UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from.............. to .............
Commission file number 0-22149
EDGE PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 76-0511037
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Texaco Heritage Plaza
1111 Bagby, Suite 2100
Houston, Texas 77002
(Address of principal executive offices)
(713) 654-8960
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
Class Outstanding at August 12, 1998
------------ ------------------------------
Common Stock 7,772,602
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EDGE PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
June 30, December 31,
1998 1997
-------------- --------------
ASSETS (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 832,529 $ 3,777,950
Accounts receivable, trade 2,345,005 2,394,497
Accounts receivable, joint interest owners, net 4,892,104 6,547,619
Receivable from related parties 238,548 385,192
Other current assets 486,656 352,571
------------ ------------
Total current assets 8,794,842 13,457,829
PROPERTY AND EQUIPMENT, Net - full cost method of accounting
for oil and natural gas properties 53,727,867 36,662,521
INVESTMENT IN FRONTERA 3,628,264 3,628,264
OTHER ASSETS 7,789 17,232
------------ ------------
TOTAL ASSETS $ 66,158,762 $ 53,765,846
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 5,036,693 $ 4,794,037
Accounts payable to related party 40,000
Accrued liabilities 1,082,132 1,020,645
------------ -----------
Total current liabilities 6,118,825 5,854,682
------------ -----------
LONG-TERM DEBT 8,000,000
DEFERRED INCOME TAXES 1,350,828
------------ -----------
Total liabilities 15,469,653 5,854,682
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01par value; 5,000,000 shares authorized; none outstanding
Common stock, $.01par value; 25,000,000 shares authorized; 7,772,602 shares
issued and outstanding 77,726 77,609
Additional paid-in capital 47,773,722 47,629,822
Retained earnings 6,271,446 3,825,009
Unearned compensation - restricted stock (3,433,785) (3,621,276)
------------ ------------
Total stockholders' equity 50,689,109 47,911,164
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 66,158,762 $ 53,765,846
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
EDGE PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
OIL AND NATURAL GAS REVENUES $ 3,849,045 $ 3,016,085 $ 7,634,711 $ 6,457,086
OPERATING EXPENSES:
Oil and natural gas operating expenses 871,347 670,825 1,542,531 1,299,238
Depletion, depreciation and amortization 1,713,437 562,830 2,900,023 1,178,594
General and administrative expenses 1,050,516 1,136,249 1,916,827 2,056,829
Unearned compensation expense 176,456 155,051 331,508 203,289
----------- ----------- ----------- ----------
Total operating expenses 3,811,756 2,524,955 6,690,889 4,737,950
----------- ----------- ----------- ----------
OPERATING INCOME 37,289 491,130 943,822 1,719,136
OTHER INCOME AND EXPENSE:
Interest expense (12,535) (1,617) (12,617) (181,924)
Interest income 56,049 391,451 102,259 499,677
----------- ----------- ----------- ----------
NET INCOME BEFORE INCOME TAX (EXPENSE) BENEFIT AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 80,803 880,964 1,033,464 2,036,889
INCOME TAX (EXPENSE) BENEFIT (33,981) 224,574 (367,862)
----------- ----------- ----------- -----------
NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 46,822 1,105,538 665,602 2,036,889
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 1,780,835
----------- ----------- ----------- -----------
NET INCOME $ 46,822 $ 1,105,538 $ 2,446,437 $ 2,036,889
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE:
Net income before cumulative effect of accounting change $ 0.01 $ 0.14 $ 0.08 $ 0.30
Cumulative effect of accounting change 0.23
------ ------ ------ ------
Basic earnings per share $ 0.01 $ 0.14 $ 0.31 $ 0.30
====== ====== ====== ======
DILUTED EARNINGS PER SHARE:
Net income before cumulative effect of accounting change $ 0.01 $ 0.14 $ 0.08 $ 0.30
Cumulative effect of accounting change 0.23
------ ------ ------ ------
Diluted earnings per share $ 0.01 $ 0.14 $ 0.31 $ 0.30
====== ====== ====== ======
BASIC WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 7,771,711 7,711,947 7,771,558 6,797,128
========= ========= ========= =========
DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 7,804,165 7,789,065 7,803,393 6,850,812
========= ========= ========= =========
</TABLE>
See accompanying accompanying notes to consolidated financial statements.
3
<PAGE>
EDGE PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
Unearned
Common Stock Additional Compensation- Total
------------------------- Paid-in Retained Restricted Stockholders'
Shares Amount Capital Earnings Stock Equity
---------- -------- ------------ ----------- -------------- --------------
BALANCE,
<S> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1998 7,760,869 $ 77,609 $ 47,629,822 $ 3,825,009 $ (3,621,276) $ 47,911,164
Issuance of restricted common stock
(unauadited) 11,733 117 143,900 (144,017)
Unearned compensation expense(unaudited) 331,508 331,508
Net income (unaudited) 2,446,437 2,446,437
---------- --------- ------------ ----------- ------------- ------------
BALANCE,
JUNE 30, 1998 (unaudited) 7,772,602 $ 77,726 $ 47,773,722 $ 6,271,446 $ (3,433,785) $ 50,689,109
========== ========= ============ =========== ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
EDGE PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
------------------------------
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 2,446,437 $ 2,036,889
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of accouning change (1,780,835)
Depletion, depreciation and amortization 2,900,023 1,178,594
Deferred income taxes 367,862
Unearned compensation expense 331,508 203,289
Changes in assets and liabilities:
Accounts receivable, trade 49,492 (1,107,589)
Accounts receivable, joint interest owners, net 1,655,515 (3,914,250)
Receivable from related parties 146,644 (48,799)
Other current assets (134,085) (295,622)
Other assets 9,443 10,532
Accounts payable, trade 242,654 2,807,854
Accounts payable, related party (40,000)
Accrued liabilities 85,543 114,055
----------- -----------
Net cash provided by operating activities 6,280,201 984,953
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas property and equipment purchases (19,961,191) (6,545,289)
Proceeds from the sale of oil and gas properties 2,735,569 250,000
----------- -----------
Net cash used in investing activities (17,225,622) (6,295,289)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 8,000,000 867,350
Payment on long-term debt (11,017,348)
Payment on long-term notes payable (387,580)
Payment on related party subordinated loans (1,300,000)
Net proceeds from issuance of common stock 41,028,258
----------- ------------
Net cash provided by financing activities 8,000,000 29,190,680
----------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,945,421) 23,880,344
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,777,950 1,543,228
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 832,529 $ 25,423,572
=========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURES - Cash paid for interest, net of amounts capitalized $ 3,696 $ 256,278
NON-CASH TRANSACTIONS:
Combination transactions $ 3,599,635
Deferred offering costs at December 31, 1996 capitalized to equity $ 1,006,379
Issuance of restricted stock $ 144,017 $ 4,134,669
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements included herein have been prepared by
Edge Petroleum Corporation, a Delaware corporation (the "Company"),
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission, and reflect all adjustments which are, in the
opinion of management, necessary to present a fair statement of the
results for the interim periods on a basis consistent with the annual
audited consolidated financial statements. All such adjustments are of a
normal recurring nature. The results of operations for the interim
periods are not necessarily indicative of the results to be expected for
an entire year. Certain information, accounting policies and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the information
presented not misleading. Certain prior year amounts have been
reclassified to conform to the current year presentation. Such
reclassifications do not affect net income. These financial statements
should be read in conjunction with the Company's audited consolidated
financial statements included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
Accounting Change - The Company uses the full-cost method of
accounting for its oil and natural gas properties. Under this method, all
acquisition, exploration and development costs that are directly
attributable to the Company's acquisition, exploration and development
activities are capitalized in a "full-cost pool" as incurred. In the
second quarter of 1998 and effective January 1, 1998, the Company changed
its method of accounting for direct internal geological and geophysical
("G&G") costs to one of capitalization of such costs, which are directly
attributable to acquisition, exploration and development activities, to
oil and natural gas property. Prior to the change the Company expensed
these costs as incurred. The Company believes that the accounting change
provides for a better matching of revenues and expenses and enhances the
comparability of its financial statements with those of other companies
that follow the full-cost method of accounting. The $1,780,835 cumulative
effect of the change in prior years (after reduction for income taxes of
$958,910) is included in income for the six months ended June 30, 1998.
The effect of the accounting change on the three months ended June 30,
1998 was to increase net income by $309,902 ($0.03 per share basic and
diluted); the effect of the accounting change on the six months ended
June 30, 1998 was to increase net income before cumulative effect of
accounting change by $574,423 ($0.07 per share basic and diluted) and net
income by $2,355,258 ($0.30 per share basic and diluted). The following
pro forma amounts reflect the effect of retroactive application of the
accounting change on general and administrative expenses, depletion and
related income taxes.
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $ 46,822 $ 1,286,766 $ 665,602 $ 2,389,789
========= =========== ========= ===========
Basic earnings per share $ 0.01 $ 0.17 $ 0.08 $ 0.35
========= =========== ========= ===========
Diluted earnings per share $ 0.01 $ 0.17 $ 0.08 $ 0.35
========= =========== ========= ===========
Basic weighted average number of
common shares outstanding 7,771,711 7,711,947 7,771,558 6,797,128
========= =========== ========= ===========
Diluted weighted average number of
common shares outstanding 7,804,165 7,789,065 7,803,393 6,850,812
========= =========== ========= ===========
</TABLE>
6
<PAGE>
The effect of the accounting change on the results of operations for
the three months ended March 31, 1998 is as follows:
<TABLE>
Three Months Ended
March 31, 1998
----------------
<S> <C>
Net income as originally reported $ 358,466
Effect of accounting change 260,231
-----------
Income before cumulative effect of
accounting change 618,697
Cumulatiove effect on prior years of
accounting change 1,780,835
-----------
Net income as restated $ 2,399,532
===========
PER SHARE AMOUNTS:
Basic Earnings Per Share:
Net income as originally reported $ 0.05
Effect of accounting change 0.03
------
Income before cumulative effect of
accounting change 0.08
Cumulative effect on prior years of
accounting change 0.23
------
Net income as restated $ 0.31
======
Diluted Earnings Per Share:
Net income as originally reported $ 0.05
Effect of accounting change 0.03
------
Income before cumulative effect of
accounting change 0.08
Cumulative effect on prior years of
accounting change 0.23
------
Net income as restated $ 0.31
======
</TABLE>
2. NOTES PAYABLE AND LONG TERM DEBT
During July 1995, the Company entered into a revolving credit
facility (the "Revolving Credit Facility") with a bank to finance
temporary working capital requirements. The Revolving Credit Facility
provided up to $20,000,000 in borrowings limited by a borrowing base, as
defined by the Revolving Credit Facility. The Revolving Credit Facility
provided for interest at the lender's prime rate plus 0.75%. The
borrowing base was subject to review by the bank on a quarterly basis and
could be adjusted subject to the provisions of the Revolving Credit
Facility. On March 3, 1997, the Company repaid the outstanding balance of
$11,017,348 plus accrued interest with proceeds from its initial public
offering. Effective April 1, 1998, the Company amended and restated its
Revolving Credit Facility to provide a revolving line of credit of up to
$100 million bearing interest at a rate equal to prime or LIBOR plus 1.5%
- 2% depending on the level of borrowing base utilization. The Company's
initial borrowing base authorized by the banks was approximately $15
million. Beginning September 1, 1998, the borrowing base will be
redetermined semi-annually by unanimous consent of the banks and from
time to time at the Company's or the banks' request. Beginning May 1,
1998 and on the first day of each month thereafter, the borrowing base is
required to be reduced by $525,000.
At June 30, 1998, borrowings under this facility totaled $8
million with approximately $5.95 million available for future borrowings.
The weighted average interest rate during the three months ended June 30,
1998 was approximately 7.2%. There were no borrowings under the Revolving
Credit Facility during the first quarter of 1998.
The Revolving Credit Facility provides for certain restrictions,
including but not limited to, limitations on additional borrowings and
7
<PAGE>
issues of capital stock, sales of its oil and natural gas properties or
other collateral, engaging in merger or consolidation transactions and
prohibitions of dividends and certain distributions of cash or properties
and certain liens. The Revolving Credit Facility also contains the
following financial covenants: (i) tangible net worth (total assets
exclusive of certain intangibles minus liabilities) must be at least $43
million plus 50% of positive net income and 100% of equity raised for all
quarterly periods subsequent to December 31, 1997; (ii) the ratio at the
end of any quarter of cash flow (net income plus proceeds of certain
project sales, depletion, depreciation, amortization and other non-cash
expenses less non-cash net income for such quarter) to debt service must
be at least 1.25 to 1.00; and (iii) the ratio at the end of any quarter
of EBIT (net income plus interest expense and taxes, excluding non-cash,
extraordinary expenses and income) to interest expense for the proceeding
12-month period must be at least 4.5 to 1.00. The Revolving Credit
Facility is secured by substantially all the assets of the Company.
3. EARNINGS PER SHARE
During 1997, the Company implemented Statement of Financial
Accounting Standard (SFAS) No. 128 - "Earnings per Share," which
establishes the requirements for presenting earnings per share ("EPS").
SFAS No. 128 requires the presentation of "basic" and "diluted" EPS on the
face of the income statement. Basic earnings per common share amounts are
calculated using the average number of common shares outstanding during
each period. Diluted earnings per share assumes the exercise of all stock
options having exercise prices less than the average market price of the
common stock using the treasury stock method. The earnings per share data
for prior years has been restated following the standards in SFAS No. 128.
The following is presented as a reconciliation of the numerators
and denominators of basic and diluted earnings per share computations, in
accordance with SFAS No. 128.
<TABLE>
Three Months Ended June 30, 1998 Three Months Ended Jun 30, 1997
------------------------------------- -------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic EPS
Income available to common
<S> <C> <C> <C> <C> <C> <C>
stockholders $ 46,822 7,771,711 $ 0.01 $ 1,105,538 7,711,947 $ 0.14
Effect of Dilutive Securities
Common stock options 32,454 77,118
----------- --------- ------- ----------- --------- -------
Diluted EPS
Income available to common
stockholders $ 46,822 7,804,165 $ 0.01 $ 1,105,538 7,789,065 $ 0.14
=========== ========= ======= =========== ========= =======
Six Months Ended June 30, 1998 Six Months Ended June 30, 1997
------------------------------------- -------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic EPS
Income available to common
stockholders $ 2,466,437 7,771,558 $ 0.31 $ 2,036,889 6,797,128 $ 0.30
Effect of Dilutive Securities
Common stock options 31,835 53,684
----------- --------- ------- ----------- --------- -------
Diluted EPS
Income available to common
stockholders $ 2,466,437 7,803,393 $ 0.31 $ 2,036,889 6,850,812 $ 0.30
=========== ========= ======= =========== ========= =======
</TABLE>
The Company was organized through an initial public offering and
a series of combination transactions (the "Combination") which were
accounted for as a reorganization of entities under common control.
Accordingly, for the six months ended June 30, 1997, the number of shares
outstanding has been computed assuming that 4,701,361 shares of common
stock originally issued in connection with the Combination, effective
February 25, 1997, were outstanding from the beginning of the period.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors that have affected certain aspects of the Company's
financial position and operating results during the periods included in the
accompanying unaudited condensed consolidated financial statements. This
discussion should be read in conjunction with the accompanying unaudited
condensed consolidated financial statements included elsewhere in this Form 10-Q
and with the Company's audited consolidated financial statements included in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
Unless otherwise indicated by the context, references herein to the "Company"
mean Edge Petroleum Corporation, a Delaware corporation that is the registrant,
and its corporate and partnership subsidiaries and predecessors.
Overview
Edge Petroleum Corporation is an independent energy company engaged in
the exploration, development and production of oil and natural gas. Edge
conducts its operations primarily along the onshore Gulf Coast with its primary
emphasis in South Texas and South Louisiana where it currently controls
interests in excess of 267,000 gross acres under lease and option. The Company
explores for oil and natural gas by emphasizing an integrated application of
highly advanced data visualization techniques 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 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 natural gas company, and
is continuously acquiring 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 majority of the areas encompassed by its
proprietary surveys, thereby allowing it to 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 substantially all of its 3-D prospects drilled to date and
to assemble a large portfolio of 3-D based prospects for future drilling. 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. During the past year, the Company
has expanded its relative focus to increase its exposure to exploration
opportunities with deeper targets. 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 uses the full-cost method of accounting for its oil and
natural gas properties. Under this method, all acquisition, exploration and
development costs that are directly attributable to the Company's acquisition,
exploration and development activities including, effective Aptil 1, 1998,
certain payroll and other internal costs are capitalized in a "full-cost pool"
as incurred (See ntoe 1). 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 depletion, depreciation and amortization and
related deferred taxes) exceed the present value (using a 10% discount rate) of
estimated futurenet after-tax cash flows from proved oil and natural gas
9
<PAGE>
reserves, such excess costs are charged to operations. Once incurred, a
write-down of oil and natural gas properties is not reversible at a later date.
As of June 30, 1998 no write down of oil and natural gas properties was deemed
necessary.
Due to the instability of oil and natural gas prices, the Company has
entered into, from time to time, price risk management transactions (e.g., swaps
and collars) for a portion of its natural gas production to achieve a more
predictable cash flow, as well as to reduce exposure from price fluctuations.
While the use of these arrangements limits the benefit to the Company of
increases in the price of natural gas it also limits the downside risk of
adverse price movements. 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 prices. The Company accounts for these transactions as hedging activities
and, accordingly, gains and losses are included in oil and natural gas revenues
during the period the hedged transactions occur. During the six months ended
June 30, 1998, the Company had in place three natural gas commodity collars with
a financial institution, expiring on January 31, April 30, and June 30, 1998,
respectively. These collars covered 5,000-10,000 MMbtu per day, or approximately
45% of the Company's daily production, with floating floor and ceiling prices
ranging between $2.15 and $3.15 per MMbtu, (delivered price basis, Houston Ship
Channel), with settlement for each calendar month occurring five business days
following the publishing of the Inside F.E.R.C. Gas Marketing Report. Total
natural gas production marketed under these arrangements was 1,060,000 Mmbtu and
1,510,000 Mmbtu, respectively, for the three-month and six-month periods ended
June 30, 1998. Included within natural gas revenues for the three and six month
periods ended June 30, 1998 were $30,000 and $66,700, respectively, representing
net gains from current collar activity. Additionally, during the three months
ended June 30, 1998, the Company has entered into a collar arrangement with a
financial institution that begins and expires on July 1, 1998 and September 30,
1998, respectively. This collar arrangement covers 10,000 MMbtus per day with a
floating floor and ceiling price ranging between $2.25 and $2.88 per MMbtu.
There was no material hedging activity during the three and six-month periods
ended June 30, 1997.
The Company's revenue, profitability and future rate of growth and
ability to borrow funds or obtain additional capital, and the carrying value of
its properties, are substantially dependent upon prevailing prices for oil and
natural gas. These prices are dependent upon numerous factors beyond the
Company's control, such as economic, political and regulatory developments and
competition from other sources of energy. The energy markets have historically
been very volatile, and there can be no assurance that oil and natural gas
prices will not be subject to wide fluctuations in the future. Oil prices have
declined significantly during the past year. A substantial or extended decline
in oil and natural gas prices could have a material advers effect on the
Company's financial condition, results of operation and access to capital, as
well as the quantities of oil and natural gas reserves that the Company may
economically produce.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to the Three Months Ended June 30,
1997
Revenue and Production
Oil and natural gas revenues for the three months ended June 30, 1998
increased 28% from $3 million to $3.8 million, as compared to the three months
ended June 30, 1997. Production volumes for oil and condensate for the three
months ended June 30, 1998 increased 8% from 37 MBbls to 39 MBbls, as compared
to the three months ended June 30, 1997. The increase in oil and condensate
production during the three months ended June 30, 1998 increased revenues by
$51,961 (based on 1997 comparable quarter average prices), offset by a 36%
decrease in the average oil and condensate sales price which decreased revenues
by $261,675 (based on current quarter production). Production volumes for
natural gas for the three months ended June 30, 1998 increased 25% from 1,213
MMcfs to 1,520 MMcfs, as compared to the three months ended June 30, 1997. The
increase in natural gas production during the three months ended June 30, 1998
increased revenues by $594,838, further increased by a 16% increase in the
average natural gas sales price which increased revenues by $447,836. The
increase in oil and natural gas production was primarily due to 76 gross (33.62
net) new successful exploratory and development wells being drilled and
completed since June 30, 1997 offset by normal production declines from existing
wells. During the three months ended June 30, 1998 and 1997 the Company marketed
10
<PAGE>
its natural gas produced from a certain gas field under the terms of various
fixed price natural gas contracts. The terms of the contracts require no minimum
volume commitment and provided incremental pricing based on certain levels of
production. Prices received for production marketed under these agreements
averaged $2.10 and $1.98 for the three months ended June 30, 1998 and 1997,
respectively. Total production, (net to the Company's interest) marketed under
these agreements for the three-month periods ended June 30, 1998 and June 30,
1997 was approximately 373,000 Mcf and 337,000 Mcf, respectively, representing
approximately 21% and 24%, respectively, of total production, on a Mcfe basis.
As described above, included within natural gas revenues for the three months
ended June 30, 1998 was $30,000 representing gains from current collar activity.
The collar settlement increased the effective natural gas sales price by
approximately $0.02 per Mcf, or 1%, for the three-months ended June 30, 1998.
There was no material hedging activity during the three months ended June 30,
1997.
The following table sets forth certain operational data of the Company
for the periods presented:
<TABLE>
Three Months Ended 1998 Period Compared
June 30, to 1997 Period
---------------------------- ------------------------
Increase % Increase
1998 1997 (Decrease) (Decrease)
Production volumes:
<S> <C> <C> <C> <C>
Oil and condensate (Bbls) 39,351 36,532 2,819 8 %
Natural gas (Mcf) 1,520,368 1,212,502 307,866 25 %
Natural gas equivalents (Mcfe) 1,756,474 1,431,694 324,780 23 %
Average sales prices:
Oil and condensate ($ per Bbl) $ 11.78 $ 18.43 $ (6.65) (36)%
Natural gas ($ per Mcf) 2.23 1.93 0.30 16 %
Operating revenues:
Oil and condensate $ 463,658 $ 673,372 $ (209,714) (31)%
Natural gas 3,385,387 2,342,713 1,042,674 45 %
----------- ----------- ----------
Total $ 3,849,045 $ 3,016,085 $ 832,960 28 %
=========== =========== ==========
</TABLE>
Costs and Operating Expenses
Oil and natural gas operating expenses for the three months ended June
30, 1998 increased 30% from $670,825 to $871,347 as compared to the three months
ended June 30, 1997, due primarily to increased oil and natural gas production.
Oil and natural gas operating expenses were $0.50 per Mcfe and $0.47 per Mcfe
for the three-month periods ended June 30, 1998 and 1997, respectively.
Depletion, depreciation and amortization expense ("DD&A") for the three
months ended June 30, 1998 increased 204% from $562,830 to $1.7 million, as
compared to the three months ended June 30, 1997. Included within DD&A for the
three-month periods ended June 30, 1998 and 1997 was $1.5 million and $477,565,
respectively, representing depletion expense of oil and natural gas property,
which increased by 220%. Increased oil and natural gas production increased
depletion expense by $108,336 and a 164% increase in the overall depletion rate
further increased depletion expense by $943,259. The increase in the depletion
rate was primarily attributable to downward revisions to oil and natural gas
reserve estimates used in computing depletion expense during 1998 and for the
year ended 1997. The downward revision in oil and natural gas reserve estimates
used to compute 1998 depletion expense was partially due to the drilling of an
unsuccessful well on a proved undeveloped prospect during the second quarter of
1998. The depletion rate also increased as a result of increased cost associated
with reserve additions since June 30, 1997. Depletion expense was further
increased by approximately $171,000 during the three months ended June 30, 1998
due to the change in accounting (See note 1). Depletion expense on a unit of
production basis for the three-month periods ended June 30, 1998 and 1997 was
$0.87 per Mcfe and $0.33 per Mcfe, respectively. The remaining increase in DD&A
is due primarily to depreciation of new computer hardware, software and office
improvements purchased since June 30, 1997 and the amortization of deferred loan
cost on the new Credit Facility.
General and administrative expenses ("G&A") for the three months ended
June 30, 1998 decreased 8% from $1,136,249 to $1,050,516, as compared to the
11
<PAGE>
three months ended June 30, 1997. The decrease in G&A is due to the change in
accounting principle, which decreased G&A by $654,777 (See note 1). Excluding
the effects of the change in accounting principle, G&A increased by $569,044
which was primarily attributable to the hiring of additional employees to
support the Company's increased level of exploration activities and 3-D project
generation and costs associated with being a public company. Included within
general and administrative expenses for the three months ended June 30, 1998 and
1997, is approximately $224,000 and $159,000, respectively, of overhead
reimbursements and management fees received from various management, operating
and seismic agreements. General and administrative expenses on a unit of
production basis for the three-month periods ended June 30, 1998 and 1997 were
$0.60 per Mcfe and $0.79 per Mcfe, respectively.
Unearned compensation expense for the three months ended June 30, 1998
increased from $155,051 to $176,456, as compared to the three months ended June
30, 1997. The increase is due to the amortization of additional restricted
common stock granted to employees and to nonemplyee members of the Board of
Directors of the Company during 1998.
Interest expense for the three months ended June 30, 1998 was $12,535,
net of amounts capitalized of $65,484, as compared to $1,617 for the three
months ended June 30, 1997. The increase in interest expense is due to
borrowings under the Company's Credit Facility during the three-month period
ended June 30, 1998. There was no significant debt outstanding during the
three-month period ended June 30, 1997.
Interest income for the three months ended June 30, 1998 decreased from
$391,451 to $56,049, as compared to the three months ended June 30, 1997. The
decrease in interest income is due to the overall reduction in invested funds.
Income tax expense for the three months ended June 30, 1998 increased
from a tax benefit of $224,574 to tax expense of $33,981, as compared to the
three months ended June 30, 1997. Prior to December 31, 1997, the Company's
available deferred tax assets and net operating loss carry forwards completely
offset the effects of any current or deferred tax expense. The Company began
providing federal income taxes at the statutory rate, which approximates the
effective rate, during the first quarter of 1998.
For the three months ended June 30, 1998, the Company had operating
income of $37,289 compared to operating income of $491,130 for the three month
period ended June 30, 1997, primarily reflecting increased oil and natural gas
production and lower general and administrative expenses as a result of the
accounting change offset by lower oil and condensate prices and increased
operating expenses. Net income was $46,822 for the three months ended June 30,
1998 as compared to net income of $1.1 million for the three-month period ended
June 30, 1997.
The Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30,
1997
Oil and natural gas revenues for the six months ended June 30, 1998
increased 18% from $6.5 million to $7.6 million, as compared to the six months
ended June 30, 1997. Production volumes for oil and condensate for the six
months ended June 30, 1998 increased 24% from 66 MBbls to 81 MBbls, as compared
to the six months ended June 30, 1997. The increase in oil and condensate
production increased revenues by $323,550 (based on 1997 comparable period
average prices), and a 37% decrease in average oil and condensate sales price
decreased revenue by $616,985 (based on current year production). Production
volumes for natural gas increased 27% from 2,235 MMcfs to 2,843 MMcfs, as
compared to the six months ended June 30, 1997. The increase in natural gas
production increased revenues by $1.4 million, further increased by a 1%
increase in average natural gas sales price which increased revenues by $75,132.
This increase in oil and natural gas production was due to 76 gross (33.62 net)
new successful exploratory and development wells being drilled and completed
since June 30, 1997 offset by normal production declines from existing wells.
During the six months ended June 30, 1998 and 1997 the Company marketed its
natural gas produced from a certain gas field under the terms of various fixed
price natural gas contracts. The terms of the contracts require no minimum
volume commitment and provided incremental pricing based on certain levels of
production. Prices received for production marketed under these agreements
averaged $2.13 and $2.19 for the six months ended June 30, 1998 and 1997,
respectively. Total volume sold by the Company under these contracts for the six
month period ended June 30, 1998 and 1997 was approximately 706,000 Mcf and
12
<PAGE>
671,000 Mcf, respectively, representing approximately 21% and 26%, respectively,
of total production, on a Mcfe basis. As described above, included within
natural gas revenues for the six months ended June 30, 1998 was $66,700
representing gains from current collar activity. The collar settlements
increased the effective natural gas sales price by approximately $0.02 per Mcf,
or 1%, for the six months ended June 30, 1998. There was no material hedging
activity during the six months ended June 30, 1997.
The following table sets forth certain operational data of the Company for
the periods presented:
<TABLE>
Six Months Ended 1998 Period Compared
June 30, to 1997 Period
---------------------------- ------------------------
Increase % Increase
1998 1997 (Decrease) (Decrease)
Production volumes:
<S> <C> <C> <C> <C>
Oil and condensate (Bbls) 81,482 65,571 15,921 24 %
Natural gas (Mcf) 2,843,391 2,234,666 608,725 27 %
Natural gas equivalents (Mcfe) 3,332,343 2,628,092 704,251 27 %
Average sales prices:
Oil and condensate ($ per Bbl) $ 12.75 $ 20.32 $ (7.57) (37)%
Natural gas ($ per Mcf) 2.32 2.29 0.03 1 %
Operating revenues:
Oil and condensate $ 1,039,114 $ 1,332,549 $ (293,435) (22)%
Natural gas 6,595,597 5,124,537 1,471,060 29 %
----------- ----------- -----------
Total $ 7,634,711 $ 3,016,085 $ 1,177,625 18 %
=========== =========== ===========
</TABLE>
Costs and Operating Expenses
Oil and natural gas operating expenses for the six months ended June 30,
1998 increased 19% from $1.3 million to $1.5 million, as compared to the six
months ended June 30, 1997, due primarily to increased oil and natural gas
production. Oil and natural gas operating expenses on a unit of production basis
were $0.46 per Mcfe and $0.49 per Mcfe for the six-month periods ended June 30,
1998 and 1997, respectively.
Depletion, depreciation and amortization expense ("DD&A") for the six
months ended June 30, 1998 increased 146% from $1.2 million to $2.9 million, as
compared to the six months ended June 30, 1997. Included within DD&A for the
six-month periods ended June 30, 1998 and 1997 was $2.5 million and $1.0
million, respectively, representing depletion expense of oil and natural gas
property, which increased by 152%. Increased oil and natural gas production
increased depletion expense by $271,738 and a 97% increase in the overall
depletion rate further increased depletion expense by $1.3 million. The increase
in the depletion rate was primarily attributable to downward revisions to oil
and natural gas reserve estimates used in computing depletion expense during
1998 and for the year ended 1997. The downward revision in oil and natural gas
reserve estimates used to compute 1998 depletion expense was partially due to
the drilling of an unsuccessful well on a proved undeveloped prospect during the
second quarter of 1998. The depletion rate also increased as a result of
increased cost associated with reserve additions since June 30, 1997. Depletion
expense was further increased by approximately $311,000 during the six months
ended June 30, 1998 due to the change in accounting (See note 1). Depletion
expense on a unit of production basis for the six-month periods ended June 30,
1998 and 1997 was $0.77 per Mcfe and $0.39 per Mcfe, respectively. The remaining
increase in DD&A is due primarily to depreciation of new computer hardware,
software and office improvements purchased since June 30, 1997 and the
amortization of deferred loan cost on the new Credit Facility.
General and administrative expenses for the six months ended June 30,
1998 decreased 7% from $2.1 million to $1.9 million, as compared to the six
months ended June 30, 1997. The decrease in G&A is due to the change in
accounting principle, which decreased G&A by $1,194,742 (See note 1). Excluding
the effects of the change in accounting principle, G&A increased by $1.1 million
which was primarily attributable to additional administrative staffing and the
13
<PAGE>
hiring of additional employees to support the Company's increased level of
drilling activities and 3-D project generation. Included within general and
administrative expenses for the six months ended June 30, 1998 and 1997, is
approximately $424,000 and $393,000, respectively, of overhead reimbursements
and management fees received from various management, operating and seismic
agreements. General and administrative expenses on a unit of production basis
for the six-month periods ended June 30, 1998 and 1997 were $0.58 per Mcfe and
$0.78 per Mcfe, respectively. The Company expects general and administrative
expenses on a per unit of production basis to generally decline over time as
expected production increases.
Unearned compensation expense for the six months ended June 30, 1998
increased from $203,281 to $331,508, as compared to the six months ended June
30, 1997. The increase is due to the amortization of additional restricted
common stock granted to employees and to nonemployee members of the Board of
Directors of the Company during 1998, further increased due to the amortization
of restricted stock granted to executives at the time of the Combination, which
was effective March 3, 1997.
Interest expense for the six months ended June 30, 1998 was $12,617, net
of interest capitalized to oil and natural gas properties of $65,484, as
compared to $181,924 for the six months ended June 30, 1997. The weighted
average debt was $2.2 million for the six months ended June 30, 1998 compared to
$4.1 million for the six months ended June 30, 1997.
Interest income for the six months ended June 30, 1998 was $102,259
compared to $499,677 for the six months ended June 30, 1997. The decrease in
interest income is due to the overall reduction in invested funds.
Income tax expense for the six months ended June 30, 1998 was $367,862.
Prior to December 31, 1997, the Company's available deferred tax assets and net
operating loss carry forwards completely offset the effects of any current or
deferred tax expense. The Company began providing federal income taxes at the
statutory rate, which approximates the effective rate, during the first quarter
of 1998.
For the six months ended June 30, 1998, the Company had operating income
of $943,822 compared to operating income of $1.7 million for the six months
ended June 30, 1997, primarily reflecting increased oil and natural gas
production and lower general and administrative expenses as a result of the
accounting change, offset by lower oil and condensate prices and increased
operating expenses. Net income was $2.4 million, $665,602 before cumulative
effect of accounting change, for the six months ended June 30, 1998 as compared
to net income of $2 million for the six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
In March 1997, the Company completed its initial public offering (the
"Offering") of 2,760,000 shares of common stock at a public offering price of
$16.50 per share. The Offering provided the Company with proceeds of
approximately $40 million, net of expenses. The Company used approximately $12.7
million to repay its long-term outstanding indebtedness incurred under its
revolving credit facility (the " Revolving Credit Facility"), subordinated loans
and equipment loans. The remaining proceeds from the Offering, together with
cash flows from operations, were used to fund planned capital expenditures,
commitments, other working capital requirements and for general corporate
purposes.
The Company had cash and cash equivalents at June 30, 1998 of $832,529
consisting primarily of short-term money market investments, as compared to $3.8
million at December 31, 1997. Working capital was $2.7 million at June 30, 1998,
as compared to $7.6 million at December 31, 1997.
Operating cash flow before changes in working capital was approximately
$4.3 million and $3.4 million for the six-month periods ended June 30, 1998 and
1997, respectively. Operating cash flow, a measure of performance for
exploration and production companies, represents cash flows from operating
activities prior to charges in assets and liabilities. Operating cash flow
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 profitability or liquidity.
14
<PAGE>
During the six months ended June 30, 1998, the Company continued to
reinvest a substantial portion of its cash flows to increase its 3-D project
portfolio, improve its 3-D seismic interpretation technology and fund its
drilling program. Capital expenditures during the six months ended June 30, 1998
were $19.9 million as compared to $6.5 million during the same period in 1997.
The Company's drilling efforts resulted in the drilling of 50 gross (23.9 net)
wells during the six months ended June 30, 1998 as compared to 42 gross (16.31
net) wells during the same period in 1997. The Company expects capital
expenditures in 1998 to be about $32 million. A substantial portion of capital
expenditures in 1998 will be invested in the Company's portfolio of 3-D projects
to fund drilling activities in an effort to expand its reserve base. In
addition, the Company expects to continue to expand and improve its
technological and 3-D seismic interpretation capabilities.
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. The Company intends to fund
its 1998 capital expenditures, commitments and working capital requirements
through cash flows from operations, borrowings and, to the extent necessary,
other financing activities. The Company believes it will have sufficient capital
resources and liquidity to fund its capital expenditures and meet such financial
obligations as they come due. In the event such capital resources are not
available to the Company, its drilling and other activities may be curtailed.
Revolving Credit Facility
During July 1995, the Company entered into a Revolving Credit Facility
with a bank to finance temporary working capital requirements. The Revolving
Credit Facility provided up to $20,000,000 in borrowings limited by a borrowing
base, as defined by the Revolving Credit Facility. The Revolving Credit Facility
provided for interest at the lender's prime rate plus 0.75%. The borrowing base
was subject to review by the bank on a quarterly basis and could be adjusted
subject to the provisions of the Revolving Credit Facility. On March 3, 1997,
the Company repaid the outstanding balance of $11,017,348 plus accrued interest
with proceeds from the initial public offering. Effective April 1, 1998, the
Company amended and restated its Revolving Credit Facility to provide a
revolving line of credit of up to $100 million bearing interest at prime or
LIBOR plus 1.5% - 2% depending on the level of borrowing base utilization. The
Company's initial borrowing base authorized by the banks was approximately $15
million. Beginning September 1, 1998, the borrowing base will be redetermined
semi-annually by unanimous consent of the banks and from time to time at the
Company's or the banks' request. Beginning May 1, 1998 and on the first day of
each month thereafter, the borrowing base is required to be reduced by $525,000.
At June 30, 1998, borrowings under this facility totaled $8 million
with approximately $5.95 million available for future borrowings. The weighted
average interest rate during the three months ended June 30, 1998 was
approximately 7.2%. There were no borrowings under the Revolving Credit Facility
during the first quarter of 1998.
The Revolving Credit Facility provides for certain restrictions,
including but not limited to, limitations on additional borrowings and issues of
capital stock, sales of its oil and natural gas properties or other collateral,
engaging in merger or consolidation transactions and prohibitions of dividends
and certain distributions of cash or properties and certain liens. The Revolving
Credit Facility also contains the following financial covenants: (i) tangible
net worth (total assets exclusive of certain intangibles minus liabilities) must
be at least $43 million plus 50% of positive net income and 100% of equity
raised for all quarterly periods subsequent to December 31, 1997; (ii) the ratio
at the end of any quarter of cash flow (net income plus proceeds of certain
project sales, depletion, depreciation, amortization and other non-cash expenses
less non-cash net income for such quarter) to debt service must be at least 1.25
to 1.00; and (iii) the ratio at the end of any quarter of EBIT (net income plus
interest expense and taxes, excluding non-cash, extraordinary expenses and
income) to interest expense for the proceeding 12-month period must be at least
4.5 to 1.00. The Revolving Credit Facility is secured by substantially all the
assets of the Company.
15
<PAGE>
YEAR 2000
The Company has evaluated the impact of the year 2000 processing issues
considering current financial and accounting, production, land and geological
computer systems and software utilized by the Company. The Company is in the
process of replacing its existing financial and accounting, production and land
applications with software which is year 2000 compliant. Implementation is
expected to be completed on or before December 31, 1998 at a total cost of
approximately $200,000. The Company's geological systems and software are year
2000 compliant. The Company currently anticipates that it will not incur a
material disruption of operations relating to year 2000 processing issues but
there can be no assurance that the Company will not incur unexpected year 2000
costs or be adversely affected by year 2000 issues of its suppliers, customers
and other entities.
ACCOUNTING CHANGE
The Company uses the full-cost method of accounting for its oil and
natural gas properties. Under this method, all acquisition, exploration and
development costs that are directly attributable to the Company's acquisition,
exploration and development activities are capitalized in a "full-cost pool" as
incurred. In the second quarter of 1998 and effective January 1, 1998, the
Company changed its method of accounting for direct internal geological and
geophysical ("G&G") costs to one of capitalization of such costs, which are
directly attributable to acquisition, exploration and development activities, to
oil and natural gas property. Prior to April 1, 1998, the Company expensed these
costs as incurred. The Company believes that the accounting change provides for
a better matching of revenues and expenses and enhances the comparability of its
results of operations with those of other oil and natural gas companies that
follow the full cost method of accounting.
FORWARD LOOKING STATEMENTS
The statements contained in all parts of this document, including, but
not limited to, those relating to the Company's drilling plans, its 3-D project
portfolio, capital expenditures, use of Offering proceeds, general and
administrative expenses on a per unit of production basis, the sufficiency of
capital resources and liquidity to support working capital and capital
expenditure requirements, reinvestment of cash flows and any other statements
regarding future operations, financial results, business plans, sources of
liquidity and cash needs and other statements that are not historical facts are
forward looking statements. When used in this document, the words "anticipate,"
"estimate," "expect," "may," "project," "believe" and similar expressions are
intended to be among the statements that identify forward looking statements.
Such statements involve risks and uncertainties, including, but not limited to,
those relating to the Company's dependence on its exploratory drilling
activities, the volatility of oil and natural gas prices, the need to replace
reserves depleted by production, operating risks of oil and natural gas
operations, the Company's dependence on its key personnel, the Company's
reliance on technological development and possible obsolescence of the
technology currently used by the Company, significant capital requirements of
the Company's exploration and development and technology development programs,
the potential impact of government regulations, litigation and environmental
matters, the Company's ability to manage its growth and achieve its business
strategy, competition, the uncertainty of reserve information and future net
revenue estimates, property acquisition risks and other factors detailed in the
Company's Form 10-K and other filings with the Securities and Exchange
Commission. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................... None
Item 2 - Changes in Securities and Use of Proceeds..................... None
Item 3 Defaults Upon Senior Securities................................. None
Item 4 - Submission of Matters to a Vote of Security Holders - .................
(A) Annual Meeting of Shareholders on May 22, 1998. (C) Set forth below
are the results of the voting with respect to each matter acted upon at
<TABLE>
Broker
For Against Withheld Abstain Non votes
------- ------- -------- ------- ---------
Election of Directors:
<S> <C> <C> <C> <C> <C>
Stanley S. Raphael 5,338,104 50,047
Robert W. Shower 5,338,404 49,747
William H. White 5,337,904 50,247
Approval of the Appointment
of Deloitte and Touche LLP
as Independent Public
Accountants 5,372,392 6,927 8,832
Approval of the Increase in
the shares of Common
Stock Reserved under
the Company's 1997
Incentive Plan 5,129,323 221,044 37,784
</TABLE>
In addition to the election of the directors indicated above, the
term of the office of the following directors continued as directors
following the meeting: John E. Calaway, James D. Calaway, Vincent
Andrews, David B. Benedict, Nils P. Perterson and John Sfondrini.
Item 5 - Other Information............................................... None
Item 6 - Exhibits and Reports on Form 8-K......................................
(A) EXHIBITS. The following exhibits are filed as part of this report:
INDEX TO EXHIBITS
Exhibit No.
- --------------
*2.1 Amended and Restated Combination Agreement by and among (i)
Edge Group II Limited Partnership, (ii) Gulfedge Limited
Partnership, (iii) Edge Group Partnership, (iv) Edge Petroleum
Corporation of Texas, (v) Edge Mergco, Inc. and (vi) the
Company, dated as of January 13, 1997 (Incorporated by
17
<PAGE>
reference to Exhibit 2.1 to the Registration Statement on Form
S-4 (Registration No. 333-17269) filed by the Company).
*3.1 Restated Certificate of Incorporation of the Company, as
amended (Incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-4 (Registration No. 333
-17269) filed by the Company).
*3.2 Bylaws of the Company (Incorporated by Reference to Exhibit
3.2 to the Registration Statement on Form S-4 (Registration
No. 333-17269) filed by the Company).
*4.1 Amended and Restated Credit Agreement, dated as of April 1,
1998, by and between Edge Petroleum Corporation and Edge
Petroleum Exploration Company (collectively the "Borrower")
and Compass Bank, a Texas state chartered banking institution,
as Agent for itself and The First National Bank of Chicago and
other lenders party thereto (Incorporated by Reference to 4.1
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998).
*4.2 Security Agreement, dated as of April 1, 1998, by and between
Edge Petroleum Corporation and Edge Petroleum Exploration
Company (collectively the "Debtor") and Compass Bank, a Texas
state chartered banking institution, as Agent for itself and
The First National Bank of Chicago and other lenders party
thereto the Credit Agreement (Incorporated by Reference to 4.2
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998).
*4.3 Security Agreement (Stock Pledge), dated as of April 1, 1998,
by and between Edge Petroleum Corporation (the "Pledgor") and
Compass Bank, a Texas state chartered banking institution, as
Agent for itself and The First National Bank of Chicago and
other lenders party thereto the Credit Agreement (Incorporated
by Reference to 4.34 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1998).
(Incorporated by Reference to 4.2 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
1998).
11.1 Computation of Earnings Per Share.
18.1 Preferability letter of Deloitte and Touche LLP on Change in
Accounting Principle.
27.1 Financial Data Schedule.
*Incorporated by reference as indicated
(B) Reports on Form 8-K.................. ................. None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDGE PETROLEUM CORPORATION,
A DELAWARE CORPORATION
(REGISTRANT)
Date 8/14/98 /S/ John E. Calaway
- ------------------------------- -------------------------------
John E. Calaway
Chief Executive Officer and
Chairman of the Board
Date 8/14/98 /S/ James D. Calaway
- ------------------------------- -------------------------------
James D. Calaway
President and Director
Date 8/14/98 /S/ Michael G. Long
- ------------------------------- -------------------------------
Michael G. Long
Chief Financial Officer
Date 8/14/98 /S/ Brian C. Baumler
- ------------------------------- -------------------------------
Brian C. Baumler
Controller and Treasurer
19
<PAGE>
EXHIBIT - 11.1
EDGE PETROLEUM CORPORATION
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -----------------------------
1998 1997 1998 1997
Basic common and common equivalent shares outstanding,
<S> <C> <C> <C> <C>
beginning of period 7,510,281 7,461,361 7,510,281 4,701,361
Weighted average shares and equivalent shares outstanding:
Issued in connection with the public offering 1,921,326
Restricted stock 261,430 250,586 261,277 174,441
Basic weighted average common and common equivalent --------- --------- --------- ---------
shares outstanding, end of period 7,771,711 7,711,947 7,771,558 6,797,128
========= ========= ========= =========
Dilutive common stock options 32,454 77,118 31,835 53,684
--------- --------- --------- ---------
Diluted weighted average common and common equivalent
shares outstanding 7,804,165 7,789,065 7,803,393 6,850,812
========= ========= ========= =========
Net Income before cumulative effect of accounting change $ 46,822 $ 1,105,538 $ 665,602 $ 2,036,889
Cumulative effect of accounting change - 1,780,835 -
----------- ----------- ----------- -----------
Net Income $ 46,822 $ 1,105,538 $ 2,446,437 $ 2,036,889
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE:
Net income before cumulative effect of accounting change $ 0.01 $ 0.14 $ 0.08 $ 0.30
Cumulative effect of accounting change - - 0.23 -
------- ------- ------- -------
Basic earnings per share $ 0.01 $ 0.14 $ 0.31 $ 0.30
======= ======= ======= =======
DILUTED EARNINGS PER SHARE:
Net income before cumulative effect of accounting change $ 0.01 $ 0.14 $ 0.08 $ 0.30
Cumulative effect of accounting change - - 0.23 -
------- ------- ------- -------
Diluted earnings per share $ 0.01 $ 0.14 $ 0.31 $ 0.30
======= ======= ======= =======
</TABLE>
20
Exhibit 18.1
August 13, 1998
Edge Petroleum Corporation
1111 Bagby, Suite 2100
Houston, Texas 77002
At your request, we have read the description included in your Quarterly Report
on Form 10-Q to the Securities and Exchange Commission for the quarter ended
June 30, 1998, of the facts relating to the modification in the application of
the full-cost accounting method. We believe, on the basis of the facts set
fourth and other information furnished to us by appropriate officials of the
Company, that the accounting change described in your Form 10-Q is to an
alternative accounting principle that is preferred under the circumstances.
We have not audited any consolidated financial statements of Edge Petroleum
Corporation and its consolidated subsidiaries as of any date or for any period
subsequent to December 31, 1997. Therefore, we are unable to express, and we do
not express, an opinion on the facts set forth in the above-mentioned form 10-Q,
on the related information furnished to us by officials of the Company, or on
the financial position, results of operations, or cash flows of Edge Petroleum
Corporation and its consolidated subsidiaries as of any period subsequent to
December 31, 1997.
Yours truly,
/S/ DELLOITTE & TOUCHE LLP
Houston, Texas
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-30-1998
<CASH> 832,529
<SECURITIES> 0
<RECEIVABLES> 7,237,109
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,794,842
<PP&E> 63,125,679
<DEPRECIATION> 9,397,812
<TOTAL-ASSETS> 66,158,762
<CURRENT-LIABILITIES> 6,118,825
<BONDS> 0
0
0
<COMMON> 77,726
<OTHER-SE> 50,611,383
<TOTAL-LIABILITY-AND-EQUITY> 66,158,762
<SALES> 7,634,711
<TOTAL-REVENUES> 7,634,711
<CGS> 0
<TOTAL-COSTS> 6,690,889
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,617
<INCOME-PRETAX> 1,033,464
<INCOME-TAX> 367,862
<INCOME-CONTINUING> 665,602
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,780,835
<NET-INCOME> 2,446,437
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
</TABLE>
