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NRM 1984 DEVELOPMENT/INCOME FUND LTD.2121 San Jacinto Street, Suite 2600Dallas, Texas 75201 PROXY STATEMENT for SPECIAL MEETING OF LIMITED PARTNERS OF NRM 1984 DEVELOPMENT/INCOME FUND LTD. To be held August 27, 1991 This Proxy Statement is being first mailed on July 19, 1991 to limited partners of NRM 1984 Development/Income Fund Ltd. (the “Partnership”) by Edisto Resources Corporation, the general partner of the Partnership (“Edisto” or the “General Partner”), to solicit proxies for use at the special meeting of limited partners (the “Meeting”) to be held at the Dallas Legal Educat ion Center, 2101 Ross Avenue, Dallas, Texas 75201 at 3:30 p.m., Dallas time, on August 27, 1991, or at such other time and place to which the Meeting may be adjourned. The purpose of the Meeting is to consider the approval of a Plan of Liquidation and Dissolution of the Partnership (the “Plan”). The accompanying proxy is solicited on behalf of the General Partner to be voted at the Meeting. In addition to the original solicitation by mail, certain regular employees of the General Partner may solicit proxies by telephone or telegraph or in person. No specially engaged employees or solicitors will be retained for proxy solicitation purposes. All expenses of this solicitation, including the cost of preparing and mailing this Proxy Statement, will be borne by the Partnership. All duly executed proxies received prior to the meeting will be voted in accordance with the choices specified thereon. If a duly executed proxy does not specify a choice, the limited partner interests represented thereby will be voted in favor of the Plan. A limited partner of the Partnership (a “Limited Partner”) who gives a proxy may revoke it at any time before it is voted at the meeting by filing with the Secretary of the General Partner an instrument revoking it (which instrument shall be signed by the Limited Partner and shall state the name of the Limited Partner, the number of Interests (as defined below) with respect to which the prior proxy was given and that the Limited Partner revokes all previously executed proxies), or by delivering a duly executed proxy bearing a later date, or by appearing at the meeting and voting in person. The agreement of limited partnership of the Partnership (the “Partnership Agreement”) does not provide for the setting of a record date for the determination of Limited Partners entitled to vote at the Meeting. Accordingly, each person who is a Limited Partner on the date of the Meeting will be entitled to vote at the Meeting. As of July 18, 1991, the Partnership had outstanding and entitled to vote 14,940 units of limited partner interest (each, an “Interest,” and collectively, the “Interests”), of which the General Partner and its affiliates owned 2,830.25. Each Interest was initially issued in exchange for a $500 capital contribution to the Partnership. The General Partner and its affiliates have acquired their interests by purchase from other Limited Partners. Each Interest entitles the holder to one vote on each matter submitted to a vote of Limited Partners. The presence at the Meeting, in person or by proxy, of the holders of a majority of the issued and outstanding Interests (a “Majority in Interest”) is necessary to constitute a quorum to transact business. In addition, the affirmative vote of a Majority in Interest is necessary to approve the Plan. The General Partner and its affiliates are entitled to vote their Interests at the Meeting, and they intend to vote such Interests in favor of the Plan. See “Plan of Liquidation and Dissolution -- Recommendation of Edisto.”The Partnership is a Texas limited partnership that commenced operations on November 13, 1984. Edisto, a Delaware corporation formerly named Natural Resource Management Corporation, serves as the sole general partner of the Partnership. The Partnership s principal executive offices are located at San Jacinto Tower, 2121 San Jacinto Street, Suite 2600, Dallas, Texas 75201 and its telephone number is (214) 880-0243. The Partnership was funded in two phases. Interests issued in exchange for the funding of the first phase in November 1984 are referred to herein as “Class A Interests” and Interests issued in exchange for the funding of the second phase in April 1985 are referred to herein as “Class B Interests.” The Class A Interests and Class B Interests generally vote together as a single class, and will do so with respect to the Plan. PLAN OF LIQUIDATION AND DISSOLUTION Reasons for and Terms of the Plan Background . The Partnership is not operating profitably and has not done so for several years. See “Selected Financial Data” and the Financial Statements and notes thereto appearing elsewhere in this Proxy Statement. The Partnership has not made cash distributions to Limited Partners since November 1988, and its cash flow projections indicate that estimated future general and administrative expense will equal or exceed estimated future revenues net of production costs, so that the Partnership is not in the future expected to have funds available either to repay the amounts advanced from or otherwise owing to the General Partner (approximately $93,000 at March 31, 1991) or to make cash distributions to the limited Partners. The General Partner does not believe that it is feasible to reduce future production costs or general and administrative expense to a level that would enable the Partnership to generate available funds for such purposes. See “Management s Discussion and Analysis of Financial Condition and Results of Operations.” The Partnership s cash flow projections are based on the estimated costs, reserve quantities and prices in the December 31, 1990 reserve report furnished to the Partnership by Williamson Petroleum Consultants, Inc., independent petroleum engineers (“Williamson”), and the General Partner s estimate of future general and administrative expense. See “Business and Properties of the Partnership -- Oil and Gas Information — Estimated Proved Reserves and Future Net Revenues from Proved Reserves.” In addition, in June 1991 Columbia Gas System Inc. (“Columbia Gas System”), the parent of two companies that purchase gas from the Partnership and together accounted for approximately 63% of the Partnership s 1990 revenues, defaulted on certain of its debt obligations and stated that it might file for bankruptcy protection. See “Business and Properties of the Partnership — Marketing.” The Partnership is unable to predict what effect, if any, the financial difficulties of Columbia Gas System will have on the Partnership. As described below, NRM Operating Company, L.P., a subsidiary of Edisto (“NRM”), has entered into a contract with Eastern American Energy Corporation (“Eastern”), a company not affiliated with Edisto or the Partnership, providing for the purchase by Eastern of certain oil and gas properties and related assets of various Edisto affiliates, including substantially all the assets of the Partnership. Edisto believes that this offer represents an attractive opportunity for the Partnership and the Limited Partners. Edisto further believes that it is in the best interests of the Partnership and the Limited Partners for the Partnership to dissolve and distribute the proceeds of the sale of its assets to its creditors and partners, rather than to continue in operation. See Recommendation of Edisto.” Consequently, Edisto has decided to recommend the Plan to the Limited Partners for their approval. The Plan consists of the following elements: (i) the dissolution of the Partnership; (ii) winding up of the Partnership in accordance with Section 11.4 of the Partnership Agreement, including without limitation the sale for cash of all or substantially all of the Partnership s assets to Eastern; and (iii) the distribution of the proceeds of such sale and the liquidation of the Partnership in accordance with the provisions of Section 11.8 of the Partnership Agreement. See “-- Certain Provisions of the Partnership Agreement.” The Eastern Offer. On June 10, 1991, NRM entered into an asset purchase agreement (the “Purchase Agreement”) with Eastern providing for the sale to Eastern all of the oil and gas properties and related assets comprising the Eastern Region of NRM and its affiliates, including without limitation all of the oil and gas properties and related assets of the Partnership (the Properties”), for an aggregate consideration of approximately $34 million, subject to certain adjustments. The sale of substantially all of such properties and assets other than the Properties was consummated on June 10, 1991. The purchase price was determined by arm s-length negotiations between NRM, on the one hand, and Eastern, on the other. It happens that the negotiated purchase price of approximately $34 million (prior to any adjustments), although it was not determined on such a basis, closely approximates the present value of the future net revenues from proved reserves attributable to the Eastern Region properties, calculated in accordance with the guidelines of the Securities and Exchange Commission (the “SEC”) l5efore income taxes and using a discount rate of 10% per annum (the “PV-l0 Value” of such properties), as of December 31, 1990, as determined by Williamson. The PV-l0 Value of the Eastern Region properties as of such date, as determined by Williamson, was approximately $33.8 million. See “Business and Properties of the Partnership -- Oil and Gas Information — Estimated Proved Reserves and Future Net Revenues from Proved Reserves.” Edisto has therefore determined to allocate the purchase price among the various selling entities based upon the ratio of the PV-10 Value as of December 31, 1990 of the properties being sold by such entity to the PV10 Value as of such date of all of the properties comprising the Eastern Region, in each case as determined by Williamson. As of December 31, 1990, the PV-10 Value of the Properties as determined by Williamson was approximately $743,000, representing approximately 1,119 MMcf of gas. Using the method of allocation described above, the amount that would be received by the Partnership if the sale to Eastern is consummated would be approximately $757,000, subject to any purchase price adjustments made with respect to the Properties. The purchase price adjustments under the Purchase Agreement include adjustments for natural gas production and certain other operating activities from January 1, 1991, the effective date of the proposed sale, to the closing date.Edisto believes that this method of allocation is, if anything, overly favorable to the Partnership and the Limited Partners. Edisto believes that, because of the small size and relatively high production costs of the Properties, there would be relatively few potential purchasers if the Properties were sold by themselves, and the purchase price obtainable would likely be significantly less than the Partnership s allocated share of the Eastern offer. Thus, Edisto believes that the Partnership and the Limited Partners will receive a benefit from the Eastern transaction that is properly attributable to the inclusion in the transaction of the other sellers properties. Nevertheless, Edisto has elected not to reduce the Partnership s allocated share of the Eastern offer to shift that benefit back to the other sellers. The sale to Eastern of substantially all the Eastern Region properties other than the Properties was consummated on June 10, 1991. The consummation of the sale to Eastern of the Properties is subject to certain conditions, including without limitation the obtaining of any required consents, including the approval of the Limited Partners. Even if a Majority in Interest approves the Plan, there can be no assurance that the sale of the Properties pursuant to the Purchase Agreement will be consummated. If the Plan is adopted but the sale of the Properties pursuant to the Purchase Agreement is not consummated for any reason, the Partnership will nevertheless have dissolved and the General Partner, as liquidating trustee, will proceed to wind up the affairs of the Partnership in accordance with Section 11.4 of the Partnership Agreement. In that event, Edisto may, at its election, exercise its right pursuant to Section 11.4(a) of the Partnership Agreement to purchase any or all of the assets of the Partnership at a price determined in accordance with Section 11.6 of the Partnership Agreement. Under the terms of the Partnership Agreement, the exercise of such right by Edisto would not require the approval of the Limited Partners. See “--Certain Provisions of the Partnership Agreement--Liquidation Provisions” for a discussion of the provisions of the Partnership Agreement that would govern any such winding up and any such exercise of Edisto s purchase option. Edisto, as General Partner, owes certain fiduciary duties to the Partnership and the Limited Partners that may limit the actions it could otherwise take with respect to the winding up of the Partnership. Edisto will not take any action in connection with the winding up of the Partnership that it does not believe is in, or not opposed to, the best interests of the Limited Partners.Distribution of Sale Proceeds. Section 11.8 of the Partnership Agreement generally provides that the proceeds of sale of the Partnership s assets shall be used to (i) repay, or reserve for, all liabilities of the Partnership to creditors other than partners of the Partnership (“Partners”), (ii) repay all liabilities of the Partnership to the Partners and (iii) distribute any remaining proceeds to the Partners in the ratio required to make the capital account balances of the Partners, as determined in accordance with the Partnership Agreement after such distributions, be in the Profit Sharing Ratio. See “-- Certain Provisions of the Partnership Agreement.” The “Profit Sharing Ratio” is 2.44% to the General Partner and 97.56% to the Limited Partners. Because none of the Partnership s costs, deductions, income and receipts attributable to the Properties developed in its initial phase are allocated to the Class B Interests, and none of the Partnership s costs, deductions, income and receipts attributable to the Properties developed in its second phase are allocated to the Class A Interests, the Class A Interests and the Class B Interests have different per-Interest capital account balances. As a result, the liquidating distributions to a holder of a Class A Interest will differ from those to a holder of a Class B Interest. At March 31, 1991, the Partnership had liabilities of approximately $93,000, consisting of amounts owed to the General Partner pursuant to the terms of the Partnership Agreement. Assuming the consummation of the sale of the Properties on the terms set forth in the Purchase Agreement and the liquidation of the Partnership on August 31, 1991, the General Partner currently estimates that, upon the liquidation of the Partnership and after the payment of all liabilities of the Partnership, approximately $39 to $47 per Class A Interest and approximately $20 to $25 per Class B Interest would be distributed to the limited Partners (or approximately $400,000 to $476,000 would be distributed in respect of all Class A Interests and approximately $95,000 to $119,000 would be distributed in respect of all Class B Interests), and approximately $15,000 would be distributed to the General Partner in respect of its general partner interest. The General Partner would also receive liquidating distributions in respect of the Interests it owns and would be repaid all amounts owed to it by the Partnership. Based on the 1,993.25 Class A Interests and 837 Class B Interests currently owned directly or indirectly by the General Partner and the approximately $93,000 owed to the General Partner by the Partnership as of March 31, 1991, the General Partner would receive an aggregate amount in the range of approximately $203,000 to $222,000. As of the date of liquidation, however, it is likely that (i) the General Partner will own more Interests than it does today, because it is expected to be the purchaser of any additional Interests tendered pursuant to the Right of Repurchase (as defined below under “— Right of Repurchase”) and (ii) the Partnership will owe the General Partner more than the $93,000 owed as of March 31, 1991, because the Partnership s operations will continue to produce insufficient cash to cover its expenses and the General Partner will continue to advance funds to the Partnership to make up the deficit. Both of those factors would tend to increase the aggregate amount to be received by the General Partner in connection with the liquidation of the Partnership.There can be no assurance that the sale of the Properties pursuant to the Purchase Agreement will be consummated or that limited Partners would actually receive the foregoing estimated amounts per Interest. Such estimates are based upon, among other things, estimations of revenues, production expenses and general and administrative expenses through August 31, 1991 and an estimation of the costs of this proxy solicitation. If the sale of the Properties pursuant to the Purchase Agreement is consummated but the liquidation of the Partnership occurs later than August 31, 1991, the General Partner expects that the liquidating distributions would be less than such estimates, because the Partnership is expected to continue to operate at a loss until the date of liquidation. If the sale of the Properties is not consummated pursuant to the terms of the Purchase Agreement, the amounts per Interest to be distributed to the Limited Partners upon liquidation of the Partnership would depend upon whether the Properties were sold or (after satisfaction of all Partnership liabilities) distributed in kind to the Partners and, if they were sold, upon the terms of such sale. Consequences of Plan not Adopted. If the Plan is not adopted, the sale to Eastern will not be consummated. The General Partner believes, however, that the continuation of Partnership operations is unlikely to be beneficial to the Partnership or the Limited Partners. See “-- Recommendation of Edisto.” Consequently, if the Plan is not adopted, the General Partner will continue to seek a purchaser for the Properties, although the General Partner believes that, because of the sniall size and relatively high production costs of the Properties, there will be relatively few potential purchasers for the Properties if they are sold by themselves, and the purchase price obtainable would likely be significantly less than the Partnership s allocated share of the Eastern offer. In addition, any such sale would require the approval of the Limited Partners, and thus would necessitate the Partnership s uncurrence of the expense of a second proxy solicitation. In light of the foregoing, the General Partner reserves the right, if the Plan is not adopted, to exercise its option under Section 11.1 of the Partnership Agreement to withdraw as General Partner of the Partnership upon at least 120 days notice to all Limited Partners. Any such withdrawal would cause the dissolution of the Partnership. The Limited Partners would then have the right, pursuant to Section 11.3 of the Partnership Agreement, to form a new partnership with one or more new general partners. See “— Certain Provisions of the Partnership Agreement -- Right to Reconstitute Partnership.” If no such new partnership was formed, whether because no person could be found who was willing to serve as the new general partner or because a Majority in Interest did not vote to approve the new partnership, the Partnership would then be liquidated in accordance with the terms of the Partnership Agreement. The General Partner reserves the right, in any such event, to exercise its option under Section 11.4(a) of the Partnership Agreement to purchase any or all of the assets of the Partnership at a price determined pursuant to Section 11.6 of the Partnership Agreement. See “-- Certain Provisions of the Partnership Agreement -- Liquidation Provisions.” Such price may be more or less than the price being offered by Eastern or the PV-l0 Value or fair market value of such assets. Recommendation of EdistoEdisto, as the General Partner of the Partnership, recommends that the Limited Partners vote “FOR” the Plan. Edisto and its affiliates intend to vote all Interests owned by them (2,830.25 at July 18, 1991) in favor of the Plan. The Partnership is not operating profitably and has not done so for several years. See “Selected Financial Data and the Financial Statements and notes thereto appearing elsewhere in this Proxy Statement. The Partnership has not made cash distributions to Limited Partners since November 1988, and its cash flow projections (based on the estimated costs, reserve quantities and prices in the December 31, 1990 Williamson reserve report and Edisto s estimate of future general and administrative expense) indicate that estimated future general and administrative expenses will equal or exceed future revenues net of production costs. Further, Edisto does not believe that it is feasible to reduce future production costs or general and administrative expense to a level that would enable the Partnership to generate available funds for such purposes. Since December 1985, the Partnership has engaged solely in the production and sale of natural gas from the Properties and has conducted no drilling activities. The Partnership has been able to reduce lease operating expense somewhat in recent years (from approximately $260,000 in 1988 to approximately $232,000 in 1990 and from approximately $59,000 in the first three months of 1990 to approximately $58,000 in the first three months of 1991), but Edisto does not believe significant further reductions are possible. The amount of the Partnership s other major expense, general and administrative expense, has also been reduced somewhat in recent years (from approximately $185,000 in 1988 to approximately $151,000 in 1990 and from approximately $44,000 in the first three months of 1990 to approximately $38,000 in the first three months of 1991). The functions contributing to the Partnership s general and administrative expenses -- principally tax and financial accounting, preparation of SEC reports and reports to Limited Partners and legal services -- are required either by the Partnership Agreement or by applicable law, and thus cannot be eliminated. Edisto therefore does not believe that significant further reductions in general and administrative expense are possible. Thus, in the absence of a significant increase in natural gas prices, the Partnership is not in the future expected to have funds available to repay its outstanding indebtedness to Edisto or to make cash distributions to the Limited Partners. This situation will be exacerbated if the Partnership is in the future required to repurchase Interests as described below under “-- Right of Repurchase.” See “Management s Discussion and Analysis of Financial Condition and Results of Operations.” Under these circumstances, Edisto has determined that the dissolution and liquidation of the Partnership are in the best interests of the Partnership and the Limited Partners. In connection therewith, Edisto believes that the sale of the Properties pursuant to the Purchase Agreement, if such sale is consummated, would be in the best interests of the Partnership and the Limited Partners. The aggregate purchase price for the Eastern Region properties was determined by arm s-length negotiations, and Edisto believes that such price is therefore the best available indicator of such properties value. In addition, as described above under “-- Reasons for and Terms of the Plan -- The Eastern Offer,” Edisto believes that the method it has selected to allocate such purchase price among the selling entities is disproportionately favorable to the Partnership and the Limited Partners, since such allocation has not been reduced to reflect the likelihood that the Properties, being relatively small, high-cost properties, would attract a smaller number of potential purchasers and a lower price if they were sold alone, instead of with the other Eastern Region properties.Edisto had an interest in the consummation of the transaction described in the Purchase Agreement that was separate and distinct from that of the Limited Partners, because the transaction also included the purchase of properties owned by affiliates of Edisto other than the Partnership. Such separate interest might have been deemed to present Edisto with a conflict of interest. However, the consummation of the sale of the other properties was not conditioned upon the inclusion of the Partnership s Properties in the sale, and the sale of substantially all of such other properties was consummated June 10, 1991. Thus, Edisto s separate and distinct interest has been substantially eliminated. Right of Repurchase The following discussion of Sections 9.5 and 9.6 of the Partnership Agreement is qualified in its entirety by reference to the text of such Sections, which are set forth in Appendix A to this Proxy Statement. Terms of Right . Pursuant to Section 9.5 of the Partnership Agreement, Limited Partners may, at certain times and under certain conditions, require the Partnership to purchase for cash their Interests in the Partnership (“Right of Repurchase”). The General Partner and its affiliates, or third parties selected by the General Partner, may, but are not obligated to, purchase Interests offered to the Partnership pursuant to the Right of Repurchase. Any such purchase shall be on the same terms as if the Partnership had made the purchase. The Right of Repurchase for Limited Partners of the Partnership commenced on January 1, 1987. As of July 18, 1991, the Partnership had repurchased and retired 1,846 Interests for approximately $148,000, and an additional 2,830.25 Interests had been purchased by the General Partner and its affiliates, in lieu of the Partnership, and remain outstanding. The remaining Limited Partners share of revenue and costs was increased due to the retired Interests. The contractual obligation of the Partnership to purchase Interests is generally subject to only two limitations, which are set forth in Sections 9.5 and 9.6 the Partnership Agreement. The first is that the Partnership is not obligated to purchase dunng any calendar year an aggregate of more than 1,000 Interests. Any purchase of tendered Units by the General Partner or its affiliates or third parties selected by the General Partner, in lieu of the Partnership, is deemed to be a purchase by the Partnership for purposes of such limitation. The second restriction is that in no event will the Partnership be obligated to purchase Interests if such a purchase would violate any law. The price at which such Interests are to be acquired by the Partnership (“Repurchase Price”) is determined according to a formula set forth in Section 9.5 of the Partnership Agreement. Generally, the Repurchase Price is calculated annually and is equal to the pro rats share represented by the tendered Interests of the excess, if any, of (i) the sum of all assets of the Partnership, including current assets (exclusive of any reserve for accounts deterniined uncollectible), the independently determined discounted value of future net revenues attributable to proved reserves and the net book value (or, under certain circumstances, the market value) of all other assets over (ii) the sum of all debts and obligations of any nature for which the Partnership is liable. The Repurchase Price is reduced for any distributions made and certain costs incurred with respect to tendered Interests between the date of the last engineering report used to calculate the Repurchase Price and its payment. Future net revenues attributable to proved reserves are discounted to present value at a rate equal to the prime rate of interest of Edisto s principal bank lender on the last day of the Partnership s preceding fiscal year plus 1 % per annum and may be further reduced by a factor that in the opinion of Edisto reflects the risks of production and development of such proved reserves and other economic contingencies that would normally be considered by a purchaser of oil and gas producing properties, but in no event by more than 33-1/3%. The foregoing formula is applied separately to the Class A Interests (using the Partnership assets and liabilities attributable to the first phase) and the Class B Interests (using the Partnership assets and liabilities attributable to the second phase). Thus, in any given year, the Partnership is likely to offer to repurchase Class A Interests at a different price than Class B Interests. The 1,000 Interests per calendar year limitation on the repurchase requirement is, however, applied to the Class A Interests and the Class B Interests collectively.Within 150 days of the close of each fiscal year, the Partnership is required to notify each Limited Partner of the amount that it will pay to purchase his interests and the method of calculation of such amount. Any Limited Partner who wishes to exercise his Right of Repurchase must return such notice to the Partnership within 30 days after it was mailed by the Partnership. Upon timely receipt of the returned notice, the Partnership will promptly deliver to the requesting Limited Partner a form of assignment, which must be properly completed, executed and returned to the Partnership so that it is received by the Partnership within 60 days after the date on which the Partnership mailed the initial notification. A Limited Partner who seeks to sell pursuant to the Right of Repurchase fewer than all of his Interests must retain at least 10 Interests. Payment for Interests purchased pursuant to the Right of Repurchase will be transmitted within 120 days after the date on which the Partnership mailed the initial notification. If more than 1,000 Interests are presented for purchase pursuant to the Right of Repurchase in any calendar year and the Partnership (or the General Partner or its affiliates or designees) elects not to purchase the excess, the Interests to be purchased will be selected by lot from all tendered Interests (regardless of class). Effect of 1991 Right of Repurchase on Participation in the Plan and the Meeting. Edisto has determined that the Repurchase Price to be offered for Interests to be purchased during 1991 will be $58.15 per Class A Interest and $32.15 per Class B Interest. The rate used to discount the Partnership s future net revenues attributable to proved reserves (as set forth in the December 31, 1990 Williamson report) was 11 % per annum, based on the applicable prime rate of interest on December 31, 1990 of 10% per annum. Edisto determined not to reduce such discounted value further to reflect risks of production and development or other economic contingencies. Edisto believes that the current best indicator of the Properties value is their allocated portion of the Eastern offer, which closely approximates their PV-10 Value as of December 31, 1990. The Repurchase Price formula for 1991 requires the use of a slightly higher present value discount rate than is used in calculating PV-l0 Value (11% per annum versus 10% per annum). Under these circumstances, Edisto decided that it was appropriate not to discount the value further. If a Limited Partner presents Interests for purchase to the Right of Repurchase and such Interests are in fact so purchased, such Limited Partner would no longer own those Interests and therefore, if the Plan is adopted, such Limited Partner would not receive a distribution with respect to those Interests upon liquidation of the Partnership (although he would of course receive the Repurchase Price for those Interests). For both the Class A Interests and the Class B Interests, the applicable 1991 Repurchase Price per Interest exceeds the upper end of the applicable range of estimated liquidating distributions per Interest discussed above under “--Reasons for and Terms of the Plan--Distribution of Sales Proceeds.” Edisto believes that it is unlikely, even if the Plan is not approved or the Plan is approved but the sale of the Properties pursuant to the Purchase Agreement is nevertheless not consummated for any reason, that the liquidating distribution per Interest of either class would exceed the 1991 Repurchase Price per Interest of that class unless the Properties were not sold pursuant to the Purchase Agreement and natural gas prices were to increase significantly before the Partnership was liquidated. Edisto expects that it will be the purchaser of all Interests that are purchased pursuant to the Right of Repurchase in 1991. The Partnership mailed to each Limited Partner the notice required by Section 9.5(c) of the Partnership Agreement on or about May 16, 1991. As of July 17, 1991, 697.25 Class A Interests and 284 Class B Interests had been tendered for purchase. Edisto purchased all of such Interests on July 17, 1991. Although the 60-day tender period provided for in the Partnership Agreement has expired with respect to the 1991 Right of Repurchase, Edisto and the Partnership do not intend to enforce that limitation with respect to Interests otherwise properly tendered that are tendered before the date of the Meeting. If any tendered Interests were repurchased by the Partnership, they would be retired and no liquidating distribution would be made with respect to them. If, however, the tendered Interests are purchased by the General Partner (as the Interests tendered to date have been and any additional Interests subsequently tendered and purchased are expected to be) or one of its affiliates or a third party selected by the General Partner, such Interests will remain outstanding and the new holder will be entitled to receive liquidating distributions with respect to them. Similarly, with respect to Interests purchased pursuant to the Right of Repurchase before the date of the Meeting, (i) the Limited Partner who sold the Interests will not be entitled to vote them at the Meeting. (ii) if the Interests were repurchased by the Partnership, they would be retired and no one would be entitled to vote them at the Meeting and (iii) if the Interests are purchased by the General Partner (as the Interests tendered to date have been and any additional Interests subsequently tendered and purchased are expected to be) or one of its affiliates or a third party selected by the General Partner, the purchaser will be entitled to vote them at the Meeting. All such Interests purchased by the General Partner or its affiliates before the date of the Meeting will be voted in favor of the Plan. See “Plan of Dissolution and liquidation — Recommendation of Edisto.” Certain Provisions of the Partnership Agreement The following discussion of Sections 11.3 through 11.8 of the Partnership Agreement is qualified in its entirety by reference to the text of such Sections, which are set forth in Appendix A to this Proxy Statement. All references to Sections in the following discussion are to Sections of the Partnership Agreement.Liquidation Provisions. Section 11.4 provides that, upon dissolution of the Partnership, the liquidating trustee (the “Liquidating Trustee”) shall proceed diligently to wind up the affairs of the Partnership. If the Plan is adopted, the General Partner will be the Liquidating Trustee. Section 11.4(a) provides that, during the winding up of the Partnership, the General Partner shall have the option to purchase any assets of the Partnership at a price determined in accordance with Section 11.6. If the sale of the Properties to Eastern pursuant to the Purchase Agreement is consummated, the General Partner will not exercise this option with respect to any of the Partnership s assets. If, however, the Plan is adopted but such sale of the Properties to Eastern is not consummated for any reason, or if the Plan is not adopted and the Partnership is subsequently dissolved by the withdrawal of the General Partner, the General Partner reserves the right to exercise such option with respect to any or all of the assets of the Partnership. No approval of the Limited Partners would be required for the General Partner to exercise such option. Section 11.6 jrovides that the value of the Partnership s assets for purposes of Section 11.4 shall be equal to: (i) the sum of (a) the Partnership s cash on hand, plus (b) the Partnership s prepaid expenses and accounts receivable (less a reasonable reserve for doubtful accounts), plus (c) the appraised value of the Partnership s interest in oil and gas leases and similar assets determined in accordance with Section 11.7, plus (d) the net book value of all other tangible assets of the Partnership; minus (ii) an amount equal to all debts and obligations of every kind and nature, including accrued expenses and other liabilities, of the Partnership. Section 11.7 provides for the evaluation of the Partnership s interest in oil and gas leases and similar assets by an independent petroleum engineer selected by the Liquidating Trustee. Section 11.7 provides that, to the extent the values of such assets are based on proved oil and gas reserves, such independent petroleum engineer shall project the estimated future net revenues therefrom, using oil and gas prices escalated at an annual rate determined by such independent petroleum engineer, consistent with then current industry practice, except as limited by contracts. Such estimated future net revenues shall then be discounted to present value at a discount rate equal to the prime rate of interest of Edisto s principal bank lender plus I % per annum. Such discounted present value shall then be reduced by such discounts for risks or other economic factors as such independent petroleum engineer may deem appropriate, considering the speculative nature of the estimates and consistent with valuation practices customarily followed in the oil and gas industry. The method for determining the value of proved oil and gas reserves set forth in Section 11.7 differs in several respects from the method for determining PV-l0 Value. In projecting estimated future net revenues for purposes of determining PV-l0 Value, oil and gas prices are not escalated except to the extent such escalation is provided for in sales contracts. In addition, the discount rate to determine present value for PV-l0 Value purposes is fixed at 10% per annum. Finally, PV-l0 Value is not further discounted for risk or other factors. Thus, the value of any Property as determined pursuant to Section 11.7 may be greater or less than its PV-l0 Value. Furthermore, the value of any Partnership asset as determined pursuant to Sections 11.6 and 11.7 may be greater or less than the amount that the Partnership could obtain in a sale to a third party if the General Partner did not have the right to purchase such asset pursuant to Section 11.4(a). Section 11.4(b) provides that, subject to the General Partner s purchase option, the Liquidating Trustee shall sell such Partnership assets as may be necessary to realize sufficient cash to repay all Partnership loans (which would include the amounts owing to the General Partner), and shall sell or otherwise dispose of all other Partnership assets other than developed leases and equipment associated therewith. Section 11.4(c) provides that then, subject to the General Partner s purchase option, the Liquidating Trustee may distribute any or all remaining Partnership assets in kind to the Partners or, with the approval of a Majority in Interest of the Limited Partners, sell any or all remaining Partnership assets. Thus, if the Plan is adopted but the sale of the Properties is not consummated for any reason, (1) the General Partner could exercise the option to purchase any or all of the assets of the Partnership; (2) if the General Partner does not elect to purchase all of the assets of the Partnership, the General Partner, as Liquidating Trustee, would be required to sell enough Partnership assets to repay all Partnership loans and all of the Partnership s assets other than its developed leases and associated equipment (which sales would not be subject to Limited Partner approval); and (3) the remaining Partnership assets, if any, would be distributed in kind to the Partners unless the General Partner, as Liquidating Trustee, determined that it was in the best interests of the Limited Partners to negotiate a sale to a third party and have the Partnership incur the expense of a second proxy solicitation to obtain the Limited Partner approval required for such a sale. The General Partner s decision in such a case would depend primarily upon its estimate of the sales terms available from third parties at that time. Section 11.8 governs the distribution in liquidation of the Partnership s assets. Such assets shall be applied first to pay all liabilities of the Partnership to creditors other than the Partners. Edisto does not anticipate that there will be any such liabilities that are contingent or uncertain in amount, but if there are, the Partnership will establish a reserve with respect thereto. (Upon the satisfaction or other discharge of such contingent or uncertain liabilities, any excess funds remaining in the reserve would be distributed as provided below.) Second, any debts of the Partnership to Partners shall be repaid. This would include the Partnership s indebtedness to Edisto (approximately $93,000 at March 31, 1991) and the Partnership s liability to Limited Partners who had submitted Interests for purchase pursuant to the Right of Repurchase (which is anticipated to be zero, since Edisto is expected to be the purchaser of such Interests). See “-- Right of Repurchase.” Next, any remaining cash shall be distributed to the Partners in the ratio required to make the capital account balances of the Partners, as determined according to the Partnership Agreement after such distributions, be in the Profit Sharing Ratio, and finally, any remaining developed leases and associated equipment shall be distributed in kind in the Profit Sharing Ratio. The Profit Sharing Ratio is 2.44% to the General Partner and 97.56% to the Limited Partners. Because none of the Partnership s costs, deductions, income and receipts attributable to the Properties developed in its initial phase are allocated to the Class B Intere sts, and none of the Partnership s costs, deductions, income and receipts attributable to the Properties developed in its second phase are allocated to the Class A Interests, the Class A Interests and the Class B Interests have different per-Interest capital account balances. As a result, the liquidating distributions to a holder of a Class A Interest will differ from those to a holder of a Class B Interest. Right to Reconstitute Partnership. Section 11.3 provides that, if the Partnership is dissolved, (e.g., if the Plan is adopted or the General Partner withdraws), the General Partner shall furnish written notice of such dissolution promptly to all Limited Partners. Section 11.3 further provides that, in such event, the Limited Partners may agree, by vote of a Majority in Interest at a meeting held within 90 days following transmission of the notice of dissolution, to form a new partnership with one or more new general partners. Such new partnership would then succeed to the assets and business of the Partnership. If the Plan is adopted, a Majority in Interest will have voted in favor of it. In light of that, and of the fact that the General Partner and its affiliates currently intend to vote their Interests against any proposal to reconstitute the Partnership, the General Partner considers it unlikely that, if the Plan is adopted, any proposal to reconstitute the Partnership pursuant to Section 11.3 would receive the necessary votes to be adopted. Certain Federal Income Tax Consequences of the Plan and the Right of RepurchaseTax Reporting on Schedule K-I. If the Plan is adopted and implemented, each Limited Partner who owns an Interest at any time during the year in which the Properties are sold will receive a Schedule K-l from the Partnership for such year. In the case of Interests retained until liquidation, the Schedule K-I will include in respect of such Interests an allocable share of all income, gains, losses, and deductions realized by the Partnership for such year, including those realized from the sale of the Properties (but will not include any gain or loss realized on liquidation). In the case of Interests sold prior to the sale of the Properties (including but not limited to Interests sold pursuant to the Right of Repurchase), the Schedule K-I will only include in respect of such Interests an allocable share of income and deductions realized by the Partnership prior to the sale; the income, gain, or loss realized on the sale of the Interest must be computed by the Limited Partner. For such purposes, a Limited Partner s tax basis in his Interest will be increased by any income and gain, and decreased by any losses or other deductions, allocated to such Interest before the sale. Tax Treatment on Sale of Properties or Interests and on Liquidation of Partnership. Regardless of whether a limited Partner sells Interests pursuant to the Right of Repurchase or retains some or all of them until liquidation, the overall tax consequences to a Limited Partner from the sale of the Properties, the sale of Interests pursuant to the Right of Repurchase and the liquidation of the Partnership will be as follows: (a) Ordinary income will be recognized to the extent that the aggregate amount realized is attributable to the recapture of intangible drilling costs and depreciation previously allowed. (b) Capital gain or loss will be realized equal to the difference between the Limited Partner s basis in his Interests and the excess of the aggregate amount realized over the amount treated as ordinary income. The General Partner expects that under the foregoing rules most Limited Partners will have ordinary income in an amount equal to substantially all of the aggregate amount received and will have a significant capital loss. However, those Limited Partners who acquired their Interests by purchase after 1987 may have little or no ordinary income and probably a smaller capital loss than other Limited Partners because of the election made in 1988 to permit a Limited Partner s tax basis in Partnership assets to reflect his tax basis in his Interests. Suspended Deductions. A Limited Partner will be entitled to deduct all passive losses previously allocated to him but which he has not been able to utilize because of the passive activity loss limitations. A Limited Partner will be entitled to deduct any loss that has previously been allocated to him but which he has not been able to utilize because of the at-risk limitations only to the extent of any gain recognized under the rules described above. The foregoing discussion is for general information only and is intended to be a summary of the principal federal income tax consequences of the exercise of the Right of Repurchase, the sale by the Partnership of the Properties, and the liquidation of the Partnership. Each Limited Partner should consult his own tax advisor concerning the federal, state, local, and other tax consequences to him of the foregoing transactions. BUSINESS AND PROPERTIES OF THE PARTNERSHIP Description of Business and Significant Properties The Partnership is an oil and gas development program that has participated in natural gas development projects on certain acreage owned by Edisto. These activities were conducted exclusively in southwestern New York and northwestern Pennsylvania. During the period from the inception of the Partnership in November 1984 to December 31, 1985, the Partnership was principally engaged in the development of natural gas properties in which it held working interests. In December 1985, the Partnership completed the development phase of its activities and has since engaged solely in the production and marketing of natural gas from developed properties. Financial information concerning the Partnership is set forth under “Selected Financial Data” and in the Financial Statements included elsewhere in this Proxy Statement. The following discussion summarizes the production history, marketing arrangements and other information concerning certain significant properties of the Partnership. As used herein and elsewhere in this Proxy Statement, gas prices represent prices net to the Partnership and reflect the payment of all reimbursements to the Partnership for severance taxes, compression costs and similar costs by the purchaser. Market clearing prices represent the prices estimated to be generally available for non-contract sales of production from the relevant field. Gas volumes are stated at the pressure base and temperature specified by the regulatory agencies in states where the gas is located. The term “Mcf” means thousand cubic feet and the term “MMcf” means million cubic feet. A “productive” well is a well that is capable of production, but may be a well that is currently shut in. Shut-in wells are wells that have been drilled and are capable of economic production but are not currently producing. All Partnership activities are conducted in the Medina Sand Trend in Erie County, Pennsylvania and Cattaraugus County, New York. As of December 31, 1990, the Partnership had participated in the drilling of 50 gross (40.80 net) gas wells. The Partnership determined during 1989 that two wells were not economical and therefore these wells were plugged and abandoned. At December 31, 1990, the Partnership had 48 gross (39.16 net) productive wells. Included in these productive wells at December 31, 1990, were 4 gross (3.27 net) wells that were shut in. If the Plan is not adopted and the Partnership continues in operation, these wells will be either (i) turned onto production if and when gas prices improve sufficiently to make such production economical or (ii) plugged and abandoned. The Partnership owns an approximate 82% working interest in the properties. During December 1990, gas sales prices ranged from $2.07 per Mcf to $2.78 per Mcf and spot market clearing prices averaged approximately $1.75 per Mcf. Edisto is the operator of all the Partnership s wells.Gas sales during December 1990 averaged approximately 548 Mcf per day, net to the Partnership. Gas deliveries from these properties were at full capacity during December 1990; therefore, gas production was virtually uncurtailed. Oil and Gas Information Estimated Proved Reserves and Future Net Revenues from Proved Reserves. The following table sets forth, as of December 31, 1990, the estimated proved developed gas reserves (the Partnership has no proved undeveloped gas reserves and no oil reserves) and the future net revenues and the present value of such future net revenues from production and sale of the proved gas reserves attributable to the Partnership. Future results may vary significantly from the amounts shown below because of price changes, normal pr-oduction declines and curtailments. Proved developed reserves (Mcf)...................$1,119,000 Estimated future net revenues from proved reserves (1).....................$1,108,000 Present value (discounted at 10%)..................$ 743,000 (PV-10 Value) ________________ (1) Future net revenues represent future ptss revenues from the production and sale of proved reserves, net of production costs (including production taxes, ad valorem taxes and operating expenses) and future development costs. The foregoing estimates of proved gas reserves, future net revenues from proved reserves and the present value of such future net revenues were prepared by Williamson. Future net revenues were computed by applying year-end gas prices (with consideration of price changes only to the extent provided by contractual agreements or law) to estimated future production of proved gas reserves and then deducting estimated future expenditures (based on current costs and excluding income taxes) to be incurred in producing and developing the proved reserves. Future prices received for such production and future production costs may vary, perhaps significantly, from the prices and costs assumed for purposes of these estimates. Present value of future net revenues were calculated by discounting the future net revenues at the rate of 10% per year over the expected period of realization. For purposes of its evaluation, Williamson assumed that gas production would be sold under applicable sales contracts. Sales prices under such contracts averaged $2.23 per Mcf at December 31, 1990. The present values shown above should not be construed as the current market value, or the market value at December 31, 1990, of the estimated gas reserves attributable to the Partnership, nor should the estimated future net revenues set forth above be construed as the net revenues the Partnership would receive in the future if it stayed in operation and continued to produce its properties. The 10% discount factor used to calculate present value, as required by the SEC. is not necessarily the most appropriate discount rate, and present value, no matter what discount rate is used, is materially affected by assumptions as to timing of future production, which may prove to be inaccurate. In addition, the calculation of estimated net revenues does not take into account the effect of various cash outlays, including, among other things, general and administrative costs and well plugging and abandonment expenses. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures. The reserve data in the preceding table represent estimates only. Gas reserve engineering must be recognized as a subjective process of estimating underground accumulations of gas that cannot be measured in an exact way, and estimates of other engineers might differ materially from those shown above. The accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment. Results of drilling, testing and production after the date of the estimate may justify revisions. Accordingly, reserve estimates are often materially different from the quantities of gas that are ultimately recovered. Production. The following table summarizes net production sold and the average sales prices attributable to the Partnership s gas production for the years ended December 31, 1990, 1989 and 1988. 1990 1989 1988 Natural gas:Production sold (Mcf)(1) 200,000 209,000 248,000 Average sales price per Mcf $2.13 $2.14 $2.07 ________________ (1) Natural gas production refers only to marketable production of gas on an “as sold” basis. Production includes dry, residue and wet gas, depending on whether liquids have been extracted before production is sold. Flared gas, injected gas and gas consumed in operations is omitted. Recovered gas-lift gas and reproduced gas is not included unless sold. Productive Wells. The following table sets forth by state the approximate number of gross and net productive gas wells in which the Partnership owned a working interest as of December 31, 1990. The Partnership owned no working interest in any oil wells as of December 31, 1990. Productive wells consist of producing wells and wells capable of production, including shut-in wells. One or more completions in the same bore hole are counted as one well.Gross (1) Net (2) New York 8 6.52 Pennsylvania 40 32.64 Total 48 39.16 _________________ (1) Gross wells refers to the number of wells in which the Partnership owns a working interest. (2) A net well is deemed to exist when the sum of the fractional working interests owned in gross wells equals one. The number of net wells is the sum of the fractional working interests in gross wells expressed in whole numbers or fractio ns thereof. Acreage. The following table sets forth the gross and net developed acres in gas leases held by the Partnership as of December 31, 1990. Developed acreage is acreage spaced or assignable to productive wells. Gross (1) Net (2) New York 738 602 Pennsylvania 1941 1584 Total 2,679 2,186 _______________ (1) Gross acres refers to the number of acres in which the Partnership owns a working interest. (2) Net acres refers to the sum of the fractional working interests owned by the Partnership in gross acres. Drilling Activity. During the period from the inception of the Partnership in November 1984 to December 31, 1985, the Partnership participated in the drilling of 50 gross (40.80 net) development gas wells. Of these gas wells, 48 are commercially productive. The rema ining 2 wells are non-commercial and Edisto plugged and abandoned these wells in 1989. There was no drilling activity during the fiscal years 1990 and 1989. As of December 31, 1990, the Partnership was not in the process of drilling any wells or installing any waterfloods, nor has it underta ken any such activity since that date. Competition The oil and gas industry is highly competitive. Many competitors have financial resources substantially greater than those of the Partnership and staffs and facilities substantial ly greater than those of Edisto, which may affect the ability of Edisto to market the Partnership s gas production on competitive terms. Marketing The Partnership sells its gas production under long-term and short-term contracts on varying terms, subject in each case to applicable governmental price controls and the de mand for gas. During fiscal 1990, Columbia Gas of New York (“Columbia of New York”), National Fuel Gas Supply Corporation (“NFG”) and Columbia Gas of Pennsylvania, Inc. (“Columbia of Pennsylvania”) accounted for approximately 10%, 21 % and 53 %, respectively, of the total revenues from the sale of the Partnership s gas production. No other purchaser accounted for more than 10% of the total revenues from the sale of gas production of the Partnership. On June 19, 1991, Columbia Gas System, the parent of Columbia of New York and Columbia of Pennsylvania, announced that it was suspending its common stock dividend, citing financial difficulties at its subsidiary, Columbia Gas Transmission Corp. (“Columbia Transmission”). Columbia Gas System attributed the difficulties to gas purchase contracts under whic h Columbia Transmission is committed to purchasing gas at prices in excess of current market leve ls. Columbia Gas System called for renegotiation of supply contracts, and confirmed that it was considering filing for bankruptcy protection if such contracts and its credit agreements were not renegotiated promptly. Since the date of its initial announcement, Columbia Gas Syste m has failed to make scheduled payments on several debt obligations. It is not clear whether or to what extent the financial difficulties of Columbi a Gas System and Columbia Transmission will affect their affiliates Columbia of New York and Columbi a of Pennsylvania. In particular, the Partnership does not know whether Columbia of New York or Columbia of Pennsylvania, or both, will file for bankruptcy protection if Columbia Gas System and Columbia Transmission do. The Partnership is unable to predict what effect, if any, the financial difficulties of Columbia Gas System and Columbia Transmission will have on the Partnership. All of the Partnership s revenues are from gas production and, therefore, are highly dependent on the prices and demand for gas. The average gas price increased 6% from 1987 to 1988 and declined 10% from 1988 to 1989. The average sales price of the Partnership s gas production during 1990, however, was relatively constant with the 1989 average price. The average gas sales price received by the Partnership during 1988, 1989 and 1990 was greater than the spot gas prices, which ranged from $1.71 to $1.77, primarily because the market prices for gas in New York and Pennsylvania (where the Partnership s wells are located) were ge nerally in excess of the spot gas prices. In addition, the gas sales price received from Columbi a of Pennsylvania, the purchaser of 53 % of the Partnership s total gas revenues, during 1990 was higher than the area market price. In July 1988, the Partnership negotiated a 2-1/2 year contract with Columbia of Pennsylvania in order to avoid Columbia s “summer months” shut-in periods. Under the contract, Columbia of Pennsylvania agreed to purchase gas for twelve months a year at $2.00 per Mcf. The average prices received by the Partnership from all purchasers for 1988, 1989 and 1990 were $2.07, $2.14 and $2.13 per Mcf, respectively.Market conditions for gas are the result of a number of factors outside of the control of the Partnership, including changing economic conditions and loss of markets to alternative fuels. The Partnership cannot predict how developments in these or related areas will affect the market for gas. Regulation The Partnership’s gas production and certain gas sales are subject to various types of regulati on, including regulation by state and federal agencies. Although such regulations have an impa ct on the Partnership and others in the oil and gas industry, the Partnership does not believe tha t it is affected by these regulations in a significantly different manner than other gas producers. Legislation affecting the oil and gas industry is under constant review for amendment or expansion. Numerous departments and agencies, both federal and state, are authorized by statute to issue and have issued rules and regulations binding on the oil and gas industry and its individual members. The failure to comply with such rules and regulations can result in substantial penalties. Many states require permits for drilling operations, drilling bonds and reports concerning operations. Many states also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and gas properties, the establishment of maximum rates of production from oil and gas wells and the regula tion of spacing, plugging and abandonment of such wells. Some state statutes and regulations lim it the rate at which gas can be produced from the Partnership s properties. The Natural Gas Act of 1938 (the “NGA”) regulates the interstate transportation and ce rtain sales for resale of natural gas. The Natural Gas Policy Act of 1978 (the “NGPA”) regulates the maximum selling prices of certain categories of gas, whether sold in so-calle d first sales in interstate or intrastate commerce. These statutes are administered by the Fe deral Energy Regulatory Commission (“FERC”). The NGPA established various categories of natural gas and provided for graduated deregulation of price controls for first sales of several categories of natural gas. With certain exceptions, all price deregulation contemplated under the NGPA as originally enacted in 1978 has already taken place. Under current market conditions, deregul ated gas prices under new contracts tend to be substantially lower than most regulated pric e ceilings prescribed by the NOPA. On July 26, 1989, the Natural Gas Wellhead Decontrol Act of 1989 (the “Decontrol Act”) was enacted. The Decontrol Act amends the NGPA to remove as of July 27, 1989 both price and non- price controls from natural gas not subject to a first sale contract in effect on July 26, 1989. The Decontrol Act also provides for the phasing out of all price