner germane to the affairs of the Joint Venture;
(c) the persons who are authorized to execute and deliver any
instrument or document of the Joint Venture; or
(d) any act or failure to act by the Joint Venture or as to any other
matter whatsoever involving the Joint Venture or any Venturer.
7.5 PERSONNEL. The Managing Venturer shall employ itself and make such
available to the Joint Venture, such personnel as are reasonably necessary for
the Managing Venturer to fulfill its duties hereunder, subject to sufficient
funds being available therefor. In recognition of the fact that the Managing
Venturer's personnel provided to the Joint Venture under this Agreement may
perform services from time to time for itself or for others, this Agreement
shall not prevent the Managing Venturer from performing such services for itself
or for others or restrict the Managing Venturer from so using the personnel
provided to the Joint Venture under this Agreement. The Managing Venturer will
make every effort, consistent with sound business practices, to honor the
specific requests of the EG II Venturer with regard to the assignment of its
employees; however, the Managing Venturer
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reserves the sole right to determine the assignment of its employee, except
that, notwithstanding the foregoing, the Managing Venturer may not, without the
EG II Venturer's consent, assign to any other business activity of the Managing
Venturer any explorationists (including geologists or geophysicists) who are
performing services for the Joint Venture commencing on the Effective Date and
the Joint Venture commences its operations, and explorationists who the Managing
Venturer hires and assigns substantially to Joint Venture operations, subject to
the further exception that this restriction shall not apply to activity if
expressly permitted by the terms of Section 7.11 (a) or (b).
7.6 AUTHORITY OF MANAGING VENTURER TO ACT AS NOMINEE. It is expressly
contemplated that the business of the Joint Venture shall be conducted by EPC,
as the Managing Venturer in EPC's name, for and on behalf of the Joint Venture,
and in connection therewith the Managing Venturer is authorized and empowered to
hold record title in its name to assets and properties, both real and personal,
for the benefit of the Joint Venture, and to execute contracts and agreements,
including, without limitation, Participation Agreements, in its name, but for
the benefit of the Joint Venture. The foregoing notwithstanding, title to any
and all Carried Interests shall, until distributed to the Venturers, be held in
the name of the Joint Venture.
7.7 RESTRICTIONS OF THE AUTHORITY OF THE MANAGING VENTURER.
Notwithstanding any other provision hereof to the contrary, consent and approval
of the EG II Venturer shall be required on any of the following matters:
(a) the creating of any indebtedness, including the amount, terms and
conditions of any money borrowed by or loaned to the Joint Venture;
(b) the granting of any mortgage or lien on all or any part of any
material property of the Joint Venture;
(c) the sale of all or substantially all of the assets of the Joint
Venture except for such sales made in the usual and regular course of
business of the Joint Venture;
(d) the settlement or compromise of all actions, claims and demands
or commencement or defense of any litigation by or against the Joint
Venture (or either Venturer if such action, claim or demand arises out of
the ownership or operation of the Joint Venture);
(e) the taking of any action in contravention of this Agreement;
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(f) the taking of any action that would make it impossible to carry
on the ordinary business of the Joint Venture; or
(g) the confession of a judgment against the Joint Venture, except in
connection with the execution of mortgages and other security instruments.
7.8 AUTHORITY, RIGHTS AND DUTIES OF THE EG II VENTURER. In addition to
the rights set forth in other sections of this Agreement, the EG II Venturer
shall have the rights and authority as set forth below:
(a) The EG II Venturer shall have regular meetings with the Managing
Venturer, no less frequently than quarterly, wherein regular reports about
the business and affairs of the Joint Venture shall be discussed, and the
EG II Venturer shall have non-binding input with respect thereto. In
addition to the foregoing, at such meetings the financial affairs and
commitments of the Joint Venture shall be discussed, and the EG II Venturer
shall have the right to demand the attendance by the Controller and
President of the Managing Venturer, and any other officers of the Managing
Venturer which the EG II Venturer shall designate. The EG II Venturer shall
have the right to have in attendance at such meetings any reasonable number
of representatives and agents which it desires, at its own expense. The
Managing Venturer shall have the right to request as a condition that any
Person attending such meetings execute reasonable agreements, agreeing to
keep confidential all information disclosed at such meetings. The EG II
Venturer shall have the right to request reports and other similar
documentation be prepared for examination and use by the EG II Venturer,
provided the Managing Venturer can prepare such without undue expense or
disruption of its affairs.
(b) Within thirty (30) days after the initiation of any Prospect on
the books of the Joint Venture, the Managing Venturer shall notify the EG
II Venturer of the Prospect and deliver a non-binding budget for such
Prospect for the non-binding review and consideration of the EG II
Venturer. Prior to the disposition by the Joint Venture of any Prospect,
the EG II Venturer shall be notified and shall have the right to voice any
objections thereto, provided that such opinions and objections shall be
advisory and not binding on the Managing Venturer, who shall make the final
determination in its discretion regarding such disposition.
(c) Approval of the budgetary matters set forth in Article VIII
hereof.
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(d) Prior to acquiring any Leases on a Prospect, the consent of the
EG II Venturer shall be obtained. In connection therewith, the Managing
Venturer shall submit to the EG II Venturer a nonbinding proposal for the
development of the Prospect along with a nonbinding budget for the Prospect
proposal, which proposal shall identify the Leases to be acquired and
contain the request for consent. In the reasonable exercise of its
discretion, the EG II Venturer may withhold consent to the acquisition of
the Leases, taking into account, among other things, the then financial
needs, commitments and requirements of the Joint Venture. If the EG II
Venturer fails to notify the Managing Venturer in writing that it objects
to the acquisition of Lease as set forth in the Prospect proposal within
five (5) days after receipt of such notice of intent to acquire Leases, it
shall be deemed to have consented to the acquisition of Leases.
(e) Approvals of any employment agreement between John E. Calaway and
EPC, and approvals of any amendments thereto which are to the detriment of
the Joint Venture, provided that on all matters of compensation, consents
to amendments shall not be unreasonably withheld.
7.9 COMPENSATION AND REIMBURSEMENT OF MANAGING VENTURER.
(a) OPERATIONAL. The Managing Venturer shall be reimbursed on a
monthly basis for all expenditures it incurs or makes on behalf of the
Joint Venture (including amounts paid to any Person to perform services for
the Joint Venture), provided that in no event shall the Managing Venturer
be entitled to reimbursement of any Indirect Costs in excess of the
budgeted amounts therefor, as set forth in Section 8.3 hereof without the
prior approval of the EG II Venturer. In no event shall the Managing
Venturer be obligated to provide services or expend funds, directly or
indirectly on behalf of the Joint Venture or otherwise or in any manner
have any liability, directly or indirectly, if funds are not available
therefor in the Indirect Costs Budget. If the Managing Venturer undertakes
any business activity, it shall be required fairly and reasonably to
allocate all of its general and administrative expenses between the
business of the Joint Venture and such additional new business, but in no
event shall the Managing Venturer be obligated to allocate to itself any
expenses or expenditures which (i) are incurred in managing any assets the
Managing Venturer will have at the Effective Date (including those assets
of Old EPC); (ii) are incurred in managing any assets the Managing Venturer
will receive by, through or as a result of this Joint Venture Agreement; or
(iii) which are otherwise deemed by the Managing Venturer, in its
discretion, to be non-material amounts. Such reimbursements shall be in
addition to any other
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reimbursements to the Managing Venturer stated elsewhere in this Agreement.
The Managing Venturer shall be reimbursed on a monthly basis for all Direct
Costs it incurs or makes, directly or indirectly, on behalf of the Joint
Venture (including amounts paid to any Person to perform services for the
Joint Venture). Such reimbursements shall be in addition to any other
reimbursements to the Managing Venturer stated elsewhere in this Agreement.
(b) ORGANIZATIONAL. The Managing Venturer shall be reimbursed for all
expenses, disbursements and advances incurred or made in connection with
the organization and start-up of the Joint Venture (including, without
limitation, those associated with RIMCO), and the qualification of the
Joint Venture and the Managing Venturer to do business. Furthermore, the
Managing Venturer shall be reimbursed any costs associated with prior
refinancing endeavors engaged in by EPC, including, without limitation,
payments made to, or on account of, The First Boston Company, up to a
maximum of $300,000.
(c) OVERRIDE BONUSES. The Managing Venturer shall have the right to
cause the Joint Venture to grant overriding royalty interests ("ORR") on
Prospects sold by the Joint Venture to geologists, scientists or other
persons who originate Prospects, and up eight-tenths of one percent (.8%)
ORR to any of EPC's presidents, vice presidents, controller, or special
consultants as the Managing Venturer shall determine in its discretion.
7.10 COMPENSATION AND REIMBURSEMENT OF EG II VENTURER. The EG II Venturer
shall receive no compensation for performing its services hereunder.
7.11 OUTSIDE ACTIVITIES. The Venturers and any director, officer, partner
or employee of the Venturers or any Affiliate thereof may have business
interests and engage in business activities in addition to those relating to the
Joint Venture, may engage in any such other businesses and activities, for their
own account and for the account of others, and may own interests in properties,
businesses and activities without having or incurring any obligation to offer
any interest in such properties, businesses or activities to the Joint Venture
or the other Venturer. No provision hereof shall be deemed to prohibit any such
Person from conducting such other businesses and activities. Neither the Joint
Venture nor any of the Venturers shall have any rights by virtue of this
Agreement or the partnership relationship created hereby in any other business
ventures of any such Person.
Additionally, EPC shall be entitled and permitted to purchase from the
Joint Venture interests in any of the Prospects which the
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Joint Venture offers for sale, and may pay an amount therefor which any
independent third-party purchaser has paid or committed to pay (with the
commitment having been accepted by EPC) for an equal interest in the Prospect
(or proportionately adjusted), or in the absence of such payment or commitment,
an amount which is fair to the Joint Venture. The foregoing notwithstanding, EPC
may not purchase such interests with a view to resale thereof, but may form
other joint ventures or other arrangements with other Persons for the purchase
of interests in Prospects of the Joint Venture, provided such arrangements are
made prior to the purchase of such interest in such Prospect.
The foregoing notwithstanding, during the Term, no Venturer shall directly
or indirectly engage in a prospect-generation business within the area
specified in Article III (except through the Joint Venture), except on the
terms hereafter set forth.
(a) EPC shall have the right, without the consent of any other
Venturer, to engage in the same Prospect-generation business as the Joint
Venture, either through new joint ventures or partnerships of any kind with
any Persons, or itself through the formation of subsidiary or affiliated
entities in which outside financing may be raised, or in which other
Persons may invest, provided that within thirty (30) days after any new
joint venture, partnership or subsidiary or affiliate of EPC has been
formed for the purpose of engaging in the same Prospect-generation business
as the Joint Venture, within the area set forth in Article III (herein
called a "New Entity"), the Managing Venturer shall deliver to the New
Entity and to the EG II Venturer a detailed list of all assets of the Joint
Venture (including any intangible assets) which existed on the books and
records of the Joint Venture as of the date of formation of the New Entity
(except cash and accounts receivable of the Joint Venture as well as any
Carried Interests), which list shall indicate the book value of such assets
determined in accordance with generally accepted accounting practices
("GAAP") as of a date within 60 days of the formation of the New Entity.
Within five (5) business days from the date of delivery of the report, the
New Entity shall have the obligation, should it wish to proceed, to pay as
a premium to the Joint Venture an amount equal to twenty-seven and a half
percent (27-1/2%) of the indicated book value of such assets as listed in
the report, provided that the premium must be not less than $4,000,000
during the first 12 months of the Joint Venture and not less than
$2,000,000 during the last 48 months of the Joint Venture. This premium,
when paid, shall be distributable in the discretion of the EG II Venturer,
in accordance with the Venturer Sharing Ratios. Upon such payment, the
Managing Venturer shall be authorized and empowered for and on behalf of
the Joint Venture to transfer to a new joint venture (the "New Venture")
all assets and rights of the Joint Venture
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(except cash and accounts receivable of the Joint Venture [unless the Joint
Venture through the EG II Venturer elects to put in cash and accounts
receivables, in which event cash and accounts receivables shall be
included] as well as any Carried Interests which shall not be transferred),
by special warranty deed to such New Venture subject to any indebtedness,
liens, claims or encumbrances of or against the Joint Venture which shall
be assumed by the New Joint Venture. The Managing Venturer shall also be
authorized and empowered for and on behalf of the Joint Venture to cause
the Joint Venture to execute a joint venture agreement with the New Entity,
on terms and conditions which the Managing Venturer shall negotiate and
determine, subject to the remaining terms hereof. The New Entity may
contribute to the New Venture no assets other than cash and/or Reserves,
without the approval of the EG II Venturer. As between the Joint Venture
and the New Entity, the joint venture agreement shall provide for sharing
of profits and losses in accordance with the percentage of each groups'
contributions to the New Venture, (each such venturer's interests being
herein called its "Proportionate Part"), provided that the contribution of
the Joint Venture shall be valued at its net book value (net of any debts
assumed by the New Venture), including intangible assets, less cash and
accounts receivables unless cash and accounts receivables are contributed
by the Joint Venture, and the contribution of the New Entity shall be the
value of the cash and Reserves (computed in the manner set forth in Section
6.3 hereof). If any portion of the acquisition by the Joint Venture of the
assets to be acquired pursuant to the Agreement of Sale is required by the
independent auditors for the Joint Venture to be accounted for as a
"rollover" or some similar classification whereby no new consideration is
deemed to have been given, then the Joint Venture shall be deemed to have
an amount of intangible assets for purposes of computing its net book
value, such amount determined by multiplying the total purchase price of
such assets purchased pursuant to the Agreement of Sale by the percentage
which is deemed to be a rollover as aforementioned. In such case, all other
provisions hereof shall otherwise remain in full force and effect, except
to the extent modified by the mutual consent of the Venturers, provided
that any expenditures for the Managing Venturers' Indirect Costs, Indirect
Research and Development Costs, as well as matters covered by the Capital
Budget, made after formation of the New Venture, shall be borne by the
Joint Venture and the New Entity in their Proportionate Parts, and the
joint venture agreement with the New Entity shall so provide.
(b) EPC shall also have the right without the consent of any other
Venturer to cause the Joint Venture to enter into a joint venture or
similar agreement with another Person during the Term for the purpose of
engaging in the same Prospect-
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generation business as the Joint Venture, provided that the Managing
Venturer shall deliver to the EG II Venturer notice of its intention to so
form such joint venture (for purposes of this subsection (b) called a "New
Venture"), said notice to specify the relevant, material information
concerning such Person and the proposed general terms of the impending
transaction. Additionally, the Managing Venturer shall provide to the EG II
Venturer such information which the EG II Venturer shall request, to the
extent the Managing Venturer has such information or can acquire such
information without unreasonable expense or delay. The EG II Venturer shall
have the right and option for thirty (30) days to determine how much cash
the Joint Venture shall be given the opportunity to contribute to such New
Venture, provided that if the EG II Venturer shall not have specified how
much it shall cause the Joint Venture to invest within such 30 day period,
then the EG II Venturer shall be deemed to have elected for the Joint
Venture to contribute $100,000 to such New Venture. Upon such
determination, the Managing Venturer shall be authorized and empowered for
and on behalf of the Joint Venture to transfer to the New Venture such sums
on behalf of the Joint Venture and shall also be authorized and empowered
for and on behalf of the Joint Venture to cause the Joint Venture to
execute a joint venture agreement with the venturing Person, on terms and
conditions which the Managing Venturer shall negotiate and determine,
subject to the remaining terms hereof. As between the Joint Venture and the
venturing Person, the joint venture agreement shall at a minimum provide
for sharing of profits and losses in accordance with the percentage of each
groups' economic contributions to the New Venture (each such venturers
interests being herein called its "Proportionate Part"). In such case, all
other provisions hereof shall otherwise remain in full force and effect,
except to the extent modified by the mutual consent of the Venturers,
provided that any expenditures for the Managing Venturer's Indirect Costs,
Indirect Research and Development Costs, made after formation of the New
Venture, shall be borne by the Joint Venture and the venturing person
proportionately, and the joint venture agreement with the venturing Person
shall so provide. For purposes hereof, the term "Promoted Rights" shall
mean an overall increase in the sharing of profits and losses granted to
the party receiving the Promoted Rights in excess of what his interests
would be based on Capital Contributions. Notwithstanding any other term or
provision hereof, the Venturers shall divide any Promoted Rights in
accordance with the Sharing Ratios after the occurrence of the Sharing
Ratio Shift A, as set forth in Exhibit B. This provision (b) shall not be
applicable at all unless the Promoted Rights to be so shared are at least
equal to twelve and a half percent (12-1/2%).
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(c) Any new transactions, whether under subsection (a) or (b) hereof
shall have a term and Wind-Up Period thereof no greater than the time
remaining under this Agreement, including the two-year Wind-Up Period
herein provided. Further, any such transaction shall be structured in such
a way that within such time frames set forth above, the New Venture shall
have sold its assets and properties or distributed them in kind. As a
condition of doing any transaction in subsections (a) or (b) hereof, the
Joint Venture shall have received an opinion of counsel, reasonably
satisfactory to the Participating Venturers, that neither the formation of
any New Venture, nor the transfer thereto of any assets by the Joint
Venture shall precipitate or occasion any adverse federal income tax
consequences to the Joint Venture or the Venturers. If in the opinion of
counsel there are adverse tax consequences, then counsel shall estimate the
extent and amount of nonmaterial federal and state tax consequences and the
amount of the federal and state tax liability which any Venturer may incur,
computed at the then highest income tax rate. A potential income tax
liability of the Venturers computed in the above manner which in the
aggregate exceeds $100,000 shall be considered material. In the event of
nonmaterial adverse consequences, EPC may proceed with the transaction if
it shall first (i) indemnify the other Venturers for any and all liability
for state or federal income taxes which may rise directly or indirectly
from the transaction inclusive of additional taxes due as a result of
receipt of the indemnification, and (ii) EPC shall pay to the other
Venturers the amount tax counsel's opinion estimated would become due as a
result of the transaction prior to effectuating the proposed transaction.
In the event of material adverse tax consequences, Edge Group II may veto
the transaction, notwithstanding EPC's compliance with (i) and (ii) above.
7.12 JOINT VENTURE FUNDS. The funds of the Joint Venture shall be
deposited in such account or accounts in the name of the Joint Venture as are
designated by the Managing Venturer and provided that the Joint Venture's funds
are segregated from other funds of the Managing Venturer. All withdrawals from
or charges against such accounts shall be made by the Managing Venturer or its
officers or agents. Funds of the Joint Venture may be invested as determined by
the Managing Venturer, except in connection with acts prohibited by this
Agreement.
7.13 OTHER MATTERS CONCERNING MANAGING VENTURER.
(a) The Managing Venturer may rely and shall be protected in acting
or refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, bond,
debenture or
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other paper or document believed by it to be genuine and to have been
signed or presented by the proper Person or parties.
(b) Any Venturer shall be entitled to consult with legal counsel
accountants, appraisers, management consultants, investment bankers and
other consultants and advisers selected by it in connection with the
ordinary and proper conduct of the business of the Joint Venture, and shall
not be liable or responsible in damages or otherwise to the Joint Venture
or any Venturer for failing to exercise due with respect to any act or
omission taken in good faith in reliance on and in accord with such advice.
This shall not relieve any Venturer from any other liability or basis of
liability with respect to such act or omission.
ARTICLE VIII.
BUDGETARY AND FINANCIAL MATTERS
8.1 GENERAL. Subject to the remaining terms hereof, the Managing Venturer
shall endeavor and use all reasonable efforts to manage and administer the
operations of the Joint Venture as herein provided so that the costs and
expenses of the operation of the Joint Venture during any applicable period of
the Joint Venture's fiscal year shall be consistent with all budgets as herein
identified insofar as such budgets are stated to be approved by the EG II
Venturer. Variation in expenses for various individual items in the budgets to
be approved by the EG II Venturer shall be permitted; however, the total fiscal
year dollar expenditures by the Managing Venturer shown in any budget to be
approved by the EG II Venturer will not be exceeded in actual expenditures by
the Managing Venturer by more than ten percent (10%) without the prior written
approval of the EG II Venturer. The foregoing limitations shall not apply to
budgets on which approval of the EG II Venturer is not required.
8.2 INITIAL BUDGET. Attached hereto as Exhibit F is a budget of all
Indirect Costs anticipated for the period beginning as of the Effective Date,
ending December 31, 1991 (the "Initial Budget"), which the EG II Venturer does
hereby accept.
8.3 INDIRECT COSTS BUDGET. No later than thirty (30) days before the
beginning of each subsequent calendar year, the Managing Venturer shall prepare
and deliver to the EG II Venturer for its review and approval, a calendar-year
budget of all Indirect Costs ("Indirect Costs Budgets") setting forth an
estimate of all Indirect Costs anticipated for the Joint Venture for the
upcoming calendar year (including, without limitation, all costs associated with
the services rendered by the Managing Venturer). All Indirect Costs Budgets
shall be in the same general format as the Initial
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Budget, and shall contain information on an annual basis, as indicated on the
Initial Budget. Any and all other Indirect Costs Budgets and any request made
to exceed an Indirect Costs Budget, or to incur an expenditure not contemplated
by an Indirect Costs Budget, shall be subject to the approval of the EG II
Venturer, but shall be deemed to have been approved twenty (20) days after any
is presented in writing to the EG II Venturer unless it is expressly
disapproved. Should any Indirect Costs Budget submitted for approval be
disapproved, the EG II Venturer shall in its notice of disapproval advise the
Managing Venturer of the specific reasons therefor, and shall work in good faith
with the Managing Venturer for the expeditious assembling of an acceptable
budget. In no event shall the Managing Venturer be obligated to provide services
or expend funds, directly or indirectly, on behalf of the Joint Venture or
otherwise or in any manner have any liability, directly or indirectly, if
sufficient funds are not available therefor in the Indirect Costs Budgets.
Notwithstanding any provision herein to the contrary, the EG II Venturer shall
not be empowered to withhold approval of the Indirect Costs Budgets if the total
Indirect Costs budgeted are equal to or below what was approved in the prior
year's budget, increased by ten percent (10%) over the preceding year's Indirect
Costs Budget. With respect to the approval of the budget for the calendar year
1992, the approval limits shall be the amount of the Initial Budget
proportionately increased to an assumed annualized budget. Notwithstanding any
other provision to the contrary herein, the Managing Venturer shall be empowered
to expend funds on the following matters (which this Agreement expressly
contemplates are to be borne by the Joint Venture) which shall not be part of an
Indirect Costs Budget: Sections 6.3; 7.3(i); 10.1; 11.3; 12.7; and Article XIV.
8.4 CAPITAL ITEM. Prior to the purchase of (i) furniture or equipment, or
(ii) any other assets by the Joint Venture other than Prospects and matters
included within the definition of Direct Costs ("Capital Items"), the approval
of the EG II Venturer shall be obtained.
8.5 DIRECT COSTS BUDGET. The Joint Venture may not, directly or
indirectly, spend Direct Costs in excess of $1,500,000 per Prospect without the
consent of the EG II Venturer, which consent may not be unreasonably withheld.
On or before each December 1 and June 1 during the Term of this Agreement, and
at such additional times as set forth in Section 7.8(d), the Managing Venturer
shall prepare and deliver to the EG II Venturer for its review a proposed Joint
Venture budget setting forth an estimate of all Direct Costs for each Prospect
and for the Joint Venture for the six-month periods of January 1 to June 30, and
July 1 to December 31, respectively. The budgets shall also reflect the total
of Direct Costs already expended on each such Prospect, and the amount
reasonably anticipated as necessary to complete such Prospect. The EG II
Venturer is not required to approve such budgets, which are
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submitted solely for informational purposes relating to the per Prospect
limitations set forth above. Furthermore, at such time as it becomes feasible,
with respect to any given Prospect, the Managing Venturer shall prepare a
Prospect budget for each Prospect, showing past and anticipated costs associated
with such Prospect in sufficient detail to permit meaningful analysis by the EG
II Venturer, who shall be afforded the opportunity to discuss such budget with
the Managing Venturer, and its personnel.
8.6 INDIRECT RESEARCH AND DEVELOPMENT COSTS. The Managing Venturer shall
be empowered without the consent or approval of the EG II Venturer to expend
from Joint Venture funds up to $1,500,000, cumulatively during the Term of this
Joint Venture, on Indirect Research and Development Costs.
8.7 RESERVE COSTS. The Managing Venturer shall be empowered without the
consent or approval of the EG II Venturer to expend Joint Venture funds to make
any and all Reserve Cost expenditures. Prior to any expenditure of significant
sums with respect to any Reserve Costs, the Managing Venturer shall advise the
EG II Venturer thereof of the facts and circumstances thereof, provided that
this is for informational purposes only and the failure to do so shall not
invalidate any payments made.
ARTICLE IX.
TRANSFERABILITY OF VENTURER'S INTEREST
The Venturers agree that they will not sell, assign, transfer, pledge or
encumber all or any part of their Interest without the prior written consent of
the others. All Venturers may, without consent, pledge rights in up to one-half
of the revenues arising from their Interest, but only if the pledgee agrees
prior to such pledge that upon a foreclosure of the Interest, the other
Venturers shall have a right of refusal to purchase the Interest to be sold on
the bona fide terms and conditions as offered by a purchaser, on a pro rata
basis. The foregoing notwithstanding, each Venturer may, and shall pledge their
interests to secure the obligations of the Joint Venture as set forth in the
Loan Documents, provided such obligations are otherwise non-recourse to the
Venturers.
ARTICLE X.
INCOME TAX MATTERS
10.1 PREPARATION OF TAX RETURNS. The Managing Venturer shall arrange at
the expense of the Joint Venture for the preparation and timely filing of all
returns of Joint Venture income and expense necessary for income tax purposes
and will cause copies of such
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returns or all pertinent information contained therein to be furnished to the
Venturers within ninety (90) days of the close of the fiscal year.
10.2 ORGANIZATIONAL EXPENSES. The Joint Venture shall elect to deduct
expenses incurred in organizing the Joint Venture ratably over a sixty (60)
month period as provided in Section 709 of the Code.
10.3 TAXATION AS A PARTNERSHIP. No election shall be made by the Joint
Venture, or any Venturer, to be excluded from the application of any of the
provisions of Subchapter K, Chapter 1 of Subtitle A of the Code, or from any
similar provisions of any state tax laws.
10.4 TAX MATTERS PARTNER. The Managing Venturer shall be the "Tax Matters
Partner" (as defined in the Code) for the Joint Venture.
ARTICLE XI.
ACCOUNTING PROCEDURE; REPORTS AND INFORMATION
11.1 FISCAL YEAR. The fiscal year of the Joint Venture shall be the
calendar year, unless otherwise determined by the Managing Venturer.
11.2 FINANCIAL RECORDS. The financial books and records of the Joint
Venture shall be kept, and tax returns shall be prepared, on the accrual basis
of accounting in accordance with generally accepted accounting principles. The
Joint Venture's books and records shall be maintained at the Joint Venture's
principal place of business and shall be available for inspection and copying by
each Venturer or its representative (at such Venturer's own expense) at all
reasonable times.
11.3 FINANCIAL REPORTS. Within one hundred twenty (120) days following
the end of each fiscal year of the Joint Venture, the Managing Venturer shall
deliver or cause to be delivered to each Venturer an annual audited report,
including a statement of the Joint Venture's accounts for and as at the end of
such fiscal year (containing a balance sheet and statement of income) prepared
on the accrual basis of accounting, all of which shall be prepared (a) by
independent certified public accountants of national recognition selected by the
Managing Venturer, or if other than nationally recognized accounting firm, as
approved by the EG II Venturer, and (b) at the cost of the Joint Venture.
Within forty-five (45) days after the end of each of the first three (3)
quarterly periods in each fiscal year of the Joint Venture, the Managing
Venturer shall
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deliver an unaudited balance sheet and income statement for each such quarter
for the Joint Venture.
11.4 TAX REPORTS. Within ninety (90) days following the end of each
fiscal year of the Joint Venture, the Managing Venturer shall furnish to the
Venturers a statement setting forth all information relating to the Joint
Venture's operations for such fiscal year as is reasonably required by the
Venturers for the completion of their respective federal, state and other income
tax returns.
ARTICLE XII.
DISSOLUTION, LIQUIDATION AND TERMINATION
12.1 EVENTS CAUSING DISSOLUTION. The Joint Venture shall be dissolved
upon the happening of any of the following events:
(a) the expiration of its Term as provided in Section 1.5;
(b) unanimous agreement of the Venturers; or
(c) the Incapacity of any Venturer.
Additionally, in the event that neither John Sfondrini nor Vincent Andrews
is a general partner of the Edge Group II, then, EPC shall have the right and
option at its sole election to dissolve the Joint Venture within sixty (60) days
after written notice that neither John Sfondrini nor Vincent Andrews is a
general partner of the Edge Group II.
12.2 LIQUIDATING AGENT. Upon the dissolution of the Joint Venture, the
Managing Venturer (or in the event the dissolution is caused by the Incapacity
of the Managing Venturer, such Person as the EG II Venturer shall designate,
including itself) shall act as liquidating agent (the "Liquidating Agent") and
immediately proceed to wind up and terminate the business and affairs of the
Joint Venture. During the Wind-Up Period, no new Prospects will be commenced
for the Joint Venture (or any venture formed under Section 7.11 hereof) with
Joint Venture funds. Upon dissolution of the Joint Venture, a proper accounting
shall be made of the Joint Venture's assets and liabilities and obligations from
the date of the last previous accounting to the date of such dissolution and the
Joint Venture's business and affairs shall be liquidated in an orderly manner in
no event to exceed two (2) years (such period being called the "Wind-Up period")
and such sales of properties of the Joint Venture as may be required for such
purposes shall be made by the Liquidating Agent as more fully hereafter set
forth. In no event, however, shall any of the retained Carried Interests
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be sold by the Joint Venture, such being handled as set forth in Section 12.6
hereof.
12.3 RIGHTS AS REGARDS PROSPECTS, ETC. At any time during the Wind-Up
Period, as regards all Prospects on the books and records of the Joint Venture
as of the date of dissolution, the following shall occur:
(a) On any Prospect on which fifty percent (50%) or more of the
Lease acreage associated with such Prospect as identified in the Prospect
proposal and request for consent to purchase Leases, as set forth in
Section 7.8(d) hereof, has been acquired by the Joint Venture as of the
date of dissolution, EPC shall cause the Joint Venture to acquire the
necessary Leases and perform any other functions it deems necessary in
order to make the Prospect ready for sale, all at Joint Venture's expense,
provided the Joint Venture has the cash necessary to so permit, and to pay
to EPC the costs and expenses indicated hereafter. EPC during such period
will continue to market such Prospects on a best-efforts basis for the
Joint Venture (taking into account any other activities in which EPC may
then be involved and any other Prospects it may then be trying to sell) for
and at the sole expense of the Joint Venture. EPC will be paid by the Joint
Venture all Direct Costs and Indirect Costs for each such Prospect.
Indirect Costs shall be a percentage as determined below of the total
Indirect Costs of EPC at such time. Such percentage of Indirect Costs shall
be determined by dividing (i) the amount of time spent by EPC in making any
Prospects ready for sale and selling such Prospects, by (ii) the total
amount of time spent by EPC on all matters, both Joint Venture and non-
Joint Venture. The amounts of time shall be estimated by EPC in good faith.
If (i) at the end of the Wind-Up Period any such Prospects remain unsold,
or (ii) at any time during the Wind-Up Period the Joint Venture is not
financially able to complete the acquisition of Leases, or pay the
necessary Indirect Costs of EPC, then, at that time, EPC shall have the
right to purchase for cash by special warranty deed any or all of these
Prospects at a price per Prospect equal to such Prospect's accumulated
Direct Costs, provided that if EPC purchases any such Prospect, directly or
indirectly, it agrees that upon the subsequent resale by EPC, directly or
indirectly, EPC will cause 50% of any Carried Interests received by EPC,
directly or indirectly, upon such sale to be paid to the Joint Venture and
thereafter distributed in accordance with the Sharing Ratios. EPC shall be
permitted to select the Prospects which it shall purchase under this
subsection, and shall not be required as a condition of purchase to
purchase all such Prospects, but it shall be required to close within 60
days after the event giving rise to this right.
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(b) On all Prospects on which less than fifty percent (50%) of the
Lease acreage associated with such Prospect has been acquired by the Joint
Venture as of the date of dissolution but at least one Lease has been
acquired, EPC shall have the right to purchase for cash by special warranty
deed all but not less than all of these Prospects as a group from the Joint
Venture at a price per Prospect equal to such Prospects' accumulated Direct
Costs (neither the Joint Venture nor any Venturer being entitled to receive
any Carried Interest thereon). EPC shall have a right to close such
purchase of such Prospects (and if it is going to so close, must do so)
within 60 days from the end of the Term of the Joint Venture.
(c) On all Prospects on which no Lease acreage has been acquired by
the Joint Venture as of the date of dissolution, EPC shall have the right
to purchase by special warranty deed any or all of these Prospects at a
price per Prospect equal to such Prospect's accumulated Direct Costs
(neither the Joint Venture nor any Venturer being entitled to receive any
Carried Interest thereon). If EPC declines to purchase any such Prospect,
then for a period of nine (9) months after such decline, EPC cannot procure
any Leases on such Prospect. EPC shall have a right to close such purchase
of such Prospects (and if it is going to so close, must do so) within 60
days from the end of the Term of the Joint Venture.
(d) If EPC should decline to purchase any Prospect identified in
subsection (b) or (c) above, then within thirty (30) days after such
decision, the Edge Group II may request that any or all such Prospects be
managed by EPC for the benefit of the Joint Venture during the Wind-Up
Period. If the Edge Group II requests EPC manage such Prospects for the
Joint Venture, then EPC shall have the right to cause the Joint Venture to
continue to acquire the necessary Leases and perform any other functions it
deems necessary in order to make the Prospects ready for sale, at Joint
Venture's expense, provided the Joint Venture has the cash necessary to so
permit, and to pay to EPC the costs and expenses indicated hereafter. EPC,
during such period, will continue to market such Prospects on a best-
efforts basis for the Joint Venture (taking into account any other
activities in which EPC may then be involved and any other Prospects it may
then be trying to sell) for and at the sole expense of the Joint Venture.
EPC will be paid by the Joint Venture all Direct Costs and Indirect Costs
as provided below for each such Prospect. The amount of Indirect Costs to
be paid to EPC shall be a percentage of the total Indirect Costs of EPC at
such time and such percentage of Indirect Costs shall be determined by
dividing (i) the amount of time spent by EPC on behalf of the Joint Venture
in making any Prospects ready for sale and selling such Prospect, by (ii)
the total amount of time spent
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by EPC on all matters, both on behalf of the Joint Venture and all non-
Joint Venture matters. The amounts of time shall be estimated by EPC in
good faith. Any proceeds of sales of Prospects (including Carried
Interests) will be distributed and paid in the same manner as proceeds of
Prospects made during the Term. At the end of the Wind-Up Period, if any
such Prospect remains unsold, then for all purposes of this Agreement it
shall be deemed worthless, and each Venturer shall be deemed to own such
Prospect as undivided co-owners, with each party being able to fully
utilize such Prospect to the exclusion of the other, there being no
obligation to account to the other for any profits, income, gain or loss
derived or obtained by any party thereafter as a result of such Prospect.
For Leases which have been executed, these shall be assigned to the
Venturer offering to pay the most therefor. If no Venturer elects to
purchase any such Leases, and such Leases thereafter lapse, any Venturer
for its own account is thereafter free to acquire a new lease or leases on
such Prospects.
(e) In the event that pursuant to any provision of this Section 12.3
the Joint Venture shall not have the funds to permit the completion of any
Prospects (including, without limitation, the payment of the Indirect
Costs of the Managing Venturer), the Venturers shall have the right and
option to contribute their proportionate parts (with proportionate part for
purposes of this subsection being in accordance with the then Sharing
Ratios) of any needed funds, and in the event that any Venturer shall not
contribute its proportionate part and the other Venturers do, then the
Venturer(s) who shall contribute shall be entitled to receive from the
Prospects which shall be so completed a special distribution of one hundred
percent (100%) of the amount it contributed in excess of its proportionate
part of such contribution (which shall not be taken into account for
purposes of computing Sharing Ratio Shifts), payable from the cash proceeds
of sale of such Prospect, before any additional distributions from such
Prospect shall be made to the other Venturers.
12.4 RIGHTS AS REGARDS SEISMIC INFORMATION, ETC. As of the date of
dissolution, EPC shall be entitled to receive and own all Nonproprietary
Seismic, and any and all proprietary regional maps, geological information, well
files, logs, synthetic seismograms, velocity surveys, and any other items which
EPC in its good faith judgment determines to be a part of the Joint Venture's
regional information base, and the parties agree that for purposes of this
Agreement, the deemed value thereof shall be zero. EPC will put up for non-
exclusive license all Proprietary Seismic, subject to EPC's right to withhold
any portion thereof by payment to the Joint Venture of such withheld seismic's
fair market value. The foregoing will apply where the seismic is the sole or
principal
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item sold or licensed, but not where the seismic data is conveyed incidental to
an EPC transaction where the seismic is not the sole or principal item sold or
licensed, including, without limitation, a sale by EPC of its business, or a
Prospect sale by EPC or by any joint venture which it controls or manages. All
cash received upon a non-exclusive license of such Proprietary Seismic by EPC to
a third party shall be taken by the Joint Venture and used or distributed as
herein provided during the Wind-Up Period. Regarding any Proprietary Seismic
not otherwise bought by EPC, EPC shall be able after dissolution of the Joint
Venture to utilize such seismic data for its own purposes, in connection with
any joint ventures, or for any other purpose, without accounting to any Venturer
therefor after the dissolution of the Joint Venture; provided that proceeds of
license of such Proprietary Seismic occurring after the Wind-Up Period, shall be
distributed to the Venturers in accordance with their Sharing Ratios, such as
they would be were the Joint Venture still then in existence. The foregoing
will apply where the seismic is the sole or principal item sold or licensed, but
not where the seismic data is conveyed incidental to an EPC transaction where
the seismic is not the sole or principal item sold or licensed, including,
without limitation, a sale by EPC of its business, or a Prospect sale by EPC or
by any joint venture which it controls or manages.
12.5 TERMINATING DISTRIBUTIONS AND MATTERS. At the commencement of the
Wind-Up Period, the Liquidating Agent shall identify all assets of the Joint
Venture which are other than cash, Carried Interests, Contributed Reserves, or
Reserves, and shall use its best efforts to sell such assets for cash. Either
Participating Venturer may bid on such assets, directly or indirectly, provided
that in such event the bidding Venturer shall notify the other Venturer of its
bid(s). Any Participating Venturer making a bid shall have cash or certified
funds immediately available to it sufficient to effectuate the purchase at its
bid price at the close of the bidding. Each Participating Venturer may counter
bids made by the other. At the conclusion of the bidding, the non-bidding or
unsuccessful Participating Venturer shall have five days to advise the bidding
Participating Venturer that if the bidding Participating Venturer has been
successful, such bid upon assets shall be retained by the Joint Venture and
distributed to the Venturers in kind, at the agreed bid value as designated by
the successfully bidding Participating Venturer. In the event that there
remains any assets of the Joint Venture which have not been sold within twenty
(20) days of the end of the Wind-Up Period, then within such twenty-day period
at such time as shall be designated by the Liquidating Agent, an auction shall
occur at the place designated by the Liquidating Agent, at which all Venturers
shall have the right to attend and bid to purchase for cash all remaining
assets, which shall be sold finally and fully at such auction by special
warranty deed or by assignment with equivalent warranties of title. The rights
of the Venturers to
38
<PAGE>
attend and bid at such auction shall be non-assignable. In the liquidation of
the Joint Venture, payments shall be made of all expenses of liquidation
(including, without limitation, any legal and accounting expenses incurred in
connection therewith) and all debts of the Joint Venture, first, to third-party
creditors and, after payment of all third party creditors, then to any Venturer
who shall properly be a creditor of the Joint Venture pursuant to Section 6.5
hereof, or adequate provision shall be made for the payment thereof.
Notwithstanding anything contained herein to the contrary, cash shall then be
initially distributed and thereafter any Carried Interests as set forth in
Section 12.6 hereof, and thereafter the remaining assets and properties of the
Joint Venture, all in accordance with their Sharing Ratios; provided, however,
that in the event the Joint Venture has distributed to the Venturers sums to pay
federal income taxes, then distributions shall first be made to the Venturers in
amounts which will cause the prior distributions together with such current
distributions to the Venturers to be equal to an amount that would have been
distributed to each Venturer if all distributions had been made in accordance
with the Sharing Ratios of each Venturer at the time the prior disproportionate
distribution was made. Except as may be caused by disproportionate
distributions to pay federal income taxes, the Venturers anticipate and expect
that the Capital Accounts of the Venturers at the time liquidating distributions
are to be made will be in the same ratio as the Sharing Ratios. If this should
be the case, the making of such liquidating distributions in accordance with the
Sharing Ratios will accomplish the same economic result as making the
liquidating distributions in accordance with the Capital Accounts of the
Venturers. If by chance the Capital Accounts (after being adjusted for the
corrective allocations pursuant to Section 5.3, the revaluation of Joint Venture
property pursuant to Section 4.3(c), and as otherwise provided by this
Agreement) at such time are not in the same ratio as the Sharing Ratios at the
time liquidating distributions are to be made, then, immediately prior thereto,
the Capital Accounts of the Venturers shall be adjusted in the manner and to the
extent necessary so that the Capital Accounts will be in the same ratio as the
Sharing Ratios at the time liquidating distributions (in the Sharing Ratios) are
made.
12.6 DISTRIBUTION OF THE RETAINED CARRIED INTERESTS, ETC. At any time
within the Wind-Up Period, as determined by the Managing Venturer in its sole
discretion, subject to the provisions of Section 12.5, the Carried Interests
then retained by the Joint Venture will be distributed to the Venturers in
accordance with the Venturers' Sharing Ratios, with reserves being valued as
set forth in Section 6.3 hereof, provided that any Carried Interests distributed
at the conclusion of the Wind-Up Period shall be valued whether or not the
operator shall have issued a division order with respect thereto. In
liquidation, the Venturers shall use all reasonable efforts to cause any
reserves that then remain from the
39
<PAGE>
Contributed Reserves to be distributed to the Managing Venturer, consistent with
the procedures herein set forth for liquidating distributions.
12.7 INDEMNIFICATION OF THE LIQUIDATING AGENT. The Liquidating Agent (or
any officer, director, shareholder, partner or employee thereof) shall be
indemnified and held harmless by the Joint Venture on the same terms and
conditions as set forth in Article XIV hereof. The indemnification rights
herein contained shall be cumulative of, and in addition to, any and all other
provisions hereof, and rights, remedies and recourse to which the Liquidating
Agent (or any officer, director, shareholder, partner or employee thereof) shall
be entitled in law or at equity.
12.8 CERTAIN POWERS AND RIGHTS OF THE LIQUIDATING AGENT. The Liquidating
Agent shall have all the powers conferred upon the Managing Venturer under the
terms of this Agreement to the extent necessary or desirable in the good faith
judgment of the Liquidating Agent to carry out the duties and functions of the
Liquidating Agent hereunder. The Liquidating Agent shall be entitled to receive
such compensation for its services as shall be reasonably agreed upon by the
Venturers, provided that should the Liquidating Agent be the Managing Venturer,
no additional compensation shall be paid for performing the matters set forth in
Section 12.3, except as therein stated. The Liquidating Agent may resign at any
time upon the giving of fifteen (15) days prior Notification to the Venturers
and may be removed at any time, but only on a showing of cause, by either
Venturer. Upon the Incapacity, removal or resignation of the Liquidating Agent,
a successor and substitute Liquidating Agent (who shall have and succeed to all
the rights, powers and duties of the original Liquidating Agent) shall, within
thirty (30) days thereafter, be designated by the Edge Group II.
12.9 COMPLETE DISTRIBUTION. Distribution of the Joint Venture properties
to the Venturers in accordance with the provisions of this Article XII shall
constitute a complete return to the Venturers of their respective Capital
Contributions. If such distributions are insufficient to return to any Venturer
the full amount of its Capital Contribution, it shall have no recourse against
the Joint Venture or any other Venturer.
ARTICLE XIII.
AMENDMENTS AND CONSENTS
13.1 AMENDMENTS. This Agreement may be amended only with the written
Consent of all of the Venturers.
40
<PAGE>
13.2 METHOD OF GIVING CONSENT. Any consent required by this Agreement
may be given by a written consent given by the consenting Venturer at or prior
to the doing of the act or thing for which the consent is solicited, unless
otherwise indicated herein.
ARTICLE XIV.
INDEMNIFICATION AND LIABILITY
14.1 INDEMNIFICATION. All Venturers shall be indemnified by the Joint
Venture under the following circumstances and in the manner and to the extent
indicated:
(a) In any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, judicial, administrative or otherwise
("Action"), to which any Venturer was or is a party, or is threatened to be
made a party, by reason of the fact that it is or was the Managing Venturer
or a Venturer in the Joint Venture, involving an alleged cause of action
for liability or damages arising out of the ordinary and proper conduct of
the business i) of the Joint Venture, ii) of the Joint Venture, and another
business in which the Joint Venture had an economic interest provided that
the conduct of such other business was permitted by this Agreement or iii)
the conduct of a business in which the Joint Venture had an economic
interest, provided that such other business was permitted by this
Agreement, the Joint Venture shall indemnify to the extent provided by
Subparagraph (b) the Venturer against all expenses, including attorneys'
fees, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by the Venturer in connection with such Action.
The parties agree, without limitation otherwise, on the meaning of the term
"proper" that the negligence of a Venturer shall not constitute improper
conduct of the business of the Joint Venture, nor a breach of trust or
fiduciary duty. Hence the parties intend that this indemnity shall apply
notwithstanding the negligence of a Venturer. The provisions of this
subsection (a) shall not apply to litigation covered by subsection (e).
(b) Where the matter arises out of the conduct of the business of the
Joint Venture and another business in which the Joint Venture had an
economic interest or another business in which the Joint Venture had an
economic interest, the indemnity shall be proportionate to the extent of
the Joint Venture's economic interest in the business activity giving rise
to the litigation.
(c) The Joint Venture shall pay or reimburse, in advance of the final
disposition of any Action, reasonable expenses
41
<PAGE>
incurred by the Venturer who was, is, or is threatened to be made a named
party in an Action, who shall be entitled to indemnification under
subsection (a), after:
(i) the Joint Venture receives a written affirmation by the
Venturer of the good faith belief that it has met the standards for
indemnification under subsection (a) and a written undertaking by or
on behalf of the Venturer to repay the amount paid or reimbursed if it
is ultimately determined that the Venturer has not met those
requirements; and
(ii) a determination, made by independent legal counsel (i.e.
without any prior professional or business relations with the
Venturers or principals of the Venturers) in a written opinion, that
it appears to those making the determination that, based upon the
facts then known to such persons, without any independent
investigation, evidence exists to support the position that the
Venturer is entitled to indemnification under subsection (a) hereunder
(it being agreed that the law firm authoring such opinion shall be
disclosed in advance to the other Venturer).
(d) The written undertaking required by subsection (c) (i) must be an
unlimited general obligation of the Venturer, and shall be accepted without
reference to financial ability to make repayment.
(e) 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 whatsoever arising out of or connected to this
Agreement, the party losing the litigation shall bear the fees and expenses
of the party which prevails in the litigation.
(f) With respect to any Action covered by 14.1(e) herein, the Joint
Venture shall pay or reimburse in advance of the final disposition of such
Action, the reasonable expense incurred by any Venturer who was, is or is
threatened to be made a party in such Action after:
(i) the Joint Venture receives a written affirmation by the
Venturer of the good faith belief that it will prevail in the
litigation and written undertaking by or on behalf of the Venturer to
repay the amount paid or reimbursed if it is not successful in the
litigation, secured by a pledge by the Venturer as set forth in
paragraph below; and
42
<PAGE>
(ii) a determination, made by independent legal counsel in a
written opinion, that it appears to those making the determination
that, based upon the facts then known to such persons, without any
independent investigation, evidence exists to support the position of
the Venturer seeking such advance (it being agreed that the law firm
authoring such opinion shall be disclosed in advance to the other
Venturer).
(g) The written undertaking required by subsection (f)(i) must be an
unlimited general obligation of the Venturer and shall be accepted without
reference to financial ability to make repayment.
(h) Any Venturer receiving payment or reimbursement of legal fees
prior to disposition of any Action either under Subparagraph (c) or (f),
shall be required as a condition to receiving such payment or reimbursement
to pledge one half of the revenue interest attributable to its partnership
interest held by such Venturer free and clear of all liens and encumbrances
other than the lien held by RIMCO, to secure its obligation to repay the
advance, if it is determined that it was not entitled to indemnification or
it does not prevail in the litigation, as the case may be.
(i) Notwithstanding any other provision of this Article to the
contrary, the Joint Venture shall pay or reimburse expenses incurred by any
Venturer in connection with it or its employees' or agents' appearance as a
witness or other participation in an Action involving or affecting the
Joint Venture at a time when the Venturer is not a named defendant or
respondent in the Action.
(j) The Joint Venture may indemnify and advance expenses to an
employee or agent of any Venturer to the same extent that it may indemnify
and advance expenses to the Venturer under this Article, to the extent
determined by the Venture and in the case of the President, any Vice-
President, Controller, General Counsel, and any special consultants of
either Venturer, such indemnity and rights hereunder shall be mandatory.
(k) Notwithstanding any provision in this Article to the contrary, if
any or all of the indemnification provisions contained herein shall be found
invalid, illegal, or unenforceable in any respect, such invalidity, illegality,
or unenforceability shall not affect any other provision hereof; and in such
event this Agreement shall be deemed written as if such provision or provisions
had never been contained herein. Regardless of any invalidity, illegality, or
unenforceability of any provision or provisions contained in this Article, the
parties to this Agreement intend that the Venturers (and its
43
<PAGE>
employees or agents) shall be and hereby are indemnified to the greatest
extent allowable under applicable law in the matters identified in
subsections (a) through (f) above.
(l) The provisions of this indemnity shall be in addition to and not
in lieu of any other rights of indemnity which may exist under Texas law,
as it may exist from time to time.
14.2 INDEMNITY LIMITATIONS. The Joint Ventures' obligation to indemnify
any Venturer shall be limited to the assets of the Joint Venture and shall be
without recourse to the Venturers.
14.3 LIMITATIONS ON LIABILITY. 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 the other Venturer. THIS
PROVISION SHALL NOT RELIEVE A VENTURER FROM ANY OTHER LIABILITY OR BASIS FOR
LIABILITY.
14.4 PROCEDURE FOR INDEMNIFICATION. Each Venturer (the "Indemnified
Venturer") agrees to give the other (the "Other Venturers") prompt written
notice of the filing or commencement of any Action against a Venturer which may
give rise to a request for indemnification hereunder, and each party will
cooperate with the other in determining the validity of any such claim or
assertion. Upon any request for indemnity by any Venturer pursuant to
subsection 14.1 (a) hereof, the Indemnified Venturer shall select counsel with
respect to the claim, loss liability which is the subject of indemnification
subject to the reasonable approval of the other Venturer. The Other Venturers
shall have the right to participate in or monitor the defense of any such third-
party suits, claims or proceedings, (but shall not have the right to invade, or
otherwise take any action to alter, modify, or destroy the attorney client
relationship). All Venturers and the Joint Venture shall cooperate with respect
to any defense, compromise or settlement. The Indemnified Venturer will not
compromise or settle any such action, suit or proceeding without the consent of
the Other Venturers, except that in any Action, if the Indemnified Venturer
advises that it wishes to accept a settlement offer, then in any subsequent
litigation between the Indemnified Venturer on the one hand, and the Joint
Venture or the Other Venturers on the other hand, arising out of such Action
which the Indemnified Venturer wished to settle, the extent of the Indemnified
Venturer's liability, if any, is the amount which the Indemnified Venturer was
willing to accept in settlement. Additionally, the Venture shall indemnify the
Other Venturers for all of the expenses, costs and fees incurred as a result of
the Indemnified Venturer's notice hereunder or claim for indemnity, including
without limitation expenses, costs, and fees incurred in participation in the
44
<PAGE>
selection of counsel or participation or monitoring the defense of the action.
14.5 CONTRIBUTION OF NET PROCEEDS FROM ANY CLAIM. If any Venturer
asserts any claim against any third party including any one or more of its
employees with respect to a claim arising for which such Venturer received
indemnification or payment of legal fees or expenses under this Article, such
Venturer shall contribute the net proceeds of any recovery on the claim (after
deducting legal fees and expenses) to the Venture to be shared by the Venturers
in accord with their Profit Sharing Ratios. No Venturer shall be under no
obligation to assert any such claim.
14.6 REIMBURSEMENT. In any action arising pursuant to subsection (e) in
which the Joint Venture pays or reimburses in advance of the final disposition
of the action the reasonable expense incurred by one Venturer, the Joint Venture
shall be obligated to pay or reimburse and shall pay or reimburse in advance of
final disposition of the action the reasonable legal fees of the Other Venturers
arising out of or in connection with the indemnified claim or action provided
such Venturer shall furnish the affirmations set forth in subsection (f) (i) to
obtain such reimbursement, and shall be required to pledge its revenue interests
as set forth above in subsection (h).
14.7 THIRD PARTY BENEFICIARIES. This section shall not be deemed to
create rights or remedies in third parties except to the extent expressly
provided for herein.
ARTICLE XV.
EFFECTIVE DATE AND GENERAL PROVISIONS
15.1 EFFECTIVE DATE. This Agreement shall be effective as of the date
both parties have executed this Agreement which date shall be the date set forth
below.
15.2 SCOPE. This Agreement constitutes the entire understanding of the
Venturers with respect to the Joint Venture.
15.3 BINDING EFFECT. This Agreement shall be binding upon and shall
inure to the benefit of the Venturers, their heirs, executors, administrators,
legal representatives, successors and assigns.
15.4 HEADINGS. The headings in this Agreement are inserted for
convenience and identification only and are in no way intended to describe,
interpret, define or limit the scope, extent or intent of this Agreement or any
provision hereof.
45
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15.5 WAIVER OF RIGHTS TO PARTITION. Each Venturer hereby irrevocably
waives during the term of the Joint Venture any right that it may have to
maintain any action for partition with respect to any Joint Venture property.
15.6 VIOLATION. The failure of any party to seek redress for violation
of or to insist upon the strict performance of any covenant or condition of
this Agreement shall not prevent a subsequent act, which would have originally
constituted a violation, from having the effect of an original violation. The
rights and remedies provided by this Agreement are cumulative and the use of any
one right or remedy by any party shall not preclude or waive its right to use
any or all other remedies. Said rights and remedies are given in addition to
any other rights the parties may have by law, statute, ordinance or otherwise.
15.7 SEVERABILITY. Every provision of this Agreement is intended to be
severable. If any term or provision is illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the validity or the
remainder hereof.
15.8 COUNTERPARTS. This Agreement may be executed in any number of
counterparts with the safe effect as if all parties hereto had all signed the
same document. All counterparts shall be construed together and shall
constitute one agreement.
15.9 APPLICABLE LAWS. This Agreement shall be enforced in accordance
with the applicable laws of the State of Texas.
15.10 NOTICES. All notices ("Notices") or other communications required
or permitted to be given pursuant to this Agreement, unless otherwise expressly
provided herein, shall be in writing and shall be considered as properly given,
in the case of notices or communications required or permitted to be given to
any Venturer, if personally delivered or if mailed by United States first-class
mail, postage prepaid, or if sent by prepaid telegram or telecopy and addressed
or transmitted to the Venturer at the address or telecopy number as they appear
below. Any Notice or other communication shall be deemed to have been given as
of the date on which it is personally delivered, or, if mailed, on the third
business day after the day on which it is deposited in the United States mails,
or if telecopied, on the date transmitted, or if by telegraph, on the date of
actual receipt, in each case in compliance with the terms of this Section 15.10.
Notices shall be addressed as follows:
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<PAGE>
(a) If to EPC:
Edge Petroleum Corporation
1111 Bagby, Suite 2100
Houston, Texas 77002
Attention: John E. Calaway
Telephone: (713) 654-8960
Telecopier: (713) 654-7722
with a copy to:
Ben C. Broocks, Esq.
Bennett & Broocks
712 Main Street, Suite 1500
Houston, Texas 77002
Telephone: (713) 222-1434
Telecopier: (713) 547-7000
(b) If to Edge Group II:
Edge Group II, Ltd.
One Landmark Square, Suite 611
Stamford, Connecticut 06901
Attention: Mr. John Sfondrini
Telephone: (203) 358-9502
Telecopier: (203) 324-0996
with a copy to:
J. Michael Gottesman, Esq.
477 Madison Avenue
New York, New York 10022
Telephone: (212) 308-2320
Telecopier: (212) 888-7306
(c) If to Gulfedge:
Gulfedge Limited Partnership
c/o Edge Petroleum Corporation
1111 Bagby, Suite 2100
Houston, Texas 77002
Attention: John E. Calaway
Telephone: (713) 654-8960
Telecopier: (713) 654-7722
47
<PAGE>
(d) If to Edge Group:
Edge Group General Partnership
One Landmark Square, Suite 611
Stamford, Connecticut 06901
Attention: Mr. John Sfondrini
Telephone: (203) 358-9502
Telecopier: (203) 324-0996
WITNESS THE EXECUTION HEREOF this 8th day of April, 1991.
EDGE GROUP II, LTD.
By: /s/ John Sfondrini
----------------------------
John Sfondrini, Managing
General Partner
and
By: NAPAMCO, LTD., General Partner
By: /s/ John Sfondrini
-----------------------
John Sfondrini, President
NEW EDGE PETROLEUM CORPORATION
By: /s/ John E. Calaway
----------------------------
John E. Calaway, President
GULFEDGE LIMITED PARTNERSHIP
("Gulfedge")
By: NEW EDGE PETROLEUM CORPORATION,
General Partner
By: /s/ John E. Calaway
----------------------
John E. Calaway, President
48
<PAGE>
EDGE GROUP PARTNERSHIP
("Edge Group I")
By: /s/ John S. Sfondrini
----------------------------
John Sfondrini, Authorized Person
and
By: EDGE LIMITED PARTNERSHIP
("Edge I"), EDGE II LIMITED
PARTNERSHIP ("Edge II") and
EDGE III LIMITED PARTNERSHIP
("Edge III"), as General
Partners of the EDGE GROUP
PARTNERSHIP
By: /s/ John Sfondrini
-----------------------------
John Sfondrini, General
Partner of Edge I, Edge II
and Edge III
and
By: NAPAMCO, LTD., General
Partner of Edge I, Edge II
and Edge III
By: /s/ John Sfondrini
------------------------
John Sfondrini, President
49
<PAGE>
LIST OF EXHIBITS
Exhibit Description
------- -----------
A Identification of Venturers; Capital
Contribution of the Venturers
B Initial Sharing Ratios
C Additional Capital Contributions of EPC
and Edge Group I
D Description of Notes Contributed by Edge
Group II
E Description of Notes Contributed by
Gulfedge
F Initial Budget
50
<PAGE>
EXHIBIT A
VENTURERS CAPITAL CONTRIBUTION
- --------- --------------------
New Edge Petroleum Corporation $772,000
and
the Contributed Reserves,
described on Annex 1
hereto, which have an
agreed value of
$5,250,000
Edge Group II Limited Partnership $12,972,000
Gulfedge Limited Partnership $451,500
Edge Group Partnership $218,000
51
<PAGE>
EXHIBIT B
I. Initial Sharing Ratios
----------------------
(a) EPC 30.741%
(b) Edge Group II 65.667%
(c) Gulfedge 2.286%
(d) Edge Group I 1.306%
II. Sharing Ratio Shift A Amounts
-----------------------------
(a) EPC $ 6,072,500
(b) Edge Group II $12,972,000
(c) Gulfedge $ 451,500
(d) Edge Group I $ 258,000
III. Certain Adjustments to Initial Sharing Ratios and Sharing
---------------------------------------------------------
Ratio Shift A Amounts
---------------------
The Sharing Ratio Shift A Amount for all Venturers shall be recomputed
if (x) either EPC or Edge Group I shall have failed to make the Additional
Capital Contribution indicated in Section 4.2 hereof within 60 days from the
date due, or (y) any note delivered to the Joint Venture by Gulfedge or Edge
Group II, respectively, shall not have been timely paid within 60 days from the
date due, by subtracting from the Sharing Ratio Shift A Amounts indicated above
(i) in the case of EPC or Edge Group I, the amount by which their respective
Additional Capital Contributions shall have fallen short of that required, and
(ii) in the case of Gulfedge and Edge Group II, the principal amount of
delivered notes which have not in fact timely paid; in both cases within 60 days
from the date due when and if such amounts shall subsequently be paid, the
Sharing Ratios and Sharing Ratio Shift A Amounts shall be adjusted accordingly.
Additionally, in such events, the Initial Sharing Ratios shall also
automatically change based upon the adjusted Sharing Ratio Shift A Amounts.
IV. Sharing Ratio after the occurrence of Sharing Ratio Shift A
-----------------------------------------------------------
(a) EPC 50.000%
(b) Edge Group II 47.407%
(c) Gulfedge 1.650%
(d) Edge Group I 0.943%
52
<PAGE>
Exhibit B Continued:
V. Sharing Ratio after the occurrence of Sharing Ratio Shift B
-----------------------------------------------------------
(a) EPC 55.000%
(b) Edge Group II 42.666%
(c) Gulfedge 1.485%
(d) Edge Group I 0.849%
53
<PAGE>
EXHIBIT C
ADDITIONAL CAPITAL CONTRIBUTIONS
--------------------------------
EPC $50,000
EDGE GROUP I $40,000
54
<PAGE>
EXHIBIT D
DESCRIPTION OF NOTES CONTRIBUTED BY EDGE GROUP II
MAKER AMOUNT
------- --------
Clarence Abell 2,500.00
F/B/O Dennis L. Adams IRA 2,500.00
Robert Ainbinder 5,000.00
Nina Andrews 2,500.00
Antwerp Diamond Dist. Inc. 5,000.00
John J. Baldasarini, IRA 70,500.00
William P. Banks 2,500.00
Dean Witter Reynolds Inc. Cust. 15,000.00
F/B/O Charles M. Becbart II
IRA Rollover DTD 6/8/89, #655-37492
Bruce W. Benedict 10,000.00
David B. Benedict (David & Pamela) 30,000.00
Pamela Benedict 5,000.00
Delaware Charter, Trustee 10,000.00
F/B/O David B. Benedict
GFT #0518599
Lawrence Bilello 5,000.00
John V. Bloomfield 5,000.00
Frank Broegol, M.D. 7,500.00
Franklin L. Broegol, M.D.
P.C. Pension Trust 2,500.00
D. Monique Boyrives 2,500.00
Kurt F. Buckhout 29,000.00
Robert F. Campbell 5,000.00
First Albany Corp., CUST. 10,000.00
F/B/O Robert F. Campbell
Account #083-99492-1-1
Bernie W. Chiles, M.D., P.C., 45,000.00
<PAGE>
Jeffrey Chismas 47,750.00
Norman Christiansen 5,000.00
The Estate of Homer W. Clapper 5,000.00
Colin Cody 12,500.00
Robert J. Covill 5,000.00
Richard J. Cranear 12,500.00
M. Cronk 17,625.00
R. Cronk 6,250.00
Edwin Crooks 2,500.00
Ralph P. Davidson 10,000.00
Michael Davidson 10,000.00
Marshall Davis 10,000.00
William B. Davis 25,000.00
John Edwards 20,000.00
Geoffrey & Susan Egginton 5,000.00
Ernest R. Esakof 30,000.00
Insurance Trust
Alfred Feldman 5,000.00
Delores A. Fisher 27,625.00
P. Garbe 20,000.00
J. Michael Gotterman 50,293.00
Raymond Grabowski 2,500.00
Goldie Green 0.00
Greenberg, IRA 10,000.00
Charles & Bonnie Grimes 35,000.00
Albert A. Gross 20,000.00
Phillip N. Guest 2,500.00
John O. Hastings 32,500.00
Hilzenrath 5,000.00
<PAGE>
Eugene Hilsenrath 5,000.00
Rony de Redo 7,500.00
Peter G. Hinchliffe 2,500.00
Jeffrey Hodde 5,000.00
Norman Hoffman 5,000.00
Arthur T. Hogliban 0.00
Brian Hunter 15,000.00
Robert E. Ivy 5,000.00
Jane B. Jackson 10,000.00
Phil Kalker 82,011.33
Anne C. Kolkar, M.D. 20,000.00
Brian Krivitsky 10,000.00
Arthur Langel 7,500.00
Bill Lackonby 70,500.00
William Lyga 15,000.00
Peter W. Lucas 2,500.00
Keogh Plan of Eugene L. Mauro 5,000.00
F/B/O Eugene L. Mauro
dated 9/22/82
Terence Meehan 10,000.00
Diane J. Milley 25,000.00
Fred Montanari 5,000.00
Paul Oscher 2,500.00
Jeff Paley 5,000.00
Joseph M. Palms Inc. 10,000.00
Defined Benefit Plan
John/Gilda Pambianchi 5,000.00
Mildred Petta 7,500.00
Nils Peterson 70,500.00
<PAGE>
Gerald P. Raffarty 15,000.00
Marilyn M. Raphael 80,500.00
Stanley S. Raphael 20,000.00
Int'l Trade Consultants Inc. 80,500.00
Pension Plan
Trade Consultants Inc. 0.00
Pension Plan
Peter Rogers 10,000.00
George Rosenfeld 5,000.00
Angelo Rossi 5,000.00
Lee A. Rubenstein 5,000.00
Paul H. Ryan 50,000.00
John Sfondrini 10,000.00
Everett Shaslow 2,500.00
William Silver 10,000.00
Charles A. Slanets, Jr. 181,000.00
Charles A. Slanets, Jr., M.D., P.C. 17,500.00
Retirement Plan 12/12/70
Charles A. Slanets, Jr., M.D., P.C., 17,500.00
Profit-Sharing Trust 1973
Charles A. Slanets, Jr., M.D., P.C. 5,000.00
Pension Plan 1973
Katherine V. Smith 30,000.00
Marion & Vernon Smith 10,000.00
Roy & Majorie Stevens 10,000.00
Charles E. Sward 20,000.00
DIVESCO F/B/O Charles E. Sward 5,000.00
Account #62-1583-04
D. Christopher Taylor 40,000.00
Jeffrey S. Teichman 10,000.00
Thomas Thornhill 20,000.00
Salahedin Velaj 5,000.00
<PAGE>
Lorrie Vining 2,500.00
Gary & Nancy Wadler 13,330.00
John C. Walsh 32,500.00
Daniel K. Weiskopf 9,500.00
Victoria V. Weiskopf 500.00
Richard E. Wheeless 20,000.00
William J. White 5,000.00
Kimberly Wiehl Trust 15,000.00
Pamela P. Wiehl, Trustee
William Wiehl 20,000.00
William P. Wiehl Trust 15,000.00
Pamela P. Wiehl Trustee
Witham Mangement Trust 5,000.00
Jeremy J. Woods 5,000.00
Bracabridge N. Young 20,000.00
William B. Young 5,000.00
X 0.00
========================= ============
Total 1,942,384.33
========================= ============
*Caddo Investors, Ltd.
Christopher M. Kinsey $ 60,000
* Bela J. Garet 10,000
*Gulfedge Limited Partnership
<PAGE>
William Harrison 10,000.00
H. Thomas Moore 5,000.00
Joel Zwick 40,000.00
Alan H. Fishman 20,000.00
Walter Hill 50,000.00
John D. Inus 10,000.00
Christine Hall 10,000.00
Wesley Craven 5,000.00
Louis Miano 10,000.00
Dorothy Karg 3,333.33
Amy McCombe 10,000.00
Joel Chaseman 10,000.00
Stu Silver 10,000.00
Leonard Giarraputo
IRA Rollover 5,000.00
Susan & Mitchell Covel 10,000.00
J. Richard Fredericks 10,000.00
John Musicaro 2,500.00
Eugene C. Wilhelm 3,333.33
Vincent Andrews 110,000.00
John Sfondrini 130,000.00
Totals 464,166.66
<PAGE>
John Sfondrini, Vincent Andrews $9,760
Vincent Andrews, John Sfondrini 10,000
John Sfondrini 10,000
John Sfondrini 10,000
John Sfondrini 10,000
John Sfondrini 10,000
John Sfondrini 10,000
John Sfondrini 10,000
John Sfondrini 10,000
John Sfondrini 10,000
Vincent Andrews 10,000
Vincent Andrews 10,000
John Sfondrini 10,000
John Sfondrini 10,000
John Sfondrini 10,000
John Sfondrini 10,000
Vincent Andrews 10,000
Vincent Andrews 10,000
Vincent Andrews 10,000
Vincent Andrews 10,000
Vincent Andrews 10,000
Vincent Andrews 10,000
Vincent Andrews 10,000
Vincent Andrews 10,000
Vincent Andrews 10,000
Vincent Andrews 10,000
<PAGE>
Vincent Andrews $10,000
John Sfondrini 10,000
Vincent Andrews 10,000
<PAGE>
EXHIBIT E
DESCRIPTION OF NOTES CONTRIBUTED BY GULFEDGE
--------------------------------------------
MAKER AMOUNT
----- ------
Bela Garet $10,000
Caddo Investors, Ltd. $60,000
56
<PAGE>
EXHIBIT F
<TABLE>
<CAPTION>
EDGE JV II
SUMMARY OF ANNUAL INDIRECT EXPENSES
-----------------------------------
<S> <C> <C> <C> <C> <C>
EXECUTIVES & OFFICERS
---------------------
SALARIES JOHN E. CALAWAY $295,000
- -------- JOEL DAVIS 125,000
PHERL BROSSMAN 125,000
EXECUTIVES & OFFICERS $705,000 RICHARD DALE 100,000
OFFICE & ADMINISTRATIVE 93,000 JAMES CALAWAY 60,000
-------- --------
$798,000 $705,000
========
GENERAL & ADMINISTRATIVE
- ------------------------
GENERAL & ADMINISTRATIVE
ADVERTISING 2,000 ------------------------
DATA PROCESSING 12,000
DELIVERY 4,000 VIRGINIA CLANTON $28,000
DUES & PUBLICATIONS 16,000 LAUREN SVATEK 25,000
LEGAL & ACCOUNTING 65,000 EVE BOWMAN 17,000
OFFICE EXPENSES 85,000 ACCOUNTING CLERK 23,000
PARKING 24,000 -------
PROFESSIONAL EDUCATION 5,000 $93,000
RENT 180,000 =======
TAXES - PAYROLL 80,000
TAXES - AD VALOREN 10,000
TELEPHONE 23,000
TEMPORARY SERVICE 10,000
TRAVEL & ENTERTAINMENT 15,000
-------
531,000
-------
$1,329,000
==========
</TABLE>
<PAGE>
EXTENSION OF JOINT VENTURE
Agreement entered into as of April 8, 1996 by and between Edge Petroleum
Corporation, a Texas corporation and successor to New Edge Petroleum Corporation
("EPC"), Edge Group II Limited Partnership, a Connecticut Limited Partnership
("Edge Group II"), Gulfedge Limited Partnership, a Texas limited partnership
("Gulfedge") and the Edge Group Partnership, a Connecticut general partnership
("Edge I").
WHEREAS, the parties to this Agreement are all of the Parties to a joint
venture agreement dated as of April 8, 1991 (the "Joint Venture Agreement")
which created Edge Joint Venture II (the "Joint Venture") and;
WHEREAS, pursuant to the terms of this Agreement all the Parties to the
Joint Venture Agreement have agreed to amend the terms of the Joint Venture
Agreement;
NOW THEREFORE, in consideration of the foregoing and the mutual promises of
the parties, it is agreed as follows (all references to paragraphs are to
paragraphs of the Joint Venture Agreement unless the context requires
otherwise):
1. Article II "Definitions" is amended as follows:
A new term, "Specially - Allocated Assets" is added which shall mean
the Venturers' respective interests under Section 12.3 (g) (1), (2) and (3)
which interests shall be held outside of the Joint Venture.
The term "Fifty Square Mile New 3-D Area Right" shall have the meaning
set forth in Paragraph 12.3 (g).
-1-
<PAGE>
The term "Belco Contract Right" shall have the meaning set forth in
Paragraph 12.3(g).
The terms "Western 3-D Area Right - Starr/Hidalgo Counties" and
"Western 3-D Area Right - Duval/Webb Counties" (collectively, the "Western
3-D Area Rights") shall have the meaning set forth in Paragraph 12.3(g)(3).
A new term "AMI Components" is added which shall mean the Joint
Venture's interest in all leases, options, contract rights and other
interests in lands and leases situated inside an AMI but outside of the
geographic area for the Prospect or Prospects in such AMI, if any have been
developed.
The term "Participating Venturer" is deleted from the agreement.
2. The term of the Joint Venture shall be extended until and shall
dissolve on December 31, 1996 at 11:59 p.m. Central Standard Time.
3. Paragraph 1.5 of the Joint Venture Agreement shall be amended to
provide that the Joint Venture shall continue in full force and effect until
December 31, 1996, unless sooner dissolved and terminated pursuant to the terms
hereof.
4. Paragraph 12.2 shall be amended to provide that the Wind-Up Period of
the Joint Venture may not extend beyond December 31, 1998 except as otherwise
provided in Section 12.5.
5. Paragraph 12.3 (a) - (e) shall be amended to provide that such
paragraphs apply only to prospects involving or based on only 2-D seismic data.
Additionally, in the event of any conflict between the terms of Paragraph 12.3
(a-e) and the terms of this Extension Agreement, the terms of this Extension
Agreement shall prevail.
-2-
<PAGE>
6. A new sub-paragraph (f) shall be added to Paragraph 12.3 providing as
follows:
"(f) On any Prospect or area (except as provided in Section 12.3(g)
(3) with respect to the Western 3-D Areas) where, as of December 31, 1996,
the Joint Venture, or EPC directly or indirectly through an industry
partner have either (i) acquired a seismic option, lease or other interest
or (ii) 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, the Venturers agree to enter into
an Area of Mutual Interest ("AMI") covering such Prospect or area, with
such AMI to be bounded by (a) the outline of the area under option in the
case of (i) above or (b) the outline of the proposed seismic survey in the
case of (ii) or (iii) above, as indicated on a plat to be furnished by the
Managing Venture to each Venturer on or before January 31, 1997 which the
Managing Venturer agrees to do. With respect to (iii) above, in situations
or areas in which the Joint Venture or its working interest partners do not
have a firm contractual commitment as of December 31, 1996 to shoot 3-D
seismic survey or acquire a seismic option, lease or other interest, such
as where its commitment is subject to contingencies or conditions, then no
such AMI shall be established with respect thereto. Separate AMIs will be
created for the Specially - Allocated Assets.
Prior to the distribution by the Joint Venture of the Prospects and
AMI Components with respect to a particular AMI, EPC as Liquidating Agent
shall continue to cause the Joint Venture to acquire leases, seismic data,
interests in land and other interests and rights within the AMI and take
other steps to develop the AMI for the Joint Venture and funds of the Joint
Venture shall be used for this purpose. Without limiting the generality of
any other provision hereof, the Liquidating Agent shall not be required to
obtain any
-3-
<PAGE>
approval under Section 7.8 of the Joint Venture Agreement. Additionally,
the Joint Venture shall reimburse EPC for the costs of its staff at the
rates set forth on Exhibit 12.10 annexed hereto provided that such rates
may never exceed the lowest rates EPC charges in bona fide transactions to
independent third parties for services it renders. Additionally, EPC shall
maintain accurate records which it shall furnish to the Venturers on a
monthly basis of the time expended by its employees and of other expenses
incurred and the Venturers shall also have the right to inspect and audit
EPC's books and records relating to its allocation of its time and expenses
to the Venturers and to others. Additionally, during this period neither
EPC nor any other Venturers may acquire for its or their own account any
leases, seismic data, interests covering land or other interests or rights
within the AMIs, it being the intention of the parties that all such
acquisitions during Wind-Up be made through the Joint Venture. Prior to
the distribution by the Joint Venture of the Prospects and AMI Components
with respect to a particular AMI, the Liquidating Agent shall make all
decisions with respect to such Prospects and AMI Components.
Subsequent to the distribution by the Joint Venture of the Prospects
and AMI Components with respect to a particular AMI and subject to the
further provisions of this Agreement, if a Venturer acquires an interest or
right in the AMI during the period when the AMI is in force and effect,
other than as a result of an acquisition of another Venturer's interest,
the acquiring party shall, within thirty (30) days from the date of the
acquisition thereof, give notice of the acquisition to the non-acquiring
Venturers. Such notice shall be in writing and shall describe the
acquisition and the actual cost to the non-acquiring party. The non-
acquiring parties so notified shall have thirty (30) days after receipt of
such notice to elect, by notice in writing to the acquiring party, to
acquire their proportionate share of such interests based upon their
ownership interests in the particular property on the same terms and
conditions as the acquiring party. During such thirty (30) day
-4-
<PAGE>
period each party shall have full access to all information possessed by
the other parties or the acquiring party with respect to the interests
acquired, except to the extent disclosure of such information would violate
applicable law or bonafide contractual obligations in which case such other
party shall disclose the applicable law and/or contractual obligation and
use its best efforts to avoid the contractual obligation or secure a waiver
of applicable law, without paying money. Unless otherwise agreed and
subject to any transfers of interest pursuant to Section 12.5, the actual
costs (plus associated brokerage and acquisition costs) of the additional
interests shall be borne by all the parties electing to acquire interests
in proportion to their respective ownership interests in the particular
property, and all such costs shall be paid to the acquiring party at the
time of the non-acquiring party's election to acquire such interest. The
acquiring party's obligation to convey such additional interest shall be
subject to consent rights and preferential purchase rights held by third
parties with respect to the interest. The conveyances from the acquiring
party to the other parties shall be by assignment containing special
warranty of title free and clear of any liens and encumbrances granted or
permitted by, through or under the party acquiring such interest, except
for the overriding royalty interests provided for in Section 12.11 below
and the terms, conditions and encumbrances created by this Agreement. If
any party acquires an additional interest covering lands partially within
the AMI and partially outside the AMI, the AMI shall be expanded to the
extent possible whereby such lands subject to the additional interest shall
be entirely subject to and included in the applicable AMI, unless pre-
existing contractual obligations would prohibit or interfere with such
expansion.
With respect to any interest acquired by the Venturers that is subject
to an AMI, the Venturers shall convey to EPC the overriding royalty
interests to the extent required by Section 12.11 hereof. The Venturers
also agree to enter into operating agreements with the
-5-
<PAGE>
same general terms as set out in Exhibit 12.12 for each Prospect developed
in an AMI, and to timely pay their share of all costs and expenses incurred
in such AMI as per the agreement.
The interests of the Venturers must vest, if at all, in each AMI
created hereunder prior to twenty-one (21) years after the date of death of
the last to die of all of the surviving descendants of Joseph P. Kennedy,
father of the late President of the United States, who are alive on the
date of execution hereof."
7. A new Paragraph 12.3 (g) entitled "Specially - Allocated Assets" is
added to the Joint Venture Agreement providing as follows:
"12.3 (g) Specially - Allocated Assets. The Venturers will have the
following rights in all AMIs created for the Specially - Allocated Assets
which rights, subject to obtaining any necessary consents or waivers, shall
be distributed to them no later than eight (8) months after the Term of the
Joint Venture, and which rights the Venturers agree have zero value at such
time. Prior to the time of such distribution, the Joint Venture's funds
will not be used in connection with the development of the Belco Contract
Right and the Fifty Square Mile New 3-D Area Right unless and until the
Venturers (other than EPC) have elected to participate therein, but may be
used in connection with the Western 3-D Areas. Prior to distribution of any
Specially - Allocated Assets, any Joint Venture funds used to develop such
properties will to the extent of EPC's share thereof, be deemed to be a
loan from the Joint Venture to EPC to be repaid with interest at the rate
being charged by Compass Bank - Houston for the Joint Venture's
indebtedness for borrowed money. For purposes of the preceding sentence
EPC's share of such funds used to develop such properties shall be a
fraction equal to the difference between EPC's ownership interests in the
Specially - Allocated Assets and its Initial Sharing Ratio in the Joint
Venture, and such loan shall be due at the time the Specially - Allocated
Assets are distributed
-6-
<PAGE>
from the Joint Venture. If the Joint Venture is unable to obtain any
necessary consents or waivers to make such distributions, then the
Specially -Allocated Assets will be held and developed inside the Joint
Venture until such time as the necessary consents or waivers are obtained,
and EPC shall be deemed to have made a loan from the Joint Venture in the
amount of its share of Joint Venture funds expended on such specially
allocated assets under the same formula and terms set forth above. Any loan
to EPC from the Venture under this agreement shall be secured by its
interest in the Joint Venture.
(1) Belco Contract Right: After the Term, the Venturers (other
than EPC) shall have the right (the "Belco Contract Right") to
participate for their Respective Share (as hereinafter defined) of 25%
of EPC's rights and interests in any 150 square mile area which is
firmly committed to be developed by both EPC and Belco and permitted
and acquired after December 31 1996 under the Belco Contract (being
that certain Exploration Agreement dated March 4, 1996 between Belco
Oil & Gas, Inc. and EPC). As used in this Section 12.3(g) certain
capitalized terms will have the same meaning as in the Belco Contract.
Such 150 square miles shall consist of any 150 square miles of Target
Areas (as selected by Edge Group II Limited Partnership) that after
December 31, 1996, are committed to be developed under the Belco
Contract by both EPC and Belco, but excluding any AMI areas which are
subject to Paragraph 12.3(f) above. Such election must be made prior
to the time development commences in the particular 150 Square Mile
Area in which the Venturers elect to participate, provided that EPC
shall be required to give the Venturers sixty (60) days, if available,
but not less than thirty (30) days notice of areas to be developed
under the Belco contract to enable the Venturers to exercise their
option. By
-7-
<PAGE>
"Respective Shares" it is meant as to each Venturer other than EPC,
such Venturer's Initial Sharing Ratio, divided by the sum of all
Venturers' (other than EPC's) Initial Sharing Ratios. For purposes of
their participation in the Belco Contract, Edge Group II Limited
Partnership's election shall be binding on Gulfedge L.P. and Edge
Group Partnership and Edge Group Partnership and Gulfedge L.P. agree
to be bound by Edge Group II's election as if Gulfedge L.P. and Edge
Group Partnership had made the election themselves. The Venturers
shall have the right to receive the same notices as are provided for
in the Belco Contract. The election by Edge Group II Limited
Partnership (on behalf of itself and Gulfedge Limited Partnership and
Edge Group Partnership) to participate in the permitting, shooting and
development of such 150 square miles shall be made in the same manner
and within the same time period as is applicable to Belco's election
right for such acreage (and the corresponding Target Area) under the
Belco Contract. The Venturers (other than EPC) shall have no right to
designate or propose Target Areas under the Belco Contract.
The Venturers agree to pay their Respective Share of 25% of EPC's
share of the preliminary budget costs and other costs (including third
party costs) provided for in the Belco Contract and to be bound by the
Joint Operating Agreement for the Target Areas in which they
participate, (including the COPAS provisions thereof) and will pay
their Respective Share of 25% of EPC's share of the overhead,
including the COPAS provisions thereof, LOE and any other Joint
Operating Agreement charges which EPC is obligated to bear thereunder.
In addition, for each Target Area in which the Venturers (or any of
them)
-8-
<PAGE>
participate in the acquisition of data, the Venturers agree to pay to
EPC their Respective Share of a one-time fee of $18,750.00 as an
administrative overhead fee. Such fee shall be due and payable at the
same time as Belco's payment of its overhead fee is due and payable
pursuant to Article 6. of the Belco Contract. These expenses and fees
shall cover all types of overhead incurred by EPC during the data
acquisition phase and all non-third party geological and geophysical
and Prospect generation charges incurred during the term of the Belco
Contract, but are in addition to any costs and expenses which are
payable to EPC as operator (other than non-third party geological,
geophysical and Prospect generation costs) under the Joint Operating
Agreements to be entered into between Edge and Belco for each
Prospect.
With respect to the Belco Contract and related operations, EPC
shall not allocate or charge the Venturers any other overhead
including, without limitations, those overhead items set forth in
Paragraph 12.10., below, but may charge the Venturers their share of
COPAS overhead pursuant to the COPAS provisions of the JOA for the
Belco Contract Area.
(2) Fifty Square Mile New 3-D Area Right. After the Term, the
Venturers shall have the right at their election (the "Fifty Square
Mile New 3-D Area Right") to participate for their Respective Shares
of 25% of EPC's interest in up to 50 square-miles of new 3-D seismic
data covering areas outside of the Belco Contract Area (as provided in
Paragraph 12.3(g)(1) above) and, the Western 3-D Areas (as described
in Paragraph 12.3(g)(3), below, and acquired or committed to be
acquired by EPC during calendar years
-9-
<PAGE>
1997, 1998 and 1999. The election to participate made by Edge Group II
Limited Partnership shall be binding on Gulfedge Limited Partnership
and Edge Group Partnership and Edge Group Partnership and Gulfedge
L.P. agree to be bound by Edge Group II's election as if Gulfedge L.P.
and Edge Group Partnership had made the election themselves. These
square miles shall be selected by Edge Group II Limited Partnership.
This right shall only apply to new regional or reconnaissance 3-D data
not covering a pre-existing AMI, and does not apply to areas covered
by AMIs created under Paragraph 12.3(f), areas covered under the Belco
Contract or areas included in the Western 3-D Areas. EPC will promptly
notify each Venturer of all proposed 3-D seismic acquisition areas in
which the Venturers have rights pursuant to this Section and over
which EPC desires to acquire seismic data after December 31, 1996,
including the terms and conditions of participation in such areas by
third-party participants of EPC. Edge Group II Limited Partnership, on
behalf of itself and Gulfedge Limited Partnership and Edge Group
Partnership, will have the right to elect to participate in the
exploration and development of any one or more of such areas as long
as the aggregate acreage covered thereby does not exceed 50 square
miles unless, after employing reasonable efforts, a third party
prevents EPC from extending such participation to the other Venturers
in which case Edge Group II Limited Partnership on behalf of the
Venturers, may substitute another new 3-D area of the same size
outside the Belco Contract Area and Exclusive Area, and the Western 3-
D Areas. If a particular area covers more than 50 square miles, the
Venturers' participation interests in such area shall be
proportionately reduced by a fraction the numerator of which is 50 and
the
-10-
<PAGE>
denominator of which is the total amount of acreage in such area. Such
election must be made within thirty (30) days of receiving such notice
from EPC of the proposed terms of participation and development. The
Venturers shall have no rights with respect to 3-D data acquisition
areas which are committed to be acquired after December 31, 1999. The
Venturers will be required to bear and pay their Respective Share of
25% of EPC's share of all overhead and other costs which are provided
for in the operating agreement, participation agreement and any other
applicable agreements which are applicable to such area.
(3) Western 3-D Area Rights. The Joint Venture's and/or EPC's
interest in all leases and/or interests in all Prospects acquired
within the geographical boundaries of the Western 3-D Area,
Starr/Hidalgo Counties, and the Western 3-D Area, Webb/Duval Counties,
as shown on the attached Exhibits 12.3(g)(3) (collectively, the
"Western 3-D Areas"), which are acquired after December 31, 1996,
shall be owned, and related costs of development borne, 50% by EPC and
50% by the remaining Venturers (except EPC). Notwithstanding the
foregoing sentence, with regard to any Prospect in the Western 3-D
Areas where leasing has commenced before December 31, 1996, such
Prospect will be treated as an AMI Prospect pursuant to the terms and
provisions of Article 12.3(f), above, and the Venturer's ownership
rights shall be determined and governed in accordance therewith and
not this Article 12.13. The Venturer's shares (other than EPC's) in
properties or interests governed by this section and not by 12.3(f)
shall be owned in proportion to their Respective Sharing Ratios which
shall be applicable only to determine the respective shares or
interests of the
-11-
<PAGE>
Venturers (other than EPC) in 50% of the Joint Venture's interest
under this paragraph. Such interests acquired pursuant to this section
and not subject to Article 12.3(f) shall be acquired outside of the
Joint Venture and shall be developed in accordance with the procedures
in Paragraph 12.11 below. The full cost of the Joint Venture (which is
$750,000,00) of acquiring the Western 3-D data in Western 3-D Area,
Webb/Duval Counties, shall be paid for by the Joint Venture prior to
December 31, 1996, provided that EPC shall be deemed to have borrowed
from the Joint Venture a fraction of the Joint Venture's cost of the
Western 3-D Area, Webb/Duval Counties equal to the difference between
50% and EPC's Initial Sharing Ratio together with interest thereon at
the rate then being charged under the Joint Venture's loan agreement
with Compass Bank-Houston for borrowed money, secured by its
interest in the Joint Venture which sum shall be repaid with interest
at end of the Wind-Up Period and provided further that the Venturers
shall not be deemed in default until the aggregate amount of their
delinquency exceeds the amount borrowed by EPC hereunder. EPC may
prepay such amount at any time. Further, during any such period when
EPC owes the Joint Venture money on account of such disproportionate
sharing of the Western 3-D data costs on the Western 3-D Area,
Webb/Duval Counties, EPC shall not be able to assert that financing is
not available for any of the Specially-Allocated Assets. The right
acquired by the Venturers under this paragraph shall be referred to as
the "Western 3-D Area Right - Starr/Hidalgo Counties" and "Western 3-D
Area Right - Webb/Duval Counties", respectively (collectively, the
"Western 3-D Area Right").
(4) Funding Distributions. EPC as
-12-
<PAGE>
Liquidating Agent at the request of the Edge Group II Limited
Partnership shall cause the Joint Venture to distribute funds to the
Edge Group II Limited Partnership, Edge Group Partnership, Gulfedge
Limited Partnership and to EPC in accordance with the Sharing Ratio in
affect at the time, for the purpose of funding their payments to EPC
or otherwise under this or any operating agreement for developing or
acquiring their respective interests in the Western 3-D Areas
Specially - Allocated Assets. If any such distributions are made,
there shall also be distributed to EPC that amount of funds which EPC
is entitled to have distributed to it under the Sharing Ratio in
effect at the time of the distribution made to Edge Group II, the Edge
Group Partnership and the Gulfedge Limited Partnership based on the
amount of such distribution. For example, assume that the Joint
Venture was required to make an aggregate distribution to Edge Group
II, Edge Group Partnership and Gulfedge under this paragraph in the
amount of $69,259.00 and that the Sharing Ratio in effect at the time
of the distribution was the Initial Sharing Ratio, then the sum of
$30,741.00 would be distributed to EPC based on the distribution of
$69,259.00 to the other Venturers. Once the Venturers' interests in
the Western 3-D Areas have been developed to the point where such
interests can be pledged by the Venturers to obtain non-recourse
borrowings secured by such interests on terms including interest
rates, which are comparable to those then being offered to borrowers
secured by oil and gas properties similar in quality to the Venturers'
interest in the Western 3-D Areas, then the Venturers will use their
best efforts to secure such loans and will utilize such borrowings to
the fullest extent possible to pay for their share of the costs of
developing and acquiring the Western 3-D Areas. Any
-13-
<PAGE>
amounts which are necessary for such development and acquisition of
the Western 3-D Areas over and above such borrowings shall be funded
by distributions from the Joint Venture.
EPC as Liquidating Agent at the request of Edge Group II Limited
Partnership shall cause the Joint Venture to make similar
distributions to cover the Venturer's share of payments for developing
or acquiring their respective interests in the Belco Contract Right,
and the Fifty Square Mile New 3-D Area Right, unless it, in its
reasonably exercised business judgment, decides and notifies the
Venturers at the same time as it gives the Venturers notice of a new
3-D area which the Venturers may elect to participate in, or of an
interest in a Belco contract right that the Venturers are entitled to
participate in, that the Venture will not be able to effectuate such
distributions. At the time of such notice, EPC shall also furnish the
Venturers with the basis for its judgment, including without
limitation, cash flow and other projections which provided the basis
for its judgment. In such event, EPC shall use reasonable efforts to
obtain bids from five (5) commercial banks or other lenders to provide
financing for the Venturers for the purpose of paying for the
Venturers' share of the costs of acquiring and developing such rights.
In seeking such bids, EPC will attempt to obtain terms which provide
for interest rates, amortization and other terms comparable to those
then being offered to borrowers for non-recourse loans secured by oil
and gas properties of a type and quality similar to the Venturer's
interest in the Belco Contract Right and the Fifty Square Mile New 3-D
Area and shall notify the Venturers of the results of its efforts and
of the
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financing which is available at the same time that it notifies them of
the areas or Prospects available for participation.
In addition, it will be EPC's sole responsibility to cover any
shortfall in the amount of any cash distributions made to it and the
amount required to cover its share of the costs of acquiring or
developing its interests in the Specially-Allocated assets.
The amount of cash, that the Joint Venture distributes to or for
the benefit of the Venturers for purposes of developing or acquiring
interests in Specially-Allocated Assets shall be used for such
purposes and shall not be taken into account in determining applicable
Sharing Ratios (i.e., will not be treated as distributions for such
purpose).
(5) Values of Specially-Allocated Assets. The Venturers
agree that the Specially-Allocated Assets will be held outside of
the Joint Venture and will have zero value at the time they are
initially distributed from the Joint Venture. However, such interests
will be subsequently valued by the Liquidating Agent during Wind-Up in
accordance with the provisions of Section 12.5 for the sole purpose of
determining applicable Sharing Ratios, with the Venturers being deemed
to have received their share of such value for such purpose less funds
contributed by the Venturers (but not including expenditures from
distributions by the Joint Venture which are not counted for purposes
of determining Sharing Ratios and shall not be subtracted from such
values for such purposes) and the Venturers' share of any indebtedness
applicable to such assets. Such valuation will not, however, be deemed
to have any affect on the Venturer's Capital Accounts.
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(6) Disclaimer of Fiduciary Relationship. Notwithstanding that
Edge Group II Limited Partnership is making certain elections under
this Agreement on behalf of Gulfedge Limited Partnership and Edge
Group Partnership, the Parties understand and consent to such
elections and agree that Edge Group II Limited Partnership shall not
be a fiduciary or held to a fiduciary standard in this regard and that
these elections are being made in the interest of uniformity of
development and uniformity of sharing ratios and to permit the parties
to obtain benefits of the rights provided in this agreement.
Additionally, Gulfedge Ltd. and Edge Group Partnership will indemnify
and hold Edge Group II harmless with respect to any liabilities or
expenses Edge Group II incurs arising out of the elections it makes
hereunder which are binding on Gulfedge Ltd. and Edge Group
Partnership.
8. Paragraph 12.4 is hereby amended and restated in its entirety to read
as follows:
"12.4 Rights as Regards 2-D Seismic Information, Etc. As used in
this Section, all references to "seismic data", whether Non-
proprietary Seismic, Proprietary Seismic, or otherwise shall mean and
refer to 2-D (two dimensional) seismic data, and such term shall not
mean or refer to so called "3-D" or three dimensional seismic data. As
of December 31, 1996, EPC shall be entitled to receive and own all
Non-Proprietary Seismic, and nay and all proprietary regional maps,
geological information, well files, log, synthetic seismograms,
velocity surveys, and any other items which EPC in its good faith
judgment determines to be a part of the Joint Venture's regional
information base, and the parties agree that for purposes of this
Agreement, the deemed value thereof shall be zero. Set forth in
Schedule 12.4 hereto is a list of
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items which the parties have agreed constitutes a part of the Joint
Venture's regional information base. EPC will put up for non-exclusive
license all Proprietary Seismic, subject to EPC's right to withhold any
portion thereof by payment to the Joint Venture of such withheld seismic's
fair market value. The foregoing will apply where the seismic is the sole
or principal item sold or licensed, but not where the seismic data is
conveyed incidental to an EPC transaction where the seismic is not the sole
or principal item sold or licensed, including, without limitation, a sale
by EPC of its business, or a Prospect sale by EPC or by any joint venture
which it controls or manages. All cash or other consideration received upon
a transfer, sale or non-exclusive license of any Proprietary Seismic by EPC
to a third-party shall be taken by the Joint Venture and used during the
Wind-Up Period or distributed as herein provided. Regarding any Proprietary
Seismic not otherwise bought by EPC, EPC shall be able after dissolution of
the Joint Venture to utilize such seismic data for its own purposes, in
connection with any joint ventures, or for any other purpose, without
accounting to any Venturer therefor after the dissolution of the Joint
Venture. Any cash proceeds or other consideration of the sale, transfer or
no-exclusive license of such Proprietary Seismic occurring after the Wind-
Up Period, shall be distributed to the Venturers in accordance with their
Sharing Ratios, such as they would be were the Joint Venture still then in
existence. The foregoing will apply where the seismic is the sole or
principal item sold or licensed, but not where the seismic data is conveyed
incidental to an EPC transaction where the seismic is not the sole or
principal item sold or licensed, including, without limitation, a sale by
EPC of its business, or a Prospect sale by EPC or by any joint venture
which it controls or manages. At the end of the Wind-Up Period, all 2-D
seismic data in which the Joint Venture acquired an interest pursuant to
this Agreement, other than seismic data that EPC is entitled to receive or
purchases under the terms of this paragraph, will be assigned
proportionately to the Venturers subject to all applicable licensing,
proprietary data ownership
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agreements, joint operating agreements and other agreements pertaining to
or applying to such data."
9. A new Paragraph 12.4(a) entitled, "Rights as Regards 3-D Seismic
Information, Etc." is added as follows:
"12.4(a) Rights as Regards 3-D Seismic Information, Etc. Subject to
the rights of the Venturers in 3-D seismic data and information as set
forth in this paragraph and elsewhere in this Agreement, as of December 31,
1996, EPC shall exclusively own and have sole possession of (and the
Venturers hereby transfer to EPC) all of the 3-D seismic data and
information and all maps, interpretations and work product based thereon
(the "3-D Data") subject to the Joint Venture's right to use the same
during Wind-up and the Venturers' rights of access thereafter. EPC (but
not the other Venturers) shall have the right to make sales of any 3-D
seismic data and information to third parties on such terms and for such
consideration as it shall deem appropriate. All proceeds, or any other
consideration if any, received upon a sale, transfer or license of 3-D Data
occurring prior to December 31, 1996 shall be used by the Joint Venture for
its normal operating purposes. Any proceeds or other consideration received
by the Joint Venture or EPC from sales, transfers or licenses of 3-D Data
(including any 3-D Data owned exclusively by EPC as a result of this
Section 12.4(a) during or after the Wind-Up Period shall be distributed 50%
to EPC, and 50% to the other Venturers in accordance with their Sharing
Ratios. The foregoing will only apply where the 3-D Data is the sole or
principal item sold or licensed, but not where the 3-D Data is not the sole
or principal item sold or licensed, including, without limitation, a sale
by EPC of its business or a Prospect sale by EPC or by any joint venture
which it controls or manages. The Venturers will receive, however, their
respective ownership shares of any proceeds received from the sale or
farmout of a Prospect.
Notwithstanding and regardless of anything to the
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contrary herein, the Venturers and/or their representatives shall have
access during normal business hours and at their sole risk and expense, to
3-D data and information and all maps, interpretation and work product
acquired by or for EPC and or the Joint Venture during the term of the
Joint Venture or thereafter for the AMIs in which the Venturers continue to
own an interest, except to the extent such access would violate applicable
law or bona fide contractual obligations, in which event EPC shall disclose
the applicable law or contractual obligation. EPC shall also use best
efforts (without payment of money) to avoid contractual limitations on its
granting the Venturers access to 3-D data and to secure a waiver of any
applicable law or existing contractual obligations. EPC represents with
respect to the Western data and the data secured from Universal Seismic
Acquisition that neither applicable law nor third-party contractual
obligations will restrict the access of the Venturers to such data.
The Venturers and their representatives will keep all data and
information, including maps and interpretations, confidential and will not
disclose or reveal the same to any third parties without the prior written
consent of EPC."
10. Paragraph 12.5 entitled "Terminating Distributions and Matters" is
amended and restated in its entirety and new Paragraph 12.5A is added as
follows:
"12.5 Terminating Distributions and Matters. At approximately two (2)
months prior to expiration of the Wind-Up Period, the Liquidating Agent
shall identify all assets of the Joint Venture which are other than cash,
computer equipment, Carried Interests, Contributed Reserves, or Reserves,
and shall use its best efforts to sell such assets for cash. The definition
of the term "Carried Interest" is clarified to make clear that a Carried
Interest includes the interest of the Venture or of a Venturer in a
Prospect, which as of the date of the valuation has been drilled. The
parties intend that
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drilled Prospects be valued in accordance with Sections 6.3 and 12.6 of the
Joint Venture Agreement. All Prospects which have not been drilled as of
the end of the Wind-Up Period (or such earlier time, if any, as determined
by the Liquidating Agent) and all AMI Components will be valued utilizing
the following bid procedure: Any Venturer may bid on such assets, directly
or indirectly, provided that in such event the bidding Venturer shall
notify the other Venturers of its bid(s). Any Venturer making a bid shall
have cash or certified funds immediately available to it (including
committed funds from a recognized bank or lending source) sufficient to
effectuate the purchase at its bid price at the closing of the bidding.
Each Venturer may counter bids made by the other and must give notice of
such counter bids. At the conclusion of the bidding, any non-bidding or
unsuccessful Venturer shall have five (5) days to advise the bidding
Venturer(s) that any such bid upon Prospect and AMI Component of the
Specially-Allocated Assets shall either be (a) accepted at the successful
bidder's bid, in which event the other Venturer's interest in such Prospect
or AMI Component shall be sold and conveyed by special warranty assignment
or similar conveyance to the successful bidder and the successful bidder
shall pay the bid price, or (b) rejected, in which event the non-bidding or
unsuccessful Venturer shall keep its interest in such asset. In either
event, the asset will be valued by the Liquidating Agent at the successful
bidder's bid price for purposes of determining applicable Sharing Ratios
under this agreement. In the event that there remains any assets of the
Joint Venture which have not been sold within twenty (20) days of the end
of the Wind-Up Period, then within such twenty (20) day period at such time
as shall be designated by the Liquidating Agent, an auction shall occur at
the place designated by the Liquidating Agent, at which all venturers shall
have the right to attend and bid to purchase for cash all remaining assets.
At approximately two (2) months prior to expiration of the Wind-Up
Period, the Liquidating Agent shall also identify any Prospects and AMI
Components of the
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Specially-Allocated Assets held by the Venturers which are not Carried
Interests. The following procedure shall apply for purposes of valuing such
assets. EPC shall make the first bid on such assets. Any Venturer may bid
on such assets, directly or indirectly, provided that in such event the
bidding Venturer shall notify the other Venturers of its bid(s). Any
Venturer making a bid shall have cash or certified funds immediately
available to it sufficient to effectuate the purchase at its bid price at
the closing of the bidding. Each Venturer may counter bids made by the
other. At the conclusion of the bidding, any non-bidding or unsuccessful
Venturer shall have five (5) days to advise the successful bidding
Venturer(s) that such bid upon each such Prospect and AMI Component of the
Specially-Allocated Assets shall either be (a) accepted at the successful
bidder's bid, in which event the other Venturer's interest in such Prospect
or AMI Component shall be sold and conveyed by special warranty assignment
or similar conveyance to the successful bidder and the successful bidder
shall pay the bid price, or (b) rejected, in which event the non-bidding or
unsuccessful Venturer shall keep its interest in such asset. In either
event, the asset will be valued by the Liquidating Agent at the successful
bidder's bid price for purposes of determining applicable Sharing Ratios
under this agreement.
In implementing the foregoing bidding and valuation procedures for
purposes of AMIs containing undrilled Prospects, the Liquidating Agent will
first put up for bid or valuation each undrilled Prospect in an AMI until
all such Prospects for such AMI have been sold and/or valued and thereafter
will put up for bid or valuation the AMI Components for the AMI. The
Liquidating Agent will cause similar valuations and solicitations for bids
to be made for all AMIs containing undrilled Prospects and AMI Components.
All assets shall be sold finally and fully at auctions under this
Section by special warranty deed or by assignment with equivalent
warranties of title. The rights of the Venturers to attend and bid at such
auction
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shall be non-assignable. The successful bidder will be entitled to a credit
for its proportionate ownership interest, if any, in such assets which are
owned outside the Joint Venture.
The Joint Venture and EPC will, to the extent they can without
violating existing contract restrictions (but without having to pay money)
transfer to the successful bidder non-transferable a license to use the
relevant portion of any 3-D data owed by the Joint Venture insofar only as
such data covers or applies to the specific property sold.
In the liquidation of the Joint Venture, payments shall be made of all
expenses of liquidation (including, without limitation, any legal and
accounting expenses incurred in connection therewith) and all debts of the
Joint Venture, first, to third-party creditors and, after payment of all
third party creditors, then to any Venturer who shall properly be a
creditor of the Joint Venture pursuant to Section 6.5 hereof, or adequate
provision shall be made for the payment thereof. The term "adequate
provision for the payment thereof" shall have the meaning set forth in
Paragraph 12.5A, below. Computer related debt will be handled in accordance
with Section 12.14. Notwithstanding anything contained herein to the
contrary, the Specially-Allocated Assets held by the Venturers shall be
valued first. Thereafter, cash, Carried Interests, Reserves, and all other
assets and properties of the Joint Venture, valued as set forth herein,
shall be distributed to the Venturers, all in accordance with their Sharing
Ratios, provided that the Liquidating Agent in making distribution of
assets shall effect a distribution of an undivided interest in all assets
of the Joint Venture. The Liquidating Agent shall not effectuate
distributions of separate properties to different venturers but shall
effectuate distributions of an undivided interests in all Joint Venture
properties. Additionally, in the event the Joint Venturer has distributed
to the Venturers sums to pay federal income taxes, then distributions shall
first be made to the Venturers in amounts which will cause the prior
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distributions together with such current distributions to the Venturers to
be equal to an amount that would have been distributed to each Venturer if
all distributions had been made in accordance with the Sharing Ratios of
each Venturer at the time the prior disproportionate distribution was made.
Except as may be caused by disproportionate distributions to pay federal
income taxes, the venturers anticipate and expect that the Capital Accounts
of the Venturers at the time liquidating distributions are to be made will
be in the same ratios as the Sharing Ratios. If this should be the case,
the making of such liquidating distributions in accordance with the Sharing
Ratios will accomplish the same economic result as making the liquidating
distributions in accordance with the Capital Accounts of the Venturers. If
by chance the Capital Accounts (after being adjusted for the corrective
allocations pursuant to Section 5.3, the revaluation of Joint Venture
property pursuant to Section 4.3(c), and as otherwise provided by this
Agreement) at such time are not in the same ratio as the Sharing Ratios at
the time liquidating distributions are to be made, then, immediately prior
thereto, the Capital Accounts of the Venturers shall be adjusted in the
manner and to the extent necessary so that the Capital Accounts will be in
the same ratio as the Sharing Ratios at the time liquidating distributions
(in the Sharing Ratios) are made.
If, with respect to any asset or property of the Joint Venture that is
to be distributed to the Venturers, including without limitation Prospects,
Carried Interests, and Reserves, there exists a preferential right to
purchase, restriction on transferability requirement for consent or other
restraint on alienation, the Liquidating Agent will use its reasonable
efforts (without having to pay money) to obtain the consent of the
appropriate party to make the transfer to the proper Venturer or Venturers.
If such consent cannot be obtained by using reasonable efforts (without
having to pay money) the Liquidating Agent may elect to retain such assets
in the Joint Venture until such time as the appropriate consent can be
obtained. The Liquidating
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Agent may in its sole discretion, seek to operate, develop or otherwise
utilize such asset or property in any manner, including without limitation
by the continued development of oil and gas properties relating to such
asset or property, and the Wind-Up Period shall be extended, as necessary
for the limited purpose of allowing the Joint Venture to continue to hold,
develop, operate or otherwise utilize any such asset or property.
It is the intent of the parties that Sharing Ratio Shift A and, if
applicable, Sharing Ratio Shift B, will take into account positive and
negative values of the Specially-Allocated Assets and will be deemed to
have occurred when the aggregate value of all Specially-Allocated Assets
taken into account with respect to Edge Group II Limited Partnership,
Gulfedge Limited Partnership and Edge Group Partnership plus the value of
all Joint Venture assets (as valued by the Liquidating Agent during Wind-Up
in accordance with the bidding provisions of Section 12.5) and not the zero
value at the time of initial distribution) distributed to such parties, in
all cases net of such parties' share of all debt, if any, which is an
encumbrance on and the proceeds of which were used for the purpose of
funding their payments to EPC or otherwise under this or any operating
agreement for developing or acquiring their respective interests in, any of
such assets and in all cases, net of amounts, if any, expended by the
parties with respect to the assets (but not including expenditures from
distributions by the Joint Venture under paragraph 12.3(g)4 above which are
not counted for Sharing Ratio purposes) equals the aggregate Sharing Ratio
Shift A Amount for such parties or, if applicable, the aggregate Sharing
Ratio Shift B Amount for such parties.
All distribution of Joint Venture's assets shall be made using the form of
assignment attached hereto as Exhibit 12.5 modified as necessary to reflect
the proper assignee and interest in the property being distributed.
12.5A Adequate Provision for the Payment of Joint Venture Debt. During
the Wind-Up Period, EPC will
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request Compass Bank-Houston (or the Joint Venture's then current lender)
and any other lenders to split out and segregate the Joint Venture's
indebtedness for borrowed money to each of the Venturers on the same terms
and conditions as are applicable to the Joint Venture. Each Venturer's
respective share of the Joint Venture's indebtedness for borrowed money
shall be a fraction equal to such Venturer's total allocated share of Joint
Venture assets at the time of final distribution (whether actually
distributed at the time or not) divided by the total assets of the Joint
Venture. Should Compass Bank-Houston, and/or the other lenders agree to
such arrangement, EPC and the other Venturers agree to enter into separate
non-recourse notes and other security documents as such lenders shall
reasonable request in order to split out such debt, such agreements to be
entered into at the time of final distribution of assets. In the event
Compass Bank-Houston and the other lenders refuse such request, then EPC
shall obtain bids from five (5) commercial banks or other lenders to
finance, on a non-recourse basis, the Venturers' respective shares of the
Joint Venture's indebtedness for borrowed money. In seeking such bids, EPC
will seek terms on behalf of the Venturers which provide for interest
rates, amortization, and other terms comparable to those then being offered
to borrowers for non-recourse loans secured by oil and gas properties of a
type and quality similar to the Venturer's interest in the Reserves and
Carried Interests. The Venturers shall be free to seek to obtain financing
on their own from other sources or to pay their share of such debt from
their own funds at the time of final distribution of assets. In the event
EPC or the Venturers are able to secure financing on terms which meet the
above parameters they each agree to sign a separate note and other security
documents as the lenders may reasonable request in order to split out and
separately allocate such Venturer's share of the Joint Venture
indebtedness, such documents to be signed at the time of final distribution
of assets. In the event that EPC or the Venturers are able to secure
financing on such terms which meet the above parameters and they refuse to
sign such notes and other security documents as the
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lenders may reasonably request in order to split out such debt, then EPC as
Liquidating Agent shall have the right and power to liquidate for cash the
interest of any Venturer who so refuses to sign such note and security
documents in any assets of the Joint Venture or Specially-Allocated Assets,
and apply the net sales proceeds to such Venturer's share of such debt. In
the event financing on such terms cannot be obtained in spite of EPC's
efforts, EPC will sell sufficient assets of the Joint Venture to pay in
full such debt."
11. A new Paragraph 12.10 entitled, "Management of Jointly Owned
Properties" is added as follows:
"12.10. Management of Jointly Owned Properties. It is contemplated
that the Venturers and EPC will become joint owners (i.e., undivided
interests in the same property) with respect to (i) certain Prospects and
AMI Components situated in an AMI at the time of their distribution to the
Venturers and (ii) the Specially-Allocated Assets, and (iii) Carried
Interests and Reserves and certain other assets of the Joint Venture.
Subject to the terms hereof, EPC will manage the jointly owned properties
but only in situations where there is not an existing operator or joint
operating agreement in place. Each Venturer including EPC, (the "Indemnitor
Party") shall indemnify and hold harmless each of the other Venturers,
including EPC, (the "Indemnitee Party") from and against such Indemnitor
Party's share of any loss, liability or lawsuit related to or arising out
of such Indemnitor Party's ownership interest in an AMI or property
hereunder, AND INCLUDING, WITHOUT LIMITATION SPECIFICALLY, ANY LOSS,
LIABILITY OR LAWSUIT BASED IN WHOLE OR IN PART ON THE NEGLIGENCE, ACTS OR
OMISSIONS OF THE INDEMNITEE PARTY, ITS OFFICERS, DIRECTORS, AGENTS,
EMPLOYEES OR CONTRACTORS, OR ON ANY THEORY OF STRICT LIABILITY IN TORT.
Subject to Paragraph 12.12A, the Venturers and their representatives will
have the right of access during normal business hours, at their own risk
and expense, to all of EPC's geological, geophysical, 3-D and other seismic
data, land and engineering records and
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work product pertaining to the AMIs and jointly owned properties except to
the extent such disclosure would violate applicable law or bonafide
contractual obligations, in which event EPC shall disclose the law or
contractual obligation and use best efforts (without the payment of money)
to secure a waiver of the law or contractual obligation. In all AMIs where
there are jointly owned properties, the Venturers shall bear and pay their
proportionate share based on their respective ownership interests in the
particular AMIs of all costs incurred by EPC in connection with the
development and operating of the AMIs, including costs to obtain permits,
design and shoot 3-D grids, acquire and process seismic data and acquire
oil and gas leases or other interests. In addition, the Venturers will be
responsible to bear and pay their share of any further costs to develop the
property including drilling, testing, completing, operating, and plugging
any wells drilled thereon in accordance with the terms of the applicable
operating agreement and the provisions of Paragraph 12.11 hereof. Any
payments which are due under this agreement will be due, unless otherwise
provided herein or in the applicable operating agreement, within thirty
(30) days from receipt of invoice. Any payments not received within thirty
(30) days will also accrue interest from the date due at the prime rate
then being charged by Compass Bank-Houston plus 2%. Any payments which
accrue under an operating agreement will be due and accrue interest as
provided in the applicable operating agreement.
In addition to the above costs, EPC shall keep, and charge the
Venturers for overhead based on, timesheets and records of its employee's
time and other expenses allocated to the jointly owned property in
accordance with the Overhead Schedule attached as Schedule 12.10 hereto,
provided that such rates may never exceed the lowest rates EPC charges in
bona fide transactions to independent third parties for services it
renders. Additionally, EPC shall maintain accurate records which it shall
furnish to the Venturers on a monthly basis of the time expended by its
employees and of other expenses
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incurred and the Venturers shall also have the right to inspect and audit
EPC's books and records relating to its allocation of its time and expenses
to the Venturers and to others. All such charges for such time and expenses
shall be paid and deducted by EPC to the extent possible from income from
the jointly owned properties from which EPC is marketing production on
behalf of all Venturers, and each Venturer authorizes EPC to make the
applicable deductions from the proceeds of the sale of its production. All
income net of expenses shall be distributed to the Venturers in accordance
with their respective interests in the properties. All invoices for such
amounts are due and payable within thirty (30) days, after which they are
delinquent. Any such time and expenses over and above income from the
jointly owned properties and time and expenses from properties where the
parties separately market their production shall be borne and paid by the
Venturers in accordance with their respective ownership interests in the
properties. The overhead expenses chargeable to the Venturers hereunder
shall cover internal overhead incurred by EPC with respect to the AMIs and
jointly owned properties and all non-third party geological and geophysical
charges with respect thereto, but do not cover outside services and
consultants and third party costs, which the Venturers also agree to bear
and pay their proportionate share of. Provided however that during any time
period when EPC, as operator, is entitled to collect a COPAS overhead
charge from the Venturers, as non-operators, pursuant to a particular joint
operating agreement for a particular well or property, then with respect to
such well or property, EPC shall not allocate or separately charge to the
Venturers any of the items described in Schedule 12.10 which are covered by
and included in the COPAS overhead with respect to such well or property.
Other types of overhead which are not covered by the COPAS provisions with
respect to such well or property may be charged to the Venturers in
accordance herewith. If with respect to any particular property EPC bears a
disproportionate share of overhead, the Venturers' shall receive the
benefit or burden of their respective share of such disproportionate
allocations of overhead. EPC
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shall be entitled to make reasonable allocations of COPAS overhead
and the non-COPAS overhead items chargeable pursuant to Schedule
12.10 hereof in appropriate situations (i.e., such as where there is
a producing or drilling well located in a larger AMI or prospect in
which the Venturers have interests). EPC shall at all times use its
best efforts to properly allocate overhead costs, and if necessary
make adjustments in its charges, so that the cost of new activities
of EPC (in which the Venturers have no interest) shall not be
allocated to the Venturers. The Venturers agree to pay their share of
all third party charges attributable to jointly owned properties or
AMIs which are not covered by the Overhead Schedule attached hereto
or any applicable COPAS overhead agreement.
Notwithstanding the foregoing provisions of this Article 12.10, on
any property or Prospect in which the Venturers become cotenants
hereunder, each Venturer shall have the right after termination of
the Wind-Up Period (but not before) to elect by written notice to
EPC, to advise that such Venturer desires not to have EPC manage such
Venturer's interest in such jointly owned property or Prospect. In
such event, after thirty (30) days from receipt of such written
notice, EPC will have no management or oversight responsibility with
respect to such Venturer's interest in such jointly owned property or
Prospect, and will have no further obligation on a prospective basis
to account to such Venturer for its financial interest therein, nor
to attend meetings with other outside owners or operators with
respect to such Venturer's interest, nor to make elections or other
decisions nor have any further management obligations nor to provide
any further technical information, data or assistance with respect to
such Venturer's interest in such property or Prospect.
Notwithstanding the foregoing, the Venturers shall retain their right
of access to 3-D and other data acquired and or developed by EPC
prior to the date of such written notice provided such data was
acquired during the Term of the Joint Venture or pertains to AMIs in
which the Venturers have an interest. In the event a Venturer makes
such
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election, EPC shall not allocate or charge such Venturer with any of
the allocated overhead or any other costs which would otherwise be
attributable to such Venturer's interest in such property or Prospect
pursuant to this Article 12.10 and/or Schedule 12.10."
12. A new Paragraph 12.11 entitled, "Prospect Identification and
Participation" shall be added to the Agreement as follows:
"12.11. Prospect Identification and Participation. Subsequent to
the distribution by the Joint Venture of the Prospects and AMI
Components with respect to a particular AMI, when EPC has received
data covering an AMI or property in which the Venturers own interests
after December 31, 1996, it shall, employing reasonable business
judgement, evaluate such Data and attempt to identify Prospects in
such area. When EPC identifies a Prospect, it shall provide written
notice to the Venturers, which notice (the "Prospect Notice") shall
set forth:
(i) the location of the Prospect, the interests therein that
may be available for acquisition, and the owners of such interests (if
known),
(ii) an estimate of possible terms on which interests in the
Prospect may be acquired, and the amount of acreage reasonably
necessary to develop the Prospect, and including the information
required to be furnished by an acquiring party pursuant to Article
12.3(f),
(iii) geological and geophysical analysis of the Prospect,
(iv) engineering analysis of the Prospect, and
(v) economics of exploration and development of the Prospect.
The Venturers shall have the right to:
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<PAGE>
(i) elect to participate in the acquisition of the available
interests in the Prospect as identified in the Prospect Notice on the
same terms and conditions as EPC and in the same manner and within
the time periods set forth in Article 12.3 (f); or
(ii) elect not to participate in the acquisition of any interests
in the Prospect.
No party shall be required to make an election on more than five
(5) Prospect Notices in a given AMI at any one time.
Such elections shall be in writing and delivered to EPC. If a
Venturer fails to make an election within thirty (30) days, such
failure shall be deemed an election not to participate in the
acquisition of the interests in the Prospect.
EPC shall be responsible for attempting to negotiate the
acquisition of such interests. Each participating Party shall bear
its share of the costs of acquiring such interests, and such
interests shall be acquired by the parties in proportion to their
respective ownership interests in the particular property. EPC shall
be entitled to retain the interest of any Venturer who elects not to
acquire interests in a particular Prospect, subject to Edge Group
II's right hereunder to acquire the interests of Edge Group and
Gulfedge if either or both of such entities elect not to acquire
interests in a Prospect.
All interests and rights which the Venturers acquire after
December 31, 1996, shall be burdened proportionately by their share
of an overriding royalty interest to be reserved by or conveyed to
EPC of up to 4.1% of 8/8ths, but only to the extent the generating
geologist or other employees of EPC (or its successors) are entitled
to receive such overriding royalty interest and further only if the
interests of all participants in the Prospect (including third
parties) are proportionately burdened by such overriding royalty
-31-
<PAGE>
interest. If such overriding royalty burden is less than 4.1%, the
burden to the Venturers shall be correspondingly reduced.
This Paragraph 12.11 shall not apply to the development of the
Belco Contract Area which shall be governed by the terms of the
Belco Contract and Section 12.3(g)."
13. A new Paragraph 12.12 entitled, "Joint Operating Agreement" shall be
added as follows:
"12.12. Joint Operating Agreement. It is the intent of the
Parties that title to any property or Prospect in which the Venturers
by virtue of this Agreement have joint ownership with EPC after
December 31, 1996 shall be held by the Venturers in their own names
(or that of their nominees) in proportion to their respective
ownership interest in such property. (This does not apply to property
or prospects which continue to be held in the Joint Venture.) In
order to facilitate the acquisition of an interest, title to such
property may be taken in the name of any Venturer, and the other
Venturers shall be promptly assigned their respective interest in
such property, subject to such Venturers agreeing to participate in
the acquisition pursuant to Article 12.3(f) and payment by each such
Venturer of its proportionate share of the acquisition cost of such
interest. Unless a property or Prospect is acquired subject to an
existing Joint Operating Agreement naming a third-party as operator,
each property and Prospect and all drilling and development within
such property or Prospect shall be subject to and conducted under the
terms of a Joint Operating Agreement in the form attached hereto as
Exhibit 12.12, with EPC (or its operating affiliate) to be the
operator. If there is a Joint Operating Agreement in existence for a
subject property at the time of its acquisition, the Venturers agree
to use their best efforts to have EPC (or its operating affiliate)
named as Operator thereunder if so requested by EPC. A separate Joint
Operating Agreement (in the
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<PAGE>
general form of Exhibit 12.12) shall be executed for each Prospect
and shall be deemed to be effective the day the parties acquire an
interest in the Prospect. The Venturers shall have the right to
participate or not participate in the exploration and/or development
of a Prospect in accordance with the terms of such Joint Operating
Agreement. EPC, as operator, agrees not to offset or withhold
revenues due the non-operators on properties covered by a particular
operating agreement, against expenses or liabilities due from such
non-operators with respect to areas covered by any other operating
agreement in which EPC is the operator and also to treat the various
operating agreements as separate and distinct instruments and to
exercise rights under each separate operating agreement separately
from claims asserted or disputes under another operating agreement.
Notwithstanding anything to the contrary herein, the Venturers shall
retain and be entitled to exercise their rights under an operating
agreement to take action to remove or replace EPC as operator,
including voting with other participants to effectuate such removal.
Notwithstanding the foregoing, if, with regard to any Prospect or
AMI in which the Venturers acquire an interest hereunder, EPC enters
into an operating agreement with a third party or parties after the
date of execution of this Extension of Joint Venture Agreement on
terms which are more favorable to such third party or parties than
the terms applicable to the Venturers under the operating agreement
provided for herein or in Sections 12.11 or 12.12A of this agreement,
then such more favorable terms shall apply in lieu of the terms
provided for in the Operating Agreement annexed hereto or the terms
provided or in this agreement, and the Venturers shall nevertheless
be entitled to their respective shares (based on proportionate
Sharing Ratios) of such more favorable terms just as if such terms
had been included in the applicable operating agreement for such
Prospect or AMI, or originally in this agreement."
-33-
<PAGE>
14. A new Paragraph 12.12A entitled "Remedies for Failure to Pay" is added
to the Agreement as follows:
"12.12A Remedies for Failure to Pay. With respect to any property
held outside of the Joint Venture, if any Venturer fails to pay for
its proportionate share of any costs or expenses, including overhead,
due EPC under this Agreement within the applicable time period
provided for herein (unless otherwise specifically provided, all
payments are due within thirty (30) days of receipt of invoice), EPC
shall have the same rights and remedies as the Operator or other
secured party under the underlying applicable operating agreement
with respect to collection of delinquent amounts from the defaulting
non-operators. Each Venturer hereby grants to EPC the same liens and
security interests and other rights as held by the operator in the
applicable underlying operating agreement including without
limitation the COPAS accounting provisions attached thereto. If there
is no underlying applicable operating agreement, then the Venturers
hereby grant to EPC the same liens and security interests and other
rights and remedies held by the operator as set forth in Article
VII.B., C and D of the Operating Agreement attached hereto as Exhibit
12.12 and including without limitation in the COPAS accounting
provisions attached thereto, and such provisions are incorporated
herein by reference and made a part hereof, modified as necessary so
that "Operator" shall mean EPC and "Non-operator", or "Parties" shall
mean the other Venturers. In addition, with regard to any Venturer
who is in default in the payment of its share of overhead costs and
expenses under this Agreement or the attached Operating Agreement or
any other applicable operating agreement, EPC shall have the right to
withhold data interpretation and technical information and assistance
until such default is cured. Notwithstanding anything in this
Agreement to the contrary, EPC's only obligation to provide notices,
information and data with respect to any defaulting Venturer while
such default is continuing shall be to furnish the notice of
acquisitions pursuant to Article 12.3(f) and 12.11 hereof and the AFE
notices for drilling and completing wells provided for in the
-34-
<PAGE>
attached operating agreement (or other applicable Operating
Agreement). In addition, EPC shall have the right, but shall not be
required, to offset any funds held by it belonging or due to the
Venturers, including distributions which have been declared by EPC as
Liquidating Agent and which are due and payable to the Venturers,
against amounts owing by the Venturers to EPC. The Venturers shall
have the right to offset any funds held by EPC or the Joint Venture
belonging or due to the Venturers against amounts owed by the
Venturers to EPC. Notwithstanding anything to the contrary above, EPC
shall allow the Venturers a reasonable period of time after the
furnishing of assignments of Joint Venture properties (not to exceed
one hundred twenty (120) days, if needed to allow the Venturers to
begin collecting their share of revenues on properties assigned to
them prior to exercising any of its rights and remedies hereunder.
Notwithstanding anything to the contrary herein, neither EPC nor
the Joint Venture may declare the Venturers in default under this or
under any operating agreement provided for herein or invoke any of
the remedies provided hereunder or any operating agreement provided
for herein for a failure to pay if at the time EPC owes money to the
Joint Venture or owes money to the Venturers. Additionally, EPC shall
be required to repay any indebtedness it owes to the Venture at any
time it determines that the Joint Venture lacks funds to fund its
operations or if it determines that it will not be able to provide
funding to the Venturers for development of any of the Specially -
Allocated Assets under paragraph 12.3(g) (4)."
16. A new Paragraph 12.14 entitled, "Debt Allocation" shall be added to
the Agreement as follows:
"12.14. Special Allocation for Computer Equipment and Debt. At
the end of the Terms of the Joint Venture, EPC shall be entitled to
own and retain all of the computer equipment of the Joint Venture,
including hardware and software and including word processors and
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<PAGE>
computers and related equipment and software, and EPC shall assume
and pay 100% of all indebtedness for borrowed money associated
therewith. With respect to all computer equipment of the Joint
Venture, EPC shall hire an independent, qualified expert appraiser,
to be selected by John Sfondrini and who is not affiliated with or
related to John Sfondrini, to determine an appraised fair market
value of the equipment as of the date of dissolution. If the
appraised market value of such portion of the computer equipment
which was purchased or acquired prior to the acquisition of the Onyx
Computer System is more than the debt attributable to such portion,
the Venturers (other than EPC) will be entitled to receive additional
assets or sharing ratio adjustments to compensate for their share of
the difference. If the appraised market value of such portion of the
equipment is less than the indebtedness attributable thereto, EPC
will be entitled to receive additional assets or sharing ratio
adjustments to compensate it for its share of such difference. With
regard to the Onyx Computer System and any equipment acquired
thereafter, EPC will assume all indebtedness associated therewith,
and EPC and the other Venturers will not be entitled to any
additional assets or adjustments if the fair market value of such
equipment is different than the indebtedness associated therewith. In
any event, EPC will be entitled to receive and retain all computer
equipment.
EPC or any affiliate or successor entity is authorized to loan
money to the Joint Venture prior to or during the Wind-Up Period in
such amounts on such terms as the parties may agree."
17. A new paragraph 15.11, "Elections" is added to the agreement as
follows:
"15.11 Elections. If a Venturer fails to make an election or
exercise a right under this agreement within the applicable time
period therefore, such failure shall be deemed an election not to
exercise such right or to
-36-
<PAGE>
participate in the applicable project, acquisition, or AMI as the
case may be."
18. Execution in Counterparts. This Amendment may be executed by the
Parties hereto in separate counterparts, each of which when so executed and
delivered shall be deemed to be an original and all of which taken together
shall constitute but one and the same instrument.
19. Governing Law. This Amendment shall be governed, and construed in
accordance with, the laws of the State of Texas.
20. Entire Agreement. THIS AMENDMENT AND THE JOINT VENTURE AGREEMENT, AS
AMENDED HEREBY, AND ALL DOCUMENTS REFERENCED HEREIN OR THEREIN CONSTITUTE THE
ENTIRE AGREEMENT BETWEEN THE PARTIES AS TO THE SUBJECT MATTER HEREIN, AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
21. Nothing herein shall relieve the Joint Venture and EPC as Managing and
Liquidating Agent of the obligation to make distributions to the extent provided
for in the Joint Venture Agreement as herein amended.
In witness whereof the Parties have executed this Agreement the day and
year first written above, effective as of April 8, 1996.
EDGE GROUP II, LTD.
By: /s/ JOHN SFONDRINI
--------------------------------
John Sfondrini
Managing General Partner
and
BY NAPAMCO, LTD.
By: /s/ JOHN SFONDRINI
--------------------------------
John Sfondrini
President
-37-
<PAGE>
EDGE PETROLEUM CORPORATION
By: /s/ JOHN E. CALAWAY
------------------------------
John E. Calaway
President/C.E.O.
Approved: GULFEDGE LIMITED PARTNERSHIP ("Gulfedge")
by Edge Petroleum Corporation
its managing partner
/s/ CHRIS KINSEY
- --------------------------- By: /s/ JOHN E. CALAWAY
Chris Kinsey ----------------------------------------
Name: John E. Calaway
/s/ BELA GARET --------------------------------------
- --------------------------- Title: President/C.E.O.
Bela Garet -------------------------------------
EDGE GROUP PARTNERSHIP ("Edge Group I")
By: /s/ JOHN SFONDRINI
----------------------------------------
John Sfondrini, Authorized Person
and
By: EDGE LIMITED PARTNERSHIP ("Edge I"),
EDGE II LIMITED PARTNERSHIP ("Edge II")
and EDGE III LIMITED PARTNERSHIP
("Edge III"), as General Partners of the
EDGE GROUP PARTNERSHIP
By: /s/ JOHN SFONDRINI
----------------------------------------
John Sfondrini, General Partner of
Edge I, Edge II and Edge III
and
By: NAPAMCO, LTD., General Partner of Edge I,
Edge II AND Edge III
By: /s/ JOHN SFONDRINI
----------------------------------------
John Sfondrini, President
-38-
<PAGE>
EXHIBIT 12.3(G)(3)
Attached to and made a part of that certain Exploration Agreement dated July 26,
1995 by and between Edge Petroleum Corporation and Carrizo Oil & Gas, Inc.
South Texas Regional 3-D Project
Starr and Hildalgo Co., Texas
[map of area subject to agreement]
<PAGE>
EXHIBIT 12.3(G)(3)
Western 3D Seismic Shoot
Duval & Webb Counties, TX
[map delineating proposed 3-D Outline]
<PAGE>
SCHEDULE 12.4
EDGE REGIONAL DATA BASE
2-D Seismic Sections
2-D Seismic Data
Time--Depth Table
PI Production Data
PI Well Data
Well Logs Data
Fault Picks
Welltops
Wellhead
Synthetics
Structure Maps
Lease Maps
Land Maps
Tobin Maps
Contour Maps
Cultural Data
GeoMaps
Dwights Energy Data
Digital Ortho Map Data
Petrophysic Analysis
Scout Data
Well Logs and Analysis
All Data Interpretations
<PAGE>
SCHEDULE 12.5
FORM OF ASSIGNMENT
ASSIGNMENT
STATE OF (S)
(S) KNOW ALL MEN BY THESE PRESENTS THAT:
COUNTY OF (S)
FOR AND IN CONSIDERATION of the sum TEN DOLLARS ($10.00) and other good and
valuable consideration the receipt and sufficiency of which are acknowledged and
in order to effectuate a distribution of assets from the EDGE JOINT VENTURE II,
a Texas partnership, created by Joint Venture Agreement dated April 8, 1991, as
amended (the "Joint Venture Agreement"), EDGE JOINT VENTURE II, by and through
its managing partner, EDGE PETROLEUM CORPORATION, with offices at 1111 Bagby,
Suite 2100, Houston, Texas 77002, as Assignor, has TRANSFERRED, ASSIGNED, SOLD,
and CONVEYED and by these presents does TRANSFER, ASSIGN, SELL and CONVEY unto
, with offices at
, as Assignee, an undivided % share of the
assets and rights described in Exhibit "A" attached hereto and incorporated
herein by reference.
Subject to the lien of any applicable operating agreement or any other
liens or encumbrances which are permitted pursuant to the terms of the Joint
Venture Agreement, Assignor agrees to warrant and forever defend title to the
rights and assets herein conveyed against the claims of all persons whomsoever
claiming or the claim the same or any part thereof by, through or under
Assignor, but not otherwise.
TO HAVE AND TO HOLD the said interests unto the said Assignee, its heirs,
representatives, successors and assigns forever.
1
<PAGE>
EXECUTED this day of , 1996, effective as of
, 1996.
ASSIGNOR:
ATTEST: EDGE JOINT VENTURE II by
By Edge Petroleum Corporation,
its Managing Partner
By:
- ----------------------------- -------------------------------
John E. Calaway
President/C.E.O.
This instrument prepared by: Robert C. Thomas, Esq.
1111 Bagby, Suite 2100
Houston, Texas 77002
STATE OF TEXAS (S)
(S)
COUNTY OF (S)
Before me, on this day, personally appeared JOHN E. CALAWAY,
President/C.E.O. of Edge Petroleum Corporation, Managing Partner of Edge Joint
Venture II, a Texas general partnership, known to me to be the person whose name
is subscribed to the foregoing instrument and acknowledged to me that he
executed the same for the purposes and consideration therein expressed.
IN WITNESS WHEREOF, I have set my hand and seal hereto this day of
, 1996.
--------------------------------
Notary Public, State of Texas
2
<PAGE>
SCHEDULE 12.10
OVERHEAD SCHEDULE
(Rates per hour of Staff/Equipment)
The rates in this Schedule have been determined in a manner so as to recover the
actual costs of providing these services.
SERVICE PROVIDER HOURLY CHARGE*
---------------- --------------
1. Engineer $ 75
2. Geologist $ 65
3. Geophysicist $ 65
4. Landman $ 75
5. Legal/Accounting $ 70
6. Accounting Clerk $ 30
7. Lease Analyst $ 40
8. Secretarial/Draftsmen $ 35
9. Geotechs $ 30
10. Executive Management (JEC, JDC) $ 140
11. Out of pocket costs (postage, At actual amount incurred
recording, copying--at $.25 per
page, travel mileage--at $.30 per
mile, long distance, taxi, hotel)
12. SGI INDY $ 35
13. SUN SPARC 10 $ 35
14. SUN SPARC 20 $ 50
15. SGI INDIGO-2 HIGH IMPACT GRAPHICS $ 80
16. SGI ONYX REALITY GRAPHICS $ 135
* Subject to annual proportionate increase as EPC's cost of doing business
increases, with any annual increase not to exceed 10%.
<PAGE>
EXHIBIT 12.12
A.A.P.L. FORM 610 - 1989
MODEL FORM OPERATING AGREEMENT
Attached to and made a part of that certain
Extension Agreement dated _________________, by and between
_____________________ and Edge Petroleum Corporation, and
Edge Group II Limited Partnership, et al
OPERATING AGREEMENT
DATED
_______________, 19__,
OPERATOR _______________________________________________________________
CONTRACT AREA __________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
COUNTY OR PARISH OF _______________________, STATE OF __________________
COPYRIGHT 1989 - ALL RIGHTS RESERVED
AMERICAN ASSOCIATION OF PETROLEUM
LANDMEN, 4100 FOSSIL CREEK BLVD.
FORT WORTH, TEXAS, 76137, APPROVED FORM.
A.A.P.L. NO. 610 - 1989
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
TABLE OF CONTENTS
-----------------
Article Title Page
- ------- ----- ----
I. DEFINITIONS.........................................................1
II. EXHIBITS............................................................1
III. INTERESTS OF PARTIES................................................2
A. OIL AND GAS INTERESTS:...........................................2
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION.....................2
C. SUBSEQUENTLY CREATED INTERESTS:..................................2
IV. TITLES..............................................................2
A. TITLE EXAMINATION................................................2
B. LOSS OR FAILURE OF TITLE:........................................3
3. All Losses....................................................3
V. OPERATOR............................................................4
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR:....................4
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR....4
1. Resignation or Removal of Operator............................4
2. Selection of Successor Operator...............................4
3. Effect of Bankruptcy..........................................4
C. EMPLOYEES AND CONTRACTORS:.......................................4
D. RIGHTS AND DUTIES OF OPERATOR:...................................4
1. Competitive Rates and Use of Affiliates.......................4
2. Discharge of Joint Account Obligations........................4
3. Protection from Liens.........................................4
4. Custody of Funds..............................................5
5. Access to Contract Area and Records...........................5
6. Filing and Furnishing Governmental Reports....................5
7. Drilling and Testing Operations...............................5
8. Cost Estimates................................................5
9. Insurance.....................................................5
VI. DRILLING AND DEVELOPMENT............................................5
A. INITIAL WELL:....................................................5
B. SUBSEQUENT OPERATIONS:...........................................5
1. Proposed Operations...........................................5
2. Operations by Less Than All Parties...........................6
3. Stand-By Costs................................................7
4. Deepening.....................................................8
5. Sidetracking..................................................8
6. Order of Preference of Operations.............................8
7. Conformity to Spacing Pattern.................................9
8. Paying Wells..................................................9
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:................9
1. Completion....................................................9
2. Rework, Recomplete or Plug Back...............................9
D. OTHER OPERATIONS:................................................9
E. ABANDONMENT OF WELLS:............................................9
1. Abandonment of Dry Holes......................................9
2. Abandonment of Wells That Have Produced......................10
3. Abandonment of Non-Consent Operations........................10
F. TERMINATION OF OPERATIONS:......................................10
G. TAKING PRODUCTION IN KIND.......................................10
(Option 1) Gas Balancing Agreement..............................10
VII. EXPENDITURES AND LIABILITY OF PARTIES..............................11
A. LIABILITY OF PARTIES:...........................................11
B. LIENS AND SECURITY INTERESTS:...................................11
C. ADVANCES:.......................................................12
D. DEFAULTS AND REMEDIES:..........................................12
1. Suspension of Rights.........................................13
2. Suit for Damages.............................................13
3. Deemed Non-Consent...........................................13
4. Advance Payment..............................................13
5. Costs and Attorneys' Fees....................................13
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:...........13
F. TAXES:..........................................................13
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST...................14
A. SURRENDER OF LEASES:............................................14
B. RENEWAL OR EXTENSION OF LEASES:.................................14
C. ACREAGE OR CASH CONTRIBUTIONS:..................................14
i
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
TABLE OF CONTENTS
-----------------
D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:....................15
E. WAIVER OF RIGHTS TO PARTITION:..................................15
IX. INTERNAL REVENUE CODE ELECTION.....................................15
X. CLAIMS AND LAWSUITS................................................15
XI. FORCE MAJEURE......................................................16
XII. NOTICES............................................................16
XIII. TERM OF AGREEMENT..................................................16
XIV. COMPLIANCE WITH LAWS AND REGULATIONS...............................16
A. LAWS, REGULATIONS AND ORDERS:...................................16
B. GOVERNING LAW:..................................................16
C. REGULATORY AGENCIES:............................................16
XV. MISCELLANEOUS......................................................17
A. EXECUTION:......................................................17
B. SUCCESSORS AND ASSIGNS:.........................................17
C. COUNTERPARTS:...................................................17
D. SEVERABILITY:...................................................17
XVI. OTHER PROVISIONS...................................................17
ii
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
OPERATING AGREEMENT
THIS AGREEMENT, entered into by and between Edge Petroleum Corporation
hereinafter designated and referred to as "Operator," and the signatory party or
parties other than Operator, sometimes hereinafter referred to individually as
"Non-Operator," and collectively as "Non-Operators."
WITNESSETH:
WHEREAS, the parties to this agreement are owners of Oil and Gas Leases
and/or Oil and Gas Interests in the land identified in Exhibit "A" and the
parties hereto have reached an agreement to explore and develop these Leases
and/or Oil and Gas Interests for the production of Oil and Gas to the extent and
as hereinafter provided,
NOW, THEREFORE, it is agreed as follows:
ARTICLE I.
DEFINITIONS
As used in this agreement, the following words and terms shall have the
meanings here ascribed to them:
A. The term "AFE" shall mean an Authority for Expenditure prepared by a
party to this agreement for the purpose of estimating the costs to be incurred
in conducting an operation hereunder.
B. The term "Completion" or "Complete" shall mean a single operation
intended to complete a well as a producer of Oil and Gas in one or more Zones,
including, but not limited to, the setting of production casing, perforating,
well stimulation and production testing conducted in such operation.
C. The term "Contract Area" shall mean all of the lands, Oil and Gas
Leases and/or Oil and Gas Interests intended to be developed and operated for
Oil and Gas purposes under this agreement. Such lands, Oil and Gas Leases and
Oil and Gas Interests are described in Exhibit "A."
D. The term "Deepen" shall mean a single operation whereby a well is
drilled to an objective Zone below the deepest Zone in which the well was
previously drilled, or below the Deepest Zone proposed in the associated AFE,
whichever is the lesser.
E. The terms "Drilling Party" and "Consenting Party" shall mean a party
who agrees to join in and pay its share of the cost of any operation conducted
under the provisions of this agreement.
F. The term "Drilling Unit" shall mean the area fixed for the drilling
of one well by order or rule of any state or federal body having authority. If
a Drilling Unit is not fixed by any such rule or order, a Drilling Unit shall be
the drilling unit as established by the pattern of drilling in the Contract Area
unless fixed by express agreement of the Drilling Parties.
G. The term "Drillsite" shall mean the Oil and Gas Lease or Oil and Gas
Interest on which a proposed well is to be located.
H. The term "Initial Well" shall mean the well required to be drilled by
the parties hereto as provided in Article VI.A.
I. The term "Non-Consent Well" shall mean a well in which less than all
parties have conducted an operation as provided in Article VI.B.2.
J. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean
a party who elects not to participate in a proposed operation.
K. The term "Oil and Gas" shall mean oil, gas, casinghead gas, gas
condensate, and/or all other liquid or gaseous hydrocarbons and other marketable
substances produced therewith, unless an intent to limit the inclusiveness of
this term is specifically stated.
L. The term "Oil and Gas Interests" or "Interests" shall mean unleased
fee and mineral interests in Oil and Gas in tracts of land lying within the
Contract Area which are owned by parties to this agreement.
M. The terms "Oil and Gas Lease," "Lease" and "Leasehold" shall mean the
oil and gas leases option agreements, farmins or interests therein covering
tracts of land lying within the Contract Area which are owned jointly by the
parties to this agreement.
N. The term "Plug Back" shall mean a single operation whereby a deeper
Zone is abandoned in order to attempt a Completion in a shallower Zone.
O. The term "Recompletion" or Recomplete" shall mean an operation
whereby a Completion in one Zone is abandoned in order to attempt a Completion
in a different Zone within the existing wellbore.
P. The term "Rework" shall mean an operation conducted in the wellbore
of a well after it is Completed to secure, restore, or improve production in a
Zone which is currently open to production in the wellbore. Such operations
include, but are not limited to, well stimulation operations but exclude any
routine repair or maintenance work or drilling, Sidetracking, Deepening,
Completing, Recompleting, or Plugging Back of a well.
Q. The term "Sidetrack" shall mean the directional control and
intentional deviation of a well from vertical so as to change the bottom hole
location unless done to straighten the hole or to drill around junk in the hole
to overcome other mechanical difficulties.
R. The term "Zone" shall mean a stratum of earth containing or thought
to contain a common accumulation of Oil and Gas separately producible from any
other common accumulation of Oil and Gas.
Unless the context otherwise clearly indicates, words used in the
singular include the plural, the word "person" includes natural and artificial
persons, the plural includes the singular, and any gender includes the
masculine, feminine, and neuter.
ARTICLE II.
EXHIBITS
The following exhibits, as indicated below and attached hereto, are
incorporated in and made a part hereof:
x A. Exhibit "A," shall include the following information:
- -------
(1) Description of lands subject to this agreement,
(2) Restrictions, if any, as to depths, formations, or substances,
(3) Parties to agreement with addresses and telephone numbers for
notice purposes,
(4) Percentages or fractional interests of parties to this agreement,
(5) Oil and Gas Leases and/or Oil and Gas Interests subject to this
agreement,
(6) Burdens on production.
x B. Exhibit "B," Form of Lease.
- -------
x C. Exhibit "C," Accounting Procedure.
- -------
x D. Exhibit "D," Insurance.
- -------
x E. Exhibit "E," Gas Balancing Agreement.
- -------
x F. Exhibit "F," Non-Discrimination and Certification of Non-Segregated
- ------- Facilities.
N/A G. Exhibit "G," Tax Partnership.
- -------
H. Other:_____________________________________________________________
- -------
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
If any provision of any exhibit, except Exhibits "E," "F" and "G," is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.
ARTICLE III.
INTERESTS OF PARTIES
A. OIL AND GAS INTERESTS:
If any party owns an Oil and Gas Interest in the Contract Area, that Interest
shall be treated for all purposes of this agreement and during the term hereof
as if it were covered by the form of Oil and Gas Lease attached hereto as
Exhibit "B," and the owner thereof shall be deemed to own both royalty interest
in such lease and the interest of the lessee thereunder.
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION:
Unless changed by other provisions, all costs and liabilities incurred in
operations under this agreement shall be borne and paid, and all equipment and
materials acquired in operations on the Contract Area shall be owned, by the
parties as their interests are set forth in Exhibit "A." In the same manner,
the parties shall also own all production of Oil and Gas from the Contract Area
subject, however, to the payment of royalties and other burdens on production
as described hereafter.
Regardless of which party has contributed any Oil and Gas Lease or Oil and
Gas Interest on which royalty or other burdens may be payable and except as
otherwise expressly provided in this agreement, each party shall pay or deliver,
or cause to be paid or delivered, all burdens on its share of the production
from the Contract Area up to, but not in excess of, royalties, overriding
royalties and other burdens, jointly borne by written agreement (See Section 9
of the Exploration Agreement). Except as otherwise expressly provided in this
agreement, if any party has contributed hereto any Lease or Interest which is
burdened with any royalty, overriding royalty, production payment or other
burden on production not jointly borne, such party so burdened shall assume and
alone bear all such excess obligations and shall indemnify, defend and hold the
other parties hereto harmless from any and all claims attributable to such
excess burden. However, so long as the Drilling Unit for the productive Zone(s)
is identical with the Contract Area, each party shall pay or deliver or cause to
be paid or delivered, all burdens on production not jointly borne from the
Contract Area due under the terms of the Oil and Gas Lease(s) which such party
has contributed to this agreement, and shall indemnify, defend and hold the
other parties free from any liability therefor.
No party shall ever be responsible, on a price basis higher than the price
received by such party, to any other party's lessor or royalty owner, and if
such other party's lessor or royalty owner should demand and receive settlement
on higher price basis, the party contributing the affected Lease shall bear the
additional royalty burden attributable to such higher price.
Nothing contained in this Article III.B. shall be deemed an assignment or
cross-assignment of interests covered hereby, and in the event two or more
parties contribute to this agreement jointly owned Leases, the parties'
undivided interests in said Leaseholds shall be deemed separate leasehold
interests for the purposes of this agreement.
C. SUBSEQUENTLY CREATED INTERESTS:
If any party has contributed hereto a Lease or Interest that is burdened with
an assignment of production given as security for the payment of money, or if,
after the date of this agreement, any party creates an overriding royalty,
production payment, net profits interest, assignment of production or other
burden payable out of production not jointly borne attributable to its working
interest hereunder, such burden shall be deemed a "Subsequently Created
Interest." Further, if any party has contributed hereto a Lease or Interest
burdened with an overriding royalty, production payment, net profits interest,
or other burden payable out of production not jointly borne created prior to the
date of this agreement, and such burden is not shown on Exhibit "A," such burden
also shall be deemed a Subsequently Created Interest.
The party whose interest is burdened with the Subsequently Created Interest
(the "Burdened Party") shall assume and alone bear, pay and discharge the
Subsequently Created Interest and shall indemnify, defend and hold harmless the
other parties from and against any liability therefor. Further, if the Burdened
Party fails to pay, when due, its share of expenses chargeable hereunder, all
provisions of Article VII.B. shall be enforceable against the Subsequently
Created Interest in the same manner as they are enforceable against the working
interest of the Burdened Party. If the Burdened Party is required under this
agreement to assign or relinquish to any other party, or parties, all or a
portion of its working interest and/or the production attributable thereto, said
other party, or parties, shall receive said assignment and/or production free
and clear of said Subsequently Created Interest, and the Burdened Party shall
indemnify, defend and hold harmless said other party, or parties, from any and
all claims and demands for payment asserted by owners of the Subsequently
Created Interest.
ARTICLE IV.
TITLES
A. Title Examination:
Title examination shall be made on the Drillsite of any proposed well prior
to commencement of drilling operations and, if two or more parties owning a
majority in interest of the Drilling Parties so request or Operator so elects,
title examination shall be made on the entire Drilling Unit, or maximum
anticipated Drilling Unit, of the well. The opinion will include the ownership
of the working interest, minerals, royalty, overriding royalty and production
payments under the applicable Leases. Each party contributing Leases and/or Oil
and Gas Interests to be included in the Drillsite or Drilling Unit, if
appropriate, shall furnish to Operator all abstracts (including federal lease
status reports), title opinions, title papers and curative material in its
possession free of charge. All such information not in the possession of or made
available to Operator by the parties, but necessary for the examination of the
title, shall be obtained by Operator. Operator shall cause title to be examined
by attorneys on its staff or by outside attorneys. Copies of all title opinions
shall be furnished to each Drilling Party. Costs incurred by Operator in
procuring abstracts, fees paid outside attorneys for title examination
(including preliminary, supplemental, shut-in royalty opinions and division
order title opinions) and other direct charges as provided in Exhibit "C" shall
be borne by the Drilling Parties in the proportion that the interest of each
Drilling Party bears to the total interest of all Drilling Parties as such
interests appear in Exhibit "A." Operator shall make no charge for services
rendered by its staff attorneys or other personnel in the performance of the
above functions.
Operator shall be responsible for securing curative matter and pooling
amendments or agreements required in connection with Leases or Oil and Gas
Interests contributed by each party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations and
communitization agreements as well as the conduct of hearings before
governmental agencies for the securing of spacing or pooling orders or any other
orders necessary or appropriate to the conduct of operations hereunder. This
shall not prevent any party from appearing on its own behalf at such hearings.
Costs incurred by Operator, including fees paid to outside attorneys, which are
associated with hearings before governmental agencies, and which costs are
necessary and proper for the activities contemplated under this agreement, shall
be direct charges to the joint account and shall not be covered by the
administrative overhead charges as provided in Exhibit "C."
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
Operator shall make no charge for services rendered by its staff attorneys or
other personnel in the performance of the above functions.
No well shall be drilled on the Contract Area until after the title has been
approved by the examining attorney or title has been accepted by all of the
Drilling Parties in such well.
B. LOSS OR FAILURE OF TITLE:
3. Other Losses: All losses of Leases or Interests committed to this
agreement, other than those set forth in Articles IV.B.1. and IV.B.2. above,
shall be joint losses and shall be borne by all parties in proportion to their
interests shown on Exhibit "A." This shall include but not be limited to the
loss of any Lease or Interest through failure to develop or because express or
implied covenants have not been performed (other than performance which requires
only the payment of money), and the loss of any Lease by expiration at the end
of its primary term if it is not renewed or extended. There shall be no
readjustment of interests in the remaining portion of the Contract Area on
account of any joint loss.
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
ARTICLE V.
OPERATOR
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR:
Edge Petroleum Corporation shall be the Operator of the Contract Area,
and shall conduct and direct and have full control of all operations on the
Contract Area as permitted and required by, and within the limits of this
agreement. In its performance of services hereunder for the Non-Operators,
Operator shall be an independent contractor not subject to the control or
direction of the Non-Operators except as to the type of operation to be
undertaken in accordance with the election procedures contained in this
agreement. Operator shall not be deemed, or hold itself out as, the agent of the
Non-Operators with authority to bind them to any obligation or liability assumed
or incurred by Operator as to any third party. Operator shall conduct its
activities under this agreement as a reasonable prudent operator, in a good and
workmanlike manner, with due diligence and dispatch, in accordance with good
oilfield practice, and in compliance with applicable law and regulation, but in
no event shall it have any liability as Operator to the other parties for losses
sustained or liabilities incurred except such as may result from gross
negligence or willful misconduct.
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:
1. Resignation or Removal of Operator: Operator may resign at any time by
giving written notice thereof to Non-Operators. If Operator terminates its
legal existence, no longer owns an interest hereunder in the Contract Area, or
is no longer capable of serving as Operator, Operator shall be deemed to have
resigned without any action by Non-Operators, except the selection of a
successor. Operator may be removed only for good cause by the affirmative vote
of Non-Operators owning a majority interest based on ownership as shown on
Exhibit "A" remaining after excluding the voting interest or Operator; such vote
shall not be deemed effective until a written notice has been delivered to the
Operator by a Non-Operator detailing the alleged default and Operator has failed
to cure the default within thirty (30) days from its receipt of the notice or,
if the default concerns an operation then being conducted, within forty-eight
(48) hours exclusive of Saturdays, Sundays and legal holidays of its receipt of
the notice. For purposes hereof, "good cause" shall mean not only gross
negligence or willful misconduct but also the material breach of or inability to
meet the standards of operation contained in Article V.A. or material failure or
inability to perform its obligations under this agreement.
Subject to Article VII.D.1., such resignation or removal shall not become
effective until 7:00 o'clock A.M. on the first day of the calendar month
following the expiration of ninety (90) days after the giving of notice of
resignation by Operator or action by the Non-Operators to remove Operator,
unless a successor Operator has been selected and assumes the duties of Operator
at an earlier date. Operator, after effective date of resignation or removal,
shall be bound by the terms hereof as a Non-Operator. A change of a corporate
name or structure of Operator or transfer of Operator's interest to any single
subsidiary, parent or successor corporation shall not be the basis for removal
of Operator.
2. Selection of Successor Operator: Upon the resignation or removal of
Operator under any provision of this agreement, a successor Operator shall be
selected by the parties. The successor Operator shall be selected from the
parties owning an interest in the Contract Area at the time such successor
Operator is selected. The successor Operator shall be selected by the
affirmative vote of two (2) or more parties owning a majority interest based on
ownership as shown on Exhibit "A"; provided, however, if an Operator which has
been removed or is deemed to have resigned fails to vote or votes only to
succeed itself, the successor Operator shall be selected by the affirmative vote
of the party or parties owning a majority interest based on ownership as shown
on Exhibit "A" remaining after excluding the voting interest of the Operator
that was removed or resigned. The former Operator shall promptly deliver to the
successor Operator all records and data relating to the operations conducted by
the former Operator to the extent such records and data are not already in the
possession of the successor operator. Any cost of obtaining or copying the
former Operator's records and data shall be charged to the joint account.
3. Effect of Bankruptcy: If Operator becomes insolvent, bankrupt or is
placed in receivership, it shall be deemed to have resigned without any action
by Non-Operators, except the selection of a successor. If a petition for relief
under the federal bankruptcy laws is filed by or against Operator, and the
removal of Operator is prevented by the federal bankruptcy court, all
Non-Operators and Operator shall comprise an interim operating committee to
serve until Operator has elected to reject or assume this agreement pursuant to
the Bankruptcy Code, and an election to reject this agreement by Operator as a
debtor in possession, or by a trustee in bankruptcy, shall be deemed a
resignation as Operator without any action by Non-Operators, except the
selection of a successor. During the period of time the operating committee
controls operations, all actions shall require the approval of two (2) or more
parties owning a majority interest based on ownership as shown on Exhibit "A."
In the event there are only two (2) parties to this agreement, during the period
of time the operating committee controls operations, a third party acceptable to
Operator, Non-Operator and the federal bankruptcy court shall be selected as a
member of the operating committee, and all actions shall require the approval of
two (2) members of the operating committee without regard for their interest in
the Contract Area based on Exhibit "A."
C. EMPLOYEES AND CONTRACTORS:
The number of employees or contractors used by Operator in conducting
operations hereunder, their selection, and the hours of labor and the
compensation for services performed shall be determined by Operator, and all
such employees or contractors shall be the employees or contractors of Operator.
D. RIGHTS AND DUTIES OF OPERATOR:
1. Competitive Rates and Use of Affiliates: All wells drilled on the
Contract Area shall be drilled on a competitive contract basis at the usual
rates prevailing in the area. If it so desires, Operator may employ its own
tools and equipment in the drilling of wells, but its charges therefor shall not
exceed the prevailing rates in the area and the rate of such charges shall be
agreed upon by the parties in writing before drilling operations are commenced,
and such work shall be performed by Operator under the same terms and conditions
as are customary and usual in the area in contracts of independent contractors
who are doing work of a similar nature. All work performed or materials
supplied by affiliates or related parties of Operator shall be performed or
supplied at competitive rates, pursuant to written agreement, and in accordance
with customs and standards prevailing in the industry.
2. Discharge of Joint Account Obligations: Except as herein otherwise
specifically provided, Operator shall promptly pay and discharge expenses
incurred in the development and operation of the Contract Area pursuant to this
agreement and shall charge each of the parties hereto with their respective
proportionate shares upon the expense basis provided in Exhibit "C." Operator
shall keep an accurate record of the joint account hereunder, showing expenses
incurred and charges and credits made and received.
3. Protection from Liens: Operator shall pay, or cause to be paid, as and
when they become due and payable, all accounts of contractors and suppliers and
wages and salaries for services rendered or performed, and for materials
supplied on, to or in respect of the Contract Area or any operations for the
joint account thereof, and shall keep the Contract Area free from
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
liens and encumbrances resulting therefrom except for those resulting from a
bona fide dispute as to services rendered or materials supplied.
4. Custody of Funds: Operator shall hold for the account of the Non-Operators
any funds of the Non-Operators advanced or paid to the Operator, either for the
conduct of operations hereunder or as a result of the sale of production from
the Contract Area, and such funds shall remain the funds of the Non-Operators on
whose account they are advanced or paid until used for their intended purpose or
otherwise delivered to the Non-Operators or applied toward the payment of debts
as provided in Article VII.B. Nothing in this paragraph shall be construed to
establish a fiduciary relationship between Operator and Non-Operators for any
purpose other than to account for Non-Operator funds as herein specifically
provided. Nothing in this paragraph shall require the maintenance by Operator of
separate accounts for the funds of Non-Operators unless the parties otherwise
specifically agree.
5. Access to Contract Area and Records: Operator shall, except as otherwise
provided herein, permit each Non-Operator or its duly authorized representative,
at the Non-Operator's sole risk and cost, full and free access at all reasonable
times to all operations of every kind and character being conducted for the
joint account on the Contract Area and to the records of operations conducted
thereon or production therefrom, including Operator's books and records relating
thereto. Such access rights shall not be exercised in a manner interfering with
Operator's conduct of an operation hereunder and shall not obligate Operator to
furnish any geologic or geophysical data of an interpretive nature unless the
cost of preparation of such interpretive data was charged to the joint account.
Operator will furnish to each Non-Operator upon request copies of any and all
reports and information obtained by Operator in connection with production and
related items, including, without limitation, meter and chart reports,
production purchaser statements, run tickets and monthly gauge reports, but
excluding purchase contracts and pricing information to the extent not
applicable to the production of the Non-Operator seeking the information. Any
audit of Operator's records relating to amounts expended and the appropriateness
of such expenditures shall be conducted in accordance with the audit protocol
specified in Exhibit "C."
6. Filing and Furnishing Governmental Reports: Operator will file, and upon
written request promptly furnish copies to each requesting Non-Operator not in
default of its payment obligations, all operational notices, reports or
applications required to be filed by local, State, Federal or Indian agencies or
authorities having jurisdiction over operations hereunder. Each Non-Operator
shall provide to Operator on a timely basis all information necessary to
Operator to make such filings.
7. Drilling and Testing Operations: The following provisions shall apply to
each well drilled hereunder, including but not limited to the Initial Well:
(a) Operator will promptly advise Non-Operators of the date on which the
well is spudded, and the date on which drilling operations are commenced.
(b) Operator will send to Non-Operators such reports, test results and
notices regarding the progress of operations on the well as the Non-Operators
shall reasonably request, including, but not limited to, daily drilling reports,
completion reports, and well logs.
(c) Operator shall adequately evaluate and/or test all Zones encountered
which may reasonably be expected to be capable of producing Oil and Gas in
paying quantities as a result of examination of the electric log or any other
logs or cores or tests conducted hereunder.
8. Cost Estimates: Upon request of any Consenting Party, Operator shall
furnish estimates of current and cumulative costs incurred for the joint account
at reasonable intervals during the conduct of any operation pursuant to this
agreement. Operator shall not be held liable for errors in such estimates so
long as the estimates are made in good faith.
9. Insurance: At all times while operations are conducted hereunder, Operator
shall comply with the workers compensation law of the state where the operations
are being conducted; provided, however, that Operator may be a self-insurer for
liability under said compensation laws in which event the only charge that shall
be made to the joint account shall be as provided in Exhibit "C." Operator shall
also carry or provide insurance for the benefit of the joint account of the
parties as outlined in Exhibit "D" attached hereto and made a part hereof.
Operator shall require all contractors engaged in work on or for the Contract
Area to comply with the workers compensation law of the state where the
operations are being conducted and to maintain such other insurance as Operator
may require.
In the event automobile liability insurance is specified in said Exhibit "D,"
or subsequently receives the approval of the parties, no direct charge shall be
made by Operator for premiums paid for such insurance for Operator's automotive
equipment.
ARTICLE VI.
DRILLING AND DEVELOPMENT
A. INITIAL WELL:
To be determined.
B. SUBSEQUENT OPERATIONS:
1. Proposed Operations: If any party hereto should desire to drill any well
on the Contract Area other than the Initial Well, or if any party should desire
to Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole or a well no
longer capable of producing in paying quantities in which such party has not
otherwise relinquished its interest in the proposed objective Zone under this
agreement, the party desiring to drill, Rework, Sidetrack, Deepen, Recomplete or
Plug Back such a well shall give written notice of the proposed operation to the
parties who have not otherwise relinquished their interest in such objective
Zone
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<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
under this agreement and to all other parties in the case of a proposal for
Sidetracking or Deepening, specifying the work to be performed, the location,
proposed depth, objective Zone and the estimated cost of the operation. The
parties to whom such a notice is delivered shall have thirty (30) days after
receipt of the notice within which to notify the party proposing to do the work
whether they elect to participate in the cost of the proposed operation. If a
drilling rig is on location, notice of a proposal to Rework, Sidetract,
Recomplete, Plug Back or Deepen may be given by telephone and mail, telegram or
fax, the response period shall be limited to forty-eight (48) hours, exclusive
of Saturday, Sunday and legal holidays. Failure of a party to whom such notice
is delivered to reply within the period above fixed shall constitute an election
by that party not to participate in the cost of the proposed operation. Any
proposal by a party to conduct an operation conflicting with the operation
initially proposed shall be delivered to all parties within the time and in the
manner provided in Article VI.B.6.
If all parties to whom such notice is delivered elect to participate in such a
proposed operation, the parties shall be contractually committed to participate
therein provided such operations are commenced within the time period hereafter
set forth, and Operator shall, no later than ninety (90) days after expiration
of the notice period of thirty (30) days (or as promptly as practicable after
the expiration of the forty-eight (48) hour period when a drilling rig is on
location, as the case may be), actually commence the proposed operation and
thereafter complete it with due diligence at the risk and expense of the parties
participating therein; provided, however, said commencement date may be extended
upon written notice of same by Operator to the other parties, for a period of
up to thirty (30) additional days if, in the sole opinion of Operator, such
additional time is reasonably necessary to obtain permits from governmental
authorities, surface rights (including rights-of-way) or appropriate drilling
equipment, or to complete title examination or curative matter required for
title approval or acceptance. If the actual operation has not been commenced
within the time provided (including any extension thereof as specifically
permitted herein or in the force majeure provisions of Article XI) and if any
party hereto still desires to conduct said operation, written notice proposing
same must be resubmitted to the other parties in accordance herewith as if no
prior proposal had been made. Those parties that did not participate in the
drilling of a well for which a proposal to Deepen or Sidetrack is made hereunder
shall, if such parties desire to participate in the proposed Deepening or
Sidetracking operation, reimburse the Drilling Parties in accordance with
Article VI.B.4. in the event of a Deepening operation and in accordance with
Article VI.B.5. in the event of a Sidetracking operation.
2. Operations by Less Than All Parties:
(a) Determination of Participation. If any party to whom such notice is
delivered as provided in Article VI.B.1. or VI.C.1. (Option No. 2) elects not to
participate in the proposed operation, then, in order to be entitled to the
benefits of this Article, the party or parties giving the notice and such other
parties as shall elect to participate in the operation shall, no later than
ninety (90) days after the expiration of the notice period of thirty (30) days
(or as promptly as practicable after the expiration of the forty-eight (48) hour
period when a drilling rig is on location, as the case by be) actually commence
the proposed operation and complete it with due diligence. Operator shall
perform all work for the account of the Consenting Parties; provided, however,
if no drilling rig or other equipment is on location, and if Operator is a
Non-Consenting Party, the Consenting Parties shall either: (i) request Operator
to perform the work required by such proposed operation for the account of the
Consenting Parties, or (ii) designate one of the Consenting Parties as Operator
to perform such work. The rights and duties granted to and imposed upon the
Operator under this agreement are granted to and imposed upon the party
designated as Operator for an operation in which the original Operator is a
Non-Consenting Party. Consenting Parties, when conducting operations on the
Contract Area pursuant to this Article VI.B.2., shall comply with all terms and
conditions of this agreement.
If less than all parties approve any proposed operation, the proposing party,
immediately after the expiration of the applicable notice period, shall advise
all Parties of the total interest of the parties approving such operation and
its recommendation as to whether the Consenting Parties should proceed with the
operation as proposed. Each Consenting Party, within forty-eight (48) hours
(exclusive of Saturday, Sunday and legal holidays) after delivery of such
notice, shall advise the proposing party of its desire to (i) limit
participation to such party's interest as shown on Exhibit "A" or (ii) carry
only its proportionate part (determined by dividing such party's interest in the
Contract Area by the interests of all Consenting Parties in the Contract Area)
of Non-Consenting Parties' interests, or (iii) carry its proportionate part
(determined as provided in (ii)) of Non-Consenting Parties' interests together
with all or a portion of its proportionate part of any Non-Consenting Parties'
interests that any Consenting Party did not elect to take. Any interest of
Non-Consenting Parties that is not carried by a Consenting Party shall be deemed
to be carried by the party proposing the operation if such party does not
withdraw its proposal. Failure to advise the proposing party within the time
required shall be deemed an election under (i). In the event a drilling rig is
on location, notice may be given by telephone, and the time permitted for such a
response shall not exceed a total of forty-eight (48) hours (exclusive of
Saturday, Sunday and legal holidays). The proposing party, at its election, may
withdraw such proposal if there is less than 100% participation and shall notify
all parties of such decision within ten (10) days or within twenty-four (24)
hours if a drilling rig is on location, following expiration of the applicable
response period. If 100% subscription to the proposed operation is obtained,
the proposing party shall promptly notify the Consenting Parties of their
proportionate interests in the operation and the party serving as Operator
shall commence such operation within the period provided in Article VI.B.1.,
subject to the same extension right as provided therein.
(b) Relinquishment of Interest for Non-Participation. The entire cost and
risk of conducting such operations shall be borne by the Consenting Parties in
the proportions they have elected to bear same under the terms of the preceding
paragraph. Consenting Parties shall keep the leasehold estates involved in such
operations free and clear of all liens and encumbrances of every kind created by
or arising from the operations of the Consenting Parties. If such an operation
results in a dry hole, then subject to Articles VI.B.6. and VI.E.3., the
Consenting Parties shall plug and abandon the well and restore the surface
location at their sole cost, risk and expense; provided, however, that those
Non-Consenting Parties that participated in the drilling, Deepening or
Sidetracking of the well shall remain liable for, and shall pay, their
proportionate shares of the cost of plugging and abandoning the well and
restoring the surface location insofar only as those costs were not increased by
the subsequent operations of the Consenting Parties. If any well drilled,
Reworked, Sidetracked, Deepened, Recompleted or Plugged Back under the
provisions of this Article results in a well capable of producing Oil and/or Gas
in paying quantities, the Consenting Parties shall Complete and equip the well
to produce at their sole cost and risk, and the well shall then be turned over
to Operator (if the Operator did not conduct the operation) and shall be
operated by it at the expense and for the account of the Consenting Parties.
Upon commencement of operations for the drilling, Reworking, Sidetracking,
Recompleting, Deepening or Plugging Back of any such well by Consenting Parties
in accordance with the provisions of this Article, each Non-Consenting Party
shall be deemed to have relinquished to Consenting Parties, and the Consenting
Parties shall own and be entitled to receive, in proportion to their respective
interests, all of such Non-Consenting Party's interest in the well and share of
production therefrom or, in the case of a Reworking, Sidetracking,
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A.A.P.L FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
Deepening, Recompleting or Plugging Back, or a Completion pursuant to Article
VI.C.1. Option No. 2, all of such Non-Consenting Party's interest in the
production obtained from the operation in which the Non-Consenting Party did
not elect to participate. Such relinquishment shall be effective until the
proceeds of the sale of such share, calculated at the well, or market value
thereof if such share is not sold (after deducting applicable ad valorem,
production, severance, and excise taxes, royalty, overriding royalty and other
interests not excepted by Article III.C. payable out of or measured by the
production from such well accruing with respect to such interest until it
reverts), shall equal the total of the following:
(i) 100% of each such Non-Consenting Party's share of the cost of any newly
acquired surface equipment beyond the wellhead connections (including but not
limited to stock tanks, separators, treaters, pumping equipment and piping),
plus 100% of each such Non-Consenting Party's share of the cost of operation of
the well commencing with first production and continuing until each such
Non-Consenting Party's relinquished interest shall revert to it under other
provisions of this Article, it being agreed that each Non-Consenting Party's
share of such costs and equipment will be that interest which would have been
chargeable to such Non-Consenting Party had it participated in the well from the
beginning of the operations; and
(ii) 500% of (a) that portion of the costs and expenses of drilling,
Reworking, Sidetracking, Deepening, Plugging Back, testing, Completing, and
Recompleting, after deducting any cash contributions received under Article
VIII.C., and of (b) that portion of the cost of newly acquired equipment in the
well (to and including the wellhead connections), which would have been
chargeable to such Non-Consenting Party if it had participated therein.
Notwithstanding anything to the contrary in this Article VI.B., if the well
does not reach the deepest objective Zone described in the notice proposing the
well for reasons other than the encountering of granite or practically
impenetrable substance or other condition in the hole rendering further
operations impracticable, Operator shall give notice thereof to each
Non-Consenting Party who submitted or voted for an alternative proposal under
Article VI.B.6. to drill the well to a shallower Zone than the deepest objective
Zone proposed in the notice under which the well was drilled, and each such
Non-Consenting Party shall have the option to participate in the first
completion attempt proposed in the zone for which such non-consenting party or
parties' submitted or voted for as an alternative proposal, after drilling
operation to reach the deepest objective zone, described in the notice
proposing such well, have been terminated by paying its share of the cost of
drilling the well to its actual depth, calculated in the manner provided in
Article VI.B.4. (a). If any such Non-Consenting Party does not elect to
participate in the first Completion proposed for such well, the relinquishment
provisions of this Article VI.B.2. (b) shall apply to such party's interest.
(c) Reworking, Recompleting or Plugging Back. An election not to participate
in the drilling, Sidetracking or Deepening of a well shall be deemed an election
not to participate in any Reworking or Plugging Back operation proposed in such
a well, or portion thereof, to which the initial non-consent election applied
that is conducted at any time prior to full recovery by the Consenting Parties
of the Non-Consenting Party's recoupment amount. Similarly, an election not to
participate in the Completing or Recompleting of a well shall be deemed an
election not to participate in any Reworking operation proposed in such a well,
or portion thereof, to which the initial non-consent election applied that is
conducted at any time prior to full recovery by the Consenting Parties of the
Non-Consenting Party's recoupment amount. Any such Reworking, Recompleting or
Plugging Back operation conducted during the recoupment period shall be deemed
part of the cost of operation of said well and there shall be added to the sums
to be recouped by the Consenting Parties 500% of that portion of the costs of
the Reworking, Recompleting or Plugging Back operation which would have been
chargeable to such Non-Consenting Party had it participated therein. If such a
Reworking, Recompleting or Plugging Back operation is proposed during such
recoupment period, the provisions of this Article VI.B. shall be applicable as
between said Consenting Parties in said well.
(d) Recoupment Matters. During the period of time Consenting Parties are
entitled to receive Non-Consenting Party's share of production, or the proceeds
therefrom, Consenting Parties shall be responsible for the payment of all ad
valorem, production, severance, excise, gathering and other taxes, and all
royalty, overriding royalty and other burdens applicable to Non-Consenting
Party's share of production not excepted by Article III.C.
In the case of any Reworking, Sidetracking, Plugging Back, Recompleting or
Deepening operation, the Consenting Parties shall be permitted to use, free of
cost, all casing, tubing and other equipment in the well, but the ownership of
all such equipment shall remain unchanged; and upon abandonment of a well after
such Reworking, Sidetracking, Plugging Back, Recompleting or Deepening, the
Consenting Parties shall account for all such equipment to the owners thereof,
with each party receiving its proportionate part in kind or in value, less cost
of salvage.
Within ninety (90) days after the completion of any operation under this
Article, the party conducting the operations for the Consenting Parties shall
furnish each Non-Consenting Party with an inventory of the equipment in and
connected to the well, and an itemized statement of the cost of drilling,
Sidetracking, Deepening, Plugging Back, testing, Completing, Recompleting, and
equipping the well for production; or, at its option, the operating party, in
lieu of an itemized statement of such costs of operation, may submit a detailed
statement of monthly billings. Each month thereafter, during the time the
Consenting Parties are being reimbursed as provided above, the party conducting
the operations for the Consenting Parties shall furnish the Non-Consenting
Parties with an itemized statement of all costs and liabilities incurred in the
operation of the well, together with a statement of the quantity of Oil and Gas
produced from it and the amount of proceeds realized from the sale of the well's
working interest production during the preceding month. In determining the
quantity of Oil and Gas produced during any month, Consenting Parties shall use
industry accepted methods such as but not limited to metering or periodic well
tests. Any amount realized from the sale or other disposition of equipment
newly acquired in connection with any such operation which would have been owned
by a Non-Consenting Party had it participated therein shall be credited against
the total unreturned costs of the work done and of the equipment purchased in
determining when the interest of such Non-Consenting Party shall revert to it as
above provided; and if there is a credit balance, it shall be paid to such
Non-Consenting Party.
If and when the Consenting Parties recover from a Non-Consenting Party's
relinquished interest the amounts provided for above, the relinquished interests
of such Non-Consenting Party shall automatically revert to it as of 7:00 a.m. on
the day following the day on which such recoupment occurs, and, from and after
such reversion, such Non-Consenting Party shall own the same interest in such
well, the material and equipment in or pertaining thereto, and the production
therefrom as such Non-Consenting Party would have been entitled to had it
participated in the drilling, Sidetracking, Reworking, Deepening, Recompleting
or Plugging Back of said well. Thereafter, such Non-Consenting Party shall be
charged with and shall pay its proportionate part of the further costs of the
operation of said well in accordance with the terms of this agreement and
Exhibit "C" attached hereto.
3. Stand-By Costs: When a well which has been drilled or Deepened has
reached its authorized depth and all tests have been completed and the results
thereof furnished to the parties, or when operations on the well have been
otherwise terminated pursuant to Article VI.F., stand-by costs incurred pending
response to a party's notice proposing a Reworking,
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A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
Sidetracking, Deepening, Recompleting, Plugging Back or Completing operation in
such a well (including the period required under Article VI.B.6. to resolve
competing proposals) shall be charged and borne as part of the drilling or
Deepening operation just completed. Stand-by costs subsequent to all parties
responding, or expiration of the response time permitted, whichever first
occurs, and prior to agreement as to the participating interests of all
Consenting Parties pursuant to the terms of the second grammatical paragraph of
Article VI.B.2. (a), shall be charged to and borne as part of the proposed
operation, but if the proposal is subsequently withdrawn because of insufficient
participation, such stand-by costs shall be allocated between the Consenting
Parties in the proportion each Consenting Party's interest as shown on Exhibit
"A" bears to the total interest as shown on Exhibit "A" of all Consenting
Parties.
In the event that notice for a Sidetracking operation is given while the
drilling rig to be utilized is on location, any party may request and receive up
to five (5) additional days after expiration of the forty-eight hour response
period specified in Article VI.B.1. within which to respond by paying for all
standby costs and other costs incurred during such extended response period;
Operator may require such party to pay the estimated stand-by time in advance as
a condition to extending the response period. If more than one party elects to
take such additional time to respond to the notice, standby costs shall be
allocated between the parties taking additional time to respond on a day-to-day
basis in the proportion each electing party's interest as shown on Exhibit "A"
bears to the total interest as shown on Exhibit "A" of all the electing parties.
4. Deepening: If less than all the parties elect to participate in a
drilling, Sidetracking, or Deepening operation proposed pursuant to Article
VI.B.1., the interest relinquished by the Non-Consenting Parties to the
Consenting Parties under Article VI.B.2. shall relate only and be limited to the
lesser of (i) the total depth actually drilled or (ii) the objective depth or
Zone of which the parties were given notice under Article VI.B.1. ("Initial
Objective"). Such well shall not be Deepened beyond the Initial Objective
without first complying with this Article to afford the Non-Consenting Parties
the opportunity to participate in the Deepening operation.
In the event any Consenting Party desires to drill or Deepen a Non-Consent
Well to a depth below the Initial Objective, such party shall give notice
thereof, complying with the requirements of Article VI.B.1., to all parties
(including Non-Consenting Parties). Thereupon, Articles VI.B.1. and 2. shall
apply and all parties receiving such notice shall have the right to participate
or not participate in the Deepening of such well pursuant to said Articles
VI.B.1. and 2. If a Deepening operation is approved pursuant to such
provisions, if any Non-Consenting Party elects to participate in the Deepening
operation, such Non-Consenting party shall pay or make reimbursement (as the
case may be) of the following costs and expenses:
(a) If the proposal to Deepen is made prior to the Completion of such well as
a well capable of producing in paying quantities, such Non-Consenting Party
shall pay (or reimburse Consenting Parties for, as the case may be) that share
of costs and expenses incurred in connection with the drilling of said well from
the surface to the Initial Objective which Non-Consenting Party would have paid
had such Non-Consenting Party agreed to participate therein, plus the
Non-Consenting Party's share of cost of Deepening and of participating in any
further operations on the well in accordance with the other provisions of this
Agreement; provided, however, all costs for testing and Completion or attempted
Completion of the well incurred by Consenting Parties prior to the point of
actual operations to Deepen beyond the Initial Objective shall be for the sole
account of Consenting Parties.
(b) If the proposal is made for a Non-Consent Well that has been previously
Completed as well capable of producing in paying quantities, but is no longer
capable of producing in paying quantities, such Non-Consenting Party shall pay
(or reimburse Consenting Parties for, as the case may be) its proportionate
share of all costs of drilling, Completing, and equipping said well from the
surface to the Initial Objective, calculated in the manner provided in paragraph
(a) above, less those costs recouped by the Consenting Parties from the sale of
production from the well. The Non-Consenting Party shall also pay its
proportionate share of all costs of re-entering said well. The Non-Consenting
Parties' proportionate part (based on the percentage of such well Non-Consenting
Party would have owned had it previously participated in such Non-Consent Well)
of the costs of salvable materials and equipment remaining in the hole and
salvable surface equipment used in connection with such well shall be determined
in accordance with Exhibit "C." If the Consenting Parties have recouped the
cost of drilling, Completing, and equipping the well at the time such Deepening
operation is conducted, then a Non-Consenting Party may participate in the
Deepening of the well with no payment for costs incurred prior to re-entering
the well for Deepening.
The foregoing shall not imply a right of any Consenting Party to propose any
Deepening for a Non-Consent Well prior to the drilling of such well to its
Initial Objective without the consent of the other Consenting Parties as
provided in Article VI.F.
5. Sidetracking: Any party having the right to participate in a proposed
Sidetracking operation that does not own an interest in the affected wellbore at
the time of the notice shall, upon electing to participate, tender to the
wellbore owners its proportionate share (equal to its interest in the
Sidetracking operation) of the value of that portion of the existing wellbore to
be utilized as follows:
(a) If the proposal is for Sidetracking an existing dry hole,
reimbursement shall be on the basis of the actual costs incurred in the initial
drilling of the well down to the depth at which the Sidetracking operation is
initiated.
(b) If the proposal is for Sidetracking a well which has previously
produced, reimbursement shall be on the basis of such party's proportionate
share of drilling and equipping costs incurred in the initial drilling of the
well down to the depth at which the Sidetracking operation is conducted,
calculated in the manner described in Article VI.B.4(b) above. Such party's
proportionate share of the cost of the well's salvable materials and equipment
down to the depth at which the Sidetracking operation is initiated shall be
determined in accordance with the provisions of Exhibit "C."
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7. Conformity to Spacing Pattern. Notwithstanding the provisions of this
Article VI.B.2., it is agreed that no wells shall be proposed (unless the well
is proposed to a separate geological anomaly) to be drilled to or Completed in
or produced from a Zone from which a well located elsewhere on the Contract Area
is producing, unless such well conforms to the then-existing well spacing
pattern for such Zone.
8. Paying Wells. No party shall conduct any Reworking, Deepening, Plugging
Back, Completion, Recompletion, or Sidetracking operation under this agreement
with respect to any well then capable of producing in paying quantities except
with the consent of all parties that have not relinquished interests in the well
at the time of such operation.
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:
1. Completion: Without the consent of all parties, no well shall be drilled,
Deepened or Sidetracked, except any well drilled, Deepened or Sidetracked
pursuant to the provisions of Article VI.B.2. of this agreement. Consent to the
drilling, Deepening or Sidetracking shall include:
[X] Option No. 2: All necessary expenditures for the drilling, Deepening or
Sidetracking and testing of the well. When such well has reached its authorized
depth, and all logs, cores and other tests have been completed, and the results
thereof furnished to the parties, Operator shall give immediate notice to the
Non-Operators having the right to participate in a Completion attempt whether or
not Operator recommends attempting to Complete the well, together with
Operator's AFE for Completion costs if not previously provided. The parties
receiving such notice shall have forty-eight (48) hours (exclusive of Saturday,
Sunday and legal holidays) in which to elect by delivery of notice to Operator
to participate in a recommended Completion attempt or to make a Completion
proposal with an accompanying AFE. Operator shall deliver any such Completion
proposal, or any Completion proposal conflicting with Operator's proposal, to
the other parties entitled to participate in such Completion in accordance with
the procedures specified in Article XVI.A. Election to participate in a
Completion attempt shall include consent to all necessary expenditures for the
Completing and equipping of such well, including necessary tankage and/or
surface facilities but excluding any stimulation operation not contained on the
Completion AFE. Failure of any party receiving such notice to reply within the
period above fixed shall constitute an election by that party not to participate
in the cost of the Completion attempt; provided, that Article XVI.A. shall
control in the case of conflicting Completion proposals. If one or more, but
less than all of the parties, elect to attempt a Completion, the provisions of
Article VI.B.2. hereof (the phrase "Reworking, Sidetracking, Deepening,
Recompleting or Plugging Back" as contained in Article VI.B.2. shall be deemed
to include "Completing") shall apply to the operations thereafter conducted by
less than all parties; provided, however, that Article VI.B.2. shall apply
separately to each separate Completion or Recompletion attempt undertaken
hereunder, and an election to become a Non-Consenting Party as to one Completion
or Recompletion attempt shall not prevent a party from becoming a Consenting
Party in subsequent Completion or Recompletion attempts regardless whether the
Consenting Parties as to earlier Completions or Recompletions have recouped
their costs pursuant to Article VI.B.2.; provided further, that any recoupment
of costs by a Consenting Party shall be made solely from the production
attributable to the Zone in which the Completion attempt is made. Election by a
previous Non-Consenting Party to participate in a subsequent Completion or
Recompletion attempt shall require such party to pay its proportionate share of
the cost of salvable materials and equipment installed in the well pursuant to
the previous Completion or Recompletion attempt, insofar and only insofar as
such materials and equipment benefit the Zone in which such party participates
in a Completion attempt.
2. Rework, Recomplete or Plug Back: No well shall be Reworked, Recompleted
or Plugged Back except a well Reworked, Recompleted, or Plugged Back pursuant to
the provisions of Article VI.B.2. of this agreement. Consent to the Reworking,
Recompleting or Plugging Back of a well shall include all necessary expenditures
in conducting such operations and Completing and equipping of said well,
including necessary tankage and/or surface facilities.
D. OTHER OPERATIONS:
Operator shall not undertake any single project reasonably estimated to
require an expenditure in excess of Ten Thousand Dollars ($10,000.00) except in
connection with the drilling, Sidetracking, Reworking, Deepening, Completing,
Recompleting or Plugging Back of a well that has been previously authorized by
or pursuant to this agreement; provided, however, that, in case of explosion,
fire, flood or other sudden emergency, whether of the same or different nature,
Operator may take such steps and incur such expenses as in its opinion are
required to deal with the emergency to safeguard life and property but Operator,
as promptly as possible, shall report the emergency to the other parties.
Operator shall furnish any Non-Operator an itemized estimate for any single
project costing in excess of Twenty-Five Thousand Dollars ($25,000.00). Any
party who has not relinquished its interest in a well shall have the right to
propose that Operator perform repair work or undertake the installation of
artificial lift equipment or ancillary production facilities such as salt water
disposal wells or to conduct additional work with respect to a well drilled
hereunder or other similar project (but not including the installation of
gathering lines or other transportation or marketing facilities, the
installation of which shall be governed by separate agreement between the
parties) reasonably estimated to require an expenditure in excess of the amount
first set forth above in this Article VI.D. (except in connection with an
operation required to be proposed under Articles VI.B.1. or VI.C.1. Option No.
2, which shall be governed exclusively by those Articles). Operator shall
deliver such proposal to all parties entitled to participate therein. If within
thirty (30) days thereof Operator secures the written consent of any party or
parties owning at least 100% of the interests of the parties entitled to
participate in such operation, each party having the right to participate in
such project shall be bound by the terms of such proposal and shall be obligated
to pay its proportionate share of the costs of the proposed project as if it had
consented to such project pursuant to the terms of the proposal.
E. ABANDONMENT OF WELLS:
1. Abandonment of Dry Holes: Except for any well drilled or Deepened
pursuant to Article VI.B.2., any well which has been drilled or Deepened under
the terms of this agreement and is proposed to be completed as a dry hole shall
not be
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
plugged and abandoned without the consent of all parties. Should Operator,
after diligent effort, be unable to contact any party, or should any party fail
to reply within forty-eight (48) hours (exclusive of Saturday, Sunday and legal
holidays) after delivery of notice of the proposal to plug and abandon such
well, such party shall be deemed to have consented to the proposed abandonment.
All such wells shall be plugged and abandoned in accordance with applicable
regulations and at the cost, risk and expense of the parties who participated in
the cost of drilling or Deepening such well. Any party who objects to plugging
and abandoning such well by notice delivered to Operator within forty-eight (48)
hours (exclusive of Saturday, Sunday and legal holidays) after delivery of
notice of the proposed plugging shall take over the well as of the end of such
forty-eight (48) hour notice period and conduct further operations in search of
Oil and/or Gas subject to the provisions of Article VI.B.; failure of such party
to provide proof reasonably satisfactory to Operator of its financial capability
to conduct such operations or to take over the well within such period or
thereafter to conduct operations on such well or plug and abandon such well
shall entitle Operator to retain or take possession of the well and plug and
abandon the well. The party taking over the well shall indemnify Operator (if
Operator is an abandoning party) and the other abandoning parties against
liability for any further operations conducted on such well except for the costs
of plugging and abandoning the well and restoring the surface, for which the
abandoning parties shall remain proportionately liable.
2. Abandonment of Wells That Have Produced: Except for any well in which a
Non-Consent operation has been conducted hereunder for which the Consenting
Parties have not been fully reimbursed as herein provided, any well which has
been completed as a producer shall not be plugged and abandoned without the
consent of all parties. If all parties consent to such abandonment, the well
shall be plugged and abandoned in accordance with applicable regulations and at
the cost, risk and expense of all the parties hereto. Failure of a party to
reply within sixty (60) days of delivery of notice of proposed abandonment shall
be deemed an election to consent to the proposal. If, within sixty (60) days
after delivery of notice of the proposed abandonment of any well, all parties do
not agree to the abandonment of such well, those wishing to continue its
operation from the Zone then open to production shall be obligated to take over
the well as of the expiration, of the applicable notice period and shall
indemnify Operator (if Operator is an abandoning party) and the other abandoning
parties against liability for any further operations on the well conducted by
such parties. Failure of such party or parties to provide proof reasonably
satisfactory to Operator of their financial capability to conduct such
operations or to take over the well within the required period or thereafter to
conduct operations on such well shall entitle Operator to retain or take
possession of such well and plug and abandon the well.
Parties taking over a well as provided herein shall tender to each of the
other parties its proportionate share of the value of the well's salvable
material and equipment, determined in accordance with the provisions of Exhibit
"C," less the estimated cost of salvaging and the estimated cost of plugging and
abandoning and restoring the surface. Each abandoning party shall assign to the
non-abandoning parties, without warranty, express or implied, as to title or as
to quantity, or fitness for use of the equipment and material, all of its
interest in the wellbore of the well and related equipment, together with its
interest in the Leasehold insofar and only insofar as such Leasehold covers the
right to obtain production from that wellbore in the Zone then open to
production. If the interest of the abandoning party is or includes an Oil and
Gas Interest, such party shall execute and deliver to the non-abandoning party
or parties an oil and gas lease, limited to the wellbore and the Zone than open
to production, for a term of one (1) year and so long thereafter as Oil and/or
Gas is produced from the Zone covered thereby, such lease to be on the form
attached as Exhibit "B." The assignments or leases so limited shall encompass
the Drilling Unit upon which the well is located. The payments by, and the
assignments or leases to, the assignees shall be in a ratio based upon the
relationship of their respective percentage of participation in the Contract
Area to the aggregate of the percentages of participation in the Contract Area
of all assignees. There shall be no readjustment of interests in the remaining
portions of the Contract Area.
Thereafter, abandoning parties shall have no further responsibility,
liability, or interest in the operation of or production from the well in the
Zone then open other than the royalties retained in any lease made under the
terms of this Article. Upon request, Operator shall continue to operate the
assigned well for the account of the non-abandoning parties at the rates and
charges contemplated by this agreement, plus any additional cost and charges
which may arise as the result of the separate ownership of the assigned well.
Upon proposed abandonment of the producing Zone assigned or leased, the assignor
or lessor shall then have the option to repurchase its prior interest in the
well (using the same valuation formula) and participate in further operations
therein subject to the provisions hereof. In the event the well to be plugged
and abandoned is the last well on the lease or unit, the abandoning parties
shall assign to the non-abandoning parties all of its interest in the wellbore,
equipment, leasehold as to all zones and shall have no further rights in such
lease or unit.
3. Abandonment of Non-Consent Operations: The provisions of Article VI.E.1.
or VI.E.2. above shall be applicable as between Consenting Parties in the event
of the proposed abandonment of any well excepted from said Articles; provided,
however, no well shall be permanently plugged and abandoned unless and until all
parties having the right to conduct further operations therein have been
notified of the proposed abandonment and afforded the opportunity to elect to
take over the well in accordance with the provisions of this Article VI.E.; and
provided further, that Non-Consenting Parties who own an interest in a portion
of the well shall pay their proportionate shares of abandonment and surface
restoration costs for such well as provided in Article VI.B.2.(b).
F. TERMINATION OF OPERATIONS:
Upon the commencement of an operation for the drilling, Reworking,
Sidetracking, Plugging Back, Deepening, testing, Completion or plugging of a
well, including but not limited to the Initial Well, such operation shall not be
terminated without consent of parties bearing 100% of the costs of such
operation; provided, however, that in the event granite or other practically
impenetrable substance or condition in the hole is encountered with renders
further operations impractical, Operator may discontinue operations and give
notice of such condition in the manner provided in Article VI.B.1., and the
provisions of Article VI.B. or VI.E. shall thereafter apply to such operation,
as appropriate.
G. TAKING PRODUCTION IN KIND:
[X] Option No. 1: Gas Balancing Agreement Attached
Each party shall take in kind or separately dispose of its
proportionate share of all Oil and Gas produced from the Contract Area,
exclusive of production which may be used in development and producing
operations in preparing and treating Oil and Gas for marketing purposes
and production unavoidably lost. Any extra expenditure incurred in the
taking in kind or separate disposition by any party of its proportionate
share of the production shall be borne by such party. Any party taking
its share of production in kind shall be required to pay for only its
proportionate share of such part of Operator's surface facilities which
it uses.
Each party shall execute such division orders and contracts as may be
necessary for the sale of its interest in production from the Contract
Area, and, except as provided in Article VII.B., shall be entitled to
receive payment
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
directly from the purchaser thereof for its share of all production.
If any party fails to make the arrangements necessary to take in kind or
separately dispose of its proportionate share of the Oil produced from the
Contract Area, Operator shall have the right, subject to the revocation at
will by the party owning it, but not the obligation, to purchase such Oil or
sell it to others at any time and from time to time, for the account of the
non-taking party. Any such purchase or sale by Operator may be terminated by
Operator upon at least thirty (30) days written notice to the owner of said
production and shall be subject always to the right of the owner of the
production upon at least thirty (30) days written notice to Operator to
exercise at any time its right to take in kind, or separately dispose of, its
share of all Oil not previously delivered to a purchaser. Any purchase or
sale by Operator of any other party's share of Oil shall be only for such
reasonable periods of time as are consistent with the minimum needs of the
industry under the particular circumstances, but in no event for a period in
excess of one (1) year.
Any such sale by Operator shall be in a manner commercially reasonable
under the circumstances but Operator shall have no duty to share any existing
market or to obtain a price equal to that received under any existing market.
The sale or delivery by Operator of a non-taking party's share of Oil under
the terms of any existing contract of Operator shall not give the non-taking
party any interest in or make the non-taking party a party to said contract.
No purchase shall be made by Operator without first giving the non-taking
party at least thirty (30) days written notice of such intended purchase and
the price to be paid or the pricing basis to be used.
All parties shall give timely written notice to Operator of their Gas
marketing arrangements for the following month, excluding price, and shall
notify Operator immediately in the event of a change in such arrangements.
Operator shall maintain records of all marketing arrangements, and of volumes
actually sold or transported, which records shall be made available to Non-
Operators upon reasonable request.
In the event one or more parties' separate disposition of its share of
the Gas causes split-stream deliveries to separate pipelines and/or
deliveries which on a day-to-day basis for any reason are not exactly equal
to a party's respective proportionate share of total Gas sales to be
allocated to it, the balancing or accounting between the parties shall be in
accordance with any Gas balancing agreement between the parties hereto,
whether such an agreement is attached as Exhibit "E" or is a separate
agreement. Operator shall give notice to all parties of the first sales of
Gas from any well under this agreement.
ARTICLE VII.
EXPENDITURES AND LIABILITY OF PARTIES
A. LIABILITY OF PARTIES:
The liability of the parties shall be several, not joint or collective. Each
party shall be responsible only for its obligations, and shall be liable only
for its proportionate share of the costs of developing and operating the
Contract Area. Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally, and no party shall
have any liability to third parties hereunder to satisfy the default of any
other party in the payment of any expense or obligation hereunder. It is not the
intention of the parties to create, nor shall this agreement be construed as
creating, a mining or other partnership, joint venture, agency relationship or
association, or to render the parties liable as partners, co-venturers, or
principals. In their relations with each other under this agreement, the parties
shall not be considered fiduciaries or to have established a confidential
relationship but rather shall be free to act on an arm's-length basis in
accordance with their own respective self-interest, subject, however, to the
obligation of the parties to act in good faith in their dealings with each other
with respect to activities hereunder.
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
B. LIENS AND SECURITY INTERESTS:
Each party grants to the other parties hereto a lien upon any interest it now
owns or hereafter acquires in Oil and Gas Leases and Oil and Gas Interests in
the Contract Area, and a security interest and/or purchase money security
interest in any interest it now owns or hereafter acquires in the personal
property and fixtures on or used or obtained for use in connection therewith, to
secure performance of all of its obligations under this agreement including but
not limited to payment of expense, interest and fees, the proper disbursement
of all monies paid hereunder, the assignment or relinquishment of interest in
Oil and Gas Leases as required hereunder, and the proper performance of
operations hereunder. Such lien and security interest granted by each party
hereto shall include such party's leasehold interests, working interests,
operating rights, and royalty and overriding royalty interests in the Contract
Area now owned or hereafter acquired and in lands pooled or unitized therewith
or otherwise becoming subject to this agreement, the Oil and Gas when extracted
therefrom and equipment situated thereon or used or obtained for use in
connection therewith (including, without limitation, all wells, tools, and
tubular goods), and accounts (including, without limitation, accounts arising
from gas imbalances or from the sale of Oil and/or Gas at the wellhead),
contract rights, inventory and general intangibles relating thereto or arising
therefrom, and all proceeds and products of the foregoing.
To perfect the lien and security agreement provided herein, each party hereto
shall execute and acknowledge the recording supplement and/or any financing
statement prepared and submitted by any party hereto in conjunction herewith or
at any time following execution hereof, and Operator is authorized to file this
agreement or the recording supplement executed herewith as a lien or mortgage in
the applicable real estate records and as a financing statement with the proper
officer under the Uniform Commercial Code in the state in which the Contract
Area is situated and such other states as Operator deem appropriate to perfect
the security interest granted hereunder. Any party may file this agreement, the
recording supplement executed herewith, or such other documents as it deems
necessary as a lien or mortgage in the applicable real estate records and/or a
financing statement with the proper officer under the Uniform Commercial Code.
Each party represents and warrants to the other parties hereto that the lien
and security interest granted by such party to the other parties shall be a
first and prior lien, and each party hereby agrees to maintain the priority of
said lien and security interest against all persons acquiring an interest in Oil
and Gas Leases and Interests covered by this agreement by, through or under such
party. All parties acquiring an interest in Oil and Gas Leases and Oil and Gas
Interests covered by this agreement, whether by assignment, merger, mortgage,
operation of law, or otherwise, shall be deemed to have taken subject to the
lien and security interest granted by this Article VII.B. as to all obligations
attributable to such interest hereunder whether or not such obligations arise
before or after such interest is acquired.
To the extent that parties have a security interest under the Uniform
Commercial Code of the state in which the Contract Area is situated, they shall
be entitled to exercise the rights and remedies of a secured party under the
Code. The bringing of a suit and the obtaining of judgment by a party for the
secured indebtedness shall not be deemed an election of remedies or otherwise
affect the lien rights or security interest as security for the payment thereof.
In addition, upon default by any party in the payment of its share of expenses,
interests or fees, or upon the improper use of funds by the Operator, the other
parties shall have the right, without prejudice to other rights or remedies, to
collect from the purchaser the proceeds from the sale of such defaulting party's
share of Oil and Gas until the amount owned by such party, plus interest as
provided in "Exhibit C," has been received, and shall have the right to offset
the amount owned against the proceeds from the sale of such defaulting party's
share of Oil and Gas. All purchasers of production may rely on a notification
of default from the non-defaulting party or parties stating the amount due as a
result of the default, and all parties waive any recourse available against
purchasers for releasing production proceeds as provided in this paragraph.
If any party does not perform all of its obligations hereunder, and the
failure to perform subjects such party to foreclosure or execution proceedings
pursuant to the provisions of this agreement, to the extent allowed by governing
law, the defaulting party waives any available right of redemption from and
after the date of judgment, any required valuation or appraisement of the
mortgaged or secured property prior to sale, any available right to stay
execution or to require a marshalling of assets and any required bond in the
event a receiver is appointed. In addition, to the extent permitted by
applicable law, each party hereby grants to the other parties a power of sale as
to any property that is subject to the lien and security rights granted
hereunder, such power to be exercised in the manner provided by applicable law
or otherwise in a commercially reasonable manner and upon reasonable notice.
Each party agrees that the other parties shall be entitled to utilize the
provisions of Oil and Gas lien law or other lien law of any state in which the
Contract Area is situated to enforce the obligations of each party hereunder.
Without limiting the generality of the foregoing, to the extent permitted by
applicable law, Non-Operators agree that Operator may invoke or utilize the
mechanics' or materialmen's lien law of the state in which the Contract Area is
situated in order to secure the payment to Operator of any sum due hereunder for
services performed or materials supplied by Operator.
C. ADVANCES:
Operator, at its election, shall have the right from time to time to demand
and receive from one or more of the other parties payment in advance of their
respective shares of the estimated amount of the expense to be incurred in
operations hereunder during the next succeeding month, which right may be
exercised only by submission to each such party of an itemized statement of such
estimated expense, together with an invoice for its share thereof. Each such
statement and invoice for the payment in advance of estimated expense shall be
submitted on or before the 20th day of the next preceding month. Each party
shall pay to Operator its proportionate share of such estimate within fifteen
(15) days after such estimate and invoice is received. If any party fails to
pay its share of said estimate within said time, the amount due shall bear
interest as provided in Exhibit "C" until paid. Proper adjustment shall be made
monthly between advances and actual expense to the end that each party shall
bear and pay its proportionate share of actual expenses incurred, and no more.
D. DEFAULTS AND REMEDIES:
If any party fails to discharge any financial obligation under this
agreement, including without limitation the failure to make any advance under
the preceding Article VII.C. or any other provision of this agreement, within
the period required for such payment hereunder, then in addition to the remedies
provided in Article VII.B. or elsewhere in this agreement, the remedies
specified below shall be applicable. For purposes of this Article VII.D., all
notices and elections shall be delivered
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
only by Operator, except that Operator shall deliver any such notice and
election requested by a non-defaulting Non-Operator, and when Operator is the
party in default, the applicable notices and elections can be delivered by any
Non-Operator. Election of any one or more of the following remedies shall not
preclude the subsequent use of any other remedy specified below or otherwise
available to a non-defaulting party.
1. Suspension of Rights: Upon request by any party, Operator will deliver to
the party in default a Notice of Default, which shall specify the default,
specify the action to be taken to cure the default, and specify that failure to
take such action will result in the exercise of one or more of the remedies
provided in this Article. If the default is not cured within thirty (30) days
of the delivery of such Notice of Default, all of the rights of the defaulting
party granted by this agreement may upon notice be suspended until the default
is cured, without prejudice to the right of the non-defaulting party or parties
to continue to enforce the obligations of the defaulting party previously
accrued or thereafter accruing under this agreement. If Operator is the party in
default, the Non-Operators shall have in addition the right, by vote of Non-
Operators owning a majority in interest in the Contract Area after excluding the
voting interest of Operator, to appoint a new Operator effective immediately.
The rights of a defaulting party that may be suspended hereunder at the election
of the non-defaulting parties shall include, without limitation, the right to
receive information as to any operation conducted hereunder during the period of
such default, the right to elect to participate in an operation proposed under
Article VI.B. of this agreement, the right to participate in an operation being
conducted under this agreement even if the party has previously elected to
participate in such operation, and the right to receive proceeds of production
from any well subject to this agreement.
2. Suit for Damages: Non-defaulting parties or Operator for the benefit of
non-defaulting parties may sue (at joint account expense) to collect the amounts
in default, plus interest accruing on the amounts recovered from the date of
default until the date of collection at the rate specified in Exhibit "C"
attached hereto. Nothing herein shall prevent any party from suing any
defaulting party to collect consequential damages accruing to such party as a
result of the default.
3. Deemed Non-Consent: The non-defaulting party may deliver a written Notice
of Non-Consent Election to the defaulting party at any time after the expiration
of the thirty-day cure period following delivery of the Notice of Default, in
which event if the billing is for the drilling of a new well or the Plugging
Back, Sidetracking, Reworking or Deepening of a well which is to be or has been
plugged as a dry hole, or for the Completion or Recompletion of any well, the
defaulting party will be conclusively deemed to have elected not to participate
in the operation and to be a Non-Consenting Party with respect thereto under
Article VI.B. or VI.C., as the case bay be, to the extent of the costs unpaid by
such party, notwithstanding any election to participate theretofore made.
Until the delivery of such Notice of Non-Consent Election to the defaulting
party, such party shall have the right to cure its default by paying its unpaid
share of costs plus interest at the rate set forth in Exhibit "C," provided,
however, such payment shall not prejudice the rights of the non-defaulting
parties to pursue remedies for damages incurred by the non-defaulting parties as
a result of the default. Any interest relinquished pursuant to this Article
VII.D.3. shall be offered to the non-defaulting parties in proportion to their
interests, and the non-defaulting parties electing to participate in the
ownership of such interest shall be required to contribute their shares of the
defaulted amount upon their election to participate therein.
4. Advance Payment: If a default is not cured within thirty (30) days of the
delivery of a Notice of Default, Operator, or Non-Operators if Operator is the
defaulting party, may thereafter require advance payment from the defaulting
party of such defaulting party's anticipated share of any item of expense for
which Operator, or Non-Operators, as the case may be, would be entitled to
reimbursement under any provision of this agreement, whether or not such expense
was the subject of the previous default. Such right includes, but is not
limited to, the right to require advance payment for the estimated costs of
drilling a well or Completion of a well as to which an election to participate
in drilling or Completion has been made. If the defaulting party fails to pay
the required advance payment, the non-defaulting parties may pursue any of the
remedies provided in this Article VII.D. or any other default remedy provided
elsewhere in this agreement. Any excess of funds advanced remaining when the
operation is completed and all costs have been paid shall be promptly returned
to the advancing party.
5. Costs and Attorneys' Fees. In the event any party is required to bring
legal proceedings to enforce any financial obligation of a party hereunder, the
prevailing party in such action shall be entitled to recover all court costs,
costs of collection, and a reasonable attorney's fee, which the lien provided
for herein shall also secure.
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:
Rentals, shut-in well payments and minimum royalties which may be required
under the terms of any lease shall be paid by the Operator. Operator shall
bill the parties for their proportionate share of all such payments in the
manner provided in paragraph "C" and subject to the provisions of Article XVI.E.
Any party may request, and shall be entitled to receive, proper evidence of all
such payments. In the event of failure to make proper payment of any rental,
shut-in well payment or minimum royalty through mistake or oversight where such
payment is required to continue the lease in force, any loss which results from
such non-payment shall be borne in accordance with the provisions of Article
IV.B.3.
Operator shall notify Non-Operators of the anticipated completion of a
shut-in well, or the shutting in or return to production of a producing well, at
least five (5) days (excluding Saturday, Sunday and legal holidays) prior to
taking such action, or at the earliest opportunity permitted by circumstances,
but assumes no liability for failure to do so. In the event of failure by
Operator to so notify Non-Operators, the loss of any lease contributed hereto by
Non-Operators for failure to make timely payments of any shut-in well payment
shall be borne jointly by the parties hereto under the provisions of Article
IV.B.3.
F. TAXES:
Beginning with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay all
such taxes assessed thereon before they become delinquent. Prior to the
rendition date, each Non-Operator shall furnish Operator information as to
burdens (to include, but not be limited to, royalties, overriding royalties and
production payments) on Leases and Oil and Gas Interests contributed by such
Non-Operator. If the assessed valuation of any Lease is reduced by reason of
its being subject to outstanding excess royalties, overriding royalties or
production payments, the reduction in ad valorem taxes resulting therefrom shall
inure to the benefit of the owner or owners of such Lease, and Operator shall
adjust the charge to such owner or owners so as to reflect the benefit of such
reduction. If the ad valorem taxes are based in whole or in part upon separate
valuations of each party's working interest, then notwithstanding anything to
the contrary herein, charges to the joint account shall be made and paid by the
parties hereto in accordance with the tax value generated by each party's
working interest. Operator shall bill the other parties for their proportionate
shares of all tax payments in the manner provided in Exhibit "C."
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and prosecute
the protest to a final determination, unless all parties agree to abandon the
protest prior to final determination. During the pendency of administrative or
judicial proceedings, Operator may elect to pay, under protest, all such taxes
and any interest and penalty. When any such protested assesment shall have been
finally determined, Operator shall pay the tax for the joint account, together
with any interest and penalty accrued, and the total cost shall then be assessed
against the parties, and be paid by them, as provided in Exhibit "C."
Each party shall pay or cause to be paid all production, severance, excise,
gathering and other taxes imposed upon or with respect to the production or
handling of such party's share of Oil and Gas produced under the terms of this
agreement.
ARTICLE VIII.
ACQUISITION, MAINTENANCE OR TRANSFER OR INTEREST
A. SURRENDER OF LEASES:
The Leases covered by this agreement, insofar as they embrace acreage in the
Contract Area, shall not be surrendered in whole or in part unless all parties
consent thereto.
However, should any party desire to surrender its interest in any Lease or in
any portion thereof, such party shall give written notice of the proposed
surrender to all parties, and the parties to whom such notice is delivered shall
have thirty (30) days after delivery of the notice within which to notify the
party proposing the surrender whether they elect to consent thereto. Failure of
a party to whom such notice is delivered to reply within said 30-day period
shall constitute a consent to the surrender of the Leases described in the
notice. If all parties do not agree or consent thereto, the party desiring to
surrender shall assign, without express or implied warranty of title, all of its
interest in such Lease, or portion thereof, and any well, material and equipment
which may be located thereon and any rights in production thereafter secured, to
the parties not consenting to such surrender. If the interest of the assigning
party is or includes an Oil and Gas Interest, the assigning party shall execute
and deliver to the party or parties not consenting to such surrender an oil and
gas lease covering such Oil and Gas Interest for a term of one (1) year and so
long thereafter as Oil and/or Gas is produced from the land covered thereby,
such lease to be on the form attached hereto as Exhibit "B." Upon such
assignment or lease, the assigning party shall be relieved from all obligations
thereafter accruing, but not theretofore accrued, with respect to the interest
assigned or leased and the operation of any well attributable thereto, and the
assigning party shall have no further interest in the assigned or leased
premises and its equipment and production other than the royalties retained in
any lease made under the terms of this Article. The party assignee or lessee
shall pay to the party assignor or lessor the reasonable salvage value of the
latter's interest in any well's salvable materials and equipment attributable to
the assigned or leased acreage. The value of all salvable materials and
equipment shall be determined in accordance wit the provisions of Exhibit "C,"
less the estimated cost of salvaging and the estimated cost of plugging and
abandoning and restoring the surface. If the assignment or lease is in favor of
more than one party, the interest shall be shared by such parties in the
proportions that the interest of each bears to the total interest of all such
parties. If the interest of the parties to whom the assignment is to be made
varies according to depth, then the interest assigned shall similarly reflect
such variances.
Any assignment, lease or surrender made under this provision shall not reduce
or change the assignor's, lessor's or surrendering party's interest as it was
immediately before the assignment, lease or surrender in the balance of the
Contract Area; and the acreage assigned, leased or surrendered, and subsequent
operations thereon, shall not thereafter be subject to the terms and provisions
of this agreement but shall be deemed subject to an Operating Agreement in the
form of this agreement.
B. RENEWAL OR EXTENSION OF LEASES:
If any party secures a renewal or replacement of an Oil and Gas Lease or
Interest subject to this agreement, then all other parties shall be notified
promptly upon such acquisition or, in the case of a replacement Lease taken
before expiration of an existing Lease, promptly upon expiration of the
existing Lease. The parties notified shall have the right for a period of
thirty (30) days following delivery of such notice in which to elect to
participate in the ownership of the renewal or replacement Lease, insofar as
such Lease affects lands within the Contract Area, by paying to the party who
acquired it their proportionate shares of the acquisition cost allocated to that
part of such Lease within the Contract Area, which shall be in proportion to the
interests held at that time by the parties in the Contract Area. Each party who
participates in the purchase of a renewal or replacement Lease shall be given an
assignment of its proportionate interest therein by the acquiring party.
If some, but less than all, of the parties elect to participate in the
purchase of a renewal or replacement Lease, it shall be owned by the parties who
elect to participate therein, in a ratio based upon the relationship of their
respective percentage of participation in the Contract Area to the aggregate of
the percentages of participation in the Contract Area of all parties
participating in the purchase of such renewal or replacement Lease. The
acquisition of a renewal or replacement Lease by any or all of the parties
hereto shall not cause a readjustment of the interests of the parties stated in
Exhibit "A," but any renewal or replacement Lease in which less than all parties
elect to participate shall not be subject to this agreement but shall be deemed
subject to a separate Operating Agreement in the form of this agreement.
If the interests of the parties in the Contract Area vary according to depth,
then their right to participate proportionately in renewal or replacement Leases
and their right to receive an assignment of interest shall also reflect such
depth variances.
The provisions of this Article shall apply to renewal or replacement Leases
whether they are for the entire interest covered by the expiring Lease or cover
only a portion of its area or an interest therin. Any renewal or replacement
Lease taken before the expiration of its predecessor Lease, or taken or
contracted for or becoming effective within six (6) months after the expiration
of the existing Lease, shall be subject to this provision so long as this
agreement is in effect at the time of such acquisition or at the time the
renewal or replacement Lease becomes effective, but any Lease taken or
contracted for more than six (6) months after the expiration of an existing
Lease shall not be deemed a renewal or replacement Lease and shall not be
subject to the provisions of this agreement.
The provisions in this Article shall also be applicable to extensions of Oil
and Gas Leases.
C. ACREAGE OR CASH CONTRIBUTIONS:
While this agreement is in force, if any party contracts for a contribution
of cash towards the drilling of a well or any other operation on the Contract
Area, such contribution shall be paid to the party who conducted the drilling or
other operation and shall be applied by it against the cost of such drilling or
other operation. If the contribution be in the form of acreage, the party to
whom the contribution is made shall promptly tender an assignment of the
acreage, without warranty of title, to the Drilling Parties in the proportions
said Drilling Parties shared the cost of drilling the well. Such acreage shall
become a separate Contract Area and, to the extent possible, be governed by
provisions identical to this agreement. Each party shall promptly notify all
other parties of any acreage or cash contributions it may obtain in support of
any well or any other operation on the Contract Area. The above provisions
shall also be applicable to optional rights to earn acreage outside the Contract
Area which are in support of well drilled inside the Contract Area.
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
If any party contracts for any consideration relating to disposition of such
party's share of substances produced hereunder, such consideration shall not be
deemed a contribution as contemplated in this Article VIII.C.
D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:
For the purpose of maintaining uniformity of ownership in the Contract Area
in the Oil and Gas Leases, Oil and Gas Interests, wells, equipment and
production covered by this agreement no party shall sell, encumber, transfer or
make other disposition of its interest in the Oil and Gas Leases and Oil and Gas
Interests embraced within the Contract Area or in wells, equipment and
production unless such disposition covers either:
1. the entire interest of the party in all Oil and Gas Leases, Oil and Gas
Interests, wells, equipment and production; or
2. an equal undivided percent of the party's present interest in all Oil
and Gas Leases, Oil and Gas Interests, wells, equipment and production in the
Contract Area.
Every sale, encumbrance, transfer or other disposition made by any party
shall be made expressly subject to this agreement and shall be made without
prejudice to the right of the other parties, and any transferee of an ownership
interest in any Oil and Gas Lease or Interest shall be deemed a party to this
agreement as to the interest conveyed from and after the effective date of the
transfer of ownership; provided, however, that the other parties shall not be
required to recognize any such sale, encumbrance, transfer or other disposition
for any purpose hereunder until thirty (30) days after they have received a copy
of the instrument of transfer or other satisfactory evidence thereof in writing
from the transferor or transferee. No assignment or other disposition of
interest by a party shall relieve such party of obligations previously incurred
by such party hereunder with respect to the interest transferred, including
without limitation the obligation of a party to pay all costs attributable to an
operation conducted hereunder in which such party has agreed to participate
prior to making such assignment, and the lien and security interest granted by
Article VII.B. shall continue to burden the interest transferred to secure
payment of any such obligations.
If, at any time the interest of any party is divided among and owned by four
or more co-owners, Operator, at its discretion, may require such co-owners to
appoint a single trustee or agent with full authority to receive notices,
approve expenditures, receive billings for and approve and pay such party's
share of joint expenses, and to deal generally with, and with power to bind; the
co-owners of such party's interest within the scope of the operators embraced in
this agreement; however, all such co-owners shall have the right to enter into
and execute all contracts or agreements for the disposition of tier respective
shares of the Oil and Gas produced from the Contract Area and they shall have
the right to receive, separately, payment of the sale proceeds thereof.
E. WAIVER OF RIGHTS TO PARTITION:
If permitted by the laws of the state or states in which the property covered
hereby is located, each party hereto owning an undivided interest in the
Contract Area waives any and all rights it may have to partition and have set
aside to it in severalty its undivided interest therein.
ARTICLE IX.
INTERNAL REVENUE CODE ELECTION
If, for federal income tax purposes, this agreement and the operations
hereunder are regarded ass a partnership, and if the parties have not otherwise
agreed to form a tax partnership pursuant to Exhibit "G" or other agreement
between then, each party thereby affected elects to be excluded from the
application of all of the provisions of Subchapter "K," Chapter 1, Subtitle "A,"
of the Internal Revenue Code of 1986, as amended ("Code"), as permitted and
authorized by Section 761 of the Code and the regulations promulgated
thereunder. Operator is authorized and directed to execute on behalf of each
party hereby affected such evidence of this election as may be required by the
Secretary of the Treasury of the United States or the Federal Internal Revenue
Service, including specifically, but not by way of limitation, all of the
returns, statements, and the data required by Treasury Regulations (S)1.761.
Should there be any requirement that each party hereby affected give further
evidence of this election, each such party shall execute such documents and
furnish such other evidence as may be required by the Federal Internal Revenue
Service or as may be necessary to evidence this election. No such party shall
give any notices or take any other action inconsistent with the election made
hereby. If any present or future income tax laws of the state or states in which
the Contract Area is located or any future income tax laws of the United States
contain provisions similar to those in Subchapter "K," Chapter 1, Subtitle "A,"
of the Code, under which an election similar to that provided by Section 761 of
the Code is permitted, each party hereby affected shall make such election ass
may be permitted or required by such laws. In making the foregoing election,
each such party states that the income derived by such party from operations
hereunder can be adequately determined without the computation of partnership
taxable income.
ARTICLE X.
CLAIMS AND LAWSUITS
Operator may settle any single uninsured third party damage claim or suit
arising from operations hereunder if the expenditure does not exceed Ten
Thousand Dollars ($10,000.00) and if the payment is in complete settlement of
such claim or suit. If the amount required for settlement exceeds the above
amount, the parties hereto shall assume and take over the further handling of
the claim or suit, unless such authority is delegated to Operator. All costs and
expenses of handling, settling, or otherwise discharging such claim or suit
shall be at the joint expense of the parties participating in the operation from
which the claim or suit arises. If a claim is made against any party or if any
party is sued on account of any matter arising from operations hereunder over
which such individual has no control because of the rights given Operator by
this agreement, such party shall immediately notify all other parties, and the
claim or suit shall be treated as any other claim or suit involving operations
hereunder.
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
ARTICLE XI.
FORCE MAJEURE
If any party is rendered unable, wholly or in part, by force majeure to carry
out its obligations under this agreement, other than the obligation to indemnify
or make money payments or furnish security, that party shall give to all other
parties prompt written notice of the force majeure with reasonably full
particulars concerning it; thereupon, the obligations of the party giving the
notice, so far as they are affected by the force majeure, shall be suspended
during, but no longer than, the continuance of the force majeure. The term
"force majeure," as here employed, shall mean an act of God, strike, lockout, or
other industrial disturbance, act of the public enemy, war, blockade, public
riot, lightning, fire, storm, flood or other act of nature, explosion,
governmental action, governmental delay, restraint or inaction, unavailability
of equipment, and any other cause, whether of the kind specifically enumerated
above or otherwise, which is not reasonably within the control of the party
claiming suspension.
The affected party shall use all reasonable diligence to remove the force
majeure situation as quickly as practicable. The requirement that any force
majeure shall be remedied with all reasonable dispatch shall not require the
settlement of strikes, lockouts, or other labor difficulty by the party
involved, contrary to its wishes; how all such difficulties shall be handled
shall be entirely within the discretion of the party concerned.
ARTICLE XII.
NOTICES
All notices authorized or required between the parties by any of the
provisions of this agreement, unless otherwise specifically provided, shall be
in writing and delivered in person or by United States mail, courier service,
telegram, telex, telecopier or any other form of facsimile, postage or charges
prepaid, and addressed to such parties at the addresses listed on Exhibit "A."
All telephone or oral notices permitted by this agreement shall be confirmed
immediately thereafter by written notice. The originating notice given under any
provision hereof shall be deemed delivered only when received by the party to
whom such notice is directed, and the time for such party to deliver any notice
in response thereto shall run from the date the originating notice is received.
"Receipt" for purposes of this agreement with respect to written notice
delivered hereunder shall be actual delivery of the notice to the address of the
party to be notified specified in accordance with this agreement,or to the
telecopy, facsimile or telex machine of such party. The second or any responsive
notice shall be deemed delivered when deposited in the United States mail or at
the office of the courier or telegraph service, or upon transmittal by telex,
telecopy or facsimile, or when personally delivered to the party to be notified,
provided, that when response is required within 24 or 48 hours, such response
shall be given orally or by telephone, telex, telecopy or other facsimile within
such period. Each party shall have the right to change its address at any time,
and from time to time, by giving written notice thereof to all other parties. If
a party is not available to receive notice orally or by telephone when a party
attempts to deliver a notice required to be delivered within 24 to 48 hours, the
notice may be delivered in writing by any other method specified herein and
shall be deemed delivered in the same manner provided above for any responsive
notice. Oral notice will not be considered as a valid notice unless written
confirmation is received within twenty-four (24) hours of such oral notice,
exclusive of Saturdays, Sundays and legal holidays.
ARTICLE XIII.
TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the Oil and Gas
Leases and/or Oil and Gas Interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any Lease or Oil and Gas Interest
contributed by any other party beyond the term of this agreement.
[X] Option No. 1: So long as any of the Jointly owned Oil and Gas Leases
subject to this agreement remain or are continued in force as to any part
of the Contract Area, whether by production, extension, renewal or
otherwise.
The termination of this agreement shall not relieve any party hereto from any
expense, liability or other obligation or any remedy therefor which has accrued
or attached prior to the date of such termination.
Upon termination of this agreement and the satisfaction of all obligations
hereunder, in the event a memorandum of this Operating Agreement has been filed
of record, Operator is authorized to file of record in all necessary recording
offices a notice of termination, and each party hereto agrees to execute such a
notice of termination as to Operator's interest, upon request of Operator, if
Operator has satisfied all its financial obligations.
ARTICLE XIV.
COMPLIANCE WITH LAWS AND REGULATIONS
A. LAWS, REGULATIONS AND ORDERS:
This agreement shall be subject to the applicable laws of the state in which
the Contract Area is located, to the valid rules, regulations, and orders of any
duly constituted regulatory body of said state; and to all other applicable
federal, state, and local laws, ordinances, rules, regulations and orders.
B. GOVERNING LAW:
This agreement and all matters pertaining hereto, including but not limited to
matters of performance, non-performance, breach, remedies, procedures, rights,
duties, and interpretation or construction, shall be governed and determined by
the law of the state of Texas shall govern.
C. REGULATORY AGENCIES:
Nothing herein contained shall grant, or be construed to grant, Operator the
right or authority to waive or release any rights, privileges, or obligations
which Non-Operators may have under federal or state laws or under rules,
regulations or
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
orders promulgated under such laws in reference to oil, gas and mineral
operations, including the location, operation, or production of wells, on tracts
offsetting or adjacent to the Contract Area.
With respect to the operations hereunder, Non-Operators agree to release
Operator from any and all losses, damages, injuries, claims and causes of action
arising out of, incident to or resulting directly or indirectly from Operator's
interpretation or application of rules, rulings, regulations or orders of the
Department of Energy or Federal Energy Regulatory Commission or predecessor or
successor agencies to the extent such interpretation or application was made in
good faith and does not constitute gross negligence. Each Non-Operator further
agrees to reimburse Operator for such Non-Operator's share of production or any
refund, fine, levy or other governmental sanction that Operator may be required
to pay as a result of such an incorrect interpretation or application, together
with interest and penalties thereon owing by Operator as a result of such
incorrect interpretation or application.
ARTICLE XV.
MISCELLANEOUS
A. EXECUTION:
This agreement shall be binding upon each Non-Operator when this agreement or
a counterpart thereof has been executed by such Non-Operator and Operator
notwithstanding that this agreement is not then or thereafter executed by all of
the parties to which it is tendered or which are listed on Exhibit "A" as owning
an interest in the Contract Area or which own, in fact, an interest in the
Contract Area. In the event of such a termination by Operator, all further
obligations of the parties hereunder shall cease as of such termination. In the
event any Non-Operator has advanced or prepaid any share of drilling or other
costs hereunder, all sums so advanced shall be returned to such Non-Operator
without interest. In the event Operator proceeds with drilling operations for
the Initial Well without the execution hereof by all persons listed on Exhibit
"A" as having a current working interest in such well, Operator shall indemnify
Non-Operators with respect to all costs incurred for the Initial Well which
would have been charged to such person under this agreement if such person had
executed the same and Operator shall receive all revenues which would have been
received by such person under this agreement if such person had executed the
same.
B. SUCCESSORS AND ASSIGNS:
This agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective heirs, devisees, legal representatives,
successors and assigns, and the terms hereof shall be deemed to run with the
Leases or Interests included within the Contract Area.
C. COUNTERPARTS:
This instrument may be executed in any number of counterparts, each of which
shall be considered an original for all purposes.
D. SEVERABILITY:
For the purposes of assuming or rejecting this agreement as an executory
contract pursuant to federal bankruptcy laws, this agreement shall not be
severable, but rather must be assumed or rejected in its entirety, and the
failure of any party to this agreement to comply with all of its financial
obligations provided herein shall be a material default.
ARTICLE XVI.
OTHER PROVISIONS
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<PAGE>
ARTICLE XVI
OTHER PROVISIONS
A. Priority of Operations
1. If at any time there is more than one operation proposed in connection
with any well subject to this agreement, then unless all participating
parties agree on the sequence of such operations, such proposals shall
be considered and disposed of in the following order of priority:
a) Proposals to do additional testing, coring, or logging;
b) Proposals to attempt a completion in the objective zone;
c) Proposals to rework;
d) Proposals to plug back and attempt completions in shallower zones
in ascending order;
e) Proposals to deepen the well, in descending order;
f) Proposals to sidetrack the well;
g) Proposals to plug and abandon the well.
B. Extension of Joint Venture Agreement Controls
This Operating Agreement is subject to that certain Extension of Joint
Venture Agreement dated effective April 8, 1996, between Edge Petroleum
Corporation and Edge Group II Limited Partnership, et al, and in the event
of a conflict, the terms of the Exploration Agreement shall prevail.
C. Area of Mutual Interest
The terms contained in Article 12.3(f) and 12.11 (Paragraphs 5 and 12,
respectively) of the Extension of Joint Venture Agreement shall define the
rights and obligations with respect to the AMI for this Prospect, but shall
not apply to any acquisitions which result from acts of merger,
consolidation, reorganization with, by or between a parent company,
subsidiary or affiliated corporation or the acquisition by one party hereto
of the interest of another party hereto or to the acquisition of the
overriding royalty interest of any Edge employee.
D. Deeper Drilling - In or Out
If, after reaching the initial proposed objective, a participating party in
the test well decides that the well is not commercially productive and a
party proposes to drill, deepen or sidetrack such well to depth greater than
the depth actually drilled in the test well, such party shall give notice
thereof to the other parties, complying with the requirements of Article
VI.B.1. Thereupon, Article VI.B. shall apply and all parties receiving
notice shall have the right to participate or not participate in the
drilling, deepening and/or sidetrack of such well, however, any party who
elects not to participate in the deeper drilling operation shall assign,
proportionately, to the parties who elect to participate in such operation
all of the nonparticipating party(s)' interest in the leaseholds in the
Contract Area insofar as they cover or apply to rights below the deepest
depth drilled in the test well. Such assignments will be free and clear of
all overriding royalty or other burdens not in existence at the date of this
agreement.
E. Delay Rentals
Operator shall submit to the parties reports of the monthly delay rental
payments that will be due and payable on leases at least sixty (60) days in
advance of such payments being due, together with the due dates for such
payments, Operator's recommendations for the payment or non-payment thereof,
and a general description of the leases and lands covered by same. A party
may elect to terminate its interest in a lease or leases by providing
written notice to Operator and all other parties hereto then owning an
interest in said lease or leases, to the effect that the notifying party
will not participate in the next ensuing delay rental payment with respect
to such lease or leases at least forty (40) days in advance of such payments
being due. Failure to notify Operator and such other parties of a party's
election at least forty (40) days in advance of the rental payment due date
shall be deemed an election to participate in payment of rentals.
If at any time a party elects not to participate in payment of a delay
rental, then the parties electing to participate in the payment shall have
the right to assume their respective proportionate shares of the interest in
the affected lease of the party electing not to participate by providing
written notice to the other participating parties and Operator within ten
(10) days after receipt of the notice of a party's election not to
participate. Failure to provide such notice shall be deemed an election not
to assume an interest. In
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<PAGE>
the event that after such elections an interest in the affected lease
remains that has not been assumed, Operator within forty-eight (48) hours
shall notify the participating parties, who may elect to assume their
respective proportionate shares of such remaining interest by providing
written notice within notice within forty-eight (48) hours after receipt of
notice of the interest that is available; failure to provide such notice
shall be deemed an election no to assume an additional interest. If, after
all such elections, an interest remains that has not been assumed by a
party, then, at Operator's sole discretion, the Operation may elect either
to assume the remaining interest and make the delay rental payment or elect
not to make the rental payment and allow the affected lease or leases to
lapse.
A party electing to terminate its interest in a lease or leases shall assign
its interest therein to the participating parties free of any overriding
royalty interests, net profits interests or other burdens or encumbrances
other than jointly borne burdens. Any such lease or leases shall be removed
from the terms of this agreement but shall be subject to the terms of an
identical Operating Agreement between the participating parties with only
the interests of the parties changed on Exhibit "A."
F. Proposed Operations
Notwithstanding any provision in this agreement to the contrary, any party
shall be allowed to propose the drilling of up to five (5) wells at any
given time, and the non-proposing parties must respond in accordance with
Article VI.B. hereof.
G. Federal and State Administration
Operator shall act as the representative for the parties hereto concerning
all filings required by and hearings and proceedings before any Federal or
State administrative bodies having jurisdiction over the Contract Area
and all costs and expenses incurred by Operator, directly or by retention of
outside personnel, in making such filings or participating in such hearings
or proceedings shall be proper charges against the joint account. Nothing
herein contained shall prohibit any of the parties to this agreement from
participating in any such hearings or proceedings in its own behalf and at
its own cost, expense and risk.
H. Payment of Taxes and Royalties
When Non-Operator is exercising the right to take in kind or separately
dispose of its proportionate part of production, Non-Operator shall pay or
arrange for the payment of all royalties, all production, severance or
similar taxes imposed on such party; but at such times when Operator is
purchasing or selling Non-Operator's share of production, Operator shall
arrange for payment of such royalty and taxes.
If a purchaser of any oil, gas or other hydrocarbons produced from the
Contract Area declines to make disbursements of all royalties, and other
payments out of, or with respect to, production which are payable on the
Contract Area, Operator at its sole election will, upon request by any Non-
Operator, provided that such Non-Operator shall execute such documents as
may be necessary in the opinion of Operator to enable Operator to do so,
receive all payments for oil, gas or other hydrocarbons attributable to such
Non-Operator's interest directly from said purchaser. In such event,
Operator will disburse common royalties, as well as other burdens created
under this agreement, on behalf of such Non-Operators. Non-Operators agree
to defend, indemnify and hold Operator harmless from any claims arising from
such disbursement, including incorrect or untimely payment. Operator will
have no liability regarding such disbursements, except to the extent that
the claim arises from Operator's gross negligence or willful misconduct.
I. Construction of Pipeline
If any party to this agreement proposes the construction and/or acquisition
of a pipeline and/or gathering line to transport production, from the
Contract Area, then such party shall offer each of the other non-proposing
parties to this agreement on mutually agreeable terms and conditions the
right to participate in the construction operation and/or acquisition and
ownership in the pipeline/gathering line, including the right of
transporting production from the Contact Area. Should one or more non-
proposing parties elect to participate, then between such participating
parties, to the extent permitted by governmental rules, regulations and
laws, there shall never be a transportation charge for gas owned by a
participant and transported from the Contract Area through such
pipeline/gathering line regardless if any or all other participants own such
gas or if all the participants own such gas but not in the same proportion
as the participation in such pipeline/gathering line; however, should third
party gas move through said gathering line, a mutually agreeable
administrative fee and operations fee (if applicable) will be charged to all
participants.
Should a party fail to elect to participate in the construction and/or
acquisition of a pipeline or gathering line, such party's share of the gas
shall not be deemed to be transported or marketed on such pipeline/gathering
line, and such party will have to make separate arrangements to market its
share of the production from the Contract Area.
It is understood that ownership will be joint in the pipeline and any
liabilities in operating and maintaining said pipeline will be proportionate
to each participating party's ownership percentage.
-17B-
<PAGE>
J. Bankruptcy
If, following the granting of relief under the Bankruptcy Code to any party
hereto as debtor thereunder, this Agreement should be held to be an
executory contract under the Bankruptcy Code, then any remaining party shall
be entitled to a determination by debtor or any trustee for debtor within
thirty (30) days from the date an order for relief is entered under the
Bankruptcy Code as to the rejection or assumption of this agreement.
In the event of an assumption, such party seeking determination shall be
entitled to adequate assurances as to the future performance of debtor's
obligation hereunder and the protection of the interest of all parties. The
debtor shall satisfy its obligation to provide adequate assurances by either
advancing payment or depositing the debtor's proportionate share of expenses
in escrow.
K. Cost Overruns
If and each time that Operator learns that there have been or there will be
cost overruns equal to more than twenty-five percent (25%) of the total
amount approved in an AFE, Operator shall send a supplemental AFE to each of
the consenting parties in the operation to which the AFE applies. The AFE
shall state the total amount of the anticipated overrun. Each consenting
party receiving the supplemental AFE shall have forty-eight (48) hours from
receipt thereof excluding Saturday, Sundays and legal holidays in which to
approve the supplemental AFE. The failure of the party receiving the
supplemental AFE to reply within the applicable period shall constitute an
election by that party not to participate in the cost of the proposed
operation, and paragraph VI.B.2. shall apply.
L. Proof of Insurance
Operator shall provide Non-Operators with a certificate of insurance
reflecting that Non-Operators have been included as an "additional insured"
in Operator's policies of insurance in compliance with Exhibit "D" attached
hereto.
M. Subsequently Created Interests
Notwithstanding the provisions of this Operating Agreement and of the
Accounting Procedure attached as Exhibit "C", the Parties to this agreement
specifically agree that in no event during the term of this contract shall
Operator be required to make more than one billing for the entire interest
credited to each party on Exhibit "A" hereto. It is further agreed that if
any Non-Operator to this Agreement (hereinafter "Selling Party") disposes of
part of the interest credited to it on Exhibit "A", the Selling Party will
be solely responsible for billing its assignee(s), and shall remain
primarily liable to the other parties for the interest(s) assigned and shall
make prompt payment to Operator for the entire amount of statements and
billings rendered to it. It is further understood and agreed that if Selling
Party disposes of all of its interest as set out on Exhibit "A", whether to
one or several assignees, Operator shall continue to issue statements and
billings to the Selling Party for the interest conveyed until such time as
Selling Party has designated and qualified one assignee to receive the
billing for the entire interest. In order to qualify one assignee to receive
the billing for the entire interest credited to Selling Party on Exhibit
"A", Selling Party shall furnish to Operator the following:
1. Written notice of the conveyance and photostatic or certified copies of
the assignments by which the transfer was made.
2. The name of the assignee to be billed and a written statement signed by
the assignee to be billed in which it consents to receive statements and
billings for the entire interest credited to Selling Party on Exhibit
"A" hereof; and, further, consents to handle any necessary sub-billings
in the event it does not own the entire interest credited to Selling
Party on Exhibit "A".1
Notwithstanding anything contained to the contrary above, it is agreed that
the original Parties to this Agreement hereto may each create one (1)
subsequent interest, thereafter the terms of XVI.M. shall apply.
N. Obligatory Well Provision
Anything hereinabove to the contrary notwithstanding, if any party shall
elect not to participate in the drilling (or any operation which could
maintain said interest) of a well which is required to be drilled to
maintain any mineral interest or lease subject to this agreement in order
to comply with any obligations thereof or for any rights in such mineral
interest or lease to be retained thereunder (hereinafter referred to as an
"obligatory well"), such non-participating party shall forfeit to the
parties participating in the drilling/operation of such well all of its
interest in the well, all production from such well, whether unitized or
not, and the mineral interest or lease preserved or maintained. The non-
participating party shall assign all of the said forfeited interest to the
parties participating in the drilling/operation of the obligatory well in
the same proportion as the cost of drilling such well is borne by the
participating parties. The interest in the well and production so assigned
shall be assigned free and clear of all burdens on production created by,
through or under the assigning party.
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<PAGE>
O. News Releases
Any party hereto or any related party hereto desiring to issue a news or
press release concerning operations, completion information, well test data
or reserve estimations shall provide the other parties hereto with copies of
the proposed release and no such news release shall be issued without first
obtaining the written consent of all the parties hereto, which consent shall
not be unreasonable withheld. The foregoing notwithstanding, with respect to
any proposed new releases, unless the other parties object in writing to the
proposed news release or the contents thereof within forty-eight (48) hours
after receipt of same, excluding Saturday, Sunday and legal holidays, any
party failing to object within the time provide will be conclusively
presumed to have approved of the proposed news release.
P. Favored Nations
Notwithstanding the foregoing, if, with regard to any Prospect or AMI in
which the Venturers acquire an interest hereunder, EPC enters into an
operating agreement or other agreement with a third party or parties after
the date of execution of the Extension of Joint Venture Agreement on terms
which are more favorable to such third party or parties than the terms
applicable to the Venturers, then such more favorable terms shall apply in
lieu of the terms provided in such agreement, and the Venturers shall
nevertheless be entitled to their respective shares (based on proportionate
Sharing Rations) of such more favorable terms just as if such terms had been
included in the operating agreement or other applicable agreement for such
Prospect or AMI, originally.
-17D-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
IN WITNESS WHEREOF, this agreement shall be effective as of the ______
day of __________________, 19______.
ATTEST OR WITNESS: OPERATOR
EDGE PETROLEUM CORPORATION
___________________________________
______________________________ By ________________________________
JOHN E. CALAWAY
______________________________ ________________________________
Type or print name
President/C.E.O.
Title __________________________
Date ___________________________
76-0334408
Tax ID or S.S. No.______________
NON-OPERATORS
________________________________
______________________________ By ________________________________
______________________________ ________________________________
Type or print name
Title _________________________
Date _________________________
Tax ID or S.S. No. ____________
________________________________
______________________________ By ________________________________
______________________________ ________________________________
Type or print name
Title __________________________
Date __________________________
Tax ID or S.S. No. _____________
________________________________
______________________________ By ________________________________
_____________________________ ________________________________
Type or print name
Title __________________________
Date __________________________
Tax ID or S.S. No. _____________
________________________________
______________________________ By ________________________________
______________________________ ________________________________
Type or print name
Title __________________________
Date __________________________
Tax ID or S.S. No. _____________
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<PAGE>
EXHIBIT "A"
Attached to and made a part of that certain
Operating Agreement dated , by and between
Edge Petroleum Corporation, as Operator, and
Edge Group II Limited Partnership, et al, as Non-Operators
(1) Description of lands subject to this agreement
All lands subject to this Agreement shall be limited in depth as to those
depths from the surface to feet and within the area outlined on the plat
attached hereto as Exhibit "A-1".
(2) Restrictions, if any, as to depths, formations or substances
As noted in leases, farm-ins or other acquisition agreements and instruments.
(3) and (4)
Parties to agreement with addresses and telephone number for notice purposes
and percentage or fractional interest of parties to this agreement.
Working Interests
-------------------
Edge Petroleum Corporation
Company, Inc. __.____%
its successors or assigns
1111 Bagby, Suite 2100
Houston, Texas 77002
(713) 654-8960 - telephone
(713) 654-7722 - fax
Edge Group II Limited Partnership __.____%
( ) ___-____ - telephone
( ) ___-____ - fax
Gulfedge Limited Partnership __.____%
( ) ___-____ - telephone
( ) ___-____ - fax
Edge Group Partnership __.____%
( ) ___-____ - telephone
( ) ___-____ - fax
(5) Oil and gas leases subject to this agreement
See Lease Schedule attached hereto
(6) Burdens on production
[To be included.]
<PAGE>
EXHIBIT "A"(1)
Attached to and made a part of that certain
Operating Agreement dated , by and between
Edge Petroleum Corporation, as Operator, and
Edge Group II Limited Partnership, et al, as Non-Operators
[TO BE INSERTED AT A LATER DATE]
<PAGE>
EXHIBIT "A"(5)
Attached to and made a part of that certain Operating
Agreement dated , by and between
Edge Petroleum Corporation, as Operator, and
Edge Group II Limited Partnership, et al, as Non-Operators
[TO BE INSERTED AT A LATER DATE]
<PAGE>
EXHIBIT "B"
OIL, GAS AND MINERAL LEASE
THIS AGREEMENT made this __________ day of ______________________ 19____,
between _____________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________.
Lessor (whether one or more), whose address is: _____________________________,
and ______________________________________________________, Lessee, WITNESSETH:
I, Lessor in consideration of __________________________________________
Dollars ($___________), in hand paid, of the royalties herein provided, and of
the agreements of Lessee herein contained, hereby grants, leases and lets
exclusively unto Lessee for the purpose of investigating, exploring,
prospecting, drilling and mining for and producing oil, gas and all other
minerals, conducting exploration, geologic and geophysical surveys by
seismograph, core test, gravity and magnetic methods, injecting gas, water and
other fluids, and air into subsurface strata, laying pipe lines, building roads,
tanks, power stations, telephone lines and other structures thereon and on, over
and across lands owned or claimed by Lessor adjacent and contiguous thereto, to
produce, save, take care of, treat, transport and own said products, and housing
its employees, the following described land in ______________________________
_____________________________________________________ County, Texas, to-wit:
This lease also covers and includes all land owned or claimed by Lessor adjacent
or contiguous to the land particularly described above, whether the same be in
said survey or surveys or in adjacent surveys, although not included within the
boundaries of the land particularly described above.
2. This is a paid up lease and subject to the other provisions herein
contained, this lease shall be for a term of ______ years from this date (called
"primary term") and as long thereafter as oil, gas or other mineral is produced
from said land or land with which said land is pooled thereunder.
3. As royalty, lessee covenants and agrees: (a) To deliver to the credit
of lessor, in the pipe line to which lessee may connect its wells, the equal
one-eighth part of all oil produced and saved by lessee from said land, or from
time to time, at the option of lessee, to pay lessor the average posted market
price of such one-eighth part of such oil at the wells as of the day it is run
to the pipe line or storage tanks, lessor's interest, in either case, to bear
one-eighth of the cost of treating oil to render it marketable pipe line oil;
(b) to pay lessor for gas and casinghead gas produced form said land (1) when
sold by lessee, one-eighth of the amount realized by lessee, computed at the
mouth of the well, or (2) when used by lessee off said land or in the
manufacture of gasoline or other products, one-eighth of the amount realized
from the sale of gasoline or other products extracted therefrom and one-eighth
of the amount realized from the sale of residue gas after deducting the amount
used for plant fuel and/or compression; (c) To pay lessor on all other mineral
mined and marketed or utilized by lessee from said land, one-tenth either in
kind or value at the well or mine at lessee's election, except that on sulphur
mined and marketed the royalty shall be one dollar ($1.00) per long ton. If, at
the expiration of the primary term or at any time or times thereafter, there is
any well on said land or on lands with which said land or any portion thereof
has been pooled, capable of producing oil or gas, and all such wells are
shut-in, this lease shall, nevertheless, continue in force as though operations
were being conducted on said land for so long as said wells are shut-in, and
thereafter this lease may be continued in force as if no shut-in had occurred.
Lessee covenants and agrees to use reasonable diligence to produce, utilize, or
market the minerals capable of being produced from said wells, but in the
exercise of such diligence, lessee shall not be obligated to install or furnish
facilities other than well facilities and ordinary lease facilities of flow
lines, separator, and lease tank, and shall not be required to settle labor
trouble or to market gas upon terms unacceptable to lessee. If, at any time or
times after the expiration of the primary term, all such wells are shut-in for a
period of ninety consecutive days, and during such time there are no operations
on said land, then at or before the expiration of said ninety day period, lessee
shall pay or tender, by check or draft of lessee, as royalty, a sum equal to one
dollar ($1.00) for each acre of land then covered hereby. Lessee shall make
like payments or tenders at or before the end of each anniversary of the
expiration of said ninety day period if upon such anniversary this lease is
being continued in force solely by reason of the provisions of this paragraph.
Each such payment or tender shall be made to the parties who at the time of
payment would be entitled to receive the royalties which would be paid under
this lease if the wells were producing, and may be deposited in the
____________________________________________ Bank at __________________________,
or its successors, which shall continue as the depositories, regardless of
changes in the ownership of shut-in royalty. If at any time that lessee pays or
tenders shut-in royalty, two or more parties are, or claim to be, entitled to
receive same, lessee may, in lieu of any other method of payment herein
provided, pay or tender such shut-in royalty, in the manner above specified,
either jointly to such parties or separately to each in accordance with their
respective ownerships thereof, as lessee may elect. Any payment hereunder may be
made by check or draft of lessee deposited in the mail or delivered to the party
entitled to receive payment or to a depository bank provided for above on or
before the last date for payment. Nothing herein shall impair lessee's right to
release as provided in paragraph 5 hereof. In the event of assignment of this
lease in whole or in part, liability for payment hereunder shall rest
exclusively on the then owners of this lease, severally as to acreage owned by
each.
4. Lessee, at its option, is hereby given the right and power to pool or
combine the acreage covered by this lease or any portion thereof as to oil and
gas, or either of them, with any other land covered by this lease, and/or with
any other land, lease or leases in the immediate vicinity thereof to the extent
hereinafter stipulated, when in Lessee's judgment it is necessary or advisable
to do so in order properly to explore, or to develop and operate said leased
premises in compliance with the spacing rules of the Railroad Commission of
Texas, or other lawful authority, or when to do so would, in the judgment of
Lessee, promote the conservation of oil and gas in and under and that may be
produced from said premises. Units pooled for oil hereunder shall not
substantially exceed 40 acres each in area, and units pooled for gas hereunder
shall not substantially exceed in area 640 acres each plus a tolerance of ten
percent (10%) thereof, provided that should governmental authority having
jurisdiction prescribe or permit the creation of units larger than those
specified, for the drilling or operation of a well at a regular location or for
obtaining maximum allowable from any well to be drilled, drilling or already
drilled, units thereafter created may conform substantially in size with those
prescribed or permitted by governmental regulations. Lessee under the
provisions hereof may pool or combine acreage covered by this lease or any
portion thereof as above provided as to oil in any one or more strata and as to
gas in any one or more strata. The units formed by pooling as to any stratum or
strata need not conform in size or area with the unit or units into which the
lease is pooled or combined as to any other stratum or strata, and oil units
need not conform as to area with gas units. The pooling in one or more
instances shall not exhaust the rights of the Lessee hereunder to pool this
lease or portions thereof into other units. Lessee shall file for record in the
appropriate records of the county in which the leased premises are situated an
instrument describing and designating the pooled acreage as a pooled unit; and
upon such recordation the unit shall be effective as to all parties hereto,
their heirs, successors, and assigns, irrespective of whether or not the unit is
likewise effective as to all other owners of surface, mineral, royalty, or other
rights in land included in such unit. Lessee may at its election exercise its
pooling option before or after commencing operations for or completing an oil or
gas well on the leased premises, and the pooled unit may include, but it is not
required to include, land or leases upon which a well capable of producing oil
or gas in paying quantities has theretofore been completed or upon which
operations for the drilling of a well for oil or gas have theretofore been
commenced. In the event of operations for drilling on or production of oil or
gas from any part of a pooled unit which includes all or a portion of the land
covered by this lease, regardless of whether such operations for drilling were
commenced or such production was secured before or after the execution of this
instrument or the instrument designating the pooled unit, such operations shall
be considered as operations for drilling on or production of oil or gas from
land covered by this lease whether or not the well or wells be located on the
premises covered by this lease and in such event operations for drilling shall
be deemed to have been commenced on said land within the meaning of paragraph 5
of this lease; and the entire acreage constituting such unit or units, as to oil
and gas, or either of them, as herein provided, shall be treated for all
purposes, except the payment of royalties on production from the pooled unit, as
if the same were included in this lease. For the purpose of computing the
royalties to which owners of royalties and payments out of production and each
of them shall be entitled on production of oil and gas, or either of them, from
the pooled unit, there shall be allocated to the land covered by this lease and
included in said unit (or to each separate tract within the unit if this lease
covers separate tracts within the unit) a pro rata portion of the oil and gas,
or either of them, produced from the pooled unit after deducting that used for
operations on the pooled unit. Such allocation shall be on an acreage basis--
that is to say, there shall be allocated to the acreage covered by this lease
and included in the pooled unit (or to each separate tract within the unit if
this lease covers separate tracts within the unit) that pro rata portion of the
oil and gas, or either of them, produced from the pooled unit which the number
of surface acres covered by this lease (or in each such separate tract) and
included in the pooled unit bears to the total number of surface acres included
in the pooled unit. Royalties hereunder shall be computed on the portion of such
production, whether it be oil and gas, or either of them, so allocated to the
land covered by this lease and included in the unit just as though such
production were from such land. The production from an oil well will be
considered as production from the lease or oil pooled unit from which it is
producing and not as production from a gas pooled unit; and production from a
gas well will be considered as production from the lease or gas pooled unit from
which it is producing and not from an oil pooled unit. This formation of any
unit hereunder shall not have the effect of changing the ownership of any shut-
in production royalty which may become payable under this lease. If this lease
now or hereafter covers separate tracts, no pooling or unitization of royalty
interest as between any such separate tracts is intended or shall be implied or
result merely from the inclusion of such separate tracts within this lease but
Lessee shall nevertheless have the right to pool as provided above with
consequent allocation of production as above provided. As used in this paragraph
4, the words, "separate tract" mean any tract with royalty ownership differing,
now or hereafter, either as to parties or amounts, from that as to any other
part of the leased premises.
<PAGE>
5. If at the expiration of the primary term, oil, gas, or other mineral is
not being produced on said land, or from land pooled therewith, but Lessee is
then engaged in drilling or reworking operations thereon, or shall have
completed a dry hole thereon within 60 days prior to the end of the primary
term, the lease shall remain in force so long as operations on said well or for
drilling or reworking of any additional well are prosecuted with no cessation of
more than 60 consecutive days, and if they result in the production of oil, gas
or other mineral, so long thereafter as oil, gas, or other mineral is produced
from said land, or from land pooled therewith. If, after the expiration of the
primary term of this lease and after oil, gas, or other mineral is produced from
said land, or from land pooled therewith, the production thereof should cease
from any cause, this lease shall not terminate if Lessee commences operations
for drilling or reworking within 60 consecutive days after the cessation of such
production, but shall remain in force and effect so long as such operations are
prosecuted with no cessation of more than 60 consecutive days, and if they
result in the production of oil, gas, or other mineral, so long thereafter as
oil, gas, or other mineral is produced from said land, or from land pooled
therewith. Any pooled unit designated by Lessee in accordance with the terms
hereof, may be dissolved by Lessee by instrument filed for record in the
appropriate records of the county in which the leased premises are situated at
any time after the completion of a dry hole or the cessation of production on
said unit. In the event a well or wells producing oil or gas in paying
quantities should be brought in on adjacent land and within 330 feet of and
draining the leased premises, or land pooled therewith, Lessee agrees to drill
such offset well or wells as a reasonably prudent operator would drill under the
same or similar circumstances. Lessee may at any time execute and deliver to
Lessor or place of record a release or releases covering any portion or portions
of the above described premises and thereby surrender this lease as to such
portion or portions and be relieved of all obligations as to the acreage
surrendered.
6. Lessee shall have the right at any time during or after the expiration
of this lease to remove all property and fixtures placed by Lessee on said land,
including the right to draw and remove all casing. When required by Lessor,
Lessee will bury all pipe lines below ordinary plow depth, and no well shall be
drilled within two hundred (200) feet of any residence or barn now on said land
without Lessor's consent.
7. The rights of either party hereunder may be assigned in whole or in
part, and the provisions hereof shall extend to their heirs, successors and
assigns; but no change or division in ownership of the land, or royalties,
however accomplished, shall operate to enlarge the obligations or diminish the
rights of Lessee; and no change or division in such ownership shall be binding
on Lessee until thirty (30) days after Lessee shall have been furnished by
registered U.S. mail at Lessee's principal place of business with a certified
copy of recorded instrument or instruments evidencing same. In the event of
assignment hereof in whole or in part, liability for breach of any obligation
hereunder shall rest exclusively upon the owner of this lease or of a portion
thereof who commits such breach. If six or more parties become entitled to
royalty hereunder, Lessee may withhold payment thereof unless and until
furnished with a recordable instrument executed by all such parties designating
an agent to receive payment for all.
8. The breach by Lessee of any obligation arising hereunder shall not work
a forfeiture or termination of this lease nor cause a termination or reversion
of the estate created hereby nor be grounds for cancellation hereof in whole or
in part. No obligation reasonably to develop the leased premises shall arise
during the primary term. Should oil, gas or other mineral in paying quantities
be discovered on said premises, then after the expiration of the primary term,
Lessee shall develop the acreage retained hereunder as a reasonably prudent
operator, but in discharging this obligation it shall in no event be required to
drill more than one well per forty (40) acres of the area retained hereunder and
capable of producing oil in paying quantities and one well per 640 acres plus an
acreage tolerance not to exceed 10% of 640 acres of the area retained hereunder
and capable of producing gas or other mineral in paying quantities. If after
the expiration of the primary term, Lessor considers that operations are not at
any time being conducted in compliance with this lease, Lessor shall notify
Lessee in writing of the facts relied upon as constituting a breach hereof, and
Lessee, if in default, shall have sixty days after receipt of such notice in
which to commence the compliance with the obligations imposed by virtue of this
instrument.
9. Lessor hereby warrants and agrees to defend the title to said land and
agrees that Lessee at its option may discharge any tax, mortgage or other lien
upon said land, either in whole or in part, and in event Lessee does so, it
shall be subrogated to such lien with right to enforce same and apply royalties
accruing hereunder toward satisfying same. Without impairment of Lessee's
rights under the warranty in event of failure of title, it is agreed that if
this lease covers a less interest in the oil, gas, sulphur, or other minerals in
all or any part of said land than the entire and undivided fee simple estate
(whether Lessor's interest is herein specified or not), or no interest therein,
then the royalties, and other monies accruing from any part as to which this
lease covers less than such full interest, shall be paid only in the proportion
which the interest therein, if any, covered by this lease, bears to the whole
and undivided fee simple estate therein. All royalty interest covered by this
lease (whether or not owned by Lessor) shall be paid out of the royalty herein
provided. Should any one or more of the parties named above as Lessors fail to
execute this lease, it shall nevertheless be binding upon the party or parties
executing the same.
10. Should Lessee be prevented from complying with any express or implied
covenant of this lease, from conducting drilling or reworking operations thereon
or from producing oil or gas therefrom by reason of scarcity of or inability to
obtain or to use equipment or material, or by operation of force majeure,
Federal or state law or any order, rule or regulation of governmental authority,
then while so prevented, Lessee's obligation to comply with such covenant shall
be suspended, and Lessee shall not be liable in damages for failure to comply
therewith; and this lease shall be extended while and so long as Lessee is
prevented by any such cause from conducting drilling or reworking operations on
or from producing oil or gas from the lease premises; and the time while Lessee
is so prevented shall not be counted against Lessee, anything in this lease to
the contrary notwithstanding.
IN WITNESS WHEREOF, this instrument is executed on the date first above
written.
____________________________________ ____________________________________
____________________________________ ____________________________________
____________________________________ ____________________________________
STATE OF TEXAS } ACKNOWLEDGEMENT
COUNTY OF }
This instrument was acknowledged before me on the ______ day of
________________________, 19____, by _________________________________________.
____________________________________
Notary Public, State of Texas
Notary's mane (printed):
Notary's commission expires:
STATE OF TEXAS } CORPORATE ACKNOWLEDGEMENT
COUNTY OF }
This instrument was acknowledged before me on the ______ day of
________________________, 19____, by __________________________________________
of ____________________________________________________________ a _____________
corporation, on behalf of said corporation.
____________________________________
Notary Public, State of Texas
Notary's name (printed):
Notary's commission expires:
================================================================================
No. ______________________
================================================================================
OIL, GAS AND MINERAL LEASE
FROM
__________________________
__________________________
TO
__________________________
__________________________
================================================================================
DATED ________________________, 19____
NO. ACRES ____________________________
_________________________COUNTY, TEXAS
TERM _________________________________
THIS INSTRUMENT WAS FILED FOR RECORD ON THE __________
DAY OF ___________________________________, 19____, AT
______ O'CLOCK ________________M. AND DULY RECORDED IN
BOOK ________________________, PAGE __________________
OF THE _______________________ RECORDS OF THIS OFFICE.
______________________________________________________
COUNTY CLERK
BY ___________________________________________, DEPUTY
WHEN RECORDED RETURN TO
______________________________________
================================================================================
<PAGE>
EXHIBIT "C"
Attached to and made a part that certain Operating Agreement dated ,
----------------------------------------------------
by and between Edge Petroleum Corporation, as Operator, and Edge Group II
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Limited Partnership, et al, as Non-Operators
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- -------------------------------------------------------------------------------
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ACCOUNTING PROCEDURE
JOINT OPERATIONS
1. GENERAL PROVISIONS
I. Definitions
"Joint Property" shall mean the real and personal property subject to the
agreement to which this Accounting Procedure is attached.
"Joint Operations" shall mean all operations necessary or proper for the
development, operation, protection and maintenance of the Joint Property.
"Joint Account" shall mean the account showing the charges paid and credits
received in the conduct of the Joint Operations and which are to be shared by
the Parties.
"Operator" shall mean the party designated to conduct the Joint Operations.
"Non-Operators" shall mean the Parties to this agreement other than the
Operator.
"Parties" shall mean Operator and Non-Operators.
"First Level Supervisors" shall mean those employees whose primary function
in Joint Operations is the direct supervision of other employees and/or
contract labor directly employed on the Joint Property in a field operating
capacity.
"Technical Employees" shall mean those employees having special and specific
engineering, geological or other professional skills, and whose primary
function in Joint Operations is the handling of specific operating conditions
and problems for the benefit of the Joint Property.
"Personal Expenses" shall mean travel and other reasonable reimbursable
expenses of Operator's employees.
"Material" shall mean personal property, equipment or supplies acquired or
held for use on the Joint Property.
"Controllable Material" shall mean Material which at the time is so
classified in the Material Classification Manual as most recently recommended
by the Council of Petroleum Accountants Societies.
2. Statement and Billings
Operator shall bill Non-Operators on or before the last day of each month for
their proportionate share of the Joint Account for the preceding month. Such
bills will be accompanied by statements which identify the authority for
expenditure, lease or facility, and all charges and credits summarized by
appropriate classifications of investment and expense except that items of
Controllable Material and unusual charges and credits shall be separately
identified and fully described in detail.
3. Advances and Payments by Non-Operators
A. Unless otherwise provided for in the agreement, the Operator may require
the Non-Operators to advance their share of estimated cash outlay for the
succeeding month's operation within fifteen (15) days after receipt of
the billing or by the first day of the month for which the advance is
required, whichever is later. Operator shall adjust each monthly billing
to reflect advances received from the Non-Operators.
B. Each Non-Operator shall pay its proportion of all bills within fifteen
(15) days after receipt. If payment is not made within such time, the
unpaid balance shall bear interest monthly at the prime rate in effect at
COMPASS BANK HOUSTON, TEXAS on the first day of the month in which
----------------------------
delinquency occurs plus 1% or the maximum contract rate permitted by the
applicable usury laws in the state in which the Joint Property is
located, whichever is the lesser, plus attorney's fees, court costs, and
other costs in connection with the collection of unpaid amounts.
4. Adjustments
Payment of any such bills shall not prejudice the right of any Non-Operator
to protest or question the correctness thereof; provided, however, all bills
and statements rendered to Non-Operators by Operator during any calendar year
shall conclusively be presumed to be true and correct after twenty-four (24)
months following the end of any such calendar year, unless within the said
twenty-four (24) month period a Non-Operator takes written exception thereto
and makes claim on Operator for adjustment. No adjustment favorable to
Operator shall be made unless it is made within the same prescribed period.
The provisions of this paragraph shall not prevent adjustments resulting from
a physical inventory of Controllable Material as provided for in Section V.
COPYRIGHT(C) 1985 by the Council of Petroleum Accountants Societies.
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<PAGE>
5. Audits
A. A Non-Operator, upon notice in writing to Operator and all other Non-
Operators, shall have the right to audit Operator's accounts and records
relating to the Joint Account for any calendar year within the twenty-
four (24) month period following the end of such calendar year; provided,
however, the making of an audit shall not extend the time for the taking
of written exception to and the adjustments of accounts as provided for
in Paragraph 4 of this Section I. Where there are two or more Non-
Operators, the Non-Operators shall make every reasonable effort to
conduct a joint audit in a manner which will result in a minimum of
inconvenience to the Operator. Operator shall bear no portion of the Non-
Operators' audit cost incurred under this paragraph unless agreed to by
the Operator. The audits shall not be conducted more than once each year
without prior approval of Operator, except upon the resignation or
removal of the Operator, and shall be made at the expense of those Non-
Operators approving such audit.
B. The Operator shall reply in writing to an audit report within 180 days
after receipt of such report.
6. Approval By Non-Operators
Where an approval or other agreement of the Parties or Non-Operators is
expressly required under other sections of this Accounting Procedure and if
the agreement to which this Accounting Procedure is attached contains no
contrary provisions in regard thereto, Operator shall notify all Non-
Operators of the Operator's proposal, and the agreement or approval of a
majority in interest of the Non-Operators shall be controlling on all Non-
Operators.
II. DIRECT CHARGES
Operator shall charge the Joint Account with the following items:
1. Ecological and Environmental
Costs incurred for the benefit of the Joint Property as a result of
governmental or regulatory requirements to satisfy environmental
considerations applicable to the Joint Operations. Such costs may include
surveys of an ecological or archaeological nature and pollution control
procedures as required by applicable laws and regulations.
2. Rentals and Royalties
Lease rentals and royalties paid by Operator for the Joint Operations.
3. Labor
A. (1) Salaries and wages of Operator's field employees directly employed on
the Joint Property in the conduct of Joint Operations.
(2) Salaries of First Level Supervisors in the field.
(3) Salaries and wages of Technical Employees directly employed on the
Joint Property if such charges are excluded from the overhead rates.
(4) Salaries and wages of Technical Employees either temporarily or
permanently assigned to and directly employed in the operation of the
Joint Property if such charges are excluded from the overhead rates.
B. Operator's cost of holiday, vacation, sickness and disability benefits
and other customary allowances paid to employees whose salaries and wages
are chargeable to the Joint Account under Paragraph 3A of this Section
II. Such costs under this Paragraph 3B may be charged on a "when and as
paid basis" or by "percentage assessment" on the amount of salaries and
wages chargeable to the Joint Account under Paragraph 3A of this Section
II. If percentage assessment is used,the rate shall be based on the
Operator's cost experience.
C. Expenditures or contributions made pursuant to assessments imposed by
governmental authority which are applicable to Operator's costs
chargeable to the Joint Account under Paragraphs 3A and 3B of this
Section II.
D. Personal Expenses of those employees whose salaries and wages are
chargeable to the Joint Account under Paragraph 3A of this Section II.
4. Employee Benefits
Operator's current costs of established plans for employees' group life
insurance, hospitalization, pension, retirement, stock purchase, thrift,
bonus, and other benefit plans of a like nature, applicable to Operator's
labor cost chargeable to the Joint Account under Paragraphs 3A and 3B of this
Section II shall be Operator's actual cost not to exceed the percent most
recently recommended by the Council of Petroleum Accountants Societies.
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<PAGE>
5. Material
Material purchased or furnished by Operator for use on the Joint Property
as provided under Section IV. Only such Material shall be purchased for or
transferred to the Joint Property as may be required for immediate use and
is reasonably practical and consistent with efficient and economical
operations. The accumulation of surplus stocks shall be avoided.
6. Transportation
Transportation of employees and Material necessary for the Joint Operations
but subject to the following limitations:
A. If Material is moved to the Joint Property from the Operator's
warehouse or other properties, no charge shall be made to the Joint
Account for a distance greater than the distance from the nearest
reliable supply store where like material is normally available or
railway receiving point nearest the Joint Property unless agreed to by
the Parties.
B. If surplus Material is moved to Operator's warehouse or other storage
point, no charge shall be made to the Joint Account for a distance
greater than the distance to the nearest reliable supply store where
like material is normally available, or railway receiving point
nearest the Joint Property unless agreed to by the Parties. No charge
shall be made to the Joint Account for moving Material to other
properties belonging to Operator, unless agreed to by the Parties.
C. In the application of subparagraphs A and B above, the option to
equalize or charge actual trucking cost is available when the actual
charge is $400 or less excluding accessorial charges. The $400 will be
adjusted to the amount most recently recommended by the Council of
Petroleum Accountants Societies.
7. Services
The cost of contract services, equipment and utilities provided by outside
sources, except services excluded by Paragraph 10 of Section II and
Paragraph i, ii, and iii, of Section III. The cost of professional
consultant services and contract services of technical personnel directly
engaged on the Joint Property if such charges are excluded from the
overhead rates. The cost of professional consultant services or contract
services of technical personnel not directly engaged on the Joint Property
shall not be charged to the Joint Account unless previously agreed to by
the Parties.
8. Equipment and Facilities Furnished By Operator
A. Operator shall charge the Joint Account for use of Operator owned
equipment and facilities at rates commensurate with costs of ownership
and operation. Such rates shall include costs of maintenance, repairs,
other operating expense, insurance, taxes, depreciation, and interest
on gross investment less accumulated depreciation not to exceed twelve
percent (12.0%) per annum. Such rates shall not exceed average
commercial rates currently prevailing in the immediate area of the
Joint Property.
B. In lieu of charges in paragraph 8A above, Operator may elect to use
average commercial rates prevailing in the immediate area of the Joint
Property less 20%. For automotive equipment, Operator may elect to use
rates published by the Petroleum Motor Transport Association.
9. Damages and Losses to Joint Property
All costs or expenses necessary for the repair or replacement of Joint
Property made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident, or other cause, except those resulting from
Operator's gross negligence or willful misconduct. Operator shall furnish
Non-Operator written notice of damages or losses incurred as soon as
practicable after a report thereof has been received by Operator.
10. Legal Expense
Expense of handling, investigating and settling litigation or claims,
discharging of liens, payment of judgements and amounts paid for settlement
of claims incurred in or resulting from operations under the agreement or
necessary to protect or recover the Joint Property, except that no charge
for services of Operator's legal staff or fees or expense of outside
attorneys shall be made unless previously agreed to by the Parties. All
other legal expense is considered to be covered by the overhead provisions
of Section III unless otherwise agreed to by the Parties, except as
provided in Section I, Paragraph 3.
11. Taxes
All taxes of every kind and nature assessed or levied upon or in connection
with the Joint Property, the operation thereof, or the production
therefrom, and which taxes have been paid by the Operator for the benefit
of the Parties. If the ad valorem taxes are based in whole or in part upon
separate valuations of each party's working interest, then notwithstanding
anything to the contrary herein, charges to the Joint Account shall be made
and paid by the Parties hereto in accordance with the tax value generated
by each party's working interest.
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<PAGE>
12. Insurance
Net premiums paid for insurance required to be carried for the Joint
Operations for the protection of the Parties. In the event Joint Operations
are conducted in a state in which Operator may act as self-insurer for
Worker's Compensation and/or Employers Liability under the respective
state's laws, Operator may, at its election, include the risk under its
self-insurance program and in that event, Operator shall include a charge
at Operator's cost not to exceed manual rates.
13. Abandonment and Reclamation
Costs incurred for abandonment of the Joint Property, including costs
required by governmental or other regulatory authority.
14. Communications
Cost of acquiring, leasing, installing, operating, repairing and
maintaining communication systems, including radio and microwave facilities
directly serving the Joint Property. In the event communication
facilities/systems serving the Joint Property are Operator owned, charges
to the Joint Account shall be made as provided in Paragraph 8 of this
Section II.
15. Other Expenditures
Any other expenditure not covered or dealt with in the foregoing provisions
of this Section II, or in Section III and which is of direct benefit to the
Joint Property and is incurred by the Operator in the necessary and proper
conduct of the Joint Operations.
III. OVERHEAD
1. Overhead - Drilling and Producing Operations
i. As compensation for administrative, supervision, office services and
warehousing costs, Operator shall charge drilling and producing
operations on either:
(x) Fixed Rate Basis, Paragraph 1A, or
( ) Percentage Basis, Paragraph 1B
Unless otherwise agreed to by the Parties, such charge shall be in
lieu of costs and expenses of all offices and salaries or wages plus
applicable burdens and expenses of all personnel, except those
directly chargeable under Paragraph 3A, Section II. The cost and
expense of services from outside sources in connection with matters of
taxation, traffic, accounting or matters before or involving
governmental agencies shall be considered as included in the overhead
rates provided for in the above selected Paragraph of this Section III
unless such cost and expense are agreed to by the Parties as a direct
charge to the Joint Account.
ii. The salaries, wages and Personal Expenses of Technical Employees
and/or the cost of professional consultant services and contract
services of technical personnel directly employed on the Joint
Property:
( ) shall be covered by the overhead rates, or
(x) shall not be covered by the overhead rates.
iii. The salaries, wages and Personal Expenses of Technical Employees
and/or costs of professional consultant services and contract services
of technical personnel either temporarily or permanently assigned to
and directly employed in the operation of the Joint Property:
( ) shall be covered by the overhead rates, or
(x) shall not be covered by the overhead rates.
A. Overhead - Fixed Rate Basis
(1) Operator shall charge the Joint Account at the following rates
per well per month:
**Drilling Well Rate $4,500.00*
(Prorated for less than a full month)
**Producing Well Rate $450.00*
(2) Application of Overhead - Fixed Rate Basis shall be as follows:
(a) Drilling Well Rate
(1) Charges for drilling wells shall begin on the date the
well is spudded and terminate on the date the drilling
rig, completion rig, or other units used in completion
of the well is released, whichever
*For all wells drilled to a Shallow Zone (defined as 0' to 4,500'), producing
well rates shall be as follows:
0-10 wells - $450.00 per well,
11-20 wells - $400.00 per well, or
21 or more - $350.00 per well.
**In the event a well(s) is drilled to a Deep Zone (defined as > 4,500'), the
drilling and producing well rates will be adjusted for overhead in accordance
with the most recent issue of Ernst & Young fixed rate overhead survey.
-4-
<PAGE>
is later, except that no charge shall be made during
suspension of drilling or completion operations for five (5)
or more consecutive calendar days.
(2) Charges for wells undergoing any type of workover or
recompletion for a period of five (5) consecutive work days
or more shall be made at the drilling well rate. Such charges
shall be applied for the period from date workover
operations, with rig or other units used in workover,
commence through date of rig or other unit release, except
that no charge shall be made during suspension of operations
for five (5) or more consecutive calendar days.
(b) Producing Well Rates
(1) An active well either produced or injected into for any
portion of the month shall be considered as a one-well
charge for the entire month.
(2) Each active completion in a multi-completed well in which
production is not commingled down hole shall be considered
as a one-well charge providing each completion is considered
a separate well by the governing regulatory authority. For
all multi-completed wells, Operator shall charge 1-1/2 times
the producing well rate only and shall not charge as
separate wells.
(3) An inactive gas well shut in because of overproduction or
failure of purchaser to take the production shall be
considered as a one-well charge providing the gas well is
directly connected to a permanent sales outlet. If a
producing well is shut-in, producing well rates may be
charged for a maximum of three (3) months.
(4) A one-well charge shall be made for the month in which
plugging and abandonment operations are completed on any
well. This one-well charge shall be make whether or not the
well has produced except when drilling well rate applies.
(5) All other inactive wells (including but not limited to
inactive wells covered by unit allowable, lease allowable,
transferred allowable, etc.) shall not qualify for an
overhead charge.
(3) The well rates shall be adjusted as of the first day of April each
year following the effective date of the agreement to which this
Accounting Procedure is attached. The adjustment shall be computed by
multiplying the rate currently in use by the percentage increase or
decrease in the average weekly earnings of Crude Petroleum and Gas
Production Workers for the last calendar year compared to the
calendar year preceding as shown by the index of average weekly
earnings of Crude Petroleum and Gas Production Workers as published
by the United States Department of Labor, Bureau of Labor Statistics,
or the equivalent Canadian index as published by Statistics Canada,
as applicable. The adjusted rates shall be the rates currently in
use, plus or minus the computed adjustment.
2. Overhead - Major Construction
To compensate Operator for overhead costs incurred in the construction and
installation of fixed assets, the expansion of fixed assets, and any other
project clearly discernible as a fixed asset required for the development and
operation of the Joint Property, Operator shall either negotiate a rate prior
to the beginning of construction, or shall charge the Joint
-5-
<PAGE>
Account for overhead based on the following rates for any Major Construction
project in excess of $25,000.00:
A. 5% of first $100,000 or total cost if less, plus
B. 3% of costs in excess of $100,000 but less than $1,000,000, plus
C. 2% of costs in excess of $1,000,000.
Total cost shall mean the gross cost of any one project. For the purpose of
this paragraph, the component parts of a single project shall not be treated
separately and the cost of drilling and workover wells and artificial lift
equipment shall be excluded.
3. Catastrophe Overhead
To compensate Operator for overhead costs incurred in the event of
expenditures resulting from a single occurrence due to oil spill, blowout,
explosion, fire, storm, hurricane, or other catastrophes as agreed to by the
Parties, which are necessary to restore the Joint Property to the equivalent
condition that existed prior to the event causing the expenditures, Operator
shall either negotiate a rate prior to charging the Joint Account or shall
charge the Joint Account for overhead based on the following rates:
A. 5% of total costs through $100,000; plus
B. 3% of total costs in excess of $100,000 but less than $1,000,000; plus
C. 2% of total costs in excess of $1,000,000.
Expenditures subject to the overheads above will not be reduced by insurance
recoveries, and no other overhead provisions of this Section III shall apply.
4. Amendment of Rates
The overhead rates provided for in this Section III may be amended from time
to time only by mutual agreement between the Parties hereto if, in practice,
the rates are found to be insufficient or excessive.
IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS
Operator is responsible for Joint Account Material and shall make proper and
timely charges and credits for all Material movements affecting the Joint
Property. Operator shall provide all Material for use on the Joint Property;
however, at Operator's option, such Material may be supplied by the
Non-Operator. Operator shall make timely disposition of idle and/or surplus
Material, such disposal being made either through sale to Operator or
Non-Operator, division in kind, or sale to outsiders. Operator may purchase, but
shall be under no obligation to purchase, interest of Non-Operators in surplus
condition A or B Material. The disposal of surplus Controllable Material not
purchased by the Operator shall be agreed to by the Parties.
1. Purchases
Material purchased shall be charged at the price paid by Operator after
deduction of all discounts received. In case of Material found to be
defective or returned to vendor for any other reasons, credit shall be passed
to the Joint Account when adjustment has been received by the Operator.
2. Transfers and Dispositions
Material furnished to the Joint Property and Material transferred from the
Joint Property or disposed of by the Operator, unless otherwise agreed to by
the Parties, shall be priced on the following basis exclusive of cash
discounts:
A. New Material (Condition A)
(1) Tubular Goods Other than Line Pipe
(a) Tubular goods, sized 2-3/8 inches OD and larger, except line
pipe, shall be priced at Eastern mill published carload base
prices effective as of date of movement plus transportation cost
using the 80,000 pound carload weight basis to the railway
receiving point nearest the Joint Property for which published
rail rates for tubular goods exist. If the 80,000 pound rail rate
is not offered, the 70,000 pound or 90,000 pound rail rate may be
used. Freight charges for tubing will be calculated from Lorain,
Ohio and casing from Youngstown, Ohio.
(b) For grades which are special to one mill only, prices shall be
computed at the mill base of that mill plus transportation cost
from that mill to the railway receiving point nearest the Joint
Property as provided above in Paragraph 2.A.(1)(a). For
transportation cost from points other than Eastern mills, the
30,000
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<PAGE>
pound Oil Field Haulers Association interstate truck rate shall be
used.
(c) Special end finish tubular goods shall be priced at the lowest
published out-of-stock price, f.o.b. Houston, Texas, plus
transportation cost, using Oil Field Haulers Association interstate
30,000 pound truck rate, to the railway receiving point nearest the
Joint Property.
(d) Macaroni tubing (size less than 2-3/8 inch OD) shall be priced at the
lowest published out-of-stock prices f.o.b. the supplier plus
transportation costs, using the Oil Field Haulers Association
interstate truck rate per weight of tubing transferred, to the
railway receiving point nearest the Joint Property.
(2) Line Pipe
(a) Line pipe movements (except size 24 inch OD and larger with walls 3/4
inch and over) 30,000 pounds or more shall be priced under provisions
of tubular goods pricing in Paragraph A.(1)(a) as provided above.
Freight charges shall be calculated from Lorain, Ohio.
(b) Line pipe movements (except size 24 inch OD and larger with walls 3/4
inch and over) less than 30,000 pounds shall be priced at Eastern
mill published carload base prices effective as of date of shipment,
plus 20 percent, plus transportation costs based on freight rates as
set forth under provisions of tubular goods pricing in Paragraph
A.(1)(a) as provided above. Freight charges shall be calculated from
Lorain, Ohio.
(c) Line pipe 24 inch OD and over and 3/4 inch wall and larger shall be
priced f.o.b. the point of manufacture at current new published
prices plus transportation cost to the railway receiving point
nearest the Joint Property.
(d) Line pipe, including fabricated line pipe, drive pipe and conduit not
listed on published price lists shall be priced at quoted prices plus
freight to the railway receiving point nearest the Joint Property or
at prices agreed to by the Parties.
(3) Other Material shall be priced at the current new price, in effect at
date of movement, as listed by a reliable supply store nearest the Joint
Property, or point of manufacture, plus transportation costs, if
applicable, to the railway receiving point nearest the Joint Property.
(4) Unused new Material, except tubular goods, moved from the Joint Property
shall be priced at the current new price, in effect on date of movement,
as listed by a reliable supply store nearest the Joint Property, or point
of manufacture, plus transportation costs, if applicable, to the railway
receiving point nearest the Joint Property. Unused new tubulars will be
priced as provided above in Paragraph 2.A.(1) and (2).
B. Good Used Material (Condition B)
Material in sound and serviceable condition and suitable for reuse
without reconditioning:
(1) Material moved to the Joint Property
At seventy-five percent (75%) of current new price, as determined by
Paragraph A.
(2) Material used on and moved from the Joint Property
(a) At seventy-five percent (75%) of current new price, as determined
by Paragraph A, if Material was originally charged to the Joint
Account as new Material or
(b) At sixty-five percent (65 of current new price, as determined by
Paragraph A, if Material was originally charged to the Joint
Account as used Material.
(3) Material not used on and moved from the Joint Property
At seventy-five percent (75%) of current new price as determined by
Paragraph A.
The cost of reconditioning, if any, shall be absorbed by the transferring
property.
C. Other Used Material
(1) Condition C
Material which is not in sound and serviceable condition and not
suitable for its original function until after reconditioning shall
be priced at fifty percent (50%) of current new price as determined
by Paragraph A. The cost of reconditioning shall be charged to the
receiving property, provided Condition C value plus cost of
reconditioning does not exceed Condition B value.
-7-
<PAGE>
(2) Condition D
Material, excluding junk, no longer suitable for its original
purpose, but usable for some other purpose shall be priced on a
basis commensurate with its use. Operator may dispose of
Condition D Material under procedures normally used by Operator
without prior approval of Non-Operators.
(a) Casing, tubing, or drill pipe used as line pipe shall be
priced as Grade A and B seamless line pipe of comparable size
and weight. Used casing, tubing or drill pipe utilized as
line pipe shall be priced at used line pipe prices.
(b) Casing, tubing or drill pipe used as higher pressure service
lines than standard line pipe, e.g. power oil lines, shall be
priced under normal pricing procedures for casing, tubing, or
drill pipe. Upset tubular goods shall be priced on a non
upset basis.
(3) Condition E
Junk shall be priced at prevailing prices. Operator may dispose
of Condition E Material under procedures normally utilized by
Operator without prior approval of Non-Operators.
D. Obsolete Material
Material which is serviceable and usable for its original function
but condition and/or value of such Material is not equivalent to that
which would justify a price as provided above may be specially priced
as agreed to by the Parties. Such price should result in the Joint
Account being charged with the value of the service rendered by such
Material.
E. Pricing Conditions
(1) Loading or unloading costs may be charged to the Joint Account at
the rate of twenty-five cents (25 cents) per hundred weight on
all tubular goods movements, in lieu of actual loading or
unloading costs sustained at the stocking point. The above rate
shall be adjusted as of the first day of April each year
following January 1, 1985 by the same percentage increase or
decrease used to adjust overhead rates in Section III, Paragraph
1.A.(3). Each year, the rate calculated shall be rounded to the
nearest cent and shall be the rate in effect until the first day
of April next year. Such rate shall be published each year by the
Council of Petroleum Accountants Societies.
(2) Material involving erection costs shall be charged at applicable
percentage of the current knocked-down price of new Material.
3. Premium Prices
Whenever Material is not readily obtainable at published or listed prices
because of national emergencies, strikes or other unusual causes over which
the Operator has no control, the Operator may charge the Joint Account for
the required Material at the Operator's actual cost incurred in providing
such Material, in making it suitable for use, and in moving it to the Joint
Property; provided notice in writing is furnished to Non-Operators of the
proposed charge prior to billing Non-Operators for such Material. Each Non-
Operator shall have the right, by so electing and notifying Operator within
ten days after receiving notice from Operator, to furnish in kind all or part
of his share of such Material suitable for use and acceptable to Operator.
4. Warranty of Material Furnished By Operator
Operator does not warrant the Material furnished. In case of defective
Material, credit shall not be passed to the Joint Account until adjustment
has been received by Operator from the manufacturers or their agents.
V. INVENTORIES
The Operator shall maintain detailed records of Controllable Material.
1. Periodic Inventories, Notice and Representation
At reasonable intervals, inventories shall be taken by Operator of the Joint
Account Controllable Material. Written notice of intention to take inventory
shall be given by Operator at least thirty (30) days before any inventory is
to begin so that Non-Operators may be represented when any inventory is
taken. Failure of Non-Operators to be represented at an inventory shall bind
Non-Operators to accept the inventory taken by Operator.
2. Reconciliation and Adjustment of Inventories
Adjustments to the Joint Account resulting from the reconciliation of a
physical inventory shall be made within six months following the taking of
the inventory. Inventory adjustments shall be made by Operator to the Joint
Account for
-8-
<PAGE>
overages and shortages, but, Operator shall be held accountable only for
shortages due to lack of reasonable diligence.
3. Special Inventories
Special inventories may be taken whenever there is any sale, change of
interest, or change of Operator in the Joint Property. It shall be the duty
of the party selling to notify all other Parties as quickly as possible after
the transfer of interest takes place. In such cases, both the seller and the
purchaser shall be governed by such inventory. In cases involving a change of
Operator, all Parties shall be governed by such inventory.
4. Expense of Conducting Inventories
A. The expense of conducting periodic inventories shall not be charged to
the Joint Account unless agreed to by the Parties.
B. The expense of conducting special inventories shall be charged to the
Parties requesting such inventories, except inventories required due to
change of Operator shall be charged to the Joint Account.
-9-
<PAGE>
EXHIBIT "D"
Attached to and made a part of that certain Operating
Agreement dated __________________, by and between
Edge Petroleum Corporation, as Operator, and
Edge Group II Limited Partnership, et al, as Non-Operators
INSURANCE PROVISIONS
At all times while operations are conducted under this Agreement, Operator
shall, when requested by Non-Operator, maintain for the benefit of all parties
hereto, insurance of the types and in the maximum amounts as provided below.
Premiums for such insurance shall be charged to the Joint Account.
Non-operating working interest owners shall be named as Additional Insureds
on the liability insurance policies, but only with respect to the performance of
all work hereunder.
All such insurance shall be carried by an acceptable company or companies;
shall be maintained in full force and effect during the term of this Agreement;
and shall not be cancelled, altered or amended without 30 days prior written
notice. If so required, Operator agrees to have its insurance carrier furnish
Certificates of Insurance evidencing such insurance coverages.
Operator and non-operating working interest owners agree to mutually waive
subrogation in favor of each other on all insurance carried by each party and/or
to obtain such waiver from the insurance carrier if so required by the insurance
contract. If such a waiver is not obtained, the party failing to do so shall
indemnify the other party for any claim by an insurance carrier arising out of
subrogation.
Non-operating working interest owners agree that the limits and coverage
carried by Operator are adequate and shall hold Operator harmless if any claim
exceeds such limit or is not covered by such policy. Such coverages and limits
may change or be unavailable from time to time and Operator does not guarantee
their continuance but will use its best effort to provide coverages and limits
at reasonable costs.
a. Worker's Compensation Insurance in full compliance with all applicable
state and federal laws and regulations
b. Employer's Liability Insurance in the limits of $500,000 per accident
covering injury or death to any employee who may be outside the scope
of the Workers' Compensation statute of the state in which the work is
performed.
c. Comprehensive General Liability Insurance with Limits per occurrence of
$1,000,000 Combined Single Limit for Bodily Injury and Property Damage,
including Property Damage by Blowout and Cratering, Completed
Operations, and Broad Form Contractual Liability as respects any
contract into which the Operator may enter under the terms of this
Agreement.
d. Automobile Liability Insurance covering owned, non-owned and hired
automotive equipment with limits of $500,000.
e. Umbrella Liability with limit of $5,000,000 per occurrence combined
single limit.
f. Operator shall carry Operators Extra Expense insurance covering the
costs of controlling a Blowout, the expenses involved in redrilling the
well, certain other related costs and Seepage and Pollution Liability.
(These are descriptive terms only and exact coverage can be found only
in the policy). The limit for this insurance is $3,000,000 per
occurrence. Non-operating working interest owners not wishing to be
covered under this policy must notify operator prior to such date, and
by such refusal of coverage each non-operating working interest owner
agrees to be responsible for this proportionate share of such loss,
anything in the agreement to the contrary notwithstanding.
g. Such other coverage for the joint account as Operator shall deem
reasonable and necessary in connection with the conduct of operations
hereunder.
Notwithstanding anything contained herein to the contrary each
Non-Operating working interest owner may at their option provide the Operator
with a Certificate of Insurance showing that the party maintains insurance
independently covering the risks set forth in subparagraph C, D, E and F with
limits of coverage at least equal to those specified with Operator named as an
additional insured but only with respect to the performance of all work
hereunder. Any party providing evidence of such coverage shall not be a named
insured under policies maintained by Operator and shall not be charged with
premiums charged to the joint account for coverage specified by subparagraphs C,
D, E and F above, and Operator may to the extent it deems appropriate reduce the
limits of coverage specified above.
<PAGE>
EXHIBIT "E"
Attached to and made a part of that certain Operating
Agreement dated___________________, by and between
Edge Petroleum Corporation, as Operator, and
Edge Group II Limited Partnership, et al, as Non-Operators
GAS BALANCING AGREEMENT
INTENT OF THIS GAS BALANCING AGREEMENT:
The parties to this gas balancing agreement (GBA) intend to provide a
method of balancing gas production from the lease(s) or unit subject to the
above Operating Agreement when a party does not take its proportionate share of
production.
Pursuant to the above Operating Agreement, each party is permitted to take
in kind and/or separately dispose of its proportionate share of the gas produced
from the above stipulated lease or unit and shall make a good-faith effort to
dispose of its share of gas as currently produced. In the event any party
hereto fails, or is unable, to take in kind and/or market its share of the gas
as produced for any reason, the terms of this GBA shall automatically become
effective, and shall supersede any relevant contrary terms in the Operating
Agreement (unless otherwise noted herein).
As long as any gas produced from the lease(s) or unit is subject to the
regulations of the Federal Energy Regulatory Commission (FERC), or any successor
governmental authority, under any section of the Natural Gas Policy Act of 1978
(NGPA), or other statutory authority which establishes maximum lawful prices for
the gas, each party shall receive its allocated share of each pricing category
of gas in accordance with his working interest in the lease or unit. It is the
intent of this GBA that balancing of gas will be based upon the allocated
volumes of each category of gas. This GBA shall apply separately to each
pricing category of gas. Any deregulated gas, including gas deregulated in the
future, shall be treated as a separate category for purposes of balancing.
The terms "party" and "parties" shall be considered to imply either the
singular or plural form of the work as applicable according to the context.
OVER/UNDER PRODUCTION:
During any period or periods when any party hereto fails, or is unable, to
take in kind and/or market, for any reason, its share of gas as produced, the
other party shall be entitled, but not required, to produce each month the
maximum amount of gas production permitted by the appropriate governmental
authority having jurisdiction and deliver to their purchasers all gas production
not taken by the underproduced party. Each party failing to take or market its
full share of the gas as produced shall be considered underproduced by a
quantity of gas equal to its share of the gas produced, less such party's share
of the gas taken or sold, vented, lost, or used in the lease or unit operations.
Those parties which are capable of taking and/or marketing quantities of gas
allocable to an underproduced party, in the absence of any other agreement
between them, shall each take a share of the gas attributed to the underproduced
party in the direct proportion that its interest bears to the total interest of
all parties taking underproduced gas and shall be considered to be overproduced.
All gas taken and marketed by a party in accordance with the terms of this GBA,
regardless of whether such party is underproduced or overproduced, shall be
regarded as gas taken for its own account with title thereto being in such
party, whether such gas is attributable to such party's working interest share
of production, to overproduction, or to makeup of underproduction.
ACCOUNTING FOR IMBALANCE:
The Operator will maintain appropriate accounting on a monthly and
cumulative basis of the quantities and categories of gas each party is entitled
to receive and the quantities and categories of gas taken and/or marketed by
each of the parties. For the sole purpose of implementing the terms of this GBA
and adjusting gas imbalances which may occur, each party disposing of gas from
the lease(s) or unit in any month, to the extent required, shall furnish or
cause to be furnished to the Operator by the last day of each calendar month a
statement showing the total volume of gas sold by such party or taken in kind
for its own account during the preceding calendar month (the "report period").
Within sixty (60) days after the end of each report period, the Operator shall
furnish each party a statement showing the status of the overproduced and
underproduced accounts of all parties. All gas volumes under this paragraph
will be identified by the appropriate category under the NGPA or any other law
or regulation in effect including deregulated gas, as appropriate. Each party
to this GBA agrees that it will not utilize any information obtained hereunder
for any purpose other than implementing the terms of this agreement.
GAS MAKEUP:
Any party underproduced as to a given category of gas shall endeavor to
bring its taking of gas of that category into balance. After a reasonable
length of time after written notice to the Operator, any party may begin taking
and/or delivering to its purchaser(s) its full share of each category of gas
produced. In addition, to allow for the recovery and makeup of underproduced
gas in a category and to balance the gas account for the category between the
parties in accordance with their respective interests, the underproduced party
shall be entitled to take an additional share of gas ("make-up gas"). After a
reasonable length of time after written notice to the Operator, the
underproduced party shall be entitled to take up to an additional fifty percent
(50%) of the monthly quantity of that category of gas attributable to the
overproduced party; however, unless the underproduced party and the overproduced
party otherwise mutually agree, the make-up gas entitlement of a party may not
exceed one hundred percent (100%) of that party's regular working interest
entitlement of production. If more than one underproduced party is entitled to
take additional gas, they shall divide the make-up gas in proportion to their
respective underproduced accounts. The first gas made up shall be assumed to be
the first gas underproduced.
It is specifically agreed that no underproduced party will be allowed to
take make-up gas during the months of November, December, January or February
(the "winter period"). How-ever, gas make-up will be allowed during the winter
period if the underproduced party has taken at least ninety percent (90%) of the
make-up gas to which it was entitled during the six consecutive months
immediately prior to the winter period.
<PAGE>
CESSATION OF PRODUCTION:
If, at the termination of production of a given category of gas, an
imbalance exists between the parties, a monetary settlement of the imbalance
between the parties shall be made within a reasonable length of time after
production permanently ceases. The amount of the monetary settlement will be
limited to the lesser of 1) the proceeds actually received by the overproduced
party at the time of overproduction, or 2) the underproduced party's respective
price at the time of underproduction, established under the terms of a valid Gas
Sales Agreement for such production, multiplied by the underproduced volumes.
Any monetary settlement between the parties shall be made net of any royalties,
production taxes, and severance taxes previously paid on the overproduction by
the overproduced party, and also net of any out-standing amounts related to the
lease(s) or unit(s) which are owed by the underproduced party to the
overproduced party. If the overproduced party did not sell its gas, but
otherwise utilized such gas in its own operations, such gas will be valued in
the same manner used for royalty and severance tax purposes when produced. In
the event the underproduced party has taken less than twenty percent (20%) of
its working interest share of cumulative gas available for sale at cessation of
production, the overproduced party shall be obligated to settle on only ninety
percent (90%) of the value received for gas removed from the lease or unit.
That portion of the monies collected by the overproduced party which is subject
to refund by orders of the FERC may be withheld by the overproduced party until
such prices are fully approved by the FERC, unless the underproduced party
furnishes a corporate undertaking agreeing to hold the over-produced party
harmless from financial loss due to refund orders by the FERC.
Notwithstanding the above, by mutual consent the parties may elect to
balance gas of like quality and vintage from a source other than lease(s)
subject to the Operating Agreement to which this GBA is attached. The gas so
returned shall be from a designated area mutually agreed to by the parties to
this GBA. In the event that the parties cannot mutually agree to balance in
kind under this provision within ninety (90) days, the gas imbalance shall be
settled under the first paragraph of this section.
ROYALTY SETTLEMENT:
Except where provision is made to the contrary in the Operating Agreement,
or otherwise required by any State or Federal law or regulation, at all times
while gas is produced from the leases or unit, each party shall pay or cause to
be paid, all royalty due and payable on its share of gas production, as if each
party were taking or delivering to a purchaser its share of production. Each
party agrees to hold each other party harmless from any and all claims for
royalty payments asserted by its royalty owners. The term "royalty owner" shall
include owners of royalty, overriding royalties, production payments, and
similar interest.
DELIVERABILITY TESTS:
Nothing herein shall be construed to deny any party the right, from time to
time, upon reasonable advance notice in writing to the operator, to produce and
take or deliver to its purchaser the full well stream for a reasonable period to
meet the deliverability test required by its purchaser.
TAXES:
Except where provision is made to the contrary in the Operating Agreement,
each party shall pay, or cause to be paid, all production and severance taxes
due and payable on its full share of gas production, as if each party were
taking or delivering to a purchaser its full share of production.
LIQUID HYDROCARBONS:
All parties hereto shall share in and own liquid hydrocarbons recovered
from all gas by primary separation equipment prior to processing in a gas plant
in accordance with their respective interest, as specified in the above
Operating Agreement, whether or not such parties are actually producing and
marketing gas at such time.
LEASE OPERATING COST:
Nothing herein shall change or affect each party's obligation to pay its
proportionate share of all costs and liabilities incurred in operations, as its
share thereof is set forth in the above described Operating Agreement.
TERM:
This agreement shall remain in force and effect as long as the Operating
Agreement is in effect and thereafter until the gas balance accounts between the
parties are settled in full and shall accrue to the benefit and be binding upon
the parties hereto, their successors, representatives, and assigns.
EXHIBIT "E" - PAGE 2
<PAGE>
EXHIBIT "F"
Attached to and made a part of that certain Operating
Agreement dated _________________, by and between
Edge Petroleum Corporation, as Operator, and
Edge Group II Limited Partnership, et al, as Non-Operators
NON-DISCRIMINATION AND CERTIFICATION
OF NON-SEGREGATED FACILITIES
Whenever used herein, the term "Contractor" shall refer to each party to the
attached Operating Agreements insofar as the particular governmental laws,
rules, regulations and orders apply to that party.
I. Equal Opportunity Clause
A. Contractor shall be bound by and agrees to the following provisions as
contained in Section 202 of Executive Order No. 11246, to wit:
1. The Contractor will not discriminate against any employee or
applicant for employment because of race, color, religion, sex, age or national
origin. The Contractor will take affirmative action to ensure that applicants
are employed, and the employees are treated during employment, without regard to
their race, color, religion, sex, age or national origin. Such action shall
including, but not be limited to, the following: employment, upgrading,
demotion or transfer, recruitment or recruitment advertising, layoff or
termination, rates of pay or other forms of compensation, and selection for
training, including apprenticeship. The Contractor agrees to post in
conspicuous places, available to employees and applicants for employment,
notices to be provided by the contracting officer setting forth the provisions
of this non-discrimination clause.
2. The Contractor will, in all solicitations or advertisements for
employees placed by or on behalf of the Contractor, state that all qualified
applicants will receive consideration for employment without regard to race,
color, religion, sex, age or national origin.
3. The Contractor will send to each labor union or representative of
workers with which he has a collective bargaining agreement or other contract or
understanding, a notice, to be provided by the agency contracting officer,
advising the labor union or workers' representative of the Contractor's
commitments under Section 202 of Executive Order No. 11246 of September 24,
1965, and shall post copies of the notice in conspicuous places available to
employees and applicants for employment.
4. The Contractor will comply with all provisions of Executive Order
No. 11246 of September 24, 1965, and of the rules and regulations, and relevant
orders of the Secretary of Labor.
5. The Contractor will furnish all information and reports required by
Executive Order No. 11246 of September 24, 1965, and by the rules, regulations,
and order of the Secretary of Labor, or pursuant thereto, and will permit access
to his books, records, and accounts by the contracting agency and the Secretary
of Labor for purposes of investigation to ascertain compliance with such rules,
regulations and orders.
6. In the event of Contractor's non-compliance with the
nondiscrimination clauses of this contract or with any of such rules,
regulations or orders, this contract may be cancelled, terminated or suspended
in whole or in part and the Contractor may be declared ineligible for further
Government contracts in accordance with procedures authorized in Executive Order
No. 11246 of September 24, 1965, and such other sanctions may be imposed and
remedies invoked as provided in Executive Order No. 11246 of September 24, 1965,
or by rules, regulations, or orders of the Secretary of Labor, or as otherwise
provided by law.
7. The Contractor will include the provisions in Paragraphs 1 through 7
in every subcontract or purchase order unless exempted by rules, regulations, or
orders of the Secretary of Labor issued pursuant to Section 204 of Executive
Order No. 11246 of September 24, 1965, so that such provisions will be binding
upon each subcontractor or vendor. The Contractor will take such action with
respect to any subcontract or purchase order as the contracting agency may
direct as a means of enforcing such provisions including sanctions for
noncompliance; provided, however, that in the event the Contractor becomes
involved in, or is threatened with, litigation with a subcontractor or vendor as
a result of such direction by the contracting agency, the Contractor may request
the United States to enter into such litigation to protect the interests of the
United States.
8. Contractor certifies that he does not maintain or provide for his
employees any segregated facilities at any of his establishments, and that he
does not permit his employees to perform their services at any location, under
his control, where segregated facilities are maintained. He certifies further
that he will not maintain or provide for his employees any segregated facilities
at any of his establishments, and that he will not permit his employees to
perform their services at any location, under his control, where segregated
facilities are maintained. Contractor agrees that a breach of this
certification is a violation of the Equal Opportunity Clause in this contract.
As used in this certification, the "segregated facilities" means any waiting
room, work areas, rest rooms and wash rooms, restaurants and other eating areas,
time clocks, locker rooms, and other storage or dressing areas, parking lots,
drinking fountains, recreation or entertainment areas, transportation and
housing facilities provided for employees which are segregated by explicit
directive or are in fact segregated on the basis of race, color, religion, sex,
age or national origin, because of habit, local custom or otherwise. He further
agrees that (except where he has obtained identical certifications from proposed
subcontractors for specific time periods) he will obtain identical
certifications from proposed subcontractors prior to the award of subcontracts
exceeding $10,000 which are not exempt from the provisions of the Equal
Opportunity Clause; that he will retain such certifications in his files, and
that he will forward the following notice to such proposed subcontractors
(except where the proposed subcontracts have submitted identical certifications
for specific time periods): NOTICE TO PROSPECTIVE SUBCONTRACTORS OF REQUIREMENT
FOR CERTIFICATIONS OF NON-SEGREGATED FACILITIES. A certification of Non-
Segregated Facilities as required by the May 9, 1968, order of Elimination of
Segregated Facilities, by the Secretary of Labor (32 Fed. Reg. 7439, May 9,
1967) must be submitted prior to the award of a subcontract exceeding $10,000
which is not exempt from the provisions of the Equal Opportunity Clause. The
<PAGE>
certification may be submitted either for each subcontract or for all
subcontracts during a period (i.e. quarterly, semi-annually, or annually).
(1968 MAR.) (NOTE: The penalty for making false statements in offers is
prescribed in 18 U.S.C. 1001).
C. The undersigned Contractor further agrees and certifies that, if the
value of any contract or purchase order is $50,000 or more and the Contractor
has 50 or more employees, Contractor will:
1. File a complete and accurate report on Standard Form 100 (EEO-1)
with the Joint Reporting Committee, Post Office Box 9336, Philadelphia,
Pennsylvania 19139 (such address may change), within thirty (30) days of the
date of contract award, unless such report has been filed within the twelve (12)
months' period preceding the date of the contract award and otherwise comply
with and file such other compliance reports as may be required under Executive
Order No. 11246, as amended, and Rules and Regulations adopted thereunder.
2. Develop a written affirmative action compliance program for each of
its establishments as required by Title 41, Code of Federal Regulations, Section
60-1.40.
II. Employment of the Handicapped
A. If this contract or purchase order is over $2,500 and pertains to a
non-exempt government contract or subcontract, then the affirmative action
clause and regulations (as amended from time to time) promulgated by the
Secretary of Labor, or his designee, and to implement Section 503 of the
Rehabilitation Act of 1973, P.O. 93-112, as amended by Rehabilitation Act of
1974, P.O. 93-516, found in 41 Code of Federal Regulations Part 60-741, are
incorporated by reference and made a part hereof, and contractor agrees to
comply with such affirmative action clause and regulations to the extent
possible.
III. Disabled Veterans and Veterans of the Vietnam Era
A. If this contract or purchase order is $10,000 or more, and pertains to
a non-exempt government contract or subcontract, then the affirmative action
clause and regulations (as amended from time to time) promulgated by the
Secretary of Labor, or his designee, to implement Section 402 of the Vietnam Era
Readjustment Act of 1974, P.L. 93-508, and found in 41 Code of Federal
Regulations Part 60-250 are incorporated by reference and made a part hereof,
and contractor agrees to comply with such affirmative action clause and
regulations to the extent applicable.
EXHIBIT "F" - PAGE 2
<PAGE>
EXHIBIT "G"
Attached to and made a part of that certain Operating
Agreement dated , by and between
Edge Petroleum Corporation, as Operator, and
Edge Group II Limited Partnership, et al, as Non-Operators
THERE IS NO EXHIBIT "G"
<PAGE>
EXHIBIT "H"
Attached to and made a part of that certain Operating Agreement
dated April 1, 1996 between Carrizo Oil & Gas, Inc., as Operator,
and Vastar Resources, Inc., et al, as Non-Operators
EDGE PETROLEUM CORPORATION'S INFORMATION DISTRIBUTION
LIST/GEOLOGICAL WELL REQUIREMENTS
NON-OPERATED WELLS
---------------------------------------------------------------------------
No. of
Copies Attention
------ ------------
AFE's 2 Mark J. Gabrisch
Drilling, Completion, & Workover Reports 1-Fax Daily John E. Calaway
1-Mail Weekly
Drilling permits, location plat, 3 John E. Calaway
completion reports filed w/regulatory
body, DST's well information, etc.
Monthly Production Reports 3 John E. Calaway
(Producing Wells)
Geological correspondence, 1-FAX Immediately John E. Calaway
correspondence & information (Paleo,
core analysis, logs, show reports, etc.)
1 set samples upon request of slabbed
section of cored interval
Electric Logs (Field & Final copies) 3-Field John E. Calaway
3-Final
1/film of final
Mud logs 1-FAX Daily John E. Calaway
Final Copies
24 HOUR NOTIFICATION of mud runs, tests,
casing approval, changes in evaluation
programs, first mud log and P&A approval
to all designated geologists, of if
unavailable, one of the people listed
below)
Land correspondence, Operating Agreements, 1 Mark J. Gabrisch
letter agreements, payout notices, etc.
Geophysical Data (films, tapes, stacked 1 John E. Calaway
migrated sections, etc.)
********************************************************************************
LIST OF TELEPHONE NUMBERS
- -------------------------
Office: 713/654-8960
Fax: 713/654-0701
MAILING ADDRESS: Edge Petroleum Corporation
- ---------------- 1111 Bagby, Suite 2100
Houston, Texas 77002
DESIGNATED GEOLOGIST: --------------------------
- ---------------------
Office: 713/654-8960
Home: 713/ -
--- ----
<PAGE>
EXHIBIT 10.2
ROYALTY JOINT VENTURE II
Dated: May 10, 1994
<PAGE>
TABLE OF CONTENTS
ROYAL JOINT VENTURE II
<TABLE>
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Page
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ARTICLE I.
<S> <C> <C>
ORGANIZATIONAL MATTERS
1.1 Formation..................................................................... 1
1.2 Name.......................................................................... 1
1.3 Principal Place of Business................................................... 1
1.4 Filings....................................................................... 1
1.5 Term.......................................................................... 1
1.6 Representations, Warranties and Agreements.................................... 1
ARTICLE II.
DEFINITIONS................................................................................... 2
ARTICLE III.
PURPOSE....................................................................................... 6
ARTICLE IV.
CAPITAL CONTRIBUTIONS
4.1 Initial Capital Contributions................................................. 7
4.2 Additional Capital Contributions.............................................. 7
4.3 Capital Accounts.............................................................. 7
4.4 Interest on Contributions..................................................... 8
4.5 No Withdrawal of Capital Contributions........................................ 8
4.6 Obligation to Restore Negative Capital Accounts............................... 8
ARTICLE V.
ALLOCATIONS OF INCOME AND LOSS
5.1 Income and Loss............................................................... 9
5.2 Corrective Allocations........................................................ 9
5.3 Minimum Gain Chargeback....................................................... 9
5.4 Transfer of Interest.......................................................... 9
5.5 Special Allocation............................................................ 9
</TABLE>
i
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<TABLE>
<CAPTION>
ARTICLE VI.
<S> <C> <C>
CURRENT DISTRIBUTIONS AND RELATED MATTERS
6.1 Cash Distributions............................................................ 10
6.2 Distribution of Non-Operating Interests....................................... 10
6.3 Property Distributions........................................................ 11
6.4 Pro Rata Distributions........................................................ 11
ARTICLE VII.
RIGHTS, POWERS AND DUTIES OF THE VENTURERS
7.1 General....................................................................... 12
7.2 Authority and Duties of the Managing Venturer................................. 12
7.3 Reliance by Third Parties..................................................... 14
7.4 Management Personnel.......................................................... 14
7.5 Absence of Authority of Managing Venturer..................................... 14
7.6 Restrictions of the Authority of the Managing Venturer........................ 14
7.7 Authority, Rights and Duties of the Limited Partnership....................... 16
7.8 Compensation and Reimbursement of Managing Venturer........................... 16
7.9 Compensation and Reimbursement of Royalty..................................... 17
7.10 Outside Activities............................................................ 17
7.11 Joint Venture Funds........................................................... 18
7.12 Other Matters Concerning Managing Venturer.................................... 18
ARTICLE VIII.
TRANSFERABILITY OF VENTURER'S INTEREST........................................................ 18
ARTICLE IX.
INCOME TAX MATTERS
9.1 Preparation of Tax Returns.................................................... 19
9.2 Organizational Expenses....................................................... 19
9.3 Taxation as a Partnership..................................................... 19
9.4 Tax Matters Partner........................................................... 19
ARTICLE X.
ACCOUNTING PROCEDURES; REPORT AND INFORMATION
10.1 Fiscal Year................................................................... 19
10.2 Financial Records............................................................. 19
10.3 Financial Reports............................................................. 20
10.4 Tax Reports................................................................... 20
</TABLE>
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<TABLE>
<CAPTION>
ARTICLE XI.
<S> <C> <C>
DISSOLUTION, LIQUIDATION AND TERMINATION
11.1 Events Causing Dissolution.................................................... 20
11.2 Liquidating Agent............................................................. 20
11.3 Terminating Distributions and Matters......................................... 21
11.4 Allocation of Liquidating Distributions....................................... 22
11.5 Indemnification of the Liquidating Agent...................................... 22
11.6 Certain Powers and Rights of the Liquidating Agent............................ 23
11.7 Complete Distribution......................................................... 23
ARTICLE XII.
AMENDMENTS AND CONSENTS
12.1 Amendments.................................................................... 23
12.2 Method of Giving Consent...................................................... 23
ARTICLE XIII.
INDEMNIFICATION AND LIABILITY
13.1 Indemnification............................................................... 23
13.2 Indemnity Limitations......................................................... 26
13.3 Limitations on Liability...................................................... 26
13.4 Procedure for Indemnification................................................. 27
13.5 Contribution of Net Proceeds from any Claim................................... 27
13.6 Reimbursement................................................................. 27
13.7 Third Party Beneficiaries..................................................... 28
ARTICLE XIV.
EFFECTIVE DATE AND GENERAL PROVISIONS
14.1 Effective Date................................................................ 28
14.2 Scope......................................................................... 28
14.3 Binding Effect................................................................ 28
14.4 Headings...................................................................... 28
14.5 Waiver of Rights to Partition................................................. 28
14.6 Violation..................................................................... 28
14.7 Severability.................................................................. 28
14.8 Counterparts.................................................................. 29
14.9 Applicable Laws............................................................... 29
14.10 Liability..................................................................... 29
14.11 Notices....................................................................... 29
</TABLE>
iii
<PAGE>
JOINT VENTURE AGREEMENT
This Joint Venture Agreement (the "Agreement") is entered into as of the
date indicated on the signature page hereto by and between Edge Joint Venture II
(herein called "Managing Venturer") and Essex Royalty Limited Partnership II, a
Connecticut Limited Partnership ("Royalty" or the "Limited Partnership").
ARTICLE I.
ORGANIZATIONAL MATTERS
1.1 FORMATION. The Venturers hereby associate themselves in the
formation of a joint venture (the "Joint Venture"), pursuant to the provisions
of the Texas Uniform Partnership Act, Tex. Rev. Civ. Stat. Ann. Art. 6132b, as
from time to time amended (the "Act").
1.2 NAME. The name of the Joint Venture shall be the Essex Royalty
Joint Venture II, and it may also be referred to as the Essex Royalty
Partnership. Moreover, the Joint Venture's business may be conducted under any
other name or names deemed advisable by the Managing Venturer.
1.3 PRINCIPAL PLACE OF BUSINESS. The principal place of business of
the Joint Venture shall be Houston, Texas.
1.4 FILINGS. The Venturers agree to immediately execute all such
certificates and other documents as may be necessary for the Managing Venturer
to accomplish all filing, recording, publishing and other acts as may be
necessary or appropriate to comply with all requirements for the formation,
preservation and operation of the Joint Venture as a general partnership (or
equivalent business organization) in all states of the United States in which
the Joint Venture may conduct its business prior to the actual conduct of such
business in any such state.
1.5 TERM. The Joint Venture shall be effective as of the date hereof
for all purposes, and shall continue in full force and effect until December 31,
1997, unless sooner dissolved and terminated pursuant to the terms hereof (the
"Term"). Thereafter, during the Wind-Up Period, the Joint Venture shall engage
in Winding Up its business and affairs.
1.6 REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
(a) The Managing Venturer represents and warrants that it is a
joint venture which has been duly formed under the laws of the State of
Texas, and is validly existing and in good standing with all requisite
power to carry on its business.
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(b) Royalty represents that it is a limited partnership, which
has been formed under the laws of the State of Connecticut, with
Napamco, Ltd., a Connecticut corporation, and Napamco Ltd., a New York
Corporation, as the general partners, and that it is validly existing
and in good standing with all requisite power to carry on its business.
(c) Each Venturer represents and agrees to furnish the other
with any and all information which shall be reasonably requested, and to
afford the other the opportunity to ask questions of and receive answers
from the other and to obtain any additional information (to the extent
such information is accessible or can be obtained without unreasonable
effort or expense).
(d) Each Venturer respectively represents and warrants for
itself that (i) the execution and delivery by it of this Agreement, and
consummation of the transactions contemplated herein have been duly
authorized by all necessary corporate or partnership action as the case
may be, and (ii) this Agreement constitutes the valid and binding
obligation of each respective Venturer enforceable against it in
accordance with its terms, subject to (x) the principles of equity; and
(y) bankruptcy, insolvency, and other laws relating to creditors'
rights.
(e) The Limited Partnership represents, warrants and covenants
that (a) it has requested from its prospective limited partners
appropriate information in the form of investor certifications for the
purpose of verifying that such investors are "accredited investors" as
defined in SEC Reg D; (b) it has used its best efforts to assure that
its offering of limited partnership interests is in compliance with Reg
D, or with Section 4(2) or 3(b) of the Securities Act of 1933, as
amended, and any applicable state blue sky laws; and (c) it has imposed
upon the holders of limited partnership interests sufficient transfer
limitations on the interests in order that the offering of limited
partnership interests in the Royalty complies with Reg D.
ARTICLE II.
DEFINITIONS
When used herein, the following words shall have the meaning assigned to
them:
"ADDITIONAL CAPITAL CONTRIBUTION" means the amount of additional cash
the Venturers contribute to the capital of the Joint Venture, including amounts
provided in Section 4.2.
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"AFFILIATE" means, when used with reference to a specified Venturer, (a)
any Person directly or indirectly controlling, controlled by, or under common
control with such Venturer; (b) any officer, director or partner of such
Venturer; and (c) any Person in which a Venturer is a general partner.
"CAPITAL CONTRIBUTIONS" means for any Venturer, the Initial Capital
Contribution and Additional Capital Contribution of such Venturer (or the
predecessor holder of the Interest of such Venturer).
"CODE" means the Internal Revenue Code of 1986, as amended (or any
corresponding provisions of succeeding law).
"EDGE GROUP I" means the Edge Group General Partnership, a general
partnership with Edge I Limited Partnership, Edge II Limited Partnership and
Edge III Limited Partnership, as the general partners thereof, and John
Sfondrini, as the managing partner.
"EDGE JOINT VENTURE II" means the general partnership with Edge Group II
Limited Partnership, Edge Petroleum Corporation, Gulfedge Limited Partnership
and Edge Group I as Venturers, formed pursuant to a Joint Venture Agreement
dated as of April 8, 1991. Edge Joint Venture II will be the Managing Venturer
of the Essex Royalty Joint Venture.
"EFFECTIVE DATE" means the date when this Agreement is executed by both
Venturers.
"INCAPACITY" or "INCAPACITATED" means, with respect to any Venturer, (i)
the filing of a petition in bankruptcy, or (ii) the dissolution or termination
(other than by merger or consolidation), as the case may be, unless, in the case
of a dissolution, such Venturer is reconstituted and its business continued as
provided in its organizational documents.
"INITIAL CAPITAL CONTRIBUTIONS" means the cash amount contributed to
the Joint Venture by the Venturers as provided in Section 4.1.
"LEASES" means full or partial interests in the leasehold estate in oil
and gas leases covering oil, gas and other mineral rights, including
applications for federal and state leases, fee rights, licenses, concessions or
other rights authorizing the owner to explore for, drill, produce and sell oil,
gas and other hydrocarbons, as well as rights to share in revenues from such
activities and interests, and contractual rights to acquire any such interest.
"MANAGING VENTURER" means Edge Joint Venture II.
3
<PAGE>
"MINERAL INTEREST" means an interest in the fee mineral estate in the
land, is typically severed from the surface estate by prior grant or
reservation, and may be leased or unleased. Unlike a royalty interest, a mineral
interest includes the right to go upon the land for the purpose of prospecting
for, drilling, severing, and removing therefrom oil, gas or other specified
minerals. A mineral interest also includes the executive leasing right, ie., the
right to execute an oil and gas lease to a third party operator who will drill a
well. The owner of a mineral interest has the right to receive a fractional
share of the oil and gas or other minerals produced from the premises as well as
any delay rentals, bonuses or royalties paid pursuant to an oil and gas lease.
The owner of the mineral interest also has the right to receive the reversionary
interest after termination of the oil and gas lease covering the interest.
"NON-OPERATING INTEREST" means an interest in oil and gas property that
does not entitle its holder(s) to participate in decisions concerning the
testing, drilling, completion, operation or abandonment of the property and all
such decisions are controlled by the holder(s) of the Working Interest in such
property. Non-Operating Interests include Royalty Interests, Overriding Royalty
Interests, Net Profits Interests, and Production Payments, as well as oil
payment, calls on production and other miscellaneous interests similar to the
foregoing. It would not include Working Interests or Mineral Interests not
subject to an oil and gas lease since these interests bear a share of the cost
and risk of testing, drilling, completing, operating and abandoning of the
property.
"NONPROPRIETARY SEISMIC" means seismic data purchased or obtained from
third parties where the purchaser obtains the right to use such data, but may
not sell it.
"NOTIFICATION" means a writing containing the information required by
this Agreement to be communicated to any Person, sent by registered or certified
United States mail, return receipt requested, postage prepaid, to such Person at
the last known address of such Person, the date of the mailing being deemed the
date of the giving of Notification; provided, however, that any communication
containing the information sent or delivered to the Person and actually received
by the Person shall constitute Notification for all purposes of this Agreement.
"OLD JOINT VENTURE" means the old Edge Joint Venture between Edge
Petroleum Partnership and Edge Group I, evidenced by that certain Operating
Agreement dated July 1, 1987.
"PARTNERSHIP INTEREST" means the entire ownership interest of a Venturer
in the Joint Venture at any particular time, including
4
<PAGE>
the rights and obligations of such Venturer under this Agreement and the Act.
"PERSON" means any individual, partnership, corporation, trust or other
entity.
"PROPRIETARY SEISMIC" means seismic data other than Nonproprietary
Seismic.
"PROSPECT" means a geographical and/or geological area deemed by the
Managing Venturer to be prospective for the accumulation of production of oil,
gas, condensate, or other hydrocarbons, or an interest therein.
"RESERVES" means the rights to ownership of oil and gas or other
hydrocarbon interests, whether by virture of a working interest, royalty
interest, net profits interest, production payment right, back in, carried
interests, and any other similar type rights.
"ROYALTY ACRE" means the number of acres of land in which the landowner
owns a full one-eighth (1/8) royalty, i.e., if a tract of 100 acres is leased
for one-eighth (1/8) royalty, the landowner owns 100 Royalty Acres. If the
landowner had leased for one-fourth (1/4) royalty, he owns 200 Royalty Acres. If
the landowner had previously conveyed away a one-sixteenth (1/16) royalty
interest in the land and then leased it for one-eighth (1/8) royalty, he would
own a 1/16 royalty interest or 50 Royalty Acres.
"ROYALTY INTERESTS AND OVERRIDING ROYALTY INTERESTS" are rights to
receive a certain part of the oil and gas or income therefrom, from oil and gas
properties, such as Leases or producing wells, without regard to participation
in the costs of finding and producing such income. Such interests have no right
to explore, drill, or develop the land, to execute oil and gas leases or to
receive bonuses or rentals. Royalty Interests are typically reserved to the
landowner when the land is leased to a third party operator and are defined by
the terms of the Lease. They may also be created by prior conveyance or
reservation in the chain of title and may be limited to a term of years or for
so long as there is production or may be perpetual. Overriding Royalty Interests
are carved out of a Working Interest, and their duration is limited by the term
of the Lease under which they are created.
"SHARING RATIOS" means as to each Venturer, as set forth on Exhibit A.
After the occurrence of a Sharing Ratio Shift, the Sharing Ratios of the
Venturers will be as set forth on Exhibit A.
"SHARING RATIO SHIFT" is that point in time, whether such occurs during
the Term hereof, or during the Wind-Up Period, but not before January 15, 1996
when the aggregate amount of (a) cash actually distributed to the Limited
Partnership and/or (b) Non-
5
<PAGE>
Operating Interests actually distributed to the Limited Partnership subject to
the limitations of and valued as set forth in paragraph 6.3 below, equals 100
percent of the amount of its Capital Contribution to the Venture. Upon the
occurrence of a Sharing Ratio Shift, all subsequent distributions based upon
Sharing Ratios shall be made based upon Sharing Ratios after the Sharing Ratio
Shift.
"SIMULATED DEPLETION DEDUCTIONS" means the simulated depletion allowance
computed by the Joint Venture with respect to each oil and gas property by using
either the cost depletion method or the percentage depletion method (computed in
accordance with Code Section 613 at the rates specified in Section 613(c) (5)
without regard to the limitation of Section 613A, which theoretically could
apply to any partner) for each taxable year that the property is owned by the
Joint Venture and subject to depletion, in accordance with Treas. Reg. Section
1.704-1 (b) (2) (iv) (k).
"SIMULATED GAINS" and "SIMULATED LOSSES" means, respectively, the
simulated gains or simulated losses computed by the Joint Venture with respect
to its oil and gas properties pursuant to Treas. Reg. Section 1.704-1 (b) (2)
(iv) (k).
"TAXABLE PERIOD" means each calendar year which begins hereafter.
"WINDING-UP" means the period, not to exceed six months, during which the
affairs of the Royalty Joint Venture are terminated and the liquidation and sale
of the assets of the Royalty Joint Venture is accomplished, such process
commencing when the Royalty Joint Venture is dissolved for any reason.
"WIND-UP PERIOD" means a period not to exceed six (6) months during
which Winding-Up of the affairs of the Joint Venture shall occur.
"WORKING INTEREST" means the operating or leasehold interest under an
oil, gas and mineral lease or other property interest covering a specific tract
or tracts of land which entitles the owner to explore for, drill, produce and
sell oil, gas and other minerals covered by such lease or other property
interest.
ARTICLE III.
PURPOSE
The purpose of the Joint Venture is to engage in the business of
purchasing Non-Operating Interests in oil and gas properties within the domestic
United States and off-shore state waters.
6
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ARTICLE IV.
CAPITAL CONTRIBUTIONS
4.1 INITIAL CAPITAL CONTRIBUTIONS. Upon the execution of this Agreement,
Royalty shall contribute $ ______________ to the Venture.
4.2 ADDITIONAL CAPITAL CONTRIBUTIONS. Royalty shall have the right to
contribute up to an additional $ ____________ provided such amount is paid on or
before January 15, 1996.
Other than the foregoing, there shall be no obligation on the part of any
Venturer to make any capital contributions or additional capital contributions
to the Joint Venturer.
4.3 CAPITAL ACCOUNTS.
(a) A capital account shall be established for each Venturer which
shall consist of the cash amount of such Venturer's Initial Capital Contribution
increased by (i) the cash amount of any Additional Capital Contributions made by
such Venturer to the Joint Venture pursuant to this Agreement, and (ii) all net
income and gains allocated to such Venturer pursuant to Sections 5.1, 5.3 and
5.4; and decreased by (x) the cash or fair market value of property distributed
to such Venturer pursuant to this Agreement, and (y) all net losses and
deductions, allocated to such Venturer pursuant to Sections 5.1 and 5.3.
(b) A Venturer's Capital Account shall be increased by the amount of
Simulated Gains allocated to such Venturer, and decreased by the amount of
simulated Depletion Deductions and Simulated Losses allocated to such Venturer.
Simulated Depletion shall be allocated to the Venturer in the same proportion as
such Venturers were properly allocated the adjusted tax basis of such property.
The aggregate Capital Account adjustments for simulated percentage depletion
allowances with respect to an oil and gas property of the Joint Venture shall
not exceed the aggregate adjusted tax basis allocated to the Venturer with
respect to such property. The Capital Accounts of the Venturers shall be
adjusted upward by the amount of any Simulated Gain in proportion to such
Venturer's allocable shares of the portion of the total amount realized from the
disposition of such property that exceeds the Joint Venture's simulated adjusted
basis in such property. The Capital Accounts of such Venturers shall be adjusted
downward by the amount of any Simulated Loss in proportion to such Venturers'
allocable share of the total amount realized from the disposition of such
property that represents recovery of the Joint Venture's simulated adjusted
basis in such property.
7
<PAGE>
(c) Upon the occurrence of a Sharing Ratio Shift, the contribution of
additional money or property to the Joint Venture (other than in accordance with
the then Sharing Ratios of the Venturers), the admittance of an additional
Venturer, distribution of property to a Venturer (other than in accordance with
the then Sharing Ratios of the Venturers), or upon liquidation, the Venturers'
Capital Accounts shall be adjusted to reflect a revaluation of Joint Venture
property. The adjustment shall be based on the fair market value of the
property as of the adjustment date as determined in Section 6.3. Any such
adjustments shall be allocated among the Venturers as provided in Sections 5.1
and 5.3. Capital Accounts shall be adjusted in accordance with Treas. Reg.
Section 1.704-1 (b) (2) (iv) (g) for allocation of depreciation, depletion,
amortization, and gains or loss as computed for book purposes with respect to
such property. The Joint Venture's distributive shares of depreciation,
depletion, amortization, and gain or loss, as computed for tax purposes with
respect to such property, shall take account of the variation between the
adjusted tax basis and book value of such property in the same manner as
required by Code Section 704 (c) with respect to contributed property.
(d) The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations Section 1.704-1 (b) (2) (iv), and shall be interpreted and applied
in a manner consistent with such Regulations. The Venturers also shall make any
adjustments that are necessary or appropriate to maintain equality between the
Capital Accounts of the Venturers and the amount of Joint Venture capital
reflected on the Joint Venture's balance sheet, as computed for book purposes in
accordance with Regulations Section 1.704-1 (b) (2) (iv) (q).
4.4 INTEREST ON CONTRIBUTIONS. The Venturers shall receive no interest on
their contributions to the capital of the Joint Venture.
4.5 NO WITHDRAWAL OF CAPITAL CONTRIBUTIONS. No Venturer shall be entitled
to withdraw any part of its Capital Contribution or its Capital Account or to
receive any distribution from the Joint Venture, except as provided in Articles
VI and XII.
4.6 OBLIGATION TO RESTORE NEGATIVE CAPITAL ACCOUNTS. If there should be a
deficit in any Venturer's capital account after taking into account all capital
account adjustments, the Venturer shall be required to make a Capital
Contribution equal to the deficit amount. Such contribution shall be made not
later than the end of the taxable year in which such Venturer's interest is
liquidated or, if later, within 90 days of the date of such liquidation.
8
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ARTICLE V.
ALLOCATIONS OF INCOME AND LOSS
5.1 INCOME AND LOSS. Except as provided in Sections 5.3 or 5.4, all net
income, gains, losses and deductions (or items thereof) for each Taxable Period
shall be allocated to the Venturers in accordance with their respective Sharing
Ratios.
5.2 CORRECTIVE ALLOCATIONS. Notwithstanding Section 5.1 and commencing at
the start of the Wind-Up Period, allocations of income (including gross income,
if necessary), gain, loss or deduction (or items thereof) shall be made in a
reasonable manner to the Venturers, as applicable and to the extent necessary,
to realign the Capital Accounts of the Venturers, to the greatest extent
possible, so that such accounts will be in accordance with the Sharing Ratios of
the Venturers at the time of the liquidation of the Joint Venture.
5.3 MINIMUM GAIN CHARGEBACK. Notwithstanding any other provision of this
Article V, if there is a net decrease in Joint Venture minimum gain, as defined
in Reg. Section 1.704-2 (b) (2) during any Joint Venture fiscal year, the
Venturers shall be allocated items of Joint Venture income and gain in
accordance with Reg. Section 1.704-2 (b). This Section 5.3 is intended to
comply with the minimum gain chargeback requirement in such Section of the
Regulations and shall be interpreted consistently therewith.
5.4 TRANSFER OF INTEREST. All net income, gains, losses, and deductions,
(or items thereof) of the Joint Venture allocable to any Interest which may have
been transferred during a Taxable Period shall be allocated between the
transferor and the transferee based upon that portion of the particular calendar
year during which each was recognized as owning such Interest, without regard
to the results of Joint Venture operations during particular portions of the
calendar year and without regard to whether cash distributions were made to the
transferor or transferee during such calendar year. In the event any Interest
in the Joint Venture is transferred in accordance with the terms of this
Agreement, the transferee shall succeed to the Capital Account of the transferor
to the extent it relates to the transferred Interest.
5.5 SPECIAL ALLOCATION REFLECTING RECEIPT OF DISTRIBUTIVE SHARE INTEREST
IN PROFIT OR LOSS IN EXCHANGE FOR SERVICES. Any income realized by the Joint
Venture as a result of providing for a transfer of a distributive share interest
in Joint Venture profits or losses in exchange for services which is deemed to
be recognized for Federal tax purposes before the Sharing Ratio Shift occurs
shall be specially allocated to the Joint Venturer receiving such interest. Any
income realized by the Joint Venture as a result of providing for a transfer of
a distributive share interest in Joint Venture profits or losses in exchange for
services which
9
<PAGE>
is deemed to be recognized for Federal tax purposes at the time the Sharing
Ratio Shift occurs shall be allocated 75% to the Limited Partnership and 25% to
the Managing Venturer in accordance with the Sharing Ratios. Any deduction or
deductions attributable to the transfer of a distributive share interest in
profits or losses in exchange for services shall be allocated in the same manner
as the income provided for herein.
ARTICLE VI
CURRENT DISTRIBUTIONS AND RELATED MATTERS
6.1 CASH DISTRIBUTIONS. During the term of the Venture and prior to a
Sharing Ratio Shift, the Managing Venturer may only make cash distributions.
Additionally, cash distributions may only be made from and to the extent of cash
proceeds received from Non-Operating Interests and interest received by the
Joint Venture and not from proceeds received from the sale or exchange of Non-
Operating Interests. The above provisions shall only apply during the Term of
this Agreement, and not during the Wind Up Period. The Joint Venture shall
distribute to the Venturers, not less than quarterly, one-hundred percent of the
amount equal to revenues received from Non-Operating Interests and interest
received by the Joint Venture on its bank deposits, less a) a proportionate
share of the semi-annual management fee payable to the Managing Venturer
applicable during the period for which distributions were made and b) amounts
expended by the Venture during the period for which distributions were made for
items covered by the budget submitted by the Managing Venturer and approved by
the Limited Partnership pursuant to paragraph 7.6 (m), but only within the
limits authorized by the budget. A proportionate share of the semi annual
management fee shall be one sixth of the semi annual fee for each month covered
by the period for which distributions were made. Notwithstanding the foregoing,
and regardless of expenses, fees or disbursements of the Joint Venture, the
Joint Venture must distribute for the period in question (which shall be not
less than quarterly) not less than 75% of the gross amount of revenues received
from Non-Operating Interests. Thus, if for a particular quarter, revenues
received from Non-Operating Interests are $20,000 and permitted expenses and
management fees are $7,000, the Venture would be required to distribute 75% of
$20,000, or $15,000 for the quarter involved.
6.2 DISTRIBUTION OF NON-OPERATING INTERESTS AND PROCEEDS OR CONSIDERATION
RECEIVED ON THE SALE OR EXCHANGE OF SUCH INTERESTS PRIOR TO A SHARING RATIO
SHIFT. Prior to a Sharing Ratio Switch, the managing venturers may not
distribute Non-Operating Interests or proceeds or other consideration received
on the sale of such interests. This provision shall only apply during the Term
of the Venture and not during the Wind Up period.
10
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6.3 PROPERTY DISTRIBUTIONS. Notwithstanding the foregoing, the Managing
Venturer may, during the term of the Venture but not before the time that the
Joint Venture shall own Non-Operating Interests on at least four different
commercially producing wells, notify the Limited Partnership that it wishes the
Joint Venture to put up for sale all of the Joint Venture's Non-Operating
Interests. In such event, the Managing Venturer shall solicit and use its best
efforts to obtain bids for all of the Joint Venture's Non-Operating Interests
from third parties, subject to the condition that any party submitting a bid
must bid on 100% of the Non-Operating Interests owned by the Joint Venture on a
Prospect and tender with his bid a certified check for the amount of the bid.
The Managing Venturer shall notify the Limited Partnership of bids when and as
they are received. Either Venturer (including the Managing Venturer) may bid on
the same terms, provided that in such event the bidding Venturer shall notify
the other Venturer of its bid(s), and shall tender with its bid a certified
check covering the amount of its bid, except that the Limited Partnership, if it
submits a bid, shall only be required to tender a check for the amount of its
bid less a sum equal to the difference between 111.3% of its Capital
Contribution to the Venture, and cash amounts previously distributed to it. Each
Venturer may counter bids made by the other or by third parties, and shall be
accorded at least 7 days after a bid for this purpose. At the conclusion of the
bidding, the Limited Partnership (if its bid was not the high bid) shall have
ten days from receipt of notice of the amount of the high bid for each property
and of the identity of the high bidder to advise the Managing Venturer which, if
any, of the bid on Non-Operating Interests shall be retained by the Joint
Venture and distributed to the Venturers in kind, valued at the high bid as
submitted by the highest bidder, in which event said Non-Operating Interests
selected by the Limited Partnership, valued at the high bid, shall immediately
be distributed in accordance with the Sharing Ratio of the parties. Otherwise,
provided that the Joint Venture received bids on (and the Limited Partnership
had the right to take in kind) Non-Operating Interests on at least four
different commercially producing wells, the Non-Operating Interests which the
Limited Partnership did not elect to take in kind shall be sold for cash to the
high bidder, and the proceeds distributed. No Venturer shall be entitled to
demand and receive property other than cash and Non-Operating Interests in
return for its Capital Contributions to the Joint Venture.
6.4 PRO RATA DISTRIBUTIONS. All distributions, whether of cash, or
otherwise shall be made pro rata among the Venturers in accordance with their
Sharing Ratios.
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ARTICLE VII.
RIGHTS, POWERS AND DUTIES OF THE VENTURERS
7.1 GENERAL. The parties hereto hereby designate Edge Joint Venture II as
the Managing Venturer of the Joint Venture, and Edge Joint Venture II accepts
such appointment. All matters to be performed by the Managing Venturer shall be
performable by it in its reasonable discretion, subject to its duty of loyalty,
unless otherwise expressly stated.
7.2 AUTHORITY AND DUTIES OF THE MANAGING VENTURER. The Managing Venturer
shall, at the Joint Venture's expense subject to the provisions of paragraph
7.6, conduct, direct and exercise full control over all activities of the Joint
Venture and its assets. Except as otherwise expressly provided herein, or
otherwise in this Agreement, all management powers over the business and
affairs of the Joint Venture shall be vested in the Managing Venturer. Without
limiting the generality of the foregoing, the Managing Venturer shall, subject
to the limitations set forth herein, perform the duties set forth below:
(a) provide all general day-to-day management functions for the Joint
Venture, and without limiting the generality of the foregoing, (i) maintain
the books and records of the Joint Venture and pay or cause to be paid all
lawful debts of the Joint Venture, (ii) provide all accounting and billing
functions, and (iii) expend all Joint Venture funds necessary to proper
operations of the Joint Venture;
(b) designate the bank or banks at which accounts shall be opened and
maintained, the signatories on such bank accounts and the removal and
replacement of such signatories;
(c) deposit Joint Venture funds which, from time to time, are not
required, in the opinion of the Managing Venturer, for the operation of the
Joint Venture in the Joint Venture bank account, in interest-bearing
accounts, certificates of deposit, or invest such funds in securities
issued or guaranteed as to principal and interest by the United States or
by a person or entity controlled or supervised by and acting as an
instrumentality of the government of the United States which have
maturities of less than one year from the date of investment or similar
securities, including, but not limited to, bank repurchase agreements, so
long as such bank repurchase agreements are for such securities or short-
term tax-exempt securities and are fully collateralized and secured;
(d) manage the Non-Operating Interests in oil and gas properties
purchased by the Joint Venture;
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(e) subject to paragraph 7.6 hereof, determine the terms and conditions
of sale of any and all Non-Operating Interests or other assets of the Joint
Venture, and enter into other agreements for the sale of Non-Operating
Interests and other assets of the Joint Venture.
(f) subject to paragraph 7.6 hereof, execute for and on behalf of the
Joint Venture any and all instruments of conveyance, assignment or other
agreements purchasing or selling Non-Operating Interests, if any, of the Joint
Venture.
(g) purchase insurance, and extend such insurance to cover the Venturers,
and any of their Affiliates, at the Joint Venture's expense to protect the
Joint Venture's properties, assets and business against loss, including
liability to third parties arising out of Joint Venture activities in such
amounts and in such kinds as the Managing Venturer shall determine;
(h) take all reasonable action that may be necessary or appropriate for
the continuation of the Joint Venture's valid existence as a partnership and
for the acquisition and holding in accordance with the provisions of this
Agreement and applicable laws and regulations, of the Joint Venture's assets;
(i) use its best efforts to cause the Joint Venture to be formed,
reformed, qualified to do business, or registered under any applicable assumed
or fictitious name, statute or similar law in any state in which the Joint
Venture then owns property or transacts business, if such formation,
reformation, qualification or registration is necessary in order to permit the
Joint Venture lawfully to own property or transact business in such state;
(j) from time to time, prepare and file all certificates (or amendments
thereto) and other similar documents that are required by law to be filed and
recorded for any reason, in the office or offices that are required under the
laws of the State of Texas or any state in which the Joint Venture is then
qualified. The Managing Venturer shall do all other acts and things (including
making publications or periodic filings of this Agreement or any certificates
of the Joint Venture or amendments thereto or other similar documents) that
may now or hereafter be required, or deemed by the Managing Venturer to be
necessary, (i) for the perfection and continued maintenance of the Joint
Venture as a partnership under the laws of each state in which the Joint
Venture is then qualified and (ii) to cause such certificates or other
documents to reflect accurately the agreement of the Venturers, the identity
of the Venturers and the amounts of their respective Capital Contributions;
and
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(k) purchase Non-Operating Interests in oil and gas properties, hold
such interests for investment, sell such interests and determine and
negotiate the terms upon which the Joint Venture will purchase and sell
such interests.
7.3 RELIANCE BY THIRD PARTIES. Any Person dealing with the Joint Venture
or the Managing Venturer may rely upon a certificate signed by the Managing
Venturer, as to:
(a) the identity of the Managing Venturer or any other Venturer;
(b) the existence or nonexistence of any fact or facts that
constitute conditions to acts by the Managing Venturer or in any other
manner germane to the affairs of the Joint Venture;
(c) the persons who are authorized to execute and deliver any
instrument or document of the Joint Venture; or
(d) any act or failure to act by the Joint Venture or as to any other
matter whatsoever involving the Joint Venture or any Venturer.
7.4 MANAGEMENT PERSONNEL. Subject to paragraph 7.6 below, the Managing
Venturer may cause the Joint Venture to hire personnel to administer and
implement the business of the Joint Venture. The Managing Venturer shall also
employ itself and make available to the Joint Venture such of its personnel as
are reasonably necessary for the Managing Venturer to fulfill its duties
hereunder. In recognition of the fact that the Managing Venturer's personnel
provided to the Joint Venture under this Agreement may perform services from
time to time for itself or for others, this Agreement shall not prevent the
Managing Venturer from performing such services for itself or for others or
restrict the Managing Venturer from so using the personnel provided to the Joint
Venture under this Agreement.
7.5 ABSENCE OF AUTHORITY OF MANAGING VENTURER TO ACT AS NOMINEE. It is
expressly contemplated that the business of the Joint Venture shall be conducted
by the Joint Venture in its name and shall not be conducted by Managing Venturer
in its name. Title to all assets and properties, both real and personal, shall
be held in the name of the Joint Venture.
7.6 RESTRICTIONS OF THE AUTHORITY OF THE MANAGING VENTURER.
Notwithstanding any other provision hereof to the contrary, consent and approval
of the Limited Partnership shall be required on any of the following matters:
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(a) the creating of any indebtedness, including the amount, terms and
conditions of any money borrowed or lent by the Joint Venture;
(b) the granting of any mortgage or lien on the property of the Joint
Venture;
(c) the sale of all or substantially all of the assets of the Joint
Venture, or the sale of any Non-Operating Interest on a Prospect after a
well has been completed on the Prospect:
(d) the settlement or compromise of all actions, claims and demands
or commencement or defense of any litigation by or against the Joint
Venture (or either Venturer if such action, claim or demand arises out of
the ownership or operation of the Joint Venture);
(e) the taking of any action in contravention of this Agreement;
(f) the taking of any action that would make it impossible to carry
on the ordinary business of the Joint Venture; or
(g) the confession of a judgment against the Joint Venture, except in
connection with the execution of mortgages and other security instruments;
(h) prior to the drilling of a well on a Prospect, the expenditure of
more than $40,000 in the aggregate in purchasing Royalty Interests or
Overriding Royalty Interests on the Prospect, or of more than $500 per
Royalty Acre.
(i) after the drilling of a well on a Prospect, (a) the expenditure
of aggregate sums in purchasing Royalty Interests or Overriding Royalty
Interests on the Prospect which, when added to expenditures prior to
drilling, would cause aggregate expenditures in purchasing such interests
on the Prospect to exceed $250,000, or (b) the expenditures of more than
$5,000 per Royalty Acre.
(j) the purchase of any Non-Operating Interests other than Royalty
Interests and Overriding Royalty Interests.
(k) the expenditure of more than 50% of the Capital Contribution of
the Limited Partnership on the purchase of Non-Operating Interests on
Prospects other than those previously sold by the Edge Group Venture II.
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(l) the purchase of Non-Operating Interests from any person or entity
who is or was employed by or affiliated with Edge Petroleum Corporation or
Edge Joint Venture II.
(m) expend any sums for any matter, expense or purpose other than the
purchase of particular Non-Operating Interests (which shall include amounts
paid to Landmen and brokers in connection with the purchase of a particular
Non-Operating Interest), unless the expense was provided for in a budget
submitted by the Managing Venturer to the Limited Partnership and approved
by the Limited Partnership. The Managing Venturers shall submit its first
budget on or before November 30, 1994, and, thereafter, on or before
November 30, of each subsequent year.
7.7 AUTHORITY, RIGHTS AND DUTIES OF THE LIMITED PARTNERSHIP. In addition
to the rights set forth in other sections of this Agreement, the Limited
Partnership shall have the rights and authority as set forth below:
The Limited Partnership shall have regular meetings with the Managing
Venturer at the offices of the Managing Venturer in Houston, Texas, no less
frequently than quarterly, wherein regular reports about the business and
affairs of the Joint Venture shall be discussed. In addition to the
foregoing, at such meetings the financial affairs and commitments of the
Joint Venture shall be discussed, and the Limited Partnership shall have
the right to demand the attendance by the Controller and President of the
Managing Venturer, and any other officers of the Managing Venturer which
the Limited Partnership shall designate. The Limited Partnership shall have
the right to have in attendance at such meetings any reasonable number of
representatives and agents which it desires, at its own expense. The
Managing Venturer shall have the right to request as a condition that any
Person attending such meetings execute reasonable agreements, agreeing to
keep confidential all information disclosed at such meetings. The Limited
Partnership shall have the right to request reports and other similar
documentation be prepared for examination and use by the Limited
Partnership, provided the Managing Venturer can prepare such without undue
expense or disruption of its affairs.
7.8 COMPENSATION AND REIMBURSEMENT OF MANAGING VENTURER.
(a) DIRECT EXPENSES. The Managing Venturer shall be reimbursed for
all sums, if any which it pays or advances on behalf of the Joint Venture: (i)
as consideration for the purchase by the Joint Venture of Non-Operating
Interests, (ii) to independent brokers in connection with the purchase of or
curing title to a particular Non-Operating Interest, (iii) to or on account of
clerical employees of the Managing Venturer
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who perform services in connection with the acquisition by the Venture of
particular Non-Operating Interests, (iv) to independent accountants who
perform billing and accounting functions for the Joint Venture, (v) office
supplies and copying, and (vi) the filing fees entailed in qualifying the
Essex Royalty Joint Venture to do business in any state.
(b) OTHER SPECIFIC BUDGETED ITEMS. The Managing Venturer shall be
reimbursed for sums which it expends as rent on office space used
exclusively by the Joint Venture and for clerical and secretarial employees
which perform services in connection with the operation or management of
the Non-Operating Interests. Additionally, in the event and so long as the
Joint Venture does not employ a full time employee to manage the affairs of
the Venture, the Managing Venturer shall be reimbursed for a substantially
proportionate share of the compensation of a single officer or employee of
Edge Petroleum Corporation or Edge Joint Venture II who devotes more than
50% of his or her time to the affairs of the Joint Venture. Reimbursement
provided under this subparagraph shall only be within the limits authorized
by the budget submitted by the Managing Venturer and approved by the
Limited Partnership pursuant to paragraph 7.6 (m) above.
(c) MANAGEMENT FEE. During the term of the Joint Venture and prior to
the earliest to occur of a Sharing Ratio Shift or the date upon which the
Joint Venture shall have expended its capital, the Joint Venture shall pay
to the Managing Venturer (to be allocated to Edge Petroleum Corporation),
$30,000 as a semi-annual management fee.
7.9 COMPENSATION AND REIMBURSEMENT OF ROYALTY. The Limited Partnership
shall receive no compensation for performing its services hereunder.
7.10 OUTSIDE ACTIVITIES. The Venturers and any director, officer, partner
or employee of the Venturers or any Affiliate thereof may have business
interests and engage in business activities in addition to those relating to the
Joint Venture, may engage in any such other businesses and activities, for their
own account and for the account of others, and may own interests in properties,
businesses and activities without having or incurring any obligation to offer
any interest in such properties, businesses or activities to the Joint Venture
or the other Venturer. No provision hereof shall be deemed to prohibit any such
Person from conducting such other businesses and activities. Neither the Joint
Venture nor any of the Venturers shall have any rights by virtue of this
Agreement or the partnership relationship created hereby in any other business
ventures of any such Person.
The foregoing notwithstanding, during the Term, no Venturer shall directly
or indirectly engage in a business involving the
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purchase and sale of Non-Operating Interests in oil and gas properties within
the area specified in Article III (except on behalf of the Joint Venture).
7.11 JOINT VENTURE FUNDS. The funds of the Joint Venture shall be
deposited in such account or accounts in the name of the Joint Venture as are
designated by the Managing Venturer. The Joint Venture's funds shall be
completely segregated from other funds of the Managing Venturer. All
withdrawals from or charges against such accounts shall be made by the Managing
Venturer or its officers or agents. Funds of the Joint Venture may be invested
as determined by the Managing Venturer, except in connection with acts
prohibited by this Agreement.
7.12 OTHER MATTERS CONCERNING MANAGING VENTURER.
(a) The Managing Venture may rely and shall be protected in acting
or refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, bond,
debenture or other paper or document believed by it to be genuine and to
have been signed or presented by the proper Person or parties.
(b) Any Venturer shall be entitled to consult with legal counsel
accountants, appraiser, management consultants, investment bankers and
other consultants and advisers selected by it in connection with the
ordinary and proper conduct of the business of the Joint Venture, and shall
not be liable or responsible in damages or otherwise to the Joint Venture
or any Venturer for failing to exercise due care with respect to any act or
omission taken in good faith in reliance on and in accord with such advice.
This shall not relieve any Venturer from any other liability or basis of
liability with respect to such act or omission.
ARTICLE VIII.
TRANSFERABILITY OF VENTURER'S PARTNERSHIP INTEREST
Except to the extent of an assignment of revenues made subject to the
limitations set forth below in this Article, the Venturers agree that they will
not sell, assign, transfer, pledge or encumber all or any part of their
Partnership Interest (including the revenues arising from such interest) without
the prior written consent of the other. All Venturers may, without consent,
pledge rights in up to one-half of the revenues arising from their Partnership
Interest, but only if the pledgee agrees prior to such pledge that upon a
foreclosure of the Partnership Interest, the other Venturers shall have a right
of first refusal to purchase the
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Partnership Interest to be sold on the same bona fide terms and conditions as
offered by a purchaser on a pro rata basis.
ARTICLE IX.
INCOME TAX MATTERS
9.1 PREPARATION OF TAX RETURNS. The Managing Venturer shall arrange at
the expense of the Joint Venture for the preparation and timely filing of all
returns of Joint Venture income and expense necessary for income tax purposes
and will cause copies of such returns or all pertinent information contained
therein to be furnished to the Venturers within ninety (90) days of the close
of the fiscal year.
9.2 ORGANIZATIONAL EXPENSES. The Joint Venture shall elect to deduct
expenses incurred in organizing the Joint Venture ratably over a sixty (60)
month period as provided in Section 709 of the Code.
9.3 TAXATION AS A PARTNERSHIP. No election shall be made by the Joint
Venture, or any Venturer, to be excluded from the application of any of the
provisions of Subchapter K, Chapter 1 of Subtitle A of the Code, or from any
similar provisions of any state tax laws.
9.4 TAX MATTERS PARTNER. The Managing Venturer shall be the "Tax Matters
Partner" (as defined in the Code) for the Joint Venture.
ARTICLE X.
ACCOUNTING PROCEDURE; REPORTS AND INFORMATION
10.1 FISCAL YEAR. The fiscal year of the Joint Venture shall be the
calendar year, unless otherwise determined by the Managing Venturer.
10.2 FINANCIAL RECORDS. The financial books and records of the Joint
Venture shall be kept, and tax returns shall be prepared, on the accrual basis
of accounting in accordance with generally accepted accounting principles. The
Joint Venture's books and records shall be maintained at the Joint Venture's
principal place of business and shall be available for inspection and copying by
each Venturer or its representative (at such Venturer's own expense) at all
reasonable times.
10.3 FINANCIAL REPORTS. Within one hundred twenty (120) days following the
end of each fiscal year of the Joint Venture, the Managing Venturer shall
deliver or cause to be delivered to each
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Venturer an annual report, including a statement of the Joint Venture's accounts
for and as at the end of such fiscal year (containing a balance sheet and
statement of income) prepared on the accrual basis of accounting, all of which
shall be prepared by independent certified public accountants (although
certification is not required) at the cost of the Joint Venture.
10.4 TAX REPORTS. Within ninety (90) days following the end of each
fiscal year of the Joint Venture, the Managing Venturer shall furnish to the
Venturers a statement setting forth all information relating to the Joint
Venture's operations for such fiscal year as is reasonably required by the
Venturers for the completion of their respective federal, state and other income
tax returns.
ARTICLE XI.
DISSOLUTION, LIQUIDATION AND TERMINATION
11.1 EVENTS CAUSING DISSOLUTION. The Joint Venture shall be dissolved
upon the happening of any of the following events:
(a) the expiration of its Term as provided in Section 1.5;
(b) unanimous agreement of the Venturers; or
(c) the Incapacity of any Venturer, unless the other Venturer elects to
continue the Venture.
Additionally, in the event the Edge Joint Venture II is terminated prior to
April 11, 1996, either party shall have the right and option at its sole
election to dissolve the Joint Venture within sixty (60) days after written
notice that Edge Joint Venture II was terminated.
11.2 LIQUIDATING AGENT. Upon the dissolution of the Joint Venture, the
Managing Venturer (or in the event the dissolution is caused by the Incapacity
of the Managing Venturer, such Person as the Limited Partnership shall designate
(including itself) shall act as liquidating agent (the "Liquidating Agent") and
immediately proceed to wind up and terminate the business and affairs of the
Joint Venture. During the Wind Up Period, no new Non-Operating Interests of any
sort may be acquired by the Joint Venture with Joint Venture funds. Upon
dissolution of the Joint Venture, a proper accounting shall be made of the Joint
Venture's assets and liabilities and obligations from the date of the last
previous accounting to the date of such dissolution and the Joint Venture's
business and affairs shall be liquidated in an orderly manner in no event to
exceed six (6) months (such period being called the "Wind-Up Period") and such
sales of properties of the Joint Venture as
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may be required for such purposes shall be made by the Liquidating Agent as
more fully hereafter set forth.
11.3 TERMINATING DISTRIBUTIONS AND MATTERS. (a) Provided that a Sharing
Ratio Shift shall have occurred prior to the Termination of the Joint Venture,
the cash and other assets of the Joint Venture shall be distributed in kind 75%
to the Limited Partnership and 25% to the Managing Venturer. If a Sharing Ratio
Shift shall not have occurred prior to Termination of the Joint Venture, than
immediately upon the commencement of the Wind-Up Period, the Liquidating Agent
shall solicit and use its best efforts to obtain bids for all of the Joint
Venture's Non-Operating Interests and other assets, if any, from third parties,
subject to the condition that any party submitting a bid must tender with his
bid a certified check for the amount of the bid. The Liquidating Agent shall
notify the Limited Partnership of bids when and as they are received. Either
Venturer (including the Liquidating Agent) may bid on the same terms, provided
that in such event the bidding Venturer shall notify the other Venturer of its
bids(s), and shall tender with its bid a certified check covering the amount of
its bid, except that the Limited Partnership, if it submits a bid, shall only be
required to tender a check for the amount of its bid less a sum equal to the
difference between 111.3% of its Capital Contribution to the Venture, and cash
amounts previously distributed to it. Each Venturer may counter bids made by the
other or by third parties, and shall be accorded at least 7 days after a bid for
this purpose. At the conclusion of the bidding, the Limited Partnership (if its
bid was not the high bid) shall have ten days from receipt of notice of the
amount of the high bid for each property and of the identity of the high bidder
to advise the Liquidating Agent which, if any, of the bid on Non-Operating
Interests shall be retained by the Joint Venture and distributed to the
Venturers in kind, valued at the high bid as submitted by the highest bidder, in
which event said Non-Operating Interests selected by the Limited Partnership,
valued at the high bid, shall immediately be distributed in accordance with the
Sharing Ratio of the parties. Otherwise, the Non-Operating Interests which the
Limited Partnership did not elect to take in kind shall be sold for cash to the
high bidder, and the proceeds distributed. No Venturer shall be entitled to
demand and receive property other than cash and Non-Operating Interests in
return for its Capital Contributions to the Joint Venture.
(b) In the liquidation of the Joint Venture, payments shall first be
made of all expenses of liquidation (including, without limitation, any legal
and accounting expenses incurred in connection therewith) and all debts of the
Joint Venture, first, to third-party creditors and, after payment of all third-
party creditors, then to any Venturer who shall properly be a creditor of the
Joint Venture or adequate provision shall be made for the payment thereof.
Thereafter the cash of the Joint Venture shall be distributed to the Venturers
and
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thereafter Non-Operating Interests shall be distributed. Non-Operating
Interests may not be distributed until the Venture shall have completed the
distribution of cash which is on hand on the Termination date or which the
Joint Venture receives during the Wind-Up Period. Subject to the provisions
of subparagraph (d), it is the intent of the parties that Non-Operating
Interests not be distributed until the end of the Wind-Up Period and the
distribution of all other assets.
(c) Any property of the Joint Venture distributed in kind in
liquidation shall be treated as if the property were sold for its fair
market value and any deemed gain or loss shall be credited to the Venturers
in accord with this Agreement.
(d) The foregoing provisions which limits the distribution of
Non-Operating Interests during the Wind-Up period shall not apply if a
Sharing Ratio Switch shall have occurred during the Term of the Venture, or
if a Sharing Ratio Switch occurs during the Wind-Up period as a result of
distributions.
11.4 ALLOCATION OF LIQUIDATING DISTRIBUTIONS BETWEEN THE VENTURERS. The
Venturers anticipate and expect that the Capital Accounts of the Venturers at
the time liquidating distributions are to be made will be in the same ratio as
the Sharing Ratios. If this should be the case, the making of such liquidating
distributions in accordance with the Sharing Ratios will accomplish the same
economic result as making the liquidating distributions in accordance with the
Capital Accounts of the Venturers. If the Capital Accounts (after being
adjusted for the corrective allocations pursuant to Section 5.3, the revaluation
of Joint Venture property pursuant to Section 4.3 (c), and as otherwise provided
by this Agreement) at such time are not in the same ratio as the Sharing Ratios
at the time liquidating distributions are to be made, then, immediately prior
thereto, the Capital Accounts of the Venturers shall be adjusted in the manner
and to the extent necessary so that the Capital Accounts will be in the same
ratio as the Sharing Ratios at the time liquidating distributions are made.
11.5 INDEMNIFICATION OF THE LIQUIDATING AGENT. The Liquidating Agent (or
any officer, director, shareholder, partner or employee thereof) shall be
indemnified and held harmless by the Joint Venture on the same terms and
conditions as set forth in Article XIII hereof. The indemnification rights
herein contained shall be cumulative of, and in addition to, any and all other
provisions hereof, and rights, remedies and recourse to which the Liquidating
Agent (or any officer, director, shareholder, partner or employee thereof) shall
be entitled in law or at equity.
11.6 CERTAIN POWERS AND RIGHTS OF THE LIQUIDATING AGENT. The Liquidating
Agent shall have all the powers conferred upon the
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Managing Venturer under the terms of this Agreement to the extent necessary or
desirable in the good faith judgment of the Liquidating Agent to carry out the
duties and functions of the Liquidating Agent hereunder. The Liquidating Agent
shall be entitled to receive such compensation for its services as shall be
reasonably agreed upon by the Venturers, provided that should the Liquidating
Agent be the Managing Venturer, no additional compensation shall be paid for
performing the matters set forth in Section 11.3, except as therein stated. The
Liquidating Agent may resign at any time upon the giving of fifteen (15) days
prior Notification to the Venturers and may be removed at any time, but only on
a showing of cause, by either Venturer. Upon the Incapacity, removal or
resignation of the Liquating Agent, a successor and substitute Liquidating Agent
(who shall have and succeed to all the rights, powers and duties of the original
Liquidating Agent) shall, within thirty (30) days thereafter, be designated by
the Limited Partnership.
11.7 COMPLETE DISTRIBUTION. Distribution of the Joint Venture properties
to the Venturers in accordance with the provisions of this Article XI shall
constitute a complete return to the Venturers of their respective Capital
Contributions. If such distributions are insufficient to return to any Venturer
the full amount of its Capital Contribution, it shall have no recourse against
the Joint Venture or any other Venturer.
ARTICLE XII.
AMENDMENTS AND CONSENTS
12.1 AMENDMENTS. This Agreement may be amended only with the written
Consent of all of the Venturers.
12.2 METHOD OF GIVING CONSENT. Any consent require by this Agreement may
be given by a written consent given by the consenting Venturer at or prior to
the doing of the act or thing for which the consent is solicited, unless
otherwise indicated herein.
ARTICLE XIII.
INDEMNIFICATION AND LIABILITY
13.1 INDEMNIFICATION. All Venturers shall be indemnified by the Joint
Venture under the following circumstances and in the manner and to the extent
indicated:
(a) In any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, judicial, administrative or otherwise
("Action"), to which any Venturer
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was or is a party, or is threatened to be made a party, by reason of the
fact that it is or was the Managing Venturer or a Venturer in the Joint
Venture, involving an alleged cause of action for liability or damages
arising out of the ordinary and proper conduct of the business i) of the
Joint Venture, ii) of the Joint Venture, and another business in which the
Joint Venture had an economic interest provided that the conduct of such
other business was permitted by this Agreement or iii) the conduct of a
business in which the Joint Venture had an economic interest, provided that
such other business was permitted by this Agreement, the Joint Venture
shall indemnify to the extent provided by Subparagraph (b) the Venturer
against all expenses, including attorneys' fees, judgments, penalties,
fines and amounts paid in settlement actually and reasonably incurred by
the Venturer in connection with such Action. The parties agree, without
limitation otherwise, on the meaning of the term "proper" that the
negligence of a Venturer shall not constitute improper conduct of the
business of the Joint Venture, nor a breach of trust or fiduciary duty.
Hence the parties intend that this indemnity shall apply notwithstanding
the negligence of a Venturer. The provisions of this subsection (a) shall
not apply to litigation covered by subsection (e).
(b) Where the matter arises out of the conduct of the business of the
Joint Venture and another business in which the Joint Venture had an
economic interest or another business in which the Joint Venture had an
economic interest, the indemnity shall be proportionate to the extent of
the Joint Venture's economic interest in the business activity giving rise
to the litigation.
(c) The Joint Venture shall pay or reimburse, in advance of the final
disposition of any Action, reasonable expenses incurred by the Venturer who
was, is, or is threatened to be made a named party in an Action, who shall
be entitled to indemnification under subsection (a), after:
(i) the Joint Venture receives a written affirmation by the Venturer
of the good faith belief that it has met the standards for indemnification
under subsection (a) and a written undertaking by or on behalf of the
Venturer to repay the amount paid or reimbursed if it is ultimately
determined that the Venturer has not met those requirements; and
(ii) a determination, made by independent legal counsel (i.e. without
any prior professional or business relations with the Venturers or
principals of the Venturers) in a written opinion, that it appears to those
making the determination that, based upon the facts then known to such
persons, without any independent investigation, evidence exists to support
the position that the Venturer is entitled
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to indemnification under subsection (a) hereunder (it being agreed that the
law firm authoring such opinion shall be disclosed to the other Venturer 10
days before any funds are paid under this subsection).
(d) The written undertaking required by subsection (c) (i) must be an
unlimited general obligation of the Venturer, and shall be accepted without
reference to financial ability to make repayment.
(e) In any Action in which the Joint Venture sues any of the
Venturers or in which one Venturer sued any other Venturer or the Joint
Venture for any reason whatsoever arising out of or connected to this
Agreement, the party losing the litigation shall bear the fees and expenses
of the party which prevails in the litigation.
(f) With respect to any Action covered by 14.1 (e) herein, the Joint
Venture shall pay or reimburse in advance of the final disposition of such
Action, the reasonable expense incurred by any Venturer who was, is or is
threatened to be made a party in such Action after:
(i) the Joint Venture receives a written affirmation by the Venturer
of the good faith belief that it will prevail in the litigation and written
undertaking by or on behalf of the Venturer to repay the amount paid or
reimbursed if it is not successful in the litigation, secured by a pledge
by the Venturer as set forth in paragraph below; and
(ii) a determination, made by independent legal counsel in a written
opinion, that it appears to those making the determination that, based upon
the facts then known to such persons, without any independent
investigation, evidence exists to support the position of the Venturer
seeking such advance (it being agreed that the law firm authoring such
opinion shall be disclosed to the other Venturer 10 days before any funds
are paid under this subsection).
(g) The written undertaking required by subsection (f) (i) must be an
unlimited general obligation of the Venturer and shall be accepted without
reference to financial ability to make repayment.
(h) Any Venturer receiving payment or reimbursement of legal fees
prior to disposition of any Action either under Subparagraph (c) or (f),
shall be required as a condition to receiving such payment or reimbursement
to pledge one half of the revenue interest attributable to its partnership
interest held by such Venturer free and clear of all liens and
encumbrances, to secure its obligation to repay the advance,
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if it is determined that it was not entitled to indemnification or it does
not prevail in the litigation, as the case may be.
(i) Notwithstanding any other provision of this Article to the
contrary, the Joint Venture shall pay or reimburse expenses incurred by any
Venturer in connection with it or its employees' or agents' appearance as a
witness or other participation in an Action involving or affecting the
Joint Venture at a time when the Venturer is not a named defendant or
respondent in the Action.
(j) The Joint Venture may indemnify and advance expenses to an
employee or agent of any Venturer to the same extent that it may indemnify
and advance expenses to the Venturer under this Article, to the extent
determined by the Venture and in the case of the President, any Vice-
President, Controller, General Counsel, and any special consultants of
either Venturer, such indemnity and rights hereunder shall be mandatory.
(k) Notwithstanding any provision in this Article to the contrary, if
any or all of the indemnification provisions contained herein shall be
found invalid, illegal, or unenforceable in any respect, such invalidity,
illegality, or unenforceability shall not affect any other provision
hereof; and in such event this Agreement shall be deemed written as if such
provision or provisions had never been contained herein. Regardless of any
invalidity, illegality, or unenforceability of any provision or provisions
contained in this Article, the parties to this Agreement intend that the
Venturers (and its employees or agents) shall be and hereby are indemnified
to the greatest extent allowable under applicable law in the matters
identified in subsections (a) through (f) above.
(l) The provisions of this indemnity shall be in addition to and not
in lieu of any other rights of indemnity which may exist under Texas law,
as it may exist from time to time.
13.2 INDEMNITY LIMITATIONS. The Joint Ventures' obligation to indemnify
any Venturer shall be limited to the assets of the Joint Venture and shall be
without recourse to the Venturers.
13.3 LIMITATIONS ON LIABILITY. 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 the other Venturer. THIS
PROVISION SHALL NOT RELIEVE A VENTURER FROM ANY OTHER LIABILITY OR BASIS FOR
LIABILITY.
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13.4 PROCEDURE FOR INDEMNIFICATION. Each Venturer (the "Indemnified
Venturer") agrees to give the other (the "Other Venturers") prompt written
notice of the filing or commencement of any Action against a Venturer which may
give rise to a request for indemnification hereunder, and each party will
cooperate with the other in determining the validity of any such claim or
assertion. Upon any request for indemnity by any Venturer pursuant to
subsection 14.1 (a) hereof, the Indemnified Venturer shall select counsel with
respect to the claim, loss liability which is the subject of indemnification
subject to the reasonable approval of the other Venturer. The Other Venturers
shall have the right to participate in or monitor the defense of any such
third-party suits, claims or proceedings, (but shall not have the right to
invade, or otherwise take any action to alter, modify, or destroy the attorney
client relationship). All Venturers and the Joint Venture shall cooperate with
respect to any defense, compromise or settlement. The Indemnified Venturer will
not compromise or settle any such action, suit or proceeding without the consent
of the Other Venturers, except that in any Action, if the Indemnified Venturer
advises that it wishes to accept a settlement offer, then in any subsequent
litigation between the Indemnified Venturer on the one hand, and the Joint
Venture or the Other Venturers on the other hand, arising out of such Action
which the Indemnified Venturer wished to settle, the extent of the Indemnified
Venturer's liability, if any, is the amount which the Indemnified Venturer was
willing to accept in settlement. Additionally, the Venture shall indemnify the
Other Venturers for all of the expenses, costs and fees incurred as a result of
the Indemnified Venturer's notice hereunder or claim for indemnity, including
without limitation expenses, costs, and fees incurred in participation in the
selection of counsel or participation or monitoring the defense of the action.
13.5 CONTRIBUTION OF NET PROCEEDS FROM ANY CLAIM. If any Venturer asserts
any claim against any third party including any one or more of its employees
with respect to a claim arising for which such Venturer received indemnification
or payment of legal fees or expenses under this Article, such Venturer shall
contribute the net proceeds of any recovery on the claim (after deducting legal
fees and expenses) to the Venture to be shared by the Venturers in accord with
their Profit Sharing Ratios. No Venturer shall be under an obligation to assert
any such claim.
13.6 REIMBURSEMENT. In any action arising pursuant to subsection (e) in
which the Joint Venture pays or reimburses in advance of the final disposition
of the action the reasonable expense incurred by one Venturer, the Joint Venture
shall be obligated to pay or reimburse and shall pay or reimburse in advance of
final disposition of the action the reasonable legal fees of the Other Venturers
arising out of or in connection with the indemnified claim or action provided
such Venturer shall furnish the affirmations set forth in subsection (f) (i) to
obtain such
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<PAGE>
reimbursement, and shall be required to pledge its revenue interests as set
forth above in subsection (h).
13.7 THIRD PARTY BENEFICIARIES. This section shall not be deemed to
create rights or remedies in third parties except to the extent expressly
provided for herein.
ARTICLE XIV.
EFFECTIVE DATE AND GENERAL PROVISIONS
14.1 EFFECTIVE DATE. This Agreement shall be effective as of the date
both parties have executed this Agreement which date shall be the date set forth
below.
14.2 SCOPE. This Agreement constitutes the entire understanding of the
Venturers with respect to the Joint Venture.
14.3 BINDING EFFECT. This Agreement shall be binding upon and shall inure
to the benefit of the Venturers, their heirs, executors, administrators, legal
representatives, successors and assigns.
14.4 HEADINGS. The headings in this Agreement are inserted for
convenience and identification only and are in no way intended to describe,
interpret, define or limit the scope, extent or intent of the Agreement or any
provision hereof.
14.5 WAIVER OF RIGHTS TO PARTITION. Each Venturer hereby irrevocably
waives during the term of the Joint Venture any right that it may have to
maintain any action for partition with respect to any Joint Venture property.
14.6 VIOLATION. The failure of any party to seek redress for violation of
or to insist upon the strict performance of any covenant or condition of this
Agreement shall not prevent a subsequent act, which would have originally
constituted a violation, from having the effect of an original violation. The
rights and remedies provided by this Agreement are cumulative and the use of
any one right or remedy by any party shall not preclude or waive its right to
use any or all other remedies. Said rights and remedies are given in addition
to any other rights the parties may have by law, statute, ordinance or
otherwise.
14.7 SEVERABILITY. Every provision of this Agreement is intended to be
severable. If any term or provision is illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the validity or the
remainder hereof.
14.8 COUNTERPARTS. This Agreement may be executed in any number of
counterparts with the safe effect as if all parties
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hereto had all signed the same document. All counterparts shall be construed
together and shall constitute one agreement.
14.9 APPLICABLE LAWS. This Agreement shall be enforced in accordance with
the applicable laws of the State of Texas.
14.10 LIABILITY. Subject to the provisions of this agreement, all risks,
liabilities and expenses with respect to the operations, business and assets of
the Joint Venture shall be bourn by the Venturers in accordance with their
respective Sharing Ratios.
14.11 NOTICES. All notices ("Notices") or other communications required or
permitted to be given pursuant to this Agreement, unless otherwise expressly
provided herein, shall be in writing and shall be considered as properly given,
in the case of notices or communications required or permitted to be given to
any Venturer, if personally delivered or if mailed by United States first-class
mail, postage prepaid, or if sent by prepaid telegram or telecopy and addressed
or transmitted to the Venturer at the address or telecopy number as they appear
below. Any Notice or other communication shall be deemed to have been given as
of the date on which it is personally delivered, or, if mailed on the third
business day after the day on which it is deposited in the United States mails,
or if telecopied, on the date transmitted, or if by telegraph, on the date of
actual receipt, in each case in compliance with the terms of this Section 15.10.
Notices shall be addressed as follows:
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(a) If to Essex Royalty Joint Venture II:
Essex Royalty Joint Venture II with a copy to:
1111 Bagby, Suite 2100
Houston, Texas 77002
Attention: John E. Calaway
Telephone: (713) 654-8960
Telecopier: (713) 654-7722
(b) If to the Essex Royalty Limited Partnership II:
Essex Royalty Limited Partnership II with a copy to:
One Landmark Square, Suite 611
Stamford, Connecticut 06901 J. Michael Gottesman
Attention: Mr. John Sfondrini 477 Madison Avenue
Telephone: (203) 358-9502 New York, New York 10022
Telecopier: (203) 324-0996 Telephone: (212) 308-2320
Telecopier: (212) 888-7306
(c) If to Edge Joint Venture II:
Edge Joint Venture II with a copy to:
1111 Bagby, Suite 2100
Houston, Texas 77002
Attention: John E. Calaway
Telephone: (713) 654-8960
Telecopier: (713) 654-7722
WITNESS THE EXECUTION HEREOF effective the 10th day of May, 1994.
ESSEX ROYALTY LIMITED PARTNERSHIP II
By: NAPAMCO, LTD., General Partner
By: /s/ John Sfondrini
_________________________________
John Sfondrini, President
EDGE JOINT VENTURE II
By: Edge Petroleum Corporation, Managing Venturer
By: /s/ John E. Calaway
________________________________
John E. Calaway, President
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EXHIBIT "A"
I. Sharing Ratios Before Sharing Ratio Shift
(a) Edge Joint Venture II 0%
(b) Essex Royalty Limited Partnership II 100%
II. Sharing Ratios After Sharing Ratio Shift
(a) Edge Joint Venture II 25%*
(b) Essex Royalty Limited Partnership II 75%
* to be allocated 50% to Edge Petroleum Corporation and 50% to Edge Group
II Limited Partnership, Gulfedge Limited Partnership and Edge Group
Partnership in accordance with their respective sharing ratio interests
in Edge Joint Venture II. These distributions will be allocated
directly to each Venturer outside of the Edge Joint Venture II. These
distributions will not apply or count towards a Sharing Ratio Shift in
the Edge Joint Venture II.
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Exhibit 10.3
------------
ROYALTY JOINT VENTURE
Dated: April 11, 1992
<PAGE>
JOINT VENTURE AGREEMENT
This Joint Venture Agreement (the "Agreement") is entered into as of the
date indicated on the signature page hereto by and between Edge Joint Venture II
(herein called "Managing Venturer") and Essex Royalty Limited Partnership, a
Connecticut Limited Partnership ("Royalty" or the "Limited Partnership").
ARTICLE I.
ORGANIZATIONAL MATTERS
1.1 FORMATION. The Venturers hereby associate themselves in the formation
of a joint venture (the "Joint Venture"), pursuant to the provisions of the
Texas Uniform Partnership Act, Tex. Rev. Civ. Stat. Ann. Art. 6132b, as from
time to time amended (the "Act").
1.2 NAME. The name of the Joint Venture shall be the Essex Royalty Joint
Venture, and it may also be referred to as the Essex Royalty Partnership.
Moreover, the Joint Venture's business may be conducted under any other name or
names deemed advisable by the Managing Venturer.
1.3 PRINCIPAL PLACE OF BUSINESS. The principal place of business of the
Joint Venture shall be Houston, Texas.
1.4 FILINGS. The Venturers agree to immediately execute all such
certificates and other documents as may be necessary for the Managing Venturer
to accomplish all filing, recording, publishing and other acts as may be
necessary or appropriate to comply with all requirements for the formation,
preservation and operation of the Joint Venture as a general partnership (or
equivalent business organization) in all states of the United States in which
the Joint Venture may conduct its business prior to the actual conduct of such
business in any such state.
1.5 TERM. The Joint Venture shall be effective as of the date hereof for
all purposes, and shall continue in full force and effect until April 11, 1996,
unless sooner dissolved and terminated pursuant to the terms hereof (the
"Term"). By consent of both Venturers, the term of the Venture may be extended
for up to one year to April 11, 1997. Thereafter, during the Wind-up Period, the
Joint Venture shall engage in Winding Up its business and affairs.
1.6 REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
(a) The Managing Venturer represents and warrants that it is a joint
venture which has been duly formed under the laws of the State of Texas,
and is validly existing and in
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good standing with all requisite power to carry on its business.
(b) Royalty represents that it is a limited partnership, which has
been formed under the laws of the State of Connecticut, with Napamco, Ltd.,
a Connecticut corporation, as the general partner, and that it is validly
existing and in good standing with all requisite power to carry on its
business.
(c) Each Venturer represents and agrees to furnish the other with any
and all information which shall be reasonably requested, and to afford the
other the opportunity to ask questions of and receive answers from the
other and to obtain any additional information (to the extent such
information is accessible or can be obtained without unreasonable effort or
expense).
(d) Each Venturer respectively represents and warrants for itself
that (i) the execution and delivery by it of this Agreement, and
consummation of the transactions contemplated herein have been duly
authorized by all necessary corporate or partnership action as the case may
be, and (ii) this Agreement constitutes the valid and binding obligation of
each respective Venturer enforceable against it in accordance with its
terms, subject to (x) the principles of equity; and (y) bankruptcy,
insolvency, and other laws relating to creditors' rights.
(e) The Limited Partnership represents, warrants and covenants that
(a) it has requested from its prospective limited partners appropriate
information in the form of investor certifications for the purpose of
verifying that such investors are "accredited investors" as defined in SEC
Reg D; (b) it has used its best efforts to assure that its offering of
limited partnership interests is in compliance with Reg D, or with Section
4(2) or 3(b) of the Securities Act of 1933, as amended, and any applicable
state blue sky laws; and (c) it has imposed upon the holders of limited
partnership interests sufficient transfer limitations on the interests in
order that the offering of limited partnership interests in the Royalty
complies with Reg D.
ARTICLE II.
DEFINITIONS
When used herein, the following words shall have the meaning assigned to
them:
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"ADDITIONAL CAPITAL CONTRIBUTION" means the amount of additional cash the
Venturers contribute to the capital of the Joint Venture, including amounts
provided in Section 4.2.
"AFFILIATE" means, when used with reference to a specified Venturer, (a)
any Person directly or indirectly controlling, controlled by, or under common
control with such Venturer; (b) any officer, director or partner of such
Venturer; and (c) any Person in which a Venturer is a general partner.
"CAPITAL CONTRIBUTIONS" means for any Venturer, the Initial Capital
Contribution and Additional Capital Contribution of such Venturer (or the
predecessor holder of the Interest of such Venturer).
"CODE" means the Internal Revenue Code of 1986, as amended (or any
corresponding provisions of succeeding law).
"EDGE GROUP I" means the Edge Group General Partnership, a general
partnership with Edge I Limited Partnership, Edge II Limited Partnership and
Edge III Limited Partnership, as the general partners thereof, and John
Sfondrini, as the managing partner.
"EDGE JOINT VENTURE II" means the general partnership with Edge Group II
Limited Partnership, Edge Petroleum Corporation, Gulfedge Limited Partnership
and Edge Group I as Venturers, formed pursuant to a Joint Venture Agreement
dated as of April 8, 1991. Edge Joint Venture II will be the Managing Venturer
of the Essex Royalty Joint Venture.
"EFFECTIVE DATE" means the date when this Agreement is executed by both
Venturers.
"INCAPACITY" or "INCAPACITATED" means, with respect to any Venturer, (i)
the filing of a petition in bankruptcy, or (ii) the dissolution or termination
(other than by merger or consolidation), as the case may be, unless, in the case
of a dissolution, such Venturer is reconstituted and its business continued as
provided in its organizational documents.
"INITIAL CAPITAL CONTRIBUTIONS" means the cash amount contributed to the
Joint Venture by the Venturers as provided in Section 4.1.
"LEASES" means full or partial interests in the leasehold estate in oil and
gas leases covering oil, gas and other mineral rights, including applications
for federal and state leases, fee rights, licenses, concessions or other rights
authorizing the owner to explore for, drill, produce and sell oil, gas and other
hydrocarbons, as well as rights to share in revenues from such
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activities and interests, and contractual rights to acquire any such interest.
"MANAGING VENTURER" means Edge Joint Venture II.
"MINERAL INTEREST" means an interest in the fee mineral estate in the land,
is typically severed from the surface estate by prior grant or reservation, and
may be leased or unleased. Unlike a royalty interest, a mineral interest
includes the right to go upon the land for the purpose of prospecting for,
drilling, severing, and removing therefrom oil, gas or other specified minerals.
A mineral interest also includes the executive leasing right, ie., the right to
execute an oil and gas lease to a third party operator who will drill a well.
The owner of a mineral interest has the right to receive a fractional share of
the oil and gas or other minerals produced from the premises as well as any
delay rentals, bonuses or royalties paid pursuant to an oil and gas lease. The
owner of the mineral interest also has the right to receive the reversionary
interest after termination of the oil and gas lease covering the interest.
"NON-OPERATING INTEREST" means an interest in oil and gas property that
does not entitle its holder(s) to participate in decisions concerning the
testing, drilling, completion, operation or abandonment of the property and all
such decisions are controlled by the holder(s) of the Working Interest in such
property. Non-Operating Interests include Royalty Interests, Overriding Royalty
Interests, Net Profits Interests, and Production Payments, as well as oil
payments, calls on production and other miscellaneous interests similar to the
foregoing. It would not include Working Interests or Mineral Interests not
subject to an oil and gas lease since these interests bear a share of the cost
and risk of testing, drilling, completing, operating and abandoning of the
property.
"NONPROPRIETARY SEISMIC" means seismic data purchased or obtained from
third parties where the purchaser obtains the right to use such data, but may
not sell it.
"NOTIFICATION" means a writing containing the information required by this
Agreement to be communicated to any Person, sent by registered or certified
United States mail, return receipt requested, postage prepaid, to such Person at
the last known address of such Person, the date of the mailing being deemed the
date of the giving of Notification; provided, however, that any communication
containing the information sent or delivered to the Person and actually received
by the Person shall constitute Notification for all purposes of this Agreement.
"OLD JOINT VENTURE" means the old Edge Joint Venture between Edge Petroleum
Partnership and Edge Group I, evidenced by that certain Operating Agreement
dated July 1, 1987.
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"PARTNERSHIP INTEREST" means the entire ownership interest of a Venturer in
the Joint Venture at any particular time, including the rights and obligations
of such Venturer under this Agreement and the Act.
"PERSON" means any individual, partnership, corporation, trust or other
entity.
"PROPRIETARY SEISMIC" means seismic data other than Nonproprietary Seismic.
"PROSPECT" means a geographical and/or geological area deemed by the
Managing Venturer to be prospective for the accumulation of production of oil,
gas, condensate, or other hydrocarbons, or an interest therein.
"RESERVES" means the rights to ownership of oil and gas or other
hydrocarbon interests, whether by virtue of a working interest, royalty
interest, net profits interest, production payment right, back in, carried
interests, and any other similar type rights.
"ROYALTY ACRE" means the number of acres of land in which the landowner
owns a full one-eighth (1/8) royalty, i.e., if a tract of 100 acres is leased
----
for a one-eighth (1/8) royalty, the landowner owns 100 Royalty Acres. If the
landowner had leased for one-fourth (1/4) royalty, he owns 200 Royalty Acres.
If the landowner had previously conveyed away a one-sixteenth (1/16) royalty
interest in the land and then leased it for one-eighth (1/8) royalty, he would
own a 1/16 royalty interest or 50 Royalty Acres.
"ROYALTY INTERESTS AND OVERRIDING ROYALTY INTERESTS" are rights to receive
a certain part of the oil and gas or income therefrom, from oil and gas
properties, such as Leases or producing wells, without regard to participation
in the costs of finding and producing such income. Such interests have no right
to explore, drill, or develop the land, to execute oil and gas leases or to
receive bonuses or rentals. Royalty Interests are typically reserved to the
landowner when the land is leased to a third party operator and are defined by
the terms of the Lease. They may also be created by prior conveyance or
reservation in the chain of title and may be limited to a term of years or for
so long as there is production or may be perpetual. Overriding Royalty Interests
are carved out of a Working Interest, and their duration is limited by the term
of the Lease under which they are created.
"SHARING RATIOS" means as to each Venturer, as set forth on Exhibit A.
After the occurrence of a Sharing Ratio Shift, the Sharing Ratios of the
Venturers will be as set forth on Exhibit A.
"SHARING RATIO SHIFT" is that point in time, whether such occurs during the
Term hereof, or during the Wind-Up Period, but
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not before September 15, 1992, when the aggregate amount of a) cash actually
distributed to the Limited Partnership and/or (b) Non-Operating Interests
actually distributed to the Limited Partnership subject to the limitations of
and valued as set forth in paragraph 6.3 below, equals 110 percent of the
amount of its Capital Contribution to the Venture. Upon the occurrence of a
Sharing Ratio Shift, all subsequent distributions based upon Sharing Ratios
shall be made based upon Sharing Ratios after the Sharing Ratio Shift.
"SIMULATED DEPLETION DEDUCTIONS" means the simulated depletion allowance
computed by the Joint Venture with respect to each oil and gas property by using
either the cost depletion method or the percentage depletion method (computed in
accordance with Code Section 613 at the rates specified in Section 613(c)(5)
without regard to the limitation of Section 613A, which theoretically could
apply to any partner) for each taxable year that the property is owned by the
Joint Venture and subject to depletion, in accordance with Treas. Reg. Section
1.704-1(b)(2)(iv)(k).
"SIMULATED GAINS" and "SIMULATED LOSSES" means, respectively, the simulated
gains or simulated losses computed by the Joint Venture with respect to its oil
and gas properties pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(k).
"TAXABLE PERIOD" means each calendar year which begins hereafter.
"WINDING-UP" means the period, not to exceed six months, during which the
affairs of the Royalty Joint Venture are terminated and the liquidation and sale
of the assets of the Royalty Joint Venture is accomplished, such process
commencing when the Roalty Joint Venture is dissolved for any reason.
"WIND-UP PERIOD" means a period not to exceed six (6) months during which
Winding-Up of the affairs of the Joint Venture shall occur.
"WORKING INTEREST" means the operating or leasehold interest under an oil,
gas and mineral lease or other property interest covering a specific tract or
tracts of land which entitles the owner to explore for, drill, produce and sell
oil, gas and other minerals covered by such lease or other property interest.
ARTICLE III.
PURPOSE
The purpose of the Joint Venture is to engage in the business of purchasing
Non-Operating Interests in oil and gas properties within the domestic United
States and off-shore state waters.
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ARTICLE IV.
CAPITAL CONTRIBUTIONS
4.1 INITIAL CAPITAL CONTRIBUTIONS. Upon the execution of this Agreement,
Royalty shall contribute $ 1,000,000 to the Venture.
4.2 ADDITIONAL CAPITAL CONTRIBUTIONS. Royalty shall have the right to
contribute up to an additional $ 2,000,000 provided such amount is paid on or
before September 15, 1992.
Other than the foregoing, there shall be no obligation on the part of any
Venturer to make any capital contributions or additional capital contributions
to the Joint Venture.
4.3 CAPITAL ACCOUNTS.
(a) A capital account shall be established for each Venturer which
shall consist of the cash amount of such Venturer's Initial Capital
Contribution increased by (i) the cash amount of any Additional Capital
Contributions made by such Venturer to the Joint Venture pursuant to this
Agreement, and (ii) all net income and gains allocated to such Venturer
pursuant to Sections 5.1, 5.3 and 5.4; and decreased by (x) the cash or
fair market value of property distributed to such Venturer pursuant to this
Agreement, and (y) all net losses and deductions, allocated to such
Venturer pursuant to Sections 5.1 and 5.3.
(b) A Venturer's Capital Account shall be increased by the amount of
Simulated Gains allocated to such Venturer, and decreased by the amount of
simulated Depletion Deductions and Simulated Losses allocated to such
Venturer. Simulated Depletion shall be allocated to the Venturer in the
same proportion as such Venturers were properly allocated the adjusted tax
basis of such property. The aggregate Capital Account adjustments for
simulated percentage depletion allowances with respect to an oil and gas
property of the Joint Venture shall not exceed the aggregate adjusted tax
basis allocated to the Venturer with respect to such property. The Capital
Accounts of the Venturers shall be adjusted upward by the amount of any
Simulated Gain in proportion to such Venturer's allocable shares of the
portion of the total amount realized from the disposition of such property
that exceeds the Joint Venturer's simulated adjusted basis in such
property. The Capital Accounts of such Venturers shall be adjusted downward
by the amount of any Simulated Loss in proportion to such Ventures'
allocable share of the total amount realized from the disposition of such
property that represents recovery of the Joint Venture's simulated adjusted
basis in such property.
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(c) Upon the occurrence of a Sharing Ratio Shift, the contribution of
additional money or property to the Joint Venture (other than in accordance
with the then Sharing Ratios of the Venturers), the admittance of an
additional Venturer, distribution of property to a Venturer (other than
in accordance with the then Sharing Ratios of the Venturers), or upon
liquidation, the Venturers' Capital Accounts shall be adjusted to reflect a
revaluation of Joint Venture property. The adjustment shall be based on the
fair market value of the property as of the adjustment date as determined
in Section 6.3. Any such adjustments shall be allocated among the Venturers
as provided in Sections 5.1 and 5.3. Capital Accounts shall be adjusted in
accordance with Treas. Reg. Section 1.704-1 (b)(2)(iv)(g) for allocation of
depreciation, depletion, amortization, and gains or loss as computed for
book tax purposes with respect to such property. The Joint Venture's
distributive shares of depreciation, depletion, amortization, and gain or
loss, as computed for tax purposes with respect to such property, shall
take account of the variation between the adjusted tax basis and book value
of such property in the same manner as required by Code Section 704(c) with
respect to contributed property.
(d) The foregoing provisions and the other provisions of this
Agreement relating to the maintenance of Capital Accounts are intended to
comply with Regulations Section 1.704-1(b)(2)(iv), and shall be interpreted
and applied in a manner consistent with such Regulations. The Venturers
also shall make any adjustments that are necessary or appropriate to
maintain equality between the Capital Accounts of the Venturers and the
amount of Joint Venture capital reflected on the Joint Venture's balance
sheet, as computed for book purposes in accordance with Regulations Section
1.704-1(b)(2)(iv)(q).
4.4 INTEREST ON CONTRIBUTIONS. The Venturers shall receive no interest on
their contributions to the capital of the Joint Venture.
4.5 NO WITHDRAWAL OF CAPITAL CONTRIBUTIONS. No Venturer shall be entitled
to withdraw any part of its Capital Contribution or its Capital Account or to
receive any distribution from the Joint Venture, except as provided in Articles
VI and XII.
4.6 OBLIGATION TO RESTORE NEGATIVE CAPITAL ACCOUNTS. If there should be a
deficit in any Venturer's capital account after taking into account all capital
account adjustments, the Venturer shall be required to make a Capital
Contribution equal to the deficit amount. Such contribution shall be made not
later than the end of the taxable year in which such Venturer's interest is
liquidated or, if later, within 90 days of the date of such liquidation.
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ARTICLE V.
ALLOCATIONS OF INCOME AND LOSS
5.1 INCOME AND LOSS. Except as provided in Sections 5.3 or 5.4, all net
income, gains, losses and deductions (or items thereof) for each Taxable Period
shall be allocated to the Venturers in accordance with their respective
Sharing Ratios.
5.2 CORRECTIVE ALLOCATIONS. Notwithstanding Section 5.1 and commencing at
the start of the Wind-Up Period, allocations of income (including gross income,
if necessary), gain, loss or deduction (or items thereof) shall be made in a
reasonable manner to the Venturers, as applicable and to the extent necessary,
to realign the Capital Accounts of the Venturers, to the greatest extent
possible, so that such accounts will be in accordance with the Sharing Ratios of
the Venturers at the time of the liquidation of the Joint Venture.
5.3 MINIMUM GAIN CHARGEBACK. Notwithstanding any other provision of this
Article V, if there is a net decrease in Joint Venture minimum gain, as defined
in Reg. Section 1.704-2(b) (2) during any Joint Venture fiscal year, the
Venturers shall be allocated items of Joint Venture income and gain in
accordance with Reg. Section 1.704-2(b). This Section 5.3 is intended to comply
with the minimum gain chargeback requirement in such Section of the
Regulations and shall be interpreted consistently therewith.
5.4 TRANSFER OF INTEREST. All net income, gains, losses, and deductions
(or items thereof) of the Joint Venture allocable to any Interest which may have
been transferred during a Taxable Period shall be allocated between the
transferor and the transferee based upon that portion of the particular calendar
year during which each was recognized as owning such Interest, without regard to
the results of Joint Venture operations during particular portions of the
calendar year and without regard to whether cash distributions were made to the
transferor or transferee during such calendar year. In the event any Interest in
the Joint Venture is transferred in accordance with the terms of this Agreement,
the transferee shall succeed to the Capital Account of the transferor to the
extent it relates to the transferred Interest.
5.5 SPECIAL ALLOCATION REFLECTING RECEIPT OF DISTRIBUTIVE SHARE INTEREST
IN PROFIT OR LOSS IN EXCHANGE FOR SERVICES. Any income realized by the Joint
Venture as a result of providing for a transfer of a distributive share interest
in Joint Venture profits or losses in exchange for services which is deemed to
be recognized for Federal tax purposes before the Sharing Ratio Shift occurs
shall be specially allocated to the Joint Venturer receiving such interest. Any
income realized by the Joint Venture as a result of providing for a transfer of
a distributive share interest in Joint Venture profits or losses in exchange for
services which
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is deemed to be recognized for Federal tax purposes at the time the Sharing
Ratio Shift occurs shall be allocated 60% to the Limited Partnership and 40% to
the Managing Venturer in accordance with the Sharing Ratios. Any deduction or
deductions attributable to the transfer of a distributive share interest in
profits or losses in exchange for services shall be allocated in the same manner
as the income provided for herein.
ARTICLE VI.
CURRENT DISTRIBUTIONS AND RELATED MATTERS
6.1 CASH DISTRIBUTIONS. During the term of the Venture and prior to a
Sharing Ratio Shift, the Managing Venturer may only make cash distributions.
Additionally, cash distributions may only be made from and to the extent of cash
proceeds received from Non-Operating Interests and interest received by the
Joint Venture and not from proceeds received from the sale or exchange of
Non-Operating Interests. The above provisions shall only apply during the Term
of this Agreement, and not during the Wind Up Period. The Joint Venture shall
distribute to the Venturers, not less than quarterly, one-hundred percent of the
amount equal to revenues received from Non-Operating Interests and interest
received by the Joint Venture on its bank deposits, less a) a proportionate
share of the semi-annual management fee payable to the Managing Venturer
applicable during the period for which distributions were made and b) amounts
expended by the Venture during the period for which distributions were made for
items covered by the budget submitted by the Managing Venturer and approved by
the Limited Partnership pursuant to paragraph 7.6(m), but only within the
limits authorized by the budget. A proportionate share of the semi annual
management fee shall be one sixth of the semi annual fee for each month covered
by the period for which distributions were made. Notwithstanding the foregoing,
and regardless of expenses, fees or disbursements of the Joint Venture, the
Joint Venture must distribute for the period in question (which shall be not
less than quarterly) not less than 75% of the gross amount of revenues received
from Non-Operating Interests. Thus, if for a particular quarter, revenues
received from Non-Operating Interests are $20,000 and permitted expenses and
management fees are $7,000, the Venture would be required to distribute 75% of
$20,000, or $15,000 for the quarter involved.
6.2 DISTRIBUTION OF NON-OPERATING INTERESTS AND PROCEEDS OR CONSIDERATION
RECEIVED ON THE SALE OR EXCHANGE OF SUCH INTERESTS PRIOR TO A SHARING RATIO
SHIFT. Prior to a Sharing Ratio Switch, the managing venturers may not
distribute Non-Operating Interests or proceeds or other consideration received
on the sale of such interests. This provision shall only apply during the Term
of the Venture and not during the Wind Up period.
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6.3 PROPERTY DISTRIBUTIONS. Notwithstanding the foregoing, the Managing
Venturer may, during the term of the Venture but not before the time that the
Joint Venture shall own Non-Operating Interests on at least four different
commercially producing wells, notify the Limited Partnership that it wishes the
Joint Venture to put up for sale all of the Joint Venture's Non-Operating
Interests. In such event, the Managing Venturer shall solicit and use its best
efforts to obtain bids for all of the Joint Venture's Non-Operating Interests
from third parties, subject to the condition that any party submitting a bid
must bid on 100% of the Non-Operating Interests owned by the Joint Venture on a
Prospect and tender with his bid a certified check for the amount of the bid.
The Managing Venturer shall notify the Limited Partnership of bids when and as
they are received. Either Venturer (including the Managing Venturer) may bid on
the same terms, provided that in such event the bidding Venturer shall notify
the other Venturer of its bid(s), and shall tender with its bid a certified
check covering the amount of its bid, except that the Limited Partnership, if it
submits a bid, shall only be required to tender a check for the amount of its
bid less a sum equal to the difference between 110% of its Capital Contribution
to the Venture, and cash amounts previously distributed to it. Each Venturer may
counter bids made by the other or by third parties, and shall be accorded at
least 7 days after a bid for this purpose. At the conclusion of the bidding, the
Limited Partnership (if its bid was not the high bid) shall have ten days from
receipt of notice of the amount of the high bid for each property and of the
identity of the high bidder to advise the Managing Venturer which, if any, of
the bid on Non-Operating Interests shall be retained by the Joint Venture and
distributed to the Venturers in kind, valued at the high bid as submitted by the
highest bidder, in which event said Non-Operating Interests selected by the
Limited Partnership, valued at the high bid, shall immediately be distributed in
accordance with the Sharing Ratio of the parties. Otherwise, provided that the
Joint Venture received bids on (and the Limited Partnership had the right to
take in kind) Non-Operating Interests on at least four different commercially
producing wells, the Non-Operating Interests which the Limited Partnership did
not elect to take in kind shall be sold for cash to the high bidder, and the
proceeds distributed. No Venturer shall be entitled to demand and receive
property other than cash and Non-Operating Interests in return for its Capital
Contributions to the Joint Venture.
6.4 PRO RATA DISTRIBUTIONS. All distributions, whether of cash, or
otherwise shall be made pro rata among the Venturers in accordance with their
Sharing Ratios.
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ARTICLE VII.
RIGHTS, POWERS AND DUTIES OF THE VENTURERS
7.1 GENERAL. The parties hereto hereby designate Edge Joint Venture II as
the Managing Venturer of the Joint Venture, and Edge Joint Venture II accepts
such appointment. All matters to be performed by the Managing Venturer shall be
performable by it in its reasonable discretion, subject to its duty of loyalty,
unless otherwise expressly stated.
7.2 AUTHORITY AND DUTIES OF THE MANAGING VENTURER. The Managing Venturer
shall, at the Joint Venture's expense subject to the provisions of paragraph
7.6, conduct, direct and exercise full control over all activities of the Joint
Venture and its assets. Except as otherwise expressly provided herein, or
otherwise in this Agreement, all management powers over the business and affairs
of the Joint Venture shall be vested in the Managing Venturer. Without limiting
the generality of the foregoing, the Managing Venturer shall, subject to the
limitations set forth herein, perform the duties set forth below:
(a) provide all general day-to-day management functions for the Joint
Venture, and without limiting the generality of the foregoing, (i) maintain
the books and records of the Joint Venture and pay or cause to be paid all
lawful debts of the Joint Venture, (ii) provide all accounting and billing
functions, and (iii) expend all Joint Venture funds necessary to proper
operations of the Joint Venture;
(b) designate the bank or banks at which accounts shall be opened and
maintained, the signatories on such bank accounts and the removal and
replacement of such signatories;
(c) deposit Joint Venture funds which, from time to time, are not
required, in the opinion of the Managing Venturer, for the operation of the
Joint Venture in the Joint Venture bank account, in interest-bearing
accounts, certificates of deposit, or invest such funds in securities
issued or guaranteed as to principal and interest by the United States or
by a person or entity controlled or supervised by and acting as an
instrumentality of the government of the United States which have
maturities of less than one year from the date of investment or similar
securities, including, but not limited to, bank repurchase agreements, so
long as such bank repurchase agreements are for such securities or short-
term tax-exempt securities and are fully collateralized and secured;
(d) manage the Non-Operating Interests in oil and gas properties
purchased by the Joint Venture;
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(e) subject to paragraph 7.6 hereof, determine the terms and conditions of
sale of any and all Non-Operating Interests or other assets of the Joint
Venture, and enter into other agreements for the sale of Non-Operating Interests
and other assets of the Joint Venture.
(f) subject to paragraph 7.6 hereof, execute for and on behalf of the
Joint Venture any and all instruments of conveyance, assignment or other
agreements purchasing or selling Non-Operating Interests, if any, of the Joint
Venture.
(g) purchase insurance, and extend such insurance to cover the Venturers,
and any of their Affiliates, at the Joint Venture's expense to protect the Joint
Venture's properties, assets and business against loss, including liability to
third parties arising out of Joint Venture activities in such amounts and in
such kinds as the Managing Venturer shall determine;
(h) take all reasonable action that may be necessary or appropriate for
the continuation of the Joint Venture's valid existence as a partnership and for
the acquisition and holding in accordance with the provisions of this Agreement
and applicable laws and regulations, of the Joint Venture's assets;
(i) use its best efforts to cause the Joint Venture to be formed,
reformed, qualified to do business, or registered under any applicable assumed
or fictitious name, statute or similar law in any state in which the Joint
Venture then owns property or transacts business, if such formation,
reformation, qualification or registration is necessary in order to permit the
Joint Venture lawfully to own property or transact business in such state;
(j) from time to time, prepare and file all certificates (or amendments
thereto) and other similar documents that are required by law to be filed and
recorded for any reason, in the office or offices that are required under the
laws of the State of Texas or any state in which the Joint Venture is then
qualified. The Managing Venturer shall do all other acts and things (including
making publications or periodic filings of this Agreement or any certificates of
the Joint Venture or amendments thereto or other similar documents) that may now
or hereafter be required, or deemed by the Managing Venturer to be necessary,
(i) for the perfection and continued maintenance of the Joint Venture as a
partnership under the laws of each state in which the Joint Venture is then
qualified and (ii) to cause such certificates or other documents to reflect
accurately the agreement of the Venturers, the identity of the Venturers and the
amounts of their respective Capital Contributions; and
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(k) purchase Non-Operating Interests in oil and gas properties, hold
such interests for investment, sell such interests and determine and
negotiate the terms upon which the Joint Venture will purchase and sell
such interests.
7.3 RELIANCE BY THIRD PARTIES. Any Person dealing with the Joint Venture
or the Managing Venturer may rely upon a certificate signed by the Managing
Venturer, as to:
(a) the identity of the Managing Venturer or any other Venturer;
(b) the existence or nonexistence of any fact or facts that
constitute conditions to acts by the Managing Venturer or in any other
manner germane to the affairs of the Joint Venture;
(c) the persons who are authorized to execute and deliver any
instrument or document of the Joint Venture; or
(d) any act or failure to act by the Joint Venture or as to any other
matter whatsoever involving the Joint Venture or any Venturer.
7.4 MANAGEMENT PERSONNEL. Subject to paragraph 7.6 below, the Managing
Venturer may cause the Joint Venture to hire personnel to administer and
implement the business of the Joint Venture. The Managing Venturer shall also
employ itself and make available to the Joint Venture such of its personnel as
are reasonably necessary for the Managing Venturer to fulfill its duties
hereunder. In recognition of the fact that the Managing Venturer's personnel
provided to the Joint Venture under this Agreement may perform services from
time to time for itself or for others, this Agreement shall not prevent the
Managing Venturer from performing such services for itself or for others or
restrict the Managing Venturer from so using the personnel provided to the Joint
Venture under this Agreement.
7.5 ABSENCE OF AUTHORITY OF MANAGING VENTURER TO ACT AS NOMINEE. It is
expressly contemplated that the business of the Joint Venture shall be conducted
by the Joint Venture in its name and shall not be conducted by Managing Venturer
in its name. Title to all assets and properties, both real and personal, shall
be held in the name of the Joint Venture.
7.6 RESTRICTIONS OF THE AUTHORITY OF THE MANAGING VENTURER.
Notwithstanding any other provision hereof to the contrary, consent and
approval of the Limited Partnership shall be required on any of the following
matters:
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(a) the creating of any indebtedness, including the amount, terms and
conditions of any money borrowed by or loaned to the Joint Venture;
(b) the granting of any mortgage or lien on the property of the Joint
Venture;
(c) the sale of all or substantially all of the assets of the Joint
Venture, or the sale of any Non-Operating Interest on a Prospect after a well
has been completed on the Prospect;
(d) the settlement or compromise of all actions, claims and demands or
commencement or defense of any litigation by or against the Joint Venture (or
either Venturer if such action, claim or demand arises out of the ownership or
operation of the Joint Venture);
(e) the taking of any action in contravention of this Agreement;
(f) the taking of any action that would make it impossible to carry on the
ordinary business of the Joint Venture; or
(g) the confession of a judgment against the Joint Venture, except in
connection with the execution of mortgages and other security instruments;
(h) prior to the drilling of a well on a Prospect, the expenditure of more
than $40,000 in the aggregate in purchasing Royalty Interests or Overriding
Royalty Interests on the Prospect, or of more than $250 per Royalty Acre.
(i) after the drilling of a well on a Prospect, (a) the expenditure of
aggregate sums in purchasing Royalty Interests or Overriding Royalty Interests
on the Prospect which, when added to expenditures prior to drilling, would cause
aggregate expenditures in purchasing such interests on the Prospect to exceed
$150,000, or (b) the expenditures of more than $2,000 per Royalty Acre.
(j) the purchase of any Non-Operating Interests other than Royalty
Interests and Overriding Royalty Interests.
(k) the expenditure of more than 10% of the Capital Contribution of the
Limited Partnership on the purchase of Non-Operating Interests on Prospects
other than those previously sold by the Edge Group Venture II.
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(l) the purchase of Non-Operating Interests from any person or entity
who is or was employed by or affiliated with Edge Petroleum Corporation or
Edge Joint Venture II.
(m) expend any sums for any matter expense or purpose other than the
purchase of particular Non-Operating Interests (which shall include amounts
paid to Landmen and brokers in connection with the purchase of a particular
Non-Operating Interest), unless the expense was provided for in a budget
submitted by the Managing Venturer to the Limited Partnership and approved
by the Limited Partnership. The Managing Venturers shall submit its first
budget on or before July 3, 1992 and, thereafter, on or before July 31, of
each subsequent year.
7.7 AUTHORITY, RIGHTS AND DUTIES OF THE LIMITED PARTNERSHIP. In addition
to the rights set forth in other sections of this Agreement, the Limited
Partnership shall have the rights and authority as set forth below:
The Limited Partnership shall have regular meetings with the Managing
Venturer at the offices of the Managing Venturer in Houston, Texas, no
less frequently than quarterly, wherein regular reports about the business
and affairs of the Joint Venture shall be discussed. In addition to the
foregoing, at such meetings the financial affairs and commitments of the
Joint Venture shall be discussed, and the Limited Partnership shall have
the right to demand the attendance by the Controller and President of the
Managing Venturer, and any other officers of the Managing Venturer which
the Limited Partnership shall designate. The Limited Partnership shall have
the right to have in attendance at such meetings any reasonable number of
representatives and agents which it desires, at its own expense. The
Managing Venturer shall have the right to request as a condition that any
Person attending such meetings execute reasonable agreements, agreeing to
keep confidential all information disclosed at such meetings. The Limited
Partnership shall have the right to request reports and other similar
documentation be prepared for examination and use by the Limited
Partnership, provided the Managing Venturer can prepare such without undue
expense or disruption of its affairs.
7.8 COMPENSATION AND REIMBURSEMENT OF MANAGING VENTURER.
(a) DIRECT EXPENSES. The Managing Venturer shall be reimbursed for
all sums, if any, which it pays or advances on behalf of the Joint
Venture: (i) as consideration for the purchase by the Joint Venture of
Non-Operating Interests, (ii) to independent brokers in connection with the
purchase of or curing title to a particular Non-Operating Interest, (iii)
to or on account of clerical employees of the Managing Venturer
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who perform services in connection with the acquisition by the Venture of
particular Non-Operating Interests, (iv) to independent accountants who
perform billing and accounting functions for the Joint Venture, (v) office
supplies and copying, and (vi) the filing fees entailed in qualifying the
Essex Royalty Joint Venture to do business in any state.
(b) OTHER SPECIFIC BUDGETED ITEMS. The Managing Venturer shall be
reimbursed for sums which it expends as rent on office space used
exclusively by the Joint Venture and for clerical and secretarial employees
which perform services in connection with the operation or management of
the Non-Operating Interests. Additionally, in the event and so long as the
Joint Venture does not employ a full time employee to manage the affairs of
the Venture, the Managing Venturer shall be reimbursed for a proportionate
share of the salary of a single officer or employee of Edge Petroleum
Corporation or Edge Joint Venture II who devotes more than 50% of his or
her time to the affairs of the Joint Venture. Reimbursement provided under
this subparagraph shall only be within the limits authorized by the budget
submitted by the Managing Venturer and approved by the Limited Partnership
pursuant to paragraph 7.6 (m) above.
(c) MANAGEMENT FEE. During the term of the Joint Venture and prior
to a Sharing Ratio Shift, the Joint Venture shall pay to the Managing
Venturer (to be allocated to Edge Petroleum Corporation), as a semi-annual
management fee, a sum equal to 1% of the Capital Contribution of the
Limited Partnership. The first 1% shall be paid during the first six months
of the Joint Venture and 1% shall be paid during each subsequent six month
period during the term of the Joint Venture, prior to a sharing ratio
shift.
7.9 COMPENSATION AND REIMBURSEMENT OF ROYALTY. The Limited Partnership
shall receive no compensation for performing its services hereunder.
7.10 OUTSIDE ACTIVITIES. The Venturers and any director, officer, partner
or employee of the Venturers or any Affiliate thereof may have business
interests and engage in business activities in addition to those relating to the
Joint Venture, may engage in any such other businesses and activities, for their
own account and for the account of others, and may own interests in properties,
businesses and activities without having or incurring any obligation to offer
any interest in such properties, businesses or activities to the Joint Venture
or the other Venturer. No provision hereof shall be deemed to prohibit any such
Person from conducting such other businesses and activities. Neither the Joint
Venture nor any of the Venturers shall have any rights by virtue of this
Agreement or the partnership relationship created hereby in any other business
ventures of any such Person.
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The foregoing notwithstanding, during the Term, no Venturer shall directly
or indirectly engage in a business involving the purchase and sale of
Non-Operating Interests in oil and gas properties within the area specified in
Article III (except on behalf of the Joint Venture).
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7.11 JOINT VENTURE FUNDS. The funds of the Joint Venture shall be
deposited in such account or accounts in the name of the Joint Venture as are
designated by the Managing Venturer. The Joint Venture's funds shall be
completely segregated from other funds of the Managing Venturer. All withdrawals
from or charges against such accounts shall be made by the Managing Venturer or
its officers or agents. Funds of the Joint Venture may be invested as determined
by the Managing Venturer, except in connection with acts prohibited by this
Agreement.
7.12 OTHER MATTERS CONCERNING MANAGING VENTURER.
(a) The Managing Venturer may rely and shall be protected in acting
or refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, bond,
debenture or other paper or document believed by it to be genuine and to
have been signed or presented by the proper Person or parties.
(b) Any Venturer shall be entitled to consult with legal counsel
accountants, appraisers, management consultants, investment bankers and
other consultants and advisers selected by it in connection with the
ordinary and proper conduct of the business of the Joint Venture, and shall
not be liable or responsible in damages or otherwise to the Joint Venture
or any Venturer for failing to exercise due care with respect to any act or
omission taken in good faith in reliance on and in accord with such advice.
This shall not relieve any Venturer from any other liability or basis of
liability with respect to such act or omission.
ARTICLE VIII.
TRANSFERABILITY OF VENTURER'S PARTNERSHIP INTEREST
Except to the extent of an assignment of revenues made subject to the
limitations set forth below in this Article, the Venturers agree that they will
not sell, assign, transfer, pledge or encumber all or any part of their
Partnership Interest (including the revenues arising from such interest) without
the prior written consent of the other. All Venturers may, without consent,
pledge rights in up to one-half of the revenues arising from their Partnership
Interest, but only if the pledgee agrees prior to such pledge that upon a
foreclosure of the Partnership Interest, the
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other Venturers shall have a right of first refusal to purchase the Partnership
Interest to be sold on the same bona fide terms and conditions as offered by a
purchaser on a pro rata basis.
ARTICLE IX.
INCOME TAX MATTERS
9.1 PREPARATION OF TAX RETURNS. The Managing Venturer shall arrange at
the expense of the Joint Venture for the preparation and timely filing of all
returns of Joint Venture income and expense necessary for income tax purposes
and will cause copies of such returns or all pertinent information contained
therein to be furnished to the Venturers within ninety (90) days of the close of
the fiscal year.
9.2 ORGANIZATIONAL EXPENSES. The Joint Venture shall elect to deduct
expenses incurred in organizing the Joint Venture ratably over a sixty (60)
month period as provided in Section 709 of the Code.
9.3 TAXATION AS A PARTNERSHIP. No election shall be made by the Joint
Venture, or any Venturer, to be excluded from the application of any of the
provisions of Subchapter K, Chapter 1 of Subtitle A of the Code, or from any
similar provisions of any state tax laws.
9.4 TAX MATTERS PARTNER. The Managing Venturer shall be the "Tax Matters
Partner" (as defined in the Code) for the Joint Venture.
ARTICLE X.
ACCOUNTING PROCEDURE; REPORTS AND INFORMATION
10.1 FISCAL YEAR. The fiscal year of the Joint Venture shall be the
calendar year, unless otherwise determined by the Managing Venturer.
10.2 FINANCIAL RECORDS. The financial books and records of the Joint
Venture shall be kept, and tax returns shall be prepared, on the accrual basis
of accounting in accordance with generally accepted accounting principles. The
Joint Venture's books and records shall be maintained at the Joint Venture's
principal place of business and shall be available for inspection and copying by
each Venturer or its representative (at such Venturer's own expense) at all
reasonable times.
10.3 FINANCIAL REPORTS. Within one hundred twenty (120) days following
the end of each fiscal year of the Joint Venture, the
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Managing Venturer shall deliver or cause to be delivered to each Venturer an
annual report, including a statement of the Joint Venture's accounts for and as
at the end of such fiscal year (containing a balance sheet and statement of
income) prepared on the accrual basis of accounting, all of which shall be
prepared by independent certified public accountants (although certification is
not required) at the cost of the Joint Venture.
10.4 TAX REPORTS. Within ninety (90) days following the end of each
fiscal year of the Joint Venture, the Managing Venturer shall furnish to the
Venturers a statement setting forth all information relating to the Joint
Venture's operations for such fiscal year as is reasonably required by the
Venturers for the completion of their respective federal, state and other income
tax returns.
ARTICLE XI.
DISSOLUTION, LIQUIDATION AND TERMINATION
11.1 EVENTS CAUSING DISSOLUTION. The Joint Venture shall be dissolved
upon the happening of any of the following events:
(a) the expiration of its Term as provided in Section 1.5;
(b) unanimous agreement of the Venturers; or
(c) the Incapacity of any Venturer, unless the other Venturer elects
to continue the Venture.
Additionally, in the event the Edge Joint Venture II is terminated
prior to April 11, 1996, either party shall have the right and option at its
sole election to dissolve the Joint Venture within sixty (60) days after written
notice that Edge Joint Venture II was terminated.
11.2 LIQUIDATING AGENT. Upon the dissolution of the Joint Venture, the
Managing Venturer (or in the event the dissolution is caused by the Incapacity
of the Managing Venturer, such Person as the Limited Partnership shall designate
(including itself) shall act as liquidating agent (the "Liquidating Agent") and
immediately proceed to wind up and terminate the business and affairs of the
Joint Venture. During the Wind Up Period, no new Non-Operating Interests of any
sort may be acquired by the Joint Venture with Joint Venture funds. Upon
dissolution of the Joint Venture, a proper accounting shall be made of the Joint
Venture's assets and liabilities and obligations from the date of the last
previous accounting to the date of such dissolution and the Joint Venture's
business and affairs shall be liquidated in an orderly manner in no event to
exceed six (6) months (such period being called the "Wind-Up Period") and such
sales of properties of the Joint Venture as
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may be required for such purposes shall be made by the Liquidating Agent as more
fully hereafter set forth.
11.3 TERMINATING DISTRIBUTIONS AND MATTERS. (a) Provided that a Sharing
Ratio Shift shall have occurred prior to the Termination of the Joint Venture,
the cash and other assets of the Joint Venture shall be distributed in kind 60%
to the Limited Partnership and 40% to the Managing Venturer. If a Sharing Ratio
Shift shall not have occurred prior to Termination of the Joint Venture, than
immediately upon the commencement of the Wind-Up Period, the Liquidating Agent
shall solicit and use its best efforts to obtain bids for all of the Joint
Venture's Non-Operating Interests and other assets, if any, from third parties,
subject to the condition that any party submitting a bid must tender with his
bid a certified check for the amount of the bid. The Liquidating Agent shall
notify the Limited Partnership of bids when and as they are received. Either
Venturer (including the Liquidating Agent) may bid on the same terms, provided
that in such event the bidding Venturer shall notify the other Venturer of its
bid(s), and shall tender with its bid a certified check covering the amount of
its bid, except that the Limited Partnership, if it submits a bid, shall only be
required to tender a check for the amount of its bid less a sum equal to the
difference between 110% of its Capital Contribution to the Venture, and cash
amounts previously distributed to it. Each Venturer may counter bids made by the
other or by third parties, and shall be accorded at least 7 days after a bid for
this purpose. At the conclusion of the bidding, the Limited Partnership (if its
bid was not the high bid) shall have ten days from receipt of notice of the
amount of the high bid for each property and of the identity of the high bidder
to advise the Liquidating Agent which, if any, of the bid on Non-Operating
Interests shall be retained by the Joint Venture and distributed to the
Venturers in kind, valued at the high bid as submitted by the highest bidder, in
which event said Non-Operating Interests selected by the Limited Partnership,
valued at the high bid, shall immediately be distributed in accordance with the
Sharing Ratio of the parties. Otherwise, the Non-Operating Interests which the
Limited Partnership did not elect to take in kind shall be sold for cash to the
high bidder, and the proceeds distributed. No Venturer shall be entitled to
demand and receive property other than cash and Non-Operating Interests in
return for its Capital Contributions to the Joint Venture.
(b) In the liquidation of the Joint Venture, payments shall first
be made of all expenses of liquidation (including, without limitation, any
legal and accounting expenses incurred in connection therewith) and all
debts of the Joint Venture, first, to third-party creditors and, after
payment of all third party creditors, then to any Venturer who shall
properly be a creditor of the Joint Venture or adequate provision shall be
made for the payment thereof. Thereafter the cash of the Joint Venture
shall be distributed to the Venturers and
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thereafter Non-Operating Interests shall be distributed. Non-Operating
Interests may not be distributed until the Venture shall have completed the
distribution of cash which is on hand on the Termination date or which the
Joint Venture receives during the Wind-Up Period. Subject to the provisions
of subparagraph (d), it is the intent of the parties that Non-Operating
Interests not be distributed until the end of the Wind Up Period and the
distribution of all other assets.
(c) Any property of the Joint Venture distributed in kind in
liquidation shall be treated as if the property were sold for its fair
market value and any deemed gain or loss shall be credited to the Venturers
in accord with this Agreement.
(d) The foregoing provisions which limits the distribution of
Non-Operating Interests during the Wind Up period shall not apply if a
Sharing Ratio Switch shall have occurred during the Term of the Venture, or
if a Sharing Ratio Switch occurs during the Wind Up period as a result of
distributions.
11.4 ALLOCATION OF LIQUIDATING DISTRIBUTIONS BETWEEN THE VENTURERS. The
Venturers anticipate and expect that the Capital Accounts of the Venturers at
the time liquidating distributions are to be made will be in the same ratio as
the Sharing Ratios. If this should be the case, the making of such liquidating
distributions in accordance with the Sharing Ratios will accomplish the same
economic result as making the liquidating distributions in accordance with the
Capital Accounts of the Venturers. If the Capital Accounts (after being adjusted
for the corrective allocations pursuant to Section 5.3, the revaluation of Joint
Venture property pursuant to Section 4.3(c), and as otherwise provided by this
Agreement) at such time are not in the same ratio as the Sharing Ratios at the
time liquidating distributions are to be made, then, immediately prior thereto,
the Capital Accounts of the Venturers shall be adjusted in the manner and to the
extent necessary so that the Capital Accounts will be in the same ratio as the
Sharing Ratios at the time liquidating distributions are made.
11.5 INDEMNIFICATION OF THE LIQUIDATING AGENT. The Liquidating Agent (or
any officer, director, shareholder, partner or employee thereof) shall be
indemnified and held harmless by the Joint Venture on the same terms and
conditions as set forth in Article XIII hereof. The indemnification rights
herein contained shall be cumulative of, and in addition to, any and all other
provisions hereof, and rights, remedies and recourse to which the Liquidating
Agent (or any officer, director, shareholder, partner or employee thereof) shall
be entitled in law or at equity.
11.6 CERTAIN POWERS AND RIGHTS OF THE LIQUIDATING AGENT. The Liquidating
Agent shall have all the powers conferred upon the
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Managing Venturer under the terms of this Agreement to the extent necessary or
desirable in the good faith judgment of the Liquidating Agent to carry out the
duties and functions of the Liquidating Agent hereunder. The Liquidating Agent
shall be entitled to receive such compensation for its services as shall be
reasonably agreed upon by the Venturers, provided that should the Liquidating
Agent be the Managing Venturer, no additional compensation shall be paid for
performing the matters set forth in Section 11.3, except as therin stated. The
Liquidating Agent may resign at any time upon the giving of fifteen (15) days
prior Notification to the Venturers and may be removed at any time, but only on
a showing of cause, by either Venturer. Upon the Incapacity, removal or
resignation of the Liquidating Agent, a successor and substitute Liquidating
Agent (who shall have and succeed to all the rights, powers and duties of the
original Liquidating Agent) shall, within thirty (30) days thereafter, be
designated by the Limited Partnership.
11.7 COMPLETE DISTRIBUTION. Distribution of the Joint Venture properties to
the Venturers in accordance with the provisions of this Article XI shall
constitute a complete return to the Venturers of their respective Capital
Contributions. If such distributions are insufficient to return to any Venturer
the full amount of its Capital Contribution, it shall have no recourse against
the Joint Venture or any other Venturer.
ARTICLE XII.
AMENDMENTS AND CONSENTS
12.1 AMENDMENTS. This Agreement may be amended only with the written
Consent of all of the Venturers.
12.2 METHOD OF GIVING CONSENT. Any consent required by this Agreement may
be given by a written consent given by the consenting Venturer at or prior to
the doing of the act or thing for which the consent is solicited, unless
otherwise indicated herein.
ARTICLE XIII.
INDEMNIFICATION AND LIABILITY
13.1 INDEMNIFICATION. All Venturers shall be indemnified by the Joint
Venture under the following circumstances and in the manner and to the extent
indicated:
(a) In any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, judicial, administrative or otherwise
("Action"), to which any Venturer
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was or is a party, or is threatened to be made a party, by reason of the fact
that it is or was the Managing Venturer or a Venturer in the Joint Venture,
involving an alleged cause of action for liability or damages arising out of
the ordinary and proper conduct of the business i) of the Joint Venture, ii) of
the Joint Venture, and another business in which the Joint Venture had an
economic interest provided that the conduct of such other business was permitted
by this Agreement or iii) the conduct of a business in which the Joint Venture
had an economic interest, provided that such other business was permitted by
this Agreement, the Joint Venture shall indemnify to the extent provided by
Subparagraph (b) the Venturer against all expenses, including attorneys' fees,
judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by the Venturer in connection with such Action. The parties
agree, without limitation otherwise, on the meaning of the term "proper" that
the negligence of a Venturer shall not constitute improper conduct of the
business of the Joint Venture, nor a breach of trust or fiduciary duty. Hence
the parties intend that this indemnity shall apply notwithstanding the
negligence of a Venturer. The provisions of this subsection (a) shall not apply
to litigation covered by subsection (e).
(b) Where the matter arises out of the conduct of the business of the
Joint Venture and another business in which the Joint Venture had an economic
interest or another business in which the Joint Venture had an economic
interest, the indemnity shall be proportionate to the extent of the Joint
Venture's economic interest in the business activity giving rise to the
litigation.
(c) The Joint Venture shall pay or reimburse, in advance of the final
disposition of any Action, reasonable expenses incurred by the Venturer who was,
is, or is threatened to be made a named party in an Action, who shall be
entitled to indemnification under subsection (a), after:
(i) the Joint Venture receives a written affirmation by the Venturer
of the good faith belief that it has met the standards for indemnification under
subsection (a) and a written undertaking by or on behalf of the Venturer to
repay the amount paid or reimbursed if it is ultimately determined that the
Venturer has not met those requirements; and
(ii) a determination, made by independent legal counsel (i.e. without
any prior professional or business relations with the Venturers or principals of
the Venturers) in a written opinion, that it appears to those making the
determination that, based upon the facts then known to such persons, without any
independent investigation, evidence exists to support the position that the
Venturer is entitled
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to indemnification under subsection (a) hereunder (it being agreed that the law
firm authoring such opinion shall be disclosed to the other Venturer 10 days
before any funds are paid under this subsection).
(d) The written undertaking required by subsection (c)(i) must be an
unlimited general obligation of the Venturer, and shall be accepted without
reference to financial ability to make repayment.
(e) 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 whatsoever arising out of or connected to this Agreement, the party
losing the litigation shall bear the fees and expenses of the party which
prevails in the litigation.
(f) With respect to any Action covered by 14.1(e) herein, the Joint
Venture shall pay or reimburse in advance of the final disposition of such
Action, the reasonable expense incurred by any Venturer who was, is or is
threatened to be made a party in such Action after:
(i) the Joint Venture receives a written affirmation by the Venturer of
the good faith belief that it will prevail in the litigation and written
undertaking by or on behalf of the Venturer to repay the amount paid or
reimbursed if it is not successful in the litigation, secured by a pledge by the
Venturer as set forth in paragraph below; and
(ii) a determination, made by independent legal counsel in a written
opinion, that it appears to those making the determination that, based upon the
facts then known to such persons, without any independent investigation,
evidence exists to support the position of the Venturer seeking such advance (it
being agreed that the law firm authoring such opinion shall be disclosed to the
other Venturer 10 days before any funds are paid under this subsection).
(g) The written undertaking required by subsection (f)(i) must be an
unlimited general obligation of the Venturer and shall be accepted without
reference to financial ability to make repayment.
(h) Any Venturer receiving payment or reimbursement of legal fees prior to
disposition of any Action either under Subparagraph (c) or (f), shall be
required as a condition to receiving such payment or reimbursement to pledge one
half of the revenue interest attributable to its partnership interest held by
such Venturer free and clear of all liens and encumbrances, to secure its
obligation to repay the advance,
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if it is determined that it was not entitled to indemnification or it does
not prevail in the litigation, as the case may be.
(i) Notwithstanding any other provision of this Article to the
contrary, the Joint Venture shall pay or reimburse expenses incurred by
any Venturer in connection with it or its employees' or agents' appearance
as a witness or other participation in an Action involving or affecting the
Joint Venture at a time when the Venturer is not a named defendant or
respondent in the Action.
(j) The Joint Venture may indemnify and advance expenses to an
employee or agent of any Venturer to the same extent that it may
indemnify and advance expenses to the Venturer under this Article, to the
extent determined by the Venture and in the case of the President, any
Vice-President, Controller, General Counsel, and any special consultants of
either Venturer, such indemnity and rights hereunder shall be mandatory.
(k) Notwithstanding any provision in this Article to the contrary, if
any or all of the indemnification provisions contained herein shall be
found invalid, illegal, or unenforceable in any respect, such invalidity,
illegality, or unenforceability shall not affect any other provision
hereof; and in such event this Agreement shall be deemed written as if
such provision or provisions had never been contained herein. Regardless of
any invalidity, illegality or unenforceability of any provision or
provisions contained in this Article, the parties to this Agreement intend
that the Venturers (and its employees or agents) shall be and hereby are
indemnified to the greatest extent allowable under applicable law in the
matters identified in subsections (a) through (f) above.
(l) The provisions of this indemnity shall be in addition to and not
in lieu of any other rights of indemnity which may exist under Texas law,
as it may exist from time to time.
13.2 INDEMNITY LIMITATIONS. The Joint Ventures' obligation to indemnify any
Venturer shall be limited to the assets of the Joint Venture and shall be
without recourse to the Venturers.
13.3 LIMITATIONS ON LIABILITY. 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 the other Venturer. THIS
PROVISION SHALL NOT RELIEVE A VENTURER FROM ANY OTHER LIABILITY OR BASIS FOR
LIABILITY.
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13.4 PROCEDURE FOR INDEMNIFICATION. Each Venturer (the "Indemnified
Venturer") agrees to give the other (the "Other Venturers") prompt written
notice of the filing or commencement of any Action against a Venturer which may
give rise to a request for indemnification hereunder, and each party will
cooperate with the other in determining the validity of any such claim or
assertion. Upon any request for indemnity by any Venturer pursuant to subsection
14.1 (a) hereof, the Indemnified Venturer shall select counsel with respect to
the claim, loss liability which is the subject of indemnification subject to the
reasonable approval of the other Venturer. The Other Venturers shall have the
right to participate in or monitor the defense of any such third-party suits,
claims or proceedings, (but shall not have the right to invade, or otherwise
take any action to alter, modify, or destroy the attorney client relationship).
All Venturers and the Joint Venture shall cooperate with respect to any defense,
compromise or settlement. The Indemnified Venturer will not compromise or settle
any such action, suit or proceeding without the consent of the Other Venturers,
except that in any Action, if the Indemnified Venturer advises that it wishes to
accept a settlement offer, then in any subsequent litigation between the
Indemnified Venturer on the one hand, and the Joint Venture or the Other
Venturers on the other hand, arising out of such Action which the Indemnified
Venturer wished to settle, the extent of the Indemnified Venturer's liability,
if any, is the amount which the Indemnified Venturer was willing to accept in
settlement. Additionally, the Venture shall indemnify the Other Venturers for
all of the expenses, costs and fees incurred as a result of the Indemnified
Venturer's notice hereunder or claim for indemnity, including without limitation
expenses, costs, and fees incurred in participation in the selection of counsel
or participation or monitoring the defense of the action.
13.5 CONTRIBUTION OF NET PROCEEDS FROM ANY CLAIM. If any Venturer asserts
any claim against any third party including any one or more of its employees
with respect to a claim arising for which such Venturer received indemnification
or payment of legal fees or expenses under this Article, such Venturer shall
contribute the net proceeds of any recovery on the claim (after deducting legal
fees and expenses) to the Venture to be shared by the Venturers in accord with
their Profit Sharing Ratios. No Venturer shall be under no obligation to assert
any such claim.
13.6 REIMBURSEMENT. In any action arising pursuant to subsection (e) in
which the Joint Venture pays or reimburses in advance of the final disposition
of the action the reasonable expense incurred by one Venturer, the Joint Venture
shall be obligated to pay or reimburse and shall pay or reimburse in advance of
final disposition of the action the reasonable legal fees of the Other Venturers
arising out of or in connection with the indemnified claim or action provided
such Venturer shall furnish the affirmations set forth in subsection (f) (i) to
obtain such
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reimbursement, and shall be required to pledge its revenue interests as set
forth above in subsection (h).
13.7 THIRD PARTY BENEFICIARIES. This section shall not be deemed to create
rights or remedies in third parties except to the extent expressly provided for
herein.
ARTICLE XIV.
EFFECTIVE DATE AND GENERAL PROVISIONS
14.1 EFFECTIVE DATE. This Agreement shall be effective as of the date both
parties have executed this Agreement which date shall be the date set forth
below.
14.2 SCOPE. This Agreement constitutes the entire understanding of the
Venturers with respect to the Joint Venture.
14.3 BINDING EFFECT. This Agreement shall be binding upon and shall inure
to the benefit of the Venturers, their heirs, executors, administrators, legal
representatives, successors and assigns.
14.4 HEADINGS. The headings in this Agreement are inserted for convenience
and identification only and are in no way intended to describe, interpret,
define or limit the scope, extent or intent of this Agreement or any provision
hereof.
14.5 WAIVER OF RIGHTS TO PARTITION. Each Venturer hereby irrevocably waives
during the term of the Joint Venture any right that it may have to maintain any
action for partition with respect to any Joint Venture property.
14.6 VIOLATION. The failure of any party to seek redress for violation of
or to insist upon the strict performance of any covenant or condition of this
Agreement shall not prevent a subsequent act, which would have originally
constituted a violation, from having the effect of an original violation. The
rights and remedies provided by this Agreement are cumulative and the use of any
one right or remedy by any party shall not preclude or waive its right to use
any or all other remedies. Said rights and remedies are given in addition to
any other rights the parties may have by law, statute, ordinance or otherwise.
14.7 SEVERABILITY. Every provision of this Agreement is intended to be
severable. If any term or provision is illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the validity or the
remainder hereof.
14.8 COUNTERPARTS. This Agreement may be executed in any number of
counterparts with the safe effect as if all parties
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hereto had all signed the same document. All counterparts shall be construed
together and shall constitute one agreement.
14.9 APPLICABLE LAWS. This Agreement shall be enforced in accordance with
the applicable laws of the State of Texas.
14.10 LIABILITY. Subject to the provisions of this agreement, all risks,
liabilities and expenses with respect to the operations, business and assets of
the Joint Venture shall be bourn by the Venturers in accordance with their
respective Sharing Ratios.
14.11 NOTICES. All notices ("Notices") or other communications required
or permitted to be given pursuant to this Agreement, unless otherwise expressly
provided herein, shall be in writing and shall be considered as properly given,
in the case of notices or communications required or permitted to be given to
any Venturer, if personally delivered or if mailed by United States first-class
mail, postage prepaid, or if sent by prepaid telegram or telecopy and addressed
or transmitted to the Venturer at the address or telecopy number as they appear
below. Any Notice or other communication shall be deemed to have been given as
of the date on which it is personally delivered, or, if mailed, on the third
business day after the day on which it is deposited in the United States mails,
or if telecopied, on the date transmitted, or if by telegraph, on the date of
actual receipt, in each case in compliance with the terms of this Section 15.10.
Notices shall be addressed as follows:
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(a) If to Essex Royalty Joint Venture:
Essex Royalty Joint Venture with a copy to:
1111 Bagby, Suite 2100
Houston, Texas 77002
Attention: John E. Calaway
Telephone: (713) 654-8960
Telephone: (713) 654-7722
(b) If to the Essex Royalty Limited Partnership:
Essex Royalty Limited Partnership with a copy to:
One Landmark Square, Suite 611
Stamford, Connecticut 06901 J. Michael Gottesman
Attention: Mr. John Sfondrini 477 Madison Avenue
Telephone: (203) 358-9502 New York, New York 10022
Telecopier: (203) 324-0996 Telephone: (212) 308-2320
Telecopier: (212) 888-7306
(c) If to Edge Joint Venture II:
Edge Joint Venture II with a copy to:
1111 Bagby, Suite 2100
Houston, Texas 77002
Attention: John E. Calaway
Telephone: (713) 654-8960
Telephone: (713) 654-7722
WITNESS THE EXECUTION HEREOF effective the 1ST day of MAY, 1992.
ESSEX ROYALTY LIMITED PARTNERSHIP
By: NAPAMCO, LTD., General Partner
/s/ John Sfondrini
By: -----------------------------
John Sfondrini, President
EDGE JOINT VENTURE II
By: Edge Petroleum Corporation, Managing Venturer
/s/ John E. Calaway
By:--------------------------------------
John E. Calaway, President
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EXHIBIT "A"
-----------
I. Sharing Ratios Before Sharing Ratio Shift
-----------------------------------------
(a) Edge Joint Venture II 0%
(b) Essex Royalty Limited Partnership 100%
II. Sharing Ratios After Sharing Ratio Shift
----------------------------------------
(a) Edge Joint Venture II 40%*
(b) Essex Royalty Limited Partnership 60%
* to be allocated 50% to Edge Petroleum Corporation and 50% to Edge Group II
Limited Partnership, Gulfedge Limited Partnership and Edge Group
Partnership in accordance with their respective sharing ratio interests in
Edge Joint Venture II. These distributions will be allocated directly to
each Venturer outside of the Edge Joint Venture II. These distributions
will not apply or count towards a Sharing Ratio Shift in the Edge Joint
Venture II.
<PAGE>
Exhibit 10.4
Edge Group II Limited Partnership
AGREEMENT OF LIMITED PARTNERSHIP
THIS AGREEMENT OF LIMITED PARTNERSHIP, entered into and effective as
of ________, 1991, by and among JOHN SFONDRINI, and NAPAMCO. LTD., with
offices at one Landmark Square, Suite 611, Stamford, Connecticut 06901, as
general partners (hereinafter referred to as the "General Partner") and
each of the other parties executing this Agreement or counterpart hereof as
limited partners (the "Limited Partners") (the General Partner and the
Limited Partners shall hereinafter be referred to collectively as the
"Partners").
W I T N E S S E T H
ARTICLE 1
(S) 1.1 Formation of Partnership
The parties hereto hereby form, pursuant to the Uniform Limited
Partnership Act of the State of Connecticut, a Limited Partnership, which
organization is referred to as the "Partnership."
(S) 1.2 Organization Certificates
The parties hereto shall immediately execute all such
certificates and other documents conforming hereto and do all such filing,
recording, publishing and other acts as may be appropriate to comply with
all requirements for the laws of the State of Connecticut. The parties
hereto also agree to execute all such certificates and other documents
conforming hereto and to do all such filing, recording, publishing and
other acts as may be appropriate to comply with the requirement of law for
the jurisdictions where the Partnership shall desire to conduct business.
Prior to conducting any business in any jurisdiction, the Partnership shall
comply with all requirements for the qualification of the Partnership to
conduct business as a limited partnership in such jurisdiction.
<PAGE>
(S) 1.3 Partnership Name
The business of the Partnership shall be conducted under the name
"Edge Group II Limited Partnership" in those jurisdictions where such name
is permitted and under such variations of this name as the General Partner
deems appropriate to comply with the laws of the other jurisdictions in
which the Partnership does business. This name and all variations thereof
are acknowledged to be the sole property of the General Partner who hereby
consents to the use thereof by the Partnership. The General Partner, his
successors and assigns, shall be free to use the said name and all
variations thereof in connection with other ventures.
(S) 1.4 Rejection
The General Partner, in his sole absolute discretion, may, at any
time prior to the date the Partnership becomes effective, reject any
subscription for any reason.
ARTICLE 2
(S) 2.1 Definitions
Whenever in this Agreement, the following terms shall have the
meanings respectively assigned to them in this (S) 2.1:
2.1.a "Agreement" means this Agreement of Limited
Partnership as it may be further amended from time to time.
2.1.b "Capital Contribution" shall mean the amount of
money which a Partner has contributed to the Partnership towards
meeting such Partner's Capital Commitment.
2.1.c "Code" shall mean the Internal Revenue Code of
1986, as amended from time to time, and regulations thereunder at the
time of reference thereto.
2.1.d "Consent of the Partners" means 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, which consent or approval shall be
obtained prior to the taking of the action for which it is required
hereunder.
2.1.e "Events of Bankruptcy" means, as to a General
Partner:
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2.1.e.i its or his admission, in writing, of
its or his inability to pay its or his debts generally as
they become due;
2.1.e.ii its or his filing a petition in
bankruptcy or for reorganization or for adoption of an
arrangement under the Bankruptcy Act;
2.1.e.iii its or his making an assignment for the
benefit of creditors;
2.1.e.iv its or his consenting to the
appointment of a receiver for all or a substantial part of
its or his property;
2.1.e.v its or his being adjudicated as
bankrupt;
2.1.e.vi the entry of a court order appointing a
receiver or trustee(s) for all or a substantial part of its
or his property without its or his consent, which order
shall not be vacated, set aside or stayed within sixty (60)
days from the date of entry; and/or
2.1.e.vii the assumption of custody or
sequestration by a court of competent jurisdiction of all or
substantially all of its or his property, which custody or
sequestration shall not be suspended or terminated within
sixty (60) days from its inception.
2.1.f "Limited Partner or Limited Partners" means any or all
of those persons designated as Limited Partners in the Partnership
Certificate or any person who becomes a substitute Limited Partner as
provided herein, in each person's capacity as a Limited Partner of the
Partnership.
2.1.g "Partner" means a General Partner or Limited Partner.
2.1.h "Partnership" means the Limited Partnership governed by
this Agreement as said Limited Partnership may from time to time be
constituted as amended.
2.1.i "Partnership Properties" shall mean all interests,
properties and rights of any type owned by the Partnership.
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2.1.j "Joint Venture Agreement" shall mean the Joint
Venture Agreement to be entered into between this Partnership and Edge
Petroleum Corporation at or before the Funding Date to form the Edge
Group Joint Venture II.
2.1.k "Funding Date" shall mean the date upon which this
Partnership makes its initial Capital Contribution to the Edge Group
Joint Venture II and EPC make its Capital Contribution to the Edge
Group Joint Venture II.
2.1.l "EPC" shall mean Edge Petroleum Corporation, a to
be formed Texas Corporation with which this Partnership will enter
into a Joint Venture for the generation, development and marketing of
oil and gas Prospects, substantially as set forth in the Private
Placement Memorandum dated December 13, 1990 relating to the offer and
sale of Partnership interests in this Partnership.
2.1.m "Capital Commitment" of a Partner shall mean the
amount of capital such Partner has committed to contribute to the
Partnership, including the amount paid on Closing and the amount due
on or before July 1, 1992. Each Partner's Capital Commitment is set
forth on the signature page of this Agreement.
2.1.n "Simulated Depletion Deductions" means the
simulated depletion allowance computed by the Partnership with respect
to each oil and gas property by using either the cost depletion method
or the percentage depletion method (computed in accordance with
Internal Revenue Code Section 613 at the rates specified in Section
613(c)(5) without regard to the limitation of Section 613A, which
theoretically could apply to any partner) for each taxable year that
the property is owned by the Partnership and subject to depletion, in
accordance with Treas.Reg. Section 1.704-1(b)(2)(iv)(k).
2.1.o "Simulated Gains" and "Simulated Losses" mean,
respectively, the simulated gains or simulated losses computed by the
Partnership with respect to its oil and gas properties pursuant to
Treas.Reg Section 1.704-1(b)(2)(iv)(k).
2.1.p "Limited Partner Percentage" shall mean for each
Limited Partner as of any date the amount of such Limited Partner's
Capital Account divided by the sum of Capital Accounts of all Limited
Partners as of such date.
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2.1.q "Cash Flow" means the Gross Cash Proceeds from Partnership
Operations less the portion thereof used to pay Partnership expenses.
ARTICLE 3
(S) 3.1 Purposes and Powers of the Partnership
The principal purpose of the Partnership shall be to enter into
(or ratify, if such Agreement has already been entered into) the Joint
Venture Agreement with EPC for the purpose of engaging in the business of
prospect generation and sales, and activities relating thereto, within the
Continental United States and off shore state waters as described in a
Private Placement Memorandum for the Partnership dated December 13, 1990 to
which this Agreement was attached as an Exhibit. The purposes of this
Partnership may be accomplished through:
3.1.a the employment of such parties and personnel and
such legal, accounting, geological, geophysical and
engineering services and advice as the General Partner deems
advisable;
3.1.b the payment (or where appropriate in the judgment
of the General Partner, the failure to make payment) of
delay rentals on leases or leasehold interests;
3.1.c the making or giving of dryhole or bottomhole
contributions in the form of acreage, money or both;
3.1.d the execution and amendment of all documents or
instruments of any kind which the General Partner may deem
appropriate for carrying out the purposes of the Partnership;
3.1.e the purchase and establishment of inventories of pipe and
other equipment and material;
3.1.f the borrowing of money or the incurring of purchase money
or other debt for Partnership purposes and the mortgaging and pledging
of Partnership Properties for the repayment of any such debt; no
person or entity to which any such debt is owed shall be required to
inquire as to the purposes for which such debt is incurred and, as
between the Partnership and such person or entity, it shall be
conclusively presumed that the proceeds of such loan are to be and
will be used for purposes authorized under the terms of this
Agreement;
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3.1.g the holding of Partnership Properties in the name of a
nominee chosen by the General Partner if it shall deem such action
appropriate;
3.1.h the administration of non-producing properties;
3.1.i the sale, relinquishment, release, Farm Out or other
disposition of any producing and non-producing leases, leasehold
interests or contractual rights to acquire such interests or undivided
interest therein (even if such sale or disposition results in the sale
of all or substantially all of the assets of the Partnership), which,
in the judgment of the General Partner, should be sold, released,
farmed out, relinquished or otherwise disposed of;
3.1.j the producing, treating, transporting and marketing of
oil and gas and the execution of division orders, gas sales contracts
and other marketing agreements;
3.1.k to execute (if it has not already been executed) or
amend the Joint Venture Agreement or other joint venture or general or
limited partnership agreements or any other agreements or undertakings
which the General Partner may determine in its sole discretion is
necessary or advisable in order to carry out the purposes of the
Partnership, to furnish and give consents and to perform and to
transact business under the Joint Venture Agreement, and other
agreements in a manner which the General Partner deems in its
discretion is necessary or desirable in order to carry out the
purposes of the Partnership.
3.1.l associating the partnership with others in
partnerships, joint ventures and other associations.
3.1.m to enter into, make, amend and perform all such
contracts, agreements and other undertakings as the General Partner in
its sole discretion may determine to be necessary or advisable or
incident to the carrying out of the objects and purposes of the
Partnership.
3.1.n to do any and all acts required of the Partnership,
and exercise all rights of the Partnership, with respect to the
Partnership's interest in any Selected Company.
3.1.o to take such other actions as may be necessary or
advisable in connection with the foregoing.
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3.1.p to consult with legal counsel and with independent
public accountants selected by the General Partner on behalf and at
the expenses of the Partnership (and any action which the General
Partner takes or omits to take in good faith in reliance upon and in
accordance with the opinion or advice of such counsel or accountants
shall afford full protection and justification for the General Partner
with respect to the action taken or omitted).
ARTICLE 4
(S) 4.1 Principal Office
The executive officers of the Partnership are at One Landmark
Square, Suite 611, Stamford, Connecticut 06901, and the Partnership shall
conduct business at such location and any additional locations as may from
time to time be determined by the General Partner.
(S) 4.2 Term of Partnership
The Partnership shall be effective from and after the date set
forth in the first sentence of this Agreement. The Partnership shall
continue in existence until December 31, 2025, unless sooner terminated
pursuant to any provisions of the Connecticut Limited Partnership Act.
ARTICLE 5
(S) 5.1 Commitment of General Partner
The General Partner shall contribute $100 to the capital of the
Partnership. Other than the as required by (S) 12.2.c, 12.2.d, the General
Partner is not committed to (but may) contribute any other cash or property
and may do so as a Limited Partner.
ARTICLE 6
(S) 6.1 Payments of the Capital Contributions of the Limited Partners
Each Limited Partner shall contribute the sum $70,500 per unit to
the Capital of the Partnership, payable $60,500 by certified or bank check
or checks at closing (or by authorization as provided in the Subscription
Agreement), and $10,000 due on or before July 1, 1992.
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(S) 6.2 Nature of Contributions
No Limited Partner shall be required to contribute any capital to
the partnership other than as provided in paragraph 6 hereof or to lend any
funds to the Partnership. No interest shall be paid to a Limited Partner on
any capital contributed to the Partnership pursuant to this paragraph 6 and
except as otherwise provided herein no Partner may withdraw his Capital
Contribution.
(S) 6.3 Defaults in Payment of Capital Contributions
It shall constitute an "Event of Default" for any Limited Partner
to fail to pay the $10,000 due on or before July 1, 1992, if such failure
to pay continues for a period of 10 days after notice of such failure to
pay has been given to the Limited Partner by the General Partner. Upon the
occurrence of an Event of Default, the General Partner shall have full
power, in its sole discretion, without prejudice to any other rights the
Partnership may have under this Agreement, to do any one or more of the
following:
(a) to allow the defaulting Limited Partner to continue as a Limited
Partner and credit any distributions to which the defaulting Limited
Partner is then or thereafter may become entitled against such Limited
Partner's obligation to the Partnership; or
(b) to cause suit to be brought against the defaulting Limited
Partner to collect all of any part of the unpaid portion of the Capital
Commitment of such defaulting Limited Partner, together with (i) interest
at the rate of 18% per annum or, if lower, the maximum rate permitted by
law, from the date on which such defaulting Limited Partner's Capital
Commitment was first due to be paid to the Partnership and (ii) all
collection expenses, including attorneys' fees incurred by the Partnership
in connection with the collection of the unpaid portion of such Limited
Partner's Capital Commitment; or
(c) to require the defaulting Limited Partner (and the defaulting
Limited Partner will be obligated) to sell to the General Partner, a third
party and/or to some or all of the other Limited Partners who wish to
purchase the defaulting Limited Partner's entire interest in the
Partnership for such price as the General Partner in good faith shall
determine to be fair and reasonable. In making such determination, the
General Partner shall give consideration to the amount of such defaulting
Limited Partner's Capital Account as at the end of the quarter immediately
preceding the occurrence of the Event of Default, less any subsequent
distributions therefrom. The amount of the defaulting Limited Partner's
Capital Commitment which remains unpaid at the time of the Event of Default
shall be deducted from the purchase price of such defaulting Limited
Partner's interest and each Partner who purchases a portion of the
defaulting Limited Partner's interest in the Partnership shall assume
responsibility for payment
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of a corresponding portion of the defaulting Limited Partner's unpaid
Capital Commitment. The remaining portion of the purchase price shall be
paid to the defaulting Limited Partner, provided that the General Partner
may impose a charge deductible therefrom not in excess of 4% of such
purchase price to cover reasonable expenses incurred in effecting the sale
of the defaulting Limited Partner's interest in the Partnership; or
(d) to terminate all the unpaid Capital Commitment of such defaulting
Limited Partner, in which event:
(i) the Partnership may make available to the General Partner,
third parties and/or some or all of the other Limited Partners the ability
to assume part of all the defaulting Limited Partner's unpaid Capital
Commitment, in which event such Partners shall pay for their respective
additional Capital Commitments;
(ii) such defaulting Limited Partner shall have no further right to
make any Capital Contributions to the Partnership and such Limited
Partner's Partnership Percentage shall be reduced to zero; and
(iii) such defaulting Limited Partner's sole right thereafter shall
be to receive distributions from the Partnership, in accordance with
Section 8.2, up to (but not more than) an amount equal to such Partner's
Capital Account as of the date of default, plus or minus such Partner's pro
---
rata share of allocations pursuant to Section 8.2 not yet made to such
----
Partner's Capital Account as of the date of default, if any, and less a
charge, not in excess of 4% of the amount to be distributed to the
defaulting Limited Partner, to cover reasonable expenses incurred in
connection with such defaulting Limited Partner's default, but in all other
respects such defaulting Limited Partner shall remain subject to all other
terms and conditions of this Agreement, including all liabilities
hereunder, as if such Event of Default had not occurred.
(e) The profits allocable to a defaulting Limited Partner will be
equal to 50% of the profits (but 100% of the losses) otherwise alocable to
such defaulting Limited Partner under Section 8.2. The 50% of the profits
not allocated to a defaulting Limited Partner will be allocated among the
remaining Partners not then in default on the basis of their respective
Capital Contributions.
(f) Capital Accounts and Partnership Percentages shall be adjusted to
reflect the purchase, pursuant to Section 6.3(c), of any part of a
defaulting Limited Partner's interest in the Partnership by the remaining
Partners and the assumption of any unpaid Capital Commitment of such
defaulting Limited Partner. In the event some or all the remaining Partners
assume part or all the unpaid Capital Commitment of a defaulting Limited
Partner pursuant to Section 6.3(c), each non-defaulting Partner's
Partnership Percentage shall be adjusted to reflect such Partner's share of
the total Capital Commitments of all non-defaulting Partners.
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Percentage shall be adjusted to reflect such Partner's share of the total
Capital Commitments of all non-defaulting Partners.
ARTICLE 7
(S) 7.1 Fiscal Year and Accounting
The fiscal year of the Partnership shall be the calendar year and
the books of the Partnership shall be kept on a cash, accrual or such other
basis as the General Partner shall determine and shall be kept in
accordance with the accounting principles employed by the Partnership for
federal income tax purposes.
(S) 7.2 Capital Accounts
7.2.a A separate capital account shall be maintained for
each Partner to which his contributions and his allocable share of
income and gains shall be credited, and his distributions, and his
allocable share of deductions and losses shall be charged. The capital
accounts are intended to comply with Treasury Regulation (S) 1.704-
1(b) and shall be maintained and adjusted in a manner consistent with
such Regulation.
7.2.b A Partnership's Capital Account shall be increased
by the amount of Simulated Gains allocated to such Partnership, and
decreased by the amount of Simulated Depletion Deductions and
Simulated Losses allocated to such Partnership. Simulated Depletion
shall be allocated to the Partnership in the same proportion as such
Partners were properly allocated the adjusted tax basis of such
property. The aggregate Capital Account adjustments for simulated
percentage depletion allowances with respect to an oil and gas
property of the Partnership shall not exceed the aggregate adjusted
tax basis allocated to the Partnership with respect to such property.
The Capital Accounts of the Partners shall be adjusted upward by the
amount of any Simulated Gain in proportion to such Partner's allocable
shares of the portion of the total amount realized from the
disposition of such property that exceed the Partnership's simulated
adjusted basis in such property. The Capital Accounts of such Partners
shall be adjusted downward by the amount of any Simulated Loss in
proportion to such Partner's allocable shares of the total amount
realized from the disposition of such property that represents
recovery of the Partnership's simulated adjusted basis in such
property.
7.2.c Minimum Gain Chargeback. Notwithstanding any other
-----------------------
provision of this Article, if there is a net decrease in Partnership
Minimum Gain, as defined in Temp. Reg. Section 1.704-1(b)(4)(iv)(c),
during any
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Partnership fiscal year each Partner shall be allocated items of
Partnership income and gain in accordance with Temp.Reg. Section
1.704-1(b) (4) (iv) (e). This Section 7.2(c) is intended to comply
with the minimum gain chargeback requirement in such Section of the
Regulations and shall be interpreted consistently therewith.
7.2.d Transfer of Interest. In the event any interest in
--------------------
the Partnership is transferred in accordance with the terms of this
Agreement, the transferee shall succeed to the Capital Account of the
transferee to the extent it relates to the transferred interest.
(S) 7.3 Deduction of Intangible Drilling and Development Costs
The Partnership shall elect to deduct intangible drilling and
development costs currently as an expense for income tax purposes and shall
use its best efforts to require any partnership, joint venture or other
arrangement in which it is a party and which incurs such costs to make a
similar election.
(S) 7.4 Elections by Partnership as to Optional Adjustments to Basis
In case of a distribution of property within the provisions of
(S) 734 of the Code or in the case of a transfer of a Partnership interest
permitted by this Agreement made within the provisions of (S) 743 of the
Code, the General Partner, on behalf of the Partnership may, at its option,
file an election under (S) 754 of such Code in accordance with the
procedures set forth in the applicable Treasury Regulations. If such an
election is filed, the General Partner will at no time be required to
provide any additional accounting or tax information with respect to any
adjustment to basis for any Limited Partner.
(S) 7.5 Election with Respect to Taxation as Partnership
Neither the Partnership nor any Partner thereof will elect under
(S) 651 of the Internal Revenue Code of 1986 to be excluded from the
application of any of the provisions of Subchapter K, Chapter 1 thereof.
ARTICLE 8
(S) 8.1 Determination of Profit and Loss
At the end of each fiscal year of the Partnership or at the end
of such intervening accounting period as the General Partner may select,
all Partnership revenues, proceeds, costs and expenses shall be determined
and allocated to the Partnership interest of each Partner for the
accounting period then ending in accordance with the provisions of this
Article.
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(S) 8.2 Allocations of Income, Gains, Losses, Deductions and Distributions
Income, Gains, Losses, Deductions and Distributions shall be
allocated among the Partners as follows:
Income, Gains, Losses, Deductions and Distributions shall be
allocated and distributed 1 percent to the General Partner and 99 percent
to the Limited Partners until such time as the amounts of cash and the fair
market value of other consideration distributed to the Limited Partners
(either during the term of the Partnership or incident to liquidation of
the Partnership) equals 150 percent of their Capital Contribution to the
Partnership. Thereafter, such items shall be allocated 25 percent to the
General Partner and the balance shall be allocated to the Limited Partners
(including the General Partner if and to the extent he invests as a Limited
Partner). Allocations and distributions to the Limited Partners shall be
allocated to each Limited Partner in accordance with his Limited
Partnership Percentage.
Notwithstanding anything contained herein to the contrary, no
distribution may be made to or loss allocated to a Limited Partner which
would render such Limited Partner a deficit Capital Account.
ARTICLE 9
(S) 9.1 Rights, Representations and Covenants of Limited Partners
9.1.a No Limited Partner shall be personally liable for
any of the debts of the Partnership or any of the losses thereof
beyond the amount of his agreed Capital Contribution. No Limited
Partner shall be responsible for any losses of any other Limited
Partner. No Limited Partner shall take part in the control or
management of the business or transact any business for the
Partnership and no Limited Partner shall have the power to sign
for or to bind the Partnership. No salary shall be paid to any
Limited Partner nor shall any Limited Partner have a drawing
account. No Limited Partner shall be entitled to the return of
his contribution.
9.1.b Each Limited Partner shall be personally obligated
to make payment of the amount he agreed to contribute to the
Capital of the Partnership upon execution of his Subscription
Agreement to the Partnership.
9.1.c In addition to other rights which a Limited
Partner may have, each Limited Partner has the right to bring a
derivative action against the General
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Partner in order to recover damages or otherwise seek relief from the
General Partner for a breach by the latter of his fiduciary
obligations to the Partnership.
(S) 9.2 Assignments by Limited Partner
9.2.a A Limited Partner may not sell, assign or transfer
his interest in the Limited Partnership to a successor Limited Partner
whether voluntarily or by operation of law unless the General Partner,
in his sole discretion, consents in writing to the sale, assignment or
transfer. Provided that such written consent is obtained, the
purchaser, assignee or transferee shall become a substitute Limited
Partner only if:
9.2.a.i the interest sold, assigned, or
transferred is not less than the total interest of the
transferor Limited Partner in the Partnership unless,
in the opinion of the General Partner, the Limited
Partner has a sufficient interest to be divided; and
9.2.a.ii the purchaser, assignee or
transferee shall consent in writing, in form satisfactory
to the General Partner, to be bound by the terms of the
Limited Partnership Agreement in the place and stead of
the assigning Limited Partner.
9.2.b A Limited Partner, without the consent of the
General Partner, may assign to any person all or any portion of his
right to receive distributions hereunder, provided, however, that such
assignment shall not be binding on the Partnership until the General
Partner shall have received a certified copy of such assignment.
9.2.c No sale or assignment of an interest in the
Partnership by a Limited Partner shall be effective until all
certificates or other documents have been performed which are
necessary to constitute the assignee a substitute Limited Partner in
the Limited Partnership in all jurisdictions in which it does business
and the General Partner approves the written assignment and said
assignment is recorded on the books of the Partnership. Each Limited
Partner agrees, upon request of the General Partner, to execute such
certificates or other documents and to perform such acts as may be
required to preserve such status and that John Sfondrini, the
individual General Partner, may execute such certificates or other
instruments or documents on behalf of each Limited
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Partner pursuant to the Power of Attorney granted by each Limited
Partner to the General Partner.
9.2.d Assignment, with or without the consent of the
General Partner, will not release the Limited Partner from his
obligation to pay his Capital Contribution.
(S) 9.3 ASSIGNEES
9.3.a In the event of the decease or incapacity of any
Limited Partner, his legal representative(s) shall have the same
status as an assignee of the Limited Partner unless and until the
General Partner shall permit such legal representative(s) to become a
Substitute Limited Partner on the terms and conditions as herein
provided. The death of a Limited Partner shall not dissolve the
Partnership.
9.3.b An assignee of a Limited Partner who does not
become a Substitute Limited Partner in accordance with (S) 9.2
shall, if such assignment is in compliance with the terms of this
Agreement, have the right to receive the same share of profits, losses
and distributions of the Partnership to which the assigning Limited
Partner would have been entitled if no such assignment had been made
by such Limited Partner.
9.3.c Any Limited Partner who shall assign all his
interest in the Partnership shall cease to be a Limited Partner of the
Partnership, and shall no longer have any rights or privileges or
obligations if a Limited Partner is admitted to the Partnership as a
Substitute Limited Partner in accordance with (S) 9.2, provided,
however, that said assigning Limited Partner shall retain the
statutory rights and be subject to the statutory obligations of an
assignor Limited Partner under the Uniform Act as well as the
obligations to make the Capital Contributions attributable to the
interest in question, if any portion thereof remains unpaid.
9.3.d In the event of any assignment of a Limited
Partner's interest as a Limited Partner, there shall be filed with the
Partnership a duly executed and acknowledged counterpart of the
instrument making such assignment, such interest must evidence the
written acceptance of the assignee to all the terms and provisions of
this Agreement; and if such instrument is not so filed, the
Partnership need not recognize any such assignment for any purpose.
9.3.e An assignee of a Limited Partner's interest as a
Limited Partner who does not become a
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Substitute Limited Partner as provided in (S) 9.2 and who desires to make a
further assignment of his interest shall be subject to the provisions of
this Article 9 to the same extent and in the same manner as any Limited
Partner desiring to make an assignment of his interest.
ARTICLE 10
(S) 10.1 Rights, Representations and Covenants of the General Partner
10.1.a The General Partner shall have full, exclusive and
complete discretion in the management and control of the affairs of the
Partnership for the purposes herein stated, shall make all decisions
affecting Partnership affairs and shall have full power and authority to
execute, amend and deliver on behalf of the Partnership such documents or
instruments relating to Partnership affairs as may in his opinion be
appropriate in the conduct of Partnership business, including, without
limitation, joint venture agreements, operating agreements, division
orders, gas sales contracts, unitization agreements, gasoline plan
contracts, recycling agreements, production payments, contracts, notes,
mortgages and deeds of trust. No person, firm or corporation dealing with
the Partnership shall be required to inquire into the authority of the
General Partner to take any action or make any decision.
10.1.b The General Partner shall devote such portion of
his time as is reasonably needed to carry out the operations contemplated
under this Agreement and shall make available at all reasonable times his
offices, organization, and facilities to carry out the purposes of the
Partnership.
10.1.c The General Partner shall, in addition to other
duties, maintain complete and accurate records and accounts of all income
and expenditures and furnish the Limited Partners with statements of
account from time to time, together with all necessary tax reporting
information. Such records and accounts shall likewise be available for
inspection and audit by any Limited Partner or his duly authorized
representative (at the expenses of such Limited Partner) during business
hours at one of the executive offices of the Partnership; however, the
General Partner shall not be required to maintain such records and material
referred to herein for a period in excess of five (5) years from the date
of the making or receipt thereof.
10.1.d The Partnership, to the extent of its assets, will
indemnify the General Partner and, in the
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sole discretion of the General Partners, their agents, employees,
advisors and consultants, against any loss or liability resulting from
good faith acts or omissions to act on its part on behalf of the
Partnership and, in any event, to the extent permissible under the
laws of the State of Connecticut. The General Partner shall not have
any liability for any failure or misfeasance on his part, other than a
willful failure or misfeasance with respect to his obligations under
the Agreement.
10.1.e Whenever a conflict of interest exists or arises
between the General Partner, on the one hand, and the Partnership or a
Limited Partner, on the other hand, 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 this Agreement, or any other agreement contemplated herein
or a breach of any standard of care or duty imposed herein or under
Connecticut law or any other applicable law, rule or regulation.
(S) 10.2 Assignment by General Partner
The General Partner shall not sell, assign or otherwise dispose of all
or any portion of his interest in the Partnership as General Partner
without prior consent; provided, however, such consent shall not be
required, if such sale or assignment relates only to the General Partner's
right to receive distributions hereunder or is required by another
provision of this Agreement.
(S) 10.3 Fees and Reimbursement to General Partner
The Partnership shall reimburse the General Partner for all expenses
and costs incurred in connection with the business of the Partnership.
Additionally, for a period of five years from the date of this Agreement,
the Partnership shall pay to the General Partner an annual management fee
equal to 2 percent of the aggregate capital commitments of the Limited
Partners. If proceeds are not available to pay the management fee, the fee
shall accrue, and be paid from the first revenue from operations which
becomes available.
Following the expiration of five years from the date hereof, the
Partnership shall pay to the General Partner a
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Management Fee equal to 3 percent of the Cash Flow of the Partnership.
ARTICLE 11
(S) 11.1 General Partner's Withdrawal from the Partnership
The General Partner may not withdraw as General Partner from the
Partnership without prior Consent, unless Vincent Andrews agrees to serve
as substitute individual General Partner.
(S) 11.2 Death or Incapacity of John Sfondrini
In the event John Sfondrini dies or for any reason ceases to be
an individual General Partner or is adjudicated to be mentally incompetent,
Vincent Andrews shall serve as substitute or additional individual General
Partner, as the case may be, if he accepts such appointment, at the time.
ARTICLE 12
(S) 12.1 Termination and Dissolution of the Partnership
The Partnership shall be dissolved on December 31, 2025, or upon
the prior occurrence of any event causing a dissolution of the Partnership
under the Uniform Limited Partnership Act of the State of Connecticut. The
Partnership shall also be dissolved upon (a) the occurrence of any event
which makes it unlawful for the Partnership business to be continued,
unless such event can be and is remedied within a reasonable period of time
not to exceed six (6) months; (b) the sale or other disposition of
substantially all interests in oil and gas acreage and leases and other
Partnership assets, or (c) the bankruptcy of a General Partner, unless a
surviving General Partner elects to continue as General Partner.
The Partnership shall not be dissolved by reason of the death,
withdrawal or expulsion of a Limited Partner or upon the admission of a new
Limited Partner.
(S) 12.2 Winding Up and Distribution
In the event of the dissolution of the Partnership, the General
Partner shall wind up the affairs of the Partnership and, after payment of
all third-party liabilities of the Partnership, shall distribute the
remaining assets of the Partnership in cash or in kind to the General
Partner and to the Limited Partners in accordance with their respective
Capital Account balances.
12.2.a Distribution to the Limited Partners
hereunder shall be allocated to each Limited Partner in
accordance with his Limited Partnership Percentage.
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12.2.b Any property distributed in kind in liquidation
shall be treated as if the property were sold for its fair market
value and any deemed gain or loss shall be credited to the Partners
in accord with this Agreement.
12.2.c If there should be a deficit in any Partner's
capital account, the Partner shall be required to make a Capital
Contribution equal to the deficit amount. Such contribution shall be
made not later than the end of the Partnership year in which such
Partners' interest is liquidated, or, if later, within 90 days of the
date of such liquidation.
12.2.d Notwithstanding anything contained herein to the
contrary, if on or during liquidation the respective Partners'
Capital Accounts do not reflect the allocation percentages provided
in Section 8.2, then the Capital Accounts, to the extent necessary,
shall be reallocated to reflect such allocation percentages.
(S) 12.3 Option of General Partner
If the Partnership is terminated without approval of the General
Partner, the General Partner shall have an option to purchase for cash all
assets of the Partnership at the aggregate amount computed by taking (as of the
December 31 last preceding such termination):
(a) The sum of (i) cash on hand, prepaid expenses and accounts
receivable; (ii) 66-2/3 percent of the future net revenues of all proven
developed oil and gas leases, royalties, overriding royalties and other
proven interest in oil and gas properties estimated by an independent
engineer in accordance with accepted practices, discounted to present
worth by an annual factor of 10 percent, which factor is subject to
increase (but not decrease) in the same proportion that the New York
Federal Reserve Bank Discount Rate (the "Discount Rate") at the time of
calculation exceeds the Discount Rate at the effective date hereof and
(iii) the present value of all other assets, less estimated cost of sale,
as determined by an independent appraiser, in the business of making such
appraisals; and subtracting therefrom an amount as determined in paragraph
12.3(b), below.
(b) An amount equal to all debts, accrued expenses and
obligations of the Partnership of every kind and nature, including the
discounted present value of payment due or to become due to the General
Partner.
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ARTICLE 13
(S) 13.1 Independent Activities
All partners may, notwithstanding the existence of this
Agreement, engage in whatever activities they choose, whether the same be
competitive with the Partnership or otherwise, without having or incurring
any obligations to offer any interest in such activities to any party
hereto. Neither this Agreement nor any activity undertaken pursuant hereto
shall prevent the General Partner from engaging as they intend to do in the
exploration for and production of oil, gas and other minerals,
individually, jointly with others, or as a party of any other association
to which the General Partner is or may become a party, except to the extent
provided herein.
ARTICLE 14
(S) 14.1 NOTICES
Any and all notices called for under this Agreement shall be
deemed adequately given, as and when postmarked, if in writing and sent
registered or certified mail, postage prepaid, to the party or parties for
whom such notices are intended. All such notices in order to be effective
shall be addressed to the last address of record on the partnership books
when given by the General Partner and intended for the Limited Partners;
and, to the address of the Partnership when given by the Limited Partners
and intended for the General Partner. Any Limited Partner may change his
address by giving notice, in writing, to the General Partner and the
General Partner may change the address of the Partnership by giving such
notice to all Limited Partners. Commencing on the fifth day after giving of
such notice, such newly designated address shall be such Partner's address
for the purpose of all notices of other communications required or
permitted to be given pursuant to this Agreement.
(S) 14.2 LAW GOVERNING
This Agreement shall be governed by and construed in accordance
with the laws of the State of Connecticut.
(S) 14.3 AMENDMENTS
The General Partner may propose in writing to the Limited
Partners the adoption of an amendment to this Agreement, and if within
sixty (60) days of the sending of such proposal, the consent of the
Partners shall have been given, the amendment shall be deemed adopted,
except that all Partners must give their consent in writing to any
amendment which would (i) extend the term of the Partnership as set forth
in Section 4.2 hereof, (ii) amend
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Sections 8.2, 12.2 or 12.3, (iii) amend this Section 14.3 or (iv) in any
manner increase the liability of the Limited Partners.
(S) 14.4 Successors and Assigns
This Agreement and all the terms and provisions hereof shall be
binding upon and shall enure to the benefit of the Partners, their
respective legal representatives, heirs, successors and assigns.
(S) 14.5 Counterparts
This Agreement may be executed in several counterparts and all so
executed shall constitute one agreement binding on all parties hereto,
notwithstanding that all the parties have not signed the original or the
same counterpart, except that no counterpart shall be binding unless signed
by the General Partner.
Individuals Entities
------------------------------- ----------------------------
Individual Limited Partner Name of Entity
By:_________________________
Signature and Title
$________________________
Total Capital Commitment
$________________________
Amount Due on or before
July 1, 1992
EDGE GROUP II LIMITED PARTNERSHIP
By:______________________________
its General Partner
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[INDIVIDUAL]
STATE OF _____________________)
: ss.:
COUNTY OF ____________________)
On ____________________, 199_, before me personally appeared
_______________________, known to me as the person(s) whose name(s) is
subscribed to the foregoing Agreement of Limited Partnership and acknowledged
that he/she/they executed the same.
______________________________
Notary Public
[CORPORATE]
STATE OF _____________________)
: ss.:
COUNTY OF ____________________)
On ____________________, 199_, before me personally appeared
_______________________, to me known and who, being by me duly sworn, did depose
and say that s/he is the _______________________ of ______________________,
a _______________________ corporation, the corporation which executed the
foregoing Limited Partnership Agreement, that s/he knows the seal of said
corporation; that the seal affixed to said Agreement is such corporate seal;
that it was so affixed by authority of the corporation; and that s/he signed
his/her name thereto by like authority.
______________________________
Notary Public
21
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[PARTNERSHIP]
STATE OF _________________)
: ss.:
COUNTY OF ________________)
On ___________, 199_, before me personally appeared _________________,
to me known and who, being by me duly sworn, did depose and say that s/he is a
General Partner of _____________, a ______________ partnership, the partnership
which executed the foregoing Limited Partnership Agreement, that s/he being
authorized to do so, did execute it on the partnership's behalf.
_________________________
Notary Public
[TRUST]
STATE OF _________________)
: ss.:
COUNTY OF ________________)
On ___________, 199_, before me personally appeared _________________,
to me known and who, being by me duly sworn, did depose and say that s/he is a
trustee of _____________, a trust, that the trust executed the foregoing Limited
Partnership Agreement, that s/he being authorized to do so, did execute it on
the trust's behalf.
_________________________
Notary Public
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Exhibit 10.5
------------
Gulfedge Limited Partnership
AGREEMENT OF LIMITED PARTNERSHIP
THIS AGREEMENT OF LIMITED PARTNERSHIP is entered into and
effective as of April 1, 1991, by and among EDGE PETROLEUM CORPORATION,
with offices at 2100 Texaco Heritage Plaza, Houston, Texas 77002, as
general partner (hereinafter referred to as the "General Partner") and each
of the other parties executing this Agreement or counterpart hereof as
limited partners (the "Limited Partners") (the General Partner and the
Limited Partners shall hereinafter be referred to collectively as the
"Partners").
W I T N E S S E T H:
ARTICLE 1
(S) 1.1 Formation of Partnership
The parties hereto hereby form, pursuant to the Uniform Limited
Partnership Act of the State of Texas, a Limited Partnership, which
organization is referred to as the "Partnership." Closing of the
Partnership shall be on April 1, 1991.
(S) 1.2 Organization Certificates
The parties hereto shall immediately execute all such
certificates and other documents conforming hereto and do all such filing,
recording, publishing and other acts as may be appropriate to comply with
all requirements for the laws of the State of Texas. The parties hereto
also agree to execute all such certificates and other documents conforming
hereto and to do all such filing, recording, publishing and other acts as
may be appropriate to comply with the requirement of law for the
jurisdictions where the Partnership shall desire to conduct business. Prior
to conducting any business in any jurisdiction, the Partnership shall
comply with all requirements for the qualification of the Partnership to
conduct business as a limited partnership in such jurisdiction.
(S) 1.3 Partnership Name
The business of the Partnership shall be conducted under the name
"Gulfedge Limited Partnership" in those jurisdictions where such name is
permitted and under such variations of this name
<PAGE>
as the General Partner deems appropriate to comply with the laws of the
other jurisdictions in which the Partnership does business.
(S) 1.4 Rejection
The General Partner, in his sole absolute discretion, may, at any
time prior to the date the Partnership becomes effective, reject any
subscription for any reason.
ARTICLE 2
(S) 2.1 Definitions
Whenever used in this Agreement, the following terms shall have
the meanings respectively assigned to them in this (S) 2.1:
2.1.a "Agreement" means this Agreement of Limited
Partnership as it may be further amended from time to time.
2.1.b "Capital Contribution" shall mean the amount of
money which a Partner has paid into the Partnership capital.
2.1.c "Code" shall mean the Internal Revenue Code of
1986, as amended from time to time, and regulations thereunder at the
time of reference thereto.
2.1.d "Consent of the Partners" means 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, which consent or approval shall be
obtained prior to the taking of the action for which it is required
hereunder.
2.1.e "Events of Bankruptcy" means, as to a General
Partner:
2.1.e.i its admission, in writing, of its inability
to pay its debts generally as they become due;
2.1.e.ii its filing a petition in bankruptcy or for
reorganization or for adoption of an arrangement under the Bankruptcy
Act;
2.1.e.iii its making an assignment for the benefit of
creditors;
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2.1.e.iv its consenting to the appointment of a
receiver for all or a substantial part of its property;
2.1.e.v its being adjudicated as bankrupt;
2.1.e.vi the entry of a court order appointing a
receiver or trustee(s) for all or a substantial part of its property
without its consent, which order shall not be vacated, set aside or
stayed within sixty (60) days from the date of entry; and/or
2.1.e.vii the assumption of custody or sequestration by
a court of competent jurisdiction of all or substantially all of its
property, which custody or sequestration shall not be suspended or
terminated within sixty (60) days from its inception.
2.1.f "Limited Partner or Limited Partners" means any or
all of those persons designated as Limited Partners in the Partnership
Certificate, or any person who becomes a substitute Limited Partner as
provided herein, in each person's capacity as a Limited Partner of the
Partnership.
2.1.g "Partner" means a General Partner or Limited
Partner.
2.1.h "Partnership" means the Limited Partnership
governed by this Agreement as said Limited Partnership may from time
to time be constituted as amended.
2.1.i "Partnership Properties" shall mean all interests,
properties and rights of any type owned by the Partnership.
2.1.j "Joint Venture Agreement" shall mean the Joint
Venture Agreement to be entered into between this Partnership, Edge
Petroleum Corporation ("EPC") and the Edge Group II Limited
Partnership ("Edge Group II) at or before the Funding Date to form the
Edge Group Joint Venture II.
2.1.k "Funding Date" shall mean the date upon which this
Partnership makes its initial Capital Contribution to the Edge Group
Joint Venture II and EPC and Edge Group II make their Capital
Contribution to the edge Group Joint Venture II.
2.1.l "EPC" shall mean Edge Petroleum Corporation, a to
be formed Texas corporation with which
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this Partnership will enter into a Joint Venture for the generation,
development and marketing of oil and gas Prospects, substantially as
set forth in the Private Placement Memorandum dated December 13, 1990
which is attached to this Partnership Agreement as an Exhibit.
2.1.m "Capital Contribution" of a Partner shall mean the
amount of cash which the Partner has contributed towards meeting such
Partner's Capital Commitment.
2.1.n "Capital Commitment" of a Partner shall mean the
amount of capital such Partner has committed to contribute to the
Partnership, including the amount paid on Closing and the amount due
on or before July 1, 1992. Each Partner's Capital Commitment is set
forth on the signature page of this Agreement.
2.1.o "Simulated Depletion Deductions" means the
simulated depletion allowance computed by the Partnership with respect
to each oil and gas property by using either the cost depletion method
or the percentage depletion method (computed in accordance with
Internal Revenue Code Section 613 at the rates specified in Section
613(c)(5) without regard to the limitation of Section 613A, which
theoretically could apply to any partner) for each taxable year that
the property is owned by the Partnership and subject to depletion, in
accordance with Treas.Reg. Section 1.704-1(b)(2)(iv)(k).
2.1.p "Simulated Gains" and "Simulated Losses" mean,
respectively, the simulated gains or simulated losses computed by the
Partnership with respect to its oil and gas properties pursuant to
Treas.Reg Section 1.704-1(b)(2)(iv)(k).
2.1.q "Limited Partner Percentage" shall mean for each
Limited Partner as of any date the amount of such Limited Partner's
Capital Account divided by the sum of Capital Accounts of all Limited
Partners as of such date.
2.1.r "Cash Flow" means the Gross Cash Proceeds from
Partnership Operations less the portion thereof used to pay
Partnership expenses.
2.1.s "Special Unit" means the units in the Partnership
acquired by the Special Limited Partners.
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ARTICLE 3
(S) 3.1 Purposes and Powers of the Partnership
The principal purpose of the Partnership shall be to enter into
the Joint Venture Agreement with EPC and the Edge Group II 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 as described in a Private Placement Memorandum for
the Edge Group II dated December 13, 1990 which is attached to the
Partnership Agreement as an Exhibit. The purposes of this Partnership may
be accomplished through:
3.1.a the employment of such parties and
personnel and such legal, accounting, geological, geophysical
and engineering services and advice as the General Partner
deems advisable;
3.1.b the payment (or where appropriate in the
judgment of the General Partner, the failure to make payment)
of delay rentals on leases or leasehold interests;
3.1.c the making or giving of dryhole or
bottomhole contributions in the form of acreage, money or
both;
3.1.d the execution and amendment of all
documents or instruments of any kind which the General Partner
may deem appropriate for carrying out the purposes of the
Partnership;
3.1.e the purchase and establishment of
inventories of pipe and other equipment and material;
3.1.f the borrowing of money or the incurring of
purchase money or other debt for Partnership purposes and the
mortgaging and pledging of Partnership Properties for the
repayment of any such debt; no person or entity to which any
such debt is owed shall be required to inquire as to the
purposes for which such debt is incurred and, as between the
Partnership and such person or entity, it shall be
conclusively presumed that the proceeds of such loan are to be
and will be used for purposes authorized under the terms of
this Agreement;
3.1.g the holding of Partnership Properties in
the name of a nominee chosen by the General Partner if it
shall deem such action appropriate;
5
<PAGE>
3.1.h the administration of non-producing properties;
3.1.i the sale, relinquishment, release, Farm Out or
other disposition of any producing and non-producing leases, leasehold
interests or contractual rights to acquire such interests or undivided
interest therein (even if such sale or disposition results in the sale
of all or substantially all of the assets of the Partnership), which,
in the judgment of the General Partner, should be sold, released,
farmed out, relinquished or otherwise disposed of;
3.1.j the producing, treating, transporting and
marketing of oil and gas and the execution of division orders, gas
sales contracts and other marketing agreements;
3.1.k to execute or amend the Joint Venture Agreement or
other joint venture or general or limited partnership agreements or
any other agreements or undertakings which the General Partner may
determine in its sole discretion is necessary or advisable in order to
carry out the purposes of the Partnership to furnish and give consents
to perform and to transact business under the Joint Venture Agreement,
and other agreements in a manner which the General Partner deems in
its discretion is necessary or desirable in order to carry out the
purposes of the Partnership.
3.1.l associating the partnership with others in
partnerships, joint ventures and other associations.
3.1.m to enter into, make, amend and perform all such
contracts, agreements and other undertakings as the General Partner in
its sole discretion may determine to be necessary or advisable or
incident to the carrying out of the objects and purposes of the
Partnership.
3.1.n to do any and all acts required of the
Partnership, and exercise all rights of the Partnership, with respect
to the Partnershp's interest in any Selected Company.
3.1.o to take such other actions as may be necessary or
advisable in connection with the foregoing.
3.1.p to consult with legal counsel and with independent
public accountants selected by the General Partner on behalf and at
the expenses of the Partnership (and any action which the General
Partner
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<PAGE>
takes or omits to take in good faith in reliance upon and in
accordance with the opinion or advice of such counsel or accountants
shall afford full protection and justification for the General Partner
with respect to the action taken or omitted).
ARTICLE 4
(S) 4.1 Principal Office
The executive officers of the Partnership are at 2100 Texaco
Heritage Plaza, Houston, Texas, and the Partnership shall conduct
business at such location and any additional locations as may from time
to time be determined by the General Partner.
(S) 4.2 Term of Partnership
The Partnership shall be effective from and after the date set
forth in the first sentence of this Agreement. The Partnership shall
continue in existence until December 31, 2020, unless sooner terminated
pursuant to any provisions of the Texas Revised Limited Partnership Act.
ARTICLE 5
(S) 5.1 Commitment of General Partner
The General Partner shall contribute $100 to the capital of the
Partnership. Other than as required by (S) 12.2.c, 12.2.d, the General
Partner is not committed to (but may) contribute any other cash or
property and may do so as a Limited Partner.
ARTICLE 6
(S) 6.1 Payments of the Capital Contributions of the Limited Partners
Each Limited Partner shall contribute the sum of $64,500 per unit
to the Capital of the Partnership, payable $54,500 by certified or bank
check or checks at closing and $10,000, in the form of the promissory
note attached hereto as an Exhibit, due on or before July 1, 1992.
(S) 6.2 Nature of Contributions
No Limited Partner shall be required to contribute any capital to
the partnership other than as provided in Article 6 hereof or to lend any
funds to the Partnership. No interest shall be paid to a Limited Partner
on any capital contributed to the
7
<PAGE>
Partnership pursuant to this Article 6 and except as otherwise provided
herein no Partner may withdraw his Capital Contribution.
(S) 6.3 Defaults in Payment of Capital Contributions
It shall constitute an "Event of Default" for any Limited Partner
to fail to pay the promissory note if such failure to pay continues for a
period of 10 days after notice of such failure to pay has been given to the
Limited Partner by the General Partner. Upon the occurrence of an Event of
Default, the General Partner shall have full power, in its sole discretion,
without prejudice to any other rights the Partnership may have under this
Agreement, to do any one or more of the following:
(a) to allow the defaulting Limited Partner to continue as a Limited
Partner and credit any distributions to which the defaulting Limited
Partner is then or thereafter may become entitled against such Limited
Partner's obligation to the Partnership; or
(b) to cause suit to be brought against the defaulting Limited
Partner to collect all of any part of the unpaid portion of the Capital
Commitment of such defaulting Limited Partner, together with (i) interest
at the rate of 18% per annum or, if lower, the maximum rate permitted by
law, from the date on which such defaulting Limited Partner's Capital
Commitment was first due to be paid to the Partnership and (ii) all
collection expenses, including attorneys' fees incurred by the Partnership
in connection with the collection of the unpaid portion of such Limited
Partner's Capital Commitment; or
(c) to require the defaulting Limited Partner (and the defaulting
Limited Partner will be obligated) to sell to the General Partner and/or to
all the other Limited Partners who wish to purchase the defaulting Limited
Partner's entire interest in the Partnership for such price as the General
Partner in good faith shall determine to be fair and reasonable. In making
such determination, the General Partner shall give consideration to the
amount of such defaulting Limited Partner's Capital Account as at the end
of the quarter immediately preceding the occurrence of the Event of
Default, less any subsequent distributions therefrom. The amount of the
defaulting Limited Partner's Capital Commitment which remains unpaid at the
time of the Event of Default shall be deducted from the purchase price of
such defaulting Limited Partner's interest and each Partner who purchases a
portion of the defaulting Limited Partner's interest in the Partnership
shall assume responsibility for payment of a corresponding portion of the
defaulting Limited Partner's unpaid Capital Commitment. The remaining
portion of the purchase price shall be paid to the defaulting Limited
Partner, provided that the General partner may impose a charge deductible
therefrom and payable to the Partnership in effecting the sale of the
defaulting Limited Partner's interest in the Partnership; or
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<PAGE>
(d) to terminate all the unpaid Capital Commitment of such defaulting
Limited Partner, in which event:
(i) the Partnership may make available to the General Partner
and/or the other Limited Partners the ability to assume part of all the
defaulting Limited Partner's unpaid Capital Commitment, in which event such
Partners shall pay for their respective additional Capital Commitments;
(ii) such defaulting Limited Partner shall have no further right to
make any Capital Contributions to the Partnership and such Limited
Partner's Partnership Percentage shall be reduced to zero; and
(iii) such defaulting Limited Partner's sole right thereafter shall be
to receive distributions from the Partnership, in accordance with Section
8.2, up to an amount equal to such Partner's Capital Account as of the date
of default, plus or minus such Partner's pro rata share of allocations
pursuant to Section 8.2 not yet made to such Partner's Capital Account as
of the date of default, if any, and less a charge, not in excess of 5% of
the amount to be distributed to the defaulting Limited Partner, to cover
reasonable expenses incurred in connection with such defaulting Limited
Partner's default, but in all other respects such defaulting Limited
Partner shall remain subject to all other terms and conditions of this
Agreement, including all liabilities hereunder, as if such Event of Default
had not occurred.
(e) The profits allocable to a defaulting Limited Partner will be equal to
50% of the profits (but 100% of the losses) otherwise allocable to such
defaulting Limited Partner under Section 8.2. The 50% of the profits not
allocated to a defaulting Limited Partner will be allocated among the remaining
Partners not then in default on the basis of their respective Capital
Contributions.
(f) Capital Accounts and Partnership Percentage shall be adjusted to
reflect the purchase, pursuant to Section 6.3(c), of any part of a defaulting
Limited Partner's interest in the Partnership by the remaining Partners and the
assumption of any unpaid Capital Commitment of such defaulting Limited Partner.
In the event some or all the remaining Partners assume part or all the unpaid
Capital Commitment of a defaulting Limited Partner pursuant to Section 6.3(c),
each non-defaulting Partner's Partnership Percentage shall be adjusted to
reflect such Partner's share of the total Capital Commitments of all non-
defaulting Partners.
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<PAGE>
ARTICLE 7
(S) 7.1 Fiscal Year and Accounting
The fiscal year of the Partnership shall be the calendar year and
the books of the Partnership shall be kept on a cash, accrual or such other
basis as the General Partner shall determine and shall be kept in
accordance with the accounting principles employed by the Partnership for
federal income tax purposes.
(S) 7.2 Capital Accounts
7.2.a A separate capital account shall be maintained for
each Partner to which his contributions and his allocable share of
income and gains shall be credited, and his distributions, and his
allocable share of deductions and losses shall be charged. The capital
accounts are intended to comply with Treasury Regulation (S) 1.704-
1(b) and shall be maintained and adjusted in a manner consistent with
such Regulation.
7.2.b A Partnership's Capital Account shall be increased
by the amount of Simulated Gains allocated to such Partnership, and
decreased by the amount of Simulated Depletion Deductions and
Simulated Losses allocated to such Partnership. Simulated Depletion
shall be allocated to the Partnership in the same proportion as such
Partners were properly allocated the adjusted tax basis of such
property. The aggregate Capital Account adjustments for simulated
percentage depletion allowances with respect to an oil and gas
property of the Partnership shall not exceed the aggregate adjusted
tax basis allocated to the Partnership with respect to such property.
The Capital Accounts of the Partners shall be adjusted upward by the
amount of any Simulated Gain in proportion to such Partner's allocable
shares of the portion of the total amount realized from the
disposition of such property that exceed the Partnership's simulated
adjusted basis in such property. The Capital Accounts of such Partners
shall be adjusted downward by the amount of any Simulated Loss in
proportion to such Partner's allocable shares of the total amount
realized from the disposition of such property that represents
recovery o the Partnership's simulated adjusted basis in such
property.
7.2.c Minium Gain Chargeback. Notwithstanding any other
provision of this Article, if there is a net decrease in Partnership
Minimum Gain, as defined in Temp.Reg. Section 1.704-1(b)(4)(iv)(c),
during any Partnership fiscal year each Partner shall be allocated
items of Partnership income and gain in accordance with
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Temp.Reg. Section 1.704-1(b)(4)(iv)(e). This Section 7.2(c) is
intended to comply with the minimum gain chargeback requirement in
such Section of the Regulations and shall be interpreted consistently
therewith.
7.2.d Transfer of Interest. In the event any interest in
the Partnership is transferred in accordance with the terms of this
Agreement, the transferee shall succeed to the Capital Account of the
transferee to the extent it relates to the transferred interest.
(S) 7.3 Deduction of Intangible Drilling and Development Costs
The Partnership shall elect to deduct intangible drilling and
development costs currently as an expense for income tax purposes and shall
use its best efforts to require any partnership, joint venture or other
arrangement in which it is a party and which incurs such costs to make a
similar election.
(S) 7.4 Elections by Partnership as to Optional Adjustments to Basis
In case of a distribution of property within the provisions of
(S) 734 of the Code or in the case of a transfer of a Partnership interest
permitted by this Agreement made within the provisions of (S) 743 of the
Code, the General Partner, on behalf of the Partnership may, at its option,
file an election under (S) 754 of such Code in accordance with the
procedures set forth in the applicable Treasury Regulations. If such an
election is filed, the General Partner will at no time be required to
provide any additional accounting or tax information with respect to any
adjustment to basis for any Limited Partner.
(S) 7.5 Election with Respect to Taxation as Partnership
Neither the Partnership nor any Partner thereof will elect under
(S) 761 of the Internal Revenue Code of 1986 to be excluded from the
application of any of the provisions of Subchapter K, Chapter 1 thereof.
ARTICLE 8
(S) 8.1 Determination of Profit and Loss
At the end of each fiscal year of the Partnership or at the end
of such intervening accounting period as the General Partner may select,
all Partnership revenues, proceeds, costs and expenses shall be determined
and allocated to the Partnership interest of each Partner for the
accounting period then ending in accordance with the provisions of this
Article.
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(S) 8.2 Allocation of Income, Gains, Losses, Deductions and Distributions
Income, Gains, Losses, Deductions and Distributions shall be
allocated among the Partners as follows:
Income, Gains, Losses, Deductions and Distributions shall be
allocated and distributed 1 percent to the General Partner and 99 percent
to the Limited Partners.
Notwithstanding anything contained herein to the contrary, no
distribution may be made to or loss allocated to a Limited Partner which
would render such Limited Partner a deficit Capital Account.
The Income, Gains, Losses, Deductions and Distributions that will
be allocated among the Partners are those items that are allocated and
distributed to the Partnership in accordance with the sharing ratio of the
Partnership in the Joint Venture Agreement. The sharing ratio will be based
on the various ventures, capital accounts. As indicated in the Joint
Venture Agreement, the sharing ratio of the Partnership will be reduced
once payout (as that term is defined in the Joint Venture Agreement) has
occurred, at which time EPC will receive its back-in interest, as more
fully described in the Joint Venture Agreement.
ARTICLE 9
(S) 9.1 Rights, Representations and Covenants of Limited Partners
9.1.a No Limited Partner shall be personally liable for any of the
debts of the Partnership or any of the losses thereof beyond the amount of
his agreed Capital Contribution. No Limited Partner shall be responsible
for any losses of any other Limited Partner. No Limited Partner shall take
part in the control or management of the business or transact any business
for the Partnership and no Limited Partner shall have the power to sign for
or to bind the Partnership. No salary shall be paid to any Limited Partner
nor shall any Limited Partner have a drawing account. No Limited Partner
shall be entitled to the return of his contribution.
9.1.b Each Limited Partner shall be personally obligated to make
payment of the amount he agreed to contribute to the Capital of the
Partnership upon execution of his Subscription Agreement to the
Partnership.
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9.1.c In addition to other rights which a Limited Partner may
have, each Limited Partner has the right to bring a derivative action
against the General Partner in order to recover damages or otherwise
seek relief from the General Partner for a breach by the latter
of his fiduciary obligations to the Partnership.
(S) 9.2 Assignments by Limited Partner
9.2.a A Limited Partner may not sell, assign or transfer
his interest in the Limited Partnership to a successor Limited Partner
whether voluntarily or by operation of law unless the General Partner,
in his sole discretion, consents in writing to the sale, assignment or
transfer. Provided that such written consent is obtained, the
purchaser, assignee or transferee shall become a substitute Limited
Partner only if:
9.2.a.i the interest sold, assigned, or transferred
is not less than the total interest of the transferor Limited Partner
in the Partnership unless, in the opinion of the General Partner, the
Limited Partner has a sufficient interest to be divided; and
9.2.a.ii the purchaser, assignee or transferee shall
consent in writing, in form satisfactory to the General Partner, to be
bound by the terms of the Limited Partnership Agreement in the place
and stead of the assigning Limited Partner.
9.2.b A Limited Partner, without the consent of the
General Partner, may assign to any person all or any portion of his
right to receive distributions hereunder, provided, however, that such
assignment shall not be binding on the Partnership until the General
Partner shall have received a certified copy of such assignment.
9.2.c No sale or assignment of an interest in the
Partnership by a Limited Partner shall be effective until all
certificates or other documents have been performed which are
necessary to constitute the assignee a substitute Limited Partner in
the Limited Partnership in all jurisdictions in which it does business
and the General Partner approves the written assignment and said
assignment is recorded on the books of the Partnership. Each Limited
Partner agrees, upon request of the General Partner, to execute such
certificates or other documents and to perform such acts as may be
required to preserve such status and that Edge Petroleum Corporation,
the General Partner, may execute such certificates or other
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instruments or documents on behalf of each Limited Partner pursuant to
the Power of Attorney granted by each Limited Partner to the General
Partner.
9.2.d Assignment, with or without the consent of the General
Partner, will not release the Limited Partner from his obligation to
pay his Capital Contribution.
(S) 9.3 Assignees
9.3.a In the event of the decease or incapacity of any
Limited Partner, his legal representative(s) shall have the same
status as an assignee of the Limited Partner unless and until the
General Partner shall permit such legal representative(s) to become a
Substitute Limited Partner on the terms and conditions as herein
provided. The death of a Limited Partner shall not dissolve the
Partnership.
9.3.b An assignee of a Limited Partner who does not become a
Substitute Limited Partner in accordance with (S) 9.2 shall, if such
assignment is in compliance with the terms of this Agreement, have the
right to receive the same share of profits, losses and distributions
of the Partnership to which the assigning Limited Partner would have
been entitled if no such assignment had been made by such Limited
Partner.
9.3.c Any Limited Partner who shall assign all his interest
in the Partnership shall cease to be a Limited Partner of the
Partnership, and shall no longer have any rights or privileges or
obligations if a Limited Partner is admitted to the Partnership as a
Substitute Limited Partner in accordance with (S) 9.2, provided,
however, that said assigning Limited Partner shall retain the
statutory rights and be subject to the statutory obligations of an
assignor Limited Partner under the Uniform Act as well as the
obligations to make the Capital Contributions attributable to the
interest in question, if any portion thereof remains unpaid.
9.3.d In the event of any assignment of a Limited Partner's
interest as a Limited Partner, there shall be filed with the
Partnership a duly executed and acknowledged counterpart of the
instrument making such assignment; such interest must evidence the
written acceptance of the assignee to all the terms and provisions of
this Agreement; and if such instrument is not so filed, the
Partnership need not recognize any such assignment for any purpose.
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9.3.e An assignee of a Limited Partner's interest as a
Limited Partner who does not become a Substitute Limited Partner as
provided in (S) 9.2 and who desires to make a further assignment of
his interest shall be subject to the provisions of this Article 9 to
the same extent and in the same manner as any Limited Partner desiring
to make an assignment of his interest.
ARTICLE 10
(S) 10.1 Rights, Representations and Covenants of the General Partner
10.1.a The General Partner shall have full, exclusive and
complete discretion in the management and control of the affairs of
the Partnership for the purposes herein stated, shall make all
decisions affecting Partnership affairs and shall have full power and
authority to execute and deliver on behalf of the Partnership such
documents or instruments relating to Partnership affairs as may in his
opinion be appropriate in the conduct of Partnership business,
including, without limitation, joint venture agreements, operating
agreements, division orders, gas sales contracts, unitization
agreements, gasoline plan contracts, recycling agreements, production
payments, contracts, notes, mortgages and deeds of trust. No person,
firm or corporation dealing with the Partnership shall be required to
inquire into the authority of the General Partner to take any action
or make any decision.
10.1.b The General Partner shall devote such portion of his
time as is reasonably needed to carry out the operations contemplated
under this Agreement and shall make available at all reasonable times
his offices, organization, and facilities to carry out the purposes of
the Partnership.
10.1.c The General Partner shall, in addition to other duties,
maintain complete and accurate records and accounts of all income and
expenditures and furnish the Limited Partners with statements of
account from time to time, together with all necessary tax reporting
information. Such records and accounts shall likewise be available for
inspection and audit by any Limited Partner or his duly authorized
representative (at the expenses of such Limited Partner) during
business hours at one of the executive offices of the Partnership;
however, the General Partner shall not be required to maintain such
records and material referred to herein for a period in excess of five
(5) years from the date of the making or receipt thereof.
15
<PAGE>
10.1.d The Partnership, to the extent of its assets, will
indemnify the General Partner and, in the sole discretion of the
General Partners, their agents, employees, advisors and consultants,
against any loss or liability and against tort or contract liability
resulting from good faith acts or omissions to act on its part on
behalf of the Partnership and, in any event, to the extent permissible
under the laws of the State of Texas. The General Partner shall not
have any liability for any failure or misfeasance on his part, other
than a willful failure or misfeasance with respect to his obligations
under the Agreement.
10.1.e Whenever a conflict of interest exists or arises
between the General Partner, on the one hand, and the Partnership or
the Limited Partner, on the other hand, or 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 Managing General Partner, the resolution, action or terms
so made, taken or provided by the General Partner shall not constitute
a breach of this Agreement, or any other agreement contemplated herein
or therein or a breach of any standard of care or duty imposed herein
or therein or under Texas law or any other applicable law, rule or
regulation.
(S) 10.2 Assignment by General Partner
The General Partner shall not sell, assign or otherwise dispose
of all or any portion of his interest in the Partnership as General Partner
without prior Consent of the Partners; provided, however, such consent
shall not be required, if such sale or assignment relates only to the
General Partner's right to receive distributions hereunder or is required
by another provision of this Agreement.
(S) 10.3 Fees and Reimbursement to General Partner
The Partnership shall reimburse the General Partner for all
reasonable expenses and costs incurred in connection with the business of
the Partnership.
16
<PAGE>
ARTICLE 11
(S) 11.1 General Partner's Withdrawal from the Partnership
The General Partner may not withdraw as General Partner from
the Partnership without prior Consent of the Partners.
ARTICLE 12
(S) 12.1 Termination and Dissolution of the Partnership
The Partnership shall be dissolved on December 31, 2020, or upon
-----------------
the prior occurrence of any event causing a dissolution of the Partnership
under the Texas Revised Limited Partnership Act. The Partnership shall also
be dissolved upon (a) the occurrence of any event which makes it unlawful
for the Partnership business to be continued, unless such event can be and
is remedied within a reasonable period of time not to exceed six (6)
months; (b) the sale or other disposition of substantially all interests in
oil and gas acreage and leases and other Partnership assets; or (c) the
bankruptcy of a General Partner, unless a surviving General Partner elects
to continue as General Partner.
The Partnership shall not be dissolved by reason of the death,
withdrawal or expulsion of a Limited Partner or upon the admission of a new
Limited Partner.
(S) 12.2 Winding Up and Distribution
In the event of the dissolution of the Partnership, the General
Partner shall wind up the affairs of the Partnership and, after payment of
all third-party liabilities of the Partnership, shall distribute the
remaining assets of the Partnership in cash or in kind in accordance with
their respective Capital Account balances.
12.2.a Distribution to the Limited Partners
hereunder shall be allocated to each Limited Partner in the
proportion that his capital account bears to the capital account
for all Limited Partners.
12.2.b Any property distributed in kind in
liquidation shall be treated as if the property were sold for its
fair market value and any deemed gain or loss shall be credited
to the Partners in accord with this Agreement.
12.2.c If there should be a deficit in any Partner's
capital account, the Partner shall be required to make a Capital
Contribution equal to the deficit
17
<PAGE>
amount. Such contribution shall be made not later than the end of the
Partnership year in which such Partners' interest is liquidated, or,
if later, within 90 days of the date of such liquidation.
12.2.d Notwithstanding anything contained herein to the
contrary, if on liquidation the respective Partners' Capital Accounts
do not reflect the allocations as provided in Section 8.2, then the
Capital Accounts, to the extent necessary, shall be reallocated to
reflect such allocations.
ARTICLE 13
(S) 13.1 Independent Activities
All Partners may, notwithstanding the existence of this
Agreement, engage in whatever activities they choose, whether the same be
competitive with the Partnership or otherwise, without having or incurring
any obligations to offer any interest in such activities to any party
hereto. Neither this Agreement nor any activity undertaken pursuant hereto
shall prevent the General Partner from engaging as they intend to do in the
exploration for and production of oil, gas and other minerals,
individually, jointly with others, or as a party of any other association
to which the General Partner is or may become a party, except to the extent
provided herein.
ARTICLE 14
(S) 14.1 Notices
Any and all notices called for under this Agreement shall be
deemed adequately given, as and when postmarked, if in writing and sent
registered or certified mail, postage prepaid, to the party or parties for
whom such notices are intended. All such notices in order to be effective
shall be addressed to the last address of record on the partnership books
when given by the General Partner and intended for the Limited Partners;
and, to the address of the Partnership when given by the Limited Partners
and intended for the General Partner. Any Limited Partner may change his
address by giving notice, in writing, to the General Partner and the
General Partner may change the address of the Partnership by giving such
notice to all Limited Partners. Commencing on the fifth day after giving of
such notice, such newly designated address shall be such Partner's address
for the purpose of all notices or other communications required or
permitted to be given pursuant to this Agreement.
18
<PAGE>
(S) 14.2 Law Governing
This Agreement shall be governed by and construed in accordance
with the laws of the State of Texas.
(S) 14.3 Amendments
The General Partner may propose in writing to the Limited
Partners the adoption of an amendment to this Agreement, and, if within
sixty (60) days of the sending of such proposal, the consent of the
Partners shall have been given, the amendment shall be deemed adopted,
except that all Partners must give their consent in writing to any
amendment which would (i) extend the term of the Partnership as set forth
in Section 4.2 hereof, (ii) amend Sections 8.2 or 12.2, (iii) amend this
Section 14.3 or (iv) in any manner increase the liability of the Limited
Partners.
(S) 14.4 Successors and Assigns
This Agreement and all the terms and provisions hereof shall be
binding upon and shall enure to the benefit of the Partners, their
respective legal representatives, heirs, successors and assigns.
(S) 14.5 Counterparts
This Agreement may be executed in several counterparts and all so
executed shall constitute one agreement binding on all parties hereto,
notwithstanding that all the parties have not signed the original or the
same counterpart, except that no counterpart shall be binding unless signed
by the General Partner.
Individuals Entities
Caddo Investors, Ltd.
___________________________________ ----------------------------------------
Investor Limited Partner Name of Entity
/s/ Christopher M. Kinsey
___________________________________ By: ------------------------------------
Social Security Number Signature and Title
Managing Partner
___________________________________
Residence Address
___________________________________
City State Zip Code
19
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$ 387,000
------------------------
Total Capital Commitment
$ 60,000
------------------------
Amount Due on or before
July 1, 1992
Individual Investors Entity Investors
Caddo Investors, Ltd.
_________________________________ --------------------------------------
Signature of Investor No.1 Name of Corporation, Partnership,
Trust, Plan or Entity
_________________________________
Name (Typed or Printed)
By: /s/ Christopher M. Kinsey
-----------------------------------
Name: Christopher M. Kinsey
Title: Managing Partner
_________________________________
Signature of Investor No.2
(if any)
[INDIVIDUAL]
STATE OF ____________________)
: SS.:
COUNTY OF ___________________)
On _______________, 1991, before me personally appeared
_________________, known to me as the person(s) whose name(s) is subscribed to
the foregoing Agreement of Limited Partnership and acknowledged that he/she/they
executed the same.
_______________________________
Notary Public
20
<PAGE>
[CORPORATE]
STATE OF _____________________)
: ss.:
COUNTY OF ____________________)
On ____________________, 1991, before me personally appeared
_________________________, to me known and who, being by me duly sworn, did
depose and say that s/he is the _____________________ of __________________, a
____________________ corporation, the corporation which executed the foregoing
Limited Partnership Agreement, that s/he knows the seal of said corporation;
that the seal affixed to said Agreement is such corporate seal; that it was so
affixed by authority of the corporation; and that s/he signed his/her name
thereto by like authority.
___________________________________
Notary Public
[PARTNERSHIP]
STATE OF Louisiana )
---------------------
: ss.: 72-1101268
PARISH OF Caddo )
---------------------
On 5th April, 1991, before me personally appeared Christopher M.
--------- --------------
Kinsey, to me known and who, being by me duly sworn, did depose and say that
- ------
s/he is a General Partner of Caddo Investors Ltd., a Louisiana partnership, the
--------------- ---------
partnership which executed the foregoing Limited Partnership Agreement, that
s/he being authorized to do so, did execute it on the partnership's behalf.
/s/ Lucille Carter Rowe
-----------------------------------
Notary Public
LUCILLE CARTER ROWE, Notary Public
Caddo Parish, Louisiana
My Commission is for Life
21
<PAGE>
[TRUST]
STATE OF ________________________)
: SS.:
COUNTY OF _______________________)
On ___________________, 1991, before me personally appeared
_______________________, to me known and who, being by me duly sworn, did depose
and say that s/he is a trustee of ____________, a trust, that the trust executed
the foregoing Limited Partnership Agreement, that s/he being authorized to do
so, did execute it on the trust's behalf.
_________________________
Notary Public
22
<PAGE>
Exhibit 10.7
EDGE PETROLEUM CORPORATION
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement (this "Agreement"), made and entered
into as of the ____ day of __________, 1997 by and between Edge Petroleum
Corporation, a Delaware corporation (the "Corporation"), and
___________________________________ ("Indemnitee"),
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Indemnitee is currently serving or is about to begin serving
as a director and/or officer of the Corporation and/or in another Corporate
Status, and Indemnitee is willing, subject to, among other things, the
Corporation's execution and performance of this Agreement, to continue in or
assume such capacity or capacities; and
WHEREAS, the Bylaws of the Corporation provide that the Corporation
shall indemnify and advance expense to all directors and officers of the
Corporation in the manner set forth therein and to the fullest extent permitted
by applicable law, and to such greater extent as applicable law may thereafter
permit, and the Corporation's Certificate of Incorporation provides for
limitation of liability for directors; and
WHEREAS, in order to induce Indemnitee to provide services as
contemplated hereby, the Corporation has deemed it to be in its best interest to
enter into this Agreement with Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's agreement to provide
services to the Corporation and/or certain of its affiliates as contemplated
hereby, the mutual agreements contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto stipulate and agree as follows:
ARTICLE I
Certain Definitions
-------------------
As used herein, the following words and terms shall have the following
respective meanings (whether singular or plural):
"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
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<PAGE>
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 or any similar schedule or
form) promulgated under the Securities Exchange Act of 1934, as amended (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.
"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.
"DGCL" means the Delaware General Corporation Law.
"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.
"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.
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<PAGE>
"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 Indemnitee pursuant to Section 6.1 of this Agreement to enforce his
rights under this Agreement.
ARTICLE II
Services by Indemnitee
----------------------
Section 2.1. Services by Indemnitee. Indemnitee agrees to serve or
continue to serve in his current capacity or capacities as a director, officer,
employee, agent or fiduciary of the Corporation. Indemnitee also agrees to
serve, as the Corporation may request from time to time, as a director, officer,
employee, agent or fiduciary of any other corporation, partnership, limited
liability company, association, joint venture, trust or other enterprise in
which the Corporation has an interest. Indemnitee and the Corporation each
acknowledge that they have entered into this Agreement as a means of inducing
Indemnitee to serve the Corporation in such capacities. Indemnitee may at any
time and for any reason resign from such position or positions (subject to any
other contractual obligation or any obligation imposed by operation of law).
The Corporation shall have no obligation under this Agreement to continue
Indemnitee in any such position for any period of time and shall not be
precluded by the provisions of this Agreement from removing Indemnitee from any
such position at any time.
ARTICLE III
Indemnification
---------------
Section 3.1. General. The Corporation shall, to the fullest extent
permitted by applicable law in effect on the date hereof, 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 3.2, Expenses (as this and all other capitalized words are
defined in Article I of this Agreement), 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.
Section 3.2. 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
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<PAGE>
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.
ARTICLE IV
Advancement of Expenses
-----------------------
Section 4.1. 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 Agreement, 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.
Section 4.2. 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 Agreement 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 Corporation for such expenses.
ARTICLE V
Procedure for Determination of Entitlement
------------------------------------------
to Indemnification
------------------
Section 5.1. 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.
Section 5.2. 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 Indemnitee may,
within 14 days after receipt of such written notice of selection, deliver to the
Corporation a written objection to such
-4-
<PAGE>
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.
Section 5.3. 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 5.3 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.
Section 5.4. 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 Agreement) to be entitled to indemnification upon submission of a
request for indemnification in accordance with Section 5.1 of this Agreement,
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 5.2 or 5.3 of this Agreement 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 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
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<PAGE>
equivalent, shall not (except as otherwise expressly provided in this Agreement)
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 Agreement.
Section 5.5. Independent Counsel Expenses. The Corporation shall pay
any and all reasonable fees and expenses of Independent Counsel incurred acting
pursuant to this Article 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.
ARTICLE VI
Certain Remedies of Indemnitee
------------------------------
Section 6.1. Adjudication. In the event that (i) a determination is
made pursuant to Section 5.2 or 5.3 hereof that Indemnitee is not entitled to
indemnification under this Agreement; (ii) advancement of Expenses is not timely
made pursuant to Section 4.1 of this Agreement; (iii) 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, or (b)
within 90 days after objections to his selection have been overruled by the
Court or (c) within 90 days after the time for
-6-
<PAGE>
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 5.2, 5.3 or 5.4 of this Agreement, 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 6.1 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 6.1, 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 6.1, 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 6.1 that the procedures and
presumptions of this Agreement are not valid, binding and enforceable, and shall
stipulate in any such proceeding that the Corporation is bound by all provisions
of this Agreement. In the event that Indemnitee, pursuant to this Section 6.1,
seeks a judicial adjudication to enforce his rights under, or to recover damages
for breach of, this Agreement, 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.
ARTICLE VII
Participation by the Corporation
--------------------------------
Section 7.1. 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 Agreement for 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
-7-
<PAGE>
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
Agreement. 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 Agreement 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.
ARTICLE VIII
MISCELLANEOUS
Section 8.1. Nonexclusivity of Rights. The rights of indemnification
and advancement of Expenses as provided by this Agreement shall not be deemed
exclusive of any other rights to which Indemnitee may at any time be entitled to
under applicable law, the Corporation's Certificate of Incorporation, the
Corporation's Bylaws, any agreement, a vote of stockholders or a resolution of
directors, or otherwise. No amendment, alteration or repeal of this Agreement
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 Agreement 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.
Section 8.2. Insurance and Subrogation. The Corporation shall not be
liable under this Agreement 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 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.
Section 8.3. Acknowledgment of Certain Matters. Both the Corporation
and Indemnitee acknowledge that in certain instances, applicable law or public
policy may prohibit
-8-
<PAGE>
indemnification of Indemnitee by the Corporation under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Corporation has
undertaken or may be required in the future to undertake, by the Securities and
Exchange Commission, to submit the question of indemnification to a court in
certain circumstances for a determination of the Corporation's right under
public policy to indemnify Indemnitee.
Section 8.4. Amendment. This Agreement may not be modified or
amended except by a written instrument executed by or on behalf of each of the
parties hereto.
Section 8.5. Waivers. The observance of any term of this Agreement
may be waived (either generally or in a particular instance and either
retroactively or prospectively) by the party entitled to enforce such term only
by a writing signed by the party against which such waiver is to be asserted.
Unless otherwise expressly provided herein, no delay on the part of any party
hereto in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party hereto of any
right, power or privilege hereunder operate as a waiver of any other right,
power or privilege hereunder nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder.
Section 8.6. Entire Agreement. This Agreement and the documents
referred to herein constitute the entire agreement between the parties hereto
with respect to the matters covered hereby, and any other prior or
contemporaneous oral or written understandings or agreements with respect to the
matters covered hereby are superseded by this Agreement.
Section 8.7. Severability. If any provision or provisions of this
Agreement 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 Agreement shall be construed so
as to give effect to the intent manifested by the provision held invalid,
illegal or unenforceable.
Section 8.8. Certain Actions For Which Indemnification Is Not
Provided. Notwithstanding any other provision of this Agreement, Indemnitee
shall not be entitled to indemnification or advancement of Expenses under this
Agreement with respect to any Proceeding, or any Matter therein, brought or made
by Indemnitee against the Corporation.
Section 8.9. 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 Agreement, 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 Agreement. Any communication
required or permitted to the Corporation shall be addressed to the Secretary of
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<PAGE>
the Corporation and any such communication to Indemnitee shall be addressed to
the Indemnitee's address as shown on the Corporation's records unless the
Indemnitee specifies otherwise and shall be personally delivered or delivered by
overnight mail delivery. Any such notice shall be effective upon receipt.
SECTION 8.10. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD
TO ANY PRINCIPLES OF CONFLICT OF LAWS THAT, IF APPLIED, MIGHT PERMIT OR REQUIRE
THE APPLICATION OF THE LAWS OF A DIFFERENT JURISDICTION.
Section 8.11. Headings. The Article and Section headings in this
Agreement are for convenience of reference only, and shall not be deemed to
alter or affect the meaning or interpretation of any provisions hereof.
Section 8.12. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
Section 8.13. Use of Certain Terms. As used in this Agreement, the
words "herein," "hereof," and "hereunder" and other words of similar import
refer to this Agreement as a whole and not to any particular paragraph,
subparagraph, section, subsection, or other subdivision. Whenever the context
may require, any pronoun used in this Agreement shall include the corresponding
masculine, feminine or neuter forms, and the singular form of nouns, pronouns
and verbs shall include the plural and vice versa.
-10-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered to be effective as of the date first above written.
EDGE PETROLEUM CORPORATION
By:
---------------------------
Name:
Title:
INDEMNITEE
______________________________
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<PAGE>
Exhibit 10.8
------------
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of the 9 day of
April, 1991, by and between NEW EDGE PETROLEUM CORPORATION (the "Corporation")
and John E. Calaway ("Calaway").
WHEREAS, the Corporation desires to employ Calaway on the terms and
conditions set forth herein; and
WHEREAS, Calaway is willing to accept such employment on the terms and
conditions hereinafter set forth;
NOW, THEREFORE, the Corporation and Calaway have agreed and do hereby agree
as follows:
SECTION 1. EMPLOYMENT, TERM, DUTIES AND AUTHORITY. The Corporation hereby
--------------------------------------
employs Calaway and Calaway hereby accepts employment as Chairman of the Board,
President, and Chief Executive Officer of the Corporation commencing as of the
date hereof and continuing until April 9, 1996 (the "Normal Expiration Date")
unless sooner terminated in accordance with the provisions of Section 5 hereof.
The period commencing from the date hereof to the Normal Expiration Date is
called the "Employment Period." Beginning April 9, 1995, the Corporation and
Calaway agree to negotiate in good faith for an extension of this Agreement on
such terms as they may agree upon, and if they are unable to agree upon an
extension, the Normal Expiration Date shall control. If the parties have not
agreed upon an extension by December 9, 1995, then Calaway will be free to
seek employment as a consultant,
<PAGE>
employee, agent, officer, director, or any other position with any entity or
individual he so chooses; and the Corporation is free to negotiate with whomever
it chooses to fill his position. Calaway shall be responsible to report to the
Board of Directors of the Corporation and will perform such other duties on
behalf of the Corporation as the Board of Directors of the Corporation shall
from time to time direct, as are customarily performed by a Chairman of the
Board, President and Chief Executive Officer of a business corporation. Calaway
shall devote such productive time, energy and ability to the proper and
efficient conduct of the Corporation's business as shall be necessary for the
successful conduct thereof, provided that subject to the provisions of Section 8
hereof, Calaway shall be able to pursue other business interests so long as such
pursuit does not unreasonably interfere with Calaway's fulfillment of his duties
hereunder.
SECTION 2. COMPENSATION.
------------
(a) BASIC COMPENSATION. The Corporation shall pay Calaway basic
------------------
compensation at the rate of at least Two Hundred Ninety-five Thousand
Dollars ($295,000) per annum during the Employment Period, which shall be
payable in equal semimonthly installments on the fifteenth and last day of
each calendar month. Calaway's salary shall be increased annually by the
increase, if any, in the current price index, although there shall be no
decrease. Calaway's salary shall be annually reviewed by the Board and may
be increased to reflect Calaway's contributions by the vote of two-thirds
or more of the entire nine person Board of Directors, but shall in no event
be decreased below the base compensation herein specified.
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<PAGE>
(b) OVERRIDING ROYALTY INTEREST. Calaway shall receive, and the
---------------------------
Corporation hereby promises to convey as and when Leases on New Prospects (as
hereinafter defined) are obtained, a three-tenths of one percent (.3%)
Overriding Royalty (which term shall be defined for purposes hereof in
accordance with the meaning which is commonly given that term in the oil and gas
industry as of the date hereof) ("ORR") in oil, gas and other mineral Leases on
New Prospects (as hereinafter defined) executed by the Corporation (or by any
joint venture which the Corporation shall be a party to) and prospective lessees
during the term of this Agreement. The term "Leases on New Prospects" shall
include, for purposes of this Agreement, all oil, gas and other mineral leases
consummated during the term of this Agreement. The Corporation shall convey the
ORR to Calaway within a reasonable time after the execution of a Lease on New
Prospect, and such conveyance shall be in the form of a recordable instrument as
is typically used by the Corporation to convey to others overriding royalties.
(c) ADDITIONAL BENEFITS. Calaway shall be entitled to participate in the
-------------------
Corporation's employee benefits plans, in accordance with their terms, and to
receive such other forms of remuneration or benefits which the Corporation may
from time to time make available to its executive officers of a similar rank, as
well as reasonable paid vacations. The Corporation shall also provide at its
expense during the Employment Period a $1,000,000 term life insurance policy,
payable to Calaway or his designated beneficiaries.
-3-
<PAGE>
(d) WITHHOLDINGS. All payments made to Calaway pursuant to this
------------
Agreement shall be reduced by all required federal, state and local
withholdings for taxes and similar charges.
SECTION 3. REIMBURSEMENT OF EXPENSES. It is understood that Calaway is
-------------------------
authorized to incur reasonable business expenses for promoting the business of
the Corporation, including reasonable expenditures for travel, lodging, meals
and client or business associate entertainment. Calaway shall be entitled to
receive reimbursement of all such expenses incurred as a result of his duties
under this Agreement.
SECTION 4. CONTINUATION OF COMPENSATION DURING ILLNESS. If Calaway shall
-------------------------------------------
become temporarily ill or disabled and shall be absent from work by reason
thereof, the Corporation will continue his compensation during the period of
such temporary illness or disability. A temporary illness or disability is any
illness or disability that is not described in Section 5(a), below.
SECTION 5. TERMINATION OF EMPLOYMENT. During the Employment Period hereof
-------------------------
set forth in Section 1 hereof, the Corporation, acting only by and through
two-thirds of the entire nine-person Board of Directors (the "Requisite Board
Members"), shall have the right at its option to terminate the employment of
Calaway hereunder by giving ten (10) days' written notice to Calaway (except
where a longer period is indicated) but only in the event any of the following
occurs:
(a) If Calaways dies or becomes unable by reason of physical
disability or other incapacity to carry out or to perform his duties under
this Agreement for a continuous period of six (6) consecutive months, upon
thirty (30) days'
-4-
<PAGE>
written notice executed by the Requisite Board Members (termination of
employment pursuant to this Subsection (a) hereof shall be referred to as
"Termination Without Cause"); provided, however, that in the case of such
disability, the Corporation shall continue to pay Calaway his basic
compensation only until such time as the disability insurance policy the
Corporation has taken out on Calaway, if there is any such policy, begins
to pay its benefit;
(b) Calaway shall be deemed to have willfully, materially and
persistently neglected his duties under this Agreement but only after (x)
having received two written warnings signed by the Requisite Board Members,
which warnings shall specify with particularity the precise problem, and
specifying in detail what must be done to correct such matter so that
Calaway may be given reasonable opportunity to correct such matter and (y)
such matters specified as areas of neglect have not been corrected;
(c) the theft of the Corporation's assets by Calaway;
(d) Calaway shall have been adjudged, pursuant to a final,
nonappealable judgment, to have committed fraud upon the Corporation or
shall be convicted of commission of a felony; or
(e) the material breach by Calaway of the provisions of Sections 7 or
8 of this Agreement (termination of employment pursuant to Subsection (b)
through (e) hereof shall be referred to as "Termination With Cause").
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<PAGE>
SECTION 6. EFFECT OF TERMINATION OF EMPLOYMENT.
-----------------------------------
(A) TERMINATION WITHOUT CAUSE. In the event of a Termination Without
-------------------------
Cause (as hereinabove defined), Calaway (or Calaway's estate, as the case
may be) shall be entitled to receive, from the date of termination, the
full amount of all compensation payable to Calaway in accordance with the
provisions and payment terms of Section 2 (a) and (c) hereof until the
Normal Expiration Date, but his right to receive the compensation specified
in Section 2 (b) shall cease at the date of termination.
(B) TERMINATION WITH CAUSE. In the event of a Termination With Cause
----------------------
(as hereinabove defined), Calaway shall only be entitled to receive the
full amount of all compensation payable to Calaway in accordance with the
provisions of Section 2 hereof through the date of termination.
SECTION 7. CONFIDENTIALITY. Calaway agrees that in performing under the
---------------
terms of this Agreement, he will have access to confidential and proprietary
information and records of the Corporation and agrees that he shall not use, for
his own account or disclose for other than proper corporate purposes, such
information or records to any third party. The provisions of this Section 7 will
survive the termination of this Agreement; provided, however, that Calaway's
obligations under this Section 7 shall not relate to information and records of
the Corporation which (a) become part of the public domain by publication or
otherwise generally known in the industry through no fault or action of Calaway;
or (b) at the time of receipt was known by Calaway.
-6-
<PAGE>
SECTION 8. RESTRICTIONS ON COMPETITION. Calaway will not, directly or
---------------------------
indirectly, including without limitation as a paid or unpaid director, officer,
agent, representative, employee of or consultant to any enterprise or by acting
as a proprietor of an enterprise or by holding any direct or indirect
participation in any enterprises an owner, partner, limited partner, joint
venturer or stockholder, (a) until this Agreement is terminated, enter into the
business of generating, marketing or developing oil and gas prospects; or (b) if
Calaway shall voluntarily, leave the employ of the Corporation before or upon
the occurrence of the Normal Expiration, or any extension thereof pursuant to
Section 1 hereof, (x) for a period of one (1) year after this Agreement is so
terminated, acquire any oil and gas leases in any prospects on which the
Corporation has itself commenced acquisition of oil and gas leases as of the
date of such termination, or (y) for a period of fourteen (14) months after this
Agreement is so terminated acquire any oil and gas leases on any "leads" which
the Corporation has identified with reasonable specificity as areas where
leasing of oil, gas and mineral rights is expected to promptly commence; or (z)
for a period of one year after this Agreement is so terminated, solicit or
procure the employment as an agent, employee or consultant, of any person who at
the time of such termination is an agent, employee or consultant of the
Corporation. As used in this section, the term "prospect" and "leads" shall have
the normal usage applied by the Corporation as of the date hereof. For purposes
hereof, the Termination by Calaway because of the Corporation's inability or
refusal to pay the compensation herein specified to be paid shall not be deemed
to be a voluntary leaving of the employ of the Corporation by Calaway.
-7-
<PAGE>
SECTION 9. REMEDIES. The parties hereto agree that the remedy at law for
--------
any breach of Calaway's obligations under Section 8 of this Agreement would be
inadequate, and that any enforcing party shall be entitled to injunctive or
other equitable relief in any proceeding which may be brought to enforce any
provisions of Section 8.
SECTION 10. NO WAIVER. The failure or delay on the part of the Corporation
---------
to exercise any power or right hereunder shall not operate as a waiver thereof,
nor shall an singular or partial exercise of any such right or power preclude
any other or further exercise thereof or the exercise of any other right or
power hereunder or otherwise available in equity at law.
SECTION 11. SUCCESSORS; NON-ASSIGNABILITY. This Agreement shall inure to
-----------------------------
the benefit of and be binding upon the parties hereto and the successors and
assigns of the Corporation, whether by merger, sale of assets or otherwise. The
obligations of Calaway under this Agreement, however, are not assignable by him.
SECTION 12. CONSTRUCTION. This Agreement shall be construed and enforced in
------------
accordance with the substantive laws of the State of Texas.
SECTION 13. AMENDMENTS. No change, modification, waiver, discharge,
----------
amendment or addition to this Agreement shall be binding unless it is in writing
and signed by the Corporation and Calaway.
SECTION 14. NOTICES. Any notice required to be given in writing by any
-------
party to this Agreement shall be mailed by first-class, registered or certified
mail, return receipt requested, postage and fees prepaid, and addressed as
follows:
If addressed to the Corporation:
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<PAGE>
New Edge Petroleum Corporation
1111 Bagby, Suite 2100
Houston, Texas 77002
with copies to:
Bennett & Broocks
712 Main Street, Suite 1500 East
Houston, Texas 77002
Attn: Mr. Ben C. Broocks
and
Mr. J. Michael Gottesman
477 Madison Avenue, 21st Floor
New York, New York 10022
If addressed to Calaway:
Mr. John E. Calaway
#14 Courtlandt Place
Houston, Texas 77006
Any party may, by notice in writing to the other, change the name and address to
which notices or other communications to him shall be mailed. Any such notice
shall be effective four (4) business days after the date of mailing by
first-class, registered or certified mail, return receipt requested, postage and
fees prepaid.
SECTION 15. HEADINGS. The section and other headings contained in this
--------
Agreement are for reference purposes only and shall not affect the
interpretation of this Agreement.
SECTION 16. COUNTERPARTS. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Employment Agreement on the day and year first above written.
NEW EDGE PETROLEUM CORPORATION
Attest: By: /s/ John Sfondrini
--------------------------------
John Sfondrini, Special Agent
and
_____________________________
Secretary
By: /s/ Vincent Andrews
--------------------------------
Vincent Andrews, Special Agent
______________________________
Witness
"CALAWAY"
/s/ John E. Calaway
----------------------------------
JOHN E. CALAWAY
-10-
<PAGE>
Exhibit 10.12
-------------
AGREEMENT
---------
This agreement is made this 18th day of March, 1989, by and between JAMES
C. CALAWAY, whose office is at 811 Dallas Street, Suite 1214, Houston, Texas
77002 (hereinafter referred to as "Calaway"), EDGE PETROLEUM CORPORATION, a
Texas corporation, with its principal place of business at 811 Dallas Street,
Suite 1220, Houston, Texas 77002 (hereinafter referred to as the
"Corporation"), CALAWAY OIL AND GAS CORPORATION ("COG"), KPC INTERESTS, INC.
("KPC"), LAWFORD ENERGY, INC. ("Lawford"), and EDGE HOLDING COMPANY LIMITED
PARTNERSHIP ("EHCLP"), each of COG, KPC, Lawford, and EHCLP are herein sometimes
referred to as a "Partner", or, collectively, the "Partners". This Agreement
supercedes in its entirety that certain agreement attached hereto as an exhibit.
1. Commencing March 1, 1989, and so long as Calaway is alive, the
Corporation shall pay Calaway the sum of Forty Thousand Dollars
($40,000.00) per twelve (12) month period. Future payments shall be
made on the 1st day of March in subsequent years. Any payment not
timely made shall bear interest at fifteen percent (15%) per annum
until paid.
2. As consideration for such payment, Calaway agrees to furnish
consulting services to the Corporation as and to the extent mutually
agreed upon.
3. The Partners agree to use their best efforts to cause Edge Petroleum
Partnership (the "Partnership") to continue to distribute any and all
Reversionary Interests (hereinafter defined), working interests,
royalty interests, or other promoted interests received by the
Partnership (all of which are referred to as "Interests"), to its
partners, in the same manner it has consistently done in the past.
4. Each Partner agrees to maintain at all times with the Controller of
the Corporation its Proportionate Part (as hereinafter defined) of
$40,000.00, but only to the extent such is available from any revenues
which any of them receives by, through or as a result of their
interest in the Partnership, including, without limitation, those on
the Reversionary Interests or such Partners' Partnership Interests, or
any Interest. If the Corporation shall default on its obligation to
pay Calaway such $40,000.00 as and when due, the Controller of the
Corporation shall make such payment from the funds contributed by the
Partners', whereupon the Partners shall have the obligation to again
contribute their Proportionate Part of $40,000.00 to the extent it is
available from any revenues which they receive as aforesaid. At such
time as the annuity referenced in paragraph 5 hereof shall have been
obtained, the obligations of the Partners hereunder shall terminate.
5. (i) Unless and until the Corporation shall have obtained an annuity
with a major bank or insurance company, reasonably acceptable to
Calaway, providing for the payment to Calaway of Three Thousand Three
Hundred Thirty-Three and 33/100 Dollars ($3,333.33) per month during
his life, which shall be used to satisfy the Corporation's obligation
to Calaway under this Agreement:
<PAGE>
(a) Each Partner agrees not to sell, pledge, assign, or mortgage
more than fifty-five percent (55%) of the Reversionary
Interests which any such Partner has received or receives in
the future through or as a result of the joint venture with the
Edge Group.
(b) The Corporation may not sell, assign, pledge, or mortgage any
of the Reversionary Interests which it receives from the Edge
Petroleum Partnership.
(c) The Corporation may not merge, and the Partners will use their
best efforts to cause the Partnership not to merge.
(ii) Notwithstanding the foregoing, nothing in this paragraph 5
shall prevent the Corporation from distributing to its
shareholders income which it receives on the Reversionary
Interests which it owns, prior to the occurrence of a default
by the Corporation, and after the cure thereof. The provisions
of 5(i) are in all respects subject to 5(ii).
6. At such time as Edge Petroleum Corporation establishes the annuity
referred to in paragraph 5 above, the restriction in paragraph 4 shall
terminate.
7. This Agreement shall not restrict the activities of Edge Petroleum
Corporation or Edge Petroleum Partnership except to the extent
expressly provided herein.
8. This Agreement shall in no way affect, restrict, or be binding upon,
in any respect, the Edge Group or Edge I Limited Partnership, Edge II
Limited Partnership, or Edge III Limited Partnership.
9. For purposes hereof, the term "Reversionary Interests" shall mean and
include any and all working interests, reversionary working interests,
leasehold interests, overriding royalty interests, mineral interests,
royalty interests, oil payments, production payments, carried
interests, and any and all other such properties or rights, including
without limitation rights of any kind or character being transferred
by the Twelve Fourteen Corporation and James Calaway to John
Sfondrini, Purchaser, pursuant to that certain Stock and Asset
Purchase Agreement, dated October 31, 1988, as amended.
10. The term "Proportionate Part" means the following percentages:
<TABLE>
<CAPTION>
Current Interest
------- --------
<S> <C>
COG 50.591%
KPC 6.721%
Lawford 5.645%
EHCLP 37.043%
--------
100.000%
--------
</TABLE>
<PAGE>
11. If any Partner violates the provisions of paragraph 5(i)(a), such
Partner must provide Calaway, within sixty (60) days, with an annuity
referenced in paragraph 5(i) in the principal amount of that
Partner's Proportionate Part of Calaway's $3,333.33 per month
payment. No Partner shall have liability for any other Partner's
violation of this Agreement. Each Partner's liability under this
Agreement shall be several and not joint.
IN WITNESS WHEREOF, the parties have signed this Agreement the day and year
first above written.
/s/ James C. Calaway
---------------------------------
JAMES C. CALAWAY
CALAWAY OIL & GAS CORPORATION
By: /s/ John E. Calaway
-----------------------------
John E. Calaway, President
KPC INTERESTS, INC.
By: /s/ James D. Calaway
-----------------------------
James D. Calaway, President
EDGE PETROLEUM CORPORATION
By: /s/ John E. Calaway
-----------------------------
John E. Calaway, President
EDGE HOLDING COMPANY LIMITED
PARTNERSHIP
By: /s/ John Sfondrini
-----------------------------
John Sfondrini,
General Partner
LAWFORD ENERGY, INC.
By: /s/ Pherl Brossman
-----------------------------
Pherl Brossman, President
<PAGE>
EXHIBIT 10.13
EDGE PETROLEUM CORPORATION
1994 INCENTIVE STOCK OPTION PLAN
This Incentive Stock Option Plan (this "Plan") is intended to advance the
interests of Edge Petroleum Corporation, a Texas corporation (the "Corporation")
and its shareholders, by encouraging and enabling the employees of the
Corporation to acquire or increase a proprietary interest in the Corporation by
ownership of its stock and thereby provide an additional incentive and benefit
for them to work on behalf of the Corporation.
1. DEFINITIONS. As used in this Plan, the following terms shall have the
respective meanings indicated:
(A) "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of
the Corporation.
(B) "CODE" means the Internal Revenue Code of 1986, as amended.
(C) "COMMON STOCK" means the Corporation's common stock, $.01 par
value per share.
(D) "FOR CAUSE" termination of employment means termination of an
Optionee's employment by the Corporation for (i) gross negligence or wilful
misconduct in the performance of the Optionee's duties or (ii) commission
of fraud or embezzlement involving the Corporation or its assets. The
determination of whether an Optionee's termination of employment was "For
Cause" shall be made in the sole discretion of the Board.
(E) "OPTION" means an option granted under this Plan.
(F) "OPTIONEE" means a person owning a valid and effective option
granted under this Plan.
(G) "REORGANIZATION" means any statutory merger; statutory
consolidation; sale of all or substantially all of the assets of the
Corporation; or sale, pursuant to an agreement with the Corporation, of
securities of the Corporation pursuant to which the Corporation is or
becomes a wholly owned subsidiary of another company after the effective
date of the Reorganization.
(H) "SUCCESSOR" means the legal representative of the estate of a
deceased Optionee or the person or persons who acquire the right to
exercise an Option by bequest or inheritance or by reason of the death of
any Optionee.
(I) "SUBSIDIARY CORPORATION" has the meaning specified in Section
424(f) of the Code.
<PAGE>
(J) "10-Percent Shareholder" means an individual who owns (within the
meaning of Sections 422 and 424 of the Code) stock possessing more than 10%
of the total combined voting power or value of all classes of stock of the
Corporation or a Subsidiary Corporation.
2. ADMINISTRATION OF PLAN. This Plan shall be administered by the Board
of Directors. Options to members of the Board may be granted only by a majority
of the disinterested members of the Board. Subject to the provisions of this
Plan, the Board shall have full authority to (i) determine the individuals to
whom, and the time or times at which, Options shall be granted, (ii) determine
the number of shares of Common Stock covered by each Option, (iii) construe and
interpret this Plan, (iv) determine the terms and provisions of the respective
option agreements (which need not be identical) including, without limitation,
terms covering the payment of the exercise price, and (v) make all other
determinations and take all other actions deemed necessary or advisable for the
proper administration of this Plan. All such actions and determinations shall be
conclusively binding for all purposes and upon all persons.
3. COMMON STOCK SUBJECT TO OPTIONS. The aggregate number of shares of
the Corporation's Common Stock which may be issued upon the exercise of Options
granted under this Plan shall not exceed 6,000, subject to adjustment in
accordance with the provisions of Section 6 hereof. The shares of Common Stock
to be issued upon the exercise of Options may be authorized but unissued shares
or shares issued and reacquired by the Corporation. In the event any Option
shall, for any reason, terminate or expire or be surrendered without having been
exercised in full, the shares subject to such Option but not purchased
thereunder shall again be available for other Options that may be granted under
this Plan.
4. PARTICIPANTS. To be eligible to participate in this Plan, an
individual must be designated as a participant by the Board and must on the
date of the granting of the Option be a regular salaried employee, including
officers and directors, of the Corporation or a Subsidiary Corporation.
Notwithstanding any provision contained herein to the contrary, a person shall
not be eligible to receive an Option hereunder if he is a 10-Percent Shareholder
at the time such Option is granted, unless at the time such Option is granted
the exercise price per share of Common Stock to which the Option relates is at
least 110% of the fair market value of each share of Common Stock and the Option
is not exercisable after the expiration of five years from the date it is
granted.
5. OPTION AGREEMENTS. Any Option granted under this Plan shall be
evidenced by an agreement ("Option Agreement"), which shall be approved as to
form and substance by the Board. Each Option Agreement shall be executed by an
officer of the Corporation and the applicable Optionee. Each Option Agreement
shall specify the number shares of Common Stock subject to the Option, which
number shall be determined in the sole discretion of the Board. All Options and
Option Agreements granted under the provisions of this Plan shall be subject to
the following limitations and conditions:
-2-
<PAGE>
(A) EXERCISE PRICE. The exercise price per share with respect to
each Option shall be determined by the Board; provided, however, that the
exercise price per share shall not be less than 100% of the fair market
value of a share of Common Stock; and provided further that in the case of
10-Percent Shareholder, the exercise price per share shall not be less than
110% of the fair market value of a share of Common Stock. For purposes of
this Plan, fair market value shall be as determined by the Board, in good
faith, and such determination shall be binding upon the Corporation and the
Optionee.
(B) PERIOD OF OPTION. The expiration date of each Option shall be
fixed by the Board; provided, however, that such expiration date shall not
be more than ten years from the date of grant of the Option; and provided
further that in the case of a 10-Percent Shareholder, the expiration date
shall not be more than five years from the date of grant of the Option.
(C) EXERCISE OF OPTION. The Option shall be exercised in accordance
with the terms specified in the Option Agreement. Exercise of an Option
shall not be effective until the Corporation has received written notice of
exercise. Such notice must specify the number of whole shares to be
purchased and must be accompanied by payment in full of the aggregate
exercise price for the number of shares purchased. Under no circumstances
shall the Corporation be required to sell, issue, or deliver a fractional
share with respect to any Option.
(D) MEDIUM AND TIME OF PAYMENT. The exercise price of an Option
shall be payable upon the exercise of the Option in cash or by cashier's
check, or, with the consent of the Board, with shares of Stock of the
Corporation owned by the Optionee which have been held by the Optionee for
at least six months prior to the date of exercise, or, with the consent of
the Board by a combination of cash and such shares. Exercise of an Option
shall not be effective until the Corporation has received written notice of
exercise. Such notice must specify the number of whole shares to be
purchased and must be accompanied by payment in full of the aggregate
exercise price for the number of shares purchased.
(E) WITHHOLDING TAXES. The Board may, in its discretion, require an
Optionee to pay to the Corporation at the time of exercise of an Option
or portion thereof the amount that the Corporation deems necessary to
satisfy its obligation to withhold Federal, state or local income or other
taxes incurred by reason of exercise. Upon the exercise of an Option
requiring tax withholding an Optionee may make a written request to have
shares of Stock withheld by the Corporation from the shares otherwise to be
received. The number of shares so withheld shall have an aggregate fair
market value on the date of exercise sufficient to satisfy the applicable
withholding taxes. The acceptance of any such request by an Optionee shall
be at the sole discretion of the Board.
-3-
<PAGE>
(F) VESTING OF SHAREHOLDER RIGHTS. No Optionee or his Successor
shall have any of the rights of a shareholder of the Corporation until the
exercise procedure for an Option is fully completed under the applicable
Option Agreement and the certificates evidencing the shares purchased are
properly delivered to such Optionee or his successor in accordance with the
terms of this Plan and the Option Agreement.
(G) NONTRANSFERABILITY OF OPTION AND SHARES. No Option shall be
transferable or assignable by an Optionee, otherwise than by will or the
laws of descent and distribution and each Option shall be exercisable,
during the Optionee's lifetime, only by him. No Option shall be pledged or
hypothecated in any way and no Option shall be subject to execution,
attachment, or similar process except with the express consent of the
Board. In addition to the foregoing, the Board may impose restrictions on
transfer of the shares received upon exercise of an Option as it deems
necessary. The Corporation shall not be required to issue or deliver any
certificate or certificates for shares of stock purchased upon the exercise
of the Option or part thereof prior to fulfillment of all of the conditions
imposed by the Board.
(H) TERMINATION OF EMPLOYMENT.
(i) Upon termination of an Optionee's employment with the
Corporation For Cause, his option privileges shall immediately
terminated and he shall have no right to acquire Common Stock by the
exercise of any previously unexercised Options.
(ii) Upon termination of an Optionee's employment with the
Corporation for any reason other than For Cause, his option privileges
shall be limited to the shares which were immediately purchasable by
him at the date of such termination and such Option privileges shall
continue during the remaining term of the Option Agreement; provided,
however, that the Option will cease to constitute an "incentive stock
option" unless it is exercised by the Optionee within ninety (90) days
after the date of such termination.
(iii) The granting of an Option to the Optionee does not alter
in any way the Corporation's existing rights to terminate the
Optionee's employment at any time and for any reason, nor does it
confer upon the Optionee any rights or privileges except as
specifically provided for in this Plan.
(I) DEATH OF OPTIONEE. If an Optionee dies while in the employment
of the Corporation, his Option privileges shall be limited to the shares
which were immediately purchasable by him at the date of death and such
Option privileges shall continue during the remaining term of the Option
Agreement; provided, however, that the Option will cease to constitute an
"incentive stock option" (within the
-4-
<PAGE>
meaning of Section 422 of the Code) unless it is exercised by the Optionee's
successor within ninety (90) days after the date of death.
(J) REPURCHASE OF OPTION. Upon the approval of the Board, the Corporation
is authorized to repurchase a previously granted Option from an Optionee by
mutual agreement with such Optionee before such Option has been exercised, by
payment to the Optionee of the amount by which the fair market value of the
shares under such Option at the time of such repurchase exceeds the exercise
price per share of the Options being repurchased.
(K) ADDITIONAL TERMS AND CONDITIONS. The Option Agreement may contain such
other terms, provisions and conditions as may be determined by the Board.
6. ADJUSTMENTS.
(a) In the event that the outstanding shares of Common Stock of the
Corporation are hereafter increased or decreased or changed into or exchanged
for a different number or kind of shares or other securities of the Corporation
or of any corporation by reason of a recapitalization, reclassification, stock
split-up, combination of shares, or dividend or other distribution payable in
capital stock, appropriate adjustment shall be made by the Board in the number
and kind of shares for the purchase of which Options may be granted under this
Plan. In addition, the Board shall make appropriate adjustment in the number and
kind of shares as to which outstanding Options, or portions thereof, then
unexercised shall be exercisable, to the end that the proportionate interest of
the holder of the Option shall, to the extent practicable, be maintained as
before the occurrence of such event. Such adjustment in outstanding Options
shall be made with respect to the unexercised portion of the Option by a
corresponding adjustment in the exercise price per share, but without any change
in the total price.
(b) In the event of the dissolution or liquidation of the Corporation, any
Option granted under this Plan shall terminate as of a date to be fixed by the
Board, provided that no less than thirty (30) days' written notice of the date
so fixed shall be given to each Optionee and each such Optionee shall have the
right during such period to exercise his Option as to all or any part of the
shares covered thereby.
(c) In the event of a Reorganization in which the Corporation is or
becomes a wholly owned subsidiary of another company after the effective date of
the Reorganization, then
(i) If there is no plan or agreement respecting the Reorganization
("Reorganization Agreement") or if the Reorganization Agreement does not
specifically provide for the change, conversion or exchange of the shares
under outstanding and unexercised stock options for securities of another
-5-
<PAGE>
corporation, any Option granted under this Plan shall terminate as of a
date to be fixed by the Board, provided that no less than thirty (30) days'
written notice of the date so fixed shall be given to each Optionee and
each such Optionee shall have the right during such period to exercise his
Option as to all or any part of the shares covered thereby; or
(ii) If there is a Reorganization Agreement and if the Reorganization
Agreement specifically provides for the change, conversion, or exchange of
the shares under outstanding and unexercised stock options for securities
of another corporation, then the Board shall adjust the shares under such
outstanding and unexercised stock options (and shall adjust the shares
remaining under this Plan which are then available to be optioned under
this Plan, if the Reorganization Agreement makes specific provisions
therefor) in a manner not inconsistent with the provisions of the
Reorganization Agreement for the adjustment, change, conversion, or
exchange of such stock and such Options.
(d) Adjustments and determinations under this Section 6 shall be made by
the Board in good faith, whose decisions as to what adjustments or
determinations shall be made and the extent thereof, shall be final, binding,
and conclusive.
7. CERTAIN PROVISIONS REGARDING ISSUANCE OF SHARES.
(A) NO REGISTRATION OF SHARES. In the event that the shares to be issued
upon exercise of the Options have not been registered under the Securities Act
of 1933, as amended (the "Securities Act"), or any state securities law, the
shares will be offered by the Corporation pursuant to exemptions from
registration under such laws. In such a case, no federal or state securities law
administrator will pass on or endorse the merits of each offering of the
Corporation's shares pursuant to this Plan and any representation contrary to
the above is unlawful.
(B) RISK OF INVESTMENT. The participants in this Plan understand that the
shares which will be offered pursuant to this Plan are suitable only for persons
who are able to bear the risk of their investment and who are acquiring them for
their own account for investment and not with a view to the resale or
distribution of the shares and who recognize and acknowledge that the transfer
of the shares will be subject to restrictions on their transfer.
(C) INFORMATION PROVIDED. In connection with the purchase of the
Corporation's shares pursuant to this Plan, the Corporation will provide each
Optionee with any information about the Corporation that can be reasonably
produced by the Corporation and that may be reasonably requested by an Optionee
to enable the Optionee to decide on whether to purchase shares of Common Stock
under his Option. Only duly authorized officers of the Corporation are
authorized
-6-
<PAGE>
to give any information or make any representations in connection with the
exercise of Options.
(d) ADDITIONAL RESTRICTIONS. Shares issued pursuant to this Plan
will be subject to the following additional limitations and restrictions,
in addition to the restrictions set forth above and those contained in an
Option Agreement:
(i) The shares of Common Stock acquired by exercise of the
Options shall not be sold, pledged, hypothecated or otherwise
transferred unless such shares are exempt from registration under the
Securities Act, and any applicable state securities law or are
properly registered thereunder.
(ii) An Optionee may not sell any shares of Common Stock
acquired through the exercise of an Option without first complying
with any applicable restrictions or preemptive rights which have been
properly created by the Corporation with respect to the sale of its
shares, including any buy-sell or stock transfer restriction
agreements or rights of first refusal.
(iii) A legend has been or will be placed on the certificate(s)
evidencing such shares which discloses all applicable restrictions as
to their transferability.
8. CERTAIN CONDITIONS UNDER TAX LAWS.
(a) The aggregate fair market value (determined as of the time an
Option hereunder is granted) of the stock with respect to which Options are
exercisable for the first time by an Optionee during any calendar year
under this Plan and any other incentive stock option plan maintained by the
Corporation and its affiliates shall not exceed in the aggregate $100,000
as provided under Section 422(d) of the Code.
(b) Notwithstanding anything to the contrary contained in this Plan,
the provisions of this Plan are intended and should be interpreted as
necessary to permit any Options to qualify as Incentive Stock Options
as that term is defined in Section 422 of the Code, and any provisions of
this Plan are hereby amended in their entirety to the extent necessary to
permit all options granted to the provisions of this Plan to qualify as
Incentive Stock Options as that term defined in Section 422 of the Code.
9. REPRESENTATIONS AND WARRANTIES OF OPTIONEE. Prior to each Optionee's
purchase of shares under this Plan, each Optionee may be required to represent
and warrant to certain matters, which representations and warranties will be
relied upon by the Corporation in permitting the exercise by such Optionee of
his Option in accordance with applicable exemptions from federal and state
securities law.
-7-
<PAGE>
10. USE OF PROCEEDS. The proceeds received by the Corporation for the sale
of Common Stock pursuant to the exercise of Options granted under this Plan
shall be added to the Corporation's general funds and used for general corporate
purposes.
11. AMENDMENT, SUSPENSION, AND TERMINATION OF PLAN. The Board may at any
time suspend or terminate this Plan or may amend it from time to time in such
respects as the Board may deem advisable in order that the Option granted
thereunder may conform to any changes in the law or in any other respect which
the Board may deem to be in the best interests of the Corporation. However, no
amendment, suspension or termination of this Plan shall, without an Optionee's
consent, alter or impair any of the rights or obligations under any Option
theretofore granted to such Optionee under this Plan. Nothing contained herein
shall be deemed to preclude the adoption by the Board of one or more additional
stock option plans either during or subsequent to the term of this Plan.
12. NO LIABILITY FOR GOOD FAITH DETERMINATIONS. The members of the Board
shall not be liable for any act, omission, or determination taken or made in
good faith with respect to this Plan or any Option granted under it, and members
of the Board shall be entitled to indemnification and reimbursement by the
Corporation in respect of any claim, loss, damage, or expense (including
attorneys' fees; the costs of settling any suit, provided such settlement is
approved by independent legal counsel selected by the Corporation; and amounts
paid in satisfaction of a judgment, except a judgment based on a finding of bad
faith) arising therefrom to the full extent permitted by law and under any
directors and officers liability or similar insurance coverage that may from
time to time be in effect.
13. INFORMATION CONFIDENTIAL. As partial consideration for the granting of
each Option hereunder, the Optionee shall agree with the Corporation that he
will keep confidential all information and knowledge that he has relating to the
manner and amount of his participation in this Plan; provided, however, that
such information may be disclosed as required by law and may be given in
confidence to the Optionee's spouse, tax and financial advisors, or to a
financial institution to the extent that such information is necessary to secure
a loan. In the event any breach of this promise comes to the attention of the
Board, it shall take into consideration such breach, in determining whether to
recommend the grant of any future Option to such Optionee, as a factor
militating against the advisability of granting any such future Option to such
individual.
14. OTHER BENEFITS. Participation in this Plan shall not preclude the
Optionee from eligibility in any other stock option plan of the Corporation or
any Subsidiary Corporation or any old age benefit, insurance, pension, profit
sharing retirement, bonus, or other extra compensation plans which the
Corporation or any Subsidiary Corporation has adopted, or may, at any time,
adopt for the benefit of its employees.
15. EXECUTION OF RECEIPTS AND RELEASES. Any payment of cash or any
issuance or transfer of shares of Stock to an Optionee, or to his legal
representative, heir, legatee, or distributee, in accordance with the provisions
hereof, shall, to the extent thereof, be in full
-8-
<PAGE>
satisfaction of all claims of such persons hereunder. The Board may require any
Optionee, legal representative, heir, legatee, or distributee, as a condition
precedent to such payment, issuance, or transfer, to execute a release and
receipt therefor in such form as it shall determine.
16. NO GUARANTEE. Neither the Board nor the Corporation guarantees the
Common Stock of the Corporation from loss or depreciation.
17. CORPORATION RECORDS. Records of the Corporation or its Subsidiary
Corporations regarding the Optionee's period of employment, termination of
employment and the reason therefor, leaves of absence, re-employment, and other
matters shall be conclusive for all purposes hereunder, unless determined by the
Board to be incorrect.
18. INFORMATION. The Corporation and its Subsidiary Corporations shall,
upon request or as may be specifically required hereunder, furnish or cause to
be furnished, all of the information or documentation which is necessary or
required by the Board to perform its duties and functions under this Plan.
19. NO LIABILITY OF CORPORATION. The Corporation assumes no obligation or
responsibility to any Optionee or his personal representatives, heirs, legatees,
or distributees for any act of, or failure to act on the part of, the Board.
20. SEVERABILITY. If any provision of this Plan is held to be illegal or
invalid for any reason, the illegality or invalidity shall not affect the
remaining provisions hereof, but such provision shall be fully severable and
this Plan shall be construed and enforced as if the illegal or invalid provision
had never been included herein.
21. NOTICES. Whenever any notice is required or permitted hereunder, such
notice must be in writing and personally delivered or sent by mail. Any notice
required or permitted to be delivered hereunder shall be deemed to be delivered
on the date on which it is personally delivered, or whether actually received or
not, on the third business day after it is deposited in the United States mail,
certified or registered, postage prepaid, addressed to the person who is to
receive it at the address which such person has theretofore specified by written
notice delivered in accordance herewith. The Corporation or an Optionee may
change, at any time and from time to time, by written notice to the other, the
address which it or he had theretofore specified for receiving notices. Until
changes in accordance herewith, the Corporation and each Optionee shall specify
in the Option Agreement its address for receiving notices.
22. SUCCESSORS. This Plan shall be binding upon the Optionee, his heirs,
legatees, and legal representatives, upon the Corporation, its successors, and
assigns, and upon the Board, and its successors.
-9-
<PAGE>
23. HEADINGS. The titles and headings of the Sections hereof are included
for convenience of reference only and are not to be considered in construction
of the provisions hereof.
24. GOVERNING LAW. All questions arising with respect to the provisions
of this Plan shall be determined by application of the laws of the State of
Texas except to the extent Texas law is preempted by federal law. Questions
arising with respect to the provisions of an Option Agreement that are matters
of contract law shall be governed by the laws of the state specified in the
Option Agreement, except to the extent Texas corporate law conflicts with the
contract law of such state, in which event Texas corporate law shall govern. The
obligation of the Corporation to sell and deliver Common Stock hereunder is
subject to applicable laws and to the approval of any governmental authority
required in connection with the authorization, issuance, sale, or delivery of
such Common Stock.
25. WORD USAGE. Words used in the masculine shall apply to the feminine
where applicable, and wherever the context of this Plan dictates, the plural
shall be read as the singular and the singular as the plural.
26. APPROVAL OF SHAREHOLDERS. This Plan shall take effect on the date it
is adopted by the Board. However, if this Plan is not approved by the holders of
a majority of the outstanding shares of Common Stock of the Corporation, within
the period beginning on the date the Board adopts this Plan and ending twelve
(12) months after the date this Plan is adopted by the Board any Options granted
hereunder shall be null, void, and of no force and effect as of their grant
date.
IN WITNESS WHEREOF, the Corporation, acting by and through its officers
hereunto duly authorized has executed this instrument, effective this ____ day
of ________________, 1994.
CORPORATION:
EDGE PETROLEUM CORPORATION
By: /s/ John E. Calaway
--------------------------------
Name: John E. Calaway
------------------------------
Title: President
-----------------------------
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<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. 1 to Form S-4 of our
reports dated January 13, 1997, relating to the combined financial statements
of Edge Petroleum Corporation, a Texas corporation, affiliated entities and
direct interests, 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 14, 1997
<PAGE>
Exhibit 23.5
CONSENT OF PERSON NAMED TO BECOME A DIRECTOR
Pursuant to Rule 438 under the Securities Act of 1933, as amended (the
"Act"), I hereby consent to the use of my name and any references to me as a
person nominated to become a director of Edge Petroleum Corporation, a Delaware
corporation (the "Company"), in each of the Prospectus constituting a part the
Company's Registration Statement on Form S-1 and the Joint Proxy and Consent
Solicitation/Statement constituting a part of the Company's Registration
Statement on Form S-4, each of which has been filed with the Securities and
Exchange Commission pursuant to the Act.
Dated: January 6, 1997
/s/ Robert Shower
______________________________________
Robert Shower
<PAGE>
EXHIBIT 99.1
ARTICLES OF INCORPORATION
of
NEW EDGE PETROLEUM CORPORATION
The undersigned, a natural person eighteen (18) years of age or more,
acting as incorporator of a corporation under the Texas Business Corporation
Act, does hereby adopt the following Articles of Incorporation for such
corporation:
ARTICLE ONE
The name of the corporation is New Edge Petroleum Corporation.
ARTICLE TWO
The period of the corporation's duration is perpetual.
ARTICLE THREE
The purpose for which the corporation is organized is to engage in any
lawful business for which corporations may be organized under the laws of the
State of Texas.
ARTICLE FOUR
The aggregate number of share of stock which the corporation shall have
authority to issue is 150,000 shares of common stock of the par value of $.01
each.
<PAGE>
ARTICLE FIVE
The corporation will not commence business until it has received for the
issuance of its shares consideration of the value of One Thousand Dollars
($1,000.00), consisting of money, labor done or property actually received.
ARTICLE SIX
No shareholder shall be entitled as a matter of right to subscribe for,
purchase, or receive additional unissued or treasury shares of any class of the
corporation, whether now or later authorized, or any bonds, debentures,
warrants, options or other securities convertible into or entitling the holder
to purchase shares, preemptive rights being hereby denied for all purposes. Such
additional shares, bonds, debentures, warrants, options or other securities
convertible into or entitling the holder to purchase shares may be issued or
disposed of as the Board of Directors in its absolute discretion deems
advisable.
ARTICLE SEVEN
At each election for directors of the corporation, each shareholder
entitled to vote at such election shall have the right to vote, in person or by
proxy, only the number of shares owned by him for as many persons as there are
directors to be elected, and no shareholder shall ever have the right or be
permitted to cumulate his votes on any basis, any and all rights of cumulative
voting being hereby expressly denied.
2
<PAGE>
ARTICLE EIGHT
The address of the initial registered office of the corporation is 1111
Bagby Street, Suite 2100, Houston, Texas 77002, and the name of its initial
registered agent at such address is Robert Thomas.
ARTICLE NINE
A director of the corporation shall not be liable to the corporation or
its shareholders for monetary damages for an act or omission in the director's
capacity as a director, except that this article does not eliminate or limit the
liability of a director to the extent the director is found liable for:
(1) a breach of the director's duty of loyalty to the
corporation or its shareholders;
(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 with
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.
3
<PAGE>
ARTICLE TEN
The number of directors constituting the initial Board of Directors is
seven, and the names and addresses of the persons who are elected and qualified
are:
NAME ADDRESS
Mr. James D. Calaway 712 Main, Suite 1500 East
Houston, Texas 77002
Mr. John E. Calaway 1111 Bagby, Suite 2100
Houston, Texas 77002
Mr. Pherl Brossman 1111 Bagby, Suite 2100
Houston, Texas 77002
Mr. John Sfondrini One Landmark Square, Suite 611
Stanford, Connecticut 06901
Mr. Vincent Andrews 19 Old Kings Highway
Darien, Connecticut 06820
Mr. Joel Davis 825 One Energy Square
4925 Greenville Ave., Suite 825
Dallas, Texas 75206
Mr. Christopher Taylor 2 Pickwick Plaza, Suite 110
Greenwich, Connecticut 06831
John E. Calaway shall be the Chairman of the Board of Directors.
ARTICLE ELEVEN
Amendment of Bylaws
-------------------
The Shareholders shall have the exclusive power to alter, amend or
repeal Bylaws or adopt new Bylaws, and the Board of Directors may not alter,
amend or repeal Bylaws or adopt new Bylaws.
4
<PAGE>
ARTICLE TWELVE
The name and address of the incorporator is:
NAME ADDRESS
Robert Thomas 1111 Bagby, Suite 2100
Houston, Texas 77002
IN WITNESS WHEREOF, the undersigned incorporator has hereunto set his
hand this 27th day of March, 1991.
/s/ ROBERT THOMAS
-----------------
Robert Thomas
5
<PAGE>
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
NEW EDGE PETROLEUM CORPORATION
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, as amended (the "Act"), the undersigned corporation adopts the
following Articles of Amendment to its Articles of Incorporation to change its
name:
1. The name of the corporation is New Edge Petroleum Corporation.
2. Article One of the Articles of Incorporation is amended
hereafter to read as follows:
ARTICLE ONE
-----------
The name of the corporation is Edge Petroleum Corporation.
3. The amendment was adopted by the shareholders by unanimous
consent on April 8, 1991.
4. The number of shares outstanding at the time of such adoption
was 105,263 and the number of shares entitled to vote hereon was
105,263.
5. The holders of all of the shares outstanding and entitled to
vote on said amendment have signed a consent in writing adopting
said amendment.
6. The amendment will not result in any change in the amount of
stated capital of the Corporation.
WITNESS THE EXECUTION HEREOF, this the 8th day of April, 1991.
/s/ RICHARD S. DALE
--------------------------
Secretary
<PAGE>
THE STATE OF TEXAS )
)
COUNTY OF HARRIS )
Before me, the undersigned authority of this day personally appeared
Richard S. Dale, being by me duly sworn, declared that he is the Secretary of
the Corporation whose name appears on the foregoing document and that the
statement therein contained are true.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 8th day of April, 1991.
/s/ Lauren R. Svatek
--------------------
Notary Public in and for the
State of Texas
Lauren R. Svatek
----------------
Printed Name
My commission expires: April 30, 1994
<PAGE>
EXHIBIT 99.2
BYLAWS OF
NEW EDGE PETROLEUM CORPORATION
DATE: APRIL 8, 1991
<PAGE>
NEW EDGE PETROLEUM CORPORATION
------------------------------
BYLAWS
ARTICLE I
Offices
-------
Section 1.1 Principal Office. The principal office of the Corporation
shall be 1111 Bagby, Suite 2100, Houston, Texas 77002.
Section 1.2 Registered Office. The registered office of the Corporation
required by the Texas Business Corporation Act to be maintained in the State of
Texas may be, but need not be, identical with the principal office, and the
address of the registered office may be changed from time to time by the Board
of Directors.
Section 1.3 Other Offices. The Corporation may also have offices at such
other places, both within and without the State of Texas, as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
------------------------
Section 2.1 Place of Meetings. The Board of Directors may designate any
place, either within or without the State of Texas, as the place of meeting for
any annual meeting or for any special meeting called by the Board. A waiver of
notice signed by all shareholders entitled to vote at a meeting may designate
any place,
<PAGE>
either within or without the State of Texas, as the place for the holding of
such meeting. If no designation is made, or if a special meeting be otherwise
called, the place of meeting shall be the principal office of the Corporation.
Section 2.2 Annual Meeting. The annual meeting of shareholders
commencing with the year 1992 shall be held at such time, on such day and at
such place as may be designated by the Board of Directors, at which time the
shareholders shall elect a Board of Directors and transact such other business
as may properly be brought before the meeting.
Section 2.3 Special Meetings. Special meetings of the shareholders for
any purpose or purposes, unless otherwise prescribed by law or by the Articles
of Incorporation, may be called by (a) the Chairman of the Board, (b) the
President, (c) the Board of Directors or (d) the holders of at least ten percent
(10%) of all of the shares entitled to vote at the meetings. Business
transacted at all special meetings shall be confined to the purpose or purposes
stated in the call.
Section 2.4 Notice of Meetings. Written or printed notice of all
meetings of shareholders stating the place, day and hour thereof, and in the
case of a special meeting the purpose or purposes for which the meeting is
called, shall be personally delivered or mailed, not less than ten (10) days nor
more than sixty (60) days prior to the date of the meeting, to the shareholders
of record entitled to vote at such meeting. If mailed, the notice shall be
addressed to the shareholders as their
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addresses appear on the stock transfer books of the Corporation and the postage
shall be prepaid. Personal delivery of any such notice to any officer of a
corporation or association, or to any member of a partnership, shall constitute
delivery of such notice to such corporation, association or partnership.
Section 2.5 Voting Lists. The officer or agent having charge of the
stock transfer books for shares of the Corporation shall make, at least ten (10)
days before each meeting of the shareholders, a complete list of shareholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of each and the number of shares held by
each, which list, for a period of ten (10) days prior to such meeting, shall be
kept on file at the registered office of the Corporation and shall be subject to
inspection by any shareholders at any time during usual business hours. Such
list shall also be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any shareholder for the duration of
the meeting. The original stock transfer books shall be prima facie evidence as
to who are the shareholders entitled to examine such list or transfer books or
to vote at any meeting of shareholders. Failure to comply with this Section
2.5 with respect to any meeting of shareholders shall not affect the validity of
any action taken at such meeting.
Section 2.6 Quorum. The holders of a majority of the shares entitled to
vote, present in person or represented by proxy, shall constitute a quorum at
all meetings of the shareholders for the
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transaction of business, except as otherwise provided by law, by the Articles of
Incorporation or by these Bylaws. If, however, such quorum shall not be present
or represented at any meeting of the shareholders, the shareholders entitled to
vote at such meeting, present in person or represented by proxy, shall have the
power to adjourn the meeting from time to time without notice other than
announcement at the meeting until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented any
business may be transacted which might have been transacted at the meeting as
originally convened. The shareholders present at a duly organized meeting at
which a quorum was present may continue to transact business until adjournment
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum present.
Section 2.7 Organization.
(a) The Chairman of the Board shall preside at all meetings of the
shareholders. In the absence of the Chairman of the Board, any shareholder or
the duly appointed proxy of any shareholder may call the meeting to order and a
chairman shall be elected from among the shareholders present.
(b) The Secretary of the Corporation shall act as secretary at all
meetings of the shareholders. In his absence an Assistant Secretary shall so
act and in the absence of all of these officers the presiding officer may
appoint any person to act as secretary of the meeting.
Section 2.8 Proxies.
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(a) At any meeting of the shareholders every shareholder entitled to vote
at such meeting shall be entitled to vote in person or by proxy executed in
writing by such shareholder or by his duly authorized attorney-in-fact. Proxies
shall be filed with the Secretary immediately after the meeting has been called
to order.
(b) No proxy shall be valid after eleven (11) months from the date of its
execution unless such proxy otherwise provides.
(c) Each proxy shall be revocable before it has been voted unless the
proxy form conspicuously states that the proxy is irrevocable and the proxy is
coupled with an interest, including the appointment as proxy of (i) a pledge,
(ii) a person who purchased or agreed to purchase, or owns or holds an option to
purchase the shares, (iii) a creditor of the Corporation who extended its credit
under terms requiring the appointment, (iv) an employee of the Corporation whose
employment contract requires the appointment or (v) a party to a voting
agreement created under the Texas Business Corporation Act. A revocable proxy
shall be deemed to have been revoked if the Secretary of the Corporation shall
have received at or before the meeting instructions of revocation or a proxy
bearing a later date, which instructions or proxy shall have been duly executed
and dated in writing by the shareholders.
(d) In the event that any instrument in writing shall designate two (2) or
more persons to act as proxies, a majority of such persons present at the
meeting or, if only one shall be present, then that one shall have and may
exercise all of the
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powers conferred by such written instrument upon all of the persons so
designated unless the instrument shall otherwise provide.
Section 2.9 Voting of Shares. Except as otherwise provided by law, the
Articles of Incorporation or these Bylaws (and subject to any voting agreement
in effect among the shareholders), each shareholder shall be entitled at each
meeting of shareholders to one (1) vote on each matter submitted to a vote at
such meeting for each share having voting rights registered in his name on the
books of the Corporation at the time of the closing of the stock transfer books
(or at the record date for such meeting). When a quorum is present at any
meeting (and not withstanding the subsequent withdrawal of enough shareholders
to leave less than a quorum present) the vote of holder of a majority of the
shares entitled to vote, present in person or represented by proxy, shall decide
any matter submitted to such meeting, unless the matter is one upon which by law
or by express provision of the Articles of Incorporation or of these Bylaws the
vote of a greater number is required, in which case the vote of such greater
number shall govern and control the decision of such matter.
Section 2.10 Voting of Shares by Certain Holders.
(a) Shares standing in the name of another corporation or partnership may
be voted by such officer, agent or proxy as by the bylaws of such corporation or
partnership agreement, as the case may be, may authorize or, in the absence of
such authorization, as the Board of Directors of such corporation may determine,
or otherwise pursuant to any voting agreement which may be in effect.
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(b) Shares held by an administrator, executor, guardian or conservator may
be voted by him so long as such shares forming part of an estate are in the
possession and form a part of the estate being served by him, either in person
or by proxy, without a transfer of such shares into his name. Shares standing
in the name of a trustee may be voted by him, either in person or by proxy, but
no trustee shall be entitled to vote shares held by him without a transfer of
such shares into his name as trustee.
(c) Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into his name if authority to do so
be contained in an appropriate order of the court by which such receiver was
appointed.
(d) A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
(e) Shares of the Corporation's stock (i) owned by the Corporation itself,
(ii) owned by another corporation, the majority of the voting stock of which is
owned or controlled by the Corporation, or (iii) held by the Corporation in a
fiduciary capacity shall not be voted, directly or indirectly, at any meeting,
and shall not be counted in determining the total number of outstanding shares
at any given time.
Section 2.11 Election of Directors. At each election for directors, each
shareholder entitled to vote at such election
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shall, unless otherwise provided by the Articles of Incorporation or by
applicable law or by applicable voting agreements, have the right to vote the
number of shares owned by him for as many persons as there are to be elected and
for whose election he has a right to vote. Unless otherwise provided by the
Articles of Incorporation, no shareholder shall have the right or be permitted
to cumulate his votes on any basis.
Section 2.12 Telephone Meetings. Shareholders may participate in and hold
a meeting of the shareholders 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 shall constitute presence in person at such meeting, except where 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.
Section 2.13 Action Without Meeting. Any action required by any provision
of law or of the Articles of Incorporation or these Bylaws to be taken at a
meeting of the shareholders or any action which may be taken at a meeting of the
shareholders may be taken without a meeting if a consent in writing, setting
forth the action so taken, shall be signed by all of the shareholders entitled
to vote with respect to the subject matter thereof, and such consent shall have
the same force and effect as a unanimous vote of the shareholders.
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ARTICLE III
Directors
---------
Section 3.1 Number and Qualification. The Board of Directors shall be
composed of nine (9) members who shall be elected annually by the shareholders.
Directors need not be residents of the State of Texas or shareholders of the
Corporation.
Section 3.2 Election and Term of Office. The directors shall be elected
at the annual meeting of the shareholders (except as provided in Sections 3.3
and 3.4). Each director elected shall hold office until his successor shall be
elected at an appropriate annual meeting of the shareholders and shall qualify,
or until his death, resignation or removal in the manner hereinafter provided.
Section 3.3 Resignation. Any director may resign at any time by giving
written notice to the President or Secretary. Such resignation shall take
effect at the time specified therein, and unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make it effective.
Section 3.4 Removal. At any special meeting of the shareholders called
expressly for that purpose, any director or directors, including the entire
Board of Directors, may be removed, either with or without cause.
Section 3.5 Vacancies.
Any vacancy occurring in the Board of Directors or any directorship to be
filled by reason of an increase in the number of directors may only be filled by
election at an annual or special meeting of the shareholders called for that
purpose.
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Section 3.6 General Powers. The property, business and affairs of the
Corporation shall be managed by the Board of Directors. In addition to the
powers and authorities expressly conferred upon them by these Bylaws, the Board
of Directors may exercise all such powers of the Corporation and do all such
lawful acts and things as are not by law or by the Articles of Incorporation or
by these Bylaws directed or required to be exercised or done by the
shareholders.
Section 3.7 Compensation. Directors as such shall not receive any stated
salary for th eir services, but by resolution of the Board, a fixed sum for
expenses of attendance, if any, may be allowed for attendance at any regular or
special meeting of the Board, provided that nothing herein contained shall be
construed to preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
ARTICLE IV
Meetings of the Board
---------------------
Section 4.1 Place of Meetings. The directors of the corporation may hold
their meetings, both regular and special, either within or without the State of
Texas.
Section 4.2 Annual Meeting. The first meeting of each newly elected
Board shall be held immediately following the adjournment of the annual meeting
of the shareholders and no notice of such
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meeting shall be necessary to the newly elected directors in order legally to
constitute the meeting, provided a quorum shall be present, or they may meet at
such time and place as shall be fixed by the consent in writing of all the
directors.
Section 4.3 Regular Meetings. Regular meetings of the Board, in addition
to the annual meetings referred to in Section 4.2, may be held without notice at
such time and place as shall from time to time be determined by the Board.
Section 4.4 Special Meetings. Special meetings of the Board may be
called by the Chairman of the Board or by the President on three (3) days'
notice (oral or written) to each director. Special meetings shall be called by
the President or the secretary on like notice on the written request of any
director. Neither the purpose of, nor the business to be transacted at, any
special meeting of the Board of Directors need be specified in the notice or
waiver of notice of such meeting. Attendance of a director at a meeting shall
constitute a waiver of notice of such meeting except where a director attends a
meeting for the express purpose of objecting to the transaction of any business
on the grounds that the meeting is not lawfully called or convened. Any
director so requesting, shall have the right to participate in such special
meetings by telephone.
Section 4.5 Quorum and Action. At all meetings of the Board, the presence
of a majority of the directors shall be necessary and sufficient to constitute a
quorum for the transaction of business and the act of a majority of the
directors at any meeting at which
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a quorum is present shall be the act of the Board of Directors unless the act of
a greater number is required by law, the Articles of Incorporation or these
bylaws. If a quorum shall not be present at any meeting of directors, the
directors present may adjourn the meeting from time to time without notice other
than announcement at the meeting until a quorum shall be present.
Section 4.6 Presumption of Assent to Action. A director who is present
at a meeting of the Board at which action on any corporate matter is taken shall
be presumed to have assented to the action taken unless his dissent shall be
entered in the minutes of the meeting or unless he shall file his written
dissent to such action with the secretary of the meeting before the adjournment
thereof or shall forward such dissent by registered mail to the Secretary of the
Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
Section 4.7 Telephone Meetings. Directors may participate in and hold a
meeting of the Board of Directors 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 shall constitute presence in person at such meeting, except where 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.
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Section 4.8 Action Without Meeting. 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 committee, as
the case may be, and such consent shall have the same force and effect as a
unanimous vote at a meeting.
ARTICLE V
Officers
--------
Section 5.1 Number. The officers of the Corporation shall be a President
and a Secretary. The Board of Directors may also elect a Chairman of the Board,
one (1) or more Vice Presidents, a Treasurer, one (1) or more Assistant
Secretaries and one (1) or more Assistant Treasurers. One (1) person may hold
any two (2) or more of these offices.
Section 5.2 Election, Term of Office and Qualification. The Board of
Directors shall elect officers, none of whom need be a member of the Board,
except for the Chairman of the Board, at its first meeting after each annual
meeting of shareholders. Each officer so elected shall hold office until his
successor shall have been duly elected and qualified or until his death,
resignation or removal in the manner hereinafter provided.
Section 5.3 Subordinate Officers. The Board of Directors may appoint
such other officers and agents as it shall deem necessary who shall hold their
offices for such terms, have such authority
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and perform such duties as the Board of Directors may from time to time
determine. The Board of Directors may delegate to any committee or office the
power to appoint any such subordinate officer or agent. No subordinate officer
appointed by any committee or superior officer as aforesaid shall be considered
as an officer of the Corporation, the officers of the Corporation being limited
to the officers elected or appointed as such by the Board of Directors.
Section 5.4 Resignation. Any officer may resign at any time by giving
written notice thereof to the Board of Directors or to the President or
Secretary of the Corporation. Any such resignation shall take effect at the time
specified therein and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
Section 5.5 Removal. Any officer elected or appointed by the Board of
Directors may be removed at any time with or without cause by the affirmative
vote of a majority of the whole Board of Directors. Any other officer may be
removed at any time with or without cause by the Board of Directors or by any
committee or superior officer in whom such power of removal may be conferred by
the Board of Directors. The removal of any officer 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 any contract
rights.
Section 5.6 Vacancies. A vacancy in any office shall be filled for the
unexpired portion of the term by the Board of
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Directors, but in case of a vacancy occurring in an office filled by a committee
or superior officer in accordance with the provisions of Section 5.3, such
vacancy may be filled by such committee or superior officer.
Section 5.7 The Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the shareholders and directors, and shall be ex
officio a member of all standing committees. In addition, the Chairman of the
Board shall perform whatever duties and shall exercise all powers that are given
to him by the Board of Directors.
Section 5.8 The President. The President shall be the chief executive
officer of the Corporation. He shall have general and active management of the
business of the Corporation, shall have the general supervision and direction of
all other officers of the Corporation with full power to see that their duties
are properly performed and shall see that all orders and resolutions of the
Board of Directors are carried into effect. He is further authorized to manage
the properties and business of the Corporation; to hire and discharge all
agents, employees and servants, and to determine their wages, compensations and
commissions for services rendered; to purchase or authorize the purchase of all
leases (oil and gas or otherwise), goods, wares, merchandise, equipment,
supplies and machinery and any other items of real or personal property required
in the transaction of the business of the Corporation; to lease or obtain
facilities necessary or required in the transaction of the business of the
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Corporation; to determine the purchase and sale price of all prospects,
properties and services purchased or sold by the Corporation; subject at all
times and in all respects to the control and direction of the Board of Directors
of this Corporation, to take such steps as may be necessary or desirable in the
prosecution of the business and operations for which this Corporation is
organized. He may sign, with any other proper officer, certificates for shares
of the Corporation and any deeds, bonds, mortgages, contracts and other
documents which the Board of Directors has authorized to be executed, except
where required by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors of these Bylaws, to some other officer or agent of the Corporation.
In addition, the President shall perform whatever duties and shall exercise all
the powers that are given to him by the Board of Directors.
Section 5.9 The Vice Presidents. The Vice Presidents shall perform the
duties as are given to them by these Bylaws and as may from time to time be
assigned to them by the Board of Directors, by the Chairman of the Board or by
the President and may sign with any other proper officer, certificates for
shares of the Corporation. At the written request of the President, the Vice
President designated by the President shall perform the duties and exercise the
powers of the President.
Section 5.10 The Secretary. The Secretary, when available, shall attend
all meetings of the Board of Directors and all
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meetings of the shareholders and record all votes and the minutes of all
proceedings in a book to be kept for that purpose and shall perform like duties
for the Executive Committee and standing committees when required. He shall
give, or cause to be given, notice of all meetings of the shareholders and
special meetings of the Board of Directors as required by law or these Bylaws,
be custodian of the corporate records and have general charge of the stock books
of the Corporation and shall perform such other duties as may be prescribed by
the Board of Directors, by the Chairman of the Board or by the President under
whose supervision he shall be. He may sign, with any other proper officer,
certificates for shares of the Corporation and shall keep in safe custody the
seal of the Corporation, and, when authorized by the Board, affix the same to
any instrument requiring it and, when so affixed, it shall be attested by his
signature or by the signature of the Treasurer or an Assistant Secretary.
Section 5.11 Assistant Secretaries. The Assistant Secretaries shall
perform the duties as are given to them by these Bylaws or as may from time to
time be assigned to them by the Board of Directors or by the Secretary. At the
request of the Secretary, or in his absence or disability, the Assistant
Secretary, designated by the Secretary (or in the absence of such designation
the senior Assistant Secretary), shall perform the duties and exercise the
powers of the Secretary.
Section 5.12 The Treasurer. The Treasurer shall have the custody and be
responsible for all corporate funds and securities
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and shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all monies and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the Board of Directors. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, taking proper vouchers
for such disbursements, and shall render to the Chairman of the Board, the
President and the Directors, at the regular meetings of the Board, or whenever
they may require it, an account of all his transactions as Treasurer and of the
financial condition of the Corporation. He may sign, with any other proper
officer, certificates for shares of the Corporation.
Section 5.13 Assistant Treasurers. The Assistant Treasurers shall
perform the duties as given to them by these Bylaws or as may from time to time
be assigned to them by the Board of Directors or by the Treasurer. At the
request of the Treasurer, or in his absence or disability, the Assistant
Treasurer, designated by the Treasurer (or in the absence of such designation,
the senior Assistant Treasurer), shall perform the duties and exercise the
powers of the Treasurer.
Section 5.14 Treasurer's Bond. If required by the Board of Directors, the
Treasurer and any Assistant Treasurer shall give the Corporation a bond in such
sum and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement or
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removal from office, of all books, papers, vouchers, money and other property
of whatever kind in his possession or under his control belonging to the
Corporation.
Section 5.15 Salaries. The salary or other compensation of officers shall
be fixed from time to time by the Board of Directors. The Board of Directors
may delegate to any committee or officer the power to fix from time to time the
salary or other compensation of subordinate officers and agents appointed in
accordance with the provisions of Section 5.3.
ARTICLE VI
Corporate Shares
----------------
Section 6.1 Share Certificates.
(a) The certificates representing shares of the Corporation shall be in
such form, not inconsistent with statutory provisions and the Articles of
Incorporation, as shall be approved by the Board of Directors. The certificates
shall be signed by the Chairman of the Board, the President or a Vice President
and a Secretary or Assistant Secretary, or such other or additional officers as
may be prescribed from time to time by the Board of Directors, and may be sealed
with the corporate seal or a facsimile thereof. The signatures of such officer
or officers upon a certificate may be facsimiles, if the certificate is
countersigned by a transfer agent, or registered by a registrar, either of which
is other than the Corporation itself or an employee of the Corporation. In case
any officer who has signed or whose facsimile
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signature has been placed upon a certificate shall have ceased to be such
officer before such certificate is issued, it may be issued with the same effect
as if he were such officer at the date of its issuance.
(b) If the Corporation is authorized to issue shares of more than one (1)
class or more than one (1) series of any class, there shall be set forth on the
face or back of the certificate or certificates, which the Corporation shall
issue to represent shares of such class or series of stock, such legends or
statements as may be required by applicable law or the Articles of Incorporation
or as may be approved by the Board of Directors.
(c) In the event the Corporation has, by its Articles of Incorporation,
limited or denied the preemptive right of shareholders of any class or series of
stock, there shall be set forth on the face or back of the certificate or
certificates, which the Corporation shall issue to represent shares of such
class or series of stock, such legends or statements as shall be required by
applicable law or the Articles of Incorporation or as may be approved by the
Board of Directors.
(d) All certificates for each class or series of stock shall be
consecutively numbered and the name of the person owning the shares represented
thereby, with the number of such shares and the date of issue, shall be entered
on the Corporation's books.
(e) All certificates surrendered to the Corporation shall be canceled,
and, except as provided in Section 6.2 with respect to lost, destroyed or
mutilated certificates, no new certificate shall
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be issued until the former certificate for the same number of shares has been
surrendered and canceled.
Section 6.2 Lost Certificates, etc. The Board of Directors may direct a
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost or destroyed. In authorizing such issue of a
new certificate or certificates, the Board of Directors may, in its discretion
and as a condition precedent to the issue thereof, require the owner of such
lost or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or indemnify the
Corporation as the Board of Directors may prescribe.
Section 6.3 Transfer of Shares. Subject to any restrictions upon
transfer, upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer and satisfaction of
the Corporation that the requested transfer complies with the provisions of
applicable state and federal laws and regulations and any agreements to which
the Corporation is a party, the Corporation shall issue a new certificate to the
person entitled thereto, cancel the old certificate and record the transaction
upon its books.
Section 6.4 Ownership of Shares. The Corporation shall be entitled to
treat and recognize the holder of record of any share
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or shares 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 Texas.
Section 6.5 Closing of Transfer Books. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders 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 its own shares) or a share dividend, or in order to make a
determination of shareholders for any other proper purpose, the Board of
Directors may provide that the stock transfer books shall be closed for a stated
period but not to exceed, in any case, sixty (60) days. If the stock transfer
books shall be closed for the purpose of determining shareholders entitled to
notice of or to vote at a meeting of shareholders, such books shall be closed
for at least ten (10) days immediately preceding such meeting. In lieu of
closing the stock transfer books, the Board of Directors may fix in advance a
date as the record date for any such determination of shareholders, such date in
any case to be not more than sixty (60) days and, in case of a meeting of
shareholders, not less than ten (10) days prior to the date on which the
particular action requiring such determination of shareholders is to be taken,
and the determination of shareholders on such record date shall apply with
respect to the particular action requiring the same
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notwithstanding any transfer of shares on the books of the Corporation after
such record date.
Section 6.6 Employee Stock Options. The Corporation shall not grant
options to purchase shares to its employees, officers and directors without the
approval of two-thirds of the disinterested Board members.
ARTICLE VII
Indemnification
---------------
Section 7.1 Definitions. In this Article:
(a) "Indemnitee" means (i) any present or former director, advisory
director or officer of the Corporation, (ii) any person who while serving in any
of the capacities referred to in clause (i) hereof served at the Corporation's
request as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, and (iii) any person nominated or designated by (or pursuant to
authority granted by) the Board of Directors or any committee thereof to serve
in any of the capacities referred to in clauses (i) or (ii) hereof.
(b) "Official Capacity" means (i) when used with respect to a director,
the office of director of the Corporation and (ii) when used with respect to a
person other than a director, the elective or appointive office of the
Corporation held by such person or the employment or agency relationship
undertaken by such person on
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behalf of the Corporation, but in each case does not include service for any
other foreign or domestic corporation or any partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise.
(c) "Proceeding" means any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative, arbitrative or
investigative, any appeal in such an action, suit or proceeding and any inquiry
or investigation that could lead to such an action, suit or proceeding.
Section 7.2 Indemnification. The Corporation shall indemnify every
Indemnitee against all judgments, penalties (including excise and similar
taxes), fines, amounts paid in settlement and reasonable expenses actually
incurred by the Indemnitee in connection with any Proceeding in which he was, is
or is threatened to be named defendant or respondent, or in which he was or is a
witness without being named a defendant or respondent, by reason, in whole or in
part, of his serving or having served, or having been nominated or designated to
serve, in any of the capacities referred to in Section 7.1, if it is determined
in accordance with Section 7.4 that the Indemnitee (a) conducted himself in good
faith, (b) reasonably believed, in the case of conduct in his Official Capacity,
that his conduct was in the Corporation's best interests, and (c) in the case of
any criminal proceeding, had no reasonable cause to believe that his conduct was
unlawful; provided, however, that in the event that an Indemnitee is found
liable to the Corporation or is found liable on the basis that
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personal benefit was improperly received by the Indemnitee the indemnification
(i) is limited to reasonable expenses actually incurred by the Indemnitee in
connection with the Proceeding and (ii) shall not be made in respect of any
Proceeding in which the Indemnitee shall have been found liable for willful or
intentional misconduct in the performance of his duty to the Corporation. Except
as provided in the immediately preceding proviso to the first sentence of this
Section 7.2, no indemnification shall be made under this Section 7.2 in respect
of any Proceeding in which such Indemnitee shall have been (x) found liable on
the basis that personal benefit was improperly received by him, whether or not
the benefit resulted from an action taken in the Indemnitee's Official Capacity,
or (y) found liable to the Corporation. The termination of any Proceeding by
judgment, order, settlement or conviction, or on a plea of nolo contendere or
its equivalent, is not of itself determination that the Indemnitee did not meet
the requirements set forth in clauses (a), (b) or (c) in the first sentence of
this Section 7.2. An Indemnitee shall be deemed to have been found liable in
respect of any claim, issue or matter only after the Indemnitee shall have been
so adjudged by court of competent jurisdiction after exhaustion of all appeals
therefrom. Reasonable expenses shall include, without limitation, all court
costs and all fees and disbursements of attorneys for the Indemnitee. The
indemnification provided herein shall be applicable whether or not negligence of
the Indemnitee is alleged or proven.
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Section 7.3 Successful Defense. Without limitation of Section 7.2 and in
addition to the indemnification provided for in Section 7.2, the Corporation
shall indemnify every Indemnitee against reasonable expenses incurred by such
person in connection with any Proceeding in which he is a witness or a named
defendant or respondent because he served in any of the capacities referred to
in Section 7.1, if such person has been wholly successful, on the merits or
otherwise, in defense of the Proceeding.
Section 7.4 Determinations. Any indemnification under Section 7.2
(unless ordered by a court of competent jurisdiction) shall be made by the
Corporation only upon a determination that indemnification of the Indemnitee is
proper in the circumstances because he has met the applicable standard of
conduct. Such determination shall be made (a) by the Board of Directors by a
majority vote of a quorum consisting of directors who, at the time of such vote,
are not named defendants or respondents in the Proceeding; (b) if such a quorum
cannot be obtained, then by a majority vote of a committee of the Board of
Directors, duly designated to act in the matter by a majority vote of all
directors (in which designation directors who are named defendants or
respondents in the Proceeding may participate), such committee to consist solely
of two (2) or more directors who, at the time of the committee vote, are not
named defendants or respondents in the Proceeding; (c) by special legal counsel
selected by the Board of Directors or a committee thereof by vote as set forth
in clauses (a) or (b) of this Section 7.4 or, if the requisite quorum of all
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of the directors cannot be obtained therefor and such committee cannot be
established, by a majority vote of all of the directors (in which directors who
are named defendants or respondents in the Proceeding may participate); or (d)
by the shareholders in a vote that excludes the shares held by directors that
are named defendants or respondents in the Proceeding. Determination as to
reasonableness of expenses shall be made in the same manner as the determination
that indemnification is permissible, except that if the determination that
indemnification is permissible is made by special legal counsel, determination
as to reasonableness of expenses must be made in the manner specified in clause
(c) of the preceding sentence for the selection of special legal counsel. In the
event a determination is made under this Section 7.4 that the Indemnitee has met
the applicable standard of conduct as to some matters but not as to others,
amounts to be indemnified may be reasonably prorated.
Section 7.5 Advancement of Expenses. Reasonable expenses (including
court costs and attorneys' fees) incurred by an Indemnitee who was or is a
witness or was, is or is threatened to be made a named defendant or respondent
in a Proceeding shall be paid by the Corporation at reasonable intervals in
advance of the final disposition of such Proceeding, and without making any of
the determinations specified in Section 7.4, after receipt by the Corporation of
(a) a written affirmation by such Indemnitee of his good faith belief that he
has met the standard of conduct necessary for indemnification by the Corporation
under this Article and (b)
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a written undertaking by or on behalf of such Indemnitee to repay the amount
paid or reimbursed by the Corporation if it shall ultimately be determined that
he is not entitled to be indemnified by the Corporation as authorized in this
Article. Such written undertaking shall be an unlimited obligation of the
Indemnitee but need not be secured, and it may be accepted without reference to
financial ability to make repayment. Notwithstanding any other provision of this
Article, the Corporation may pay or reimburse expenses incurred by an Indemnitee
in connection with his appearance as a witness or other participation in a
Proceeding at a time when he is not named a defendant or respondent in the
Proceeding.
Section 7.6 Employee Benefit Plans. For purposes of this Article, the
Corporation shall be deemed to have requested an Indemnitee to serve an employee
benefit plan whenever the performance by him of his duties to the Corporation
also imposes duties on or otherwise involves services by him to the plan or
participants or beneficiaries of the plan. Excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable law
shall be deemed fines. Action taken or omitted by an Indemnitee with respect to
an employee benefit plan in the performance of his duties for a purpose
reasonably believed by him to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose which is not
opposed to the best interests of the Corporation.
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Section 7.8 Notice. Any indemnification of or advance of expenses to an
Indemnitee in accordance with this Article shall be reported in writing to the
shareholders of the Corporation with or before the notice or waiver of notice to
the next shareholders' meeting or with or before the next submission to
shareholders of a consent to action without a meeting and, in any case, within
the twelve-month period immediately following the date of the indemnification or
advance.
Section 7.9 Construction. The indemnification provided by this Article
shall be subject to all valid and applicable laws, including, without
limitation, Article 2.02-1 of the Texas Business Corporation Act, and, in the
event this Article or any of the provisions hereof or the indemnification
contemplated hereby are found to be inconsistent with or contrary to any such
valid laws, the latter shall be deemed to control and this Article shall be
regarded as modified accordingly, and, as so modified, to continue in full force
and effect.
Section 7.10 Continuing Offer, Reliance, etc. The provisions of this
Article (a) are for the benefit of, and may be enforced by, each Indemnitee of
the Corporation, the same as if set forth in their entirety in a written
instrument duly executed and delivered by the Corporation and such Indemnitee
and (b) constitute a continuing offer to all present and future Indemnitees. The
Corporation, by its adoption of these Bylaws, (x) acknowledges and agrees that
each Indemnitee of the Corporation has relied upon and will continue to rely
upon the provisions of this Article in
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becoming, and serving in any of the capacities referred to in Section 7.1(a) of
this Article, (y) waives reliance upon, and all notices of acceptance of, such
provisions by such Indemnitees and (z) acknowledges and agrees that no present
or future Indemnitee shall be prejudiced in his right to enforce the provisions
of this Article in accordance with their terms by any act or failure to act on
the part of the Corporation.
Section 7.11 Effect of Amendment. No amendment, modification or repeal
of this Article or any provision hereof shall in any manner terminate, reduce or
impair the right of any past, present or future Indemnitees to be indemnified by
the Corporation, nor the obligation of the Corporation to indemnify any such
Indemnitees, under and in accordance with the provisions of the Article as in
effect immediately prior to such amendment, modification or repeal with respect
to claims arising from or relating to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of when such claims
may arise or be asserted.
ARTICLE VIII
General Provisions
------------------
Section 8.1 Waiver of Notice.
----------- -----------------
(a) Whenever, under the provisions of applicable law or of the Articles
of Incorporation or of these Bylaws, any notice is required to be given to any
shareholder or director, a waiver thereof in writing signed by the person or
persons entitled to such
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notice, whether before or after the time stated therein, shall be equivalent to
the giving of such notice.
(b) Attendance of a director at a meeting shall constitute a waiver of
notice of such meeting except where a director attends a meeting for the express
purpose of objecting to the transaction of any business on the grounds that the
meeting is not lawfully called or convened.
Section 8.2 Seal. If one be adopted, the corporate seal shall have
inscribed thereon the name of the Corporation and shall be in such form as may
be approved by the Board of Directors. Said seal may be used by causing it or a
facsimile of it to be impressed or affixed or in any manner reproduced.
Section 8.3 Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
Section 8.4 Checks, Notes, etc. All checks or demands for money and
notes of the Corporation shall be signed by such officer or officers or such
other person or persons as the Board of Directors may from time to time
designate. The Board of Directors may authorize any officer or officers or such
other person or persons to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the Corporation, and such authority
may be general or confined to specific instances.
Section 8.5 Examination of Books and Records. The Board of Directors
shall determine from time to time whether, and if allowed, when and under what
conditions and regulations the accounts and books of the Corporation (except
such as may by
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statute be specifically opened to inspection) or any of them shall be open to
inspection by the shareholders, and the shareholders' rights in this respect are
and shall be restricted and limited accordingly.
Section 8.6 Voting Upon Shares or Interests Held by the Corporation.
Subject at all times to the Board of Directors, the Chairman of the Board or the
President, acting on behalf of the Corporation, shall have full power and
authority to attend and to act and to vote at any meeting of shareholders of any
corporation in which the Corporation may hold shares or of partners of any
general or limited partnership in which the Corporation shall be a general or
limited partner and at any such meeting shall possess and may exercise any and
all of the rights and powers incident to the ownership of such shares or
interests, as the case may be, which, as the owner thereof, the Corporation
might have possessed and exercised, if present. The Board of Directors by
resolution from time to time may confer like powers upon any other person or
persons, or restrict or inhibit the action of such officer, or direct him how to
vote or proceed.
Section 8.7 Interested Directors. Any contract or transaction between
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers or have a financial interest, shall be approved by the
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affirmative vote of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum.
ARTICLE IX
Amendments
----------
Section 9.1 Amendment by Board of Directors. The power to alter, amend
or repeal these Bylaws or adopt new Bylaws shall be as set forth in the Articles
of Incorporation.
ARTICLE X
Subject to All Laws
-------------------
Section 10.1 Subject to All Laws. The provisions of these Bylaws shall
be subject to all valid and applicable laws, including, without limitation, the
Texas Business Corporation Act as now or hereafter amended, and in the event
that any of the provisions of these Bylaws are found to be inconsistent with or
contrary to any such valid laws, the latter shall be deemed to control and these
Bylaws shall be deemed modified accordingly, and, as so modified, to continue in
full force and effect.
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EXHIBIT 99.3
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PROXY
EDGE PETROLEUM CORPORATION
A TEXAS CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD FEBRUARY , 1997
The undersigned, having received the Joint Proxy and Consent Solicitation
Statement/Prospectus dated January __, 1997 (the "Proxy Statement"), hereby
appoints John E. Calaway, James D. Calaway and Richard S. Dale, jointly and
severally, proxies, with full power of substitution and with discretionary
authority, to represent and to vote, as designated on the reverse side hereof,
all shares of common stock which the undersigned is entitled to vote at the
special meeting of shareholders of Edge Petroleum Corporation, a Texas
corporation (the "Company"), or any adjournments or postponements thereof.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned shareholder.
The Board of Directors of the Company recommends a vote FOR the Combination
Agreement.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE COMBINATION
AGREEMENT.
Edge Petroleum Corporation
Texaco Heritage Plaza
1111 Bagby, Suite 2100
Houston, Texas 77002
(continued and to be signed and dated on other side)
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<PAGE>
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1. Proposal to approve and adopt the Amended and Restated Combination
Agreement dated as of January 13, 1997, by and among the Company; Edge Group II
Limited Partnership, a Connecticut limited partnership ("Edge Group II");
Gulfedge Limited Partnership, a Texas limited partnership ("Gulfedge"); Edge
Group Partnership, a Connecticut general partnership ("Edge Group"); Edge
Petroleum Corporation, a Delaware corporation ("New Edge"); and Edge Mergeco,
Inc., a Texas corporation ("Mergeco"); pursuant to which, among other things,
Mergeco will merge with and into the Company (the "Merger"), the separate
existence of Mergeco shall thereupon cease and the Company shall be the
surviving corporation of such merger and a wholly owned subsidiary of New Edge;
as a result of which each currently outstanding share of common stock of the
Company would be converted into 22.307862 shares of common stock of New Edge,
which would continue to conduct, directly or indirectly, the Company's oil and
gas business. The Combination Agreement includes the Plan of Merger relating to
the Merger and also provides for certain other transactions among New Edge and
each of Edge Group II, Gulfedge and Edge Group, as described in the Proxy
Statement.
FOR [ ] WITHHELD [ ] ABSTAIN [ ]
(PLEASE INDICATE "X" IN BLACK OR BLUE INK.)
2. In their discretion, the proxies are authorized to vote upon any other
business as may properly come before the special meeting.
Change of Address and/or Comments Mark Here [ ]
Date:_________________________, 1997
__________________________________
(Signature of Shareholder)
(In signing as Attorney, Administrator,
Executor, Guardian, Trustee or
Corporate Officer, please add
your title as such.)
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
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