<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
----------------------------
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1997 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from _________ to __________
---------------------------
COMMISSION FILE NUMBER 0-13305
----------------------------
PARALLEL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-1971716
(State of other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Marienfeld Place, Suite 465,
Midland, Texas 79701
(Address of principal executive offices) (Zip Code)
(915) 684-3727
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes 'X' No ___
The number of outstanding shares of the issuer's common stock, $.01 par
value, was 17,809,108 shares as of July 1, 1997.
<PAGE> 2
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Reference is made to the succeeding pages for the following financial
statements:
- Balance Sheets as of December 31, 1996 and June 30, 1997
- Statements of Operations for the three months ended June 30,
1996 and 1997 and six months ended June 30, 1996 and 1997
- Statements of Cash Flows for the six months ended June 30,
1996 and 1997
- Notes to Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
/a/ Exhibits
10. Parallel Petroleum Corporation Non-Employee Directors
Stock Option Plan
27. Financial Data Schedule
/b/ Reports on Form 8-K
No reports were filed on Form 8-K during the quarterly period
ended June 30, 1997.
<PAGE> 3
PARALLEL PETROLEUM CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30, 1997
ASSETS 1996 (Unaudited)
- ------ ------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 41,569 $ 17,604
Accounts receivable:
Oil and gas 2,888,400 1,721,611
Other, net of allowance for doubtful accounts
of $28,130 in 1996 and 1997 127,837 227,775
Affiliate 24,991 3,475
----------- -----------
3,041,228 1,952,861
Other assets 7,540 106,256
----------- -----------
Total current assets 3,090,337 2,076,721
----------- -----------
Property and equipment, at cost:
Oil and gas properties, full cost method 47,130,874 55,334,697
Other 380,207 411,593
----------- -----------
47,511,081 55,746,290
Less accumulated depreciation and depletion 12,576,560 14,369,433
----------- -----------
Net property and equipment 34,934,521 41,376,857
----------- -----------
Other assets, net of accumulated amortization of
$33,263 in 1996 and $46,031 in 1997 73,311 77,955
----------- -----------
$38,098,169 $43,531,533
=========== ===========
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
December 31, June 30, 1997
1996 (Unaudited)
-------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities:
Trade $ 2,735,639 $ 1,894,357
Affiliates 3,181 23,467
----------- -----------
Total current liabilities 2,738,820 1,917,824
----------- -----------
Long-term debt 8,521,391 10,577,610
Deferred income taxes 2,119,823 3,005,195
Stockholders' equity:
Preferred stock - par value of $.10 per share,
authorized 40,000,000 shares, none issued -- --
Common stock - par value of $.01 per share,
authorized 100,000,000 shares, issued and
outstanding 17,406,358 in 1996 and 17,809,108
in 1997 174,063 178,091
Additional paid-in surplus 21,189,442 22,700,611
Retained earnings 3,354,630 5,152,202
----------- -----------
Total stockholders' equity 24,718,135 28,030,904
Contingencies
----------- -----------
$38,098,169 $43,531,533
=========== ===========
</TABLE>
* The balance sheet as of December 31, 1996 has been derived from the Company's
audited financial statements. The accompanying notes are an integral part
of these financial statements.
<PAGE> 5
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
Three Months Ended June 30, 1996 and 1997
Six Months Ended June 30, 1996 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Oil and gas revenues $3,381,316 $2,654,734 $5,719,240 $6,695,381
---------- ---------- ---------- ----------
Cost and expenses:
Lease Operating expense 645,727 646,532 1,098,690 1,539,782
General and administrative 66,687 59,197 130,316 143,172
Public reporting, auditing and legal 81,711 97,507 126,747 154,742
Depreciation, depletion and amortization 778,399 853,362 1,431,797 1,814,608
---------- --------- ---------- ----------
1,572,524 1,656,598 2,787,550 3,652,304
---------- --------- ---------- ----------
Operating income 1,808,792 998,136 2,931,690 3,043,077
---------- --------- ---------- ----------
Other income (expense), net:
Interest income 382 2,941 475 4,603
Other income 30,151 8,482 47,486 16,965
Interest expense (311,516) (210,810) (593,674) (376,917)
Other expense (185) (3,488) (370) (4,784)
---------- ---------- ---------- ----------
Total other expense, net (281,168) (202,875) (546,083) (360,133)
---------- ---------- ---------- ----------
Income before income taxes 1,527,624 795,261 2,385,607 2,682,944
Income tax expense - deferred 519,000 262,436 811,000 885,372
---------- ---------- ---------- ----------
Net income $1,008,624 $ 532,825 $1,574,607 $1,797,572
========== ========== ========== ==========
Net income per common share $ .065 $ .099 $ .102 $ .098
========== ========== ========== ==========
Weighted average common share and common
stock equivalents outstanding 15,532,674 18,243,723 15,484,731 18,343,452
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 6
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1996 and 1997
(Unaudited)
<TABLE>
1996 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,574,607 $1,797,572
Adjustments to reconcile net income to net cash
provided (used in) by operating activities:
Depreciation, depletion and amortization 1,431,797 1,814,608
Income taxes 811,000 885,372
Other, net (3,875) (4,644)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (1,442,401) 1,088,367
(Increase) decrease in prepaid expenses and other 666 (98,716)
(Decrease) increase in accounts payable and accrued
liabilities 664,351 (820,996)
---------- ----------
Net cash provided (used in) by operating activities 3,036,145 4,661,563
---------- ----------
Cash flows from investing activities:
Additions of property and equipment (6,270,471) (8,256,944)
---------- ----------
Net cash used in investing activities (6,270,471) (8,256,944)
---------- ----------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt 3,393,996 6,290,000
Payment of long-term debt -- (4,233,781)
Proceeds from exercise of options and warrants 10,938 45,282
Stock offering costs -- (13,409)
Proceeds from common stock issuance -- 1,483,324
---------- ----------
Net cash provided by financing activities 3,404,934 3,571,416
---------- ----------
Net increase (decrease) in cash and cash equivalents 170,608 (23,965)
Beginning cash and cash equivalents 558,748 41,569
---------- ----------
Ending cash and cash equivalents $ 729,356 17,604
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 7
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. OPINION OF MANAGEMENT
The financial information included herein is unaudited. However, such
information includes all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of the results of operations for the interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements should be read in connection with the financial statements and
notes thereto included in the Company's 1996 Annual Report and Form 10-K.
NOTE 2. LONG TERM DEBT
On July 1, 1996, the Company entered into a loan agreement with a bank to
refinance the outstanding indebtedness with its former lender and to provide
funds for working capital. The loan agreement provides for a revolving
credit facility in the maximum amount of $30,000,000 with a current borrowing
base of $20,000,000 reduced by a monthly commitment reduction of $333,333
until October 1, 1997. The borrowing base is subject to redetermination
every six months on April 1 and October 1 of each year, or at such other
times as the bank elects. The loan agreement, which matures in July 2001,
is secured by substantially all of the Company's oil and gas properties.
Commitment fees of .25% per annum on the difference between the commitment
and the average daily amount outstanding are due quarterly.
The unpaid principal balance on the note bears interest at the election
of the Company at a rate equal to (i) the bank's base lending rate or (ii)
the bank's Eurodollar rate plus a margin of 2.5%. On June 30, 1997, the
interest rate in effect was the bank's base lending rate of 8.5%.
The loan agreement contains various restrictive covenants and compliance
requirements, which include (1) maintenance of certain financial ratios,
(2) limiting the incurrence of additional indebtedness, and (3) prohibiting
the payment of dividends.
NOTE 3. COMMON STOCK OFFERING
On December 18, 1996, the Company closed a public offering of 2,500,000
shares of its common stock at a price of $4.25 per share. Proceeds received,
net of related expenses, were approximately $9,421,000. In connection with
the common stock offering the underwriters were granted an over-allotment
option to purchase an additional 375,000 shares of common stock. In
January 1997, the over-allotment option was exercised and an additional
375,000 shares of common stock were sold at a price of $4.25 per share.
Proceeds received by the Company, net of related expenses, were approximately
$1,470,000. The net proceeds from the sale of the 2,875,000 shares of
common stock were used to reduce the indebtedness outstanding under the
Company's loan agreement.
<PAGE> 8]
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the Company's Financial Statements and the related notes thereto.
OVERVIEW
The Company's long-term business strategy is to increase the Company's
reserve base by utilizing 3-D seismic technology to obtain exploratory
drilling returns on capital invested with developmental drilling risks.
The Company intends to exploit its existing properties and acquire those
properties which it believes can be exploited by developing reserves not
previously produced. The Company undertakes projects only when it believes
the project has the potential for initial cash flow adequate to return the
project's capital expenditures within a short period of time, generally less
than 36 months. The Company also endeavors to maximize the present value of
its projects by accelerating production of its reserves consistent with
prudent reservoir management.
As part of this business strategy, the Company has made acquisitions of
oil and gas producing properties in the Permian Basin of West Texas and has
discovered oil and gas reserves through the use of 3-D seismic technology in
the Horseshoe Atoll Reef Trend of West Texas and the Yegua/Frio Gas Trend
onshore the Gulf Coast of Texas. Capital utilized to acquire such reserves
has been provided primarily by secured bank financing, sales of the Company's
equity securities and cash flow from operations.
The Company's operating performance is influenced by several factors, the
most significant of which are the prices received for its oil and gas and
the Company's production volumes. The world price for oil has overall
influence on the prices that the Company receives for its oil production.
The prices received for different grades of oil are based upon the world
price for oil, which is then adjusted based upon the particular grade.
Typically, light oil is sold at a premium, while heavy grades of crude are
discounted. Gas prices the Company receives are primarily influenced by
seasonal demand, weather, hurricane conditions in the Gulf of Mexico,
availability of pipeline transportation to end users and proximity of the
Company's wells to major transportation pipeline infrastructure and, to a
lesser extent, world oil prices. Additional factors influencing operating
performance include production expenses, overhead requirements, and cost of
capital.
The Company's oil and gas producing activities are accounted for using
the full cost method of accounting. Accordingly, the Company capitalizes all
costs incurred in connection with the acquisition of oil and gas properties
and the exploration for and development of oil and gas reserves. These costs
include lease acquisition costs, geological and geophysical expenditures,
costs of drilling both productive and non-productive wells, and overhead
expenses directly related to land acquisition and exploration and development
activities. Proceeds from the disposition of oil and gas properties are
accounted for as a reduction in capitalized costs, with no gain or loss
recognized unless such disposition involves a material change in reserves,
in which case the gain or loss is recognized.
Depletion of the capitalized costs of oil and gas properties, including
estimated future development costs, is provided using the equivalent
unit-of-production method based upon estimates of proved oil and gas reserves
and production, which are converted to a common unit of measure based upon
their relative energy content. Unproved oil and gas properties are not
amortized, but are individually assessed for impairment. The cost of any
impaired property is transferred to the balance of oil and gas properties
being depleted.
The Company's quarterly production and results of operations have varied
from quarter to quarter. Based on its scheduled drilling activities, the
Company does not currently anticipate that its production volumes in the
third and fourth quarters of 1997 will increase significantly compared to its
production volumes in the prior year, and normal operating considerations
and other factors could result in decreased production volumes in subsequent
quarters.
<PAGE> 9
RESULTS OF OPERATIONS
Because of the Company's ever-changing reserve base and sources of
production, year to year or quarter to quarter comparisons of the Company's
results of operations can be difficult. This situation is further complicated
by significant changes in product mix (oil vs. gas volumes) and related
price fluctuations for both oil and gas. For these reasons, the table below
compares the Results of Operations on the basis of equivalent barrels of oil
("EBO") for the period indicated. An EBO means one barrel of oil equivalent
using the ratio of six Mcf of gas to one barrel of oil.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
---------------------------- --------------------
12-31-96 3-31-97 6-30-97 6-30-96 6-30-97
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Production and Prices:
Oil (Bbls) 58,196 50,554 48,154 57,387 48,154
Natural Gas (Mcf) 982,655 976,555 862,245 906,826 862,245
Equivalent Barrels of Oil (EBO) 221,972 213,313 191,861 208,525 191,861
Oil Price (per Bbl) $24.14 $21.01 $19.03 $22.77 $19.03
Gas Price (per Mcf) $ 3.13 $ 3.05 $ 2.02 $ 2.28 $ 2.02
Price per EBO $20.16 $18.94 $13.84 $16.21 $13.84
Results of Operations per EBO
Oil and gas revenues $20.16 $18.94 $13.84 $16.21 $13.84
Costs and expenses:
Lease operating expense 3.53 4.19 3.37 3.10 3.37
General and administrative .42 .39 .31 .32 .31
Public reporting, auditing
and legal .19 .27 .51 .39 .51
Depreciation and depletion 5.05 4.50 4.45 3.73 4.45
------ ------ ------ ------ ------
Total costs and expenses 9.19 9.35 8.64 7.54 8.64
------ ------ ------ ------ ------
Operating income 10.97 9.59 5.20 8.67 5.20
Interest expense, net 1.38 .77 1.08 1.49 1.08
Other expense (income) (.03) (.03) (.03) (.15) (.03)
------ ------ ------ ------ ------
Pretax income 9.62 8.85 4.15 7.33 4.15
Income tax expense 1.75 2.92 1.37 2.49 1.37
------ ------ ------ ------ ------
Net income 7.87 5.93 2.78 4.84 2.78
------ ------ ------ ------ -------
Income before working
capital adjustments $14.67 $13.35 $ 8.60 $11.06 $ 8.60
====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
6-30-95 6-30-96 6-30-97
------- ------- -------
<S> <C> <C> <C>
Production and Prices:
Oil (Bbls) 79,388 102,100 98,707
Natural Gas (Mcf) 668,303 1,608,721 1,838,800
Equivalent Barrels of Oil (EBO) 190,772 370,220 405,174
Oil Price (per Bbl) $17.11 $20.80 $20.05
Gas Price (per Mcf) $ 1.43 $ 2.23 $ 2.56
Price per EBO $12.14 $15.45 $16.52
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
Six Months Ended
6-30-95 6-30-96 6-30-97
------- ------- -------
<S> <C> <C> <C>
Results of Operations per EBO
Oil and gas revenues $12.14 $15.45 $16.52
Costs and expenses:
Lease operating expense 3.70 2.97 3.80
General and administrative .49 .35 .35
Public reporting, auditing
and legal .47 .34 .38
Depreciation and depletion 3.82 3.87 4.48
------ ------ ------
Total costs and expenses 8.48 7.53 9.01
------ ------ ------
Operating income 3.66 7.92 7.51
Interest expense, net 2.72 1.60 .92
Other expense (income) (.12) (.14) (.03)
------ ------ ------
Income before income taxes $ 1.06 $ 6.46 $ 6.62
====== ====== ======
Net cash flow before working
capital adjustments $ 4.88 $10.33 $11.10
====== ====== ======
</TABLE>
The following table sets forth for the periods indicated the percentage of
total revenues represented by each item reflected on the Company's statements
of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- --------------------
12-31-96 3-31-97 6-30-97 6-30-96 6-30-97
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Oil and gas revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Production costs 17.5 22.1 24.4 19.2 23.0
General and administrative 2.1 2.1 2.2 2.3 2.1
Public reporting, auditing
and legal .9 1.4 3.7 2.2 2.3
Depreciation, depletion and
amortization 25.0 23.8 32.1 25.0 27.1
------ ------ ------ ------ ------
Total costs and expense 45.5 49.4 62.4 48.7 54.5
------ ------ ------ ------ ------
Operating income 54.5 50.6 37.6 51.3 45.5
------ ------ ------ ------ ------
Interest expense, net 6.8 4.1 7.8 10.4 5.6
Other expense (income) (.1) (.2) (.2) (.8) (.2)
------ ------ ------ ------ ------
Pretax income 47.8 46.7 30.0 41.7 40.1
Income tax expense 8.7 15.4 9.9 14.2 13.2
------ ------ ------ ------ ------
Net income 39.1% 31.3% 20.1% 27.5% 26.9%
====== ====== ====== ====== ======
</TABLE>
<PAGE> 11
THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996:
Oil and Gas Revenues. Oil and gas revenues decreased $726,582, or 21%,
to $2,654,734 for the three months ended June 30, 1997, from $3,381,316 for
the same period of 1996. The decrease was primarily the result of a 16,664
EBO, or 8%, decrease to 191,861 EBO in the Company's oil and gas production,
and a decrease of 15% in the average sales price per EBO from $16.21 in the
three months ended June 30, 1996 to $13.84 for the same period of 1997. Of
the $726,582 decrease in revenues, approximately 35% was attributable to
decreased oil and gas production volume and approximately 65% was attributable
to the decrease in average sales prices.
Production Costs. Production costs increased $805, or 0.1%, to $646,532
during the second three months of 1997, from $645,727 for the same period of
1996. Average production costs per EBO increased $0.27, or 9%, to $3.37
for the second three months in 1997 compared to $3.10 for the same period in
1996.
General and Administrative Expenses. General and administrative expenses
decreased $7,490, or 11%, to $59,197 for the second three months of 1997,
from $66,687 for the same period of 1996 primarily due to an increase in
franchise taxes and in general corporate legal expense. Such increase
represents $.31 per EBO sold in the second three months of 1997 compared to
$.32 per EBO sold in the second three months of 1996. General and
administrative costs are expected to remain fairly stable with no material
increases expected in any particular category.
Public Reporting, Auditing and Legal Expenses. Public reporting,
auditing and legal expense increased $15,796, or 19%, to $97,507 for the
second three months of 1997, from $81,711 for the same period of 1996.
Such increase is primarily due to increased legal expense and shareholder
communication costs.
Depreciation, Depletion and Amortization Expense. Depreciation,
depletion and amortization expense increased $74,963, or 10%, to $853,362
for the second three months of 1997, from $778,399 for the same period of
1996. The increase in depreciation, depletion and amortization as a
percentage of revenues is primarily a result of the decrease in prices
realized per EBO, partially offset by an increase in the DD&A Rate to
$4.45 in the three months ended June 30, 1997 from $3.73 in 1996. The
increase in the DD&A Rate is attributable to increased exploration and
drilling activities.
Net Interest Expense. Interest expense decreased $103,265, or 33%, to
$207,869 for the three months ended June 30, 1997, from $311,134 for the
same period of 1996, due principally to the decrease in the Company's
revolving line of credit, which resulted from the repayment of the loan
with the proceeds of the December 1996 stock offering.
Income Tax Expense. The Company had an effective tax rate of 33% for
the three months ended June 30, 1997.
Net Income and Operating Cash Flow. Net income decreased $475,799, or
47%, to $532,825 for the three months ended June 30, 1997, compared to
$1,008,624 for the three months ended June 30, 1996. Operating cash flow
decreased $657,400, or 29%, to $1,648,623 for the three months ended
June 30, 1997 compared to $2,306,023 for the three months ended June 30, 1996.
The net income and operating cash flow decreases are primarily due to the
21% decrease in oil and gas revenues and the 65% decrease in average sales
price.
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996:
Oil and Gas Revenues. Oil and gas revenues increased $976,141, or 17%,
to $6,695,381 for the six months ended June 30, 1997, from $5,719,240 for
the same period of 1996. The increase was primarily the result of 34,954 EBO,
or 9%, increase to 405,174 EBO in the Company's oil and gas production, and
an increase of 7% in the average sales price per EBO from $15.45 in the six
months ended June 30, 1996 to $16.52 for the same period of 1997. Of the
$976,141 increase in revenues, approximately 50% was attributable to
increased oil and gas production volume and approximately 50% was attributable
to the increase in average sales prices.
<PAGE> 12
Production Costs. Production costs increased $441,092, or 40%, to
$1,539,782 for the first six months of 1997, from $1,098,690 for the same
period of 1996. The 9% increase in production of 34,954 EBO was primarily
responsible for the increase in production costs. Additionally, average
production costs per EBO increased $.83, or 28%, to $3.80 for the first six
months in 1997 compared to $2.97 for the same period in 1996 as a result of
increased day to day operating costs associated with production from the
Company's Yegua/Frio wells.
General and Administrative Expenses. General and administrative expenses
increased $12,856, or 10%, to $143,172 for the first six months of 1997,
from $130,316 for the same period of 1996. As a result of the Company's low
administrative cost structure and the increase in revenues, the Company's
general and administrative expenses as a percentage of revenues decreased
slightly from 2.3% for the six months ended June 30, 1996 to 2.1% for the
same period in 1997. General and administrative costs are expected to
remain fairly stable with no material increases expected in any particular
category.
Public Reporting, Auditing and Legal Expenses. Public reporting,
auditing and legal expense increased $27,995, or 22%, to $154,742 for the
first six months of 1997, from $126,747 for the same period of 1996. Such
increase is primarily due to increased legal expense and shareholder
communication costs.
Depreciation, Depletion and Amortization Expense. Depreciation,
depletion and amortization expense increased $382,811, or 27%, to $1,814,608
for the first six months of 1997, from $1,431,797 for the same period of 1996.
The increase in depreciation, depletion and amortization as a percentage of
revenues is primarily a result of the increase in prices realized per EBO,
partially offset by an increase in the DD&A Rate to $4.48 in the six months
ended June 30, 1997 from $3.87 in 1996. The increase in the DD&A Rate is
attributable to increased exploration and drilling activities.
Net Interest Expense. Interest expense decreased $220,885, or 37%, to
$372,314 for the six months ended June 30, 1997, from $593,199 for the same
period of 1996, due principally to the decrease in the Company's revolving
line of credit, which resulted from the repayment of the loan with the
proceeds of the December 1996 stock offering.
Income Tax Expense. The Company had an effective tax rate of 33% for the
six months ended June 30, 1997.
Net Income and Operating Cash Flow. Net income increased $222,965, or
14%, to $1,797,572 for the six months ended June 30, 1997, compared to
$1,574,607 for the six months ended June 30, 1996. Operating cash flow
increased approximately $680,148, or 18%, to $4,497,552 for the six months
ended June 30, 1997 compared to $3,817,404 for the six months ended June 30,
1996. The net income and operating cash flow increases are primarily due to
the 17% increase in oil and gas revenues.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased $192,620 as of June 30, 1997 compared to
December 31, 1996. Current assets exceeded current liabilities by $158,897
at June 30, 1997 compared to $351,517 at December 31, 1996. Current assets
decreased primarily due to a decrease of $1,088,367 in accounts receivable
offset by an increase of $98,716 in prepaid expenses and a decrease in cash
of $23,965. The decrease in cash was primarily due to the Company's
investments in oil and gas drilling activities, payment of trade payables
accrued as of December 31, 1996 and the Company's cash management system,
whereby it maintains minimum cash balances with any excess cash applied
against its bank line of credit. The Company continues to employ 3-D seismic
technology in conjunction with its drilling activities, which are concentrated
on certain gas prospects located in south Texas.
The Company incurred net costs of $8,256,944 in its oil and gas property
acquisition, development, and enhancement activities for the six months ended
June 30, 1997. Such costs were financed by the utilization of the Company's
cash position and funds provided from its line of credit.
Based on the Company's projected oil and gas revenues and related expenses,
management believes that its internally generated cash flow, coupled with
proceeds from borrowings under the Company's lending facility, will be
sufficient to fund its current operations. The Company continually reviews
and considers alternative methods of financing.
<PAGE> 13
TREND AND PRICES
The Company's revenues, cash flows and borrowing capacity are affected by
changes in oil and gas prices. The markets for oil and gas have historically
been, and will continue to be, volatile. Prices for oil and gas typically
fluctuate in response to relatively minor changes in supply and demand,
market uncertainty, seasonal, political and other factors beyond the control
of the Company. The Company is unable to accurately predict domestic or
worldwide political events or the effects of such other factors on the prices
received by the Company for its oil and gas. The Company historically has
not entered into transactions to hedge against changes in oil and gas prices,
but may elect to enter into hedging transactions in the future to protect
against fluctuations in oil and gas prices.
During 1996, the average sales price received by the Company for its oil
was approximately $21.83 per barrel ("Bbl"), as compared to $17.26 in 1995,
while the average sales prices for the Company's gas was approximately $2.55
per thousand cubic feet ("Mcf") in 1996, as compared to $1.50 per Mcf in 1995.
At June 30, 1997, the average price received by the Company for its oil
production was approximately $19.03 per Bbl, while the average price received
by the Company, at that same date, for its gas production was approximately
$2.02 per Mcf.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's annual meeting of stockholders was held on May 14, 1997.
At the meeting, the following persons were elected to serve as Directors of
the Company for a term of one year expiring in 1998 and until their
respective successors are duly qualified and elected: (1) Thomas R.
Cambridge, (2) Danny H. Conklin, (3) Ernest R. Duke, (4) Myrle Greathouse,
(5) Larry C. Oldham and (6) Charles R. Pannill.
Set forth below is a tabulation of votes with respect to each nominee for
Director:
<TABLE>
<CAPTION>
NAME VOTES CAST FOR VOTES WITHHELD BROKER NON-VOTE
<S> <C> <C> <C>
Thomas R. Cambridge 14,918,067 38,719 --
Danny H. Conklin 14,918,462 38,324 --
Ernest R. Duke 14,915,252 41,534 --
Myrle Greathouse 14,914,067 42,719 --
Larry C. Oldham 14,918,587 38,199 --
Charles R. Pannill 14,913,772 43,014 --
</TABLE>
In addition to electing Directors, the stockholders of the Company also
voted upon and ratified the appointment of KPMG Peat Marwick LLP to serve as
the Company's independent public accountants for 1997.
Set forth below is a tabulation of votes with respect to the proposal to
ratify the appointment of the Company's independent public accountants:
<TABLE>
<CAPTION>
VOTES CAST FOR VOTES CAST AGAINST ABSTENTIONS BROKER NON-VOTE
<C> <C> <C> <C>
14,880,659 33,275 42,852 --
</TABLE>
<PAGE> 14
The stockholders of the Company also voted upon a Nonemployee Directors
Stock Option Plan. Set forth below is a tabulation of votes with respect to
the proposal to approve and adopt the Non-employee Directors Stock Option Plan.
<TABLE>
<CAPTION>
VOTES CAST FOR VOTES CAST AGAINST ABSTENTIONS BROKER NON-VOTE
<C> <C> <C> <C>
13,827,090 670,227 459,469 --
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10. Parallel Petroleum Corporation Non-Employee Directors Stock
Option Plan
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter ended June
30, 1997.
<PAGE> 15
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PARALLEL PETROLEUM CORPORATION
Date: August 13, 1997 /s/ THOMAS R. CAMBRIRDGE
------------------------------
THOMAS R. CAMBRIDDGE
CHIEF EXECUTIVE OFFICER
Date: August 13, 1997 /s/ LARRY C. OLDHAM
------------------------------
LARRY C. OLDHAM,
PRESIDENT AND
PRINCIPAL FINANCIAL OFFICER
<PAGE> 16
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
- ------ --------------------------
*10 Parallel Petroleum Corporation
Non-employee Directors
Stock Option Plan
*27 Financial Data Schedule
- -----------------------
* Filed herewith
<PAGE> 1
Exhibit 10
PARALLEL PETROLEUM CORPORATION
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
1. Purpose of the Plan. The purpose of the Parallel Petroleum
Corporation Non-employee Directors Stock Option Plan (the "Plan") is to
secure for Parallel Petroleum Corporation (the Company) and its stockholders
the benefits of the incentives inherent in increased common stock ownership
by members of the Board of Directors (the Board) of the Company who are not
employees of the Company (Non-employee Directors) or any of its subsidiaries
and to provide a means whereby Non-employee Directors of the Company may
develop a sense of proprietorship and personal involvement in the development
and financial success of the Company, and to encourage them to remain with and
devote their best efforts to the business of the Company, thereby advancing
the interests of the Company and its stockholders. Accordingly, the Plan
provides for granting to Non-employee Directors the option ("Option") to
purchase shares of common stock of the Company ("Stock"), as hereinafter
set forth. Options granted under the Plan to Non-employee Directors are not
intended to be incentive stock options within the meaning of section 422 of
the Internal Revenue Code of 1986, as amended.
2. Administration. The Plan shall be administered by the Board of
Directors of the Company (the "Board") or by a committee (the "Committee") of
two or more directors of the Company appointed by the Board. If a Committee
is not appointed by the Board, the Board shall act as and be deemed to be
the Committee for all purposes of the Plan. The Committee shall have sole
authority (within the limitations described herein) to select the Non-employee
Directors who are to be granted Options; to establish the number of shares
which may be issued to Non-employee Directors under each Option; and to
prescribe the form of the agreement embodying awards of Options. The
Committee is authorized to interpret the Plan, to determine all questions
arising thereunder and to adopt such rules and regulations, consistent with
the provisions of the Plan, as it may deem advisable to carry out the Plan.
All decisions made by the Committee shall be final and conclusive. No member
of the Board shall be liable for anything done or omitted to be done by such
member or by any other member of the Board in connection with the Plan,
except for such member's own willful misconduct or as expressly provided by
statute.
3. Eligibility of Optionee. Options may be granted only to
directors who are not employees of the Company or any parent or subsidiary
corporation of the Company at the time the Option is granted. The adoption
of this Plan shall not be deemed to give any director any right to be granted
an Option. Options may be granted to the same Non-employee Director on more
than one occasion.
4. Shares Subject to the Plan. The aggregate number of shares
which may be issued under Options granted under the Plan shall not
exceed 500,000 shares of Stock. Such shares may consist of authorized
but unissued shares of Stock or previously issued shares of Stock
reacquired by the Company. Any of such shares which remain unissued
<PAGE> 2
and which are not subject to outstanding Options at the termination of
the Plan shall cease to be subject to the Plan, but, until termination
of the Plan, the Company shall at all times make available sufficient
number of shares to meet the requirements of the Plan. If any Option
hereunder expires or terminates prior to its exercise in full, the
shares theretofore subject to such Option may again be subject to an
Option granted under the Plan. The aggregate number of shares which
may be issued under the Plan shall be subject to adjustment in the
same manner as provided in Paragraph 7 hereof with respect to shares
of Stock subject to Options then outstanding. Exercise of an Option
in any manner shall result in a decrease in the number of shares of
Stock which may thereafter be available, both for purposes of the Plan
and for sale to any one individual, by the number of shares as to which
the Option is exercised.
5. Option Agreements; Terms and Conditions. Each Option granted
under the Plan shall be evidenced by an agreement and shall contain such
terms and conditions, and may be exercisable for such periods, as the
Committee shall prescribe from time to time in accordance with this Plan,
and shall comply with the following terms and conditions:
(a) The Option exercise price shall be the fair market value of
the Stock subject to the Option on the date the Option is granted. For all
purposes under the Plan, the fair market of a share of Stock on a particular
date shall be equal to the average of the high and low sales prices of the
Stock on the date of grant as reported on the Nasdaq National Market tier of
The Nasdaq Stock Market (NMS), or on the stock exchange composite tape if
the Stock is traded on a national stock exchange on that date, or if no
prices are reported on that date, on the last preceding date on which such
prices of the Stock are so reported. If the Stock is not traded on the NMS
or other stock exchange on that date, but is otherwise traded over the
counter at the time a determination of its fair market value is required to
be made hereunder, its fair market value shall be deemed to be equal to the
average between the reported high and low or closing bid and asked prices of
the Stock on the most recent date on which the Stock was publicly traded.
If the Stock is not publicly traded at the time a determination of its value
is required to be made hereunder, the determination of its fair market value
shall be made by the Committee in such manner as it deems appropriate.
(b) The Option shall not be transferable otherwise than by will
or the laws of descent and distribution, and may be exercised only by the
Non-employee Director during the Non-employee Director's lifetime and while
the Non-employee Director remains a director of the Company, except that:
(i) If the Non-employee Director ceases to be a director
of the Company because of disability, the Option may be
exercised in full by the Non-employee Director (or the
Non-employee Director's estate or the person who acquires
the Option by will or the laws of descent and distribution
or otherwise by reason of the death of the Non-employee
Director) at any time during the period of one year following
such termination;
(ii) If the Non-employee Director dies while he is a
director of the Company, the Non-employee Director's estate,
or the person who acquires the Option by will or the laws of
<PAGE> 3
descent and distribution or otherwise by reason of the death
of the Non-employee Director, may exercise the Option in full
at any time during the period of one year following the
date of the Non-employee Director's death; and
(iii) If the Non-employee Director ceases to be director of
the Company for any reason other than as described in clause
(i) or (ii) above, unless the Non-employee Director is removed
for cause, the Option may be exercised by the Non-employee
Director at any time during the period of three months
following the date the Non-employee Director ceases to be a
director of the Company, or by the Non-employee Director's
estate (or the person who acquires the Option by will or
the laws of descent and distribution or otherwise by reason of
the death of the Non-employee Director) during a period of
one year following the Non-employee Director's death if the
Non-employee Director dies during such three-month period,
but in each case only as to the number of shares the
Non-employee Director was entitled to purchase hereunder
upon exercise of the Option as of the date the Non-employee
Director ceases to be a director.
(c) The Option shall not be exercisable in any event after the
expiration of ten years from the date of grant.
(d) The purchase price of shares as to which the Option is exercised
shall be paid in full at the time of exercise (a) in cash, (b) by
delivering to the Company shares of Stock having a fair market value
equal to the purchase price, or (c) any combination of cash or Stock,
as shall be established by the Committee. Unless and until a
certificate or certificates representing such shares shall have been
issued by the Company to the Non-employee Director, the Non-employee
Director (or the person permitted to exercise the Option in the event
of Director's death) shall not be or have any of the rights or
privileges of a stockholder of the Company with respect to shares
acquirable upon an exercise of the Option.
(e) The terms and conditions of the respective Non-employee Director
Stock Option agreements need not be identical.
6. Term of Plan. The Plan shall be effective upon the date of its
approval and adoption by the stockholders of the Company. Except with
respect to Options then outstanding, if not sooner terminated under the
provisions of Paragraph 8, the Plan shall terminate upon and no further
Options shall be granted after the expiration of ten years from the date of
its adoption by the Board.
7. Recapitalization or Reorganization.
(a) The existence of the Plan and the Options granted hereunder
shall not affect in any way the right or power of the Board or the
stockholders of the Company to make or authorize any adjustment,
<PAGE> 4
recapitalization, reorganization or other change in the Company's
capital structure or its business, any merger or consolidation of
the Company, any issue of debt or equity securities ahead of or
affecting the Stock or the rights thereof, the dissolution or
liquidation of the Company or any sale, lease, exchange or other
disposition of all or any part of its assets or business or any
other corporate act or proceeding.
(b) The shares with respect to which Options may be granted are
shares of Stock as presently constituted, but if, and whenever,
prior to the expiration of an Option theretofore granted, the
Company shall effect a subdivision or consolidation of shares of
Stock or the payment of a stock dividend on Stock without receipt
of consideration by the Company, the number of shares of Stock with
respect to which such Option may thereafter be exercised (i) in the
event of an increase in the number of outstanding shares shall be
proportionately increased, and the purchase price per share shall
be proportionately reduced, and (ii) in the event of a reduction in
the number of outstanding shares shall be proportionately reduced,
and the purchase price per share shall be proportionately increased.
(c) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise of an Option theretofore
granted the optionee shall be entitled to purchase under such Option,
in lieu of the number of shares of Stock as to which such Option
shall then be exercisable, the number and class of shares of stock
and securities to which the optionee would have been entitled pursuant
to the terms of the recapitalization if, immediately prior to such
recapitalization, the optionee had been the holder of record of the
number of shares of Stock as to which such Option is then exercisable.
If (i) the Company shall not be the surviving entity in any merger or
consolidation (or survives only as a subsidiary of an entity other than
a previously wholly-owned subsidiary of the Company), (ii) the Company
sells, leases or exchanges or agrees to sell, lease or exchange all or
substantially all of its assets to any other person or entity (other
than a wholly-owned subsidiary of the Company (iii) the Company is
to be dissolved and liquidated, (iv) any person or entity, including
a "group" as contemplated by Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended, acquires or gains ownership or
control (including, without limitation, power to vote) of more than
50% of the outstanding shares of Stock, or (v) as a result of or in
connection with a contested election of directors, the persons who
were directors of the Company before such election shall cease to
constitute a majority of the Board (each such event is referred to
herein as a "Corporate Change"), then upon the occurrence of any
such Corporate Change, any outstanding Options held by Non-employee
Directors shall become fully exercisable and upon any exercise of an
Option theretofore granted the Non-employee Director shall be
entitled to purchase under such Option, in lieu of the number of
shares of Stock as to which such Option shall then be exercisable,
the number and class of shares of stock or other securities or
property to which the Non-employee Director would have been entitled
pursuant to the terms of the Corporate Change if, immediately prior
to such Corporate Change, the Non-employee Director had been the
holder of record of the number of shares of Stock as to which such
Option is then exercisable.
(d) Any adjustment provided for in Subparagraphs (b) or (c) above
shall be subject to any required stockholder action.
(e) Except as hereinbefore expressly provided, the issuance by
the Company of shares of stock of any class or securities convertible
<PAGE> 5
into shares of stock of any class, for cash, property, labor or
services, upon direct sale, upon the exercise of rights or warrants
to subscribe therefor, or upon conversion of shares or obligations
of the Company convertible into such shares or other securities, and
in any case whether or not for fair value, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the
number of shares of Stock subject to Options theretofore granted or
the purchase price per share.
8. Amendment or Termination of the Plan. The Board in its
discretion may terminate the Plan at any time with respect to any
shares for which Options have not theretofore been granted. The
Board shall have the right to alter or amend the Plan or any part
thereof from time to time, provided, that no change in any Option
theretofore granted may be made which would impair the rights of the
optionee without the consent of such optionee.
9. Miscellaneous Provisions.
(a) Neither the Plan nor any action taken hereunder shall be
construed as giving any Non-Employee Director any right to be
retained in the service of the Company.
(b) An optionee's rights and interest under the Plan may not be
assigned or transferred in whole or in part either directly or by
operation of law or otherwise (except in the event of an optionee's
death or disability, by will or the laws of descent and distribution),
including, but not by way of limitation, execution, levy, garnishment,
attachment, pledge, bankruptcy, or in any other manner, and no such
right or interest of any participant in the Plan shall be subject to
any obligation or liability of such participant.
(c) No shares of Stock shall be issued hereunder unless counsel for
the Company shall be satisfied that such issuance will be in compliance
with applicable Federal, state, and other securities laws and
regulations.
(d) It shall be a condition to the obligation of the Company to
issue shares of Stock upon exercise of an Option, that the optionee
(or any beneficiary or person entitled to act under or through Optionee
as provided herein) pay to the Company, upon its demand, such amount as
may be requested by the Company for the purpose of satisfying any
liability to withhold Federal, state, local, or foreign income or other
taxes. If the amount requested is not paid, the Company may refuse to
issue shares of Stock.
(e) By accepting any Option under the Plan, each optionee and each
person claiming under or through such person shall be conclusively
deemed to have indicated his or her acceptance and ratification of, and
consent to, any action taken under the Plan by the Company, the Board
or the Committee.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 17,604
<SECURITIES> 0
<RECEIVABLES> 1,980,991
<ALLOWANCES> 28,130
<INVENTORY> 0
<CURRENT-ASSETS> 2,076,721
<PP&E> 55,746,290
<DEPRECIATION> 14,369,433
<TOTAL-ASSETS> 43,531,533
<CURRENT-LIABILITIES> 1,917,824
<BONDS> 10,577,610
<COMMON> 178,091
0
0
<OTHER-SE> 27,852,813
<TOTAL-LIABILITY-AND-EQUITY> 43,531,533
<SALES> 0
<TOTAL-REVENUES> 6,695,381
<CGS> 0
<TOTAL-COSTS> 3,652,304
<OTHER-EXPENSES> (12,181)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 372,314
<INCOME-PRETAX> 2,682,944
<INCOME-TAX> 885,372
<INCOME-CONTINUING> 1,797,572
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,797,572
<EPS-PRIMARY> .098
<EPS-DILUTED> .098
</TABLE>
