**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

ý**QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2001**

 

**OR**

 

o**TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from________ to_______**

 

**Commissionfile number 0-22149**

 

**EDGE PETROLEUM CORPORATION**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                                         |   | **76-0511037**                            |
|----------------------------------------------------------------------|--------|-------------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer 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 checkmarkwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes ý  No o

 

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common equity, as of the latest practicable date.

 

| Class        |   | Outstanding at November  9, 2001 |
|--------------|--------|----------------------------------|
|         |   |                             |
| Common Stock |   | 9,304,046                        |

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

** **

**EDGEPETROLEUM CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**
|                                                                                                                                                                                   |   | **September 30, 2001** |       | **December 31, 2000** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|-----------------------|--------|
|                                                                                                                                                                                   |   | **(Unaudited)**        |       |                  |   |
| **ASSETS**                                                                                                                                                                             |   |                   |       |                  |   |
|                                                                                                                                                                                   |   |                   |       |                  |   |
| CURRENT ASSETS:                                                                                                                                                                        |   |                   |       |                  |   |
| Cash and cash  equivalents                                                                                                                                                             |   | $                      | 2,040,987  |                  | $      | 247,981 |   |
| Accounts  receivable, trade, net of allowance of $300,000 and $0 at September 30, 2001  and December 31, 2000, respectively                                                            |   | 5,920,116              |       | 8,752,871             |   |
| Accounts receivable,  joint interest owners, net of allowance of $163,000 at each of September 30,  2001 and December 31, 2000                                                         |   | 679,619                |       | 369,524               |   |
| Accounts  receivable, related parties                                                                                                                                                  |   | --                     |       | 22,410                |   |
| Other current  assets                                                                                                                                                                  |   | 421,782                |       | 298,973               |   |
| Total current  assets                                                                                                                                                                  |   | 9,062,504              |       | 9,691,759             |   |
| PROPERTY AND  EQUIPMENT, Net – full cost method of accounting for oil and natural gas  properties                                                                                 |   | 55,810,286             |       | 47,242,409            |   |
| OTHER ASSETS                                                                                                                                                                           |   | 329,788                |       | 7,788                 |   |
| TOTAL ASSETS                                                                                                                                                                           |   | $                      | 65,202,578 |                  | $      | 56,941,956 |   |
|                                                                                                                                                                                   |   |                   |       |                  |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                         |   |                   |       |                  |   |
| CURRENT  LIABILITIES:                                                                                                                                                                  |   |                   |       |                  |   |
| Accounts  payable, trade                                                                                                                                                               |   | $                      | 767,837    |                  | $      | 1,277,440 |   |
| Accrued  liabilities                                                                                                                                                                   |   | 3,887,462              |       | 2,484,865             |   |
| Accrued interest  payable                                                                                                                                                              |   | --                     |       | 50,385                |   |
| Current portion  of long-term debt                                                                                                                                                     |   | --                     |       | 3,000,000             |   |
| Total current liabilities                                                                                                                                                              |   | 4,655,299              |       | 6,812,690             |   |
| DEFERRED INCOME  TAX                                                                                                                                                                   |   | 659,030                |       | --                    |   |
| LONG-TERM DEBT                                                                                                                                                                         |   | --                     |       | --                    |   |
| Total  liabilities                                                                                                                                                                     |   | 5,314,329              |       | 6,812,690             |   |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                                         |   |                   |       |                  |   |
| STOCKHOLDERS’  EQUITY                                                                                                                                                             |   |                   |       |                  |   |
| Preferred stock,  $0.01 par value; 5,000,000 shares authorized; none issued and outstanding                                                                                            |   | --                     |       | --                    |   |
| Common stock,  $0.01 par value; 25,000,000 shares authorized; 9,304,046 shares and 9,186,071  shares issued and outstanding at September 30, 2001 and December 31, 2000,  respectively |   | 93,040                 |       | 91,861                |   |
| Additional  paid-in capital                                                                                                                                                            |   | 56,040,635             |       | 56,247,130            |   |
| Retained  earnings (accumulated deficit)                                                                                                                                               |   | 3,766,091              |       | (6,209,725            | )      |
| Accumulated  other comprehensive loss                                                                                                                                                  |   | (11,517                | )          | --                    |   |
| Total  stockholders’ equity                                                                                                                                                       |   | 59,888,249             |       | 50,129,266            |   |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                       |   | $                      | 65,202,578 |                  | $      | 56,941,956 |   |

 

See accompanying notes toconsolidated financial statements.

 

**EDGEPETROLEUM CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS (Unaudited)**

 
|                                                          |   | **Three  Months Ended** |      | **Nine  Months Ended** |   |
|---------------------------------------------------------------|--------|-------------------------|-----------|------------------------|--------|
|                                                          |   | **September  30,**      |      | **September  30,**     |   |
|                                                          |   | **2001**                |      | **2000**               |   | **2001** |   | **2000** |   |
| OIL AND NATURAL  GAS REVENUE                                  |   | $                       | 6,181,026 |                   | $      | 5,587,517 |   | $ | 25,749,241 |   | $ | 14,081,277 |   |
|                                                          |   |                    |      |                   |   |   |   |   |   |
| OPERATING  EXPENSES:                                          |   |                    |      |                   |   |   |   |   |   |
| Lifting costs                                                 |   | 853,718                 |      | 391,358                |   | 2,157,044 |   | 1,403,320 |   |
| Severance and ad  valorem taxes                               |   | 493,252                 |      | 434,491                |   | 2,036,986 |   | 1,045,283 |   |
| Depletion,  depreciation and amortization                     |   | 3,340,138               |      | 1,877,863              |   | 7,803,694 |   | 5,855,351 |   |
| General and  administrative expenses                          |   | 1,040,788               |      | 877,719                |   | 3,679,257 |   | 2,767,656 |   |
| Deferred  compensation expense                                |   | 103,011                 |      | 107,681                |   | (595,737 | ) | 107,681 |   |
| Unearned  compensation expense                                |   | --                      |      | 8,590                  |   | -- |   | 25,768 |   |
| Total operating  expenses                                     |   | 5,830,907               |      | 3,697,702              |   | 15,081,244 |   | 11,205,059 |   |
|                                                          |   |                    |      |                   |   |   |   |   |   |
| OPERATING INCOME                                              |   | 350,119                 |      | 1,889,815              |   | 10,667,997 |   | 2,876,218 |   |
|                                                          |   |                    |      |                   |   |   |   |   |   |
| OTHER INCOME AND  EXPENSE:                                    |   |                    |      |                   |   |   |   |   |   |
| Loss on sale of  investment in Frontera                       |   | --                      |      | --                     |   | -- |   | (354,733 | ) |
| Interest income                                               |   | 38,438                  |      | 34,294                 |   | 117,267 |   | 61,164 |   |
| Interest expense  and amortization of deferred loan costs     |   | (41,814                 | )         | (29,655                | )      | (150,418 | ) | (120,333 | ) |
|                                                          |   |                    |      |                   |   |   |   |   |   |
| INCOME BEFORE  INCOME TAXES                                   |   | 346,743                 |      | 1,894,454              |   | 10,634,846 |   | 2,462,316 |   |
|                                                          |   |                    |      |                   |   |   |   |   |   |
| INCOME TAX  BENEFIT (EXPENSE)                                 |   | 122,565                 |      | --                     |   | (659,030 | ) | -- |   |
|                                                          |   |                    |      |                   |   |   |   |   |   |
| NET INCOME                                                    |   | $                       | 469,308   |                   | $      | 1,894,454 |   | $ | 9,975,816 |   | $ | 2,462,316 |   |
|                                                          |   |                    |      |                   |   |   |   |   |   |
| BASIC EARNINGS  PER SHARE                                     |   | $                       | 0.05      |                   | $      | 0.21 |   | $ | 1.08 |   | $ | 0.27 |   |
|                                                          |   |                    |      |                   |   |   |   |   |   |
| DILUTED EARNINGS  PER SHARE                                   |   | $                       | 0.05      |                   | $      | 0.20 |   | $ | 1.02 |   | $ | 0.26 |   |
|                                                          |   |                    |      |                   |   |   |   |   |   |
| BASIC WEIGHTED  AVERAGE NUMBER OF COMMON SHARES OUTSTANDING   |   | 9,304,074               |      | 9,192,801              |   | 9,272,650 |   | 9,181,168 |   |
|                                                          |   |                    |      |                   |   |   |   |   |   |
| DILUTED WEIGHTED  AVERAGE NUMBER OF COMMON SHARES OUTSTANDING |   | 9,700,816               |      | 9,330,817              |   | 9,783,907 |   | 9,331,529 |   |

 

See accompanying notes toconsolidated financial statements.

 

**EDGEPETROLEUM CORPORATION**

**CONSOLIDATEDSTATEMENT OF STOCKHOLDER'S EQUITY (Unaudited)**

** **
|                                      |   |             |   |        |   | **Retained**     |   | **Accumulated**   |   |                   |       |
|-------------------------------------------|--------|------------------|--------|-------------|--------|------------------|--------|-------------------|--------|------------------------|------------|
|                                      |   |             |   |        |   | **Additional**   |   | **Earnings**      |   | **Other**              |       | **Total** |   |
|                                      |   | **Common Stock** |   | **Paid-in** |   | **(Accumulated** |   | **Comprehensive** |   | **Stockholders’** |       |
|                                      |   | **Shares**       |   | **Amount**  |   | **Capital**      |   | **Deficit)**      |   | **Loss**               |       | **Equity** |   |
| BALANCE, JANUARY  1, 2001                 |   | 9,186,071        |   | $           | 91,861 |             | $      | 56,247,130        |   | $                      | (6,209,725 | ) | $ | -- |   | $ | 50,129,266 |   |
| Exercise of  stock options                |   | 75,872           |   | 758         |   | 389,663          |   | --                |   | --                     |       | 390,421 |   |
| Issuance of  stock                        |   | 42,103           |   | 421         |   | (421             | )      | --                |   | --                     |       | -- |   |
| Deferred  compensation expense            |   | --               |   | --          |   | (595,737         | )      | --                |   | --                     |       | (595,737 | ) |
| Transition  adjustment                    |   | --               |   | --          |   | --               |   | --                |   | (1,137,221             | )          | (1,137,221 | ) |
| Realization of  hedging loss              |   | --               |   | --          |   | --               |   | --                |   | 925,603                |       | 925,603 |   |
| Change in  valuation of hedge instruments |   | --               |   | --          |   | --               |   | --                |   | 200,101                |       | 200,101 |   |
| Net income                                |   | --               |   | --          |   | --               |   | 9,975,816         |   | --                     |       | 9,975,816 |   |
| BALANCE,  SEPTEMBER 30, 2001              |   | 9,304,046        |   | $           | 93,040 |             | $      | 56,040,635        |   | $                      | 3,766,091  |   | $ | (11,517 | )  | $ | 59,888,249 |   |
|                                           |        |                  |        |             |        |                  |        |                   |        |                        |            |  |  |  |  |  |  |  |  |  |

 

See accompanying notes toconsolidated financial statements.

 

**EDGEPETROLEUM CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Unaudited)**
|                                                                               |   | **Nine  Months Ended September 30,** |       |
|------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                               |   | **2001**                             |       | **2000** |   |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                         |   |                                 | ** ** |   | ** ** |
| Net income                                                                         |   | $                                    | 9,975,816  |   | $ | 2,462,316 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                                 |       |   |   |
| Deferred income  taxes                                                             |   | 659,030                              |       | -- |   |
| Depletion,  depreciation and amortization                                          |   | 7,803,694                            |       | 5,855,351 |   |
| Bad debt expense                                                                   |   | 300,000                              |       | -- |   |
| Amortization of  deferred loan costs                                               |   | 76,054                               |       | -- |   |
| Deferred loss  from derivative activity                                            |   | (11,517                              | )          | -- |   |
| Deferred  compensation                                                             |   | (595,737                             | )          | 107,681 |   |
| Unearned  compensation expense                                                     |   | --                                   |       | 25,768 |   |
| Loss on sale of  investment to Frontera                                            |   | --                                   |       | 354,733 |   |
| Changes in  assets and liabilities:                                                |   |                                 |       |   |   |
| (Increase)  decrease in accounts receivable, trade                                 |   | 2,532,755                            |       | (731,904 | ) |
| (Increase)  decrease in accounts receivable, joint interest owners                 |   | (310,095                             | )          | 802,089 |   |
| Decrease in  accounts receivable, related parties                                  |   | 22,410                               |       | 32,341 |   |
| Increase in  other assets                                                          |   | (513,194                             | )          | (49,581 | ) |
| Decrease in  accounts payable, trade                                               |   | (509,603                             | )          | (526,230 | ) |
| Increase  (decrease) in accrued liabilities                                        |   | 1,402,597                            |       | (3,493,147 | ) |
| Increase  (decrease) in accrued interest payable                                   |   | (50,385                              | )          | 38,623 |   |
|                                                                               |   |                                 |       |   |   |
| Net cash  provided by operating activities                                         |   | 20,781,825                           |       | 4,878,040 |   |
|                                                                               |   |                                 |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                         |   |                                 |       |   |   |
| Oil and natural  gas property and equipment purchases                              |   | (16,371,571                          | )          | (6,195,686 | ) |
| Proceeds from  the sale of oil and natural gas properties and prospects            |   | --                                   |       | 1,792,978 |   |
| Proceeds from  the sale of investment in Frontera                                  |   | --                                   |       | 3,512,500 |   |
| Net cash used in  investing activities                                             |   | (16,371,571                          | )          | (890,208 | ) |
|                                                                               |   |                                 |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                         |   |                                 |       |   |   |
| Borrowings from  long-term debt                                                    |   | 1,000,000                            |       | 850,000 |   |
| Payments of  long-term debt                                                        |   | (4,000,000                           | )          | (3,000,000 | ) |
| Net proceeds  from issuance of common stock                                        |   | 390,421                              |       | -- |   |
| Other                                                                              |   | (7,669                               | )          | -- |   |
| Net cash used in  financing activities                                             |   | (2,617,248                           | )          | (2,150,000 | ) |
|                                                                               |   |                                 |       |   |   |
| **NET INCREASE IN CASH AND CASH  EQUIVALENTS**                                     |   | 1,793,006                            |       | 1,837,832 |   |
|                                                                               |   |                                 |       |   |   |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF PERIOD**                                |   | 247,981                              |       | -- |   |
|                                                                               |   |                                 |       |   |   |
| **CASH AND CASH EQUIVALENTS, END OF  PERIOD**                                      |   | $                                    | 2,040,987  |   | $ | 1,837,832 |   |

 

See accompanying notes toconsolidated financial statements.

 

**EDGE PETROLEUM CORPORATION**

**NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

** **

**1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

                The financialstatements included herein have been prepared by Edge Petroleum Corporation, aDelaware corporation (“we”, “our”, “us” or the “Company”), without auditpursuant to the rules and regulations of the Securities and ExchangeCommission, and reflect all adjustments which are, in the opinion ofmanagement, necessary to present a fair statement of the results for theinterim periods on a basis consistent with the annual audited consolidatedfinancial statements.  All suchadjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarilyindicative of the results to be expected for an entire year.  Certain information, accounting policies andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been omitted pursuant to such rules and regulations, althoughwe believe that the disclosures are adequate to make the information presentednot misleading. These financial statements should be read in conjunction withour audited consolidated financial statements included in our Annual Report onForm 10-K for the year ended December 31, 2000.

 

**               ***Concentration of CreditRisk* – Substantially all ofthe Company’s accounts receivable result from oil and natural gas sales orjoint interest billings to third parties in the oil and natural gasindustry.  This concentration ofcustomers and joint interest owners may impact the Company’s overall creditrisk in that these entities may be similarly affected by changes in economicand other conditions.  Historically, theCompany has not experienced significant credit losses on such receivables.  In July 2001, the Company was notified thata purchaser had not made payment for May and June production.  The Company’s results of operations for thenine months ended September 30, 2001 include a reserve of $300,000 for bad debtexpense related to the uncertainty of collecting from this purchaser.

 

*                Reclassifications -*Certainprior year balances have been reclassified to conform to current yearpresentation.

 

**AccountingPronouncements**

 

*      **Derivatives***– We adopted Statement of Financial Accounting Standards No. 133, “Accountingfor Derivative Instruments and Hedging Activities” (“SFAS 133”) effectiveJanuary 1, 2001.  The statement, asamended, requires that all derivatives be recognized as either assets orliabilities and measured at fair value, and changes in the fair value ofderivatives be reported in current earnings, unless the derivative isdesignated and effective as a hedge.  Ifthe intended use of the derivative is to hedge the exposure to changes in thefair value of an asset, a liability or firm commitment, then the changes in thefair value of the derivative instrument will generally be offset in the incomestatement by the change in the item’s fair value.  However, if the intended use of the derivative is to hedge theexposure to variability in expected future cash flows then the changes in fairvalue of the derivative instrument will generally be reported in OtherComprehensive Income (“OCI”).  The gainsand losses on the derivative instrument that are reported in OCI will bereclassified to earnings in the period in which earnings are impacted by thehedged item.

 

      We account for our natural gas and crude oil hedge derivativeinstruments as cash flow hedges under SFAS 133.  Although the fair value of our derivative instruments fluctuatesdaily, as of January 1, 2001, the fair value of our natural gas hedgederivative instruments was approximately ($1.1) million, which was recorded inthe Consolidated Balance Sheet on January 1, 2001.  The ($1.1) million was recorded as a liability on our balancesheet as part of the transition adjustment related to our adoption of SFAS133.  The offset to this balance sheetadjustment was a decrease to “Accumulated Other Comprehensive Loss”, acomponent of stockholders’ equity. In early January, we closed out of our hedgeobligation for the period from February 1, 2001 to December 31, 2001.  In accordance with SFAS 133, the cost toclose out the hedge is recognized in net income over the period in which thehedged production occurs.  As ofSeptember 30, 2001, $536,243 of this loss was recorded to net income with thebalance of $11,517 to be recognized over the remainder of the year.  As of September 30, 2001, we were not aparty to any hedging activity.

 

      On June 29,2001, the FASB approved its proposed SFAS No. 141, ("FAS 141")  "Business Combinations," and SFASNo. 142 ("FAS 142"), "Goodwill and Other IntangibleAssets."   Under FAS 141, allbusiness combinations should be accounted for using the purchase method ofaccounting; use of the pooling-of-interests method is prohibited. Theprovisions of the statement will apply to all business combinations initiatedafter June 30, 2001.

 

      FAS 142 will applyto all acquired intangible assets whether acquired singly, as part of a group,or in a business combination. The statement will supersede AccountingPrincipals Board, ("APB"), Opinion No. 17, "IntangibleAssets," and will carry forward provisions in APB Opinion No.17 related tointernally developed intangible assets. Adoption of FAS 142 will result in ceasingamortization of goodwill. All of the provisions of the statement should beapplied in fiscal years beginning after December 15, 2001 to all goodwill andother intangible assets recognized in an entity's statement of financialposition at that date, regardless of when those assets were initiallyrecognized.  The Company does not haveany goodwill or intangible assets recorded as of September 30, 2001.

 

      In July2001, the FASB issued SFAS No. 143, “Accounting for Asset RetirementObligations.”  The statement requiresentities to record the fair value of a liability for legal obligationsassociated with the retirement of obligations of tangible long-lived assets inthe period in which it is incurred. When the liability is initially recorded, the entity increases thecarrying amount of the related long-lived asset.  Accretion of the liability is recognized each period, and thecapitalized cost is depreciated over the useful life of the related asset. Uponsettlement of the liability, an entity either settles the obligation for itsrecorded amount or incurs a gain or loss upon settlement. The standard iseffective for fiscal years beginning after June 15, 2002, with earlierapplication encouraged. The Company is currently evaluating the effect ofadopting Statement No. 143 on its financial statements and has not determinedthe timing of adoption.

 

      The Companydoes not expect the adoption of these standards to have a material effect onits consolidated financial statements.

 

**2.   LONG TERM DEBT**

 

      During the first quarter of 2001, we repaid all amountsborrowed under our credit facility (the “Credit Facility”) and as of September30, 2001, no borrowings were outstanding. Future borrowings under the CreditFacility, if any, will bear interest at a rate equal to prime plus 0.50% or LIBORplus 2.75%.  The Credit Facility maturesOctober 2, 2002, and is secured by substantially all of our assets.

 

      Originally the borrowing base under the Credit Facility was $5million and was subject to automatic reductions at a rate of $300,000 per monthbeginning February 28, 2001.  In March2001, the Credit Facility was amended to increase the borrowing base to $14million, and to eliminate the $300,000 per month automatic reduction.  The borrowing base is redetermined on asemi-annual basis.  The borrowing basewas redetermined in September 2001 with no changes.  The next semi-annual redetermination is expected in the secondquarter of 2002.

 

      The Credit Facility provides for certain restrictions,including but not limited to, limitations on additional borrowings and issuesof capital stock, sales of oil and natural gas properties or other collateral,and engaging in merger or consolidation transactions. The Credit Facility alsoprohibits dividends and certain distributions of cash or properties and certainliens.  The Credit Facility alsocontains certain financial covenants. The EBITDA to Interest Expense Ratiorequires that (a) consolidated EBITDA, as defined in the agreement, of theCompany for the four fiscal quarters then ended to (b) the consolidatedinterest expense of the Company for the four fiscal quarters then ended, to notbe less than 3.5 to 1.0.  The WorkingCapital ratio requires that the amount of the Company’s consolidated currentassets less its consolidated current liabilities, as defined in the agreement,be at least $1.0 million.  The AllowableExpenses ratio requires that (a) the aggregate amount of the Company’s year todate consolidated general and administrative expenses for the period from January1 of such year through the fiscal quarter then ended to (b) the Company’s yearto date consolidated oil and gas revenue, net of hedging activity, for theperiod from January 1 of such year through the fiscal quarter then ended, to beless than .40 to 1.0.  At September 30,2001, the Company was in compliance with the above-mentioned covenants.

 

 

**3.   EARNINGS PER SHARE**

 

      We account for earnings per share inaccordance with Statement of Financial Accounting Standards No. 128 – “Earningsper Share,”  (“SFAS No. 128”) whichestablishes 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 arecalculated using the average number of common shares outstanding during eachperiod.  Diluted earnings per shareassumes the exercise of all stock options, restricted stock awarded but notissued and warrants, having exercise prices less than the average market priceof the common stock during the periods, using the treasury stock method.

 

      The following is presented as areconciliation of the numerators and denominators of basic and diluted earningsper share computations, in accordance with SFAS No. 128.

 
|                                     |   | **Three Months Ended September 30,  2001** |    | **Three Months Ended September 30,  2000** |      |
|------------------------------------------|--------|--------------------------------------------|---------|--------------------------------------------|-----------|
|                                     |   | **Income  (Numerator)**                    |    | **Shares  (Denominator)**                  |      | **Per  Share Amount** |   | **Income  (Numerator)** |   | **Shares  (Denominator)** |   | **Per  Share Amount** |   |
| **Basic EPS**                            |   |                                       |    |                                       |      |   |   |   |   |   |   |   |   |
| Income available  to common stockholders |   | $                                          | 469,308 |                                       | 9,304,074 |   | $ | 0.05 |   | $ | 1,894,454 |   | 9,192,801 |   | $ | 0.21 |   |
| Effect of  Dilutive Securities:          |   |                                       |    |                                       |      |   |   |   |   |   |   |   |   |
| Restricted stock                         |   | --                                         |    | 196,199                                    |      | -- |   | -- |   | 138,016 |   | (0.01 | ) |
| Common stock  options                    |   | --                                         |    | 160,248                                    |      | -- |   | -- |   | -- |   | -- |   |
| Warrants                                 |   | --                                         |    | 40,295                                     |      | -- |   | -- |   | -- |   | -- |   |
| **Diluted EPS**                          |   |                                       |    |                                       |      |   |   |   |   |   |   |   |   |
| Income available  to common stockholders |   | $                                          | 469,308 |                                       | 9,700,816 |   | $ | 0.05 |   | $ | 1,894,454 |   | 9,330,817 |   | $ | 0.20 |   |

 
|                                     |   | **Nine Months Ended September 30,  2001** |      | **Nine Months Ended September 30,  2000** |      |
|------------------------------------------|--------|-------------------------------------------|-----------|-------------------------------------------|-----------|
|                                     |   | **Income (Numerator)**                    |      | **Shares  (Denominator)**                 |      | **Per  Share Amount** |   | **Income  (Numerator)** |   | **Shares  (Denominator)** |   | **Per  Share Amount** |   |
| **Basic EPS**                            |   |                                      |      |                                      |      |   |   |   |   |   |   |   |   |
| Income available  to common stockholders |   | $                                         | 9,975,816 |                                      | 9,272,650 |   | $ | 1.08 |   | $ | 2,462,316 |   | 9,181,168 |   | $ | 0.27 |   |
| Effect of  Dilutive Securities:          |   |                                      |      |                                      |      |   |   |   |   |   |   |   |   |
| Restricted stock                         |   |                                      |      | 174,621                                   |      | (0.02 | )  |   |   | 150,361 |   | (0.01 | )  |
| Common stock  options                    |   |                                      |      | 222,641                                   |      | (0.03 | )  |   |   | -- |   | -- |   |
| Warrants                                 |   |                                      |      | 113,995                                   |      | (0.01 | )  |   |   | -- |   | -- |   |
| **Diluted EPS**                          |   |                                      |      |                                      |      |   |   |   |   |   |   |   |   |
| Income available  to common stockholders |   | $                                         | 9,975,816 |                                      | 9,783,907 |   | $ | 1.02 |   | $ | 2,462,316 |   | 9,331,529 |   | $ | 0.26 |   |

 

**4.             INCOME TAXES**

 

           Weaccount for income taxes under the provisions of Statement of FinancialAccounting Standards No. 109 – “Accounting for Income Taxes,” (“SFAS No. 109”)which provides for an asset and liability approach in accounting for incometaxes.  Under this approach, deferredtax assets and liabilities are recognized based on anticipated future taxconsequences, using currently enacted tax laws, attributable to differences betweenfinancial statement carrying amounts of assets and liabilities and theirrespective tax bases.  Due to theuncertainty as to whether certain tax assets would be realized in the future, avaluation allowance was provided to offset the tax benefits of certain taxassets.

 

           Basedon our current projection of taxable income for the year ending December 31,2001, we anticipate utilizing all of our available net tax assets during2001.  Our annual effective tax rate,after consideration of the above, is estimated at approximately 6% at September30, 2001.  As a result, a provision forincome tax expense of $659,030, or $0.07 per share was included in our resultsfor the nine months ended September 30, 2001. In addition, we are now paying estimated alternative minimum taxpayments resulting in a deferred tax asset of $322,000 at September 30, 2001.No income tax expense was recorded for the nine-month period ended September30, 2000 as we had utilized the benefit of net operating loss carry-forwards tooffset taxable income.

 

           Thedifferences between statutory federal income taxes calculated using a federaltax rate of 35% and our effective tax rate as of September 30, 2001 and 2000are summarized as follows:

 

|                                     |   | **Nine  Months Ended September 30,** |      |
|------------------------------------------|--------|--------------------------------------|-----------|
|                                     |   | **2001**                             |      | **2000** |   |
| Statutory  federal income taxes          |   | $                                    | 3,722,196 |   | $ | 861,811 |   |
|                                     |   |                                 |      |   |   |
| Permanent  differences:                  |   |                                 |      |   |   |
| Expense not  deductible for tax purposes |   | 23,574                               |      | 7,236 |   |
| Change in  valuation allowance           |   | (3,086,740                           | )         | (869,047 | ) |
| Income tax  expense                      |   | $                                    | 659,030   |   | $ | -- |   |

 

**5.             EQUITY**

 

                We account forStock Based Compensation in accordance with Statement of Financial AccountingStandards No. 123 - “Accounting for Stock Based Compensation,” (“SFAS No.123”).  Under SFAS No. 123, we arepermitted to either record expense for stock options and other employeecompensation plans based on their fair value at the date of grant or tocontinue to apply our current accounting policy under Accounting PrinciplesBoard Opinion No. 25 (“APB No.25”) and recognize compensation expense, if any,based on the intrinsic value of the equity instrument at the measurementdate.  We have elected to continuefollowing APB No. 25.

 

                    Effective May 21, 1999, weamended and restated the Incentive Plan. In conjunction with those and other amendments of the Incentive Plan, weexchanged, on a voluntary basis, 556,488 outstanding nonqualified stock optionsof certain of our employees and directors for 326,700 new common stock optionsin replacement of those options.   Theexercise price of the replacement options was $7.06, which represents themarket price of the Company’s common stock on the date of grant.  The replaced options have a ten-year termwith 50% of the options vesting immediately on the date of grant with theremaining 50% vesting on May 21, 2000.  On May 21, 1999, in conjunction with the repricing, we also issued99,800 new ten-year common stock options to employees, which vested 100% on May21, 2001.  The exercise price of the newoptions was $7.06, which represents the market price of the Company’s commonstock on the date of grant.  On June 1,1999 we issued 21,000 ten-year common stock options to non-employee directorswith an exercise price of $7.28 per share, which represents the market price ofthe Company’s common stock at the date of grant, vesting 100% on June 1, 2001.

 

A non-cash charge tocompensation expense of $899,548, or $0.10 per share, was required in thefourth quarter of 2000 in accordance with FASB Interpretation No. (“FIN”) 44, “*Accounting for Certain Transactions involving StockCompensation*”.  FIN 44requires, among other things, a non-cash charge to compensation expense if theprice of Edge’s common stock on the last trading day of a reporting period isgreater than the exercise price of certain options.  FIN 44 could also result in a credit to compensation expense tothe extent that the trading price declines from the trading price as of the endof the prior period, but not below the exercise price of the options.  We will adjust deferred compensation expenseupward or downward on a monthly basis based on the trading price at the end ofeach such period as necessary to comply with FIN 44.  The charge is related to the non-qualified stock options grantedto employees and directors in prior years and re-priced in May of 1999, as wellas certain options newly issued in conjunction with the repricing discussedabove.  At September 30, 2001, the priceof Edge’s common stock had declined from the price at December 31, 2000. As aresult, we included a credit to deferred compensation expense of $(850,725), or$(0.09) per share before income taxes for the nine months ended September 30,2001.

 

During the first quarterof 2001, we purchased options exercisable for 133,645 shares of common stockfrom a former employee at a cost of $100,000, all of which representscompensation expense.

 

 

**6.   SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTINGAND FINANCING ACTIVITIES**

 

We consider all highlyliquid debt instruments purchased with an original maturity of three months orless to be cash equivalents.   A summaryof non-cash investing and financing activities for the nine months endedSeptember 30, 2001 and 2000 is presented below:

 

We issued 42,103 sharesof common stock with a fair market value of $126,300 at the time of grantduring the first quarter of 2001.  Theseshares represent one-third of the shares subject to a restricted stock grantmade effective March 2, 2000.

 

In connection with thesale of our investment in Frontera in the second quarter of 2000, we recorded areceivable for $2.0 million of the proceeds that was received subsequent toJune 30, 2000.  Additionally, werecorded an accrued liability of $87,500 in fees associated with the sale thatwas paid subsequent to June 30, 2000.

 

In May 2000, a portion ofthe annual retainer due our non-employee directors was paid by the issuance of9,648 shares of common stock valued at $30,000, based on quoted market priceson the date of issuance.

 

For the nine months endedSeptember 30, 2000 forfeitures of restricted stock were recorded with respectto 4,763 shares valued at $1,848.

 

 

Supplemental Disclosureof Cash Flow Information

 

|                                         |   | **For the Nine Months Ended** |   |
|----------------------------------------------|--------|-------------------------------|--------|
|                                         |   | **September 30,**             |   |
|                                         |   | **2001**                      |   | **2000** |   |
| Cash paid during  the period for:            |   |                          |   |   |   |
| Interest, net of  amounts capitalized        |   | $                             | 28,456 |   | $ | 106,499 |   |
| Estimated  alternative minimum tax  payments |   | 322,000                       |   | -- |   |
|                                              |        |                               |        |  |  |  |  |

 

**7.             HEDGING ACTIVITIES**

 

Due to the instability ofoil and natural gas prices, we enter into, from time to time, price riskmanagement transactions (e.g., swaps and collars) for a portion of our oil andnatural gas production in an effort to achieve a more predictable cash flow, aswell as to reduce exposure from price fluctuations.  While the use of these arrangements limits the benefit to us ofincreases in the price of oil and natural gas it also limits the downside riskof adverse price movements.  Our hedgingarrangements, to the extent we enter into any, typically apply to only aportion of our production, providing only partial price protection againstdeclines in oil and natural gas prices and limiting potential gains from futureincreases in prices.  We account forthese transactions as cash flow hedges under SFAS 133 and, accordingly, gainsand losses are included in oil and natural gas revenue during the period thehedged production occurs.

 

The impact on oil andnatural gas revenue from hedging activities for the nine months ended September30, 2001 and 2000 was as follows:

 
|                                   |     |                |     |          |   |          |   |        |         |        |   | **Loss**              |   |
|----------------------------------------|----------|---------------------|----------|---------------|--------|---------------|--------|-------------|--------------|-------------|--------|-----------------------|--------|
|                                   |     |                |     |          |   |          |   | **Bbl**     |         | **MMBtu**   |   | **Nine Months Ended** |   |
| **Hedge**                              |     | **Effective Dates** |     | **Price Per** |   | **Price Per** |   | **Volumes** |         | **Volumes** |   | **September 30,**     |   |
| **Type**                               |     | **Beg.**            |     | **Ending**    |   | **Barrel**    |   | **MMBtu**   |         | **Per Day** |   | **Per Day**           |   | **2001** |   | **2000** |   |
| Natural Gas Collar                     |     | 2/1/00              |     | 2/29/00       |   |          |   | $           | 2.20 - $2.31 |        |   |                  | 9,000  |   | $ | -- |   | $ | (70,470 |  

) |
| Natural Gas Collar                     |     | 3/1/00              |     | 4/30/00       |   |          |   | $           | 2.20 - $2.50 |        |   |                  | 9,000  |   | -- |   | (135,900 |  

) |
| Natural Gas Collar                     |     | 5/1/00              |     | 9/30/00       |   |          |   | $           | 2.05 - $2.60 |        |   |                  | 6,000  |   | -- |   | (1,342,320 |  

) |
| Oil Swap                               |     | 1/1/00              |     | 3/31/00       |   | $             | 25.60  |        |         |        | 150    |                  |   |   | -- |   | (27,521 | ) |
| Oil Swap                               |     | 4/1/00              |     | 6/30/00       |   | $             | 22.87  |        |         |        | 125    |                  |   |   | -- |   | (55,481 | ) |
| Oil Swap                               |     | 7/1/00              |     | 9/30/00       |   | $             | 21.47  |        |         |        | 60     |                  |   |   | -- |   | (65,796 | ) |
| Natural Gas Collar                     |     | 1/1/01              |     | 1/31/01       |   |          |   | $           | 4.50 - $6.70 |        |   |                  | 4,000  |   | (389,360 |  

) | -- |   |
| Loss realized from close  out of hedge | (536,243 | )                   | --       |          |
| Total                                  |     | $                   | (925,603 | )             | $      | (1,697,488    | )      |
|                                        |          |                     |          |               |        |               |        |             |              |             |        |                       |        |  |  |  |  |  |  |  |  |  |  |

 

Our hedging activitiesfor natural gas are entered into on a per MMbtu delivered price basis, HoustonShip Channel, with settlement for each calendar month occurring five businessdays following the publishing of the Inside F.E.R.C. Gas Marketing Report.

 

Included within oil and natural gas revenue for the nine months endedSeptember 30, 2001 was $(925,603) representing net losses from hedgingactivity.  During December 2000, weentered into a natural gas collar covering 4,000 MMbtu per day for the periodJanuary 1, 2001 to December 31, 2001 with a floor of $4.50 per MMBtu and aceiling of $6.70 per MMbtu.  For themonth of January we realized a loss on hedging activity of $(389,360).  On January 3, 2001, we closed out the hedgefor the period February 1, 2001 to December 31, 2001 at a cost of $547,760. Inaccordance with SFAS 133, this amount is recognized in net income over theperiod in which the hedged production occurs. As of September 30, 2001, $536,243 of this loss was recorded to netincome with the balance of $11,517 to be recognized over the remainder of theyear.  At September 30, 2001, we werenot a party to any hedging activity.

 

Included within oil and natural gas revenue for the nine months endedSeptember 30, 2000 was $(1,697,488) representing net losses from hedgingactivity.  During December 1999, weentered into a crude oil fixed price swap. The number of barrels of oil per day (“BOD”) and the related fixed pricesubject to the oil price swap were as follows: i) January 1, 2000 – March 31,2000, 150 BOD, swap at $25.60, ii) April 1, 2000 – June 30, 2000, 125 BOD, swapat $22.87, iii) July 1, 2000 – September 30, 2000, 60 BOD, swap at $21.47, andiv) October 1, 2000 – December 31, 2000, 50 BOD, swap at $ 20.46. During thefirst quarter of 2000 we entered into three natural gas collars.  The natural gas collars cover the followingperiods, MMbtu per day and floor and ceiling per MMbtu prices: i) February 1,2000 – February 29, 2000, 9,000 MMbtu per day, $2.20 floor - $2.31 ceiling, ii)March 1, 2000 – April 30, 2000, 9,000 MMbtu per day, $2.20 floor - $2.50ceiling and iii) May 1, 2000 – September 30, 2000, 6,000 MMbtu per day, $2.05floor - $2.60 ceiling.

 

**8.   COMMITMENTS AND CONTINGENCIES**

 

From time to time we area party to various legal proceedings arising in the ordinary course ofbusiness.  While the outcome of lawsuitscannot be predicted with certainty, we are not currently a party to anyproceeding that we believe, if determined in a manner adverse to us, could havea potential material adverse effect on our financial condition, results ofoperations or cash flows except for the litigation involving BNP PetroleumCorporation (“BNP”) described below.

 

The Company, as one ofthree original plaintiffs, filed a lawsuit against BNP, Seiskin Interests, LTD,Pagenergy Company, LLC and Gap Marketing Company, LLC, as defendants, in the229th Judicial District Court of Duval County, Texas, for fraud and breach ofcontract in connection with an agreement whereby BNP was obligated to drill atest well in an area known as the Slick Prospect in Duval County, Texas.  The allegations of the Company in thislitigation were, in general, that BNP gave the Company inaccurate andincomplete information on which the Company relied in entering into the transactionand in making its decision not to participate in the test well and theprospect, resulting in the loss of the Company's interest in the lease, thetest well and four subsequent wells drilled in the prospect. The Company soughtto enforce its interest in the prospect and sought damages or rescission, aswell as costs and attorneys' fees.  Thecase was originally filed in Duval County, Texas onFebruary 25, 2000.  TheCompany filed a lis pendens to protect its interest in the real property atissue.

 

In mid-March, 2000, thedefendants filed an original answer and certain counterclaims againstplaintiffs, seeking unspecified damages for slander of title, tortiousinterference with business relations and exemplary damages.  The case proceeded to trial before the Court(without a jury) on June 19, 2000, after the plaintiffs were found bythe court to have failed to comply with procedural requirements regarding therequest for a jury.  After several daysof trial, the case was recessed and later resumed on September 5, 2000.The court at that time denied the plaintiffs' motion for mistrial based on thecourt's denial of a jury trial.  Thecourt also ordered that the defendants' counterclaims would be the subject of aseparate trial that would commence on December 11, 2000.  The parties proceeded to try issues relatedto the plaintiffs claims on September 5–13, 2000.  Defendants filed a second amended answer andcounterclaim and certain supplemental responses to a request for disclosure inwhich they stated that they were seeking damages in the amount of $33.5 millionby virtue of an alleged lost sale of the subject properties, $17 million inalleged lost profits from other prospective contracts, and unspecifiedincidental and consequential damages from the alleged wrongful suspension offunds under their gas sales contract with the gas purchaser on the properties,alleged damage to relationships with trade creditors and financialinstitutions, including the inability to leverage the Slick Prospect, andattorneys' fees at prevailing hourly rates in Duval County, Texas incurred indefending against plaintiffs' claims and for 40% of any aggregate recovery inprosecuting their counterclaims.  Insubsequent deposition testimony, the defendants verbally alleged $26 million ofdamages by virtue of the alleged lost sale of the properties (as opposed to the$33.5 million previously sought), $7.5 million of damages by virtue of loss ofa lease development opportunity and $100 million of damages by virtue of theloss of a business opportunity related to BNP's alleged inability toparticipate in a 3-D seismic project.

 

The Company also allegedthat BNP, Seiskin Interests, LTD and Pagenergy Company, LLC breached aconfidentiality agreement with the plaintiffs by obtaining oil and gas leaseswithin an area restricted by that contract. This breach of contract allegationis the subject of an additional lawsuit by plaintiffs in the 165th DistrictCourt in Harris County, Texas.  In thisseparate action, the Company is seeking damages as a result of defendants'actions as well as costs and attorneys' fees.

 

During the week ofDecember 11–15, 2000, in Duval County BNP tried itscounterclaims against Edge, and Edge presented its defenses to thecounterclaims.  BNP presented evidencethat its damages were in the amounts of $19.6 million for the alleged lost saleof the properties, $35 million for the alleged loss of the lease developmentopportunity, and $308 million for the alleged loss of the opportunity relatedto participation in the 3-D seismic project. During the course of the trial, Edge presented its motion for summaryjudgment on the counterclaims based on the doctrine of absolute judicialproceeding privilege. The judge partially granted Edge's motion for summaryjudgment as it related to the filing of the lis pendens, but denied it withregard to the other allegations of BNP.  The judge also granted Edge's plea in abatement relating to the breachof the confidentiality agreement, ruling that the District Court in HarrisCounty has dominant jurisdiction of that issue.

 

OnNovember 5, 2001, the court filed with the clerk and provided to theCompany a final judgment that had been signed by the court, but not provided tothe Company, on October 26, 2001. Pursuant to the terms of the judgment, the Company takes nothing on itsclaims against BNP and is denied any recovery of its interest in the lease, theprospect, or the wells of the Slick Prospect. Instead, the court confirmed title in the lease, prospect, and wells inBNP's affiliate.  In addition, theCompany was found to have tortiously and maliciously interfered with twodifferent BNP contracts or prospective contracts, and BNP was awarded actualdamages against the Company in the amount of $10 million and punitive damagesin the amount of $5.1 million.  Thejudgment does not reflect a credit in the amount of $1,945,000 to which theCompany believes that it is entitled by reason of certain settlements by itstwo co-plaintiffs and co-counterdefendants. The Company intends to file a motion to modify the judgment to reflectthe credit.

 

The Company continues tobelieve that it should have prevailed on its claims to recover an interest inthe lease, prospect, and wells and that it had sufficient legal and factualdefenses to all of the defendants' counterclaims.  The Company intends to challenge the judgment with post-judgmentmotions and, if necessary, to perfect an appeal to the Fourth Court of Appealsin San Antonio.  The Company isoptimistic about its chances for success in the event of an appeal; however,there can be no assurance as to the outcome of any post–judgment motionsor appeals.  In order to supersede thejudgment pending an appeal, the Company may be required to post a bond in theamount of the judgment, plus interest for the estimated duration of the appealand costs.  The Company believes that ithas the resources available to obtain the necessary supersedeas bond.  If a bond in that amount cannot be posted,the Company may seek to supersede the judgment by providing alternativesecurity or approval of security in a lesser amount.  There can be no assurance as to the Company's ability to obtainsuch a bond or otherwise supersede the judgment pending appeal.  A failure by the Company to prevail on itschallenges to the judgment may have a material adverse effect on the Company’sfinancial condition and results of operations.

 

In July 2001, the Companywas notified of a potential title problem related to its lease covering certainproperties in Starr County, Texas known as the North LaCopita prospect and theNeblett lease.  The lease is part of theunit that contains four wells, one of which has not yet been completed.  At this time, the ultimate outcome of thepotential title problem and the impact of such outcome on the Company areuncertain.  The Company believes that ifthe title issue is found to be unfavorable it will be treated as a good faithtrespasser and entitled to recover its sunk costs.  Due to the uncertainty of the final outcome, the Company hasceased to record revenue from the properties as of August 2001 which net to theCompany averaged approximately 1.4 Mmcfe per day of production at the time theunit was shut in.  In addition, thecompany removed the associated reserves of 1.4 Bcfe from its property base.  The Company believes this loss is not materialto its financial condition and results of operations.

 

**9.  **      **COMPREHENSIVE INCOME**

 

Comprehensive income was$470,579 million and $11.1 million for the three months and nine months endedSeptember 30, 2001, respectively. Comprehensive income includes other comprehensive income of $1.1 millionrelated to derivative and hedging activities in the nine months ended September30, 2001.

 

** **
| **ITEM 2.** | **MANAGEMENT'S DISCUSSION AND  ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS** |
|-------------|---------------------------------------------------------------------------------------------|

 

The following is management’sdiscussion and analysis of certain significant factors that have affectedcertain aspects of our financial position and operating results during theperiods included in the accompanying unaudited condensed consolidated financialstatements.  This discussion should beread in conjunction with the accompanying unaudited condensed consolidatedfinancial statements included elsewhere in this Form 10-Q and with our auditedconsolidated financial statements included in our annual report on Form 10-Kfor the year ended December 31, 2000.

 

***Overview***

 

The following matters hada significant impact on our results of operations and financial position forthe nine months ended September 30, 2001:

 

*Commodity Prices* –For the third quarter of 2001, the average realized price for our productionwas $3.44 per thousand cubic feet of gas equivalent (Mcfe) compared to $6.51per Mcfe for the first quarter of 2001 and $4.40 per Mcfe for the secondquarter of 2001.  Year-to-date, theaverage realized price for our production, before the effects of hedgingactivity, increased 39% from $3.50 per Mcfe for the first nine months of 2000to $4.88 per Mcfe for the comparable period this year.  Hedging activity for the nine months endedSeptember 30, 2001 resulted in a net loss of $925,603, or $0.17 per Mcfe,compared to a net loss of  $1.7 million,or $0.38 per Mcfe, for the same period in 2000.

 

*Debt*– As ofSeptember 30, 2001, there were no borrowings outstanding under our CreditFacility. Our current borrowing base is $14 million and no automatic monthlyreductions are required.  The borrowingbase was redetermined in September 2001 with no changes.  The next semi-annual redetermination isexpected in the second quarter of 2002.

 

*Deferredcompensation* - A non-cash charge to compensation expense of$899,548, or $0.10 per share, was required in the fourth quarter of 2000 inaccordance with FASB Interpretation No. (“FIN”) 44, “*Accounting for Certain Transactions involving Stock Compensation*”.  At September 30, 2001, the price of Edge’scommon stock had declined from the price at December 31, 2000 and as a result,we included a credit to deferred compensation expense of $(850,725), or $(0.09)per share before income taxes for the nine months ended September 30, 2001.

 

*Income Taxes* – Basedon our current projection of taxable income for the year ended December 31,2001, we anticipate utilizing all of our available net tax assets during2001.  As a result, a provision fordeferred taxes of  $659,030, or $0.07per share was included in our results for the nine months ended September 30,2001.

 

***RESULTS OF OPERATIONS***

 

**Revenueand Production**

 

Oil and natural gasrevenue for the third quarter of 2001 increased 11% over the same period in2000.  Natural gas production comprised84% of total production on an equivalent Mcf basis and contributed 80% of totalrevenue for the third quarter of 2001. Oil and condensate production was 10% oftotal production and contributed 13% of total oil and gas revenue while naturalgas liquids (NGLs) production comprised 6% of total production and contributed7% of total oil and gas revenue.  In thecomparable 2000 period, natural gas production comprised 83% of totalproduction and contributed 82% of total revenue.  Oil and condensate production was 8% of total production and 10%of revenue and NGLs production comprised 9% of total production and contributed8% of total revenue.

 

Oil and natural gasrevenue for the nine months ended September 30, 2001 increased 83% over thesame period in 2000.  Natural gasproduction comprised 88% of total production and contributed 88% of totalrevenue for the year-to-date period. Oil and condensate production was 9% oftotal production and contributed 9% of total oil and gas revenue while NGLsproduction comprised 3% of total production and contributed 2% of total oil andgas revenue.  Other oil and gas revenuerelated to marketing activities contributed 1% to total revenue.  In the comparable 2000 period, natural gasproduction comprised 80% of total production and contributed 78% of totalrevenue.  Oil and condensate productionwas 10% of total production and 13% of revenue and NGLs production comprised10% of total production and contributed 9% of total revenue.

 

The following tablesummarizes volume and price information with respect to our oil and gasproduction for the quarter and year-to-date periods ended September 30, 2001and 2000:

 
|                                       |   | **For  the Three Months** |   | **For  the Nine Months** |   |
|--------------------------------------------|--------|---------------------------|--------|--------------------------|--------|
|                                       |   | **Ended  September 30,**  |   | **Ended  September 30,** |   |
|                                       |   | **2001**                  |   | **2000**                 |   | **Increase  (Decrease)** |   | **2001** |   | **2000** |   | **Increase  (Decrease)** |   |
| Gas Volume –  MCFGPD (1)              |   | 16,358                    |   | 13,636                   |   | 2,722 |   | 17,331 |   | 13,227 |   | 4,104 |   |
| Average Gas  Price – per MCF          |   | $                         | 3.30   |                     | $      | 4.39 |   | $ | (1.09 | ) | $ | 4.97 |   | $ | 3.46 |   | $ | 1.51 |   |
| Hedge Loss – per  MCF                 |   | --                        |   | $                        | (0.74  | ) | $ | 0.74 |   | $ | (0.20 | ) | $ | (0.43 | ) | $ | 0.23 |   |
|                                       |   |                      |   |                     |   |   |   |   |   |   |   |   |   |
| Oil and  Condensate Volume – BPD (2)  |   | 338                       |   | 227                      |   | 111 |   | 308 |   | 264 |   | 44 |   |
| Average Oil  Price – per barrel       |   | $                         | 24.49  |                     | $      | 29.67 |   | $ | (5.18 | ) | $ | 26.13 |   | $ | 26.78 |   | $ | (0.65 | ) |
| Hedge Loss – per  barrel              |   | --                        |   | $                        | (3.16  | ) | $ | 3.16 |   | -- |   | $ | (2.06 | ) | $ | 2.06 |   |
|                                       |   |                      |   |                     |   |   |   |   |   |   |   |   |   |
| Natural Gas  Liquids Volume – BPD (2) |   | 190                       |   | 247                      |   | (57 | ) | 97 |   | 277 |   | (180 | ) |
| Average NGL  Price – per barrel       |   | $                         | 24.89  |                     | $      | 20.17 |   | $ | 4.72 |   | $ | 22.60 |   | $ | 17.23 |   | $ | 5.37 |   |
|                                       |   |                      |   |                     |   |   |   |   |   |   |   |   |   |
| Other oil and  gas revenue – per Mcfe |   | --                        |   | --                       |   |   |   |   | $ | 0.07 |   |   | -- |   | $ | 0.07 |   |

 

----

(1) MCFGPD – thousand cubic feet of gas per day

(2) BPD – barrels per day

** **

**ThirdQuarter 2001 Compared to the Third Quarter 2000**

 

Natural gas sales revenueincreased 8%, from $4.6 million for the third quarter of 2000 to over $4.9million for the same period in 2001 due primarily to an increase inproduction.  In addition, losses fromgas hedging activity were significantly lower in the third quarter of 2001compared to the same period in 2000. Production volumes for natural gas for the three months ended September30, 2001 increased 20% from 13,636 MCFGPD for the third quarter of 2000 to16,358 MCFGPD for the comparable period in 2001.  This increase in natural gas production during the third quarterof 2001 increased revenue by $1.1 million (based on 2000 third quarter averageprices).  The increase was due toproduction from 23 gross (9.8297 net) new successful exploratory anddevelopment wells drilled and completed since September 30, 2000.   The average realized price for natural gasproduction, excluding the effect of hedging activity, was $3.30 per Mcf for thethird quarter of 2001, a decrease of 25% over the 2000-third quarter averageprice of $4.39 per Mcf.  This decreasein average prices impacted revenue by approximately $(1.6) million (based oncurrent quarter production). Included within natural gas revenue for the threemonths ended September 30, 2001 was $(1,271) representing losses from hedgingactivities.  For the same period in2000, gas hedging activities resulted in a loss of $(932,640) and decreased theeffective natural gas sales price for that prior period by $(0.74) per Mcf.

 

Revenue from sales of oiland condensate increased 38% from $552,568 in the third quarter of 2000 to$762,692 for the comparable 2001 period due to increased production and theabsence of losses from oil hedging activities in the 2001 period.  Production volumes for oil and condensateincreased 49% from 227 BPD in the third quarter of 2000 to 338 BPD for thecomparable period in 2001.  Thisincrease in production favorably impacted quarterly revenue by $305,700 (basedon 2000 third quarter average prices). The average realized price for oil and condensate in the third quarterof 2001 was $24.49 per barrel compared to $29.67 per barrel, excluding theeffect of hedging activity, for the same period in 2000. This decrease in theaverage realized price received for our oil and condensate decreased revenue$(161,400) (based on current quarter production).  No oil hedges were in place for production during the thirdquarter of 2001; however, in the third quarter of 2000 hedging losses of$(65,800) decreased the average realized price for oil and condensate by$(3.16) per barrel.

 

Revenue from sales ofnatural gas liquids (NGLs) decreased 5% from $457,822 in the third quarter of2000 to $435,373 for the comparable 2001 period due to lower productionpartially offset by higher average prices. Production volumes for NGLsdecreased 23% from 247 BPD in the third quarter of 2000 to 190 BPD for thecomparable period in 2001.  Thisdecrease in production decreased quarterly revenue $(105,000) (based on 2000third quarter average prices).  Theaverage realized price for NGLs in the third quarter of 2001 was $24.89 perbarrel compared to $20.17 per barrel for the same period in 2000.  This increase in the average realized pricereceived for our NGLs increased revenue $82,500 (based on current quarterproduction).

 

 

**NineMonths Ended September 30, 2001 Compared to the Nine Months Ended September 30,2000**

 

Natural gas sales revenueincreased 106%, from approximately $11.0 million for the nine months endedSeptember 30, 2000 to $22.6 million for the same period in 2001 due to theimpact of favorable natural gas prices, an increase in production and lowerhedging losses. The average realized price for natural gas production,excluding the effect of hedging activity, was $4.97 per Mcf for the 2001year-to-date period, an increase of 44% over the average price for the firstnine months of 2000 of $3.46 per Mcf. This increase in average prices favorably impacted revenue byapproximately $7.2 million (based on current year-to-date production). Includedwithin natural gas revenue for the nine months ended September 30, 2001 was$(925,600) representing losses from hedging activities.  These losses decreased the effective naturalgas price by $(0.20) per Mcf for the nine months ended September 30, 2001.  For the same period in 2000, gas hedgingactivities resulted in a loss of $(1,548,690) and decreased the effectivenatural gas sales price for that prior period by $(0.43) per Mcf.  Production volumes for natural gas for thenine months ended September 30, 2001 increased 31% from 13,227 MCFGPD for 2000to 17,331 MCFGPD for the comparable period in 2001.  This increase in natural gas production during the nine monthsended September 30, 2001 increased revenue by $3.8 million (based on 2000year-to-date average prices).  Theincrease was due to production from 23 gross (9.8297 net) new successfulexploratory and development wells drilled and completed since September 30,2000.   Offsetting the favorable impactof new production was a decrease in production volumes that primarily resultedfrom the disposition of certain proved producing properties effective April 1,2000, further reduced by normal production declines from existing wells.

 

Revenue from sales of oiland condensate increased 23% from $1.8 million in 2000 to approximately $2.2million for the comparable 2001 period due to higher production and the absenceof losses from oil hedging activities in 2001. Production volumes for oil and condensate increased 17% from 264 BPD forthe nine months ended September 30, 2000 to 308 BPD for the comparable periodin 2001. This increase in production favorably impacted year-to-date revenue by$315,700 (based on 2000 year-to-date average prices).  The average realized price for oil and condensate for the ninemonths ended September 30, 2001 was $26.13 per barrel, compared to $26.78 perbarrel, excluding the effect of hedging activity, for the same period in 2000.This decrease in the average realized price received for our oil and condensatedecreased revenue $(54,400) (based on current year-to-date production).  No oil hedges were in place for productionduring 2001; however, in the comparable 2000 period hedging losses of$(148,800) decreased the average realized price for oil and condensate by$(2.06) per barrel.

 

Revenue from sales ofnatural gas liquids (NGLs) decreased significantly from $1,307,986 for the ninemonths ended September 30, 2000 to $597,531 for the comparable 2001 period dueto lower production. Production volumes for NGLs decreased 65% from 277 BPD inthe nine-month period of 2000 to 97 BPD for the comparable period in 2001.  Due to high natural gas prices, we electednot to process much of our gas during the first half of 2001.  This decrease in production decreasedyear-to-date revenue $(852,500) (based on 2000 year-to-date average prices).  The average realized price for NGLs in thenine months of 2001 was $22.60 per barrel compared to $17.23 per barrel for thesame period in 2000.  This increase inthe average realized price received for our NGLs increased revenue $142,000(based on current year-to-date production).

 

**Costsand Operating Expenses**

 

Lifting costs for the three-month period endedSeptember 30, 2001 totaled $853,718, a 118% increase compared to the sameperiod in 2000 and averaging $0.48 per Mcfe for the three-month period endedSeptember 30, 2001 compared to $0.26 per Mcfe in the prior year period.  For the nine-month period ended September30, 2001, lifting costs totaled $2.2 million, a 54% increase compared to thesame period in 2000.  Lifting costs were$0.40 per Mcfe for the nine-month period ended September 30, 2001 compared to$0.31 per Mcfe in the prior year period. The increase in costs was due primarily to high well control insurance,saltwater disposal and natural gas processing costs recorded in 2001.

 

Severance and ad valorem taxes for the three monthsended September 30, 2001 increased 14% from $434,491 in the prior year periodto $493,252 in the third quarter of 2001. Severance and ad valorem taxes for the nine months ended September 30,2001 increased 95% from $1,045,283 in the prior year period to $2,036,986 in2001.  The increase in severance and advalorem taxes in each of the 2001 periods was due primarily to higher severancetaxes paid on the increased revenue compared to the prior year periods.  Severance tax averaged 7.1% of revenue forthe year-to-date 2001 period compared to 5.8% for the same period in 2000.

 

Depletion, depreciation and amortization expense(“DD&A”) expense for the three-month and nine-month periods ended September30, 2001 totaled $3.3 million and $7.8 million, respectively, compared to $1.9million and $5.9 million in the same periods of 2000.  Full cost DD&A on our oil and natural gas properties totaled$3.2 million for the third quarter of 2001 compared to $1.7 million for thesame period in 2000. Depletion expense on a unit of production basis for thethree-month periods ended September 30, 2001and 2000 was $1.77 per Mcfe and$1.13 per Mcfe, respectively.  For thenine months ended September 30, 2001 depletion on our oil and natural gasproperties totaled $7.3 million compared to $5.3 million for the same period in2000. Depletion expense on a unit of production basis for the nine-monthperiods ended September 30, 2001 and 2000 was $1.35 per Mcfe and $1.18 perMcfe, respectively.  For the nine monthsended September 30, 2001 as compared to the prior year period, a 14% increasein the overall depletion rate increased depletion expense by $903,900 whilehigher oil and natural gas production increased depletion expense by$1,043,400. The increase in the depletion rate was primarily due to highcapital costs in the second and third quarter of 2001.  Other DD&A expense totaled $168,691 and$509,870 for the three-month and nine-month periods ended September 30, 2001,comparable to the prior period totals of $169,652 and $508,871, respectively.

 

General and administrative expenses (“G&A”) forthe third quarter of 2001 increased 19% to $1,040,788, as compared to $877,719for the three months ended September 30, 2000 due primarily to higher salaryand benefit costs.  For the thirdquarter of 2001 and 2000, overhead reimbursement fees recorded as a reductionto G&A totaled $35,600 and $29,400, respectively.  Capitalized G&A further reduced total G&A by $411,000 and$303,700 for the three months ended September 30, 2001 and 2000,respectively.  For the nine months endedSeptember 30, 2001, G&A, excluding deferred compensation expense related torestricted stock and FIN 44 requirements, increased 33% to $3.7 million, ascompared to $2.8 million for the comparable prior year period.    For the first nine months of 2001 and2000, overhead reimbursement fees recorded as a reduction to G&A totaled$116,300 and $92,300, respectively. Capitalized G&A further reduced total G&A by $1,233,000 and$1,066,100 for the nine months ended September 30, 2001 and 2000,respectively.  The increase in G&Awas primarily attributable to bad debt expense of $300,000 reserved in June of2001, higher salaries and benefits, and higher professional services (includinglegal, tax and accounting fees) for the nine months ended September 30, 2001 comparedto the same period in 2000.  Inaddition, compensation expense of $100,000 was recorded in the first quarter of2001 related to the purchase of options from a former employee.  G&A on a unit of production basis forthe nine-month periods ended September 30, 2001 and 2000 was $0.68 per Mcfe($0.63 per Mcfe excluding the bad debt expense) and $0.61 per Mcfe,respectively.

 

Deferred compensation expense for the three-month andnine-month periods ended September 30, 2001 was a net charge of $103,011 and anet credit of $(595,737), respectively, compared to a charge of $107,681 forboth periods of 2000.   For the threemonths ended September 30, 2001 and 2000, amortization of compensation expenserelated to restricted stock grants totaling $103,011 and $107,681,respectively, with no FIN 44 charges for either period.  Amortization of compensation expense relatedto restricted stock totaled $254,988 for the nine months ended September 30,2001 compared to $107,681 for the comparable 2000 period.  For the 2001 year-to-date period, a non-cashcredit to deferred compensation expense of $(850,725), or $(0.09) per sharebefore income taxes was recorded related to FIN 44.   In December 2000, a non-cash charge of $899,548, or $0.10 pershare, was required in accordance with FIN 44.   FIN 44 requires, among other things, a non-cash charge tocompensation expense if the price of Edge’s common stock on the last tradingday of a reporting period is greater than the exercise price of certainoptions.  FIN 44 also results in acredit to compensation expense to the extent that the trading price declinesfrom the trading price as of the end of the prior period, but not below theexercise price of the options.  Weadjust deferred compensation expense upward or downward on a monthly basisbased on the trading price at the end of each such period as necessary tocomply with FIN 44.  The adjustment isrelated only to the non-qualified stock options granted to employees anddirectors in prior years and re-priced in May of 1999, as well as certainoptions newly issued in conjunction with the repricing.  At September 30, 2001, the price of Edge’scommon stock had declined from the price at December 31, 2000 resulting in thecredit to deferred compensation expense for the nine months ended September 30,2001.

 

Unearned compensation expense was fully amortized in2000 and as a result, no expense was reported for 2001.   For the three-month and nine-month periodsended September 30, 2000 unearned compensation expense totaled $8,590 and$25,768, respectively.

 

Interest expense totaled $41,814 for the third quarterof 2001 compared to $29,655 in the same quarter of 2000.  No debt was outstanding during the thirdquarter of 2001; however, finance costs of $16,470 were paid to maintain our currentavailable borrowing base of $14 million. No interest was capitalized in the third quarter of 2001 compared to$84,565 in the third quarter of 2000. The amortization of deferred loan costs totaled $25,344 for the threemonths ended September 30, 2001 compared to no costs in the 2000 period.  For the nine months ended September 30,2001, interest expense totaled $150,418 compared to $120,333 in the same periodof 2000.  Gross interest expense was$98,766 for the nine months ended September 30, 2001 on weighted average debtof approximately $633,700 compared to gross interest expense of $439,827 onweighted average debt of $6.0 million for the same prior year period.  Capitalized interest for the nine months endedSeptember 30, 2001 totaled $24,402 compared to $319,494 in 2000.  The amortization of deferred loan coststotaled $76,054 for the nine months ended September 30, 2001 compared to nocosts in the 2000 period.  Interestincome totaled $38,438 for the third quarter of 2001 and $34,294 for the same2000 period.  Interest income totaled$117,267 for the 2001 year-to-date period and $61,164 for the comparable 2000period.   Other income (expense) for thenine-month period ended September 30, 2000 also included the loss on the saleof our investment in Frontera of $(354,733), or $(0.04) per share.

 

Based on our current projection of taxable income forthe year ending 2001, we anticipate utilizing all of our available net taxassets during 2001.  Currently oureffective tax rate, after consideration of the above, is estimated to be6%.  Due to a reduction in our estimateof our effective rate from 8% at June 30, 2001, we recorded an income taxbenefit of $122,565 for the three months ended September 30, 2001.  For the nine-month period, we recorded incometax expense of $(659,030) or  $(0.07)per share.  No (expense) benefit wasrecorded for the three-month or nine-month periods ended September 30, 2000 dueto the estimated deferred tax asset at that time.

 

For the third quarter of 2001, we reported net incomeof $469,308 or $0.05 basic earnings per share, compared to net income of  $1,894,454, or $0.21 basic earnings pershare, for the same period in 2000. Weighted average shares outstanding increased from approximately 9.2million shares for the three months ended September 30, 2000 to 9.3 millionshares in the comparable 2001 period. The increase was due primarily to the exercise of stock options and theissuance of common stock related to a 2000 restricted stock grant.

 

For the nine months ended September 30, 2001, wereported net income of $9,975,816 or $1.08 basic earnings per share, comparedto net income of  $2,462,316, or $0.27basic earnings per share, for the same period in 2000.  Pro forma net income, excluding theafter-tax non-cash compensation credit related to FIN 44, was $9,177,810, or$0.99 per share. Weighted average shares outstanding increased fromapproximately 9.2 million shares for the nine months ended September 30, 2000to 9.3 million shares in the comparable 2001 period.  The increase was due primarily to the exercise of stock optionsand the issuance of common stock related to a 2000 restricted stock grant.

 

***LIQUIDITY AND CAPITAL RESOURCES***

 

Our primary cash needs are for exploration,development and acquisition of oil and gas properties, and repayment ofprincipal and interest on outstanding debt. Due to our active exploration anddevelopment and technology enhancement programs, we have experienced and expectto continue to experience substantial working capital requirements.  We intend to fund our remaining 2001 capitalexpenditures, commitments and working capital requirements through cash flowsfrom operations, and to the extent necessary other financing activities.  We believe we will be able to generatecapital resources and liquidity sufficient to fund our capital expenditures andmeet such financial obligations as they come due.  In the event such capital resources are not available us,drilling and other activities may be curtailed.

 

We are in discussions with our lenders to obtain abond for purposes of an appeal in the BNP litigation.  To the extent we post a bond in connection with the BNPlitigation, our borrowing capacity under our Credit Facility will be reduced.  Although this could partially or entirelyeliminate our available credit under our Credit Facility, the Company believesthat it will be able to fund its planned 2002 capital expenditures from cashflows from operations.  Such decrease inborrowing capacity could, however, strain the Company’s ability to make acquisitionsor increase capital expenditures.

 

*Liquidity*

 

We had cash and cash equivalents at September 30, 2001of $2.0 million consisting primarily of short-term money market investments, ascompared to $247,981 at December 31, 2000.  Our working capital surplus was $4.4 million at September 30,2001, as compared to $2.9 million at December 31, 2000, as revised. Ourratio of current assets to current liabilities was 1.95:1 at September 30, 2001compared to 1.4:1 at December 31, 2000. At September 30, 2001, no borrowingswere outstanding under our Credit Facility. At December 31, 2000, borrowings totaled $3.0 million.  Excluding such current portion of long-termdebt at December 31, 2000, we had a working capital surplus of $5.9 million andour ratio of current assets to current liabilities was 2.5:1.  Our increases in working capital surplus andcurrent ratio at September 30, 2001 resulted primarily from our ability toreduce accounts payable and accrued liabilities with the strong cash flow fromoperations.

* *

*CashFlows*

 

Cash flows provided byoperations were $20.8 million and $4.9 million for the nine months endedSeptember 30, 2001 and 2000, respectively. The increase in cash flows provided by operations is primarily due to anincrease in net income from $2.5 million for the first nine months of 2000 to$10.0 million for the same period in 2001. The first half of 2001 was a record period for us in terms of bothrevenue and net income, allowing us the flexibility to repay borrowings andreduce current liabilities. Improvements in working capital for the nine months ended September 30,2001 increased cash flow $2.6 million as compared to working capital usage of$3.9 million for the same period in 2000. Operating cash flows, before changesin working capital, were $18.2 million and $8.8 million for the nine monthsended September 30, 2001 and 2000, respectively.  Operating cash flow should not be considered in isolation or as asubstitute for net income, operating income, cash flows from operating activitiesor any other measure of financial performance presented in accordance withgenerally accepted accounting principles or as a measure of profitability orliquidity.

 

Cash used in investing activities totaled $16.4million for the nine months ended September 30, 2001 compared to $890,208 usedin the same period of 2000.  Capitalexpenditures during the nine months ended September 30, 2001 were approximately$16.4 million as compared to $6.2 million during the same period in 2000.  We expended $8.4 million in our drillingoperations resulting in the drilling of 16 gross (7.0393 net) wells during the2001 year-to-date period as compared to 16 gross (5.3646 net) wells during thesame period in 2000.  Since September30, 2000, we have drilled 23 successful gross wells.  Currently, one gross well is testing and two gross wells aredrilling.  In addition to capitalexpenditures for drilling operations, approximately $1.0 million was incurredon currently producing properties and $5.0 million was expended on land andseismic activities.  The remaining costcapitalized to oil and natural gas properties was internal G&G and interestof approximately $1.3 million.  For thenine months ended September 30, 2000, other investing activity also includedproceeds from the sale of oil and natural gas properties of $1.8 million andproceeds from the sale of our investment in Frontera of $3.5 million.

 

Cash used in financing activities totaled $2.6 millionfor the nine months ended September 30, 2001 and included borrowings of $1.0million and repayments of $4.0 million under our Credit Facility.   Other financing activities included netproceeds from the exercise of stock options of $390,421.  For the nine months ended September 30,2000, cash used in financing activities totaled $2.15 million, which includedborrowings of $850,000 and repayments of $3,000,000.

 

**Credit Facility**

 

During the first quarterof 2001, we repaid all amounts borrowed under our Credit Facility and as ofSeptember 30, 2001, no borrowings were outstanding. Future borrowings under theCredit Facility, if any, will bear interest at a rate equal to prime plus 0.50%or LIBOR plus 2.75%.  The CreditFacility matures October 2, 2002, and is secured by substantially all of ourassets.

 

Originally the borrowingbase under the Credit Facility was $5 million and was subject to automaticreductions at a rate of $300,000 per month beginning February 28, 2001.  In March 2001, the Credit Facility wasamended to increase the borrowing base to $14 million, and to eliminate the$300,000 per month automatic reduction. The borrowing base is redetermined on a semi-annual basis.  In September the bank confirmed our currentborrowing base at $14 million.

 

The Credit Facilityprovides for certain restrictions, including but not limited to, limitations onadditional borrowings and issues of capital stock, sales of oil and natural gasproperties or other collateral, engaging in merger or consolidationtransactions. The Credit Facility also prohibits dividends and certaindistributions of cash or properties and certain liens.  The Credit Facility also contains certainfinancial covenants. The EBITDA to Interest Expense Ratio requires that (a)consolidated EBITDA, as defined in the agreement, of the Company for the fourfiscal quarters then ended to (b) the consolidated interest expense of theCompany for the four fiscal quarters then ended, to not be less than 3.5 to1.0.  The Working Capital ratio requiresthat the amount of the Company’s consolidated current assets less itsconsolidated current liabilities, as defined in the agreement, be at least $1.0million.  The Allowable Expenses ratiorequires that (a) the aggregate amount of the Company’s year to dateconsolidated general and administrative expenses for the period from January 1 ofsuch year through the fiscal quarter then ended to (b) the Company’s year todate consolidated oil and gas revenue, net of hedging activity, for the periodfrom January 1 of such year through the fiscal quarter then ended, to be lessthan .40 to 1.0.  At September 30, 2001,the Company was in compliance with the above-mentioned covenants.

 

**Accounting Pronouncements**

 

***Derivatives*** – We adopted Statement ofFinancial Accounting Standards No. 133, “Accounting for Derivative Instrumentsand Hedging Activities” (“SFAS 133”) effective January 1, 2001.  The statement, as amended, requires that allderivatives be recognized as either assets or liabilities and measured at fairvalue, and changes in the fair value of derivatives be reported in currentearnings, unless the derivative is designated and effective as a hedge.  If the intended use of the derivative is tohedge the exposure to changes in the fair value of an asset, a liability orfirm commitment, then the changes in the fair value of the derivative instrumentwill generally be offset in the income statement by the change in the item’sfair value.  However, if the intendeduse of the derivative is to hedge the exposure to variability in expectedfuture cash flows then the changes in fair value of the derivative instrumentwill generally be reported in Other Comprehensive Income (“OCI”).  The gains and losses on the derivativeinstrument that are reported in OCI will be reclassified to earnings in theperiod in which earnings are impacted by the hedged item.

 

      We account for our natural gas and crude oil hedge derivativeinstruments as cash flow hedges under SFAS 133.  Although the fair value of our derivative instruments fluctuatesdaily, as of January 1, 2001, the fair value of our natural gas hedgederivative instruments was approximately ($1.1) million, which was recorded inthe Consolidated Balance Sheet on January 1, 2001.  The ($1.1) million was recorded as a liability on our balancesheet as part of the transition adjustment related to our adoption of SFAS133.  The offset to this balance sheetadjustment was a decrease to “Accumulated Other Comprehensive Loss”, acomponent of stockholders’ equity. In early January, we closed out of our hedgeobligation for the period from February 1, 2001 to December 31, 2001.  In accordance with SFAS 133, the cost toclose out the hedge is recognized in net income over the period in which thehedged production occurs.  As ofSeptember 30, 2001, $536,243 of this loss was recorded to net income with thebalance of $11,517 to be recognized over the remainder of the year.  As of September 30, 2001, we were not aparty to any hedging activity.

 

On June 29, 2001, theFASB approved its proposed SFAS No. 141, ("FAS 141")  "Business Combinations," and SFASNo. 142 ("FAS 142"), "Goodwill and Other IntangibleAssets."   Under FAS 141, allbusiness combinations should be accounted for using the purchase method ofaccounting; use of the pooling-of-interests method is prohibited. The provisionsof the statement will apply to all business combinations initiated after June30, 2001.

 

      FAS 142will apply to all acquired intangible assets whether acquired singly, as partof a group, or in a business combination. The statement will supersedeAccounting Principals Board, ("APB"), Opinion No. 17,"Intangible Assets," and will carry forward provisions in APB OpinionNo.17 related to internally developed intangible assets. Adoption of FAS 142will result in ceasing amortization of goodwill. All of the provisions of thestatement should be applied in fiscal years beginning after December 15, 2001to all goodwill and other intangible assets recognized in an entity's statementof financial position at that date, regardless of when those assets wereinitially recognized.  The Company doesnot have any goodwill or intangible assets recorded as of September 30, 2001.

 

      In July2001, the FASB issued SFAS No. 143, “Accounting for Asset RetirementObligations.”  The statement requiresentities to record the fair value of a liability for legal obligations associatedwith the retirement of obligations of tangible long-lived assets in the periodin which it is incurred.  When theliability is initially recorded, the entity increases the carrying amount ofthe related long-lived asset.  Accretionof the liability is recognized each period, and the capitalized cost isdepreciated over the useful life of the related asset. Upon settlement of theliability, an entity either settles the obligation for its recorded amount orincurs a gain or loss upon settlement. The standard is effective for fiscalyears beginning after June 15, 2002, with earlier application encouraged. TheCompany is currently evaluating the effect of adopting Statement No. 143 on itsfinancial statements and has not determined the timing of adoption.

 

      The Companydoes not expect the adoption of these standards to have a material effect onits consolidated financial statements.

 

 

***FORWARD LOOKING STATEMENTS***

 

The statements contained in all parts of thisdocument, including, but not limited to, those relating to our drilling plans,our 3-D project portfolio, capital expenditures, future capabilities, thesufficiency of capital resources and liquidity to support working capital andcapital expenditure requirements (including the amount thereof and the sourceof funds thereof), reinvestment of cash flows, the outcome, effects and timingof litigation, the ability to obtain an appeal bond, projection of taxableincome, the resolution of title matters and any other statements regardingfuture operations, financial results, business plans, sources of liquidity andcash needs and other statements that are not historical facts are forwardlooking statements.  When used in thisdocument, the words “anticipate,” “estimate,” “expect,” “may,” “project,”“believe” and similar expressions are intended to be among the statements thatidentify forward looking statements. Such statements involve risks and uncertainties, including, but notlimited to, those relating to our dependence on our exploratory drillingactivities, the volatility of oil and natural gas prices, the need to replacereserves depleted by production, operating risks of oil and natural gasoperations, our dependence on key personnel, our reliance on technologicaldevelopment and possible obsolescence of the technology currently used by us,significant capital requirements of our exploration and development andtechnology development programs, the potential impact of governmentregulations, litigation (including outcome and timing), the ability of the Companyto obtain an appeal bond, environmental and title matters, our ability tomanage our growth and achieve our business strategy, competition, theuncertainty of reserve information and future net revenue estimates, propertyacquisition risks and other factors detailed in our Form 10-K and other filingswith the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, orshould underlying assumptions prove incorrect, actual outcomes may varymaterially from those indicated.

 

***ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK***

 

We are exposed to market risk from changes in interest rates andcommodity prices.  We use a CreditFacility, which has a floating interest rate, to finance a portion of our operations.We are not subject to fair value risk resulting from changes in our floatinginterest rates.  The use of floatingrate debt instruments provides a benefit due to downward interest ratemovements but does not limit us to exposure from future increases in interestrates.  At September 30, 2001, noborrowings were outstanding under our Credit Facility.

 

In the normal course of business we enter into hedging transactions,including commodity price collars and swaps, to mitigate our exposure to commodityprice movements, but not for trading or speculative purposes. In December 2000,due to the instability of natural gas prices and to achieve a more predictablecash flow, we had in place a natural gas collar for a portion of our year 2001natural gas production.  The natural gascollar covered 4,000 MMbtu per day for the period January 1, 2001 to December31, 2001 at a floor of $4.50 per MMbtu and a ceiling of $6.70 per MMbtu. OnJanuary 3, 2001, we closed out the hedge for the period February 1, 2001 toDecember 31, 2001 at a cost of $547,760. Currently, there are no natural gascollars in place for any future periods.

 

**PART II- OTHER INFORMATION**

 

**Item 1 - Legal Proceedings**

 

From time to time we are a party to various legalproceedings arising in the ordinary course of business.  While the outcome of lawsuits cannot bepredicted with certainty, we are not currently a party to any proceeding thatwe believe, if determined in a manner adverse to us, could have a potentialmaterial adverse effect on our financial condition, results of operations orcash flows except for the litigation involving BNP Petroleum Corporation("BNP") described below.

 

Edge v. BNP:  The Company, as one of three originalplaintiffs, filed a lawsuit against BNP, Seiskin Interests, LTD, PagenergyCompany, LLC and Gap Marketing Company, LLC, as defendants, in the 229thJudicial District Court of Duval County, Texas, for fraud and breach ofcontract in connection with an agreement whereby BNP was obligated to drill atest well in an area known as the Slick Prospect in Duval County, Texas.  The allegations of the Company in thislitigation were, in general, that BNP gave the Company inaccurate andincomplete information on which the Company relied in entering into thetransaction and in making its decision not to participate in the test well andthe prospect, resulting in the loss of the Company's interest in the lease, thetest well and four subsequent wells drilled in the prospect. The Company soughtto enforce its interest in the prospect and sought damages or rescission, aswell as costs and attorneys' fees.  Thecase was originally filed in Duval County, Texas onFebruary 25, 2000.  TheCompany filed a lis pendens to protect its interest in the real property atissue.

 

In mid-March, 2000, thedefendants filed an original answer and certain counterclaims againstplaintiffs, seeking unspecified damages for slander of title, tortiousinterference with business relations and exemplary damages.  The case proceeded to trial before the Court(without a jury) on June 19, 2000, after the plaintiffs were found bythe court to have failed to comply with procedural requirements regarding therequest for a jury.  After several daysof trial, the case was recessed and later resumed on September 5, 2000.The court at that time denied the plaintiffs' motion for mistrial based on thecourt's denial of a jury trial.  Thecourt also ordered that the defendants' counterclaims would be the subject of aseparate trial that would commence on December 11, 2000.  The parties proceeded to try issues relatedto the plaintiffs' claims on September 5–13, 2000.  Defendants filed a second amended answer andcounterclaim and certain supplemental responses to a request for disclosure inwhich they stated that they were seeking damages in the amount of $33.5 millionby virtue of an alleged lost sale of the subject properties, $17 million inalleged lost profits from other prospective contracts, and unspecifiedincidental and consequential damages from the alleged wrongful suspension offunds under their gas sales contract with the gas purchaser on the properties,alleged damage to relationships with trade creditors and financialinstitutions, including the inability to leverage the Slick Prospect, andattorneys' fees at prevailing hourly rates in Duval County, Texas incurred indefending against plaintiffs' claims and for 40% of any aggregate recovery inprosecuting their counterclaims.  Insubsequent deposition testimony, the defendants verbally alleged $26 million ofdamages by virtue of the alleged lost sale of the properties (as opposed to the$33.5 million previously sought), $7.5 million of damages by virtue of loss ofa lease development opportunity and $100 million of damages by virtue of theloss of a business opportunity related to BNP's alleged inability toparticipate in a 3-D seismic project.

 

The Company also allegedthat BNP, Seiskin Interests, LTD and Pagenergy Company, LLC breached aconfidentiality agreement with the plaintiffs by obtaining oil and gas leaseswithin an area restricted by that contract. This breach of contract allegationis the subject of an additional lawsuit by plaintiffs in the 165th DistrictCourt in Harris County, Texas.  In thisseparate action, the Company is seeking damages as a result of defendants'actions as well as costs and attorneys' fees.

 

During the week ofDecember 11–15, 2000, in Duval County BNP tried itscounterclaims against Edge, and Edge presented its defenses to thecounterclaims.  BNP presented evidencethat its damages were in the amounts of $19.6 million for the alleged lost saleof the properties, $35 million for the alleged loss of the lease developmentopportunity, and $308 million for the alleged loss of the opportunity relatedto participation in the 3-D seismic project. During the course of the trial, Edge presented its motion for summaryjudgment on the counterclaims based on the doctrine of absolute judicialproceeding privilege. The judge partially granted Edge's motion for summaryjudgment as it related to the filing of the lis pendens, but denied it withregard to the other allegations of BNP.  The judge also granted Edge's plea in abatement relating to the breachof the confidentiality agreement, ruling that the District Court in HarrisCounty has dominant jurisdiction of that issue.

 

OnNovember 5, 2001, the court filed with the clerk and provided to theCompany a final judgment that had been signed by the court, but not provided tothe Company, on October 26, 2001. Pursuant to the terms of the judgment, the Company takes nothing on itsclaims against BNP and is denied any recovery of its interest in the lease, theprospect, or the wells of the Slick Prospect. Instead, the court confirmed title in the lease, prospect, and wells inBNP's affiliate.  In addition, theCompany was found to have tortiously and maliciously interfered with twodifferent BNP contracts or prospective contracts, and BNP was awarded actualdamages against the Company in the amount of $10 million and punitive damagesin the amount of $5.1 million.  Thejudgment does not reflect a credit in the amount of $1,945,000 to which theCompany believes that it is entitled by reason of certain settlements by itstwo co-plaintiffs and co-counterdefendants. The Company intends to file a motion to modify the judgment to reflectthe credit.

 

The Company continues tobelieve that it should have prevailed on its claims to recover an interest inthe lease, prospect, and wells and that it had sufficient legal and factualdefenses to all of the defendants' counterclaims.  The Company intends to challenge the judgment with post-judgmentmotions and, if necessary, to perfect an appeal to the Fourth Court of Appealsin San Antonio.  The Company isoptimistic about its chances for success in the event of an appeal; however,there can be no assurance as to the outcome of any post–judgment motionsor appeals.  In order to supersede thejudgment pending an appeal, the Company may be required to post a bond in theamount of the judgment, plus interest for the estimated duration of the appealand costs.  The Company believes that ithas the resources available to obtain the necessary supersedeas bond.  If a bond in that amount cannot be posted,the Company may seek to supersede the judgment by providing alternative securityor approval of security in a lesser amount. There can be no assurance as to the Company's ability to obtain such abond or otherwise supersede the judgment pending appeal.  A failure by the Company to prevail on itschallenges to the judgment may have a material adverse effect on the Company’sfinancial condition and results of operations.

 

**GMT v.ExxonMobil v. GMT, et al: **This matter involves thetitle failure on the Neblett lease in Starr County, Texas, being Edge's N.LaCopita Prospect, in which Edge owns a non-operating working interest.  The operator of the lease, GMT, filed apetition for, and was granted, a temporary restraining order against ExxonMobilin the 229th Judicial District Court in Starr County, Texasenjoining ExxonMobil from taking possession of the Neblett wells.  Pending resolution of the underlying titleissue, the temporary restraining order was extended voluntarily by agreement ofthe parties, conditioned on GMT paying the revenues into escrow and agreeing toprovide ExxonMobil with certain discovery materials relating to title,production and costs associated with the property.  Edge did not join in this action.  ExxonMobil has filed a counterclaim against GMT and all thenon-operators, including Edge, to establish the validity of their lease, removecloud on title, quiet title to the property, and for conversion, trespass andpunitive damages.  They seek unspecifieddamages for the lost profits on the sale of the hydrocarbons from thisproperty, and for a determination of whether Edge and the other workinginterest owners were in good faith or bad faith in trespassing on thislease.  If a determination of bad faithis made, the parties will not be able to recover their costs of developing thisproperty from the revenues therefrom. While there is always a risk in the outcome of any litigation, theCompany believes there is no question that Edge acted in good faith and intendsto vigorously defend its position.  (SeeNote 8 to the consolidated financial statements).

 
| **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** |   | None   |   |
| **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 CombinationAgreement by and among (i) Edge Group II Limited Partnership, (ii) GulfedgeLimited Partnership, (iii) Edge Group Partnership, (iv) Edge PetroleumCorporation, (v) Edge Mergeco, Inc. and (vi) the Company, dated as ofJanuary 13, 1997 (Incorporated by reference from exhibit 2.1 to theCompany’s Registration Statement on Form S-4 (Registration No. 333-17269))

 

†3.1                         —            Restated Certificate of Incorporatedof the Company, as amended (Incorporated by reference from exhibit 3.1 to theCompany’s Registration Statement on Form S-4 (Registration No. 333-17269)).

 

†3.2                         —            Bylaws of the Company  (Incorporated by Reference from exhibit 3.3to the Company’s Quarterly Report on Form 10-Q for the quarterly period endedSeptember 30, 1999).

 

†3.3                         —            First Amendment to Bylaws of theCompany on September 28, 1999 (Incorporated by Reference from exhibit 3.2 tothe Company’s Quarterly Report on Form 10-Q for the quarterly period endedSeptember 30, 1999).

 

†4.1                         —            Security Agreement, dated as ofApril 1, 1998, by and between the Borrower and Compass Bank, a Texas statechartered banking institution, as Agent for itself and The First National Bankof Chicago and other lenders party thereto the Credit Agreement (Incorporatedby Reference from exhibit 4.1 to the Company’s Quarterly Report on Form 10-Qfor the quarterly period ended March 31, 1998).

 

†4.2                         —            Security Agreement (Stock Pledge),dated as of April 1, 1998, by and between Edge Petroleum Corporation andCompass Bank, a Texas state chartered banking institution, as Agent for itselfand The First National Bank of Chicago and other lenders party thereto theCredit Agreement (Incorporated by Reference from exhibit 4.1 to the Company’sQuarterly Report on Form 10-Q for the quarterly period ended March 31, 1998).

 

†4.3                         —            Second Amended and Restated CreditAgreement dated October 6, 2000 by and between Edge Petroleum Corporation, EdgePetroleum Exploration Company and Edge Petroleum Operating Company, Inc.(collectively, the “Borrowers”) and Union Bank Of California, N.A., a nationalbanking association, as Agent for itself and as lender. (Incorporated byReference from exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q forthe quarterly period ended September 31, 2000).

 

†4.4                         —            Letter Agreement  dated October 31, 2000 by and between EdgePetroleum Corporation, Edge Petroleum Exploration Company and Edge PetroleumOperating Company, Inc. (collectively, the “Borrowers”) and Union Bank OfCalifornia, N.A., a national banking association, as Agent for itself and aslender.  (Incorporated by Reference fromexhibit 4.6 to the Company’s Quarterly Report on Form 10-Q for the quarterlyperiod ended September 31, 2000).

 

†4.5                         —            Letter Agreement  dated March 23, 2001 by and between EdgePetroleum Corporation, Edge Petroleum Exploration Company and Edge PetroleumOperating Company, Inc. (collectively, the “Borrowers”) and Union Bank Of California,N.A., a national banking association, as Agent for itself and as lender.(Incorporated by Reference from exhibit 4.5 to the Company’s Annual Report onForm 10-K for the annual period ended December 31, 2000).

 

*4.6                         —            Letter Agreement  dated September 21, 2001 by and between EdgePetroleum Corporation, Edge Petroleum Exploration Company and Edge PetroleumOperating Company, Inc. (collectively, the “Borrowers”) and Union Bank OfCalifornia, N.A., a national banking association, as Agent for itself and as lender.

 

†4.7                         —            Common Stock Subscription Agreementdated 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 Reporton Form 10-Q/A for the quarter ended March 31, 1999).

 

†4.8                         —            Warrant Agreement dated as of May 6,1999 between the Company and the Warrant holders named therein (Incorporated byreference from exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q/A forthe quarter ended March 31, 1999).

 

†4.9                         —            Form of Warrant for the purchase ofthe Common Stock (Incorporated by reference from the Common Stock SubscriptionAgreement from exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q/A forthe quarter ended March 31, 1999).

 

†10.1                       —            Joint Venture Agreement between Edge Joint Venture II andEssex Royalty Limited Partnership II, dated as of May 10, 1994 (Incorporated byreference 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 andEssex Royalty Limited Partnership, dated as of April 11, 1992 (Incorporated byreference 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 andeach of its directors (Incorporated by reference from exhibit 10.7 to theCompany’s Registration Statement on Form S-4 (Registration No. 333-17269)).

 

†10.4                       —            Stock Option Plan of Edge Petroleum Corporation, a Texascorporation (Incorporated by reference from exhibit 10.13 to the Company’sRegistration Statement on Form S-4 (Registration No. 333-17269)).

 

†10.5                       —            Employment Agreement dated as of November 16, 1998, byand between the Company and John W. Elias. (Incorporated by reference from10.12 to the Company’s Annual Report on Form 10-K for the year ended December31, 1998).

 

†10.6                       —            Incentive Plan of Edge Petroleum Corporation as Amendedand Restated Effective as of July 27, 1999 and as amended March 1, 2001. (Incorporatedby reference from exhibit 10.6 to the Company’s Quarterly Report on Form 10-Qfor the quarterly period ended June 30, 2001).

 

†10.7                       —            Edge Petroleum Corporation Incentive Plan “StandardNon-Qualified Stock Option Agreement” by and between Edge Petroleum Corporationand the Officers named therein. (Incorporated by reference from exhibit 10.2 tothe Company’s Quarterly Report on Form 10-Q for the quarterly period endedSeptember 30, 1999).

 

†10.8                       —            Edge Petroleum Corporation Incentive Plan “DirectorNon-Qualified Stock Option Agreement” by and between Edge Petroleum Corporationand the Directors named therein. (Incorporated by reference from exhibit 10.3to the Company’s Quarterly Report on Form 10-Q for the quarterly period endedSeptember 30, 1999).

 

†10.9                       —            Severance Agreements by and between Edge PetroleumCorporation and the Officers of the Company named therein. (Incorporated byreference from exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q forthe quarterly period ended September 30, 1999).

 

†10.10                     —            Form of Employee Restricted Stock Award Agreement underthe Incentive Plan of Edge Petroleum Corporation (Incorporated by Referencefrom exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q/A for thequarterly period ended March 31, 1999).

 

†10.11                     —            Edge Petroleum Corporation Amended and Restated EliasStock Incentive Plan.  (Incorporated byreference from exhibit 4.5 to the Company’s Registration Statement on Form S-8filed May 30, 2001 (Registration No. 333-61890)).

 

†10.12                     —            Form of Edge Petroleum Corporation John W. EliasNon-Qualified Stock Option Agreement (Incorporated by reference from exhibit4.6 to the Company’s Registration Statement on Form S-8 filed May 30, 2001(Registration No. 333-61890)).

 

----

* Filed herewith.

† Incorporated by reference as indicated.

 

(B)      Reports on Form 8-K                                                                                                   None

##  

## ** **

## ** **

## **SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|   |   |   | EDGE PETROLEUM  CORPORATION, |
|--------|--------|--------|------------------------------|
|   |   |   | A DELAWARE CORPORATION       |
|   |   |   | (REGISTRANT)                 |   |
|   |   |   |                         |   |  
 

 

 

 

 

 
 

 

 

 

 

 
 

 

 

 

 

 
Date: 11/14/01

 

/S/

John W.  Elias

 

 
 

 

 

John W. Elias

 

 
 

 

 

Chief Executive Officer  and

 

 
 

 

 

Chairman of the Board

 

 
 

 

 

 

 

 
Date: 11/14/01

 

/S/

Michael G. Long

 

 
 

 

 

Michael G. Long

 

 
 

 

 

Senior Vice President  and

 

 
 

 

 

Chief Financial and  Accounting Officer

 

 
  |