UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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) (Zip code)
713-654-8960
(Registrant's telephone number including area code)
----------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 3, 2000, was $25,286,316 (based on a value of $3.00 per
share, the closing price of the Common Stock as quoted by NASDAQ National Market
on such date). 9,182,023 shares of Common Stock, par value $.01 per share, were
outstanding on March 3, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the registrant's 2000 Annual
Meeting of Shareholders, filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, are incorporated by reference into Part III of this
report.
1
<PAGE>
EDGE PETROLEUM CORPORATION
This Amendment No. 1 to Form 10-K on Form 10-K/A amends Part II, Item 8 and
Part IV, Item 14 of our Annual Report on Form 10-K for the year ended December
31, 1999 to change the report as follows:
(1) A word processing error in the 1999 column of the Consolidated Balance
Sheet on page F-3 was corrected.
(2) A word processing error on page F-14, last paragraph of Note 6 was
corrected by replacing a period with a comma in the date.
(3) A word processing error on page F-17 in the 1999 column was corrected by
placing parenthesis around the diluted loss per share information.
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements and Supplementary Information
listed in the accompanying Index to Consolidated Financial Statements and
Supplementary Information on page F-1 herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules:
1. Financial Statements: See Index to the Consolidated Financial Statements and
Supplementary Information immediately following the signature page of this
report.
2. Financial Statement Schedule: See Index to the Consolidated Financial
Statements and Supplementary Information immediately following the signature
page of this report.
3. Exhibits: The following documents are filed as exhibits to this report.
+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, (v)
Edge Mergeco, Inc. and (vi) the Company, dated as of January 13,
1997 (Incorporated by reference from exhibit 2.1 to the Company's
Registration Statement on Form S-4 (Registration No. 333-17269))
+3.1 -- Restated Certificate of Incorporation of the Company, as amended
(Incorporated by reference from exhibit 3.1 to the Company's
Registration Statement on Form S-4 (Registration No. 333-17269)).
+3.2 -- Bylaws of the Company (Incorporated by Reference from exhibit 3.3
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1999).
+3.3 -- First Amendment to Bylaws of the Company on September 28, 1999
(Incorporated by reference from exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999).
+4.1 -- Amended and Restated Credit Agreement, dated April 1, 1998, by
and between Edge Petroleum Corporation and Edge Petroleum
Exploration Company (collectively the "Borrower")
2
<PAGE>
and Compass Bank, a Texas state chartered banking institution, as
Agent for itself and First National Bank of Chicago and other
lenders party thereto. (Incorporated by Reference from exhibit 4.1
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998).
+4.2 -- First Amendment dated September 29, 1998 to the Amended and
Restated Credit Agreement, dated as of April 1, 1998, by and between
the Borrower and the First National Bank of Chicago as agent and a
Lender thereto (Incorporated by Reference from exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1998).
+4.3 -- Security Agreement, dated as of April 1, 1998, by and between 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 the Credit Agreement
(Incorporated by Reference from exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March
31, 1998).
+4.4 -- Security Agreement (Stock Pledge), dated as of April 1, 1998, by
and between Edge Petroleum Corporation 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 from exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1998).
-- 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.
+4.5 -- Common Stock Subscription Agreement dated as of April 30, 1999
between the Company and the purchasers named therein (Incorporated
by reference from exhibit 4.5 to the Company's Quarterly Report on
Form 10-Q/A for the quarter ended March 31, 1999).
+4.6 -- Warrant agreement dated as of May 6, 1999 between the Company and
the Warrant holders named therein (Incorporated by reference from
exhibit 4.5 to the Company's Quarterly Report on Form 10-Q/A for the
quarter ended March 31, 1999).
+4.7 -- Form of Warrant for the purchase of the Common Stock
(Incorporated by reference from the Common Stock Subscription
Agreement from exhibit 4.5 to the Company's Quarterly Report on Form
10-Q/A for the quarter ended March 31, 1999).
+10.1 -- Joint Venture Agreement between Edge Joint Venture II and Essex
Royalty Limited Partnership II, dated as of May 10, 1994
(Incorporated by reference from exhibit 10.2 to the Company's
Registration Statement on Form S-4 (Registration No. 333-17269)).
+10.2 -- Joint Venture Agreement between Edge Joint Venture II and Essex
Royalty Limited Partnership, dated as of April 11, 1992
(Incorporated by reference from exhibit 10.3 to the Company's
Registration Statement on Form S-4 (Registration No. 333-17269)).
+10.3 -- Form of Indemnification Agreement between the Company and each of
its directors (Incorporated by reference from exhibit 10.7 to the
Company's Registration Statement on Form S-4 (Registration No.
333-17269)).
+10.4 -- Employment Agreement dated February 25, 1997 between Edge
Petroleum Corporation and James D. Calaway (Incorporated by
reference from exhibit 10.5 Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997).
3
<PAGE>
+10.5 -- Consulting Agreement of James C. Calaway dated March 18, 1989
(Incorporated by reference from exhibit 10.12 to the Company's
Registration Statement on Form S-4 (Registration No. 333-17269)).
+10.6 -- Stock Option Plan of Edge Petroleum Corporation, a Texas
corporation (Incorporated by reference from exhibit 10.13 to the
Company's Registration Statement on Form S-4 (Registration No.
333-17269)).
+10.7 -- Employment Agreement dated as of November 16, 1998, by and
between the Company and John W. Elias. (Incorporated by reference
from exhibit 10.12 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998).
+10.8 -- Agreement dated as of November 16, 1998 by and between the
Company and John E. Calaway. (Incorporated by reference from exhibit
10.13 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998).
+10.9 -- Incentive Plan of Edge Petroleum Corporation as Amended and
Restated Effective as of July 27, 1999. (Incorporated by reference
from exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999).
+10.10 -- Edge Petroleum Corporation Incentive Plan "Standard Non-Qualified
Stock Option Agreement" by and between Edge Petroleum Corporation
and the Officers named therein. (Incorporated by reference from
exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999).
+10.11 -- Edge Petroleum Corporation Incentive Plan "Director Non-Qualified
Stock Option Agreement" by and between Edge Petroleum Corporation
and the Directors named therein. (Incorporated by reference from
exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999).
+10.12 -- Severance Agreements by and between Edge Petroleum Corporation
and the Officers of the Company named therein. (Incorporated by
reference from exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1999).
*10.13 -- Severance Agreement dated as of December 17, 1999 by and between
Edge Petroleum Corporation and James D. Calaway.
+10.14 -- Form of Employee Restricted Stock Award Agreement under the
Incentive Plan of Edge Petroleum Corporation (Incorporated by
Reference from exhibit 10.15 to the Company's Quarterly Report on
Form 10-Q/A for the quarterly period ended March 31, 1999).
+10.15 -- Form of Employee Restricted Stock Award Agreement between the
Company and James D. Calaway under the Incentive Plan of Edge
Petroleum Corporation (Incorporated by Reference from exhibit 10.18
to the Company's Quarterly Report on Form 10-Q/A for the quarterly
period ended March 31, 1999).
*10.16 -- Letter agreement dated November 9, 1999 for the purchase and sale
of working interests in oil and natural gas properties between the
Company and James C. Calaway.
*21.1 -- Subsidiaries of the Company.
*23.1 -- Consent of Deloitte & Touche LLP.
*23.2 -- Consent of Ryder Scott Company.
*27.1 -- Financial Data Schedule.
*99.1 -- Summary of Reserve Report of Ryder Scott Company Petroleum
Engineers as of December 31, 1999 (included as an appendix to Form
10-K).
-------------------
4
<PAGE>
* Previously filed.
+ Incorporated by reference as indicated.
(b) Reports on Form 8-K: The Company filed no report on Form 8-K during the
quarter ended December 31, 1999.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
DATE JUNE 14, 2000 /s/ JOHN W. ELIAS
John W. Elias
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
DATE JUNE 14, 2000 /s/ JOHN W. ELIAS
John W. Elias
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
DATE JUNE 14, 2000 /s/ MICHAEL G. LONG
Michael G. Long
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer
and Controller)
DATE JUNE 14, 2000 /s/ VINCENT ANDREWS
Vincent Andrews
Director
DATE JUNE 14, 2000 /s/ DAVID B. BENEDICT
David B. Benedict
Director
DATE JUNE 14, 2000 /s/ NILS P. PETERSON
Nils P. Peterson
Director
DATE JUNE 14, 2000 /s/ STANLEY S. RAPHAEL
Stanley S. Raphael
Director
DATE JUNE 14, 2000 /s/ JOHN SFONDRINI
John Sfondrini
Director
DATE JUNE 14, 2000 /s/ ROBERT W. SHOWER
Robert W. Shower
Director
6
<PAGE>
EDGE PETROLEUM CORPORATION
Index to Consolidated Financial Statements and Supplementary Information
CONSOLIDATED FINANCIAL STATEMENTS
Audited Financial Statements:
Independent Auditors' Report......................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998......... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997.................................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.................................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997.................................... F-6
Notes to Consolidated Financial Statements........................... F-7
Unaudited Information:
Supplementary Information to Consolidated Financial Statements...... F-19
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
NONE
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors,
Edge Petroleum Corporation
We have audited the accompanying consolidated balance sheets of Edge
Petroleum Corporation (a Delaware Corporation) (the "Company") as of December
31, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1999 and 1998,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1998 the Company changed its method of accounting for direct internal
geological and geophysical costs to one of capitalization of such costs, which
are directly attributable to acquisition, exploration and development
activities, to oil and natural gas properties.
/S/ Deloitte & Touche LLP
Houston, Texas
February 18, 2000
F-2
<PAGE>
EDGE PETROLEUM CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
-----------------------------------------------------------------------------------------
DECEMBER 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 577,864 $ 272,428
Accounts receivable, trade ......................... 3,489,709 2,237,113
Accounts receivable, joint interest owners, net
of allowance of $163,000 and $250,000 at
December 31, 1999 and 1998, respectively ....... 1,177,555 2,215,096
Receivables from related parties ................... 59,951 228,922
Other current assets ............................... 161,558 313,631
------------ ------------
Total current assets .................. 5,466,637 5,267,190
PROPERTY AND EQUIPMENT, Net - full cost method
of accounting for oil and natural gas properties .... 45,976,007 47,258,993
INVESTMENT IN FRONTERA ................................ 3,867,233 3,744,935
OTHER ASSETS .......................................... 7,788 7,789
------------ ------------
TOTAL ASSETS .......................................... $ 55,317,665 $ 56,278,907
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade ............................ $ 1,332,760 $ 2,948,791
Accrued liabilities ................................ 4,994,929 3,779,881
Accrued interest payable ........................... 16,369 93,880
Current portion of long-term debt .................. 4,100,000 6,700,000
------------ ------------
Total current liabilities ............. 10,444,058 13,522,552
------------ ------------
LONG-TERM DEBT ........................................ 2,700,000 5,800,000
------------ ------------
Total liabilities ..................... 13,144,058 19,322,552
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 5,000,000
shares authorized; none outstanding
Common stock, $.01 par value; 25,000,000
shares authorized; 9,182,023 and 7,758,667
shares issued and outstanding at December 31, 1999
and 1998, respectively ........................... 91,820 77,586
Additional paid-in capital ......................... 55,223,901 47,769,159
Retained earnings (deficit) ........................ (13,107,890) (9,398,410)
Unearned compensation - restricted stock ........... (34,224) (1,491,980)
------------ ------------
Total stockholders' equity ............ 42,173,607 36,956,355
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............ $ 55,317,665 $ 56,278,907
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
EDGE PETROLEUM CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OIL AND NATURAL GAS REVENUES .................................... $ 14,485,995 $ 15,463,432 $ 13,468,042
OPERATING EXPENSES:
Oil and natural gas operating expenses
including production and ad valorem taxes ................ 3,039,070 3,375,759 2,330,648
Depletion, depreciation and amortization ..................... 8,511,826 10,002,533 2,875,457
Impairment of oil and natural gas properties ................. 10,012,989
General and administrative expenses .......................... 4,528,517 4,582,973 4,641,374
Unearned compensation expense ................................ 349,623 621,191 513,393
Other charge ................................................. 1,688,227 2,898,125 --
------------ ------------ ------------
Total operating expenses ........................ 18,117,263 31,493,570 10,360,872
------------ ------------ ------------
OPERATING INCOME (LOSS) ......................................... (3,631,268) (16,030,138) 3,107,170
OTHER INCOME AND (EXPENSE):
Interest expense ............................................. (130,067) (90,075) (183,028)
Interest income .............................................. 51,855 132,993 900,867
------------ ------------ ------------
NET INCOME (LOSS) BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE .................. (3,709,480) (15,987,220) 3,825,009
INCOME TAX BENEFIT .............................................. -- 982,966 --
------------ ------------ ------------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE ......................................... (3,709,480) (15,004,254) 3,825,009
CUMULATIVE EFFECT OF ACCOUNTING CHANGE .......................... -- 1,780,835 --
------------ ------------ ------------
NET INCOME (LOSS) ............................................... $ (3,709,480) $(13,223,419) $ 3,825,009
============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) before cumulative effect of accounting change $ (0.43) $ (1.93) $ 0.53
Cumulative effect of accounting change ........................ -- 0.23 --
------------ ------------ ------------
Basic earnings (loss) per share ............................... $ (0.43) $ (1.70) $ 0.53
============ ============ ============
DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss) before cumulative effect of accounting change $ (0.43) $ (1.93) $ 0.52
Cumulative effect of accounting change ........................ -- 0.23 --
------------ ------------ ------------
Diluted earnings (loss) per share ............................. $ (0.43) $ (1.70) $ 0.52
============ ============ ============
BASIC WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING .................................... 8,680,369 7,758,667 7,274,617
============ ============ ============
DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING .................................... 8,680,369 7,758,667 7,320,400
============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
EDGE PETROLEUM CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................... $ (3,709,480) $(13,223,419) $ 3,825,009
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of accounting change .............. (1,780,835)
Depletion, depreciation and amortization ............ 8,511,826 10,002,533 2,875,457
Impairment of oil and natural gas properties ........ 10,012,989
Deferred income taxes ............................... (982,966)
Unearned compensation expense ...................... 1,483,211 2,268,610 513,393
Changes in assets and liabilities:
Accounts receivable, trade .......................... (1,252,596) 157,384 (355,608)
Accounts receivable, joint interest owners, net ..... 1,037,541 4,332,523 (3,888,594)
Receivable from related parties ..................... 168,971 156,270 (198,630)
Other current assets ................................ 152,073 38,940 (238,115)
Other assets ........................................ 9,443 1,088
Accounts payable, trade ............................. (1,616,031) (403,213) 2,292,013
Accrued interest payable ............................ (77,511) 93,880 (74,354)
Accrued liabilities ................................. 1,215,048 1,301,259 (606,292)
------------ ------------ ------------
Net cash provided by operating activities 5,913,052 11,983,398 4,145,367
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of prospects and property and equipment ...... (14,587,680) (34,823,922) (29,874,155)
Proceeds from the sale of prospects and oil and
natural gas properties ............................... 7,451,341 6,951,673 2,325,418
Investment in Frontera ................................. (122,298) (116,671) (3,628,264)
------------ ------------ ------------
Net cash used in investing activities .... (7,258,637) (27,988,920) (31,177,001)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable ............................. 12,500,000 867,350
Payment on notes payable ................................ (5,700,000) (11,017,348)
Payment on long-term notes payable ...................... (411,904)
Payment on related party subordinated loans ............. (1,300,000)
Net proceeds from issuance of common stock .............. 7,351,021 41,028,258
Net proceeds from exercise of common stock options ...... -- -- 100,000
------------ ------------ ------------
Net cash provided by financing activities . 1,651,021 12,500,000 29,266,356
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..... 305,436 (3,505,522) 2,234,722
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............ 272,428 3,777,950 1,543,228
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................. $ 577,864 $ 272,428 $ 3,777,950
============ ============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES - Cash paid for interest $ 740,694 $ 415,820 $ 257,382
NON-CASH TRANSACTIONS:
Combination transactions ................................ $ 3,599,635
Deferred offering costs at December 31, 1996 capitalized
to equity ............................................. $ 1,006,379
Tax benefit from exercise of common stock options ....... $ 224,617
Issuance of restricted common stock ..................... $ 29,479 $ 148,882
Issuance of common stock for oil and natural
gas properties ........................................ $ 92,500
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
EDGE PETROLEUM CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------------
OLD EDGE
COMMON STOCK COMMON STOCK ADDITIONAL
----------------------------- ----------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1997 ............. $ 105,263 $ 1,053 $ 634,695
Combination ................. (105,263) (1,053) 4,701,361 $ 47,014 2,544,557
Public common stock
offering, net
of offering costs
of $5.4 million .......... 2,760,000 27,600 39,994,279
Issuance of restricted
common stock ............. 250,586 2,506 4,132,163
Proceeds from the exercise of
common stock options ...... 48,922 489 99,511
Tax benefit from exercise of
common stock options ...... 224,617
Unearned compensation expense
Net income ..................
------------ ------------ ------------ ------------ -----------
BALANCE,
DECEMBER 31,1997 ........... -- -- 7,760,869 77,609 47,629,822
Issuance of restricted
common stock ............. 12,025 120 148,762
Forfeiture of restricted
common stock ............ (14,227) (143) (9,425)
Unearned compensation expense
Net loss ....................
------------ ------------ ------------ ------------ -----------
BALANCE,
DECEMBER 31, 1998 ........... -- -- 7,758,667 77,586 47,769,159
Issuance of restricted
common stock ............. 4,809 48 29,431
Forfeiture of restricted
common stock ............. (325) (3) (4,021)
Private common stock
offering, net
of offering
costs of $261,479 ........ 1,400,000 14,000 7,337,021
Issuance of common
stock for oil and
natural gas properties ... 18,872 189 92,311
Unearned compensation expense
Net loss ....................
------------ ------------ ------------ ------------ -----------
BALANCE,
DECEMBER 31, 1999 ........... -- $ -- 9,182,023 $ 91,820 $55,223,901
============ ============ ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
UNEARNED
COMPENSATION- TOTAL
TREASURY RETAINED RESTRICTED STOCKHOLDERS'
STOCK EARNINGS (DEFICIT) STOCK EQUITY (DEFECIT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1997 ............. $ (42,000) $ (967,117) (373,369)
Combination ................. 42,000 967,117 3,599,635
Public common stock
offering, net
of offering costs
of $5.4 million .......... 40,021,879
Issuance of restricted
common stock ............. $ (4,134,669)
Proceeds from the exercise of
common stock options ...... 100,000
Tax benefit from exercise of
common stock options ...... 224,617
Unearned compensation expense 513,393 513,393
Net income .................. 3,825,009 3,825,009
------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1997 .......... -- 3,825,009 (3,621,276) 47,911,164
Issuance of restricted
common stock ............. (148,882)
Forfeiture of restricted
common stock ............ 9,568
Unearned compensation expense 2,268,610 2,268,610
Net loss .................... (13,223,419) (13,223,419)
------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1998 ........... -- (9,398,410) (1,491,980) 36,956,355
Issuance of restricted
common stock ............. (29,479)
Forfeiture of restricted
common stock ............. 4,024
Private common stock
offering, net
of offering
costs of $261,479 ........ 7,351,021
Issuance of common
stock for oil and
natural gas properties ... 92,500
Unearned compensation expense 1,483,211 1,483,211
Net loss .................... (3,709,480) (3,709,480)
------------ ------------ ------------ ------------
BALANCE,
DECEMBER 31, 1999 ........... $- $(13,107,890) $ (34,224) $ 42,173,607
============ ============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The Company was organized as a Delaware corporation in August
1996 in connection with the Offering and related combination of certain entities
that held interests in Edge Joint Venture II (the "Joint Venture") and certain
other oil and natural gas properties; herein referred to as the "Combination".
In a series of combination transactions the Company issued an aggregate of
4,701,361 shares of common stock and received in exchange 100% of the ownership
interests in the Joint Venture and certain other oil and natural gas properties.
In March 1997, and contemporaneously with the Combination, the Company completed
the Initial Public Offering of 2,760,000 shares of its common stock (the
"Offering") generating proceeds of approximately $40 million, net of expenses.
NATURE OF OPERATIONS - The Company is an independent energy company
engaged in the exploration, development and production of oil and natural gas.
The Company conducts its operations primarily along the onshore United States
Gulf Coast, with its primary emphasis in South Texas and Louisiana where it
currently controls interests in excess of 98,000 gross acres held under lease or
option. 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.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of all majority owned subsidiaries of the Company, including Edge
Petroleum Operating Company Inc., and Edge Petroleum Exploration Company, which
are 100% owned subsidiaries of the Company. All intercompany transactions have
been eliminated in consolidation.
OTHER CHARGE - On December 31, 1999, but effective January 3, 2000, James D.
Calaway resigned as President, Chief Operating Officer and Director of the
Company. As a result of his resignation the Company recorded a one-time charge
of approximately $1.5 million to satisfy corporate obligations under his
employment contract. Included in the $1.5 million is a $1.1 million non-cash
amount relating to vesting of the remaining balance of Mr. James Calaway's
restricted common stock award granted concurrent with the Company's Offering
(see Note 8). The balance of the 1999 other charge primarily represents an
accrual for workforce reduction and cash payments to be paid to Mr. Calaway from
the date of his resignation to December 31, 2000.
Effective November 16, 1998, John E. Calaway resigned as Chairman of the
Board, Chief Executive Officer ("CEO") and Director of the Company. As a result
of his resignation the Company recorded a one-time charge of approximately $2.9
million to satisfy corporate obligations under his employment contract. Included
in the $2.9 million is a $1.6 million non-cash amount relating to vesting of the
remaining balance of Mr. John Calaway's restricted common stock award granted
concurrent with the Company's Offering (see Note 8). The balance of the special
charge primarily represents cash payments to be paid to Mr. Calaway from the
date of his resignation to January, 2000.
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 the acquisition, exploration and
development activities, to oil and natural gas properties. Prior to the change
the Company expensed these costs as incurred. The Company believes the
accounting change provides for a better matching of revenues and expenses and
enhances the comparability of it's 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 the net loss for the year ended December 31, 1998.
The effect of the accounting change (reduced G&A offset by increased DD&A) on
the year ended December 31, 1998 was to decrease the net loss by $1,646,187
($0.21 basic and diluted loss per share).
F-7
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
YEAR ENDED
DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------- ------------- -------------
Net income (loss):
As reported ................ $ (3,709,480) $ (13,223,419) $ 3,825,009
============= ============= =============
Pro forma .................. $ (3,709,480) $ (15,004,254) $ 4,005,275
============= ============= =============
Basic earnings (loss) per share:
As reported ................ $ (0.43) $ (1.70) $ 0.53
============= ============= =============
Pro forma .................. $ (0.43) $ (1.93) $ 0.55
============= ============= =============
Diluted earnings (loss) per share:
As reported ................ $ (0.43) $ (1.70) $ 0.52
============= ============= =============
Pro forma .................. $ (0.43) $ (1.93) $ 0.55
============= ============= =============
Basic weighted average number of
common shares outstanding ...... 8,680,369 7,758,667 7,274,617
============= ============= =============
Diluted weighted average number of
common shares outstanding ...... 8,680,369 7,758,667 7,320,400
============= ============= =============
REVENUE RECOGNITION - The Company recognizes oil and natural gas revenue from
its interests in producing wells as oil and natural gas is produced and sold
from those wells. Oil and natural gas sold by the Company is not significantly
different from the Company's share of production.
OIL AND NATURAL GAS PROPERTY - Investments in oil and natural gas properties
are accounted for using the full cost method of accounting. All costs associated
with the acquisition, exploration and development of oil and natural gas
properties are capitalized.
Oil and natural gas properties are amortized using the unit-of-production
method using estimates of proved reserve quantities. Investments in unproved
properties are not amortized until proved reserves associated with the prospects
can be determined or until impairment occurs. If the results of an assessment
indicates that an unproved property is impaired, the amount of impairment is
added to the proved oil and natural 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 rates per Mcfe for the years ended December 31,
1999, 1998 and 1997 were $1.15, $1.30 and $0.47, 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 oil and natural gas properties are accounted for as
adjustments of capitalized costs with no loss recognized.
In addition, the capitalized costs of oil and natural gas properties are
subject to a "ceiling test," whereby to the extent that such capitalized costs
subject to amortization in the full cost pool (net of depletion, depreciation
and amortization and related deferred taxes) exceed the present value (using 10%
discount rate) of estimated future net after-tax cash flows from proved oil and
natural gas reserves, such excess costs are charged to operations. Once incurred
an impairment of oil and natural gas properties is not reversible at a later
date. Impairment of oil and natural gas properties is assessed on a quarterly
basis in conjunction with the Company's quarterly filings with the Securities
and Exchange Commission. At December 31, 1998 the Company recorded a full cost
ceiling test write down of its oil and natural gas properties of approximately
$10.0 million.
F-8
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Depreciation of other office furniture and equipment and computer hardware
and software is provided using the straight-line method based on estimated
useful lives ranging from five to ten years.
INCOME TAXES - The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109 - "Accounting for Income
Taxes," ("SFAS No. 109") which provides for an asset and liability approach for
accounting for income taxes. Under this approach, deferred tax assets and
liabilities are recognized based on anticipated future tax consequences, using
currently enacted tax laws, attributable to differences between financial
statement carrying amounts of assets and liabilities and their respective tax
bases (see Note 6).
HEDGING ACTIVITIES - 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 oil and 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 oil and 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 oil and 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 (see Note 4).
STATEMENTS OF CASH FLOWS - The consolidated 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.
INVESTMENT IN FRONTERA - In August 1997, the Company acquired 15,171 shares
of Series D Preferred Stock of Frontera Resources Corporation ("Frontera") that
are convertible into common stock. The Company paid $3.6 million for these
shares. Frontera develops and operates oil and gas projects in emerging market
areas around the world. Frontera's focus is on known hydrocarbon-bearing basins,
where technical risk is reduced. Frontera's first focus area is the onshore Kura
Basin, along the energy corridor from the Caspian Sea to the Black Sea. Frontera
currently holds interests in three large oil and gas fields in Azerbaijan and
Georgia.
Pursuant to a rights offering conducted by Frontera in November 1998, the
Company agreed to purchase 44,027 shares of Frontera common stock (the "Frontera
Common Stock") plus such additional shares, if necessary, to maintain its then
current 8.73% interest of the partially diluted outstanding Frontera Common
Stock (assuming conversion of all preferred stock). As a result, the Company
paid Frontera $116,671 in December 1998 for 44,027 shares of Frontera Common
Stock, $5,626 in January 1999 for 2,123 shares of Frontera Common Stock and
$116,672 in April 1999 for 44,027 shares of Frontera Common Stock bring its
total investment in Frontera to $3,867,233.
The Company believes that the fair market value of its investment in Frontera
is in excess of its carrying value.
STOCK-BASED COMPENSATION - The Company accounts for Stock Based Compensation
in accordance with Financial Accounting Standards Board Statement No. 123 -
"Accounting for Stock Based Compensation," ("SFAS No. 123"). Under SFAS No. 123,
the Company is permitted to either record expenses for stock options and other
employee compensation plans based on their fair value at the date of grant or to
continue to apply its current accounting policy under Accounting Principles
Board Opinion No. 25 ("APB No. 25") and recognize compensation expense, if any,
based on the intrinsic value of the equity instrument at the measurement date.
The Company elected to continue following APB No. 25. The adoption of SFAS No.
123 in 1997 had no effect on the Company's results of operations (see Note 8).
EARNINGS PER SHARE - The Company accounts for its Earnings per share in
accordance with Statement of Financial Accounting Standards No. 128 - "Earnings
per Share," ("SFAS No. 128") 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 and warrants having exercise prices less than the average
market price of the common
F-9
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
stock using the treasury stock method. During the year ended December 31, 1999
and 1998 the Company reported a net loss, thus the effects of stock options are
antidilutive.
FINANCIAL INSTRUMENTS - The Company's financial instruments consist of cash,
receivables, payables, long-term debt and oil 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 as of December 31, 1999 and 1998 approximates fair value and the
fair value, gain (loss), of outstanding hedges was approximately $15,000 and
$(292,000), respectively.
DERIVATIVES - In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activity" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities that require an entity to recognize all derivatives as an asset or
liability measured at fair value. Depending on the intended use of the
derivatives, changes in its fair value will be reported in the period of change
as either a component of earnings or a component of other comprehensive income.
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" ("SFAS No. 137"). SFAS No. 137 delays
the effective date for implementation of SFAS No. 133 for one year making SFAS
No. 133 effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. Retroactive application to periods prior to adoption is not
allowed. The Company has not quantified the impact of adoption on its financial
statements or the date it intends to adopt.
COMPREHENSIVE INCOME - As of December 31, 1999, 1998 and 1997, there were no
adjustments ("Other Comprehensive Income") to net income (loss) in deriving
comprehensive income.
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 as of 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.
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 natural 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 significant
credit losses on such receivables but the Company can not ensure that such
losses may not be realized in the future.
RECLASSIFICATIONS - Certain prior year balances have been reclassified to
conform to the current year presentation.
2. PROPERTY AND EQUIPMENT
At December 31, 1999 and 1998, property and equipment consisted of the
following:
1999 1998
------------ ------------
Developed oil and natural gas properties .... $ 58,981,484 $ 48,441,741
Undeveloped oil and natural gas properties .. 17,930,027 21,388,831
Computer equipment and software ............. 3,769,489 3,663,335
Other office property and equipment ......... 1,286,669 1,282,273
------------ ------------
Total property and equipment ................ 81,967,669 74,776,180
Accumulated depletion, depreciation and
amortization............................... (35,991,662) (27,517,187)
------------ ------------
Property and equipment, net ................. $ 45,976,007 $ 47,258,993
============ ============
F-10
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Undeveloped oil and natural gas properties are not subject to amortization
and 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 natural gas leases not held by production,
production response to secondary recovery activities and available funds for
exploration and development.
The following table summarizes the cost of the properties not subject to
amortization for the year the cost was incurred:
DECEMBER 31,
--------------------------------
1999 1998
----------- -----------
Year cost incurred:
Remainder ......................... $ 172,991
1995 .............................. $ 50,116 182,210
1996 .............................. 333,077 943,055
1997 .............................. 2,276,640 4,489,822
1998 .............................. 7,409,175 15,600,753
1999 .............................. 7,861,019
----------- -----------
Total ............................. $17,930,027 $21,388,831
=========== ===========
During August 1999, the Company completed a transaction in which it sold,
effective July 1, 1999, its working interests in proved producing and
undeveloped properties within it's BTA and Spartan Extension 3-D project areas
in Goliad and Victoria Counties, Texas. Proceeds from the sale were
approximately $4 million and associated net proved reserves were approximately
1.4 Bcfe or 6% of the Company's total proved reserves. The Company uses the
full-cost method of accounting for its oil and natural gas properties. Under
this method a sale of oil and natural gas properties, whether or not being
amortized currently, shall be accounted for as an adjustment of capitalized
costs, with no gain or loss recognized unless such adjustment would
significantly alter the relationship between capitalized costs and proved
reserves. The proceeds from the sale of these proved producing properties were
credited directly to the full cost pool.
3. 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 originally provided up to
$20 million in borrowings limited by a borrowing base, as defined by the
Revolving Credit Facility. 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. The
Revolving Credit Facility is secured by substantially all the assets of the
Company.
Effective March 1, 1999, the Company and the bank amended the Revolving
Credit Facility to include the following terms: 1) the initial borrowing base
was $12 million comprised of two tranches, a $9 million Revolving Credit
Facility and a $3 million term facility; 2) beginning May 1, 1999, and on the
first day of each month thereafter, the Revolving Credit Facility borrowing base
was required to be reduced by $400,000; and 3) 75% of prospect sales proceeds
were to be used to pay down the term facility with the remaining unpaid term
facility balance maturing on August 31, 1999. On May 8, 1999, from proceeds
generated by the Private Offering (see Note 8), the Company repaid the $3
million term loan in addition to $1.9 million of the Revolving Credit Facility.
Each quarter, at the election of the Company or the bank, the borrowing
base can be redetermined. At December 31, 1999 and 1998, the borrowing base
originally authorized by the bank was $9.0 million and $15.0 million,
respectively. The borrowing base is also subject to mandatory reductions which
are subject to revision each time the Revolving Credit Facility is redetermined.
At December 31, 1999 and 1998, the borrowing base was
F-11
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
required to be reduced on the first day of each subsequent month by $450,000 and
$550,000, respectively. Total reductions from the original borrowing base were
$450,000 and $1,650,000 as of December 31, 1999 and 1998, respectively.
At December 31, 1999, borrowings under this facility totaled $6.8 million
with approximately $1.8 million available for future borrowings. At March 1,
2000, total borrowings under the Revolving Credit Facility were $7.2 million
with no additional borrowings available under this facility. The terms of the
Revolving Credit facility require the borrowing base to be reduced by $450,000
on the first day of each subsequent month. For the years ended December 31, 1999
and 1998, the weighted average debt was $8.4 million and $7 million,
respectively, and the weighted average interest rate was 7.6% and 7.3%,
respectively.
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 certain financial covenants. The Tangible Net
Worth Covenant requires that at the end of each quarter the Company's Tangible
Net Worth be at least 90% of the Company's actual tangible net worth as reported
at December 31, 1998 (or $33,260,720) plus 50% of positive net income and 100%
of other increases in equity for all fiscal quarters ending subsequent to
December 31, 1998. The Fixed Charge Covenant requires that at the end of each
quarter beginning June 30, 1999, the ratio of annualized EBITDA (as defined) to
the sum of annualized interest expense plus 50% of the quarter end loans
outstanding must be at least 1.25 to 1.00. At December 31, 1999 the Company was
in compliance with the above mentioned covenants.
At December 31, 1999 and 1998, current maturities of long-term debt and
long-term debt consisted of the following:
1999 1998
------------ ------------
Revolving credit facility .............. $ 6,800,000 $ 12,500,000
Current portion ........................ (4,100,000) (6,700,000)
------------ ------------
Long-term portion ...................... $ 2,700,000 $ 5,800,000
============ ============
4. HEDGING ACTIVITIES
The impact on oil and natural gas revenues from hedging activities for the
three years ended December 31, 1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
EFFECTIVE DATES MMBTU GAIN (LOSS)
HEDGE -------------------- PRICE PER VOLUMES ----------------------------------
TYPE BEGINNING ENDING MMBTU PER DAY DECEMBER 31,
----- --------- -------- ------------- ------- ----------------------------------
1999 1998 1997
------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Collar 10/1/97 1/31/98 $2.50 - $3.15 5,000 $ 33,150
Collar 2/1/98 4/30/98 $2.25 - $2.75 5,000 $ 36,700
Collar 4/1/98 6/30/98 $2.15 - $2.37 10,000 30,000
Collar 7/1/98 9/30/98 $2.25 - $2.88 10,000 266,900
Collar 10/1/98 12/31/98 $2.00 - $2.63 5,000 1,500
Collar 10/1/98 12/31/98 $2.11 - $2.60 5,000 33,500
Collar 10/1/98 12/31/98 $2.05 - $2.60 5,000 10,550
Collar 10/1/98 12/31/98 $2.20 - $2.65 5,000 102,375
Swap 3/1/99 10/31/99 $ 1.957 13,000 $ (1,096,580)
Swap 5/1/99 9/15/99 $ 2.145 3,000 (154,124)
Swap 11/1/99 12/31/99 $ 3.000 3,000 80,070
Swap 12/1/99 12/31/99 $ 3.000 3,000 82,770
------------ -------- --------
Total $ (1,087,864) $481,525 $ 33,150
============ ======== ========
</TABLE>
F-12
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company's hedging activities are entered into on a 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.
Included within natural gas revenues for the three years ended December
31, 1999 was approximately $(1.1) million, $482,000, and $33,000 respectively,
representing net (losses) and net gains from hedging activity. During December
1999, the Company entered into a crude oil fixed price swap. The number of
barrels of oil per day ("BOD") and the related fixed price subject to the oil
price swap are as follows: i) January 1, 2000 - March 31, 2000, 150 BOD, swap at
$25.60, ii) April 1, 2000 - June 30, 2000, 125 BOD, swap at $22.87, iii) July 1,
2000 - September 30, 2000, 60 BOD, swap at $21.47, and iv) October 1, 2000 -
December 31, 2000, 50 BOD, swap at $ 20.46. At December 31, 1999 and 1998, the
fair value of outstanding hedges was approximately $15,000 and $(292,000),
respectively. Subsequent to December 31, 1999, the Company entered into three
natural gas collars. The natural gas collars cover the following MMbtu per day
and floor and ceiling per MMbtu prices: i) February 1, 2000 - February 29, 2000,
6,000 MMbtu per day, $2.20 floor - $2.31 ceiling, ii) March 1, 2000 - April 30,
2000, 6,000 MMbtu per day, $2.20 floor - $2.50 ceiling and iii) May 1, 2000 -
September 30, 2000, 9,000 MMbtu per day, $2.05 floor - $2.63 ceiling.
5. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is party to certain lawsuits and claims
arising in the ordinary course of business. While the outcome of lawsuits and
claims cannot be predicted with certainty, management does not expect these
matters to have a materially adverse effect on the Company's financial
condition, results of operations or cash flows. 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.
Additionally, 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 natural gas industry in general,
the business and prospects of the Company could be adversely affected.
At December 31, 1999, the Company was obligated under noncancelable
operating leases. Following is a schedule of the remaining future minimum lease
payments under these lease:
2000 ............... $283,969
2001 ............... 283,969
2002 ............... 283,969
2003 ............... 60,671
2004 ............... 16,012
--------
Total .............. $928,590
========
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
$511,270, $478,652, and $214,143, respectively.
6. 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 in accordance with
SFAS No. 109.
F-13
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Significant components of the Company's deferred tax liabilities and
assets as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax liability:
Book basis of oil and natural gas properties
in excess of tax basis ............................ $(2,522,052) $(2,633,825)
Deferred tax asset:
Other charge not currently deductable for tax purposes 186,585 792,708
Net operating loss carryforwards ..................... 9,069,999 7,142,358
Statutory depletion carryforward ..................... 140,390
Other misc. .......................................... 142,056 146,630
Valuation allowance .................................. (6,876,588) (5,588,261)
----------- -----------
Total deferred tax asset .................................. 2,522,052 2,633,825
----------- -----------
Net deferred tax asset .................................... $ -- $ --
=========== ===========
</TABLE>
The differences between the statutory federal income taxes calculated at
using a federal tax rate of 35% and the Company's effective tax rate is
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal income taxes ............. $(1,298,318) $(5,595,527) $ 1,338,753
Permanent differences:
Expense not deductible for tax purposes 9,991 7,266 10,483
Income not taxable to the company ..... (66,961)
Temporary differences:
Non-Statutory stock options ........... (224,617)
Cumulative effect of accounting change (958,910)
Other ................................. (24,056)
Change in valuation allowance ......... 1,288,327 5,588,261 (1,057,658)
----------- ----------- -----------
Income tax (benefit) expense ............... $ -- $ (982,966) $ --
=========== =========== ===========
</TABLE>
At December 31, 1999, the Company had cumulative net operating loss
carryforwards ("NOL") for federal income tax purposes of approximately $25.3
million which will begin to expire in 2007. The net operating loss carryforwards
assume that certain items, primarily intangible drilling costs have been written
off in the current year. However, the Company has not made a final determination
if an election will be made to capitalize all or part of these items for tax
purposes. Due to the 1997 ownership change of Old Edge and the Joint venture,
future utilization of the NOLs is limited by Internal Revenue Code Section 382.
7. EMPLOYEE BENEFIT PLANS
Effective July 1, 1997 the Company established a defined-contribution
401(k) Savings & Profit Sharing Plan Trust (the "Plan") covering employees of
the Company who are age 21 or older. The Company's matching contributions to the
Plan are discretionary. For the years ended December 31, 1999, 1998 and 1997 the
Company contributed $81,990, $68,869 and $40,954, respectively, to the Plan.
8. EQUITY AND STOCK PLANS
EQUITY OFFERINGS - On March 3, 1997 Combination was consummated resulting in the
issuance of 4,701,361 shares to the predecessor owners of the combining entities
involved in the Combination (see Note 1). In addition, during
F-14
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
March 1997, the Company completed its Offering issuing 2,760,000 shares at
$16.50 per share. Net proceeds totaled approximately $40.0 million, net of
offering costs of approximately $5.4 million.
PRIVATE OFFERING - On May 6, 1999, the Company completed a "Private Offering" of
1,400,000 shares of common stock at a price of $5.40 per share. The Company also
issued warrants, which were purchased for $0.125 per warrant, to acquire an
additional 420,000 shares of common stock at $5.35 per share and are exercisable
through May 6, 2004. At the election of the Company, the warrants may be called
at a redemption price of $0.01 per warrant at any time after any date at which
the average daily per share closing bid price for the immediately proceeding 20
consecutive trading days exceeds $10.70. No warrants have been exercised as of
December 31, 1999. Total proceeds, net of offering costs, were approximately
$7.4 million of which $4.9 million was used to repay debt under the Revolving
Credit Facility with the remainder being utilized to satisfy working capital
requirements and to fund a portion of the Company's exploration program.
STOCK PLAN - In conjunction with the Offering, the Company established the
Incentive Plan of Edge Petroleum Corporation (the "Incentive Plan"). The
Incentive Plan is discretionary and provides for the granting of awards,
including options for the purchase of the Company's Common Stock ("Common
Stock") and for the issuance of restricted and/or unrestricted Common Stock to
directors, officers, employees and independent contractors of the Company. The
options and restricted stock granted to date vest over 2-10 years. An aggregate
of 1,200,000 shares of Common Stock have been reserved for grants under the
Incentive Plan, of which 335,866 shares were available for future grants at
December 31, 1999 (these shares include only those issued under the Incentive
Plan). Shares of Common Stock awarded as restricted stock are subject to
restrictions on transfer and subject to risk of forfeiture until earned by
continued employment or service or achievement of certain performance
milestones. During 1999, 1998 and 1997, 4,809, 12,025 and 250,586 shares,
respectively, of restricted stock were awarded having a market value of $6.13,
$12.38 and $16.50, respectively, per share as of the award date. The total
market value of such awards has been recorded as unearned
compensation-restricted stock and is shown as a separate component of
stockholders' equity and is amortized to expense over the vesting period.
Effective May 21, 1999, the Company amended and restated the Incentive
Plan. In conjunction with those and other amendments of the Incentive Plan, the
Company exchanged, on a voluntary basis, 556,488 outstanding Nonqualified Stock
options of certain employees and Directors of the Company for 326,700 new common
stock options in replacement of those options. The exercise price of the
replacement options was $7.06, which represents the fair market value on the
date of grant. The replaced options have a ten-year term with 50% of the options
vesting immediately on the date of grant with the remaining 50% vesting on May
21, 2000. On May 21, 1999, the Company also issued 99,800 new ten-year common
stock options to employees, which vest 100% on May 21, 2001. The exercise price
of the new options was $7.06, which represents the fair market value on the date
of grant. On June 1, 1999 the Company issued 21,000 ten-year common stock
options to non-employee directors with an exercise price of $7.28 per share
vesting 100% on June 1, 2001.
Effective January 8, 1999, as a component of his employment agreement with
the Company, John Elias, CEO and Chairman of the Board, was granted options
outside of the Incentive Plan for the purchase of 200,000 shares of common
stock. These options vest and become exercisable one-third upon issue, and
one-third upon each of January 1, 2000 and January 1, 2001. These amounts are
included within options granted, and 66,666 options exercisable, during 1999 in
the table below.
In addition, as of the date of the Combination, Old Edge had in place a
stock incentive plan which was administered by non-employee members of the Board
of Directors of Old Edge. Prior to the Combination, two executives of the
Company each held outstanding options for the purchase of 2,193 shares of Old
Edge Common Stock granted under the Old Edge incentive plan. Upon completion of
the Combination, such options were converted into incentive stock options for
the purchase of an aggregate of 97,844 (48,922 for each of the two individuals)
shares of Common Stock of the Company (such number of shares of Common Stock as
would have existed if such options had been exercised immediately prior to the
Combination Transactions). After adjustment for the conversion, the option price
per share of Common Stock for each of the two grants was approximately $ 4.09
and $2.04, respectively. These amounts are included within options granted
during 1997 in the table below. Of these shares 48,922 were exercised during
1997 and 48,922 remain outstanding at December 31, 1999, 1998 and 1997.
F-15
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
UNEARNED COMPENSATION EXPENSE - Unearned compensation expense is amortized to
operations over the corresponding vesting period. Amortization of unearned
compensation expense for the years ended December 31, 1999, 1998 and 1997 was
$349,623, $621,191 and $513,393, respectively.
Effective December 31, 1999, Mr. James D. Calaway resigned as President
and Chief Operating Officer and a Director of the Company. In connection with
his resignation his remaining restricted stock, 93,552 shares, became fully
vested. Included in "Other charge" for 1999 is the amortization of approximately
$1.1 million of unearned compensation expense resulting from the vesting of
those restricted shares.
Effective November 16, 1998, Mr. John E. Calaway resigned as Chairman of
the Board, Chief Executive Officer and a Director of the Company. In connection
with his resignation his remaining restricted stock, 106,916 shares, became
fully vested. Included in "Other charge" for 1998 is the amortization of
approximately $1.6 million of unearned compensation expense resulting from the
vesting of those restricted shares.
A summary of the status of the Company's stock options and changes as of
and for each of the three years ended December 31, 1999 is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- --------------------------
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- -------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 . 739,055 $ 15.17 706,365 $ 15.63
Granted ................ 320,800 $ 5.30 107,600 $ 12.76 783,040 $ 14.80
Reissued/repriced ...... 326,700 $ 7.06
Recalled ............... (556,488) $ 15.84
Forfeited .............. (11,500) $ 7.06 (74,910) $ 16.01 (27,753) $ 16.50
Exercised .............. (48,922) $ 2.04
-------- -------- --------
Outstanding, December 31 818,567 $ 7.74 739,055 $ 15.17 706,365 $ 15.63
======== ======== ========
Exercisable, December 31 409,783 $ 9.32 272,785 $ 14.27 48,922 $ 4.09
======== ======== ========
</TABLE>
A summary of the of the Company's stock options categorized by class of
grant at December 31, 1999 is presented below:
<TABLE>
<CAPTION>
ALL OPTIONS OPTIONS EXERCISABLE
------------------------------------------------------------ ------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF SHARES CONTRACTUAL LIFE EXERCISE RANGE OF SHARES EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISE PRICE OUTSTANDING PRICE
-------------- ----------- ---------------- -------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$4.09 - $4.22 248,922 8.64 $ 4.19 $4.09 - $4.22 115,588 $ 4.17
$7.06 - $7.28 436,000 9.41 $ 7.07 $7.06 - $7.28 160,550 $ 7.06
$16.50 133,645 7.17 $ 16.50 $16.50 133,645 $ 16.50
</TABLE>
F-16
<PAGE>
EDGE PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company applies the intrinsic value based method of APB No.25 in
accounting for its stock options. Accordingly, no compensation expense has been
recognized for any stock options granted. Had compensation expense for the
Company's stock options granted during the years ended December 31, 1999, 1998
and 1997 been determined based on the fair value at the grant dates, consistent
with the methodology prescribed by SFAS No.123, the Company's net income and
earnings per share would have been reduced to the amounts indicated below based
on the Black-Scholes option pricing model (the "Model") adopted for the use in
valuing stock options. The estimated values under the Model are based on the
following assumptions for the years ended December 31, 1999, 1998 and 1997:
expected volatility based on historical volatility of daily Common Stock Prices
(70%, 53% and 41%, respectively), a risk free rate of return based on a discount
rate which approximates the U.S. Treasury rate at the time of the grant, no
dividend yields, an expected option exercise period of 8 years for both periods
(with the exercise occurring at the end of such period) and a forfeiture rate of
0-10% over the vesting period of such options.
Following is the pro forma effect of FASB 123 and its impact on net income
(loss) and earnings (loss) per basic and diluted share for the three years ended
December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net income (loss):
As reported ......................... $ (3,709,480) $ (13,223,419) $ 3,825,009
============== ============== ==============
Pro forma ........................... $ (4,186,567) (13,743,611) 3,454,671
============== ============== ==============
As Reported:
Basic earnings (loss) per share:
Net income (loss) before cumulative
effect of accounting change ......... $ (0.43) $ (1.93) $ 0.53
Cumulative effect of accounting change -- 0.23 --
-------------- -------------- --------------
Basic earnings (loss) per share ...... $ (0.43) $ (1.70) $ 0.53
============== ============== ==============
Diluted earnings (loss) per share:
Net income (loss) before cumulative .. $ (0.43) $ (1.93) $ 0.52
effect of accounting change ......... -- 0.23 --
-------------- -------------- --------------
Cumulative effect of accounting change $ (0.43) $ (1.70) $ 0.52
============== ============== ==============
Diluted earnings (loss) per share
Pro forma:
Basic earnings (loss) per share:
Net income (loss) before cumulative
effect of accounting change ......... $ (0.49) $ (2.00) $ 0.47
Cumulative effect of accounting change -- 0.23 --
-------------- -------------- --------------
Basic earnings (loss) per share ...... $ (0.49) $ (1.77) $ 0.47
============== ============== ==============
Diluted earnings (loss) per share:
Net income (loss) before cumulative
effect of accounting change ......... $ (0.49) $ (2.00) $ 0.47
Cumulative effect of accounting change -- 0.23 --
-------------- -------------- --------------
Diluted earnings (loss) per share .... $ (0.49) $ (1.77) $ 0.47
============== ============== ==============
</TABLE>
F-17
<PAGE>
COMPUTATION OF EARNINGS PER SHARE - 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.
YEAR ENDED DECEMBER 31, 1997
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ----------- ---------
BASIC EPS
Income available to common
stockholders ...................... $ 3,825,009 7,274,617 $ 0.53
EFFECT OF DILUTIVE SECURITIES
Common stock options ................ -- 45,783 (0.01)
------------- ----------- ---------
DILUTED EPS
Income available to common
stockholders ...................... $ 3,825,009 7,320,400 $ 0.52
============= =========== =========
For the year ended December 31, 1999, and 1998, the Company reported a net
loss, thus the effects of stock options and warrants are antidilutive.
9. RELATED PARTY TRANSACTIONS
In May 1992, the Company became the managing venturer of the Essex
Royalty Joint Venture ("Essex") and the Company entered into a management
agreement with Essex. In September 1994, the Company became the managing
venturer of the Essex Royalty Joint Venture II ("Essex II") and the Company
entered into a management agreement with Essex II. Under the management
agreements with Essex and Essex II (collectively, the "Essex Joint Ventures"),
the Company receives a monthly management fee for managing the Essex Joint
Ventures, the general partner of each of which is a related party. For the years
ended December 31, 1999, 1998 and 1997, the Company recorded management fees
totaling $52,560, $120,000 and $120,000, respectively, and have recorded these
amounts as a reduction of general and administrative expenses. In addition,
these agreements stipulate that the Company is entitled to be reimbursed for
certain direct general and administrative expenses and other reimbursable costs.
Such amounts invoiced by the Company to the Essex Joint Ventures for the years
ended December 31, 1998 and 1997 amounted to $3,074 and $61,746, respectively.
At December 31, 1999 and 1998, the Company had a receivable from the Essex Joint
Ventures of $58,651 and $167,971, respectively, relating to these management
fees, direct expenses, and costs.
Pursuant to a Purchase and Sale Agreement dated as of November 9, 1999,
the Company sold 18,872 shares of Common Stock to Mr. James C. Calaway. In
exchange for such stock, the Company received from Mr. Calaway his working
interests in all the Company's prospects, leases and areas of mutual interest.
F-18
<PAGE>
10. SUPPLEMENTAL FINANCIAL QUARTERLY RESULTS (UNAUDITED):
<TABLE>
<CAPTION>
4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1999
Oil and natural gas revenues ........... $ 3,699 $ 3,056 $ 4,189 $ 3,542
Operating expenses ..................... 6,923 2,960 4,414 3,820
Operating income (loss) ................ (3,224) 96 (225) (278)
Other income and (expense), net ........ (36) (15) (27)
Net income (loss) ...................... (3,260) 96 (240) (305)
Basic earnings (loss) per share ........ $ (0.36) $ 0.01 $ (0.03) $ (0.04)
Diluted earnings (loss) per share ...... $ (0.36) $ 0.01 $ (0.03) $ (0.04)
1998
Oil and natural gas revenues ........... $ 3,847 $ 3,981 $ 3,849 $ 3,786
Operating expenses ..................... 19,865 4,538 3,812 3,279
Operating income (loss) ................ (16,017) (556) 37 506
Other income and (expense), net ........ (44) (3) 44 46
Income tax (expense) benefit ........... 1,020 191 (34) (194)
Net income (loss) ...................... (13,260) (368) 47 358
Basic earnings (loss) per share:
Net income (loss) before cumulative
effect of accounting change ......... $ (1.71) $ (0.05) $ 0.01 $ 0.05
Cumulative effect of accounting change 0.23
Basic earnings (loss) per share ...... (1.71) (0.05) 0.01 0.28
Diluted earnings (loss) per share:
Net income (loss) before cumulative
effect of accounting change ......... $ (1.71) $ (0.05) $ 0.01 $ 0.05
Cumulative effect of accounting change 0.23
Diluted earnings (loss) per share: ... (1.71) (0.05) 0.01 0.28
</TABLE>
The sum of the individual quarterly basic and diluted earnings (loss) per
share amounts may not agree with year-to-date basic and diluted earnings (loss)
per share amounts as a result of each period's computation being based on the
weighted average number of common shares outstanding during that period.
Included in operating expenses for the three months ended December 31,
1999 and 1998 is an other charge of approximately $1.7 million and $2.9 million,
respectively, the majority of which represents one-time charges to satisfy
corporate obligations under the former President's and Chairman's employment
contracts (see Note 1). Included in operating expenses during the three months
ended December 31, 1998 is approximately $10 million representing an impairment
of oil and natural gas properties (see Note 1).
F-19
<PAGE>
11. SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND NATURAL 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 Natural Gas
Producing Activities."
CAPITALIZED COSTS - Capitalized costs and accumulated depletion, depreciation
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>
DECEMBER 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Developed oil and natural gas properties ..... $ 58,981,484 $ 48,441,741
Undeveloped oil and natural gas properties ... 17,930,027 21,388,831
Accumulated depletion, depreciation and
amortization ............................... (33,521,520) (25,708,987)
------------ ------------
Net capitalized cost ......................... $ 43,389,991 $ 44,121,585
============ ============
</TABLE>
COSTS INCURRED - Costs incurred in oil and natural gas property acquisition,
exploration and development activities are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Acquisition Cost:
Unproved projects and prospects . $ 7,691,947 $20,852,838 $17,659,706
Exploration costs ....................... 3,334,836 10,236,188 8,640,530
Development costs ....................... 3,455,493 3,249,492 1,207,771
----------- ----------- -----------
Gross costs incurred ............ 14,482,276 34,338,518 27,508,007
Less proceeds from the sales of prospects 3,471,247 6,951,673 2,325,418
----------- ----------- -----------
Net cost incurred ............... $11,011,029 $27,386,845 $25,182,589
=========== =========== ===========
</TABLE>
Net costs incurred excludes sales of proved oil and natural gas properties
which 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.
RESULTS OF OPERATIONS - Results of operations for the Company's oil and natural
gas producing activities are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Oil and natural gas revenues ................. $ 14,485,995 $ 15,463,432 $ 13,468,042
Operating expenses:
Oil and natural gas operating expenses
and ad valorem taxes ................... 1,954,058 2,438,553 1,459,291
Production taxes ........................... 1,085,012 937,206 871,357
Depletion, depreciation and amortization ... 7,812,533 9,254,412 2,483,539
Impairment of oil and natural gas properties 10,012,989
------------ ------------ ------------
Results of operations ................... $ 3,634,392 $ (7,179,728) $ 8,653,855
============ ============ ============
</TABLE>
F-20
<PAGE>
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 (see
Standardized Measure) 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>
NATURAL GAS
(MCF)
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Proved developed and undeveloped reserves
Beginning of year ............... 24,235,000 29,123,000 13,417,000
Revisions of previous estimates . (5,011,534) (6,834,982) (5,397,141)
Extensions and discoveries ...... 8,519,618 8,231,477 25,402,000
Sales of natural gas properties . (1,306,146)
Production ...................... (5,675,938) (6,284,495) (4,298,859)
----------- ----------- -----------
End of Year ................. 20,761,000 24,235,000 29,123,000
=========== =========== ===========
Proved developed reserves at year end ... 15,084,000 15,844,000 17,866,000
=========== =========== ===========
<CAPTION>
OIL, CONDENSATE AND NATURAL GAS LIQUIDS
(BBLS)
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Proved developed and undeveloped reserves
Beginning of year ............... 444,813 866,186 642,714
Revisions of previous estimates . 150,207 (401,003) (147,917)
Extensions and discoveries ...... 309,246 121,404 537,029
Sales of oil properties ......... (15,661)
Production ...................... (187,223) (141,774) (165,640)
------------ ------------ ------------
End of Year ................. 701,382 444,813 866,186
============ ============ ============
Proved developed reserves at year end ... 577,775 308,347 646,009
============ ============ ============
</TABLE>
STANDARDIZED MEASURE - The Standardized Measure of Discounted Future Net Cash
Flows relating to the Company's ownership interests in proved oil and natural
gas reserves for each of the three years ended December 31, 1999 is shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Future cash inflows ......................... $ 64,112,983 $ 49,444,900 $ 83,454,087
Future oil and natural gas operating expenses (13,055,050) (11,718,097) (16,228,391)
Future development costs .................... (3,170,357) (3,297,539) (5,957,039)
Future income tax expenses .................. (16,575,185)
------------ ------------ ------------
Future net cash flows ....................... 47,887,576 34,429,264 44,693,472
10% discount factor ......................... (13,826,224) (11,699,510) (13,450,819)
------------ ------------ ------------
Standardized measure of discounted future
net cash flows ...................... $ 34,061,352 $ 22,729,754 $ 31,242,653
============ ============ ============
</TABLE>
F-21
<PAGE>
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 oil and natural gas operating expenses and development costs are computed
primarily by the Company's petroleum engineers and are provided to Ryder Scott
as estimates of expenditures to be incurred in developing and producing the
Company's proved oil and natural gas reserves at the end of the year, based on
year end costs and assuming the continuation of existing economic conditions.
Future income taxes are based on year-end statutory rates, adjusted for
net 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 natural 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, a discount
factor more representative of the time value of money and the risks inherent in
reserve estimates.
CHANGES IN STANDARDIZED MEASURE (Y) Changes in Standardized Measure of
Discounted Future Net Cash Flows relating to proved oil and gas reserves are
summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Changes due to current year operations:
Sales of oil and natural gas, net of oil and natural
gas operating expenses ........................ $(11,446,925) $(12,087,673) $(11,137,394)
Sales of oil and natural gas properties ............. (1,439,355)
Extensions and discoveries .......................... 16,483,064 6,417,976 34,003,639
Changes due to revisions in standardized variables:
Prices and operating expenses ....................... 10,947,292 (9,163,029) (15,703,096)
Revisions of previous quantity estimates ............ (5,903,857) (9,612,849) (8,897,696)
Estimated future development costs .................. 164,412 2,659,500 (4,974,436)
Income taxes ........................................ 9,645,975 3,116,093
Accretion of discount ............................... 2,272,975 4,088,863 3,942,563
Production rates (timing) and other .................. 224,021 (461,662) 692,811
------------ ------------ ------------
Net change ................................................ 11,301,627 (8,512,899) 1,042,484
Beginning of year ......................................... 22,729,754 31,242,653 30,200,169
------------ ------------ ------------
End of year ............................................... $ 34,061,352 $ 22,729,754 $ 31,242,653
============ ============ ============
</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 natural 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-22
