<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - K
[X]
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
[ ]
Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______ to ______.
Commission File Number: 0 - 13305
PARALLEL PETROLEUM CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 75-1971716
- ------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
110 North Marienfeld Street
One Marienfeld Place, Suite 465
Midland, Texas 79701
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (915) 684-3727
----- --------
Securities Registered Pursuant to Section 12(b) of the Exchange Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Common Stock Purchase Warrants
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting and non-voting common equity held
by non-affiliates of the Registrant as of March 15, 1999 was approximately
$32,080,751, based on the last sale price of the common stock on the same
date.
At March 15, 1999 there were 18,331,858 shares of common stock outstanding.
<PAGE> (i)
FORM 10-K
PARALLEL PETROLEUM CORPORATION
TABLE OF CONTENTS
Item No. Page
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . .1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . .23
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . .27
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . . . . . . . .27
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . .28
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . .30
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . .31
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk . . . . . . . . . . . . . . . . . . . .52
Item 8. Financial Statements and Supplementary Data . . . . . . . .54
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure. . . . . . . . . . . . . . . . . . . . . . . .54
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . .55
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . .59
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . .69
Item 13. Certain Relationships and Related Transactions. . . . . ..72
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . .75
<PAGE> (ii)
Forward Looking Statements
Some statements contained in our Form 10-K report are "forward-
looking statements". All statements other than statements of historical
facts included in this document, including without limitation,
statements regarding planned capital expenditures, the availability of
capital resources to fund capital expenditures, estimates of proved
reserves, our financial position, business strategy and other plans and
objectives for future operations, are forward-looking statements.
Although we believe the expectations reflected in these forward-looking
statements are reasonable, we cannot give any assurances that our
expectations will prove to be correct. All of these statements involve
assumptions of future events and risks and uncertainties. Risks and
uncertainties associated with forward-looking statements include:
. risks associated with the drilling of wells;
. competition;
. financing availability;
. fluctuations in prices of gas and oil;
. governmental regulations;
. geological concentration of our reserves; and
. the Year 2000 issue.
For these and other reasons, actual results may differ materially
from those projected or implied. We caution you against putting undue
reliance on forward-looking statements or projecting any future results
based on such statements.
<PAGE> 1
PART I
ITEM 1. BUSINESS
General
Parallel Petroleum is an independent energy company. Our
primary business is natural gas and oil exploration, development and
production, and the acquisition of producing properties.
We own interests in two core areas: the onshore gulf coast area
of south Texas and the Permian Basin of west Texas.
Throughout this report, we refer to some terms that are commonly
used and understood in the gas and oil industry. These terms are:
Mcf, Bcf, Bbls and EBO. Mcf refers to the quantity of one thousand
cubic feet of natural gas and Bcf means one billion cubic feet of
natural gas. Bbls means barrels of oil or crude oil condensate. An
EBO is an equivalent barrel of oil, or 6 Mcf of natural gas for one
barrel of oil.
At December 31, 1998, our estimated proved reserves were
approximately 26.0 Bcf of natural gas and 1.72 million Bbls of oil. The
present value of our pretax future net revenues was approximately
$26.8 million. Approximately 72% of our proved reserves are natural
gas and approximately 67% are categorized as proved developed
reserves.
During 1998, we participated in drilling 23 gross (5.48 net)
exploratory and development wells. Thirteen gross (3.32 net) wells
were productive and 10 gross (2.16 net) wells were dry holes.
Parallel was incorporated in Texas on November 26, 1979, and
reincorporated in the State of Delaware on December 18, 1994.
<PAGE> 2
Our executive offices are located at 110 Marienfeld Place, Suite
465, Midland, Texas 79701. Our telephone number is (915) 684-3727.
Business Strategies
In pursuing our goal of capital appreciation for our stockholders,
we emphasize the following strategies:
. focusing on exploration activities;
. using advanced technologies;
. serving as geophysical operator;
. emphasizing cost controls; and
. positioning for opportunity.
These strategies are discussed in more detail in the following
paragraphs.
Focusing on Exploration Activities. We seek to increase our gas
and oil reserves and production through targeted exploration activities
in our core operating areas. We focus on prospects having the
following characteristics:
. known geological and reservoir characteristics;
. located near existing wells so data from these
wells can be correlated with seismic data for
prospects; and
. a potential to have a meaningful impact on our
reserves.
<PAGE> 3
When economic conditions are favorable and when we have
sufficient capital resources, we believe we can maximize the value of
our properties by accelerating drilling activities. This provides us an
opportunity to replace reserves at a more rapid pace than existing
reserves are produced.
Using Advanced Technologies. We believe the use of 3-D seismic
data and other advanced technologies provides us with a risk
management tool. Our use of these technologies in exploring for and
developing gas and oil properties can:
. reduce drilling risks;
. lower finding costs; and
. provide for more efficient production of natural gas
and oil from our properties.
Generally, 3-D seismic surveys provide more accurate and
comprehensive information to evaluate drilling prospects than
conventional 2-D seismic technology. We evaluate substantially all of
our exploratory prospects using 3-D seismic technology. On some
exploratory prospects, we also use amplitude versus offset, or AVO,
analysis. AVO analysis shows the high contrast between sands and
shales and assists in determining the presence of natural gas in
potential reservoir sands.
It is our belief that using 3-D seismic and AVO technologies also
gives us a competitive advantage over companies that do not regularly
use such technologies because it increases the likelihood of successful
drilling. When we evaluate exploratory prospects in geographical areas
where the use of 3-D seismic and other advanced technologies are not
likely to provide any advantages, we use traditional evaluation
methods, such as 2-D seismic technology.
<PAGE> 4
Serving as Geophysical Operator. We prefer to serve as the
geophysical operator of exploratory projects located in areas where we
have experience using 3-D seismic technology. By doing so, we control
the design, acquisition, processing and interpretation of 3-D surveys
and, in most cases, determine drilling locations and well depths. The
integrity of 3-D seismic analysis in our projects is assured by
emphasizing quality controls throughout the data acquisition,
processing and interpretation phases.
We retain experienced outside consultants and participate with
experienced joint working interest owners when we acquire, process
and interpret 3-D seismic surveys. When possible, we also attempt to
correlate or model the interpretations of 3-D seismic surveys with wells
previously drilled on or near the prospect being evaluated.
Emphasizing Cost Controls. We strive to maintain low general and
administrative expenses in our operations. Our concentrated
geographic focus allows us to manage a relatively large asset base with
few employees. We believe that this operational base enables us to add
exploratory prospects and acquire producing properties at relatively low
incremental overhead costs.
We also pursue cost savings by using outside geological and
geophysical consultants for our exploration and development efforts.
We use independent contractors for all of our field operations.
Positioning for Opportunity. Because of intense competition among
independent oil and gas producers, we must be able to react quickly to
available exploration and acquisition opportunities. We attempt to
position for these opportunities by maintaining:
. adequate capital resources for projects in our primary
areas of operations;
. the technological capabilities to conduct a thorough
evaluation of a particular project; and
. a small staff that is able to respond swiftly to
exploration and acquisition opportunities.
<PAGE> 5
We continually screen, review and evaluate potential leases and
prospects. Our sources for possible acquisitions include independent
landmen, independent oil and gas operators, geologists and engineers.
We also evaluate properties that become available for purchase from
major oil companies. If our review of an undeveloped lease or prospect
or a producing property indicates that it may have geological
characteristics favorable for 3-D seismic analysis, we may decide to
acquire a working interest in the property or an option to acquire a
working interest. In the case of producing properties, we also seek
properties that are under-performing relative to their potential. To
reduce our financial exposure in any one prospect and participate in
more prospects, we enter into co-ownership arrangements with third
parties under standard industry form operating agreements. This is
common in the industry and enables us to share the drilling and
related costs and dry-hole risks with other participants. From time to
time, we sell prospects to third parties or farm-out prospects and
retain an interest in revenues from these prospects.
Exploration and Development Activities in 1998
The scope of our exploration and development activities is
affected by gas and oil prices. Our 1998 capital expenditures were
approximately 20% lower than our capital expenditures in 1997. As oil
and gas prices continued to deteriorate during 1998, we decreased our
drilling activity.
* Gulf Coast Area of South Texas
During 1998, our principal exploration and development activities
were concentrated in south Texas. Our activities were conducted in the
Yegua/Frio/Wilcox gas trend in the onshore gulf coast areas in Dewitt,
Jackson, Lavaca, Victoria and Wharton Counties. This trend has been
our primary area of activity since 1993.
<PAGE> 6
We participated in drilling 23 wells in 1998, of which 22 were
drilled in the gulf coast area of south Texas. One dry hole was drilled
in the Permian Basin. The following table shows the results of our
1998 drilling activity in the Yegua/Frio/Wilcox gas trend of south
Texas.
1998 Drilling Activity
Yegua/Frio/Wilcox Gas Trend
<TABLE>
Target No. of
Formation Depth Range (feet) Wells Drilled Productive Dry
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Yegua 6,300 - 13,000 11 10 1
Frio 6,400 - 8,400 5 1 4
Wilcox 13,200 - 17,500 6 2 4
------- ------ ------
Total 22 13 9
======= ====== ======
</TABLE>
At March 1, 1999, we owned interests in 77 gross wells in south
Texas.
Our exploration activities in the Yegua/Frio/Wilcox gas trend are
conducted under exploration agreements with third party participants.
These agreements allow us to participate in the acquisition and
ownership of:
. 3-D seismic surveys;
. options to acquire gas and oil leasehold interests; and
. undivided working interests in gas and oil leases.
<PAGE> 7
Our exploration agreements include area of mutual interest
provisions. Generally, an AMI is an agreed upon area of land which is
subject to rights of first refusal among the participants. For example,
if we acquire any minerals, royalty, overriding royalty, gas and oil
leasehold or other interests in the AMI, we would then be obligated to
offer the other participants the right to purchase their pro rata share of
the interest on the same terms that we acquired the interest. If the
other participants elect not to acquire their pro-rata share, we would
then typically be free to retain or sell our interest for our own account.
The 3-D seismic survey data we obtain is confidential and shared
only with our participants. Typically, seismic data is obtained from
seismic operations conducted over large blocks of acreage. Our actual
working interest ownership in acreage surveys is less than the total
area surveyed.
* Permian Basin of West Texas
Before entering the gulf coast area of south Texas in 1993, our
principal activities were focused on acquiring producing properties in
the Permian Basin of west Texas. These properties produce primarily
crude oil. At December 31, 1998, we were operator of all our Permian
Basin properties.
We emphasize an ongoing program of enhancement, remedial and
development drilling activities on our Permian Basin properties when
oil prices are at levels to support these activities. In 1998, because of
the continued decline in oil prices, we limited our capital expenditures
on our Permian Basin properties primarily to those activities necessary
to maintain optimum well performance. We drilled one well in the
Permian Basin in 1998, which was a dry hole.
<PAGE> 8
When oil prices recover to levels that will support enhancement,
remedial and development drilling activities on our Permian Basin
properties, we intend to allocate available funds for these activities.
Enhancement and remedial activities include:
. recompleting existing wellbores;
. restimulating producing reservoirs;
. identifying potential infill drilling locations;
. making mechanical improvements to surface facilities
and downhole equipment; and
. reviewing the practicality of applying new drilling and
production technologies that could either improve
recovery potential or result in the discovery of a new
reservoir.
From time to time, we may also renegotiate gas purchase
contracts or reconfigure gathering lines. In connection with our
enhancement operations, we routinely review the performance and
economics of our gas and oil properties. When necessary, we take
corrective action, such as:
. shutting-in temporarily uneconomic properties;
. plugging wells we believe to be permanently impaired
or depleted;
. terminating gas and oil leases that are uneconomic
under existing operating conditions; and/or
. selling properties to third parties.
<PAGE> 9
Drilling and Acquisition Costs
The table below shows our gas and oil property acquisition,
exploration and development costs for the periods indicated.
<TABLE>
Year Ended December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Transfers from undeveloped
leases held for sale $ -- $ -- $ 60 $ 197 $ 339
Proved property acquisition
costs 89 918 3,839 372 238
Unproved property
acquisition costs 6,034 7,710 369 841 2,542
Exploration costs 8,556 9,604 8,669 1,519 3,400
Development costs 3,873 4,877 3,963 889 1,226
------- ------- ------- ------- -------
$18,552 $23,109 $16,900 $ 3,818 $ 7,745
======= ======= ======= ======= =======
</TABLE>
Natural Gas and Oil Prices are Volatile
Industry conditions started deteriorating during the latter part of
1997 and continued throughout 1998, primarily because of declining
oil prices. Recently, there has been an excess supply of, and reduced
demand for, crude oil worldwide. This excess supply has placed
downward pressures on oil prices in the United States as well as
worldwide. Natural gas prices also declined during this period because
of warm weather conditions, which reduced demand.
Our profitability and cash flows are highly dependent on the
prices of natural gas and oil. Current low oil prices and, to a lesser
degree, natural gas prices, continue to have a material adverse effect
on our cash flows. If prices remain depressed for a sustained period of
time, this could have a material adverse effect on our future operations
and financial condition.
<PAGE> 10
Natural gas and oil prices can fluctuate widely on a month-to-
month basis in response to a variety of factors that are beyond our
control. These factors include:
. weather conditions;
. the supply of foreign oil;
. the level of product demand;
. worldwide economic conditions; and
. the price and availability of alternative fuels.
The average prices we received for the natural gas and oil we
produced in 1998, 1997 and 1996 are shown in the table below:
<TABLE>
Average Price Received for the
Year Ended December 31,
------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Natural gas (Mcf). . . . . $ 2.04 $ 2.70 $ 2.55
Oil (Bbl). . . . . . . . . $12.49 $19.88 $21.83
</TABLE>
The average natural gas price we received at March 15, 1999 was
$1.75 per Mcf. At the same date, the average price we were receiving
for our oil sales was approximately $12.50 per Bbl. At December 31,
1998, approximately 75% of our daily production was natural gas and
25% was oil. There is substantial uncertainty regarding future gas and
oil prices and we can provide no assurance that prices will not remain
at current levels or decline further.
Part of Our Business is Seasonal in Nature
Weather conditions affect the demand for and prices of natural
gas and can also delay drilling activities, disrupting our overall
business plans. Demand for natural gas is typically higher during
winter months.
<PAGE> 11
Our Gas and Oil Operations Are Subject to Many Inherent Risks
Gas and oil drilling activities and production operations are
highly speculative and involve a high degree of risk. These operations
are marked by unprofitable efforts because of dry holes and wells that
do not produce gas or oil in sufficient quantities to return a profit. The
success of our operations depends, in part, upon the ability of our
management and technical personnel. There is no assurance that our
gas and oil drilling or acquisition activities will be successful, that any
production will be obtained, or that any such production, if obtained,
will be profitable.
Our operations are subject to all of the operating hazards and
risks normally incident to drilling for and producing gas and oil. These
hazards and risks include:
. encountering unusual or unexpected formations and
pressures;
. explosions, blowouts and fires;
. pipe and tubular failures and casing collapses;
. environmental pollution; and
. personal injuries.
We maintain general liability insurance and obtain insurance
against blowouts on a well-by-well basis. We do not carry insurance
against pollution risks. If we sustain an uninsured loss or liability,
our ability to operate could be materially adversely affected.
Our gas and oil operations are not subject to renegotiation of
profits or termination of contracts at the election of the federal
government.
<PAGE> 12
Executive Officers of Parallel
At March 15, 1999, Parallel's executive officers were Thomas R.
Cambridge and Larry C. Oldham.
Mr. Cambridge, age 63, is the Chief Executive Officer and
Chairman of the Board of Directors of Parallel. He is an independent
petroleum geologist engaged in the exploration for, development and
production of oil and natural gas. From 1970 until 1990, such
activities were carried out primarily through Cambridge & Nail
Partnership, a Texas general partnership. Since 1990, such activities
have been carried out through Cambridge Production, Inc., a Texas
corporation. Mr. Cambridge has served as a Director of Parallel since
February, 1985; as President during the period from October, 1985 to
October, 1994; and as Chairman of the Board of Directors and Chief
Executive Officer since October, 1985. He received a Bachelors degree
in geology from the University of Nebraska in 1958 and a Masters of
Science degree in 1960.
Mr. Oldham, age 45, is a founder of Parallel. He has served as an
officer and Director since Parallel's formation in 1979. He served as
Executive Vice-President until October, 1994 when he became
President. Mr. Oldham received a Bachelor of Business Administration
degree from West Texas State University in 1975. He is a member of
the American Institute of Certified Public Accountants and a member of
the Permian Basin Landman's Association.
The term of both officers expires at Parallel's annual meeting of
Directors or when their respective successors are duly elected and
qualified. There is no family relationship between the executive
officers.
Parallel is the beneficiary of a $1 million key-man life insurance
policy on the life of Mr. Cambridge and a $5 million key-man life
insurance policy on the life of Mr. Oldham.
<PAGE> 13
Employees
At March 15, 1999, Parallel had seven full time employees. Mr.
Thomas R. Cambridge, the Chief Executive Officer and Chairman of the
Board of Directors of Parallel, serves in the capacity of a consultant,
and not as a full-time employee. Parallel also retains independent land,
geological, geophysical and engineering consultants and expects to
continue to do so in the future. Additionally, Parallel retains eight
contract pumpers on a month-to-month basis.
We consider our employee relations to be satisfactory. None of
our employees are represented by a union and we have not experienced
work stoppages or strikes.
Wells Drilled
The following table shows certain information concerning the
number of gross and net wells we drilled during the three-year period
ended December 31, 1998.
<TABLE>
Exploratory Wells (1) Development Wells (2)
--------------------------- --------------------------
Year Ended Productive Dry Productive Dry
December 31, ------------- ---------- -------------- ----------
Gross Net Gross Net Gross Net Gross Net
------ ----- ----- ---- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 9.0 2.16 8.0 1.71 4.0 1.16 2.0 .45
1997 19.0 4.45 17.0 4.08 7.0 6.54 1.0 .20
1996 20.0 5.20 9.0 2.38 3.0 1.40 1.0 .42
</TABLE>
- ------------------
(1) An exploratory well is a well drilled to find and produce gas or oil in
an unproved area, to find a new reservoir in a field previously found
to be productive of gas or oil in another reservoir, or to extend a
known reservoir.
(2) A development well is a well drilled within the proved area of a gas or
oil reservoir to the depth of a stratigraphic horizon known to be
productive.
<PAGE> 14
All of our drilling is performed on a contract basis by third-party
drilling contractors. We do not own any drilling equipment.
At March 15, 1999, we were participating in the completion of two
gross (.31 net) gas wells in Wharton and Victoria, Counties, Texas. At
that same date, four gross (.87 net) gas wells were waiting on
completion. These four wells are located in Victoria, DeWitt and
Jackson Counties, Texas.
Volumes, Prices and Lifting Costs
The following table shows certain information about our
production, including the volumes of gas and oil we produced, the
average sales prices per Mcf of gas and Bbl of oil produced, and the
average production, or lifting, cost per EBO for the three-year period
ended December 31, 1998.
<TABLE>
Year Ended December 31,
-------------------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net Production:
Oil (Bbls) 185,474 175,246 221,499
Gas (Mcf) 3,275,882 3,383,190 3,654,897
EBO(1) 731,454 739,111 830,649
Average Sales Price:
Oil (per Bbl) $ 12.49 $ 19.88 $ 21.83
Gas (per Mcf) $ 2.04 $ 2.70 $ 2.55
EBO $ 12.31 $ 17.07 $ 17.06
Average Production
(lifting) Cost per $ 3.33 $ 4.29 $ 3.23
EBO
Operating Margin $ 8.98 $ 12.78 $ 13.83
per EBO(2)
Depletion per EBO $ 8.07 $ 5.29 $ 4.47
</TABLE>
- --------------
(See notes on following page).
<PAGE> 15
(1) An EBO means one barrel of oil equivalent using the ratio of six Mcf of gas
to one barrel of oil.
(2) Operating margin is determined by deducting the average production cost per
EBO from the average sales price per EBO.
Our 1998 gas sales represented approximately 75% of our
combined gas and oil sales for the year ended December 31, 1998.
Markets and Customers
Substantially all of our gas and oil production is sold at the well
site on an as produced basis at floating or market related prices. We
sell our gas and oil production to purchasers on a month-to-month
basis. In the table below, we show the purchasers that accounted for
10% or more of our revenues during the specified years.
<TABLE>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Enron Oil & Gas Transportation 11% 12% 11%
Cox & Perkins Exploration 24% 53% 46%
Allegro Investments 22% -- --
Brayton Operating 18% -- --
</TABLE>
We do not believe the loss of any one of our purchasers would
materially affect our ability to sell gas or oil. Other purchasers are
available in our areas of operations.
Our business does not require us to maintain a backlog of
products, customer orders or inventory.
<PAGE> 16
Office Facilities
Our corporate offices consist of approximately 5,776 square feet
of leased space in Midland, Texas. Our current rental rate is $3,461
per month until June 1, 1999 when the rental rate increases to $3,851
per month. The lease expires in May, 2001.
Competition
The gas and oil industry is highly competitive, particularly in the
areas of acquiring exploration and development prospects and
producing properties. The principal means of competing for the
acquisition of gas and oil properties are the amount and terms of the
consideration offered. Our competitors include major oil companies,
independent oil and gas concerns and individual producers and
operators. Many of these competitors have financial resources, staffs
and facilities substantially greater than ours.
The principal resources we need for acquiring, exploring,
developing, producing and selling gas and oil are:
. leasehold prospects under which gas and oil reserves
may be discovered;
. drilling rigs and related equipment to explore for such
reserves; and
. knowledgeable personnel to conduct all phases of gas
and oil operations.
<PAGE> 17
Gas and Oil Regulations
Our operations are regulated by certain federal and state
agencies. Gas and oil production and related operations are or have
been subject to:
. price controls;
. taxes; and
. environmental and other laws relating to the gas and
oil industry.
We cannot predict how existing laws and regulations may be
interpreted by enforcement agencies or court rulings, whether
additional laws and regulations will be adopted, or the effect such
changes may have on our business, financial condition or results of
operations.
Our gas and oil exploration, production and related operations
are subject to extensive rules and regulations that are enforced by
federal, state and local agencies. Failure to comply with these rules
and regulations can result in substantial penalties. The regulatory
burden on the gas and oil industry increases our cost of doing
business and affects our profitability. Because these rules and
regulations are frequently amended or reinterpreted, we are not able to
predict the future cost or impact of complying with such laws.
Texas and many other states require drilling permits, bonds and
operating reports. Other requirements relating to the exploration and
production of gas and oil are also imposed. These states also have
statutes or regulations addressing conservation matters, including
provisions for:
. the unitization or pooling of gas and oil properties;
. the establishment of maximum rates of production
from gas and oil wells; and
. the regulation of spacing, plugging and abandonment
of wells.
<PAGE> 18
Sales of natural gas we produce are not regulated and are made
at market prices. However, the Federal Energy Regulatory Commission
regulates interstate and certain intrastate gas transportation rates and
services conditions, which affect the marketing of our gas, as well as
the revenues we receive for sales of our production. Since the mid-
1980s, FERC has issued a series of orders, culminating in Order Nos.
636, 636-A, 636-B and 636-C. These orders, commonly known as
Order 636, have significantly altered the marketing and transportation
service, including the unbundling by interstate pipelines of the sales,
transportation, storage and other components of the city-gate sales
services these pipelines previously performed.
One of FERC's purposes in issuing the orders was to increase
competition in all phases of the gas industry. Order 636 and
subsequent FERC orders issued in individual pipeline restructuring
proceedings have been the subject of appeals, the results of which have
generally been supportive of the FERC's open-access policy. In 1996,
the United States Court of Appeals for the District of Columbia Circuit
largely upheld Order No. 636. Because further review of certain of
these orders is still possible, and other appeals remain pending, it is
difficult to predict the ultimate impact of the orders on Parallel and our
gas marketing efforts. Generally, Order 636 has eliminated or
substantially reduced the interstate pipelines' traditional role as
wholesalers of gas, and has substantially increased competition and
volatility in gas markets. While significant regulatory uncertainty
remains, Order 636 may ultimately enhance our ability to market and
transport our gas, although it may also subject us to greater
competition.
Sales of oil we produce are not regulated and are made at market
prices. The price we receive from the sale of oil is affected by the cost
of transporting the product to market. Effective January 1, 1995,
FERC implemented regulations establishing an indexing system for
transportation rates for interstate common carrier oil pipelines, which,
generally, would index such rates to inflation, subject to certain
conditions and limitations. These regulations could increase the cost
of transporting oil by interstate pipelines, although the most recent
adjustment generally decreased rates. These regulations have generally
been approved on judicial review. We are unable to predict with
<PAGE> 19
certainty what effect, if any, these regulations will have on us. The
regulations may, over time, tend to increase transportation costs or
reduce wellhead prices for oil.
We are required to comply with various federal and state
regulations regarding plugging and abandonment of gas and oil wells.
Environmental Regulations
Various federal, state and local laws and regulations governing
the discharge of materials into the environment, or otherwise relating
to the protection of the environment, health and safety, affect our
operations and costs. These laws and regulations sometimes:
. require prior governmental authorization for certain
activities;
. limit or prohibit activities because of protected areas
or species;
. impose substantial liabilities for pollution related to
our operations or properties; and
. provide significant penalties for noncompliance.
In particular, our exploration and production operations, our
activities in connection with storing and transporting oil and other
liquid hydrocarbons, and our use of facilities for treating, processing or
otherwise handling hydrocarbons and related exploration and
production wastes are subject to stringent environmental regulations.
As with the industry generally, compliance with existing and
anticipated regulations increases our overall cost of business. While
these regulations affect our capital expenditures and earnings, we
believe that they do not affect our competitive position in the industry
because our competitors are also affected by environmental regulatory
programs. Since environmental regulations have historically been
subject to frequent change, we cannot predict with certainty the future
costs or other future impacts of environmental regulations on our
<PAGE> 20
future operations. A discharge of hydrocarbons or hazardous
substances into the environment could subject us to substantial
expense, including the cost to comply with applicable regulations that
require a response to the discharge, such as claims by neighboring
landowners, regulatory agencies or other third parties for costs of:
. containment or cleanup;
. personal injury;
. property damage; and
. penalties assessed or other claims sought for natural
resource damages.
The following are examples of some environmental laws that
potentially impact our operations.
. Water. The Oil Pollution Act, or OPA, was enacted in 1990
and amends provisions of the Federal Water Pollution
Control Act of 1972 and other statutes as they pertain to
prevention of and response to major oil spills. The OPA
subjects owners of facilities to strict, joint and potentially
unlimited liability for removal costs and certain other
consequences of an oil spill, where such spill is into
navigable waters, or along shorelines. In the event of an oil
spill into such waters, substantial liabilities could be
imposed upon Parallel. States in which Parallel operates
have also enacted similar laws. Regulations are currently
being developed under the OPA and similar state laws that
may also impose additional regulatory burdens on Parallel.
The FWPCA imposes restrictions and strict controls
regarding the discharge of produced waters, other gas and
oil wastes, any form of pollutant, and, in some instances,
storm water runoff, into waters of the United States. The
FWPCA provides for civil, criminal and administrative
<PAGE> 21
penalties for any unauthorized discharges and, along with
the OPA, imposes substantial potential liability for the costs
of removal, remediation or damages resulting from an
unauthorized discharge and, along with the OPA, imposes
substantial potential liability for the costs of removal,
remediation or damages resulting from an unauthorized
discharge. State laws for the control of water pollution also
provide civil, criminal and administrative penalties and
liabilities in the case of an unauthorized discharge into
state waters. The cost of compliance with the OPA and the
FWPCA have not historically been material to our
operations, but there can be no assurance that changes in
federal, state or local water pollution control programs will
not materially adversely affect us in the future. Although
no assurances can be given, we believe that compliance with
existing permits and compliance with foreseeable new permit
requirements will not have a material adverse effect on our
financial condition or results of operations.
. Solid Waste. Parallel generates non-hazardous solid
wastes that fall under the requirements of the Federal
Resource Conservation and Recovery Act and comparable
state statutes. The EPA and the states in which we operate
are considering the adoption of stricter disposal standards
for the type of non-hazardous waste we generate. The
Resource Conservation and Recovery Act also governs the
generation, management, and disposal of hazardous wastes.
At present, we are not required to comply with a substantial
portion of the Resource Conservation and Recovery Act
requirements because our operations generate minimal
quantities of hazardous wastes. However, it is anticipated
that additional wastes, which could include wastes currently
generated during operations, could in the future be
designated as hazardous wastes. Hazardous wastes are
subject to more rigorous and costly disposal and
management requirements than are non-hazardous wastes.
Such changes in the regulations may result in Parallel
incurring additional capital expenditures or operating
expenses.
<PAGE> 22
. Superfund. The Comprehensive Environmental Response,
Compensation, and Liability Act, sometimes called CERCLA
or Superfund, imposes liability, without regard to fault or
the legality of the original act, on certain classes of persons
in connection with the release of a hazardous substance
into the environment. These persons include the current
owner or operator of any site where a release historically
occurred and companies that disposed or arranged for the
disposal of the hazardous substances found at the site.
CERCLA also authorizes the EPA and, in some instances,
third parties to act in response to threats to the public
health or the environment and to seek to recover from the
responsible classes of persons the costs they incur. In the
course of our ordinary operations, we may have managed
substances that may fall within CERCLA's definition of a
hazardous substance. We may be jointly and severally
liable under CERCLA for all or part of the costs required to
clean up sites where we disposed of or arranged for the
disposal of these substances. This potential liability
extends to properties that we owned or operated, as well as
to properties owned and operated by others at which
disposal of Parallel's hazardous substances occurred.
Parallel may also fall into the category of the current owner or
operator. We currently own or lease numerous properties that for
many years have been used for exploring and producing gas and oil.
Although we believe we use operating and disposal practices standard
in the industry, hydrocarbons or other wastes may have been disposed
of or released by us on or under properties that we have owned or
leased. In addition, many of these properties have been previously
owned or operated by third parties who may have disposed of or
released hydrocarbons or other wastes at these properties. Under
CERCLA, and analogous state laws, we could be required to remove or
remediate previously disposed wastes, including wastes disposed of or
released by prior owners or operators, to clean up contaminated
property, including contaminated groundwater, or to perform remedial
plugging operations to prevent future contamination.
<PAGE> 23
ITEM 2. PROPERTIES
General
Our principal properties consist of developed and undeveloped
gas and oil leases and the reserves associated with these leases.
Generally, developed gas and oil leases remain in force so long as
production is maintained. Undeveloped gas and oil leaseholds are
generally for a primary term of five or ten years. In most cases, we can
extend the term of our undeveloped leases by paying delay rentals or
by producing reserves that we discover under our leases.
Producing Wells and Acreage
We have presented the following table to provide you with a
summary of the producing gas and oil wells and the developed and
undeveloped acreage in which we owned an interest at December 31,
1998. We have not included in the table acreage in which our interest
is limited to options to acquire leasehold interests, royalty or similar
interests.
<TABLE>
Producing Wells Acreage
----------------------------------- -------------------------------------
Oil Gas Developed Undeveloped
--------------- ---------------- ---------------- ----------------
Gross Net (1) Gross Net (1) Gross Net (2) Gross Net (2)
----- ------- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Texas 74 60.2 104 41.30 34,528 24,584 80,411 21,323
New Mexico -- -- -- -- -- -- 11,357 355
Oklahoma 1 .25 320 80 -- --
---- ----- --- ----- ------ ------ ------ ------
Total 74 60.2 105 41.55 34,848 24,664 91,768 21,678
==== ===== === ===== ====== ====== ====== ======
</TABLE>
- -----------------
(1) Net wells are computed by multiplying the number of gross wells by our
working interest in the gross wells.
(2) Net acres are computed by multiplying the number of gross acres by our
working interest in the gross acres.
<PAGE> 24
In addition to the interests we own in developed and undeveloped
acreage, at December 31, 1998 we also owned options to acquire
interests in an additional 85,606 gross (20,392 net) acres in Texas.
At December 31, 1998, we were operating 81 wells in which we
also owned interests. Approximately 31% of the discounted present
value of our gas and oil reserves at December 31, 1998 is attributable
to wells operated by us. As operator, we supervise the drilling,
completion and production of wells and the further development of
surrounding properties.
The operator of a well has significant control over its location and
the timing of its drilling. In addition, the operator of a well receives
fees from other working interest owners as reimbursement for general
and administrative expenses for operating the wells.
Except for our gas and oil leases, we do not own any patents,
licenses, franchises or concessions which are significant to our gas and
oil operations.
Title to Properties
As is customary in the gas and oil industry, we make only a
cursory review of title to undeveloped gas and oil leases at the time
they are acquired. These cursory title reviews, while consistent with
industry practices, are necessarily incomplete. We believe that it is not
economically feasible to review in depth every individual property we
acquire, especially in the case of producing property acquisitions
covering a large number of leases. Ordinarily, when we acquire
producing properties, we focus our review efforts on properties believed
to have higher values and will sample the remainder. However, even an
in-depth review of all properties and records may not necessarily reveal
existing or potential defects nor will it permit a buyer to become
sufficiently familiar with the properties to assess fully their deficiencies
and capabilities. In the case of producing property acquisitions,
inspections may not always be performed on every well, and
environmental problems, such as ground water contamination, are not
necessarily observable even when an inspection is undertaken. In the
<PAGE> 25
case of undeveloped leases or prospects we acquire, before any drilling
commences, we will usually cause a more thorough title search to be
conducted, and any material defects in title that are found as a result
of the title search are generally remedied before drilling a well on the
lease commences. We believe that we have good title to our gas and oil
properties, some of which are subject to immaterial encumbrances,
easements and restrictions. The gas and oil properties we own are also
typically subject to royalty and other similar non-cost bearing interests
customary in the industry. We do not believe that any of these
encumbrances or burdens will materially affect our ownership or the
use of our properties.
Gas and Oil Reserves
Our gas and oil reserves were estimated as of December 31, 1998
by Joe C. Neal and Associates, Midland, Texas.
At December 31, 1998, our estimated proved reserves were
approximately 26.0 Bcf of gas and 1.72 million Bbls of oil, or 6.06
million EBO.
The information in the table below provides you with certain
information regarding our proved reserves at December 31, 1998.
<TABLE>
Proved Proved
Developed Undeveloped Total
------------ ------------- ------------
<S> <C> <C> <C>
Gas (Mcf). . . . . . . . . . . . . . . 19,071,984 6,948,660 26,020,644
Oil (Bbls) . . . . . . . . . . . . . . . 852,560 871,200 1,723,760
Future Net Revenues (before income taxes)
(000's). . . . . . . . . . . . . . . . . $ 32,211 $ 11,483 $ 43,695
Present Value of Future Net Revenues
(before income taxes) (000's). . . . . . $ 21,767 $ 5,055 $ 26,823
</TABLE>
<PAGE> 26
For additional information concerning our estimated proved gas
and oil reserves, you should read Note 14 in the notes to financial
statements. See Item 8 - Financial Statements and Supplementary
Data.
Except for depressed oil prices, no major discovery or other
favorable or adverse event has occurred since January 1, 1998 which
has caused a significant change in our estimated proved gas and oil
reserves as reported at December 31, 1998.
The reserve data in this report represent estimates only.
Reservoir engineering is a subjective process. There are numerous
uncertainties inherent in estimating our natural gas and oil reserves
and their estimated values. Many factors are beyond our control.
Estimating underground accumulations of natural gas and oil cannot
be measured in an exact manner. The accuracy of any reserve estimate
is a function of the quality of available data and of engineering and
geological interpretation and judgment. As a result, estimates of
different engineers often vary. In addition, estimates of reserves are
subject to revision by the results of drilling, testing and production
after the date of such estimates. Consequently, reserve estimates are
often different from the quantities of natural gas and oil that are
ultimately recovered. The meaningfulness of such estimates is highly
dependent upon the accuracy of the assumptions upon which they were
based.
Generally, the volume of production from natural gas and oil
properties declines as reserves are produced and depleted. Unless we
acquire properties containing proved reserves or conduct successful
drilling activities, our proved reserves will decline as we produce our
existing reserves. Our future natural gas and oil production is highly
dependent upon our level of success in acquiring or finding additional
reserves.
We do not have any gas or oil reserves outside the United States.
<PAGE> 27
Our gas and oil reserves and production are not subject to any
long-term supply or similar agreements with foreign governments or authorities.
Other than estimated reserve volumes we file with the U.S.
Department of Energy, our estimated reserves have not been filed with
or included in reports to any federal agency other than the SEC.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are a party to ordinary routine litigation
incidental to our business. We are not currently a party to any
pending litigation, and we are not aware of any threatened litigation.
We have not been a party to any bankruptcy, receivership,
reorganization, adjustment or similar proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
We did not submit any matter to a vote of our stockholders during
the fourth quarter of 1998.
<PAGE> 28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under
the symbol PLLL. The following table shows, for the periods indicated, the
high and low closing sales prices for the common stock as reported by
Nasdaq.
<TABLE>
Price Per Share
---------------
High Low
------ ------
<S> <C> <C>
1996
First quarter $2.75 $1.75
Second quarter $4.00 $2.50
Third quarter $5.56 $3.56
Fourth quarter $5.50 $4.25
1997
First quarter $5.81 $4.31
Second quarter $5.50 $3.88
Third quarter $6.88 $4.38
Fourth quarter $7.25 $5.25
1998
First quarter $7.06 $5.37
Second quarter $6.25 $4.12
Third quarter $4.93 $2.62
Fourth quarter $2.93 $1.34
</TABLE>
The last sale price of our common stock on March 15, 1999 was
$1.75 per share, as reported on the Nasdaq National Market.
<PAGE> 29
As of March 15, 1998, there were approximately 2,213
stockholders of record.
We have not paid, and do not intend to pay in the foreseeable
future, cash dividends on our common stock. The revolving credit
facility we have with our bank lender prohibits the payment of
dividends on the common stock. The credit facility allows us to pay
dividends on our outstanding shares of 6% convertible preferred stock
as long as we are not in default under the terms of the credit facility.
Our preferred stock contains provisions which restrict us from paying
dividends or making distributions on our common stock if all dividends
on the preferred stock have not been paid in full. The holders of the
preferred stock are entitled, as and when declared by the Board of
Directors, to receive an annual dividend of $.60 per share, payable
semi-annually on June 15 and December 15 of each year. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations Liquidity and Capital Resources" on page 31.
<PAGE> 30
ITEM 6. SELECTED FINANCIAL DATA
In the table below, we provide you with selected historical
financial data. We have prepared this information using the audited
financial statements of Parallel for the five-year period ended December
31, 1998. It is important that you read this data along with our
financial statements and related notes, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" under
Item 7 below. The selected financial data provided are not necessarily
indicative of the future results of our operations or financial
performance.
<TABLE>
Year Ended December 31,
-------------------------------------------------------------------
1998(1) 1997 1996 1995 1994
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 9,001,582 $ 12,614,242 $ 14,167,470 $ 4,713,748 $ 4,692,706
Operating expenses $ 24,056,923 $ 7,968,146 $ 6,945,168 $ 3,518,163 $ 3,339,478
Net income (loss) $(12,995,910) $ 2,743,930 $ 4,330,654 $ 137,080 $ 444,360
Cumulative preferred stock
dividend $ (276,712) $ -- $ -- $ -- $ --
Net income (loss) available to
common stockholders $(13,272,622) $ 2,743,930 $ 4,330,654 $ 137,080 $ 444,360
Net income (loss) per common share
Basic $ (.73) $ .15 $ .29 $ .01 $ .03
Diluted $ (.73) $ .15 $ .28 $ .01 $ .03
Cash dividends - common stock $ -- $ -- $ -- $ -- $ --
Weighted average common shares
and common stock equivalents
outstanding:
Basic 18,300,998 17,862,792 14,957,404 14,860,332 14,088,073
Diluted 18,300,998 18,640,990 15,693,258 15,395,777 14,821,749
Present value of proved oil and gas
reserves discounted at 10%
(before estimated federal
income taxes) $ 26,822,980 $ 46,419,580 $ 67,015,980 $ 25,890,050 $ 20,462,420
Working capital $ 128,813 $ (2,162,139) $ 351,517 $ 639,299 $ (233,460)
Total assets $ 46,564,782 $ 49,855,532 $ 38,098,169 $ 23,914,698 $ 22,760,729
Total liabilities $ 20,839,642 $ 20,736,779 $ 13,380,034 $ 13,079,285 $ 13,431,823
Long-term debt, less current
maturities $ 18,035,889 $ 12,182,610 $ 8,521,391 $ 11,674,625 $ 11,000,000
Total stockholders' equity $ 25,725,140 $ 29,118,753 $ 24,718,135 $ 10,835,413 $ 9,328,906
</TABLE>
- -------------------
(1) Results include a noncash charge of $14,757,028 related to the
impairment of gas and oil properties incurred in the fourth quarter of
1998, primarily a result of low gas and oil prices at year-end.
<PAGE> 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Since 1992, our primary focus has been exploratory drilling using
3-D seismic technology. Our long term business strategy is to increase
our reserve base by using this and other advanced technologies.
Additionally, we intend to exploit our existing properties and to acquire
properties we believe can be exploited by developing reserves not
previously produced.
We undertake projects only when we believe 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. We also endeavor to maximize the present value of our
projects by accelerating production of our reserves consistent with
prudent reservoir management and prevailing energy prices.
Following this strategy, we have discovered gas and oil reserves
using 3-D seismic technology in the Horseshoe Atoll Reef Trend of west
Texas and the Yegua/Frio/Wilcox gas trend onshore the gulf coast of
Texas and acquired producing gas and oil properties in the Permian
Basin of west Texas. Capital used to acquire these properties has been
provided primarily by secured bank financing, sales of our equity
securities and cash flows from operations.
Our operating performance is influenced by several factors, the
most significant of which are the prices we receive for our gas and oil
and our production volumes. The world price for oil has overall
influence on the prices that we receive for our oil production. The
prices received for different grades of oil are based upon the world
<PAGE> 32
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 we receive are influenced by:
. seasonal demand;
. weather;
. hurricane conditions in the Gulf of Mexico;
. availability of pipeline transportation to end users;
. proximity of our wells to major transportation pipeline
infrastructures; and
. to a lesser extent, world oil prices.
Additional factors influencing our overall operating performance
include:
. production expenses;
. overhead requirements; and
. costs of capital.
Our gas and oil producing activities are accounted for using the
full cost method of accounting. Under this accounting method, we
capitalize all costs incurred in connection with the acquisition of gas
and oil properties and with the exploration and development of gas and
oil reserves. Normal dispositions of gas and oil properties are
accounted for as adjustments to capitalized costs, with no gain or loss
recognized. Certain directly identifiable internal costs of property
acquisition, exploration and development activities are capitalized. In
1998, internal costs capitalized totaled $527,500 compared with
$461,537 in 1997 and $587,198 in 1996.
Depletion of capitalized costs is calculated using the
unit-of-production method based upon estimates of proved gas and oil
reserves. Gas and oil production is converted to a common unit of
measurement based upon relative energy content of each commodity.
Costs from unproved properties are excluded from depletion until
evaluated. Under the full cost method of accounting, net capitalized
costs of gas and oil properties, or the full cost ceiling limitation, are
<PAGE> 33
not to exceed their related estimated future net revenues discounted at
10%, and lower of cost or estimated fair value of unproved properties,
net of tax considerations.
Depletion per equivalent unit of production EBO was $8.07 in
1998 versus $5.29 in 1997 and $4.47 in 1996. The increase per BOE
was a result of a combination of factors including:
. a decline in Parallel's reserve base during 1998 due to
lower commodity prices;
. an increase in Parallel's net depletable basis, as a
result of an impairment charge to the full cost pool
related to unproved properties; and
. the effect of unsuccessful drilling efforts, which
increase the cost pool but add no units of production.
Results of Operations
Our business activities are characterized by frequent, and
sometimes significant, changes in our:
. reserve base;
. sources of production;
. product mix (gas versus oil volumes); and
. the prices we receive for our gas and oil production.
Year-to-year or other periodic comparisons of the results of our
operations can be difficult and may not fully and accurately describe
our condition. The following table shows selected operating data for
each of the three years ended December 31, 1998, 1997 and 1996.
<PAGE> 34
<TABLE>
Year Ended December 31,
-------------------------------------
1998(1) 1997 1996
-------- ------ -------
<S> <C> <C> <C>
Production and Prices:
Oil (Bbls) 185,474 175,246 221,499
Natural gas (Mcf) 3,275,882 3,383,190 3,654,897
Oil price (per Bbl) $ 12.49 $ 19.88 $ 21.83
Gas price (per Mcf) $ 2.04 $ 2.70 $ 2.55
Ratio of oil to gas price 6.12/1 7.36/1 8.56/1
EBO 731,454 739,111 830,649
Increase (decrease) in production
volumes over prior year (1%) (11%) 107%
Results of Operations per EBO:
Oil and gas revenues $ 12.31 $ 17.07 $ 17.06
Costs and expenses:
Production costs 3.33 4.29 3.23
General and administrative 1.23 1.13 .63
Depreciation, depletion and
amortization 8.16 5.36 4.50
Impairment of oil and gas
properties 20.17 -- --
-------- -------- --------
Total Costs and Expenses 32.89 10.78 8.36
-------- -------- --------
Operating income (loss) (20.58) 6.29 8.70
Interest expense, net 1.89 1.09 1.50
Other income, net (.46) (.03) (.08)
-------- -------- --------
Pretax income (loss) per EBO $ (22.01) $ 5.23 $ 7.28
======== ======== ========
</TABLE>
- ---------------
(1) Results include a noncash charge of $14,757,028 related to the
impairment of oil and gas properties incurred in the fourth quarter of
1998, primarily a result of low gas and oil prices at year-end.
<PAGE> 35
The following table shows the percentage of total revenues
represented by each item reflected on our statements of operations for
the periods indicated.
<TABLE>
Year Ended December 31,
------------------------------------------
1998(1) 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Oil and gas revenues 100.0% 100.0% 100.0%
Costs and expenses:
Production costs 27.0 25.1 19.0
General and administrative 10.0 6.6 3.7
Depreciation, depletion and
amortization 66.3 31.4 26.4
Impairment of oil and gas properties 163.9
----- ----- -----
Total costs and expenses 267.2 63.1 49.1
----- ----- -----
Operating income (loss) (167.2) 36.9 50.9
Interest expense, net 15.3 6.4 8.7
Other income, net (3.8) (.2) (.5)
----- ----- -----
Pretax income (loss) (178.7) 30.7 42.7
Income tax (expense) benefit 34.4 (8.9) (12.1)
----- ----- -----
Net income (loss) (144.3%) 21.8% 30.6%
===== ===== =====
</TABLE>
- ---------------
(1) Results include a noncash charge of $14,757,028 related to the
impairment of oil and gas properties incurred in the fourth quarter of
1998, primarily a result of low gas and oil prices at year-end.<PAGE>
<PAGE> 36
Years Ended December 31, 1998 and December 31, 1997
Oil and Gas Revenues. Parallel's total oil and gas revenues for
1998 were $9,001,582, a decrease of $3,612,660, or approximately
29%, from $12,614,242 for 1997. The decrease in revenues for 1998,
compared to 1997, is related to a 28% decline in the average prices we
received for our natural gas and oil production volumes, and, to a
lesser degree, a 1% decline in production volumes.
Production. On an equivalent barrel basis, 1998 production
totaled 731,454 EBO compared with 739,111 EBO in 1997, a 1%
decline, resulting from a 3% decrease in natural gas production. The
decrease in natural gas production was primarily due to normal
production declines associated with producing wells and decreased
drilling activity in 1998, which limited our ability to replace gas and oil
we produced during the year.
Production Costs. The decrease in production costs for 1998,
compared with 1997, was primarily the result of adding lower cost oil
and gas production, a decrease in the accrual of ad valorem taxes and,
to a lesser degree, a decrease in production volumes. Production costs
decreased $736,576 or 23%, to $2,434,658 for the twelve months ended
December 31, 1998, from $3,171,234 for the same period of 1997.
Production costs as a percentage of revenues increased primarily
because of lower gas and oil prices. Average production costs per EBO
decreased 23% to $3.33 for the twelve months ended December 31,
1998 compared to $4.29 in the same period of 1997.
General and Administrative Expenses. General and administrative
expenses increased $61,381 or 7% to $899,016 for the year ended
December 31, 1998, from $837,635 for the same period of 1997. The
increase in general and administrative expenses was primarily related
to salary and benefit adjustments and increased franchise taxes.
General and administrative expenses as a percentage of revenues
increased to 10.0% for the year ended December 31, 1998 versus 6.6%
for the same period in 1997. This increase is primarily a result of the
low gas and oil prices we received in 1998, which reduced revenues.
<PAGE> 37
Depreciation, Depletion and Amortization Expense. DD&A expenses
for 1998 increased $2,006,944, or 51% to $5,966,221 from $3,959,277
for 1997. This increase was a result of a combination of factors that
included:
. production of 731,454 EBO;
. reserve additions of 1,539,000 EBO;
. a 23% decrease in our proved reserves from 6,985,333
EBO in 1997 to 6,060,534 EBO in 1998 due to low
commodity prices and reservoir performance;
. a downward revision of 1,732,000 EBO, due to
property performance and low gas and oil prices; and
. an increase in our full cost pool related to the
impairment of unproved properties.
DD&A expense as a percentage of revenues increased primarily
because of the impairment charge, which increased the DD&A rate to
$8.16 per EBO from $5.36 in 1997, and lower gas and oil prices, which
reduced revenues.
Impairment of Gas and Oil Properties. During the fourth quarter of
1998, we recognized a noncash impairment charge of $14,757,028, or
$12,269,834 net of tax, related to our gas and oil reserves and
unproved properties. The impairment of gas and oil assets was
primarily the result of the effect of significantly lower natural gas and
oil prices on both proved and unproved gas and oil properties. We did
not recognize an impairment in 1997.
Under full cost accounting rules, each quarter we are required to
perform a ceiling test calculation. The full cost pool carrying values
cannot exceed a company's future net revenues from its proved
reserves, discounted at 10% per annum using constant current product
prices, and the lower of cost or market of unproved properties.
<PAGE> 38
At December 31, 1998, natural gas and oil prices were much
lower compared with 1997 year-end prices, resulting in an impairment
charge to the full cost carrying value of our gas and oil properties. In
response to the decline in oil prices and the softening of natural gas
prices, in the third quarter of 1998, we postponed the development of
certain unproved properties and instead focused on projects that were
lower risk with the potential to add significant reserves. We
determined that it was likely, because oil prices were at the lowest
levels in decades and natural gas prices had also declined, that the
postponement of developing certain unproved properties had caused a
decline in the carrying values of such properties. Therefore, we
included the lower of cost or market of certain unproved properties in
our full cost pool for the ceiling test.
The ceiling test was computed using the net present value of
reserves at December 31, 1998 based on prices of $10.50 per Bbl of oil
and $2.00 per Mcf of natural gas. The prices used to compute the
ceiling test in 1997 were $17.00 per Bbl and $2.60 per Mcf.
Net Interest Expense. Net interest expense increased $573,944 or
71%, to $1,378,332 for the year ended December 31, 1998, from
$804,388 for the same period of 1997. This increase was principally a
result of an increase in average borrowings from our revolving line of
credit facility. Borrowings were used to conduct 3-D seismic
acquisition and drilling activities in the Yegua/Frio/Wilcox gas trend.
Additionally, cash flows generated from operations declined as a result
of lower gas and oil prices, which necessitated additional borrowings to
fund capital expenditures.
Income Tax Benefit (Expense). For the year ended December 31,
1998, we recognized a tax benefit of $3,100,027, which includes a
$2,530,196 deferred tax valuation charge to reduce the carrying value
of our deferred tax assets. During the fourth quarter of 1998, we
reviewed our deferred tax assets and, in light of the current economic
conditions in the gas and oil industry, the outlook for future
commodity prices, and our operational results in 1998, we believe that
<PAGE> 39
some of our net operating losses may expire unused. Therefore, we
established a valuation allowance against them. We recognized tax
expense in 1997 of $1,122,450.
Our effective tax rate for 1998 was approximately 19% versus
29% in 1997. You should read Note 5 of the Notes to the Financial
Statements on page F-13, included in Item 8 - Financial Statements
and Supplementary Data, for further discussion of our income tax
provisions and benefits.
Net Income (Loss) and Operating Cash Flow. Our net loss, before
preferred stock dividends, was $12,995,910 for the year ended
December 31, 1998, compared with net income of $2,743,930 for the
year ended December 31, 1997. The 1998 loss was primarily caused by
a fourth quarter 1998 noncash impairment charge to gas and oil
properties totaling $14,757,028, the result of significantly lower gas
and oil prices at year-end 1998. Other factors contributing to the loss
included:
. a 51% increase in DD&A expenses, again a result of
the low commodity price environment and an
impairment charge to unproved properties, which
increased the full cost pool;
. a 71% increase in net interest expense due to
increased bank borrowings;
. a 28% decrease in the average price we received for
our production; and
. 1% decline in production volumes.
Factors contributing to the net loss were partially offset by a 23%
decrease in 1998 lease operating expenses when compared with 1997
lease operating expenses.
<PAGE> 40
Operating cash flow for 1998 decreased approximately $3,198,345
or 41%, to $4,627,312 compared with $7,825,657 for the year ended
December 31, 1997. Other sources of funds included net proceeds of
$166,625 from the exercise of stock options, net proceeds of $9,352,215,
excluding offering costs and preferred stock dividends, from private
placements of preferred stock and bank borrowings of $5,853,279 under
our credit facility.
Years Ended December 31, 1997 and December 31, 1996
Gas and Oil Revenues. Our gas and oil revenues decreased
$1,553,228 million, or 11% to $12,614,242 for the twelve months
ended December 31, 1997, from $14,167,470 for the same period of
1996. The decrease was primarily the result of a 91,538 EBO, or 11%
decrease to 739,111 EBO in our gas and oil production for the twelve
months ended December 31, 1997, compared to 830,649 EBO for the
same period of 1996. The $1,553,228 decrease in revenues was
attributable to decreased gas and oil production from our
Yegua/Frio/Wilcox gas trend properties. Drilling activity in 1997 was
delayed because of inclement weather, which adversely affected our
ability to increase production volumes.
Production Costs. Production costs increased $485,572 or 18%, to
$3,171,234 for the twelve months ended December 31, 1997, from
$2,685,662 for the same period of 1996. The decrease in production of
91,538 EBO and an overall increase in direct field operating expenses
was responsible for the increase in production costs. Production costs
as a percentage of revenues increased primarily because of the 11%
decrease in gas and oil production volumes. Additionally, average
production costs per EBO increased 33% to $4.29 for the twelve
months ended December 31, 1997 compared to $3.23 in the same
period of 1996 as a result of decreased production volumes from our
Yegua/Frio wells drilled in 1996. At December 31, 1997, substantially
all of our oil wells employed artificial lift (pumping) and have higher
associated production costs than our gas wells, which flow. As a result
of our drilling efforts in the Yegua/Frio/Wilcox gas trend during 1997
and 1996, our production has become more weighted toward gas
production.
<PAGE> 41
General and Administrative Expenses. General and administrative
expenses increased $316,851 or 61% to $837,635 for the year ended
December 31, 1997, from $520,784 for the same period of 1996. The
increase resulted from capitalizing less of our general and
administrative expenses, increased public reporting costs and adding
one additional employee. General and administrative expenses as a
percentage of our revenues was 6.6% for the year ended December 31,
1997 and 3.7% for the same period in 1996.
Depreciation, Depletion and Amortization Expense. DD&A expense
increased $220,555, or 6% to $3,959,277 in the year ended December
31, 1997, from $3,738,722 for the same period of 1996. The increase
in DD&A expense as a percentage of revenues is primarily a result of
the 11% decrease in production volumes and an increase in the DD&A
rate to $5.36 in the year ended December 31, 1997 from $4.50 in 1996.
The increase in the DD&A rate is attributable to increased exploration
and drilling activities associated with a 1% decrease in our proved
reserve base in 1997 to 6.98 million EBO compared to 7.06 million
EBO in 1996. The reserve base decreased due to the following items:
. production of 739,111 EBO;
. reserve additions of 3,476,000 EBO;
. sale of reserves of 924,000 EBO; and
. a downward revision of 1,893,000 EBO.
Revisions were due to property performance and gas and oil
prices which were approximately 30% lower as of December 31, 1997
compared to December 31, 1996. DD&A expenses increased 19% per
EBO, reflecting our increased DD&A rate.
Net Interest Expense. Interest expense decreased $433,338 or
35%, to $804,388 for the year ended December 31, 1997, from
$1,237,726 for the same period of 1996, due principally to the decrease
in average borrowings under our revolving line of credit facility. The
decrease resulted from applying the proceeds received from the
<PAGE> 42
December, 1996 stock offering toward our revolving line of credit
balance and our cash management practices at that time, whereby we
maintained minimum cash balances with any excess cash applied
against the line of credit.
Income Tax Expense. Our effective tax rate for 1997 was 29% and
28% for 1996.
Net Income and Operating Cash Flow. Net income decreased
$1,586,724, or 37%, to $2,743,930 million for the year ended
December 31, 1997, compared to $4,330,654 million for the year ended
December 31, 1996. Operating cash flow decreased approximately
$1,961,832, or 20%, to $7,825,657 for the year ended December 31,
1997 compared to $9,787,489 for the year ended December 31, 1996.
The net income and operating cash flow decreases were primarily due
to the 11% decrease in gas and oil revenues, the 18% increase in lease
operating expenses, the 61% increase in general and administrative
expenses, offset by the 35% decrease in interest expense.
Liquidity and Capital Resources
Working capital increased $2,290,952 as of December 31, 1998
compared to December 31, 1997. Current assets exceeded current
liabilities by $128,813 at December 31, 1998, compared to current
liabilities exceeding current assets by $2,162,139 at December 31,
1997. Current assets increased primarily due to an increase of
$581,670 in cash, offset by a decrease in accounts receivable of
$881,971. Current liabilities decreased by $2,566,932 due to a
reduction in the amount of our trade payables.
We incurred costs of $18,551,681 in our oil and gas property
acquisition and development activities for the year ended December 31,
1998 compared with $23,109,516 in 1997, a decrease of 20%. These
costs were financed by working capital, cash flow provided from
operations, proceeds from the sale of properties, net cash provided
from bank borrowings, net proceeds from the issuance of preferred
stock and the exercise of stock options.
<PAGE> 43
At December 31, 1998, the loan agreement with our bank lender
allowed us to borrow up to the lesser of $30,000,000 or the borrowing
base amount determined by the bank. The borrowing base at
December 31, 1998 was $21,100,000. The borrowing base included (1)
a $19,100,000 revolving credit facility and (2) an additional $2,000,000
non-revolving development facility. All indebtedness under the
revolving facility matures on July 1, 2001 and the indebtedness under
the development facility was scheduled to be due and payable on March
31, 1999. Loans made to us under the revolving facility bear interest
at our election at a rate equal to (1) the bank's base lending rate less
.25% or (2) the bank's Eurodollar rate plus a margin of 2.5%. At
December 31, 1998, the interest rate on the revolving facility was
7.50%. The interest rate in effect for the development facility was the
bank's base rate plus 5.5% or 13.25% at December 31, 1998.
Commitment fees of .25% per annum on the difference between the
borrowing base and the average daily amount outstanding are due
quarterly. Before we amended the loan agreement on March 23, 1999,
the borrowing base was automatically reduced each month at a rate of
$380,000. The borrowing base and the $380,000 monthly reduction
amount are scheduled to be redetermined by the bank on or about
April 1 and October 1 of each year or at such other times as the bank
may elect. At December 31, 1998, the principal amount outstanding
under our loan agreement was $18,035,889. Of this amount,
$16,623,889 was outstanding under the revolving facility and
$1,412,000 was outstanding under the development facility.
In March, 1999, we entered into an agreement with our bank
lender amending certain terms of the loan agreement. Under the
amendment, the amount then outstanding under the development
facility, or $1,592,000, was rolled into the revolving facility. The
interest rate on the principal amount outstanding under the revolving
facility was established at the bank's base rate, plus 0.25%, or 8.0% at
March 23, 1999. The borrowing base was redetermined by the bank
and is now $18,900,000. The $380,000 monthly reduction amount was
suspended until May 1, 1999, when the borrowing base and monthly
reduction amount are both scheduled for redetermination by the bank.
At March 23, 1999, the total principal amount outstanding under the
revolving facility was $18,815,889. Unless the bank increases the
<PAGE> 44
borrowing base or we repay some or all of our indebtedness to the
bank, we cannot borrow additional funds from the bank at the present
time.
Our obligations to the bank are secured by substantially all of
our gas and oil properties. Borrowings under the loan agreement were
incurred to finance our property acquisition, 3-D seismic surveys,
enhancement and drilling activities.
The loan agreement contains various restrictive covenants and
compliance requirements, including:
. maintaining certain financial ratios;
. limiting additional indebtedness; and
. prohibiting the payment of dividends on our common
stock.
If we have borrowing capacity under our loan agreement, we
intend to borrow, repay and reborrow under the revolving credit facility
from time-to-time as necessary, subject to borrowing base limitations,
to fund:
. 3-D seismic surveys;
. lease option exercises;
. drilling activities on our properties in
the Yegua/Frio/Wilcox gas trend;
. developmental drilling on our Permian
Basin properties, when economically
feasible;
. other drilling expenditures and
acquisition opportunities; and
. general corporate purposes.
<PAGE> 45
In April, 1998, we privately placed 600,000 shares of $.60
cumulative convertible preferred stock at a price of $10 per share. The
net proceeds from the sale of the preferred stock, approximately
$5,919,000, were used by Parallel to reduce bank debt. In October,
1998, we issued 600,000 shares of 6% convertible preferred stock,
$0.10 par value, in exchange for all of our outstanding $.60 cumulative
convertible preferred stock. After the exchange of preferred stock, we
privately placed an additional 374,500 shares of 6% convertible
preferred stock at a price of $10 per share. Proceeds received, net of
expenses, were approximately $3,709,000, and were also used to
reduce outstanding bank debt.
The 6% cumulative convertible preferred stock:
. requires us to pay dividends of $.60 per annum, semi-
annually on June 15 and December 15 of each year.
. can be converted into common stock at any time after April
21, 1999, at the option of the holder, into 2.8751 shares of
common stock at an initial conversion price of $3.50 per
share, subject to adjustment in certain events.
. is redeemable at our option, in whole or in part, after
October 20, 1999, for $10 per share, plus accrued
dividends.
. has no voting rights, except as required by applicable law,
and, except that as long as any shares of preferred stock
remain outstanding, the holders of a majority of the
outstanding shares of the preferred stock may vote on any
proposal to change any provision of the preferred stock
which materially and adversely affects the rights,
preferences or privileges of the preferred stock.
. is senior to the common stock with respect to dividends and
on liquidation, dissolution or winding up of Parallel.
. has a liquidation value of $10 per share, plus accrued and
unpaid dividends.
<PAGE> 46
Future Capital Requirements
Our capital expenditure budget for 1999 is highly dependent on
future gas and oil prices. In light of the current pricing environment,
these expenditures will be governed by the following factors:
. internally generated cash flows;
. availability of borrowing under our current credit
facility;
. additional sources of financing; and
. future drilling successes.
In 1999, we intend to drill lower risk natural gas prospects that
could have a meaningful effect on our reserve base and cash flows.
Higher risk, higher impact projects will be deferred until the pricing
environment improves.
Outlook
The gas and oil industry is capital intensive. We make, and
anticipate that we will continue to make, substantial capital
expenditures in the exploration for, development and acquisition of gas
and oil reserves. Historically, our capital expenditures have been
financed primarily with:
. internally generated cash from operations;
. proceeds from bank borrowings; and
. proceeds from sales of equity securities.
<PAGE> 47
The continued availability of these capital sources depends upon a
number of variables, including:
. our proved reserves,
. the volumes of gas and oil we produce
from existing wells;
. the prices at which we sell gas and
oil; and
. our ability to acquire, locate and
produce new reserves.
Each of these variables materially affects our borrowing capacity. We
may from time to time seek additional financing in the form of:
. increased bank borrowings;
. sales of Parallel's securities;
. sales of non-core properties; or
. other forms of financing.
We do not have agreements for any future financing and there
can be no assurance as to the availability or terms of any such
financing.
Trends and Prices
Changes in gas and oil prices significantly affect our revenues,
cash flows and borrowing capacity. Markets for gas and oil have
historically been, and will continue to be, volatile. Prices for gas and
oil typically fluctuate in response to relatively minor changes in supply
and demand, market uncertainty, seasonal, political and other factors
beyond our control. We are unable to accurately predict domestic or
worldwide political events or the effects of other factors on the prices
we receive for our gas and oil. Historically, we have not entered into
transactions to hedge against changes in gas and oil prices, but we
may elect to enter into hedging transactions in the future to protect
against fluctuations in gas and oil prices.
<PAGE> 48
During 1998, the average sales price we received for our oil
production was approximately $12.49 per Bbl, as compared with
$19.88 in 1997, while the average sales price for our gas was
approximately $2.04 per Mcf in 1998, as compared with $2.70 per Mcf
in 1997. At March 15, 1999, we were receiving an average of $12.50
per Bbl for our oil production and $1.75 per Mcf for our gas
production.
Information Systems for the Year 2000
We place a high priority on resolving the computer or embedded
chip problems related to the Year 2000 that might cause operational
disruptions. Our Year 2000 project addresses the inability of computer
software, hardware or equipment with embedded microprocessors that
are time sensitive to process correctly date data beginning on January
1, 2000. This problem results from computer programs using two
digits rather than four to define an applicable year.
In planning and developing the project, we considered both our
information technology, or IT, systems and non-IT systems. IT systems
generally include computer equipment and software. Alarm systems,
fax machines, monitors for field operations and other miscellaneous
systems, which may contain embedded technology, are considered non-
IT systems. These types of systems are more difficult to assess and
repair than IT systems.
The scope of our project includes:
. conducting an inventory of our software, hardware and
embedded systems equipment;
. assessing the potential for failure and the associated
risk;
. prioritizing the need for remediation, repairing or
replacing significant noncompliant items; and
. testing any modifications to ensure Year 2000
compliance.
<PAGE> 49
Additionally, our project assesses the risks associated with the
Year 2000 compliance of material business partners.
The assessment phase of our Year 2000 project is at varying
stages of completion as it pertains to IT and non-IT systems and
applications. We have begun a comprehensive analysis of the
operational problems and costs that would be reasonably likely to
result from the failure by us and significant third parties to complete
efforts necessary to achieve Year 2000 compliance on a timely basis.
We believe our most significant risks will be in two areas:
. measuring the quantities of oil and natural
gas that we produce; and
. receiving timely payment from purchasers
of our gas and oil.
We also depend upon third parties for most of our non-
information technology systems such as:
. telephones;
. facsimile machines;
. air conditioning;
. heating;
. elevators in our office building; and
. other equipment which may have embedded technology
such as micro processors.
Many systems owned or controlled by third parties and that we
are dependent upon, including non-information technology systems,
may or may not be Year 2000 compliant. Written inquiries have been
sent to these third parties, but most of this technology is outside of our
control and it is difficult to assess or remedy any non-compliance that
could adversely affect our ability to conduct business.
<PAGE> 50
In December, 1998, we mailed letters to our significant vendors,
service providers and business partners to determine the extent to
which interfaces with such entities are vulnerable to Year 2000 issues
and whether the products and services purchased from or provided by
such entities are Year 2000 compliant. We have obtained written
assurances from our bank lender, major purchasers of production and
our accounting software provider indicating that they are or will be Y2K
compliant by the end of the year. However, we are mindful that our
own level of readiness is partially dependent on the ability of these and
other third parties to be fully compliant. The failure of third parties to
be Y2K compliant creates a likelihood that we will also experience Y2K
interruptions through a "ripple effect" stemming from external forces.
The remedial phase of our project is also at varying stages of
completion. The remedial phase includes the upgrade and/or
replacement of software applications and hardware systems. Most of
the software providers for our personal computers have confirmed their
readiness for the Year 2000 or have provided updates to correct most
identified Year 2000 problems. Based on identification and assessment
efforts to be completed in the second quarter of 1999, we plan to
replace or upgrade critical hardware and software to become Year 2000
compliant. This phase of the project is also expected to be completed
by the second quarter of 1999. Other activities either underway or
scheduled include the testing of our desktop computers and local area
network and conducting an inventory of embedded systems in field
locations that could affect our operations.
It is impossible to accurately predict all potential Y2K problems
and the magnitude of any adverse effects on Parallel. Because of these
uncertainties, we are developing a contingency plan to minimize
potential business interruptions. In preparing contingency plans, we
have assumed that many third parties will not be Y2K compliant. Our
remediation efforts are expected to reduce significantly our level of
uncertainty about Year 2000 compliance and the possibility of
interruptions of normal business operations. After completion of our
Year 2000 review and testing, which is currently expected to be
<PAGE> 51
completed by June 30, 1999, we will further develop a contingency plan
as required. This plan is expected to be completed by September 30,
1999.
The following table summarizes the current overall status of our
project and lists anticipated completion dates for each phase of the
project.
<TABLE>
Phase
- ----------------------------------------------------------------------------------------
Component Inventory Assessment Remediation
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Business Partners January 31, 1999 May 31, 1999 June 30, 1999
Software April 30, 1999 May 31, 1999 June 30, 1999
Hardware April 30, 1999 May 31, 1999 June 30, 1999
Embedded Systems April 30, 1999 May 31, 1999 June 30, 1999
</TABLE>
To date, we have incurred only minor costs for project planning.
Substantially all of the personnel working on the project to identify,
assess, remediate and test Year 2000 issues are existing employees.
Therefore, we expect labor costs incurred in connection with the project
will be minimal. Based on current information, we do not anticipate
that the costs associated with any necessary in-house modifications
will be material to our operations or financial condition. We expect
that the total cost of our project will range from $10,000 to $20,000.
The Y2K problems we may encounter will come at a time that is
particularly adverse to the oil and gas industry as a whole. We
anticipate that gas and oil prices will remain at or close to their
current low levels throughout the remainder of 1999. Our revenues
and profitability, like our competitors, have been significantly and
adversely affected by the precipitous and sustained decline in oil and
natural gas prices. This downward trend, coupled with potential
business interruptions caused by Y2K failures, compounds the risk of
further deterioration in our revenues and profitability. It is uncertain
what impact the Y2K problem will have on our operations, liquidity and
financial condition.
<PAGE> 52
The failure to correct a material Year 2000 problem could result
in an interruption in, or a failure of, certain normal business activities
or operations that could materially and adversely affect our operations,
liquidity and financial condition. Because of the uncertainty
surrounding Year 2000 issues, primarily those associated with third
party suppliers and material business partners, we are unable to
determine at this time whether Year 2000 failures will have a material
impact on our operations. However, our project is expected to reduce
the risk of Year 2000 issues significantly, particularly regarding the
compliance and readiness of our material vendors, suppliers and
business partners. We believe that the timely completion of this
project will reduce the possibility of significant interruptions of normal
business operations.
This is a flexible plan that we will change to address additional
Y2K issues as new problems are identified. As a result, any time and
costs estimates and the assessment of risks associated with Y2K issues
are subject to revision as needed to meet our goal to be Y2K compliant.
Inflation
Inflation has not had a significant impact on our financial
condition or results of operations. We do not believe that inflation
poses a material risk to our business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Market Risk and Interest Rate Sensitivity
We do not have or trade in derivative financial instruments and
we do not have firmly committed sales transactions. We have not
entered into hedging arrangements and do not have any delivery
<PAGE> 53
commitments. While hedging arrangements reduce exposure to losses
as a result of unfavorable price changes, they also limit the ability to
benefit from favorable market price changes.
Our major market risk exposure is in the pricing applicable to our
natural gas and oil production. Realized pricing is primarily driven by
the prevailing domestic price for crude oil and spot prices applicable to
the region in which we produce natural gas. Historically, prices
received for gas and oil production have been volatile and
unpredictable. Pricing volatility is expected to continue. Natural gas
prices we received during 1998 ranged from a monthly low of $1.10 per
Mcf to a monthly high of $3.16 per Mcf. Oil prices ranged from a
monthly low of $8.96 per barrel to a monthly high of $17.49 per barrel
during 1998. A significant decline in the prices of natural gas or oil
could have a material adverse effect on our financial condition and
results of operations.
Our only financial instrument sensitive to changes in interest
rates is our bank debt. Our annual interest costs in 1999 will
fluctuate based on short-term interest rates. As the interest rate is
variable and reflects current market conditions, the carrying value
approximates the fair value. The table below shows principal cash
flows and related weighted average interest rates by expected maturity
dates. Weighted average interest rates were determined using weighted
average interest paid and accrued in December, 1998. You should read
Note 3 of the Notes to the Financial Statements and Supplementary
Data, for further discussion of our debt that is sensitive to interest
rates.
<TABLE>
Fair
1999 2000 2001 Total Value
------ ------ ------ ------- -------
(in 000's, except interest rates)
<S> <C> <C> <C> <C> <C>
Variable rate debt:
Revolving Facility (secured) $18,036 $18,036 $18,036
Average interest rate 7.50% 7.50% 7.50%
</TABLE>
<PAGE> 54
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Parallel's financial statements and supplementary financial data,
which begin on page F-1, are included elsewhere in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE> 55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
The Directors and executive officers of Parallel at March 15, 1999
are as follows:
<TABLE>
Director
Name Age Since Position with Company
- ----------------- --- -------- ---------------------
<S> <C> <C> <C>
Thomas R. Cambridge 63 1985 Chairman of the Board
of Directors and Chief
Executive Officer
Larry C. Oldham 45 1979 President, Treasurer and
Director
Ernest R. Duke(1) 72 1980 Director
Myrle Greathouse(2) 76 1993 Director
Charles R. Pannill(1)(2) 73 1982 Director
</TABLE>
______________________
(1) Member of Audit Committee
(2) Member of Compensation Committee
Mr. Cambridge is an independent petroleum geologist engaged in
the exploration for, development and production of oil and natural gas.
From 1970 until 1990, such activities were carried out primarily
through Cambridge & Nail Partnership, a Texas general partnership.
<PAGE> 56
Since 1990, such oil and gas activities have been carried out through
Cambridge Production, Inc., a Texas corporation. He received a
Bachelors degree in geology from the University of Nebraska in 1958
and a Master of Science degree in geology from the University of
Nebraska in 1960.
Mr. Oldham, a founder of Parallel, has served as an officer and
Director since its formation in 1979. Before Parallel's formation, Mr.
Oldham was employed by Dorchester Gas Corporation during the
period 1976 to 1979 and by KPMG Peat Marwick LLP during 1975 and
1976. Mr. Oldham became President of Parallel in October, 1994, and
served as Executive Vice President before that time. Mr. Oldham is a
member of the American Institute of Certified Public Accountants and
the Permian Basin Landman's Association. He received a Bachelor of
Business Administration degree from West Texas State University in
1975.
Mr. Duke is a consultant to MI Drilling Fluids, LLC and the
president and majority shareholder of Mustang Mud, Inc., privately
held oil field service companies. He received a Bachelor of Science
degree in Geology from Southern Methodist University in 1950.
Mr. Greathouse is the chairman of the board of directors and sole
shareholder of Wes-Tex Drilling Company, a corporation engaged in oil
and gas exploration and production. Mr. Greathouse graduated from
the University of Oklahoma in 1949 with a degree in Business
Administration.
Mr. Pannill was employed by The Western Company of North
America for over thirty years until his retirement in February, 1982.
During his employment with The Western Company of North America,
Mr. Pannill served in various capacities, including those of an executive
officer and director. He received a Bachelor of Science degree in
Geology from Texas A&M University in 1950.
Not included in the table above is Danny H. Conklin. Mr. Conklin
served as a director of Parallel from 1985 until January, 1999 when he
resigned.
<PAGE> 57
Directors hold office until the annual meeting of stockholders
following their election or appointment and until their respective
successors have been duly elected or appointed.
Officers are appointed annually by the Board of Directors to serve
at the Board's discretion and until their respective successors in office
are duly appointed.
There are no family relationships between any of Parallel's
Directors or officers.
Key Employees
In addition to the services provided by Mr. Cambridge and Mr.
Oldham, Parallel also relies extensively on the key employees identified
below.
Eric A. Bayley, Manager of Engineering, has been a full-time
employee of Parallel since October, 1993. From December, 1990 to
October, 1993, Mr. Bayley was an independent consulting engineer and
devoted substantially all of his time to Parallel. Mr. Bayley graduated
from Texas A&M University in 1978 with a Bachelor of Science degree
in Petroleum Engineering, and in 1984, Mr. Bayley graduated from the
University of Texas of the Permian Basin with a Master's of Business
Administration degree.
Rebecca A. Burrell, Manager of Accounting, has been a full-time
employee of Parallel since January, 1985. Mrs. Burrell graduated from
Jacksonville College in 1974 with a degree in accounting and has
worked in oil and gas accounting since 1978.
Rhonda L. Keller, Manager of Investor Relations, has been a full-
time employee since August, 1997. From October 1991 to July 1997,
Ms. Keller served as President of Corporate Perspective, Inc., an
independent investor relations and corporate communications firm,
providing services primarily to publicly owned companies. From
January 1986 to September 1991, Ms. Keller was Director of Investor
Relations for Edisto Resources Corporation, Dallas, Texas.
<PAGE> 58
John S. Rutherford, Manager of Land/Administration, has been
employed by Parallel since October, 1993. From May, 1991 to October,
1993, Mr. Rutherford served as a consultant to Parallel, devoting
substantially all of his time to Parallel's business. Mr. Rutherford
graduated from Oral Roberts University in 1982 with a degree in
Education and in 1986, he graduated from Baylor University with a
Master's degree in Business Administration. From April, 1988 to April,
1991, Mr. Rutherford was a Vice President in the energy lending
division of Chase Bank of Texas, National Association, Midland, Texas.
Consulting Arrangements
As part of our overall business strategy, we continually monitor
and control our general and administrative expenses. Decisions
regarding our general and administrative expenses are made within
parameters we believe to be compatible with our size, the level of our
activities and projected future activities. Our goal is to keep general
and administration expenses at acceptable levels, without impairing the
quality of services and organizational structure necessary for
conducting our business.
As part of our strategy, we retain outside advisors and
consultants to provide technical and administrative services and
support in the operation of our business. From time to time, we grant
consultants overriding royalty interests, working interests, or options
to acquire working interests, in wells in which we own an interest. We
believe these types of compensation arrangements enable us to attract,
retain and provide additional incentives to qualified and experienced
consultants.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires
Parallel's Directors and officers to file periodic reports with the SEC.
These reports show the Directors' and officers' ownership, and the
changes in ownership, of Parallel's common stock and other equity
<PAGE> 59
securities. To our knowledge, all Section 16(a) filing requirements have
been complied with during 1998, except that one transaction involving
the purchase by Mr. Duke of 5,000 shares of common stock was
reported late.
ITEM 11. EXECUTIVE COMPENSATION
Summary of Annual Compensation
The table below shows a summary of the types and amounts of
compensation paid to our executive officers during the last three years.
<TABLE>
Summary Compensation Table
Long-Term Compensation
---------------------------
Annual Compensation Awards Payouts
-------------------------------- ------------------------- ---------
Other
Annual Restricted Securities
Name and Compen- Stock Underlying LTIP All Other
Principal Salary Bonus sation Awards Options/ Payouts Compensation
Position Year ($) ($) ($) ($) SARs(#) ($) ($)
- -------- ---- ------ ----- ------ ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
T.R. Cambridge, 1998 $ 73,631 $ 500 $ 900 0 50,000 0 0
Chief
Executive
Officer and 1997 $ 70,686 $1,000 $ 825 0 100,000 0 0
Chairman of
the Board
of Directors 1996 $ 66,402 $2,945 $ 825 0 0 0 0
L.C. Oldham, 1998 $112,923 $ 500 $23,150(1) 0 100,000 0 $5,139(2)
President,
Treasurer 1997 $104,297 $1,000 $16,620(1) 0 100,000 0 $6,695(2)
and Director
1996 $ 98,766 $4,346 $11,290(1) 0 0 0 $2,963(2)
</TABLE>
- ------------------
(See notes on following page).
<PAGE> 60
(1) Such amount includes insurance premiums for nondiscriminatory group life,
medical, disability and dental insurance as follows: $17,445 for 1998;
$11,532 for 1997; and $10,417 for 1996.
(2) For 1996, such amount represents contributions made by Parallel to Mr.
Oldham's individual retirement account maintained under the 408(k)
simplified employee pension plan/individual retirement account ("SEP
Account"). For 1997, such amount includes $3,129 contributed by Parallel
to Mr. Oldham's SEP Account and the reimbursement to Mr. Oldham of $3,566
for income tax preparation and planning. For 1998, such amount includes
$3,388 contributed by Parallel to Mr. Oldham's SEP Account and the
reimbursement to Mr. Oldham of $1,751 for income tax preparation and
planning.
Stock Options
Parallel uses stock options as part of the overall compensation of
Directors, officers and employees. We have included summary
descriptions of our stock option plans so you can review the types of
options we have granted and the significant features of our stock
options.
In the following table, we show certain information with respect to
stock options granted in 1998 to the named executive officers.
<TABLE>
Option/Sar Grants in Last Fiscal Year
Individual Grants
---------------------------------------------------
Potential Realizable
Number of Percent Value at Assumed
Securities Total Options Annual Rates of Stock
Underlying Granted to Exercise or Price Appreciation for
Options Employees in Base Price Expiration Option Term (1)
Name Granted (#) Fiscal Year ($/Sh) Date 5%($) 10%($)
- ------------------- ------------- ------------ ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
T. R. Cambridge 50,000 (2) 22.73% $3.60 8-4-08 $113,400 $286,200
L.C. Oldham 100,000 (3) 45.50% $3.60 8-4-08 $226,800 $572,400
</TABLE>
- ------------------------
(See notes on following page).
<PAGE> 61
(1) These amounts are calculated based on the indicated annual rates of
appreciation and annual compounding from the date of grant to the end of
the option term. Actual gains, if any, on stock option exercises are
dependent on the future performance of the common stock and overall stock
market conditions. There is no assurance that the amounts reflected in this
table will be achieved.
(2) A nonqualified stock option to purchase 50,000 shares of common stock was
granted to Mr. Cambridge on August 4, 1998 pursuant to Parallel's Non-
employee Directors' Stock Option Plan. The option is exercisable in two
equal annual installments, commencing August 4, 1999.
(3) On August 4, 1998 an incentive stock option to purchase 54,000 shares of
common stock and a nonqualified stock option to purchase 46,000 shares of
common stock were granted to Mr. Oldham pursuant to the 1992 Stock
Option Plan. Both options are exercisable in two equal annual installments,
commencing August 4, 1999.
The following table shows certain information with respect to
stock options exercised in 1998 by Parallel's executive officers and the
value of their unexercised stock options at December 31, 1998.
<TABLE>
Aggregated Option/SAR Exercises in
Last Fiscal Year and Fiscal Year - End Option/SAR Values
Value of
Number of Securities Unexercised
Shares Value Underlying Unexercised in-the-Money Options
Acquired Realized Options at Fiscal Year-End (#) at Fiscal Year-End ($) (2)
Name on Exercise ($) (1) Exercisable Unexercisable Exercisable Unexercisable
- ------------- ------------ -------- ------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C>
T.R. Cambridge 150,000 $129,000 150,000 100,000 $ 0(3) $ 0(3)
L. C. Oldham 0 0 367,000 180,000 $ 159,770 $ 0(4)
</TABLE>
- ------------------
(See notes on following page).
<PAGE> 62
(1) The value realized is equal to the fair market value of a share of
common stock on the date of exercise ($1.50 per share), based on the
last sale price of Parallel's common stock, less the exercise price.
(2) The value of in-the-money options is equal to the fair market value of a
share of common stock at fiscal year-end ($1.44 per share), based on
the last sale price of Parallel's common stock, less the exercise price.
(3) At December 31, 1998, the exercise prices of all of the options held by
Mr. Cambridge exceeded $1.44, the fair market value of our common
stock on that date.
(4) The exercise prices of all of Mr. Oldham's unexercisable options
exceeded the fair market value of our common stock on December 31,
1998.
Change of Control Arrangements
Parallel's outstanding stock options and stock option plans
contain certain change of control provisions which are applicable to
Parallel's outstanding stock options, including the options held by
Messrs. Cambridge and Oldham, and other Directors of Parallel. For
purposes of our options, a change of control occurs if:
. Parallel is not the surviving entity in a merger or
consolidation;
. Parallel sells, leases or exchanges all or substantially
all of its assets;
. Parallel is to be dissolved and liquidated;
. any person or group acquires beneficial ownership of
more than 50% of Parallel's common stock; or
. in connection with a contested election of directors,
the persons who were directors of Parallel before the
election cease to constitute a majority of the Board of
Directors.
<PAGE> 63
If a change of control occurs, the Compensation Committee of the
Board of Directors can:
. accelerate the time at which options may be exercised;
. require optionees to surrender some or all of their
options and pay to each optionee the change of control
value;
. make adjustments to the options to reflect the change
of control; or
. permit the holder of the option to purchase, instead of
the shares of common stock as to which the option is
then exercisable, the number and class of shares of
stock or other securities or property which the
optionee would acquire under the terms of the merger,
consolidation or sale of assets and dissolution if,
immediately before the merger, consolidation or sale of
assets or dissolution, the optionee had been the holder
of record of the shares of common stock as to which
the option is then exercisable.
The change of control value is an amount equal to, whichever is
applicable:
. the per share price offered to Parallel's stockholders in
a merger, consolidation, sale of assets or dissolution
transaction;
. the price per share offered to Parallel's stockholders in
a tender offer or exchange offer where a change of
control takes place; or
. if a change of control occurs, other than from a tender
or exchange offer, the fair market value per share of
the shares into which the options being surrendered
are exercisable, as determined by the Committee.
<PAGE> 64
Compensation of Directors
Parallel's non-employee Directors each receive $1,000 for
attending meetings of the Board of Directors and $500 for attending
meetings of Board committees that they serve on. Under these
arrangements, during 1998, Danny H. Conklin and Ernest R. Duke
each received $4,000. Myrle Greathouse received $3,000 and Charles
R. Pannill received $4,500. All Directors are reimbursed for expenses
incurred in connection with attending meetings.
Parallel's 1992 Stock Option Plan provides for the granting of a
one-time stock option to purchase 25,000 shares of common stock to
each person who becomes a non-employee director after March 1, 1992.
No options were granted in 1998 under this plan.
Directors who are not employees of Parallel are also eligible to
participate in the Non-Employee Directors Stock Option Plan. On
August 4, 1998, Messrs. Conklin, Duke, Greathouse and Pannill were
each granted an option to purchase 25,000 shares of common stock.
Mr. Cambridge was granted an option to purchase 50,000 shares of
common stock. All of the options were granted with an exercise price
of $3.60 per share, the fair market value of the common stock on the
date of grant. The options are exercisable with respect to one-half of
the shares on August 4, 1999, and one-half on August 4, 2000. The
options expire on August 4, 2008.
Stock Option Plans
1983 Incentive Stock Option Plan. In May, 1984, our stockholders
approved and adopted the 1983 Incentive Stock Option Plan. Stock
options granted under the 1983 Plan are intended to be "incentive
stock options" within the meaning of the Internal Revenue Code which,
generally, provides the optionee with certain favorable tax benefits.
Although the 1983 Plan expired by its own terms in 1993, incentive
stock options to purchase 247,000 shares of common stock remain
outstanding. The 1983 Plan is administered by the Compensation
Committee of the Board of Directors. Under the terms of the 1983
Plan, all employees of Parallel were eligible to participate. The 1983
<PAGE> 65
Plan authorized the granting of options to purchase a total of 750,000
shares of common stock. All options granted under the 1983 Plan were
granted with exercise prices equal to the fair market value of the
common stock on the date of grant. All options expire, in any event,
ten years after the date of grant.
1992 Stock Option Plan. In May, 1992, our stockholders approved
and adopted the 1992 Stock Option Plan. The 1992 Plan provides for
granting to key employees, including officers and Directors who are
also key employees of Parallel, and Directors who are not employees,
options to purchase up to an aggregate of 750,000 shares of common
stock. Options granted under the 1992 Plan to employees may be
either incentive stock options or options which do not constitute
incentive stock options. Options granted to non-employee Directors
will not be incentive stock options.
The 1992 Plan is administered by the Board's Compensation
Committee, none of whom are eligible to participate in the 1992 Plan
except to receive a one-time option to purchase 25,000 shares at the
time he becomes a Director. The Compensation Committee selects the
employees who are to be granted options and establishes the number of
shares issuable under each option and other such terms and
conditions as may be approved by the Compensation Committee. The
purchase price of common stock issued under each option must not be
less than the fair market value of the common stock at the time of
grant.
The 1992 Plan provides for the granting of an option to purchase
25,000 shares of common stock to each individual who was a non-
employee Director of Parallel on March 1, 1992 and to each individual
who becomes a non-employee Director following March 1, 1992.
Members of the Compensation Committee are not eligible to participate
in the 1992 Plan other than to receive a non-qualified stock option to
purchase 25,000 shares of common stock as described above.
An option may be granted in exchange for an individual's right
and option to purchase shares of common stock pursuant to the terms
of a prior option agreement. An agreement that grants an option in
<PAGE> 66
exchange for a prior option must provide for the surrender and
cancellation of the prior option. The purchase price of common stock
issued under an option granted in exchange for a prior option is
determined by the Compensation Committee and may be equal to the
price for which the optionee could have purchased common stock
under the prior option.
The 1992 Plan will expire by its own terms in May, 2002.
Non-Employee Directors Stock Option Plan. The Parallel Petroleum
Non-Employee Directors Stock Option Plan was approved by our
stockholders at the annual meeting of stockholders held in May, 1997.
This plan provides for granting to Directors who are not employees of
Parallel options to purchase up to an aggregate of 500,000 shares of
common stock. Options granted under the plan will not be incentive
stock options within the meaning of the Internal Revenue Code.
The Directors Plan is administered by the Compensation
Committee of the Board of Directors. The Compensation Committee
has sole authority 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
such terms and conditions, as the Committee shall prescribe from time
to time in accordance with the Plan. Under provisions of the Directors
Plan, the option exercise price must be the fair market value of the
stock subject to the option on the date the option is granted. Options
are not transferable other than by will or the laws of descent and
distribution and are not exercisable after ten years from the date of
grant.
The purchase price of shares as to which an option is exercised
must be paid in full at the time of exercise (1) in cash, (2) by delivering
to Parallel shares of stock having a fair market value equal to the
purchase price, or (3) a combination of cash or stock, as established by
the Compensation Committee.
<PAGE> 67
1998 Stock Option Plan. In June, 1998, our stockholders adopted
the 1998 Stock Option Plan. The 1998 Plan provides for the granting
of options to purchase up to 850,000 shares of common stock. Stock
options granted under the 1998 Plan may be either incentive stock
options or stock options which do not constitute incentive stock
options.
The 1998 Plan is administered by the Compensation Committee of
the Board of Directors. Members of the Compensation Committee are
not eligible to participate in the 1998 Plan. Only employees are eligible
to receive options under the 1998 Plan. The Compensation Committee
selects the employees who are granted options and establishes the
number of shares issuable under each option.
Options granted to employees contain terms and conditions that
are approved by the Compensation Committee. The Compensation
Committee is empowered and authorized, but is not required, to
provide for the exercise of options by payment in cash or by delivering
to Parallel shares of common stock having a fair market value equal to
the purchase price, or any combination of cash or common stock. The
purchase price of common stock issued under each option must not be
less than the fair market value of the common stock at the time of
grant.
Options granted under the 1998 Plan are not transferable other
than by will or the laws of descent and distribution. The 1998 Plan
will expire in June, 2008.
Other Option Grants. The Board of Directors granted a non-
qualified stock option to Mr. Cambridge in October, 1993 under the
general corporate powers of Parallel. Upon recommendation of the
Board's Compensation Committee, the Board granted the option to Mr.
Cambridge to purchase 100,000 shares of common stock at an exercise
price of $3.9375 per share, the fair market value of the common stock
on the date of grant. The option is not transferable, except by will or
the laws of descent and distribution. The option expires in October,
2003.
<PAGE> 68
Retirement Plan
Parallel maintains under Section 408(k) of the Code a
combination simplified employee pension ("SEP") and individual
retirement account ("IRA") plan (the "SEP/IRA") for eligible employees.
Generally, eligible employees include all employees who are at least
twenty-one years of age.
Contributions to employee SEP accounts may be made at the
discretion of Parallel, as authorized by the Compensation Committee of
the Board of Directors. The percentage of contributions may vary from
time to time. However, the same percentage contribution must be
made for all participating employees. Parallel is not required to make
annual contributions to the employees SEP accounts. Parallel may
make tax-deductible contributions for each employee participant of up
to 15% of a participant's compensation, or $30,000, whichever is less.
Under the prototype simplified employee pension plan adopted by
Parallel, all of the SEP contributions must be made to SEP/IRAs
maintained with the sponsor of the plan, a national investment banking
firm. All contributions to employees' accounts are immediately 100%
vested and become the property of each employee at the time of
contribution, including employer contributions, income-deferral
contributions and IRA contributions. Generally, earnings on
contributions to an employee's SEP/IRA account are not subject to
federal income tax until withdrawn.
In addition to receiving SEP contributions made by Parallel,
employees may make individual annual IRA contributions of up to the
lesser of $2,000 or 100% of compensation. Each employee is
responsible for the investment of funds in his or her own SEP/IRA and
can select investments offered through the sponsor of the plan.
Distributions may be taken by employees at any time and must
commence by April 1st following the year in which the employee attains
age 70 1/2.
<PAGE> 69
Parallel presently makes matching contributions to employee
accounts in an amount equal to the contribution made by each
employee, not to exceed, however, 3% of each employee's salary during
any calendar year. During 1998, Parallel contributed an aggregate of
$11,632 to the accounts of seven employee participants. Of this
amount, $3,388 was allocated to Mr. Oldham's account.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table shows certain information as of March 15,
1999 with respect to the beneficial ownership of common stock by: (1)
each person known by us to own beneficially more than five percent of
our outstanding common stock; (2) each executive officer of Parallel; (3)
each Director of Parallel; and (4) all of our executive officers and
Directors as a group.
<TABLE>
Name and Address Amount and Nature Percent
of of of
Beneficial Owner Beneficial Ownership(1) Class(2)
------------------ ----------------------- --------
<S> <C> <C>
Thomas R. Cambridge
216 Texas Commerce Bank Building
Amarillo, Texas 79109 967,045 (3) 5.22%
Ernest R. Duke
408 West Wall Street
Midland, Texas 79701 269,973 (4) 1.47%
Myrle Greathouse
401 Cypress, Suite 519
Abilene, Texas 79601 1,644,057 (5) 8.64%
Larry C. Oldham
One Marienfeld Place, Suite 465
Midland, Texas 79701 697,090 (6) 3.72%
Charles R. Pannill
3416 Acorn Run
Fort Worth, Texas 76019 89,495 (7) *
<PAGE> 70
Name and Address Amount and Nature Percent
of of of
Beneficial Owner Beneficial Ownership(1) Class(2)
------------------ ----------------------- --------
Wes-Tex Drilling Company
519 First National Bank Building West
Abilene, Texas 79601 1,246,773 (8) 6.69%
Julia Jones Matthews
400 Pine, Suite 900
Abilene, Texas 79601 1,742,846 (9) 8.95%
Dodge Jones Foundation
400 Pine, Suite 900
Abilene, Texas 79601 1,371,482(10) 7.10%
All Executive Officers and Directors
as a Group (5 persons) 3,667,660 (11) 18.64%
</TABLE>
- --------------------
* Less than one percent.
(1) Unless otherwise indicated, all shares of common stock are held
directly with sole voting and investment powers.
(2) Securities not outstanding, but included in the beneficial ownership
of each such person are deemed to be outstanding for the purpose of
computing the percentage of outstanding securities of the class
owned by such person, but are not deemed to be outstanding for the
purpose of computing the percentage of the class owned by any other
person.
(3) Includes 200,000 shares of common stock underlying presently
exercisable stock options.
(4) Includes 35,000 shares of common stock underlying a presently
exercisable stock option. Also included are 74,395 shares held by
Duke and Cain Partnership, a general partnership in which Mr. Duke
is a partner, and 20,000 shares held in the name of Mr. Duke's wife.
Mr. Duke has shared voting and investment powers with respect to
such shares.
<PAGE> 71
(5) Includes 932,488 shares of common stock held directly by Wes-Tex
Drilling Company, a corporation, and 314,285 shares of common
stock that may be acquired by Wes-Tex upon conversion of 110,000
shares of preferred stock held by Wes-Tex. Mr. Greathouse is the
chairman of the board of directors and sole shareholder of Wes-Tex
and, accordingly, has shared voting and investment powers with
respect to such shares. See note 8 below. Also included are 60,000
shares of common stock underlying presently exercisable stock
options, and 1,000 shares held by a twenty-two member investment
club, of which Mr. Greathouse is a member, and as to which Mr.
Greathouse has shared voting and investment powers. The
Greathouse Charitable Remainder Trust and the Greathouse
Foundation may each acquire 157,142 shares of common stock upon
conversion of 55,000 shares of preferred stock held by each of them.
Such shares of common stock are included in the total number of
shares shown in the table. However, Mr. Greathouse disclaims
beneficial ownership of all 314,284 shares of common stock that may
be acquired by The Greathouse Charitable Remainder Trust and the
Greathouse Foundation.
(6) Includes 387,000 shares of common stock underlying presently
exercisable stock options.
(7) Includes 35,000 shares of common stock underlying a presently
exercisable stock option. Also included are 1,300 shares held by Mr.
Pannill as custodian for the benefit of two minor grandchildren and
as to which Mr. Pannill disclaims beneficial ownership.
(8) Mr. Greathouse, a Director of Parallel, is the chairman of the board of
directors and sole stockholder of Wes-Tex Drilling Company. Wes-Tex
has shared voting and investment powers with respect to such
shares. See note 5 above.
(9) Includes 200,000 shares of common stock owned directly by the Julia
Jones Matthews Family Trust and 171,428 shares of common stock
that may be acquired by the Trust upon conversion of 60,000 shares
of preferred stock held directly by the Trust. By virtue of her position
as the President and a Director of the Dodge Jones Foundation,
Matthews has shared voting and investment powers with respect to,
and may also be deemed to be the beneficial owner of, 971,428
<PAGE> 72
shares of common stock that may be acquired by the Dodge Jones
Foundation upon conversion of 340,000 shares of preferred stock
held by it, and 400,000 shares of common stock that are owned
directly by the Dodge Jones Foundation. Matthews disclaims
beneficial ownership of all shares of common stock beneficially owned
by the Dodge Jones Foundation. See note 10.
(10) Includes 971,428 shares that may be acquired upon conversion of
340,000 shares of preferred stock. The Dodge Jones Foundation has
shared voting and investment powers with respect to such shares of
common stock. See note 9.
(11) Includes 717,000 shares of common stock underlying presently
exercisable stock options and 628,569 shares of common stock that
may be acquired upon conversion of 220,000 shares of preferred
stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, Wes-Tex Drilling Company, a corporation,
acquires undivided interests in oil and gas leasehold acreage from
Parallel and participates with Parallel and other interest owners in the
drilling and development of such acreage. Myrle Greathouse, a director
and the sole shareholder of Wes-Tex, is also a Director of Parallel.
Wes-Tex participates in these operations under standard form
operating agreements on the same or similar terms afforded by Parallel
to nonaffiliated third parties. We invoice all working interest owners,
including Wes-Tex, on a monthly basis, without interest, for their pro
rata share of lease acquisition, drilling and operating expenses. During
1998, we billed Wes-Tex $83,946 for Wes-Tex's proportionate share of
lease operating expenses incurred on properties we operate. The
largest amount owed to us by Wes-Tex at any one time during 1998 for
its share of lease operating expenses was $28,945. At December 31,
1998, Wes-Tex owed us $579 for these expenses. During 1998, we
disbursed $34,330 to Wes-Tex in payment of revenues attributable to
<PAGE> 73
Wes-Tex's pro rata share of the proceeds from sales of gas and oil
produced from properties in which Wes-Tex and Parallel owned
interests.
In April, 1998, Parallel privately placed 600,000 shares of $.60
cumulative convertible preferred stock to eight accredited investors. Of
the 600,000 shares of preferred stock, 100,000 shares were purchased
by Wes-Tex, 50,000 shares were purchased by the Greathouse
Foundation and 50,000 shares were purchased by the Greathouse
Charitable Remainder Trust. The Greathouse Foundation is a tax-
exempt entity under Section 501(c)(3) of the Internal Revenue Code and
engages in the business of making charitable grants for benevolent
purposes. Mr. Greathouse is the chairman of the board of directors of
the Greathouse Foundation. The Greathouse Charitable Remainder
Trust is a charitable remainder trust in which Mr. Greathouse and his
wife are the trustees and uni-trust beneficiaries. All of the shares of
preferred stock were purchased for cash at a price of $10 per share on
the same terms as all other unaffiliated purchasers. The net proceeds
from the sale of the preferred stock, approximately $5,919,000, were
used by Parallel to reduce bank debt.
In October, 1998, the holders of the $.60 cumulative convertible
preferred stock, including Wes-Tex, the Foundation and the Trust,
surrendered all of the preferred stock to Parallel in exchange for
Parallel's issuance of a like number of shares of a newly created class
of preferred stock, designated as the 6% convertible preferred stock,
$0.10 par value per share. After the exchange, Wes-Tex was the record
holder of 100,000 shares of the newly created class of preferred stock,
the Foundation was the record holder of 50,000 shares and the Trust
was the record holder of 50,000 shares of $.60 cumulative convertible
preferred stock. All outstanding shares of the preferred stock were
cancelled and restored to the status of authorized but unissued
preferred stock.
The rights, privileges and preferences of the 6% convertible
preferred stock are substantially identical to the $.60 cumulative
convertible preferred stock, except that the initial conversion price of
the preferred stock is $3.50 per share, while the initial conversion price
of the $.60 cumulative convertible preferred stock was $6.40 per share.
<PAGE> 74
In October, 1998, Parallel privately placed an additional 374,500
shares of 6% convertible preferred stock. Of the 374,500 shares that
were sold, 10,000 shares were purchased by Wes-Tex, 5,000 shares
were purchased by the Foundation and 5,000 shares were purchased
by the Trust. These purchases were made for cash at a price of $10
per share on the same terms as all other third parties. The net
proceeds from the sale of the preferred stock, approximately
$3,709,000, were used to reduce bank debt.
During 1998, Cambridge Production, Inc., a corporation owned
by Mr. Cambridge, served as operator of two wells on oil and gas leases
in which we also owned an interest. Generally, the operator of a well is
responsible for the day to day operations on the lease, overseeing
production, employing field personnel, maintaining production and
other records, determining the location and timing of drilling of wells,
administering gas contracts, joint interest billings, revenue
distribution, making various regulatory filings, reporting to working
interest owners and other matters. During 1998, Cambridge
Production billed us $69,894 for our pro rata share of lease operating
expenses and drilling and workover expenses. We paid $84,554 to
Cambridge Production during 1998, which included amounts remaining
unpaid and owed to Cambridge Production at the end of 1997. The
largest amount we owed Cambridge Production at any one time during
1998 was $22,981. At December 31, 1998, no amounts were due to us
from Cambridge Production. Cambridge Production's billings to
Parallel are made monthly on the same basis as all other working
interest owners in the wells. Our pro rata share of oil and gas sales
during 1998 from the wells operated by Cambridge Production was
$217,806.
We believe the transactions described above were made on terms
no less favorable than if we had entered into the transactions with an
unrelated party.
<PAGE> 75
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
For a list of Financial Statements and
Schedules, see "Index to the Financial
Statements and Schedules" on page F-1, and
incorporated herein by reference.
(b) No reports on Form 8-K were filed by Parallel during the last
quarter of its fiscal year ended December 31, 1998.
(c) Exhibits:
Exhibit
No. Description of Exhibit
- -------- ----------------------
*3.1 Certificate of Incorporation of Registrant
3.2 Bylaws of Registrant (Incorporated by reference to
Exhibit 3.2 to Form 10-K of the Registrant for the
fiscal year ended December 31, 1995.)
4.1 Certificate of Designations, Preferences and Rights
of Serial Preferred Stock - 6% Convertible Preferred
Stock (Incorporated by reference to Exhibit 4.1 to
Form 10-Q of the Registrant for the fiscal quarter
ended September 30, 1998.)
<PAGE> 76
Exhibit
No. Description of Exhibit
- -------- ----------------------
Executive Compensation Plans and Arrangements
(Exhibit No.'s 10.1 through 10.7):
---------------------------------------------
10.1 1983 Incentive Stock Option Plan (Incorporated by
reference to Exhibit 10.2 to Form S-l of the Regis-
trant (File No. 2-92397) as filed with the Securities
and Exchange Commission on July 26, 1984, as
amended by Amendments No. 1 and 2 on October
5, 1984, and October 25, 1984, respectively.)
10.2 1992 Stock Option Plan (Incorporated by reference
to Exhibit 28.1 to Form S-8 of the Registrant (File
No. 33-57348) as filed with the Securities and
Exchange Commission on January 25, 1993.)
10.3 Stock Option Agreement between the Registrant
and Thomas R. Cambridge dated December 11,
1991 (Incorporated by reference to Exhibit 10.4 of
Form 10-K of the Registrant for the fiscal year
ended December 31, 1992.)
10.4 Stock Option Agreement between the Registrant
and Thomas R. Cambridge dated October 18, 1993
(Incorporated by reference to Exhibit 10.4(e) of
Form 10-K of the Registrant for the fiscal year
ended December 31, 1993.)
10.5 Merrill Lynch, Pierce, Fenner & Smith Incorporated
Prototype Simplified Employee Pension Plan
(Incorporated by reference to Exhibit 10.6 of the
Registrant's Form 10-K for the fiscal year ended
December 31, 1995.)
<PAGE> 77
10.6 Non-Employee Directors Stock Option Plan
(Incorporated by reference to Exhibit 10.6 of the
Registrant's Form 10-K Report for the fiscal year
ended December 31, 1997).
*10.7 1998 Stock Option Plan
10.8 Loan Agreement dated July 1, 1996 between the
Registrant and Bank One Texas, N.A. (Incorporated
by reference to Exhibit 10.1 of Form 10-Q of the
Registrant for the fiscal quarter ended June 30,
1996.)
*10.9 Letter agreement, dated March 24, 1999, between
the Registrant and Bank One, Texas, N.A.
*23.1 Consent of Independent Auditors
*23.2 Consent of Independent Petroleum Engineers
*27 Financial Data Schedule
- ----------------------------
* Filed herewith.
<PAGE> F-1
PARALLEL PETROLEUM CORPORATION
Index to the Financial Statements
Page
----
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets at December 31, 1998 and 1997 F-3
Statements of Income for the years ended
December 31, 1998, 1997, and 1996 F-4
Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 F-5
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-6
Notes to Financial Statements F-7
All schedules are omitted, as the required information is inapplicable or the
information is presented in the financial statements or related notes.
<PAGE> F-2
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
Parallel Petroleum Corporation:
We have audited the financial statements of Parallel Petroleum Corporation
(the "Company") as listed in the accompanying index. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Parallel Petroleum Corporation
as of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
KPMG LLP
Midland, Texas
February 12, 1999
<PAGE> F-3
PARALLEL PETROLEUM CORPORATION
Balance Sheets
December 31, 1998 and 1997
<TABLE>
Assets 1998 1997
- ------ ---- ----
<S>
Current assets: <C> <C>
Cash and cash equivalents $ 1,178,819 597,149
Accounts receivable:
Oil and gas 1,432,659 1,649,350
Others, net of allowance for
doubtful accounts of $71,358 in
1998 and $28,130 in 1997 247,740 915,358
Affiliate 11,844 9,506
----------- ---------
1,692,243 2,574,214
Other assets 61,504 37,183
----------- ---------
Total current assets 2,932,566 3,208,546
----------- ---------
Property and equipment, at cost:
Oil and gas properties, full cost method
Note 11) 65,565,466 62,659,570
Other 287,586 433,922
---------- ----------
65,853,052 63,093,492
Less accumulated depreciation and depletion (22,279,355) (16,514,102)
---------- ----------
Net property and equipment 43,573,697 46,579,390
---------- ----------
Other assets, net of accumulated amortization
of $86,917 in 1998 and $59,085 in 1997 58,519 67,596
---------- ----------
$ 46,564,782 49,855,532
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities:
Trade $ 2,803,539 5,313,439
Affiliate 214 14,660
Income taxes payable - 42,586
---------- ----------
Total current liabilities 2,803,753 5,370,685
---------- ----------
Long-term debt (Note 3) 18,035,889 12,182,610
Deferred income taxes (Note 5) - 3,183,484
Stockholders' equity:
Preferred stock - $.60 cumulative
convertible preferred stock - par value
of $.10 per share, (aggregate liquidation
preference of $10) authorized 10,000,000
shares, issued and outstanding 974,500 in
1998 97,450 -
Common stock - par value of $.01 per share,
authorized 60,000,000 shares,issued and
outstanding 18,306,858 in 1998 and
18,114,358 in 1997 183,069 181,144
Additional paid-in surplus 32,341,971 22,839,049
Retained earnings (deficit) (6,897,350) 6,098,560
---------- ----------
Total stockholders' equity 25,725,140 29,118,753
Contingencies
---------- ----------
$ 46,564,782 49,855,532
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> F-4
PARALLEL PETROLEUM CORPORATION
Statements of Income
Years ended December 31, 1998, 1997, and 1996
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Oil and gas revenues $ 9,001,582 12,614,242 14,167,470
------------ ------------ ------------
Costs and expenses:
Lease operating expense 2,434,658 3,171,234 2,685,662
General and administrative 899,016 837,635 520,784
Depreciation, depletion and amortization 5,966,221 3,959,277 3,738,722
Impairment of oil and gas properties 14,757,028 - -
------------ ------------ ------------
Total costs and expenses 24,056,923 7,968,146 6,945,168
------------ ------------ ------------
Operating income (loss) (15,055,341) 4,646,096 7,222,302
------------ ------------ ------------
Other income (expense), net:
Interest income 2,771 8,984 8,165
Other income 395,683 33,512 65,757
Interest expense (1,381,103) (813,372) (1,245,891)
Other expense (57,947) (8,840) (1,566)
------------ ------------ ------------
Total other expense, net (1,040,596) (779,716) (1,173,535)
------------ ------------ ------------
Income (loss) before income taxes (16,095,937) 3,866,380 6,048,767
Income tax (expense) benefit 3,100,027 (1,122,450) (1,718,113)
------------ ------------ ------------
Net income (loss) $(12,995,910) 2,743,930 4,330,654
============ ============ ============
Cumulative preferred stock dividend $ (276,712) - -
------------- ------------ ------------
Net income (loss) available to
common stockholders $(13,272,622) 2,743,930 4,330,654
=========== ============ ============
Net income (loss) per common share:
Basic $ (.73) .15 .29
Diluted $ (.73) .15 .28
See accompanying notes to financial statements.
</TABLE>
<PAGE> F-5
PARALLEL PETROLEUM CORPORATION
Statements of Stockholders' Equity
Years ended December 31, 1998, 1997, and 1996
<TABLE>
Common stock Preferred stock Additional Retained Total
------------------- -------------------
Number of Number of paid-in earnings stockholders'
shares Amount shares Amount surplus (deficit) equity
------ ------ ------ ------ ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1996 14,854,108 $ 148,540 - - 11,662,897 (976,024) 10,835,413
Issuance of stock, net 2,500,000 25,000 - - 9,395,630 - 9,420,630
Options exercised 12,250 123 - - 21,315 - 21,438
Warrants exercised 40,000 400 - - 109,600 - 110,000
Net income - - - - - 4,330,654 4,330,654
----------- --------- ------- ------- ----------- ----------- -----------
Balance,
December 31, 1996 17,406,358 174,063 - - 21,189,442 3,354,630 24,718,135
Options exercised 708,000 7,081 - - 1,633,404 - 1,640,485
Tax benefits related
to options - - - - 16,203 - 16,203
Net income - - - - - 2,743,930 2,743,930
----------- ---------- -------- ------- ----------- ----------- -----------
Balance,
December 31, 1997 18,114,358 181,144 - - 22,839,049 6,098,560 29,118,753
Issuance of stock, net - - 974,500 97,450 9,531,477 - 9,628,927
Options exercised 192,500 1,925 - - 164,700 - 166,625
Tax benefits related
to options - - - - 83,457 - 83,457
Net loss - - - - - (12,995,910) (12,995,910)
Dividends ($.60 per
share) - - - - (276,712) - (276,712)
---------- --------- ------- ------ ---------- ----------- ----------
Balance,
December 31, 1998 18,306,858 $ 183,069 974,500 97,450 32,341,971 (6,897,350) 25,725,140
========== ========= ======= ====== ========== ============ ==========
See accompanying notes to financial statements.
</TABLE>
<PAGE> F-6
PARALLEL PETROLEUM CORPORATION
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(12,995,910) 2,743,930 4,330,654
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 5,966,221 3,959,277 3,738,722
Deferred income taxes (3,100,027) 1,079,864 1,706,048
Impairment of oil and gas properties 14,757,028 - -
Provision for losses on trade receivables 43,228 - -
Other, net 9,077 5,715 (32,317)
Changes in assets and liabilities:
Decrease (increase) in trade receivables 838,743 467,014 (2,274,978)
Decrease (increase) in prepaid expenses and
other (24,321) (29,643) 8,753
Increase (decrease) in accounts payable and
accrued liabilities 123,421 (67,078) 217,801
Income tax payable - 30,521 12,065
------------ ----------- -----------
Net cash provided by
operating activities 5,617,460 8,189,600 7,706,748
------------ ----------- -----------
Cash flows from investing activities:
Additions to property and equipment (21,300,419) (20,516,544) (15,271,761)
Proceeds from disposition of property and equipment 892,510 7,580,820 649,000
------------ ----------- -----------
Net cash used in
investing activities (20,407,909) (12,935,724) (14,622,761)
------------ ----------- -----------
Cash flows from financing activities:
Borrowings from bank line of credit 18,182,279 16,330,000 22,387,102
Payments on bank line of credit (12,329,000) (12,668,781) (25,540,336)
Proceeds from exercise of options and warrants 166,625 1,640,485 131,438
Stock offering costs (116,072) - (1,205,620)
Proceeds from common stock issuance - - 10,626,250
Proceeds from preferred stock issuance 9,744,999 - -
Payments of preferred stock dividend (276,712) - -
------------ ----------- -----------
Net cash provided by
financing activities 15,372,119 5,301,704 6,398,834
------------ ----------- -----------
Net increase (decrease) in cash
and cash equivalents 581,670 555,580 (517,179)
Beginning cash and cash equivalents 597,149 41,569 558,748
------------ ----------- -----------
Ending cash and cash equivalents $ 1,178,819 597,149 41,569
============ =========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE> F-7
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements
Years ended December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
------------------------------------------
Nature of Operations
--------------------
Parallel Petroleum Corporation (the "Company"), a Delaware corporation,
is primarily engaged in, and its only industry segment is, the
acquisition of, and the exploration for, development, production and
sale of, crude oil and natural gas. The Company's business activities
are carried out primarily in Texas. The Company's activities in Texas
are focused in the onshore Gulf Coast area of Jackson, Wharton,
Lavaca, Dewitt and Victoria Counties,Texas, and in the Permian Basin
of West Texas.
Concentration of Credit Risk
----------------------------
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of unsecured accounts
receivable from unaffiliated working interest owners and crude oil
and natural gas purchasers.
Property and Equipment
----------------------
The Company's oil and gas producing activities are accounted for using
the full cost method of accounting. Accordingly, all costs associated
with acquisition, exploration, and development of oil and gas
reserves, including directly related overhead costs, are capitalized,
with no gain or loss recognized.
Depletion is provided using the unit-of-production method based upon
estimates of proved oil and gas reserves with oil and gas production
being converted to a common unit of measure based upon their relative
energy content. Investments in unproved properties and major
development projects are not amortized until proved reserves
associated with the projects can be determined or until impairment
occurs. If the results of an assessment indicate that the properties
are impaired, the amount of the impairment is added to the capitalized
costs to be amortized.
In addition, the capitalized costs are subject to a "ceiling test",
which basically limits such costs to the aggregate of the "estimated
present value", discounted at a 10-percent interest rate of future net
revenues, net of income tax effects, from proved reserves, based on
current economic and operating conditions, plus the lower of cost or
fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments
of capitalized costs with no gain or loss recognized, unless such
adjustments would significantly alter the relationship between
capitalized costs and proved reserves of oil and gas, in which case
<PAGE> F-8
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
the gain or loss is recognized in income. Abandonments of properties
are accounted for as adjustments of capitalized costs with no loss
recognized.
Maintenance and repairs are charged to operations; renewals and
betterments are charged to the appropriate property and equipment
accounts.
Upon retirement or disposition of assets other than oil and gas
properties, the cost and related accumulated depreciation are removed
from the accounts with the resulting gains or losses, if any,
reflected in results of operations. Depreciation of other property
and equipment is computed using the straight-line method based on
their estimated useful lives.
Income Taxes
------------
The Company accounts for federal income taxes using Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("FAS 109"). Under the asset and liability method of FAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. Under FAS 109, the effect on previously
recorded deferred tax assets and liabilities resulting from a change
in tax rates is recognized in earnings in the period in which the
change is enacted.
Environmental
-------------
The Company is subject to extensive Federal, state and local
environmental laws and regulations. These laws, which are constantly
changing, regulate the discharge of materials into the environment and
may require the Company to remove or mitigate the environmental
effects of the disposal or release of petroleum or chemical substances
at various sites. Environmental expenditures are expensed or
capitalized depending on their future economic benefit. Expenditures
that relate to an existing condition caused by past operations and
that have no future economic benefits are expensed. Liabilities for
expenditures of a noncapital nature are recorded when environmental
assessment and/or remediation is probable, and the costs can be
reasonably estimated. Such liabilities are generally undiscounted
unless the timing of cash payments for the liability or component are
fixed or reliably determinable.
Revenue Recognition
-------------------
The Company uses the sales method of accounting for crude oil revenues.
To the extent that crude oil is produced but not sold, the oil in
tanks is not recorded as inventory on the financial statements. The
oil in tanks at December 31, 1998, 1997, and 1996 was not material.
<PAGE> F-9
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
The Company uses the sales method of accounting for natural gas
revenues. Under this method, revenues are recognized based on actual
volumes of gas sold to purchasers.
Gas Balancing
-------------
Deferred income associated with gas balancing is accounted for on the
entitlements method and represents amounts received for gas sold under
gas balancing arrangements in excess of the Company's interest in
properties covered by such agreements. The Company currently has no
significant amounts outstanding under gas balancing arrangements.
Net Income Per Share
--------------------
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share"
("FAS 128"). FAS 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of option, warrants and convertible securities
and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the
period. Diluted earnings per share is computed similarly to the
previously reported fully diluted earnings per share and reflects the
assumed conversion of all potentially dilutive securities. In
accordance with the provisions of FAS 128, the Company adopted FAS 128
in its year ended December 31, 1997 financial statements and all prior
period EPS information has been restated.
Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
Preparation of the accompanying financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash Management
---------------
The Company maintains a cash management system, whereby it maintains
minimum cash balances with any excess cash applied against its bank
line of credit.
Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers all
demand deposits,money market accounts and certificates of deposit
purchased with an original maturity of three months or less to be cash
equivalents.
<PAGE> F-10
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(2) Fair Value of Financial Instruments
-----------------------------------
The carrying amount of cash, accounts receivable, accounts payable, and
accrued liabilities approximates fair value because of the short
maturity of these instruments.
The carrying amount of long-term debt approximates fair value because
the Company's current borrowing rate does not differ from the existing
rate on the Company's long-term debt balance.
(3) Long-Term Debt
--------------
Long-term debt consists of the following at December 31:
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Revolving Facility note payable to bank,
at bank's base lending rate (7.5%
at December 31, 1998) (a) $ 16,623,889 12,182,610
Development Facility note payable to
bank, at bank's base lending rate
plus 5.5% (13% at December 31, 1998) 1,412,000 -
Less: current maturities - -
------------ ----------
$ 18,035,889 12,182,610
============ ==========
_________________
(a) The note payable is classified as long-term due to a maturity date of
July 1, 2001.
At December 31, 1998, the Company is party to a note agreement with a
bank. Pursuant to the note agreement, the Company may borrow
$30,000,000 or the "borrowing base" then in effect. The borrowing base
in effect at December 31, 1998 of $21,100,000 includes (i) a
$19,100,000 revolving credit facility ("Revolving Facility") and (ii)
a $2,000,000 non-revolving line of credit ("Development Facility").
The borrowing base is reduced by a monthly commitment reduction of
$380,000 until April 1, 1999. The borrowing base and monthly
commitment reduction are 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 latest redetermination date was on September 1,
1998. Indebtedness under the Revolving Facility matures July 1, 2001
and indebtedness under the Development Facility is due and payable on
March 31, 1999. The note 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 for the Revolving Facility bears interest
at the election of the Company at a rate equal to (i) the bank's base
lending rate less .25% or (ii) the bank's Eurodollar rate plus a
margin of 2.5%. The unpaid principal balance for the Development
<PAGE> F-11
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Facility bears interest at the bank's base lending rate plus 5.5%.
Interest under both Facilities is due and payable monthly.
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) no payment of dividends for common stock.
On March 23, 1999, the Company entered into an agreement with its bank
amending certain terms of the note agreement. Under the amendment,
(i) the amount outstanding under the Development Facility of
$1,592,000 was rolled into the Revolving Facility (ii) the borrowing
base was redetermined at $18,900,000 (iii) the unpaid principal
balance for the Revolving Facility bears interest at the bank's prime
rate plus .25%, or 8% at March 23, 1999, and (iv) the monthly
commitment reduction was suspended until May 1, 1999, when the
borrowing base and monthly commitment reduction are scheduled for
redetermination by the bank.
(4) Stock Options and Warrants
--------------------------
At the election of the board of directors, the Company awards both
incentive stock options and nonqualified stock options to selected
key employees and officers. The options are awarded at an exercise
price based on the closing price of the Company's common stock on the
date of grant, a two-year and four-year vesting schedule and a
ten-year exercise period. As of December 31, 1998, options expire
beginning in the year-ended December 31, 2001 through 2008. Exercise
of the nonqualified stock options resulted in a deferred tax effect of
$83,457, $16,203, and $0 for the years ended December 31, 1998, 1997
and 1996, respectively.
The Company applies APB 25 and related Interpretations in accounting for
its stock option awards. No compensation expense has been recognized
for its stock option awards. If compensation expense for the stock
option awards had been determined consistent with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), the Company's net income and net income
per share would have been adjusted to the pro forma amounts indicated
below for the years ended December 31:
</TABLE>
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ (13,452,020) $ 2,464,487 $ 4,295,248
Basic net income (loss)
per share $ (.74) $ .14 $ .29
Diluted net income (loss)
per share $ (.74) $ .13 $ .27
</TABLE>
The pro forma net income and pro forma net income per share amounts
noted above are not likely to be representative of the pro forma
amounts to be reported in future years. The pro forma amounts for
1996 reflect
<PAGE> F- 12
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
the initial phase-in of FAS 123 and as a result do not
reflect any compensation expense for options granted prior to 1995.
Pro forma adjustments in future years will include compensation
expense associated with options granted beginning in 1995 plus
compensation expense associated with any options awarded in subsequent
years. As a result, such pro forma compensation expense is likely to
be higher than the levels experienced in 1996.
Under FAS 123, the fair value of each stock option grant is estimated
on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in
1998, 1997 and 1996:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.61 6.41 6.15
Expected life 7 years 7 years 7 years
Expected volatility .71 .55 .64
</TABLE>
A summary of the Company's stock option plans as of December 31, 1998,
1997 and 1996, and changes during the years ended on those dates is
presented below:
<TABLE>
For the year ended For the year ended For the year ended
December 31, 1998 December 31, 1997 December 31, 1996
------------------ ------------------ ------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Shares Price of Shares Price of Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Stock options:
Outstanding at
beginning of year 1,364,250 $ 3.06 1,207,250 $ 1.82 1,134,500 $ 1.55
Options granted 370,000 3.60 485,000 4.41 85,000 5.40
Options exercised (192,500) (.87) (323,000) .44 (12,250) 1.75
Options canceled - - (5,000) 4.53 - -
--------- ------ --------- ------ --------- ------
Outstanding at end
of year 1,541,750 $ 3.46 1,364,250 $ 3.06 1,207,250 $ 1.82
========= ====== ========= ====== ========= ======
Exercisable at end
of year 816,750 $ 2.97 775,500 $ 2.08 987,250 $ 1.35
========= ====== ========= ====== ========= ======
Weighted average fair
value of options
granted during the
year $ 2.58 $ 2.80 $ 3.70
========= ========= =========
</TABLE>
The following table summarizes information about the Company's stock
options outstanding at December 31, 1998:
<TABLE>
Options Outstanding Options Exercisable
------------------------------------------------------ ----------------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Prices December 31, 1998 Contractual Life Exercise Price December 31, 1998 Exercise Price
----------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$.64 - $.69 175,000 4 years $ .65 175,000 $ .65
$1.03 - $1.75 123,000 4 years $1.18 105,500 $1.09
$3.19 - $5.50 1,243,750 9 years $3.01 536,250 $4.10
--------- -------
1,541,750 816,750
========= =======
</TABLE>
<PAGE> F-13
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Stock Warrants
--------------
In connection with a common stock offering in 1996, an underwriter
received a five-year warrant to purchase 125,000 shares of common
stock at an exercise price of $5.10 per share. At December 31, 1998,
no shares have been purchased in connection with the five-year
warrant.
In connection with a private placement offering in 1994, a broker-
dealer responsible for introducing the Company to the Company's
principal placement agent received a five-year warrant to purchase
64,415 shares of common stock at a price of $2.75 per share. As of
December 31 1998 and 1997, 50,000 shares have been purchased in
connection with the five-year warrant.
The Company has outstanding at December 31, 1998 and 1997, 300,000
warrants. Each warrant allows the holder to buy one share of common
stock for $6.00. The warrants were issued as part of the Company's
initial public offering in 1980 and are exercisable for a 30 day
period commencing on the date a registration statement covering
exercise is declared effective. The warrants contain antidilution
provisions and in the event of liquidation,dissolution, or winding up
of the Company, the holders are not entitled to participate in the
assets of the Company.
(5) Income Taxes
------------
Federal income tax expense differs from the amount computed at the
Federal statutory rate as follows:
<TABLE>
Year ended
December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
<S>
Income tax expense (benefit) at statutory <C> <C> <C>
rate $ (5,472,619) $ 1,314,570 2,056,581
Change in valuation allowance for deferred
tax assets 2,530,196 - -
Statutory depletion (171,803) (241,274) (358,854)
Nondeductible expenses and other 14,199 49,154 20,386
------------ ----------- ---------
Income tax expense (benefit) $ (3,100,027) $ 1,122,450 1,718,113
============ =========== =========
</TABLE>
Income tax expense is deferred, with the exception of $64,986 in 1997
related to alternative minimum tax ("AMT").
<PAGE> F-14
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31 are as follows:
<TABLE>
1998 1997
---- ----
Noncurrent
----------
<S>
Deferred income tax assets: <C> <C>
Net operating loss carryforwards $ 5,309,428 2,124,284
Statutory depletion carryforwards 53,099 787,217
------------ ---------
Total noncurrent deferred tax assets 6,262,527 2,911,501
------------ ---------
Less valuation allowance (2,530,196) -
------------ ---------
Net deferred tax assets 3,732,331 2,911,501
------------ ---------
Deferred income tax liabilities:
Property and equipment, principally due to
differences in basis, expensing of intangible
drilling costs for tax purposes and depletion 3,732,331 6,094,985
------------ ---------
Total deferred income tax liabilities 3,732,331 6,094,985
------------ ---------
Net noncurrent deferred income tax
liability - 3,183,484
============ =========
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Due to
the uncertainty of future commodity prices and based on management's
intention to continue its drilling program (generating intangible
drilling costs which are projected to create future losses for tax
purposes), it does not appear more likely than not that the Company
will be able to utilize all the available carryforwards prior to
their ultimate expiration.
<PAGE> F-15
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
As of December 31, 1998, the Company had investment tax credit and net
operating loss carryforwards for regular tax purposes available to
reduce future taxable income and tax liability, respectively. These
carryforwards expire as follows:
<TABLE>
Alternative
minimum tax
Net operating Investment net operating
loss tax credit loss
---- ---------- ----
<S> <C> <C> <C>
1999 - 7,000 -
2000 - 15,000 -
2001 $ 498,000 24,000 -
2002 421,000 - -
2003 138,000 - -
2004 257,000 - -
2005 69,000 - -
2006 1,011,000 - -
2007 792,000 - -
2008 1,596,000 - 1,733,000
2009 2,170,000 - 1,974,000
2013 8,663,000 - 8,197,000
------------ ------ ----------
$ 15,615,000 46,000 11,904,000
============ ====== ==========
</TABLE>
(6) Major Customers
---------------
The following purchasers accounted for 10% or more of the Company's oil
and gas sales for the years ended December 31:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Purchaser A 11% 12% 11%
Purchaser B 24% 53% 46%
Purchaser C 22% - -
Purchaser D 18% - -
<PAGE> F-16
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(7) Employee Pension Plan
---------------------
Effective September 1, 1988, the Company established a simplified
employee pension plan covering all salaried employees of the Company.
The employees voluntarily contribute a portion of their eligible
compensation, not to exceed $7,000, adjusted for inflation beginning
in 1988, to the plan. The Company's contribution, including the
employees contribution, cannot exceed the lesser of $30,000 or 15% of
compensation. During 1998, 1997 and 1996, the Company contributed an
aggregate of $11,632, $12,709, and $7,986, respectively, of which
$3,388, $3,129 and $2,963, respectively, was allocated to a Director
of the Company. The Company has no obligation to make contributions
to the plan.
(8) Statements of Cash Flows
------------------------
During 1998, 1997 and 1996, $0, $0, and $60,413 were transferred from
leases held for resale to oil and gas properties, respectively. These
transfers are considered non-cash transactions.
No Federal taxes were paid in 1998, 1997 and 1996, as a result of net
operating losses or loss carryforwards.
The Company made interest payments of $1,349,786, $794,079, and
$1,221,144 in 1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, there were $1,868,241 and $4,558,594,
respectively, of property additions accrued in accounts payable.
(9) Equity Transactions
-------------------
Preferred Stock
On April 8, 1998, the Company completed a private placement of 600,000
shares of its $.60 Cumulative Convertible Preferred Stock, $.10 par
value per share ("Old Preferred Stock"). Cumulative dividends of $.60
per share were payable semi-annually on June 15 and December 15 of
each year. Each share of Old Preferred Stock was convertible at the
option of the holder, into 1.5625 shares of common stock at an initial
conversion price of $6.40 per share, subject to adjustment in certain
events. Proceeds received, net of related expenses, were
approximately $5,919,000. The net proceeds from the sale of Old
Preferred Stock were used to reduce the indebtedness outstanding under
the Company's loan agreement.
On October 16, 1998, the Company exchanged 600,000 shares of its $.60
Cumulative Convertible Preferred Stock ("Old Preferred Stock"),
issued in a private placement transaction dated April 8, 1998, for
600,000 shares of its 6% Convertible Preferred Stock, $0.10 par value
per share ("Preferred Stock"). Each share of Preferred Stock may be
converted, at the option of the holder, into 2.8571 shares of common
stock at an initial conversion price of $3.50 per share, subject to
adjustment in certain events. The Company
<PAGE> F-17
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
may redeem the Preferred Stock, in whole or part, after October 20,
1999, for $10 per share plus accrued dividends.
On October 30, 1998, the Company completed a private placement of
374,500 shares of its 6% Convertible Preferred Stock, $0.10 par value
per share ("Preferred Stock"). Each share of Preferred Stock may be
converted, at the option of the holder, into 2.8571 shares of common
stock at an initial conversion price of $3.50 per share, subject to
adjustment in certain events. The Company may redeem the Preferred
Stock, in whole or part, after October 20, 1999, for $10 per share
plus accrued dividends. Proceeds received, net of expenses, were
approximately $3,709,000. The net proceeds from the sale of the
Preferred Stock were used to reduce the indebtedness under the
Company's loan agreement.
Cumulative dividends of $0.60 are payable semi-annually on June 15 and
December 15 of each year, commencing on December 15, 1998.
(10) Related Party Transactions
--------------------------
During 1998 and 1997, the Company was charged $2,900 and $2,000,
respectively, for drilling services and lease operating expenses by
entities in which certain Directors are majority owners. These
Directors and their companies own interests in certain wells operated
by the Company. During 1998 and 1997, the Company charged $97,000 and
$45,000, respectively, for the lease operating expenses and drilling
costs and paid $62,000 and $122,000, respectively, in oil and gas
revenues to these related parties related to these wells.
An entity in which the Chief Executive Officer and Chairman of the
Board is the owner acted as the Company's agent in performing the
routine day to day operations of certain wells. In 1998 and 1997,
the Company was billed $70,000 and $498,000, respectively, for the
Company's pro rata share of lease operating and drilling expenses and
received $218,000 and $211,000 in 1998 and 1997, respectively, in oil
and gas revenues related to these wells.
An entity in which a certain Director of the Company is the sole
shareholder purchased a total of 110,000 shares of preferred stock of
the Company during 1998. In addition, during 1998, a Foundation,
where this same Director is the chairman of the board of directors of
the Foundation, and a Trust, where this same Director is trustee,
purchased a total of 55,000 shares each of preferred stock of the
Company. All of the shares of preferred stock of the Company were
purchased at a price of $10 per share on the same terms as all other
unaffiliated purchasers. (See Note 9) Total proceeds received of
$2,200,000 were used to reduce the Company's bank debt.
<PAGE> F-18
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(11) Oil and Gas Expenditures
------------------------
The following table reflects capitalized costs related to the oil and
gas producing activities as of December 31:
</TABLE>
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Capitalized costs:
Proved properties $ 48,945,738 48,590,827
Unproved properties 16,619,728 14,068,743
------------ ----------
65,565,466 62,659,570
Accumulated depletion (22,122,758) (16,217,470)
------------ -----------
$ 43,442,708 46,442,100
============ ===========
</TABLE>
Certain directly identifiable internal costs of property acquisition,
exploration and development activities are capitalized. Such costs
capitalized in 1998, 1997 and 1996 totaled $527,500, $461,537, and
$587,198, respectively.
Depletion per equivalent unit of production (BOE) was $8.07, $5.29, and
$4.47 for 1998, 1997 and 1996, respectively.
The following table reflects costs incurred in oil and gas property
acquisition, exploration and development activities for each of the
years in the three-year period ended December 31:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Transfers from undeveloped leases
held for sale $ - - 60,413
Proved property acquisition costs 88,747 917,883 3,838,495
Unproved property acquisition costs 6,034,025 7,710,358 7,602,441
Exploration 8,555,741 9,604,035 1,435,933
Development 3,873,168 4,877,240 3,962,977
------------ ---------- ----------
$ 18,551,681 23,109,516 16,900,259
============ ========== ==========
</TABLE>
(12) Impairment of Oil and Gas Properties
------------------------------------
As a result of a ceiling test calculation, which limits capitalized
costs, net of related deferred tax liability, to the aggregate of the
estimated present value, discounted at 10-percent of future net
revenues from proved reserves plus lower of cost or fair market value
of unproved properties, the Company recognized an impairment of
approximately $14,757,000 (approximately $12,300,000 net of tax)
related to its oil and gas properties during the fourth quarter of
1998. No impairment was determined to exist in 1997.
<PAGE> F-19
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(13) Earnings per Share
------------------
In accordance with the provisions of FAS 128, the following table
provides a reconciliation between basic and diluted earnings per
share for the year ended December 31:
<TABLE>
1998 1997 1996
---- ---- ----
<S>
Numerator: <C> <C> <C>
Net income (loss) $ (12,995,910) 2,743,930 4,330,654
Preferred stock dividend (276,712) - -
------------- --------- ---------
Net income (loss) and numerator for
basic and diluted net income (loss)
per share available to common
stockholders $ (13,272,622) 2,743,930 4,330,654
============= ========= =========
Denominator:
Weighted average common shares for
basic earnings (loss) per share 18,300,998 17,862,792 14,957,404
Effect of dilutive securities:
Employee stock options - 765,403 719,086
Warrants - 12,795 16,768
------------- ---------- ----------
Weighted average common shares for
diluted earnings (loss) per share
assuming conversions 18,300,998 18,640,990 15,693,258
============= ========== ==========
Basic net earnings (loss) per share $ (.73) 0.15 0.29
======== ==== ====
Diluted net earnings (loss) per share $ (.73) 0.15 0.28
======== ==== ====
</TABLE>
Employee stock options to purchase shares of common stock and
convertible preferred stock were outstanding during 1998 but were not
included in the computation of diluted net loss per share because
either (i) the employee stock options' exercise price was greater than
the average market price of the common stock of the Company, (ii) the
effect of the assumed conversion of the Company's preferred stock to
common stock would be antidilutive, or (iii) the Company had a net
loss from continuing operations and, therefore, the effect would be
antidilutive.
<PAGE> F-20
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(14) Supplemental Oil and Gas Reserve Data (Unaudited)
-------------------------------------------------
The estimates of the Company's proved oil and gas reserves, which are
all located in the United States are prepared by independent
petroleum engineers. Reserves were estimated in accordance with
guidelines established by the U.S. Securities and Exchange Commission
and the Financial Accounting Standards Board, which require that
reserve estimates be prepared under existing economic and operating
conditions with no provision for price and cost escalations except by
contractual arrangements. Information for oil is presented in barrels
(BBL) and for gas in thousands of cubic feet (MCF).
A summary of changes in reserve balances is presented below (in
thousands):
<TABLE>
Total Proved Proved Developed
-------------- ----------------
BBL MCF BBL MCF
--- --- --- ---
<S> <C> <C> <C> <C>
Reserves as of January 1, 1996 1,503 26,124 1,255 20,854
Purchase of reserves in place 273 4,797 273 4,797
Extensions and discoveries 128 9,034 128 9,034
Revisions of previous estimates (42) (3,746) (40) (3,684)
Production (221) (3,655) (221) (3,655)
----- ------ ----- ------
Reserves as of December 31, 1996 1,641 32,554 1,395 27,346
Sales of reserves in place (461) (2,779) (461) (2,779)
Extensions and discoveries 1,063 14,477 243 9,623
Revisions of previous estimates (174) (10,319) (164) (10,478)
Production (175) (3,385) (176) (3,384)
----- ------ ----- -------
Reserves as of December 31, 1997 1,894 30,548 837 2,328
Extensions and discoveries 281 7,554 210 5,634
Revisions of previous estimates (265) (8,806) (9) (3,614)
Production (186) (3,275) (185) (3,276)
----- ------ --- ------
Reserves as of December 31, 1998 1,724 26,021 853 19,072
===== ====== === ======
</TABLE>
The following is a standardized measure of the discounted net future
cash flows and changes applicable to proved oil and gas reserves
required by SFAS No. 69. The future cash flows are based on
estimated oil and gas reserves utilizing prices and costs in effect
as of year end discounted at 10% per year and assuming continuation
of existing economic conditions.
During 1998, the average sales price received by the Company for its
oil was approximately $12.49 per Bbl, as compared to $19.88 in 1997,
while the average sales price for the Company's gas was approximately
$2.04 per Mcf in 1998, as compared to $2.70 per Mcf in 1997. At March
15, 1999, the price received by the Company for its oil production was
approximately $12.50 per Bbl, while the price received by the Company,
at that same date, for its gas production was approximately $1.75 per
Mcf.
<PAGE> F-21
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
The standardized measure of discounted future net cash flows, in
management's opinion, should be examined with caution. The basis
for this table are the reserve studies prepared by independent
petroleum consultants, which contain imprecise estimates of quantities
and rates of production of reserves. Revisions of previous year
estimates can have a significant impact on these results. Also,
exploration costs in one year may lead to significant discoveries in
later years and may significantly change previous estimates of proved
reserves and their valuation. Therefore, the standardized measure of
discounted future net cash flow is not necessarily a "best estimate"
of the fair value of the Company's proved oil and gas properties.
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
(In Thousands)
<TABLE>
December 31,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Future cash flows $ 70,141 111,549 153,441
Future costs:
Production (20,706) (28,352) (39,296)
Development (5,740) (6,269) (2,790)
-------- ------ -------
Future net cash flows before income
taxes 43,695 76,928 111,355
Future income taxes - (8,891) (22,493)
-------- ------ -------
Future net cash flows 43,695 68,037 88,862
10% annual discount for estimated timing
of cash flows (16,872) (21,982) (31,513)
-------- ------ -------
Standardized measure of discounted net
cash flows $ 26,823 46,055 57,349
======== ====== ======
</TABLE>
<PAGE> F-22
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Changes in Standardized Measure of
Discounted Future Net Cash Flows From Proved Reserves
(In Thousands)
<TABLE>
Years ended December 31,
---------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Increase (decrease):
Sales of minerals in place $ - ( 6,491) -
Purchase of minerals in place - - 6,437
Extensions and discoveries and improved
recovery, net of future production and
development costs 8,916 25,530 23,660
Accretion of discount 4,642 6,701 2,589
Net change in sales prices net of
production costs (16,036) (18,293) 24,273
Changes in estimated future
development costs 664 (51) 40
Revisions of quantity estimates (8,325) (13,333) (6,043)
Net change in income taxes 365 9,300 (8,940)
Sales, net of production costs (6,588) (9,443) (11,482)
Changes of production rates (timing) and
other (2,870) (5,214) 1,650
-------- ------ ------
Net increase (decrease) (19,232) (11,294) 32,184
Standardized measure of discounted future
net cash flows:
Beginning of year 46,055 57,349 25,165
-------- ------ ------
End of year $ 26,823 46,055 57,349
======== ====== ======
</TABLE>
(PAGE> S-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PARALLEL PETROLEUM CORPORATION
March 29, 1999 By: /s/ Thomas R. Cambridge
--------------------------
Thomas R. Cambridge, Chief
Executive Officer and
Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
/s/ Thomas R. Cambridge Chief Executive Officer March 29, 1998
- ----------------------- and Chairman of the
Thomas R. Cambridge Board of Directors
(Principal Executive
Officer)
/s/ Larry C. Oldham President and Treasurer March 29, 1998
- ----------------------- (Principal Financial and
Larry C. Oldham Accounting Officer)
/s/ Ernest R. Duke Director March 29, 1998
- -----------------------
Ernest R. Duke
/s/ Myrle Greathouse Director March 29, 1998
- -----------------------
Myrle Greathouse
/s/ Charles R. Pannill Director March 29, 1998
- -----------------------
Charles R. Pannill
<PAGE> 1
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
- ------- ---------------------------
*3.1 Certificate of Incorporation of Registrant.
3.2 Bylaws of Registrant (Incorporated by reference to
Exhibit 3.2 to Form 10-K of the Registrant for the
fiscal year ended December 31, 1995.)
4.1 Certificate of Designations, Preferences and Rights of
Serial Preferred Stock - 6% Convertible Preferred
Stock (Incorporated by reference to Exhibit 4.1 to
Form 10-Q of the Registrant for the fiscal quarter
ended September 30, 1998.)
Executive Compensation Plans and Arrangements (Exhibit
No.'s 10.1 through 10.7):
------------------------------------------------------
10.1 1983 Incentive Stock Option Plan (Incorporated by
reference to Exhibit 10.2 to Form S-l of the Registrant
(File No. 2-92397) as filed with the Securities and
Exchange Commission on July 26, 1984, as amended
by Amendments No. 1 and 2 on October 5, 1984, and
October 25, 1984, respectively.)
10.2 1992 Stock Option Plan (Incorporated by reference to
Exhibit 28.1 to Form S-8 of the Registrant (File No.
33-57348) as filed with the Securities and Exchange
Commission on January 25, 1993.)
<PAGE> 2
10.3 Stock Option Agreement between the Registrant and
Thomas R. Cambridge dated December 11, 1991
(Incorporated by reference to Exhibit 10.4 of Form 10-
K of the Registrant for the fiscal year ended December
31, 1992.)
10.4 Stock Option Agreement between the Registrant and
Thomas R. Cambridge dated October 18, 1993
(Incorporated by reference to Exhibit 10.4(e) of Form
10-K of the Registrant for the fiscal year ended
December 31, 1993.)
10.5 Merrill Lynch, Pierce, Fenner & Smith Incorporated
Prototype Simplified Employee Pension Plan
(Incorporated by reference to Exhibit 10.6 of the
Registrant's Form 10-K for the fiscal year ended
December 31, 1995.)
10.6 Non-Employee Directors Stock Option Plan
(Incorporated by reference to Exhibit 10.6 of the
Registrant's Form 10-K Report for the fiscal year ended
December 31, 1997).
*10.7 1998 Stock Option Plan
10.8 Loan Agreement dated July 1, 1996 between the
Registrant and Bank One Texas, N.A. (Incorporated by
reference to Exhibit 10.1 of Form 10-Q of the
Registrant for the fiscal quarter ended June 30, 1996.)
*10.9 Letter agreement, dated March 24, 1999, between the
Registrant and Bank One, Texas, N.A.
*23.1 Consent of Independent Auditors
*23.2 Consent of Independent Petroleum Engineers
*27 Financial Data Schedule
- ----------------------
* Filed herewith. Exhibit 3.1
<PAGE> 1
CERTIFICATE OF INCORPORATION
OF
PARALLEL PETROLEUM CORPORATION
"FIRST: The name of the corporation is PARALLEL PETROLEUM
CORPORATION.
SECOND: The address of its registered office in the State of Delaware is No.
100 West Tenth Street, in the City of Wilmington, County of New Castle. The
name of its registered agent at such address is The Corporation Trust
Company.
THIRD: The nature of the business of the Corporation and the objects and
purposes and business thereof proposed to be transacted, promoted or carried
on are as follows:
1. To transact any and all lawful business for which a
corporation may be incorporated under the laws of the State of
Delaware.
2. To do everything necessary, proper, advisable or convenient
for the accomplishment of the purposes hereinabove set forth and
to do all things incidental thereto or connected therewith which are
not prohibited by the laws of the State of Delaware, by other laws
or by these Articles.
It is the intention that the purposes, objects and powers specified by the
foregoing clauses shall not, by reference to or inference from the terms of any
other clause in this Certificate of Incorporation, but each purpose, object or
power stated in the foregoing clauses shall be regarded as an independent
purpose, object or power.
FOURTH: The total number of shares of all classes that the Corporation shall
have authority to issue is 140,000,000 of which 40,000,000 shall be Preferred
Shares, par value $.10 per share, and 100,000,000 shall be Common Shares,
$.01 par value per share.
The designations, preferences, limitations and relative rights of the
shares of each class that the Corporation shall have authority to issue are as
follows:
<PAGE> 2
1. Preferred Shares.
The Corporation may divide and issue the Preferred Shares in series.
Preferred Shares of each series when issued shall be designated to distinguish
them from the shares of all other series. The Board of Directors is hereby
expressly vested with authority to divide the class of Preferred Shares into
series and to fix and determine the relative rights and preferences of the
shares of any such series so established to the full extent permitted by this
Certificate of Incorporation and the laws of the State of Delaware in respect
of the following:
(a) The number of shares to constitute such series, and
the distinctive designations thereof;
(b) The rate and preference of dividends, if any, the time
of payment of dividends, whether dividends are cumulative and the
date from which any dividend shall accrue;
(c) Whether shares may be redeemed and, if so, the
redemption price and the terms and conditions of redemption;
(d) The amount payable upon shares in event of
involuntary liquidation;
(e) The amount payable upon shares in event of voluntary
liquidation;
(f) Sinking fund or other provisions, if any, for the
redemption or purchase of shares;
(g) The terms and conditions on which shares may be
converted, if the shares of any series are issued with the privilege
of conversion;
(h) Voting rights, if any; and
(i) any other relative rights and preferences of shares of
such series, including, without limitation, any restriction on any
increase in the number of shares of any series theretofor
authorized and any limitation or restriction of rights or powers to
which shares of any future series shall be subject.
<PAGE> 3
2. Common Shares.
(a) The rights of holders of Common Shares to receive dividends
or to share in the distribution of assets in the event of liquidation,
dissolution or winding up of the affairs of the Corporation shall be subject
to the preferences, limitations and relative rights of the Preferred Shares
fixed in the resolution or resolutions which may be adopted from time to
time by the Board of Directors of the Corporation providing for the issuance
of one or more series of the Preferred Shares.
(b) The holders of the Common Shares shall be entitled to
vote for each Common Share held by them of record at the time for
determining the holders thereof entitled to vote.
FIFTH: The names and mailing addresses of the incorporators are:
Name Address
- ---- ----------
Frank S. Delay 500 Metro Building
119 North Colorado
Midland, Texas
79701
Larry C. Oldham 500 Metro Building
119 North Colorado
Midland, Texas
79701
SIXTH: The names and mailing addresses of the persons who are to serve as
the directors (until their successors are duly elected and qualified) are:
Name Address
- ---- -----------
Frank S. Delay 500 Metro Building
119 North Colorado
Midland, Texas
79701
<PAGE> 4
Name Address
- ---- -----------
E. R. Duke 500 Metro Building
119 North Colorado
Midland, Texas
79701
Larry C. Oldham 500 Metro Building
119 North Colorado
Midland, Texas
79701
Charles R. Pannill 500 Metro Building
119 North Colorado
Midland, Texas
79701
Glenn A. Smith 500 Metro Building
119 North Colorado
Midland, Texas
79701
SEVENTH: The corporation is to have perpetual existence.
EIGHTH: The Board of Directors shall have power to enact, alter, amend and
repeal such By-Laws not inconsistent with the laws of the State of Delaware
and this Certificate of Incorporation as it may deem best for the management of
the Corporation.
NINTH: Cumulative voting shall not be allowed in the election of directors.
TENTH: Shareholders shall not have a preemptive right to subscribe for,
purchase or acquire additional unissued or treasury shares of the Corporation
or securities convertible into shares or carrying share purchase warrants or
privileges as the same may be issued from time to time by the corporation.
ELEVENTH: Elections of directors need not be by written ballot unless
the by-laws of the corporation shall so provide.
Meetings of stockholders may be held within or without the State of
Delaware, as the by-laws may provide. The books of the corporation may be
kept (subject to any provision contained in the statutes) outside the State of
<PAGE> 5
Delaware at such place or places as may be designated from time to time by
the board of directors or in the by-laws of the corporation.
TWELFTH Any action required by statute to be taken at any annual or
special meeting of stockholders, or any action which may be taken at any
annual or special meeting of stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of all of the outstanding
stock of the Corporation.
THIRTEENTH: The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statue, and all rights conferred upon
stockholders herein are granted subject to this reservation.
WE, THE UNDERSIGNED, being each of the incorporators hereinbefore
named, for the purpose of forming a corporation pursuant to the General
Corporation Law of the State of Delaware, do make this certificate, hereby
declaring and certifying that this is our act and deed and the facts herein
stated are true, and accordingly heave hereunto set our hands this 6th day of
June, 1984.
/s/ Frank S. Delay
---------------
FRANK S. DELAY
/s/ Larry C. Oldham
-----------------
LARRY C. OLDHAM
<PAGE> 1
CERTIFICATE OF CHANGE OF ADDRESS OF
REGISTERED OFFICE AND OF REGISTERED AGENT
PURSUANT TO SECTION 134 OF TITLE 8 OF THE DELAWARE CODE
To: DEPARTMENT OF STATE
Division of Corporations
Townsend Building
Federal Street
Dover, Delaware 19903
Pursuant to the provisions of Section 134 of Title 8 of the Delaware Code,
the undersigned Agent for service of process, in order to change the address of
the registered office of the corporations for which it is registered agent,
hereby certifies that:
1. The name of the agent is: The Corporation Trust Company
2. The address of the old registered office was:
100 West Tenth Street
Wilmington, Delaware, 19801
3. The address to which the registered office is to be changed is:
Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
The new address will be effective on July 30, 1984.
4. The names of the corporations represented by said agent are
set forth on the list annexed to this certificate and made a
part hereof by reference.
<PAGE> 2
IN WITNESS WHEREOF, said agent has caused this certificate to
be signed on its behalf by its Vice-President and Assistant Secretary
this 25th day of July, 1984.
THE CORPORATION TRUST COMPANY
------------------------------
(Name of Registered Agent)
By: /S/ Virginia Colwel
--------------------
(Vice-President)
ATTEST:
/S/ Mark
- -------------------------
(Assistant Secretary)
<PAGE> 1
CERTIFICATE OF MERGER
MERGING
PARALLEL PETROLEUM CORPORATION
A TEXAS CORPORATION
INTO
PARALLEL PETROLEUM CORPORATION
A DELAWARE CORPORATION
(Pursuant to Section 252 of the General Corporation
Law of the State of Delaware)
1. The names of the constituent corporations and the states
under the laws of which they are respectively organized are
Name of Corporation State
---------------------- -----------
Parallel Petroleum
Corporation Texas
Parallel Petroleum
Corporation Delaware
2. An agreement of Merger has been approved, adopted,
certified, executed and acknowledged by each of the constituent
corporations in accordance with Section 252(c) of the General
Corporation Law of the State of Delaware.
3. The name of the surviving corporation is Parallel Petroleum
Corporation, a Delaware corporation.
4. The Certificate of Incorporation of Parallel Petroleum
Corporation shall be the Certificate of Incorporation of the surviving
corporation.
<PAGE> 2
5. The executed Agreement of Merger is on file at the principal
place of business of Parallel Petroleum Corporation.
Parallel Petroleum Corporation
119 North Colorado
Metro Building
Suite 500
Midland, Texas 79701
6. A copy of the Agreement of Merger will be furnished by Parallel
Petroleum Corporation, on request and without cost, to any stockholder
of any constituent corporation.
7. The authorized capital stock of Parallel Petroleum Corporation,
Texas, is 120,000,000 shares.
IN WITNESS WHEREOF, said Parallel Petroleum Corporation, a
Delaware corporation, has caused its corporate seal to be affixed and this
certificate to be signed by Frank S. Delay, its President, and Larry C.
Oldham, its Secretary, this 17th day of December, A.D., 1984.
By: /s/ Frank S. Delay
--------------------------
Frank S. Delay, President
/s/ Larry C. Oldham
--------------------------
Larry C. Oldham, Secretary
<PAGE> 3
STATE OF TEXAS
COUNTY OF MIDLAND
Be it remembered that on this 17th day of December, A.D., 1984,
personally came before me, Phyllis D. Evans, a notary public in and for
the county and state aforesaid, Frank S. Delay, President of Parallel
Petroleum Corporation, a corporation of the State of Delaware, the
Corporation described in and which executed the foregoing Certificate,
known to me personally to be such, and he, the said Frank S. Delay, as
such President, duly executed said Certificate before me and
acknowledged the said Certificate to be his act and deed and the act and
deed of said corporation; that the signatures of the said President and of
the Secretary of said corporation to said foregoing Certificate are in the
handwriting of the said President and Secretary of said corporation,
respectively, and that the seal affixed to said Certificate is the common or
corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and seal of the
office the day and year aforesaid.
Notarial Seal /s/ Phyllis D. Evans
----------------------
Name: Phyllis D. Evans
----------------
Notary Public in and for said
County and State
My Commission Expires:
11/24/85
<PAGE> 1
PARALLEL PETROLEUM CORPORATION
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF SERIAL PREFERRED STOCK
$.30 CUMULATIVE CONVERTIBLE PREFERRED STOCK
Pursuant to Section 151 of the Delaware
General Corporation Law
RESOLVED, by the Board of Directors of Parallel Petroleum
Corporation, a Delaware corporation (the "Company"), that pursuant to
authority expressly granted to and vested in the Board of Directors by the
provisions of the Certificate of Incorporation of the Company, the Board
of Directors hereby creates a series of the class of authorized Serial
Preferred Stock, $.10 par value ("Preferred Stock"), of the Company, and
authorizes the issuance thereof, and hereby fixes the designations and
amount thereof, and the voting powers, preferences and relative,
participation, optional and other special rights of the shares of such
series, and the qualifications, limitations or restrictions thereof (in
addition to the designations, preferences and relative, participating,
optional and other special rights of the shares of such series, and the
qualifications, limitations or restrictions thereof (in addition to the
designations, preferences and relative, participating and other special
rights, and the qualifications, limitations or restrictions thereof, set forth
in the Certificate of Incorporation of the Company, which are applicable
to the Serial Preferred Stock of all series) as follows:
1.1 Designation and Amount. The shares of such series shall be
designated ".$30 Cumulative Convertible Preferred Stock" (such series
being hereinafter sometimes called "this Series"), and the number of
shares constituting such Series shall initially be 174,669. The number
of authorized shares of this Series may be reduced by further resolution
duly adopted by the Board of Directors of the Company and by the filing
of a certificate pursuant to the provisions of the General Corporation Law
of the State of Delaware stating that such reduction has been so
authorized, but the number of authorized shares of this Series shall not
be increased. Shares in this Series have a par value of $.10 per share.
1.2 Dividends. The holders of shares of this Series shall be
entitled to receive, out of the funds of the Company legally available
therefore and as and when declared by the Board of Directors, cash
dividends at the rate of $.30 per share per annum, payable semi-annually
<PAGE> 2
on the first day of the months of May and November in each year,
commencing November 1, 1986, except that if such date is a Saturday,
Sunday or legal holiday then such dividend shall be payable on the first
immediately preceding day which is not a Saturday, Sunday or legal
holiday. Such dividends shall be cumulative (whether or not in any semi-
annual dividend period there shall be funds of the Company legally
available for the payment of such dividends), commencing on the date of
original issue and shall be payable for any period less than a full semi-
annual period on the basis of a year of 360 days with equal 30 day
months. Dividends shall be payable to holders of record, as they appear
on the stock books of the Company on such record dates as may be
declared by the Board of Directors, not more than sixty (60) days nor less
than ten (10) days preceding the payment dates for such dividends.
Dividends in arrears may be declared and paid at any time, without
reference to any regular dividend payment date, to holders of record on
such date, not exceeding sixty (60) days preceding the payment date
thereof, as may be fixed by the Board of Directors of the Company.
Except as provided below with regard to any class of stock ranking on a
parity with the Preferred Stock as to payment of dividends. In no event,
so long as this Series shall remain outstanding, shall any dividend
whatsoever be declared or paid upon, nor shall any distribution be made
or ordered in respect of, any class of stock of the Company ranking on a
parity with or junior to this Series with respect to payment of dividends,
unless dividends on this Series since the date of issue thereof to the date
of such distribution shall have been paid or declared and set apart for
payment. When dividends are not paid in full upon the shares of this
Series and any other preferred stock ranking on a parity as to payment
of dividends with this Series, all dividends declared upon shares of this
Series and any other preferred stock ranking on a parity as to dividends
with this Series shall be declared pro rata so that the amount of dividends
declared per share on this Series and such other preferred stock shall in
all cases bear to each other the same ratio that accrued dividends per
share on the shares of this Series and such other preferred stock bear to
each other. If full cumulative dividends on this Series have not been
declared and paid or set apart for payment, the Company shall not declare
or pay or set apart for payment any dividends or make any other
distributions on, or make any payment on account of the purchase,
redemption or retirement of, the Common Stock, $.01 par value, of the
<PAGE> 3
Company ("Common Stock"), or any other stock of the Company ranking
junior to this Series as to dividends or distribution of assets on
liquidation, dissolution or winding up of the Company (other than, in the
case of dividends or distributions, dividends or distributions paid in
shares of Common Stock or such other junior ranking stock), until full
cumulative dividends on this Series are declared and paid or set apart for
payment.
1.3 Conversion. The holders of shares of this Series shall have the
right, at their option, to convert all or any part of such shares of this
Series into shares of Common Stock of the Company at any time on and
subject to the following terms and conditions:
(a) The shares of this Series shall be convertible at the office of
any transfer agent for such stock, and at such other place or places, if
any, as the Board of Directors of the Company may designate, into fully
paid and nonassessable shares ) calculated as to each conversion to the
nearest 1/100th of a share) of Common Stock of the Company. The
number of shares of Common Stock issuable upon conversion of each
share of this Series shall be equal to $3.00 divided by the conversion
price in effect at the time of conversion, determined as hereinafter
provided. The price at which shares of Common Stock shall be delivered
upon conversion (herein called the "conversion price") shall be initially
$.50 per share of Common Stock and such conversion price shall be and
shall remain in effect until the close of business on March 1, 1988. After
March 1, 1988, the conversion price shall be $.75 per share of Common
Stock. The conversion price shall be subject to adjustment from time to
time in certain instances as hereinafter provided. If the Company calls
for the redemption of any shares of this Series, such right of conversion
shall cease and terminate, as to the shares designated for redemption, at
the close of business on the redemption date, unless the Company
defaults in the payment of the redemption price. No fractional shares of
Common Stock will be issued. A cash payment will be paid in lieu of any
fractional share in an amount equal to the same fraction of the last sale
price on the Common Stock (determined as provided in Section 1.3(c)(iv)
at the close of business on the business day which next precedes the day
of conversion.
<PAGE> 4
(b) Before any holder of shares of this Series shall be entitled to
convert the same into Common Stock, he shall surrender the certificate
or certificates therefor, duly endorsed or assigned to the Company or in
blank, at the office of any transfer agent for such stock or at such other
place or places, if any, as the Board of Directors of the Company may
have designated, and shall give written notice to the Company at said
office or place that he elects to convert the same and shall state in writing
therein the name or names (with addresses) in which he wishes the
certificate or certificates for Common Stock to be issued. Shares of this
Series surrendered for conversion during the period from the close of
business on any record date for the payment of a dividend on the shares
of this Series to the opening of business on the date for payment of such
dividends shall (except in the case of shares of this Series which have
been called for redemption on a redemption date within such period) be
accompanied by payment of an amount equal to the dividend payable on
such dividend payment date on the shares of this Series being
surrendered for conversion. Except as provided in the preceding
sentence, no payment or adjustment shall be made upon any conversion
on account of any dividend accrued on the shares of this Series
surrendered for conversion or on account of any dividends on the
Common Stock issued upon conversion. The Company will, as soon as
practicable thereafter, issue and deliver at said office or place to such
holder of shares of this Series, or to his nominee or nominees, certificates
for the number of full shares of Common Stock to which he shall be
entitled as aforesaid, together with cash in lieu of any fraction of a share.
Shares of this Series shall be deemed to have been converted as of the
close of business on the date of surrender of such shares for conversion
as provided above, and the person or persons entitled to receive the
Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such Common Stock as of the
close of business on such date.
(c) The conversion price in effect at any time shall be subject to
adjustment as follows:
(i) In case the Company shall (A) declare a
dividend or make a distribution payable in
Common Stock on any class of capital stock of the
<PAGE> 5
Company, unless the payment thereof would
increase the number of shares of Common Stock
outstanding by less than one percent (1%), (B)
subdivide or reclassify its outstanding shares of
Common Stock into a greater number of shares, or
(C) combine its outstanding shares of Common
Stock into a smaller number of shares, the
conversion price in effect at the time of the record
date for such dividend or distribution or the
effective date of such subdivision, combination or
reclassification shall be proportionately reduced in
the case of any increase in the number of shares of
Common Stock outstanding and increased in the
case of any reduction in the number of shares of
Common Stock outstanding so that the holder of
any share of this Series surrendered for conversion
after such time shall be entitled to receive the kind
and amount of shares which he would have owned
or have been entitled to receive had such share of
this Series been converted into Common Stock
immediately prior to such time and had such
Common Stock received such dividend or other
distribution or participated in such subdivision,
combination or reclassification. Such adjustment
shall be effective as of the record date for such
dividend or distribution or the effective date of
such combination, subdivision or reclassification
and shall be made successively whenever any event
listed above shall occur.
(ii) In case the Company shall issue rights or
warrants to all holders of its Common Stock
entitling them to subscribe for or purchase shares
of Common Stock at a price per share less than the
Current Market Price (as defined in paragraph (iv)
below) of the Common Stock, on the date fixed for
the determination of stockholders entitled to
receive such rights or warrants, the conversion
<PAGE> 6
price at the opening of business on the day
following the date fixed for such determination
shall be reduced by multiplying the conversion
price by a fraction of which the numerator shall be
the number of shares of Common Stock
outstanding at the close of business on the date
fixed for such determination plus the number of
shares of Common Stock which the aggregate of
the offering price of the total number of shares of
Common Stock so offered for subscription or
purchase would purchase at such Current Market
Price of the Common Stock and the denominator
shall be the number of shares of Common Stock
outstanding at the close of business on the date
fixed for such determination plus the number of
shares of Common Stock so offered for subscription
or purchase, such reduction to become effective
immediately after the opening of business on the
day following the date fixed for such determination.
For purposes of determining under this paragraph
the number of shares of Common Stock
outstanding at any time, there shall be excluded all
shares of Common Stock held in the treasury of
the Company. If any or all such rights or warrants
are not so issued or expire or terminate before
being exercised, the conversion price then in effect
shall be appropriately readjusted.
(iii) In case the Company shall distribute to
all holders of its Common Stock evidences of its
indebtedness or assets (including securities, but
excluding cash dividends or a distribution referred
to in paragraph (i) above or paid out of earned
surplus) or subscription rights or warrants
(excluding those referred to in paragraph (ii)
above), the conversion price shall be adjusted so
that it shall equal the price determined by
multiplying the conversion price in effect
<PAGE> 7
immediately prior to the close of business on the
date fixed for the determination of stockholders
entitled to receive such distribution by a fraction of
which the numerator shall be the Current Market
Price per share of the Common Stock on the date
fixed for such determination less the then fair
market value (as determined by the Board of
Directors of the Company, in good faith and in the
exercise of its reasonable business judgment and
described in a Board Resolution filed with any
transfer agent for this Series) of the portion of the
assets or evidences of indebtedness so distributed
applicable to one share of Common Stock and the
denominator shall be such Current Market Price
per share of the Common Stock. Such adjustment
shall become effective immediately prior to the
opening of business on the day following the date
fixed for the determination of stockholders entitled
to receive such distribution.
(iv) For the purpose of any computation
under paragraphs (ii) and (iii) above, the "Current
Market Price" per share of Common Stock on any
date shall be deemed to be the average of the daily
closing prices per share of Common Stock for 15
consecutive business days selected by the
Company commencing no more than 45 business
days before such date. The closing price for each
day shall be the last reported sales price regular
way or, in case no such sale takes place on such
day, the average of the closing bid and asked
prices regular way, in either case on the American
Stock Exchange, or, if the Common Stock is not
listed or admitted to trading on such Exchange, on
the principal national securities exchange or no
such quotations are available, the average of the
closing bid and asked prices as furnished by any
member of the National Association of Securities
<PAGE> 8
Dealers, Inc. selected from time to time by the
Company for that purpose or if no such quotations
are available, the fair market value as determined
in good faith in the exercise of their reasonable
business judgment by the Board of Directors of the
Company.
(v) All calculations under this section 1.3(c)
shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be.
(vi) No adjustment in the conversion price
shall be required unless such adjustment would
require a change of at least 1% in such price;
provided, however, that any adjustments which by
reason of this paragraph (vi) are not required to be
made shall be carried forward and taken into
account in any subsequent adjustment.
(d) Whenever the conversion price is adjusted as herein provided:
(i) The Company shall promptly file any of
the transfer agents for this Series a certificate of
the Treasurer of the Company setting forth the
adjusted conversion price and showing in
reasonable detail the facts upon which such
adjustment is based, including a statement of the
consideration received or to be received by the
Company for any shares of Common Stock issued
or deemed to have been issued; and
(ii) a notice stating that the conversion price
has been adjusted and setting forth the adjusted
conversion price shall forthwith be required, and
as soon as practicable after it is required, such
notice shall be mailed by the Company to the
holders of record of this series.
<PAGE> 9
(e)
(i) In case of any consolidation or merger of
the Company with or into any other corporation
(other than a merger which does not result in any
reclassification, conversion, exchange or
cancellation of the Common Stock), or in case of
any sale or transfer of all or substantially all of the
assets of the company, or the reclassification of the
Common Stock into another form of capital stock
of the Company, whether in whole or in part, the
holder of each share of this Series shall have the
right to receive securities, cash or property, or any
combination thereof, having a value equal to the
greater of (A) $3.00 per share, plus an amount
equal to all dividends accumulated and unpaid on
each such share at the time of such consolidation,
merger, sale or transfer or reclassification or (B)
the value of the shares of stock and other
securities, cash and property (including, if
applicable, Common Stock) which such holder
would have been entitled to receive upon such
consolidation, merger, sale or transfer or
reclassification if he had held the Common Stock
issuable upon the conversion of such share of this
Series immediately prior to such consolidation,
merger, sale or transfer, or reclassification.
(ii) In the event that at any time, as a result
of paragraph (i) above, the holder of any share of
this Series shall become entitled to receive any
shares of stock and other securities and property
(including, if applicable, Common Stock), thereafter
the amount of such shares of stock and other
securities so receivable upon conversion of any
share of this Series shall be subject to adjustment
from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions
<PAGE> 10
with respect to the Common Stock contained in
paragraphs (i) to (vi), inclusive, of section 1.3 (c)
above, and for the provisions of section 1.3(c) with
respect to the Common Stock shall apply on like
terms to any such shares of stock and other
securities and property (including, if applicable,
Common Stock).
(f) In case:
(i) the Company shall authorize the
distribution to all holders of its Common Stock of
evidences of its indebtedness of assets (other than
cash dividends or other cash distributions paid out
of earned surplus); or
(ii) the Company shall authorize the granting
to the holders of its Common Stock or rights or
warrants to subscribe for or purchase any shares
of capital stock of any class or of any other rights;
or
(iii) of any reclassification of the capital stock
of the Company (other than a subdivision or
combination of its outstanding shares of Common
Stock), or of any consolidation or merger to which
the Company is required, or of the sale or transfer
of all or substantially all of the assets of the
Company; or
(iv) of the voluntary or involuntary
dissolution, liquidation or winding up of the
Company;
<PAGE> 11
then, in each case, the Company shall cause to be filed with any of the
transfer agents for this Series, and shall cause to be mailed, first class
postage prepaid, to the holders of record of the outstanding shares of this
Series, at least 20 days prior to the applicable record date hereinafter
specified, a notice stating (x) the date on which a record is to be taken for
the purpose of such dividend, distribution, rights or warrants, or, if a
record is not to be taken, the date as of which the holders of Common
Stock or record to be entitled to such dividend, distribution, rights or
warrants are to be determined, or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up is expected to become effective, and the date as
of which it is expected that holders of Common Stock of record shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up.
(g) The Company shall at all times reserve and keep available, free
from preemptive rights, out of its authorized but unissued Common Stock,
solely for the purpose of effecting the conversion of the shares of this
Series, the full number of shares of Common Stock then issuable upon
the conversion of all outstanding shares of this Series. For the purpose
of this section 1.3(g), the full number of shares of Common Stock issuable
upon the conversion of all outstanding shares of this Series shall be
computed as if at the time of computation of such number of shares of
Common Stock all outstanding shares of this Series were held by a single
holder. The Company shall from time to time, in accordance with the
laws of the State of Delaware, increase the authorized amount of its
Common Stock if at any time the authorized amount of its Common Stock
remaining unissued shall not be sufficient to permit the conversion of all
shares of this Series at the time outstanding. If any shares of Common
Stock required to be reserved for issuance upon conversions of shares of
this Series hereunder require registration with or approval of any
governmental authority under any Federal or State law before such shares
may be issued upon such conversion, the company will in good faith and
as expeditiously as possible endeavor to cause such shares to be so
registered or approved.
(h) The Company will pay any and all taxes that may be payable
in respect of the issue or delivery of shares of Common Stock on
conversion of shares of this Series pursuant hereto. The Company shall
not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issue or transfer and delivery of shares of
<PAGE> 12
Common Stock in a name other than that in which the shares of this
Series so converted were registered, and no such issue or delivery shall
be made unless and until the person requesting such issue has paid to
the Company the amount of any such tax or has established to the
satisfaction of the Company that such tax has been paid.
(i) Whenever reference is made in this section 1.3 to the issue or
sale of shares of Common Stock, the term "Common Stock" shall include
only shares of the class designated as Common Stock, $.01 par value, of
the Company at the date hereof or shares of any class or classes resulting
from any reclassification or reclassifications thereof and which have no
preference in respect of dividends or of amounts payable in the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
Company and which are not subject to redemption by the Company,
provided that if at any time there shall be more than one such resulting
class, the shares of each such class then so deliverable shall be
substantially in the proportion which the total number of shares of such
class resulting from all such reclassifications bears to the total number
of shares of all such classes resulting from all such reclassifications.
1.4 Liquidation Rights. In the event of any liquidation,
dissolution, or winding up of the affairs of the Company, whether
voluntary or otherwise, after payment or provision for payment of the
debts and other liabilities of the Company, the holders of this Series shall
be entitled to receive an amount in cash for each share of this Series
equal to $3.00 per share, plus an amount equal to all dividends
accumulated and unpaid on each such share up to the date fixed for
distribution, before any distribution shall be made to the holders of the
Common Stock and of any other capital stock of the Company ranking
junior to this Series upon the liquidation, dissolution or winding up of the
Company. If upon any liquidation, dissolution or winding up of the
Company, the assets distributable among the holders of this Series shall
be insufficient to permit the payment in full to the holders of all the then
outstanding shares of this Series and all holders of preferred stock
ranking on a parity with this Series with respect to the payment upon
liquidation, dissolution and winding up of the Company of all preferential
amounts payable to all such holders, then the entire assets of the
Company thus distributable shall be distributed ratably among the
<PAGE> 13
holders of this Series and all such other holders of preferred stock in
proportion to the respective amounts that would be payable per share if
such assets were sufficient to permit payment in full. Subject to the
provisions of section 1.3(e)(i), a consolidation or merger of the Company
with or into one or more corporations or the sale or transfer of all or
substantially all of the assets of the Company shall not be deemed to be
a liquidation, dissolution or winding up of the Company.
1.5 Optional Cash Redemption. The shares of this Series are not
redeemable prior to May 145, 1987, unless the average of the closing bid
and asked prices of the Common Stock as quoted by any member of the
National Association of Securities Dealers, Inc. shall have equaled or
exceeded 140% of the conversion price in effect on the date of notice
referred to below for at least 20 of the 30 consecutive trading days
immediately prior to the date notice of redemption is given. The share of
this Series are redeemable for cash, in whole at any time or from time to
time in part at the option of the Company, at a redemption price of $3.00
per share, plus any accumulated and unpaid dividends thereon.
Notice of redemption pursuant to this section 1.5 will be mailed at
least 30 days but not more than 60 days before the redemption date to
each holder of record of shares of this Series to be redeemed at the
address shown on the stock books of the Company (but no failure to mail
such notice or any defect therein or in the mailing thereof shall affect the
validity of the proceedings for such redemption except as to the holder to
whom the Company has failed to mail such notice or except as to the
holder whose notice was defective). On and after the redemption date,
dividends shall cease to accumulate on shares of this Series called for
redemption (unless the Company defaults in the payment of the
redemption price).
If less than all the outstanding shares of this Series not previously
called for redemption are to be redeemed pursuant to this section 2.5,
shares to be redeemed shall be selected by the Company from outstanding
shares not previously called for redemption by lot or pro rata (as nearly
as may be) as determined by the Board of Directors of the Company. The
Company may not redeem less than all outstanding shares of this Series
pursuant to this section 1.5 unless full cumulative dividends shall have
<PAGE> 14
been declared and paid or set apart for payment upon all outstanding
shares of this Series for all past dividend periods. Shares of this Series
redeemed by the Company will be restored to the status of authorized but
unissued shares of preferred stock, without designation as to series, and
may thereafter be issued, but not as shares of this Series.
1.6 Voting Rights. The holders of shares of this Series shall have
no right to vote for any purpose, except as specifically required by the
laws of the State of Delaware and except as follows:
(a) So long as any shares of this Series remain outstanding, the
affirmative vote or consent of the holders of at least 66-2/3% of the then
outstanding shares of this Series, in person or by proxy, either in writing
or at a meeting called for that purpose (voting as a class with the holders
of all other series of preferred stock ranking on a parity with this Series
either as to dividends or distributions or upon liquidation, dissolution or
winding up of the Company and upon which like voting rights have been
conferred and are then exercisable), shall be necessary to permit, effect
or validate the repeal, amendment or other change of any provision of the
Certificate of Incorporation of the Company in any manner which
materially and adversely affects the rights, preferences, or privileges of
this Series or the holders thereof; provided, however, that any increase in
the amount of authorized preferred stock or the creation and issuance of
other series of preferred stock, whether ranking on a parity with or junior
or prior to this Series with respect to the payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up shall
not be deemed to materially and adversely affect such rights, preferences
or privileges.
The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be
required shall be effected, all outstanding shares of this Series shall have
been redeemed or sufficient funds shall have been deposited in trust to
effect such redemption.
IN WITNESS WHEREOF, this Certificate has been executed and
attested by the undersigned on October 21, 1986, and shall be effective
<PAGE> 15
at 10:00 a.m. Eastern Daylight Time, on October 21, 1986, or the date on
which filed with the Secretary of State of Delaware, whichever is later.
PARALLEL PETROLEUM CORPORATION
ATTEST:
By: /s/ Thomas R. Cambridge
/s/ Larry C. Oldham -------------------------
- -------------------------- Thomas R. Cambridge,
Larry C. Oldham, Secretary President
<PAGE> 1
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
OF
PARALLEL PETROLEUM CORPORATION
Parallel Petroleum Corporation, a corporation organized and
existing under the General Corporation Law of the State of Delaware
(the "Corporation") does hereby certify as follows:
FIRST: Pursuant to the provisions of the Delaware General
Corporation Law, the Board of Directors and the stockholders of the
Corporation adopted the Amendment to the Certificate of Incorporation
of the Corporation, which is set forth in the following resolution in
accordance with Section 242 of the Delaware General Corporation Law,
the purpose of which Amendment is to add a new Article Fourteenth to
the Certificate of Incorporation:
"RESOLVED, That Article Fourteenth is hereby added to the
Certificate of Incorporation to read in its entirety as follows:
ARTICLE FOURTEENTH
Section 1
A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the directors' duty of loyalty to
the Corporation or tits stockholders, (ii) for acts or omissions
not in good faith or whish involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction
from which the director derived any improper personal benefit.
If the Delaware General Corporation Law is amended after
approval by the stockholders of this article to authorize
corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent
<PAGE> 2
permitted by the Delaware General Corporation Law, as so
amended.
Any repeal or modification of the foregoing paragraph by
the stockholders of the Corporation shall not adversely affect
any right or protection of a director of the Corporation existing
at the time of such repeal or modification.
Section 2
(a) Right to Indemnification. Each person who was or is made
a party or is threatened to be made a party to or is otherwise involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or
she is or was a director, officer or employee of the Corporation or is or
was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint
venture, trust or other enterprise, including service with respect to
employee benefit plans (hereinafter an "indemnitee"), whether the basis
of such proceeding is alleged action in an official capacity as a director,
officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the
Delaware General Corporation Law, as the same exists or may hereafter
be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide
prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered
by such indemnitee in connection therewith and such indemnification
shall continue as to an indemnitee who has ceased to e a director, officer,
employee or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators; provided, however, that, except as provided
in paragraph (b) hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated such indemnitee
only if such proceeding (or part thereof) was authorized by the Board of
<PAGE> 3
Directors of the Corporation. The right to indemnification conferred in
this Section shall be a contract right and shall include the right to be
paid by the Corporation the expenses incurred in defending any such
proceeding in advance of its final disposition (hereinafter an
"advancement of expenses"); provided, however, that, if the Delaware
General Corporation Law requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a director or officer (and not
in any other capacity in which service was or is rendered by such
indemnitee, including without limitation, service to an employee benefit
plan) shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such indemnitee, to undertaking, by or on
behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal that such indemnitee is not entitled to be
indemnified for such expenses under this Section or otherwise (hereinafter
an "undertaking").
(b) Right of Indemnitee to Bring Suite. If a claim under paragraph
(a) of this Section is not paid in full by the Corporation within sixty days
after a written claim has been received by the Corporation, except in the
case of a claim for an advancement of expenses, in which case the
applicable period shall be twenty days, the indemnitee may at any time
thereafter bring suit against the Corporation to recover the unpaid
amount of the claim. If successful in whole or in part in any such suit or
in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall
be entitled to be paid also the expense of prosecuting or defending such
suit. In (i) any suite brought by the indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the indemnitee
to enforce a right to an advancement of expenses) it shall be a defense
that, and (ii) any suit by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking the Corporation shall
be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met the applicable standard of conduct set forth in
the Delaware General Corporation Law. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel,
or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is
<PAGE> 4
proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors), independent legal counsel or its
stockholders) that the indemnitee has not met such applicable standard
of conduct, shall create a presumption that the indemnitee has not met
the applicable standard of conduct or, in the case of such suit brought by
the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right hereunder, or by the Corporation to recover
an advancement of expenses pursuant to the terms of an undertaking, the
burden of proving that the indemnitee is not entitled to be indemnified or
to such advancement of expenses under this Section or otherwise shall be
on the Corporation.
(c) Non-Exclusivity of Rights. The rights to indemnification and
to the advancement of expenses conferred in this Section shall not be
exclusive of any other right which any person may have or hereafter
acquire under any statute, this Certificate of Incorporation, by-law,
agreement, vote of stockholders or disinterested directors or otherwise.
(d) Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust
or other enterprise against any expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against
such expense, liability or loss under the Delaware General Corporation
Law.
(e) Indemnification of Agents of the Corporation. The Corporation
may, to the extent authorized from time to time by the Board of Directors,
grant rights to indemnification and to the advancement of expenses, to
any agent of the Corporation to the fullest extent of the Provisions of this
Section with respect to the indemnification and advancement of expenses
of directors, officers and employees of the Corporation.
SECOND: Pursuant to the provisions of the Delaware General
Corporation Law, the Board of Directors and the stockholders of the
Corporation adopted the amendment to the Certificate of Designations,
<PAGE> 5
Preferences and Rights of Serial Preferred Stock - $.30 Cumulative
Convertible Preferred Stock filed October 27, 1986 with the Delaware
Secretary of State, which is set forth in the following resolution in
accordance with Section 242 of the Delaware General Corporation Law,
the purpose of which Amendment is to reduce the conversion price of the
Corporation's outstanding shares of $.30 Cumulative Convertible Preferred
Stock:
RESOLVED, That Section 1.3(a) of the Certificate of Designations,
Preferences and Rights of Serial Preferred Stock - $.30 Cumulative
Convertible Preferred Stock is hereby amended to read in its entirety
as follows:
(a) The shares of this Series shall be convertible at the office
of any transfer agent for such stock, and at such other place or
places, if any, as the Board of Directors of the Company may
designate, into fully paid and nonassessable shares (calculated as
to each conversion to the nearest 1/100th of a share) of Common
Stock of the Company. The number of shares of Common Stock
issuable upon conversion of each share of this Series shall be equal
to $3.00 divided by the conversion price in effect at the time of
conversion, determined as hereinafter provided. The price at which
shares of Common Stock shall be delivered upon conversion (herein
called the "conversion price") shall be $.25 per share of Common
Stock and such conversion price shall be and shall remain in effect
until the close of business on August 15, 1988. After August 15,
1988 the conversion price shall be $.50 per share of Common Stock.
The conversion price shall be subject to adjustment from time to
time in certain instances as hereinafter provided. If the Company
calls for the redemption of any shares of this Series, such right of
conversion shall cease and terminate, as to the shares designated
for redemption, at the close of business on the redemption date,
unless the Company defaults in the payment of the redemption
price. No fractional shares of Common Stock will be issued. A cash
payment will be paid in lieu of any fractional share in an amount
equal to the same fraction of the last sale price on the Common
Stock (determined as provided in Section 1.3(c)(iv) at the close of
<PAGE> 6
business on the business day which next precedes the day of
conversion.
IN WITNESS WHEREOF, Parallel Petroleum Corporation has caused
this Certificate of Amendment to be signed by Thomas R. Cambridge, its
President, and attested by Larry C. Oldham, its Secretary, this 15th day
of June, 1988.
Parallel Petroleum Corporation
By:/S/ Thomas R. Cambridge
-----------------------
Thomas R. Cambridge,
President
ATTESTED:
/S/ Larry C. Oldham
- --------------------------
Larry C. Oldham, Secretary
The undersigned President of Parallel Petroleum Corporation, being
duly sworn, does verify that the foregoing instrument represents the act
and deed of Parallel Petroleum Corporation and that the facts stated in
such instrument are true.
/S/ Thomas R. Cambridge
------------------------------
Thomas R. Cambridge, President
<PAGE> 7
THE STATE OF TEXAS
COUNTY OF MIDLAND
Before me, the undersigned authority, on this day personally
appeared Thomas R. Cambridge and Larry C. Oldham, President and
Secretary, respectively, of Parallel Petroleum Corporation, a corporation
formed under the laws of the State of Delaware, known to me to be the
individuals whose names are subscribed to the foregoing instrument, and
acknowledged and swore to me that they each executed the same for the
purposes and consideration therein expressed and as the act and deed of
said corporation and that the facts stated in the foregoing instrument are
true.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this 15th of June,
1988.
/S/ Jimmie L. Cromwell
---------------------------------
Name:Jimmie L. Cromwell
----------------------------
Notary Public in and for the State
Commission Expires: of Texas
1-26-91
- -------------------
<PAGE> 1
PARALLEL PETROLEUM CORPORATION
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF PREFERRED STOCK NON-VOTING CONVERTIBLE
PREFERRED STOCK
Pursuant to Section 151 of the Delaware
General Corporation Law
The undersigned, President and Secretary, respectively, of Parallel
Petroleum Corporation, a Delaware corporation (the "Company"), certify
that pursuant to authority granted to and vested in the Board of
Directors of the Company by the provisions of the Certificate of
Incorporation of the Company, the Board of Directors has duly adopted
the following resolutions creating a series of Preferred Stock of the
Company designated as the Non-Voting Convertible Preferred Stock :
RESOLVED, by the Board of Directors of Parallel Petroleum
Corporation, a Delaware corporation (the "Company"), that pursuant to
authority expressly granted to and vested in the Board of Directors by
the provisions of the Certificate of Incorporation of the Company, the
Board of Directors hereby creates a series of the class of authorized
Preferred Stock, $.10 par value ("Preferred Stock"), of the Company,
and authorizes the issuance thereof, and hereby fixes the designations
and amount thereof, and the voting powers, preferences and relative,
participation, optional and other special rights of the shares of such
series, and the qualifications, limitations or restrictions thereof (in
addition to the designations, preferences and relative, participating,
optional and other special rights of the shares of such series, and the
qualifications, limitations or restrictions thereof (in addition to the
designations, preferences and relative, participating and other special
rights, and the qualifications, limitations or restrictions thereof, set
forth in the Certificate of Incorporation of the Company, which are
applicable to the Preferred Stock) as follows:
1.1 Designation and Amount. The shares of such series shall be
designated Non-Voting Convertible Preferred Stock" (such series being
hereinafter sometimes called "this Series"), and the number of shares
constituting such Series shall initially be 65,248. The number of
authorized shares of this Series may be reduced by further resolution
duly adopted by the Board of Directors of the Company and by the
filing of a certificate pursuant to the provisions of the General
<PAGE> 2
Corporation Law of the State of Delaware stating that such reduction
has been so authorized, but the number of authorized shares of this
Series shall not be increased. Shares in this Series have a par value of
$.10 per share.
1.2 Dividends. The holders of shares of this Series shall not be
entitled to receive dividends.
1.3 Conversion. The holders of shares of this Series shall have
the right, at their option, to convert all or any part of such shares of
this Series into shares of Common Stock of the Company at any time
on and subject to the following terms and conditions:
(a) The shares of this Series shall be convertible at the office of
any transfer agent for such stock, and at such other place or places, if
any, as the Board of Directors of the Company may designate, into fully
paid and nonassessable shares ) calculated as to each conversion to
the nearest 1/100th of a share) of Common Stock of the Company. The
number of shares of Common Stock issuable upon conversion of each
share of this Series shall be equal to $3.50 divided by the conversion
price in effect at the time of conversion, determined as hereinafter
provided. The price at which shares of Common Stock shall be
delivered upon conversion (herein called the "conversion price") shall be
initially $.35 per share of Common Stock. The conversion price shall
be subject to adjustment from time to time in certain instances as
hereinafter provided. If the Company calls for the redemption of any
shares of this Series, such right of conversion shall cease and
terminate, as to the shares designated for redemption, at the close of
business on the redemption date, unless the Company defaults in the
payment of the redemption price. No fractional shares of Common
Stock will be issued. A cash payment will be paid in lieu of any
fractional share in an amount equal to the same fraction of the last
sale price on the Common Stock (determined as provided in Section
1.3(c)(iv)) at the close of business on the business day which next
precedes the day of conversion.
(b) Before any holder of shares of this Series shall be entitled to
convert the same into Common Stock, he shall surrender the certificate
or certificates therefor, duly endorsed or assigned to the Company or in
blank, at the office of any transfer agent for such stock or at such
<PAGE> 3
other place or places, if any, as the Board of Directors of the Company
may have designated, and shall give written notice to the Company at
said office or place that he elects to convert the same and shall state in
writing therein the name or names (with addresses) in which he wishes
the certificate or certificates for Common Stock to be issued. No
payment or adjustment shall be made upon any conversion on account
of any dividends on the Common Stock issued upon conversion. The
Company will, as soon as practicable thereafter, issue and deliver at
said office or place to such holder of shares of this Series, or to his
nominee or nominees, certificates for the number of full shares of
Common Stock to which he shall be entitled as aforesaid, together with
cash in lieu of any fraction of a share. Shares of this Series shall be
deemed to have been converted as of the close of business on the date
of surrender of such shares for conversion as provided above, and the
person or persons entitled to receive the Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder
or holders of such Common Stock as of the close of business on such
date.
(c) The conversion price in effect at any time shall be subject to
adjustment as follows:
(i) In case the Company shall (A) declare
a dividend or make a distribution payable in
Common Stock on any class of capital stock of
the Company, unless the payment thereof would
increase the number of shares of Common Stock
outstanding by less than one percent (1%), (B)
subdivide or reclassify its outstanding shares of
Common Stock into a greater number of shares,
or (C) combine its outstanding shares of Common
Stock into a smaller number of shares, the
conversion price in effect at the time of the
record date for such dividend or distribution or
the effective date of such subdivision,
combination or reclassification shall be
proportionately reduced in the case of any
increase in the number of shares of Common
<PAGE> 4
Stock outstanding and increased in the case of
any reduction in the number of shares of
Common Stock outstanding so that the holder of
any share of this Series surrendered for
conversion after such time shall be entitled to
receive the kind and amount of shares which he
would have owned or have been entitled to
receive had such share of this Series been
converted into Common Stock immediately prior
to such time and had such Common Stock
received such dividend or other distribution or
participated in such subdivision, combination or
reclassification. Such adjustment shall be
effective as of the record date for such dividend
or distribution or the effective date of such
combination, subdivision or reclassification and
shall be made successively whenever any event
listed above shall occur.
(ii) In case the Company shall issue
rights or warrants to all holders of its Common
Stock entitling them to subscribe for or purchase
shares of Common Stock at a price per share less
than the Current Market Price (as defined in
paragraph (iv) below) of the Common Stock, on
the date fixed for the determination of
stockholders entitled to receive such rights or
warrants, the conversion price at the opening of
business on the day following the date fixed for
such determination shall be reduced by
multiplying the conversion price by a fraction of
which the numerator shall be the number of
shares of Common Stock outstanding at the close
of business on the date fixed for such
determination plus the number of shares of
Common Stock which the aggregate of the
offering price of the total number of shares of
Common Stock so offered for subscription or
<PAGE> 5
purchase would purchase at such Current
Market Price of the Common Stock and the
denominator shall be the number of shares of
Common Stock outstanding at the close of
business on the date fixed for such determination
plus the number of shares of Common Stock so
offered for subscription or purchase, such
reduction to become effective immediately after
the opening of business on the day following the
date fixed for such determination. For purposes
of determining under this paragraph the number
of shares of Common Stock outstanding at any
time, there shall be excluded all shares of
Common Stock held in the treasury of the
Company. If any or all such rights or warrants
are not so issued or expire or terminate before
being exercised, the conversion price then in
effect shall be appropriately readjusted.
(iii) In case the Company shall distribute
to all holders of its Common Stock evidences of
its indebtedness or assets (including securities,
but excluding cash dividends or a distribution
referred to in paragraph (i) above or paid out of
earned surplus) or subscription rights or
warrants (excluding those referred to in
paragraph (ii) above), the conversion price shall
be adjusted so that it shall equal the price
determined by multiplying the conversion price in
effect immediately prior to the close of business
on the date fixed for the determination of
stockholders entitled to receive such distribution
by a fraction of which the numerator shall be the
Current Market Price per share of the Common
Stock on the date fixed for such determination
less the then fair market value (as determined by
the Board of Directors of the Company, in good
faith and in the exercise of its reasonable
<PAGE> 6
business judgment and described in a Board
Resolution filed with any transfer agent for this
Series) of the portion of the assets or evidences
of indebtedness so distributed applicable to one
share of Common Stock and the denominator
shall be such Current Market Price per share of
the Common Stock. Such adjustment shall
become effective immediately prior to the opening
of business on the day following the date fixed
for the determination of stockholders entitled to
receive such distribution.
(iv) For the purpose of any computation
under paragraphs (ii) and (iii) above, the "Current
Market Price" per share of Common Stock on any
date shall be deemed to be the average of the
daily closing prices per share of Common Stock
for 15 consecutive business days selected by the
Company commencing no more than 45 business
days before such date. The closing price for each
day shall be the last reported sales price regular
way or, in case no such sale takes place on such
day, the average of the closing bid and asked
prices regular way, in either case on the
American Stock Exchange, or, if the Common
Stock is not listed or admitted to trading on such
Exchange, on the principal national securities
exchange or no such quotations are available, the
average of the closing bid and asked prices as
furnished by any member of the National
Association of Securities Dealers, Inc. selected
from time to time by the Company for that
purpose or if no such quotations are available,
the fair market value as determined in good faith
in the exercise of their reasonable business
judgment by the Board of Directors of the
Company.
<PAGE> 7
(v) All calculations under this section
1.3(c) shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case
may be.
(vi) No adjustment in the conversion price
shall be required unless such adjustment would
require a change of at least 1% in such price;
provided, however, that any adjustments which
by reason of this paragraph (vi) are not required
to be made shall be carried forward and taken
into account in any subsequent adjustment.
(d) Whenever the conversion price is adjusted as herein
provided:
(i) the Company shall promptly file any
of the transfer agents for this Series a certificate
of the Treasurer of the Company setting forth the
adjusted conversion price and showing in
reasonable detail the facts upon which such
adjustment is based, including a statement of the
consideration received or to be received by the
Company for any shares of Common Stock issued
or deemed to have been issued; and
(ii) a notice stating that the conversion
price has been adjusted and setting forth the
adjusted conversion price shall forthwith be
required, and as soon as practicable after it is
required, such notice shall be mailed by the
Company to the holders of record of this series.
(e)
(i) In case of any consolidation or merger
of the Company with or into any other
corporation (other than a merger which does not
<PAGE> 8
result in any reclassification, conversion,
exchange or cancellation of the Common Stock),
or in case of any sale or transfer of all or
substantially all of the assets of the company, or
the reclassification of the Common Stock into
another form of capital stock of the Company,
whether in whole or in part, the holder of each
share of this Series shall have the right to receive
securities, cash or property, or any combination
thereof, having a value equal to the greater of (A)
$3.50 per share, plus an amount equal to all
dividends accumulated and unpaid on each such
share at the time of such consolidation, merger,
sale or transfer or reclassification or (B) the
value of the shares of stock and other securities,
cash and property (including, if applicable,
Common Stock) which such holder would have
been entitled to receive upon such consolidation,
merger, sale or transfer or reclassification if he
had held the Common Stock issuable upon the
conversion of such share of this Series
immediately prior to such consolidation, merger,
sale or transfer, or reclassification.
(ii) In the event that at any time, as a
result of paragraph (i) above, the holder of any
share of this Series shall become entitled to
receive any shares of stock and other securities
and property (including, if applicable, Common
Stock), thereafter the amount of such shares of
stock and other securities so receivable upon
conversion of any share of this Series shall be
subject to adjustment from time to time in a
manner and on terms as nearly equivalent as
practicable to the provisions with respect to the
Common Stock contained in paragraphs (i) to (vi),
inclusive, of section 1.3 (c) above, and for the
provisions of section 1.3(c) with respect to the
<PAGE> 9
Common Stock shall apply on like terms to any
such shares of stock and other securities and
property (including, if applicable, Common
Stock).
(f) In case:
(i) the Company shall authorize the
distribution to all holders of its Common Stock of
evidences of its indebtedness of assets (other
than cash dividends or other cash distributions
paid out of earned surplus); or
(ii) the Company shall authorize the
granting to the holders of its Common Stock or
rights or warrants to subscribe for or purchase
any shares of capital stock of any class or of any
other rights; or
(iii) of any reclassification of the capital
stock of the Company (other than a subdivision
or combination of its outstanding shares of
Common Stock), or of any consolidation or
merger to which the Company is required, or of
the sale or transfer of all or substantially all of
the assets of the Company; or
(iv) of the voluntary or involuntary
dissolution, liquidation or winding up of the
Company;
then, in each case, the Company shall cause to be filed with any of the
transfer agents for this Series, and shall cause to be mailed, first class
postage prepaid, to the holders of record of the outstanding shares of
this Series, at least 20 days prior to the applicable record date
hereinafter specified, a notice stating (x) the date on which a record is
to be taken for the purpose of such dividend, distribution, rights or
warrants, or, if a record is not to be taken, the date as of which the
<PAGE> 10
holders of Common Stock or record to be entitled to such dividend,
distribution, rights or warrants are to be determined, or (y) the date on
which such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up is expected to become effective,
and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding
up.
(g) The Company shall at all times reserve and keep available,
free from preemptive rights, out of its authorized but unissued
Common Stock, solely for the purpose of effecting the conversion of the
shares of this Series, the full number of shares of Common Stock then
issuable upon the conversion of all outstanding shares of this Series.
For the purpose of this section 1.3(g), the full number of shares of
Common Stock issuable upon the conversion of all outstanding shares
of this Series shall be computed as if at the time of computation of
such number of shares of Common Stock all outstanding shares of this
Series were held by a single holder. The Company shall from time to
time, in accordance with the laws of the State of Delaware, increase the
authorized amount of its Common Stock if at any time the authorized
amount of its Common Stock remaining unissued shall not be
sufficient to permit the conversion of all shares of this Series at the
time outstanding. If any shares of Common Stock required to be
reserved for issuance upon conversions of shares of this Series
hereunder require registration with or approval of any governmental
authority under any Federal or State law before such shares may be
issued upon such conversion, the company will in good faith and as
expeditiously as possible endeavor to cause such shares to be so
registered or approved.
(h) The Company will pay any and all taxes that may be payable
in respect of the issue or delivery of shares of Common Stock on
conversion of shares of this Series pursuant hereto. The Company
shall not, however, be required to pay any tax which may be payable in
respect of any transfer involved in the issue or transfer and delivery of
shares of Common Stock in a name other than that in which the shares
of this Series so converted were registered, and no such issue or
delivery shall be made unless and until the person requesting such
<PAGE> 11
issue has paid to the Company the amount of any such tax or has
established to the satisfaction of the Company that such tax has been
paid.
(i) Whenever reference is made in this section 1.3 to the issue
or sale of shares of Common Stock, the term "Common Stock" shall
include only shares of the class designated as Common Stock, $.01 par
value, of the Company at the date hereof or shares of any class or
classes resulting from any reclassification or reclassifications thereof
and which have no preference in respect of dividends or of amounts
payable in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company and which are not subject to
redemption by the Company, provided that if at any time there shall be
more than one such resulting class, the shares of each such class then
so deliverable shall be substantially in the proportion which the total
number of shares of such class resulting from all such reclassifications
bears to the total number of shares of all such classes resulting from
all such reclassifications.
1.4 Liquidation Rights. In the event of any liquidation,
dissolution, or winding up of the affairs of the Company, whether
voluntary or otherwise, after payment or provision for payment of the
debts and other liabilities of the Company, the holders of this Series
shall be entitled to receive an amount in cash for each share of this
Series equal to $3.50 per share, plus an amount equal to all dividends
accumulated and unpaid on each such share up to the date fixed for
distribution, before any distribution shall be made to the holders of the
Common Stock and of any other capital stock of the Company ranking
junior to this Series upon the liquidation, dissolution or winding up of
the Company. If upon any liquidation, dissolution or winding up of the
Company, the assets distributable among the holders of this Series
shall be insufficient to permit the payment in full to the holders of all
the then outstanding shares of this Series and all holders of preferred
stock ranking on a parity with this Series with respect to the payment
upon liquidation, dissolution and winding up of the Company of all
preferential amounts payable to all such holders, then the entire assets
of the Company thus distributable shall be distributed ratably among
the holders of this Series and all such other holders of preferred stock
in proportion to the respective amounts that would be payable per
share if such assets were sufficient to permit payment in full. Subject
<PAGE> 12
to the provisions of section 1.3(e)(i), a consolidation or merger of the
Company with or into one or more corporations or the sale or transfer
of all or substantially all of the assets of the Company shall not be
deemed to be a liquidation, dissolution or winding up of the Company.
1.5 Optional Cash Redemption. The shares of this Series are
redeemable for cash, in whole at any time or from time to time in part
at the option of the Company, at a redemption price of $3.50 per share.
Notice of redemption pursuant to this section 1.5 will be mailed
at least 30 days but not more than 60 days before the redemption date
to each holder of record of shares of this Series to be redeemed at the
address shown on the stock books of the Company (but no failure to
mail such notice or any defect therein or in the mailing thereof shall
affect the validity of the proceedings for such redemption except as to
the holder to whom the Company has failed to mail such notice or
except as to the holder whose notice was defective). On and after the
redemption date, dividends shall cease to accumulate on shares of this
Series called for redemption (unless the Company defaults in the
payment of the redemption price).
If less than all the outstanding shares of this Series not
previously called for redemption are to be redeemed pursuant to this
section 1.5, shares to be redeemed shall be selected by the Company
from outstanding shares not previously called for redemption by lot or
pro rata (as nearly as may be) as determined by the Board of Directors
of the Company. Shares of this Series redeemed by the Company will
be restored to the status of authorized but unissued shares of preferred
stock, without designation as to series, and may thereafter be issued,
but not as shares of this Series.
1.6 Voting Rights. The holders of shares of this Series shall
have no right to vote for any purpose, except as specifically required by
the laws of the State of Delaware and except as follows:
(a) So long as any shares of this Series remain
outstanding, the affirmative vote or consent of the holders of
at least 66-2/3% of the then outstanding shares of this
Series, in person or by proxy, either in writing or at a
meeting called for that purpose (voting as a class with the
<PAGE> 13
holders of all other series of preferred stock ranking on a
parity with this Series either as to dividends or distributions
or upon liquidation, dissolution or winding up of the
Company and upon which like voting rights have been
conferred and are then exercisable), shall be necessary to
permit, effect or validate the repeal, amendment or other
change of any provision of the Certificate of Incorporation of
the Company in any manner which materially and adversely
affects the rights, preferences, or privileges of this Series or
the holders thereof; provided, however, that any increase in
the amount of authorized preferred stock or the creation
and issuance of other series of preferred stock, whether
ranking on a parity with or junior or prior to this Series
with respect to the payment of dividends or the distribution
of assets upon liquidation, dissolution or winding up shall
not be deemed to materially and adversely affect such
rights, preferences or privileges.
The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be
required shall be effected, all outstanding shares of this Series shall
have been redeemed or sufficient funds shall have been deposited in
trust to effect such redemption.
1.7 Parity. The shares of this Series shall be on a parity with
the Company's $.30 Cumulative Convertible Preferred Stock with
respect to the distribution of assets upon liquidation, dissolution or
winding up of the Company.
<PAGE> 14
IN WITNESS WHEREOF, this Certificate has been executed and
attested by the undersigned on October 10, 1988, and shall be effective
on the date filed with the Secretary of State of Delaware.
PARALLEL PETROLEUM CORPORATION
By /S/ Thomas R. Cambridge
--------------------------------
Thomas R. Cambridge, President
ATTEST:
/S/ Larry C. Oldham
- ---------------------------
Larry C. Oldham, Secretary
<PAGE> 1
PARALLEL PETROLEUM CORPORATION
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF SERIAL PREFERRED STOCK -
$.60 CUMULATIVE CONVERTIBLE
PREFERRED STOCK
Pursuant to Section 151 of the Delaware
General Corporation Law
The undersigned, President and Secretary, respectively, of Parallel
Petroleum Corporation, a Delaware corporation (the "Company"), certify
that pursuant to authority granted to and vested in the Board of
Directors of the Company by the provisions of the Certificate of
Incorporation of the Company, the Board of Directors has duly adopted
the following resolutions creating a series of Serial Preferred Stock of
the Company designated as the $.60 Cumulative Convertible Preferred
Stock:
RESOLVED, by the Board of Directors of Parallel Petroleum
Corporation, a Delaware corporation (the "Company"), that pursuant to
authority expressly granted to and vested in the Board of Directors by
the provisions of the Certificate of Incorporation of the Company, the
Board of Directors hereby creates a series of the class of authorized
Serial Preferred Stock, $.10 par value ("Preferred Stock"), of the
Company, and authorizes the issuance thereof, and hereby fixes the
designations and amount thereof, and the voting powers, preferences
and relative, participating, optional and other special rights of the
shares of such series, and the qualifications, limitations or restrictions
thereof (in addition to the designations, preferences and relative,
participating and other special rights, and the qualifications,
limitations or restrictions thereof, set forth in the Certificate of
Incorporation of the Company, which are applicable to the Serial
Preferred Stock of all series) as follows:
1.1 Designation and Amount. The shares of such series shall be
designated "$.60 Cumulative Convertible Preferred Stock" (such series
being hereinafter sometimes called "this Series"), and the number of
shares constituting such Series shall initially be 600,000. The number
of authorized shares of this Series may be reduced by further
resolution duly adopted by the Board of Directors of the Company and
<PAGE> 2
by the filing of a certificate pursuant to the provisions of the General
Corporation Law of the State of Delaware stating that such reduction
has been so authorized, but the number of authorized shares of this
Series shall not be increased. Shares in this Series have a par value of
$.10 per share.
1.2 Dividends. The holders of shares of this Series shall be
entitled to receive, out of the funds of the Company legally available
therefor and as and when declared by the Board of Directors, cash
dividends at the rate of $.60 per share per annum, payable semi-
annually on the fifteenth day of the months of June and December in
each year, commencing June 15, 1998, except that if such date is a
Saturday, Sunday or legal holiday then such dividend shall be payable
on the first immediately preceding day which is not a Saturday, Sunday
or legal holiday. Such dividends shall be cumulative (whether or not in
any semi-annual dividend period there shall be funds of the Company
legally available for the payment of such dividends), commencing on
the date of original issue and shall be payable for any period less than
a full semi-annual period on the basis of a year of 360 days with equal
30 day months. Dividends shall be payable to holders of record, as
they appear on the stock books of the Company on such record dates
as may be declared by the Board of Directors, not more than sixty (60)
days nor less than ten (10) days preceding the payment dates for such
dividends. Dividends in arrears may be declared and paid at any time,
without reference to any regular dividend payment date, to holders of
record on such date, not exceeding sixty (60) days preceding the
payment date thereof, as may be fixed by the Board of Directors of the
Company. Except as provided below with regard to any class of stock
ranking on a parity with the Preferred Stock as to payment of
dividends, in no event, so long as this Series shall remain outstanding,
shall any dividend whatsoever be declared or paid upon, nor shall any
distribution be made or ordered in respect of, any class of stock of the
Company ranking on a parity with or junior to this Series with respect
to payment of dividends, unless dividends on this Series since the date
of issue thereof to the date of such distribution shall have been paid or
declared and set apart for payment. When dividends are not paid in
full upon the shares of this Series and any other preferred stock
ranking on a parity as to payment of dividends with this Series, all
dividends declared upon shares of this Series and any other preferred
<PAGE> 3
stock ranking on a parity as to dividends with this Series shall be
declared pro rata so that the amount of dividends declared per share
on this Series and such other preferred stock shall in all cases bear to
each other the same ratio that accrued dividends per share on the
shares of this Series and such other preferred stock bear to each other.
If full cumulative dividends on this Series have not been declared and
paid or set apart for payment, the Company shall not declare or pay or
set apart for payment any dividends or make any other distributions
on, or make any payment on account of the purchase, redemption or
retirement of, the Common Stock, $.01 par value, of the Company
("Common Stock"), or any other stock of the Company ranking junior to
this Series as to dividends or distribution of assets on liquidation,
dissolution or winding up of the Company (other than, in the case of
dividends or distributions, dividends or distributions paid in shares of
Common Stock or such other junior ranking stock), until full
cumulative dividends on this Series are declared and paid or set apart
for payment.
1.3 Conversion. The holders of shares of this Series shall have
the right, at their option, to convert all or any part of such shares of
this Series into shares of Common Stock of the Company at any time
after October 8, 1998 and subject to the following terms and
conditions:
(a) The shares of this Series shall be convertible at the
office of any transfer agent for such stock, and at such other
place or places, if any, as the Board of Directors of the Company
may designate, into fully paid and nonassessable shares
(calculated as to each conversion to the nearest 1/100th of a
share) of Common Stock of the Company. The number of shares
of Common Stock issuable upon conversion of each share of this
Series shall be equal to $10.00 divided by the conversion price in
effect at the time of conversion, determined as hereinafter
provided. The price at which shares of Common Stock shall be
delivered upon conversion (herein called the "conversion price")
shall be initially $6.40 per share of Common Stock. The
conversion price shall be subject to adjustment from time to time
in certain instances as hereinafter provided. If the Company calls
for the redemption of any shares of this Series, such right of
<PAGE> 4
conversion shall cease and terminate, as to the shares designated
for redemption, at the close of business on the redemption date,
unless the Company defaults in the payment of the redemption
price. No fractional shares of Common Stock will be issued. A
cash payment will be paid in lieu of any fractional share in an
amount equal to the same fraction of the last sale price of the
Common Stock (determined as provided in Section 1.3(c)(iv)) at
the close of business on the business day which next precedes
the day of conversion.
(b) Before any holder of shares of this Series shall be
entitled to convert the same into Common Stock, he shall
surrender the certificate or certificates therefor, duly endorsed or
assigned to the Company or in blank, at the office of any transfer
agent for such stock or at such other place or places, if any, as
the Board of Directors of the Company may have designated, and
shall give written notice to the Company at said office or place
that he elects to convert the same and shall state in writing
therein the name or names (with addresses) in which he wishes
the certificate or certificates for Common Stock to be issued.
Shares of this Series surrendered for conversion during the period
from the close of business on any record date for the payment of
a dividend on the shares of this Series to the opening of business
on the date for payment of such dividends shall (except in the
case of shares of this Series which have been called for
redemption on a redemption date within such period) be
accompanied by payment of an amount equal to the dividend
payable on such dividend payment date on the shares of this
Series being surrendered for conversion. Except as provided in
the preceding sentence, no payment or adjustment shall be made
upon any conversion on account of any dividend accrued on the
shares of this Series surrendered for conversion or on account of
any dividends on the Common Stock issued upon conversion.
The Company will, as soon as practicable thereafter, issue and
deliver at said office or place to such holder of shares of this
Series, or to his nominee or nominees, certificates for the number
of full shares of Common Stock to which he shall be entitled as
aforesaid, together with cash in lieu of any fraction of a share.
Shares of this Series shall be deemed to have been converted as
<PAGE> 5
of the close of business on the date of surrender of such shares
for conversion as provided above, and the person or persons
entitled to receive the Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder
or holders of such Common Stock as of the close of business on
such date.
(c) The conversion price in effect at any time shall be
subject to adjustment as follows:
(i) In case the Company shall (A) declare a
dividend or make a distribution payable in Common
Stock on any class of capital stock of the Company,
unless the payment thereof would increase the number
of shares of Common Stock outstanding by less than
one percent (1%), (B) subdivide or reclassify its
outstanding shares of Common Stock into a greater
number of shares, or (C) combine its outstanding
shares of Common Stock into a smaller number of
shares, the conversion price in effect at the time of the
record date for such dividend or distribution or the
effective date of such subdivision, combination or
reclassification shall be proportionately reduced in the
case of any increase in the number of shares of
Common Stock outstanding and increased in the case
of any reduction in the number of shares of Common
Stock outstanding so that the holder of any share of
this Series surrendered for conversion after such time
shall be entitled to receive the kind and amount of
shares which he would have owned or have been
entitled to receive had such share of this Series been
converted into Common Stock immediately prior to
such time and had such Common Stock received such
dividend or other distribution or participated in such
subdivision, combination or reclassification. Such
adjustment shall be effective as of the record date for
such dividend or distribution or the effective date of
such combination, subdivision or reclassification and
<PAGE> 6
shall be made successively whenever any event listed
above shall occur.
(ii) In case the Company shall issue rights or
warrants to all holders of its Common Stock entitling
them to subscribe for or purchase shares of Common
Stock at a price per share less than the Current
Market Price (as defined in paragraph (iv) below) of the
Common Stock, on the date fixed for the determination
of stockholders entitled to receive such rights or
warrants, the conversion price at the opening of
business on the day following the date fixed for such
determination shall be reduced by multiplying the
conversion price by a fraction of which the numerator
shall be the number of shares of Common Stock
outstanding at the close of business on the date fixed
for such determination plus the number of shares of
Common Stock which the aggregate of the offering
price of the total number of shares of Common Stock
so offered for subscription or purchase would purchase
at such Current Market Price of the Common Stock
and the denominator shall be the number of shares of
common Stock outstanding at the close of business on
the date fixed for such determination plus the number
of shares of Common Stock so offered for subscription
or purchase, such reduction to become effective
immediately after the opening of business on the day
following the date fixed for such determination. For
purposes of determining under this paragraph the
number of shares of Common Stock outstanding at any
time, there shall be excluded all shares of Common
Stock held in the treasury of the Company. If any or
all such rights or warrants are not so issued or expire
or terminate before being exercised, the conversion
price then in effect shall be appropriately readjusted.
(iii) In case the Company shall distribute to all
holders of its Common Stock evidences of its
indebtedness or assets (including securities, but
<PAGE> 7
excluding cash dividends or a distribution referred to
in paragraph (i) above or paid out of surplus) or
subscription rights or warrants (excluding those
referred to in paragraph (ii) above), the conversion
price shall be adjusted so that it shall equal the price
determined by multiplying the conversion price in
effect immediately prior to the close of business on the
date fixed for the determination of stockholders
entitled to receive such distribution by a fraction of
which the numerator shall be the Current Market Price
per share of the Common Stock on the date fixed for
such determination less the then fair market value (as
determined by the Board of Directors of the Company,
in good faith and in the exercise of its reasonable
business judgment and described in a Board
Resolution filed with any transfer agent for this Series)
of the portion of the assets or evidences of
indebtedness so distributed applicable to one share of
Common Stock and the denominator shall be such
Current Market Price per share of the Common Stock.
Such adjustment shall become effective immediately
prior to the opening of business on the day following
the date fixed for the determination of stockholders
entitled to receive such distribution.
(iv) For the purpose of any computation under
paragraphs (ii) and (iii) above, the "Current Market
Price" per share of Common Stock on any date shall be
deemed to be the average of the daily closing prices
per share of Common Stock for 15 consecutive
business days selected by the Company commencing
no more than 45 business days before such date. The
closing price for each day shall be the last reported
sales price regular way or, in case no such sale takes
place on such day, the average of the closing bid and
asked prices regular way, in either case on the Nasdaq
National Market System or, if the Common Stock is not
listed or admitted to trading on such Nasdaq National
Market System on the principal national securities
<PAGE> 8
exchange on which the Common Stock is listed or
admitted to trading, or if it is not listed or admitted to
trading on any national securities exchange or no such
quotations are available, the average of the closing bid
and asked prices as furnished by any member of the
National Association of Securities Dealers, Inc.
selected from time to time by the Company for that
purpose, or if no such quotations are available, the
fair market value as determined in good faith in the
exercise of their reasonable business judgment by the
Board of Directors of the Company.
(v) All calculations under this Section 1.3(c)
shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be.
(vi) No adjustment in the conversion price shall
be required unless such adjustment would require a
change of at least 1% in such price; provided, however,
that any adjustments which by reason of this
paragraph (vi) are not required to be made shall be
carried forward and taken into account in any
subsequent adjustment.
(d) Whenever the conversion price is adjusted as herein
provided:
(i) the Company shall promptly file with any of
the transfer agents for this Series a certificate of the
principal financial officer of the Company setting forth
the adjusted conversion price and showing in
reasonable detail the facts upon which such
adjustment is based, including a statement of the
consideration received or to be received by the
Company for any shares of Common Stock issued or
deemed to have been issued; and
(ii) a notice stating that the conversion price
has been adjusted and setting forth the adjusted
<PAGE> 9
conversion price shall forthwith be required, and as
soon as practicable after it is required, such notice
shall be mailed by the Company to the holders of
record of this Series.
(e)
(i) In case of any consolidation or merger of
the Company with or into any other person (other than
a merger which does not result in any reclassification,
conversion, exchange or cancellation of the Common
Stock), or in case of any sale or transfer of all or
substantially all of the assets of the Company, or the
reclassification of the Common Stock into another
form of capital stock of the Company, whether in
whole or in part, the holder of each share of this
Series shall have the right to receive the kind and
amount of securities, cash or property, or any
combination thereof which such holder would have
been entitled to receive upon such consolidation,
merger, sale or transfer or reclassification if he had
held the Common Stock issuable upon the conversion
of such share of this Series immediately prior to such
consolidation, merger, sale or transfer, or
reclassification.
(ii) In the event that at any time, as a result of
paragraph (i) above, the holder of any share of this
Series shall become entitled to receive any shares of
stock and other securities and property (including, if
applicable, Common Stock), thereafter the amount of
such shares of stock and other securities so receivable
upon conversion of any share of this Series shall be
subject to adjustment from time to time in a manner
and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock
contained in paragraphs (i) to (vi), inclusive, of section
1.3(c) above, and the provisions of section 1.3(c) with
respect to the Common Stock shall apply on like terms
<PAGE> 10
to any such shares of stock and other securities and
property (including, if applicable, Common Stock).
(f) In case:
(i) the Company shall authorize the
distribution to all holders of its Common Stock of
evidences of its indebtedness or assets (other than
cash dividends or other cash distributions paid out of
surplus); or
(ii) the Company shall authorize the granting
to the holders of its Common Stock of rights or
warrants to subscribe for or purchase any shares of
capital stock of any class or of any other rights; or
(iii) of any reclassification of the capital stock of
the Company (other than a subdivision or combination
of its outstanding shares of Common Stock), or of any
consolidation or merger, or of the sale or transfer of all
or substantially all of the assets of the Company; or
(iv) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in each case, the Company shall cause to be filed with any
of the transfer agents for this Series, and shall cause to be
mailed, first class postage prepaid, to the holders of record of the
outstanding shares of this Series, at least 20 days prior to the
applicable record date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such
dividend, distribution, rights or warrants, or, if a record is not to
be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution, rights or
warrants are to be determined, or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their Common Stock for
<PAGE> 11
securities or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up.
(g) The Company shall at all times reserve and keep
available, free from preemptive rights, out of its authorized but
unissued Common Stock, solely for the purpose of effecting the
conversion of the shares of this Series, the full number of shares
of Common Stock then issuable upon the conversion of all
outstanding shares of this Series. For the purpose of this section
1.3(g), the full number of shares of Common Stock issuable upon
the conversion of all outstanding shares of this Series shall be
computed as if at the time of computation of such number of
shares of Common Stock all outstanding shares of this Series
were held by a single holder. The Company shall from time to
time, in accordance with the laws of the State of Delaware,
increase the authorized amount of its Common Stock if at any
time the authorized amount of its Common Stock remaining
unissued shall not be sufficient to permit the conversion of all
shares of this Series at the time outstanding.
(h) The Company will pay any and all taxes that may be
payable in respect of the issue or delivery of shares of Common
Stock on conversion of shares of this Series pursuant hereto. The
Company shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issue or
transfer and delivery of shares of Common Stock in a name other
than that in which the shares of this Series so converted were
registered, and no such issue or delivery shall be made unless
and until the person requesting such issue has paid to the
Company the amount of any such tax or has established to the
satisfaction of the Company that such tax has been paid.
(i) Whenever reference is made in this section 1.3 to the
issue or sale of shares of Common Stock, the term "Common
Stock" shall include only shares of the class designated as
Common Stock, $.01 par value, of the Company at the date hereof
or shares of any class or classes resulting from any
reclassification or reclassifications thereof and which have no
<PAGE> 12
preference in respect of dividends or of amounts payable in the
event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company and which are not subject to
redemption by the Company, provided that if at any time there
shall be more than one such resulting class, the shares of each
such class then so deliverable shall be substantially in the
proportion which the total number of shares of such class
resulting from all such reclassifications bears to the total number
of shares of all such classes resulting from all such
reclassifications.
1.4 Liquidation Rights. In the event of any liquidation,
dissolution, or winding up of the affairs of the Company, whether
voluntary or otherwise, after payment or provision for payment of the
debts and other liabilities of the Company, the holders of this Series
shall be entitled to receive an amount in cash for each share of this
Series equal to $10.00 per share, plus an amount equal to all dividends
accumulated and unpaid on each such share up to the date fixed for
distribution, before any distributions shall be made to the holders of
the Common Stock and of any other capital stock of the Company
ranking junior to this Series upon the liquidation, dissolution or
winding up of the Company. If upon any liquidation, dissolution or
winding up of the Company, the assets distributable among the holders
of this Series shall be insufficient to permit the payment in full to the
holders of all the then outstanding shares of this Series and all holders
of preferred stock ranking on a parity with this Series with respect to
the payment upon liquidation, dissolution and winding up of the
Company of all preferential amounts payable to all such holders, then
the entire assets of the Company thus distributable shall be distributed
ratably among the holders of this Series and all such other holders of
Preferred Stock in proportion to the respective amounts that would be
payable per share if such assets were sufficient to permit payment in
full. Subject to the provisions of section 1.3(e)(i), a consolidation or
merger of the Company with or into one or more persons or the sale or
transfer of all or substantially all of the assets of the Company shall
not be deemed to be a liquidation, dissolution or winding up of the
Company.
<PAGE> 13
1.5 Optional Cash Redemption. The shares of this Series are
not redeemable prior to April 1, 1999. Thereafter, the shares of this
Series are redeemable for cash, in whole at any time or from time to
time in part at the option of the Company, at a redemption price of
$10.00 per share, plus any accumulated and unpaid dividends thereon.
Notice of redemption pursuant to this Section 1.5 will be mailed
at least 30 days but not more than 60 days before the redemption date
to each holder of record of shares of this Series to be redeemed at the
address shown on the stock books of the Company (but no failure to
mail such notice or any defect therein or in the mailing thereof shall
affect the validity of the proceedings for such redemption except as to
the holder to whom the Company has failed to mail such notice or
except as to the holder whose notice was defective). On and after the
redemption date, dividends shall cease to accumulate on shares of this
Series called for redemption (unless the Company defaults in the
payment of the redemption price).
If less than all the outstanding shares of this Series not
previously called for redemption are to be redeemed pursuant to this
Section 1.5, shares to be redeemed shall be selected by the Company
from outstanding shares not previously called for redemption by lot or
pro rata (as nearly as may be) as determined by the Board of Directors
of the Company. The Company may not redeem less than all
outstanding shares of this Series pursuant to this Section 1.5 unless
full cumulative dividends shall have been declared and paid or set
apart for payment upon all outstanding shares of this Series for all
past dividend periods. Shares of this Series redeemed by the Company
will be restored to the status of authorized but unissued shares of
preferred stock, without designation as to series, and may thereafter be
issued, but not as shares of this Series.
1.6 Voting Rights. The holders of shares of this Series shall
have no right to vote for any purpose, except as specifically required by
the laws of the State of Delaware and except as follows:
So long as any shares of this Series remain
outstanding, the affirmative vote or consent of the holders of
a majority of the then outstanding shares of this Series, in
<PAGE> 14
person or by proxy, either in writing or at a meeting called
for that purpose (voting as a class with the holders of all
other series of preferred stock ranking on a parity with this
Series either as to dividends or distributions or upon
liquidation, dissolution or winding up of the Company and
upon which like voting rights have been conferred and are
then exercisable), shall be necessary to permit, effect or
validate the repeal, amendment or other change of any
provision of the Certificate of Incorporation of the Company
in any manner which materially and adversely affects the
rights, preferences, or privileges of this Series or the holders
thereof; provided, however, the creation and issuance of
other series of preferred stock, whether ranking on a parity
with or junior or prior to this Series with respect to voting,
the payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up shall not be deemed
to materially and adversely affect such rights, preferences or
privileges. In connection with any right to vote, each holder
of outstanding shares of this Series shall have one vote for
each share held.
The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be
required shall be effected, all outstanding shares of this Series shall
have been redeemed or sufficient funds shall have been deposited in
trust to effect such redemption.
<PAGE> 15
IN WITNESS WHEREOF, this Certificate has been executed and
attested by the undersigned on April 7, 1998, and shall be effective at
10:00 a.m. Eastern Daylight Time, on April 8, 1998, or the date on
which filed with the Secretary of State of the State of Delaware,
whichever is later.
PARALLEL PETROLEUM CORPORATION
By: /S/ Larry C. Oldham
---------------------------
Larry C. Oldham, President
ATTEST:
/S/ Thomas W. Ortloff
- -------------------------
Thomas W. Ortloff, Secretary
<PAGE> 1
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
PARALLEL PETROLEUM CORPORATION
Parallel Petroleum Corporation, a corporation organized and
existing under the General Corporation Law of the State of Delaware
(the "Corporation"), does hereby certify as follows:
Pursuant to the provisions of the Delaware General Corporation
Law, the Board of Directors and the stockholders of the Corporation
adopted an amendment to the Certificate of Incorporation of the
Corporation, which is set forth in the following resolution in
accordance with Section 242 of the Delaware General Corporation Law,
the purpose of which amendment is to decrease the number of
authorized shares of Common Stock and Preferred Stock:
"RESOLVED, That the first paragraph of Article Fourth of
the Company's Certificate of Incorporation be amended as
follows:
FOURTH: The total number of shares of all
classes that the Corporation shall have authority
to issue is 70,000,000, of which 10,000,000 shall
be Preferred Shares, par value $.10 per share,
and 60,000,000 shall be Common Shares, $.01
par value per share.
Except as specifically amended hereby, all other provisions of
Article Fourth shall remain in full force and effect.
IN WITNESS WHEREOF, Parallel Petroleum Corporation has
caused this Certificate of Amendment to be signed by Larry C. Oldham,
its President, and attested by Rebecca A. Burrell, its Assistant
Secretary, this 15th day of June, 1998.
PARALLEL PETROLEUM
CORPORATION
<PAGE> 2
By:/S/ Larry C. Oldham
---------------------
Larry C. Oldham,
President
ATTESTED:
/S/ Rebecca A. Burrell
- ---------------------------------------
Rebecca A. Burrell, Assistant Secretary
The undersigned President of Parallel Petroleum Corporation,
being duly sworn, does verify that the foregoing instrument represents
the act and deed of Parallel Petroleum Corporation and that the facts
stated in such instrument are true.
/S/ Larry C. Oldham
------------------------------
Larry C. Oldham, President
STATE OF TEXAS
COUNTY OF MIDLAND
Before me, the undersigned authority, on this day personally
appeared Larry C. Oldham and Rebecca A. Burrell, President and
Assistant Secretary, respectively, of Parallel Petroleum Corporation, a
corporation formed under the laws of the State of Delaware, known to
me to be the individuals whose names are subscribed to the foregoing
instrument, and acknowledged and swore to me that they each
executed the same for the purposes and consideration therein
expressed and as the act and deed of said corporation and that the
facts stated in the foregoing instrument are true.
<PAGE> 3
GIVEN UNDER MY HAND AND SEAL OF OFFICE this 15th day of
June, 1998.
/S/ Diane DePrang Hurst
-------------------------
Notary Public in and for
the State of Texas
<PAGE> 1
PARALLEL PETROLEUM CORPORATION
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF SERIAL PREFERRED STOCK -
6% CONVERTIBLE PREFERRED STOCK
Pursuant to Section 151 of the Delaware
General Corporation Law
Pursuant to the provisions of Section 151 of the General
Corporation Law of the State of Delaware and Paragraph Fourth of the
Certificate of Incorporation of Parallel Petroleum Corporation (the
"Company"), the undersigned Company submits the following statement
for the purpose of establishing and designating a series of shares and
fixing and determining the relative rights and preferences thereof:
1. The name of the corporation is Parallel Petroleum
Corporation.
2. The following resolutions were duly adopted by the Board of
Directors of the Company on October 13, 1998:
WHEREAS, the Company is authorized by its Certificate of
Incorporation, as amended, to issue 10,000,000 shares of Preferred
Stock, $.10 par value; and
WHEREAS, the Certificate of Incorporation does not otherwise
state or fix the designations, preferences, voting rights and relative,
participating, optional or other special rights, qualifications, limitations
and restrictions of the preferred stock, $.10 par value, of the Company,
but instead authorizes the issuance thereof in series from time to time
with such designations, preferences, voting rights, rights of conversion
into Common Stock and relative, participating, optional or other rights,
qualifications, limitations and restrictions thereof as shall be stated
and expressed in the resolution or resolutions providing for the
<PAGE> 2
creation and issuance of such series adopted by the Board of Directors
of the Company; and
WHEREAS, the Board of Directors deems it advisable to create
and establish and authorize the issuance of a new series of the
Company's preferred stock, $.10 par value;
NOW, THEREFORE, BE IT RESOLVED, by the Board of Directors
of the Company, that pursuant to authority expressly granted to and
vested in the Board of Directors by the provisions of the Certificate of
Incorporation of the Company, the Board of Directors hereby creates a
series of the class of authorized Serial Preferred Stock, $.10 par value
("Preferred Stock"), of the Company, and authorizes the issuance
thereof, and hereby fixes the designations and amount thereof, and the
voting powers, preferences and relative, participating, optional and
other special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof (in addition to the designations,
preferences and relative, participating and other special rights, and the
qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation of the Company, which are applicable to the
Serial Preferred Stock of all series) as follows:
1.1 Designation and Amount. The shares of such series shall be
designated "6% Convertible Preferred Stock" (such series being
hereinafter sometimes called "this Series"), and the number of shares
constituting such Series shall initially be 1,200,000. The Board of
Directors of the Company reserves the right by subsequent amendment
of this resolution from time to time to decrease the number of shares
which constitute this Series (but not below the number of shares
thereof then outstanding) and, subject to anything to the contrary set
forth in the Certificate of Incorporation of the Company applicable to
the preferred stock, to subdivide the number of shares, the stated
value per share and the liquidation value per share of this Series and
in other respects to amend, within the limitations provided by law, this
resolution and the Certificate of Incorporation of the Company.
<PAGE> 3
1.2 Dividends. The holders of shares of this Series shall be
entitled to receive, out of the funds of the Company legally available
therefor and as and when declared by the Board of Directors, cash
dividends at the rate of $.60 per share per annum, payable semi-
annually on the fifteenth day of the months of June and December in
each year, commencing December 15, 1998, except that if such date is
a Saturday, Sunday or legal holiday then such dividend shall be
payable on the first immediately preceding day which is not a
Saturday, Sunday or legal holiday. Such dividends shall be cumulative
(whether or not in any semi-annual dividend period there shall be
funds of the Company legally available for the payment of such
dividends), commencing on the date of original issue and shall be
payable for any period less than a full semi-annual period on the basis
of a year of 360 days with equal 30 day months. Dividends shall be
payable to holders of record, as they appear on the stock books of the
Company on such record dates as may be declared by the Board of
Directors, not more than sixty (60) days nor less than ten (10) days
preceding the payment dates for such dividends. Dividends in arrears
may be declared and paid at any time, without reference to any regular
dividend payment date, to holders of record on such date, not
exceeding sixty (60) days preceding the payment date thereof, as may
be fixed by the Board of Directors of the Company. Except as provided
below with regard to any class of stock ranking on a parity with the
Preferred Stock as to payment of dividends, in no event, so long as this
Series shall remain outstanding, shall any dividend whatsoever be
declared or paid upon, nor shall any distribution be made or ordered in
respect of, any class of stock of the Company ranking on a parity with
or junior to this Series with respect to payment of dividends, unless
dividends on this Series since the date of issue thereof to the date of
such distribution shall have been paid or declared and set apart for
payment. When dividends are not paid in full upon the shares of this
Series and any other preferred stock ranking on a parity as to payment
of dividends with this Series, all dividends declared upon shares of this
Series and any other preferred stock ranking on a parity as to
dividends with this Series shall be declared pro rata so that the
amount of dividends declared per share on this Series and such other
preferred stock shall in all cases bear to each other the same ratio that
accrued dividends per share on the shares of this Series and such
<PAGE> 4
other preferred stock bear to each other. If full cumulative dividends
on this Series have not been declared and paid or set apart for
payment, the Company shall not declare or pay or set apart for
payment any dividends or make any other distributions on, or make
any payment on account of the purchase, redemption or retirement of,
the Common Stock, $.01 par value, of the Company ("Common Stock"),
or any other stock of the Company ranking junior to this Series as to
dividends or distribution of assets on liquidation, dissolution or
winding up of the Company (other than, in the case of dividends or
distributions, dividends or distributions paid in shares of Common
Stock or such other junior ranking stock), until full cumulative
dividends on this Series are declared and paid or set apart for
payment.
1.3 Conversion. The holders of shares of this Series shall have
the right, at their option, to convert all or any part of such shares of
this Series into shares of Common Stock of the Company at any time
after April 20, 1999 and subject to the following terms and conditions:
(a) The shares of this Series shall be convertible at the
office of any transfer agent for such stock, and at such other
place or places, if any, as the Board of Directors of the Company
may designate, into fully paid and nonassessable shares
(calculated as to each conversion to the nearest 1/100th of a
share) of Common Stock of the Company. The number of shares
of Common Stock issuable upon conversion of each share of this
Series shall be equal to $10.00 divided by the conversion price in
effect at the time of conversion, determined as hereinafter
provided. The price at which shares of Common Stock shall be
delivered upon conversion (herein called the "conversion price")
shall be initially $3.50 per share of Common Stock. The
conversion price shall be subject to adjustment from time to time
in certain instances as hereinafter provided. If the Company
calls for the redemption of any shares of this Series, such right
of conversion shall cease and terminate, as to the shares
designated for redemption, at the close of business on the
redemption date, unless the Company defaults in the payment of
the redemption price. No fractional shares of Common Stock will
<PAGE> 5
be issued. A cash payment will be paid in lieu of any fractional
share in an amount equal to the same fraction of the last sale
price of the Common Stock (determined as provided in Section
1.3(c)(iv)) at the close of business on the business day which
next precedes the day of conversion.
(b) Before any holder of shares of this Series shall be
entitled to convert the same into Common Stock, he shall
surrender the certificate or certificates therefor, duly endorsed or
assigned to the Company or in blank, at the office of any transfer
agent for such stock or at such other place or places, if any, as
the Board of Directors of the Company may have designated, and
shall give written notice to the Company at said office or place
that he elects to convert the same and shall state in writing
therein the name or names (with addresses) in which he wishes
the certificate or certificates for Common Stock to be issued.
Shares of this Series surrendered for conversion during the
period from the close of business on any record date for the
payment of a dividend on the shares of this Series to the opening
of business on the date for payment of such dividends shall
(except in the case of shares of this Series which have been
called for redemption on a redemption date within such period)
be accompanied by payment of an amount equal to the dividend
payable on such dividend payment date on the shares of this
Series being surrendered for conversion. Except as provided in
the preceding sentence, no payment or adjustment shall be made
upon any conversion on account of any dividend accrued on the
shares of this Series surrendered for conversion or on account of
any dividends on the Common Stock issued upon conversion.
The Company will, as soon as practicable thereafter, issue and
deliver at said office or place to such holder of shares of this
Series, or to his nominee or nominees, certificates for the
number of full shares of Common Stock to which he shall be
entitled as aforesaid, together with cash in lieu of any fraction of
a share. Shares of this Series shall be deemed to have been
converted as of the close of business on the date of surrender of
such shares for conversion as provided above, and the person or
persons entitled to receive the Common Stock issuable upon
<PAGE> 6
such conversion shall be treated for all purposes as the record
holder or holders of such Common Stock as of the close of
business on such date.
(c) The conversion price in effect at any time shall be
subject to adjustment as follows:
(i) In case the Company shall (A) declare a
dividend or make a distribution payable in Common
Stock on any class of capital stock of the Company,
unless the payment thereof would increase the number
of shares of Common Stock outstanding by less than
one percent (1%), (B) subdivide or reclassify its
outstanding shares of Common Stock into a greater
number of shares, or (C) combine its outstanding
shares of Common Stock into a smaller number of
shares, the conversion price in effect at the time of the
record date for such dividend or distribution or the
effective date of such subdivision, combination or
reclassification shall be proportionately reduced in the
case of any increase in the number of shares of
Common Stock outstanding and increased in the case
of any reduction in the number of shares of Common
Stock outstanding so that the holder of any share of
this Series surrendered for conversion after such time
shall be entitled to receive the kind and amount of
shares which he would have owned or have been
entitled to receive had such share of this Series been
converted into Common Stock immediately prior to
such time and had such Common Stock received such
dividend or other distribution or participated in such
subdivision, combination or reclassification. Such
adjustment shall be effective as of the record date for
such dividend or distribution or the effective date of
such combination, subdivision or reclassification and
shall be made successively whenever any event listed
above shall occur.
<PAGE> 7
(ii) In case the Company shall issue rights or
warrants to all holders of its Common Stock entitling
them to subscribe for or purchase shares of Common
Stock at a price per share less than the Current
Market Price (as defined in paragraph (iv) below) of the
Common Stock, on the date fixed for the determination
of stockholders entitled to receive such rights or
warrants, the conversion price at the opening of
business on the day following the date fixed for such
determination shall be reduced by multiplying the
conversion price by a fraction of which the numerator
shall be the number of shares of Common Stock
outstanding at the close of business on the date fixed
for such determination plus the number of shares of
Common Stock which the aggregate of the offering
price of the total number of shares of Common Stock
so offered for subscription or purchase would purchase
at such Current Market Price of the Common Stock
and the denominator shall be the number of shares of
common Stock outstanding at the close of business on
the date fixed for such determination plus the number
of shares of Common Stock so offered for subscription
or purchase, such reduction to become effective
immediately after the opening of business on the day
following the date fixed for such determination. For
purposes of determining under this paragraph the
number of shares of Common Stock outstanding at any
time, there shall be excluded all shares of Common
Stock held in the treasury of the Company. If any or
all such rights or warrants are not so issued or expire
or terminate before being exercised, the conversion
price then in effect shall be appropriately readjusted.
(iii) In case the Company shall distribute to all
holders of its Common Stock evidences of its
indebtedness or assets (including securities, but
excluding cash dividends or a distribution referred to
in paragraph (i) above or paid out of surplus) or
<PAGE> 8
subscription rights or warrants (excluding those
referred to in paragraph (ii) above), the conversion
price shall be adjusted so that it shall equal the price
determined by multiplying the conversion price in
effect immediately prior to the close of business on the
date fixed for the determination of stockholders
entitled to receive such distribution by a fraction of
which the numerator shall be the Current Market Price
per share of the Common Stock on the date fixed for
such determination less the then fair market value (as
determined by the Board of Directors of the Company,
in good faith and in the exercise of its reasonable
business judgment and described in a Board
Resolution filed with any transfer agent for this Series)
of the portion of the assets or evidences of
indebtedness so distributed applicable to one share of
Common Stock and the denominator shall be such
Current Market Price per share of the Common Stock.
Such adjustment shall become effective immediately
prior to the opening of business on the day following
the date fixed for the determination of stockholders
entitled to receive such distribution.
(iv) For the purpose of any computation under
paragraphs (ii) and (iii) above, the "Current Market
Price" per share of Common Stock on any date shall be
deemed to be the average of the daily closing prices
per share of Common Stock for 15 consecutive
business days selected by the Company commencing
no more than 45 business days before such date. The
closing price for each day shall be the last reported
sales price regular way or, in case no such sale takes
place on such day, the average of the closing bid and
asked prices regular way, in either case on the Nasdaq
National Market System or, if the Common Stock is not
listed or admitted to trading on such Nasdaq National
Market System on the principal national securities
exchange on which the Common Stock is listed or
<PAGE> 9
admitted to trading, or if it is not listed or admitted to
trading on any national securities exchange or no such
quotations are available, the average of the closing bid
and asked prices as furnished by any member of the
National Association of Securities Dealers, Inc.
selected from time to time by the Company for that
purpose, or if no such quotations are available, the
fair market value as determined in good faith in the
exercise of their reasonable business judgment by the
Board of Directors of the Company.
(v) All calculations under this Section 1.3(c)
shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be.
(vi) No adjustment in the conversion price shall
be required unless such adjustment would require a
change of at least 1% in such price; provided, however,
that any adjustments which by reason of this
paragraph (vi) are not required to be made shall be
carried forward and taken into account in any
subsequent adjustment.
(d) Whenever the conversion price is adjusted as herein
provided:
(i) the Company shall promptly file with any of
the transfer agents for this Series a certificate of the
principal financial officer of the Company setting forth
the adjusted conversion price and showing in
reasonable detail the facts upon which such
adjustment is based, including a statement of the
consideration received or to be received by the
Company for any shares of Common Stock issued or
deemed to have been issued; and
(ii) a notice stating that the conversion price
has been adjusted and setting forth the adjusted
<PAGE> 10
conversion price shall forthwith be required, and as
soon as practicable after it is required, such notice
shall be mailed by the Company to the holders of
record of this Series.
(e)
(i) In case of any consolidation or merger of
the Company with or into any other person (other than
a merger which does not result in any reclassification,
conversion, exchange or cancellation of the Common
Stock), or in case of any sale or transfer of all or
substantially all of the assets of the Company, or the
reclassification of the Common Stock into another
form of capital stock of the Company, whether in
whole or in part, the holder of each share of this
Series shall have the right to receive the kind and
amount of securities, cash or property, or any
combination thereof which such holder would have
been entitled to receive upon such consolidation,
merger, sale or transfer or reclassification if he had
held the Common Stock issuable upon the conversion
of such share of this Series immediately prior to such
consolidation, merger, sale or transfer, or
reclassification.
(ii) In the event that at any time, as a result of
paragraph (i) above, the holder of any share of this
Series shall become entitled to receive any shares of
stock and other securities and property (including, if
applicable, Common Stock), thereafter the amount of
such shares of stock and other securities so receivable
upon conversion of any share of this Series shall be
subject to adjustment from time to time in a manner
and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock
contained in paragraphs (i) to (vi), inclusive, of section
1.3(c) above, and the provisions of section 1.3(c) with
<PAGE> 11
respect to the Common Stock shall apply on like terms
to any such shares of stock and other securities and
property (including, if applicable, Common Stock).
(f) In case:
(i) the Company shall authorize the
distribution to all holders of its Common Stock of
evidences of its indebtedness or assets (other than
cash dividends or other cash distributions paid out of
surplus); or
(ii) the Company shall authorize the granting
to the holders of its Common Stock of rights or
warrants to subscribe for or purchase any shares of
capital stock of any class or of any other rights; or
(iii) of any reclassification of the capital stock of
the Company (other than a subdivision or combination
of its outstanding shares of Common Stock), or of any
consolidation or merger, or of the sale or transfer of all
or substantially all of the assets of the Company; or
(iv) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in each case, the Company shall cause to be filed with any
of the transfer agents for this Series, and shall cause to be
mailed, first class postage prepaid, to the holders of record of the
outstanding shares of this Series, at least 20 days prior to the
applicable record date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such
dividend, distribution, rights or warrants, or, if a record is not to
be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution, rights or
warrants are to be determined, or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up is expected to become effective, and the
<PAGE> 12
date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up.
(g) The Company shall at all times reserve and keep
available, free from preemptive rights, out of its authorized but
unissued Common Stock, solely for the purpose of effecting the
conversion of the shares of this Series, the full number of shares
of Common Stock then issuable upon the conversion of all
outstanding shares of this Series. For the purpose of this section
1.3(g), the full number of shares of Common Stock issuable upon
the conversion of all outstanding shares of this Series shall be
computed as if at the time of computation of such number of
shares of Common Stock all outstanding shares of this Series
were held by a single holder. The Company shall use all
reasonable efforts from time to time, in accordance with the laws
of the State of Delaware, to cause its stockholders to increase the
authorized amount of its Common Stock if at any time the
authorized amount of its Common Stock remaining unissued shall
not be sufficient to permit the conversion of all shares of this
Series at the time outstanding.
(h) The Company will pay any and all taxes that may be
payable in respect of the issue or delivery of shares of Common
Stock on conversion of shares of this Series pursuant hereto. The
Company shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issue or
transfer and delivery of shares of Common Stock in a name other
than that in which the shares of this Series so converted were
registered, and no such issue or delivery shall be made unless
and until the person requesting such issue has paid to the
Company the amount of any such tax or has established to the
satisfaction of the Company that such tax has been paid.
(i) Whenever reference is made in this section 1.3 to the
issue or sale of shares of Common Stock, the term "Common
<PAGE> 13
Stock" shall include only shares of the class designated as
Common Stock, $.01 par value, of the Company at the date hereof
or shares of any class or classes resulting from any
reclassification or reclassifications thereof and which have no
preference in respect of dividends or of amounts payable in the
event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company and which are not subject to
redemption by the Company, provided that if at any time there
shall be more than one such resulting class, the shares of each
such class then so deliverable shall be substantially in the
proportion which the total number of shares of such class
resulting from all such reclassifications bears to the total number
of shares of all such classes resulting from all such
reclassifications.
(j) Upon any conversion of shares of this Series, the
shares so converted shall have the status of authorized and
unissued shares of preferred stock, unclassified as to series, and
the number of shares of preferred stock which the Company shall
have authority to issue shall not be decreased by the conversion
of shares of this Series.
1.4 Liquidation Rights. In the event of any liquidation,
dissolution, or winding up of the affairs of the Company, whether
voluntary or otherwise, after payment or provision for payment of the
debts and other liabilities of the Company, the holders of this Series
shall be entitled to receive an amount in cash for each share of this
Series equal to $10.00 per share, plus an amount equal to all dividends
accumulated and unpaid on each such share up to the date fixed for
distribution, before any distributions shall be made to the holders of
the Common Stock and of any other capital stock of the Company
ranking junior to this Series upon the liquidation, dissolution or
winding up of the Company. If upon any liquidation, dissolution or
winding up of the Company, the assets distributable among the holders
of this Series shall be insufficient to permit the payment in full to the
holders of all the then outstanding shares of this Series and all holders
of preferred stock ranking on a parity with this Series with respect to
the payment upon liquidation, dissolution and winding up of the
<PAGE> 14
Company of all preferential amounts payable to all such holders, then
the entire assets of the Company thus distributable shall be distributed
ratably among the holders of this Series and all such other holders of
Preferred Stock in proportion to the respective amounts that would be
payable per share if such assets were sufficient to permit payment in
full. Subject to the provisions of section 1.3(e)(i), a consolidation or
merger of the Company with or into one or more persons or the sale or
transfer of all or substantially all of the assets of the Company shall
not be deemed to be a liquidation, dissolution or winding up of the
Company.
1.5 Optional Cash Redemption. The shares of this Series are
not redeemable prior to October 20, 1999. Thereafter, the shares of
this Series are redeemable for cash, in whole at any time or from time
to time in part at the option of the Company, at a redemption price of
$10.00 per share, plus any accumulated and unpaid dividends thereon.
Notice of redemption pursuant to this Section 1.5 will be mailed
at least 30 days but not more than 60 days before the redemption date
to each holder of record of shares of this Series to be redeemed at the
address shown on the stock books of the Company (but no failure to
mail such notice or any defect therein or in the mailing thereof shall
affect the validity of the proceedings for such redemption except as to
the holder to whom the Company has failed to mail such notice or
except as to the holder whose notice was defective). On and after the
redemption date, dividends shall cease to accumulate on shares of this
Series called for redemption (unless the Company defaults in the
payment of the redemption price).
If less than all the outstanding shares of this Series not
previously called for redemption are to be redeemed pursuant to this
Section 1.5, shares to be redeemed shall be selected by the Company
from outstanding shares not previously called for redemption by lot or
pro rata (as nearly as may be) as determined by the Board of Directors
of the Company. The Company may not redeem less than all
outstanding shares of this Series pursuant to this Section 1.5 unless
full cumulative dividends shall have been declared and paid or set
apart for payment upon all outstanding shares of this Series for all
<PAGE> 15
past dividend periods. Shares of this Series redeemed by the Company
shall, after such redemption, have the status of authorized but
unissued shares of preferred stock, without designation as to series,
and may thereafter be issued.
1.6 Voting Rights. The holders of shares of this Series shall
have no right to vote for any purpose, except as specifically required by
the laws of the State of Delaware and except as follows:
So long as any shares of this Series remain
outstanding, the affirmative vote or consent of the holders of
a majority of the then outstanding shares of this Series, in
person or by proxy, either in writing or at a meeting called
for that purpose (voting as a class with the holders of all
other series of preferred stock ranking on a parity with this
Series either as to dividends or distributions or upon
liquidation, dissolution or winding up of the Company and
upon which like voting rights have been conferred and are
then exercisable), shall be necessary to permit, effect or
validate the repeal, amendment or other change of any
provision of the Certificate of Incorporation of the Company
in any manner which materially and adversely affects the
rights, preferences, or privileges of this Series or the holders
thereof; provided, however, that any increase or decrease
(but not below the number of shares of this Series then
outstanding) in the amount of authorized preferred stock or
the creation and issuance of other series of preferred stock,
whether ranking on a parity with or junior or prior to this
Series with respect to voting, the payment of dividends or
the distribution of assets upon liquidation, dissolution or
winding up shall not be deemed to materially and adversely
affect such rights, preferences or privileges. In connection
with any right to vote, each holder of outstanding shares of
this Series shall have one vote for each share held.
The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be
required shall be effected, all outstanding shares of this Series shall
<PAGE> 16
have been redeemed or sufficient funds shall have been deposited in
trust to effect such redemption.
IN WITNESS WHEREOF, this Certificate has been executed and
attested by the undersigned on October 19, 1998, and shall be effective
at 10:00 a.m. Eastern Daylight Time on the date on which filed with
the Secretary of State of the State of Delaware.
PARALLEL PETROLEUM CORPORATION
By: /s/ Larry C. Oldham
--------------------------
Larry C. Oldham, President
ATTEST:
/s/ Thomas W. Ortloff
- ----------------------------
Thomas W. Ortloff, Secretary
<PAGE> 1
PARALLEL PETROLEUM CORPORATION
CERTIFICATE OF RETIREMENT OF PREFERRED STOCK
Pursuant to the provisions of Section 243 of the Delaware General
Corporation Law, the undersigned, being the duly elected and acting
President of Parallel Petroleum Corporation, a Delaware corporation,
hereby certifies as follows:
1. The name of the corporation is Parallel Petroleum
Corporation (the "Corporation").
2. A resolution was duly adopted by the Board of Directors of
the Corporation on October 20, 1998 retiring 600,000 shares of the
Corporation's $.60 Cumulative Convertible Preferred Stock (the
"Shares").
3. The Shares constitute all of the authorized shares of the
series to which they belong.
4. The Certificate of Designations, Preferences and Rights of
Serial Preferred Stock (the "Certificate of Designations") creating the
Shares prohibits the reissuance of such shares as a part of the series
created by the Certificate of Designations. The Shares shall be
restored to the status of authorized but unissued shares of preferred
stock, $.10 par value per share, without designation as to series.
IN WITNESS WHEREOF, this Certificate has been executed by the
undersigned on October 30, 1998, and shall be effective at 10:00 a.m.
Eastern Daylight Time on the date filed with the Secretary of State of
the State of Delaware.
PARALLEL PETROLEUM CORPORATION
By: /s/ Larry C. Oldham
--------------------------
Larry C. Oldham, President
<PAGE> 1
Exhibit 10.7
PARALLEL PETROLEUM CORPORATION
1998 STOCK OPTION PLAN
I. Purpose of the Plan
The Parallel Petroleum Corporation 1998 Stock Option Plan (the "Plan")
is intended to provide a means whereby certain employees of Parallel
Petroleum Corporation, a Delaware corporation (the "Company"), and its
subsidiaries 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 certain employees the option
("Option") to purchase shares of the common stock of the Company ("Stock"),
as hereinafter set forth. Options granted under the Plan to employees may
be either incentive stock options, within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), ("Incentive
Stock Options") or options which do not constitute Incentive Stock
Options.
II. 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 employees who are to be
granted Options hereunder and to establish the number of shares which may be
issued to employees under each Option and to prescribe the form of the
agreement embodying awards of Options. The Committee is authorized to
interpret the Plan and may from time to time 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 in selecting the
employees to whom Options shall be granted, in establishing the number of
shares which may be issued to employees under each Option and in construing
the provisions of the Plan shall be final. 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.
<PAGE> 2
III. 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 employee
during the employee's lifetime and while the employee remains employed by
the Company, except that: (i) if the employee ceases to be an employee of
the Company because of disability, the Option may be exercised in full by
the employee (or the employee'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 employee) at any time during the period of one
year following such termination; (ii) if the employee dies while he is an
employee of the Company, the employee'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 employee, may exercise the Option in full at any
time during the period of one year following the date of the employee's death;
and (iii) if the employee ceases to be an employee of the Company for any
reason other than as described in clause (i) or (ii) above, unless the
employee is removed for cause, the Option may be exercised by the employee
at any time during the period of three months following the date the employee
ceases to be an employee of the Company, or by the employee'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 employee) during a period of one
year following the employee's death if the employee dies during such
three-month period, but in each case only as to the number of shares the
employee was entitled to purchase hereunder upon exercise of the Option as
of the date the employee ceases to be an employee.
<PAGE> 3
(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
employee, the employee (or the person permitted to exercise the Option in the
event of the employee'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 employee stock option
agreements need not be identical.
IV. Eligibility of Optionee
(a) Subject to the provisions of paragraph (b) below, Options may be
granted only to individuals who are employees (including officers and
directors who are also employees) of the Company or any parent or subsidiary
corporation (as defined in Section 424 of the Code) of the Company at the
time the Option is granted. Options may be granted to the same employee on
more than one occasion.
(b) No Incentive Stock Option shall be granted to an individual if, at
the time the Option is granted, such individual owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company or of its parent or subsidiary corporation, within the meaning of
Section 422(b)(6) of the Code, unless (i) at the time such Option is
granted the option price is at least 110% of the fair market value of the
Stock subject to the Option and (ii) such Option by its terms is not
exercisable after the expiration of five years from the date of grant. To
the extent that the aggregate fair market value (determined at the
time the respective Incentive Stock Option is granted) of stock with respect
to which Incentive Stock Options are exercisable for the first time by an
individual during any calendar year under all incentive stock option plans
of the Company and its parent and subsidiary corporations exceeds $100,000,
such Incentive Stock Options shall be treated as options which do not
constitute Incentive Stock Options. The Committee shall determine, in
accordance with applicable provisions of the Code, Treasury Regulations and
other administrative pronouncements, which of an employee optionee's
Incentive Stock Options will not constitute Incentive Stock Options because
of such limitation and shall notify the employee optionee of such
determination as soon as practicable after such determination.
<PAGE> 4
V. Shares Subject to the Plan
The aggregate number of shares which may be issued under Options granted
under the Plan shall not exceed 850,000 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 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 a sufficient number
of shares to meet the requirements of the Plan. Should any Option hereunder
expire or terminate 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 Article VII
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. Separate stock certificates shall be issued
by the Company for those shares acquired pursuant to the exercise of an
Incentive Stock Option and for those shares acquired pursuant to the exercise
of any Option which does not constitute an Incentive Stock Option.
VI. 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 Article VIII,
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.
VII. 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, 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 contituted, but if, and whenever, prior to the
expiration of an Option theretofore granted, the Company shall effect a
<PAGE> 5
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 employees shall
become fully exercisable and upon any exercise of an Option theretofore
granted the employee 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 employee would have been entitled pursuant to the
terms of the Corporate Change if, immediately prior to such Corporate Change,
the employee 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 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.
<PAGE> 6
VIII. 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.
IX. Miscellaneous Provisions
(a) Neither the Plan nor any action taken hereunder shall be construed
as giving any employee 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, all as provided in Article III),
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 of Directors or
the Committee.
<PAGE> 1
Exhibit 10.9
[Logo of Bank One, Texas, N.A.]
March 23, 1999
Parallel Petroleum Corporation
110 North Marienfeld, Suite 465
Midland, Texas 79701
Attention: Mr. Larry C. Oldham
Re: Restated Loan Agreement dated as
of July 1, 1997, by and between
Parallel Petroleum Corporation
("Borrower") and Bank One, Texas,
N.A. ("Lender"), as amended (the
"Loan Agreement")
Gentlemen:
Pursuant to Section 21.D; Availability under the Development Facility
shall be $0.00. As of this agreement all outstandings shall be
transferred to the Revolving Facility.
Pursuant to Section 2.6 of the Loan Agreement and effective as of March
23, 1999, the Interest Rate to be charged under the referenced Revolving
Facility shall be the Bank's Base Lending Rate plus 0.25%.
Pursuant to Section 3.2 of the Loan Agreement and effective as of March
23, 1999, Lender has redetermined the Borrowing Base to be
$18,900,000.00 and has redetermined the Monthly Commitment
Reduction to be $0.00. The next scheduled Borrowing Base and
Monthly Commitment Reduction shall be redetermined on or about May
1, 1999.
Capitalized terms used but not defined herein shall have the respective
meanings ascribed thereto in the Loan Agreement.
UPON YOUR EXECUTION HEREOF IN THE SPACE PROVIDED
BELOW, THIS AGREEMENT SHALL REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENT BETWEEN THE PARTIES.
If you are in agreement with the foregoing please execute and return a
copy of this letter to me.
Sincerely,
BANK ONE, TEXAS, N.A.
By: /s/ Michael J. Davis
Michael J. Davis
Vice President
<PAGE> 2
AGREED TO AS OF THE ABOVE DATE:
Parallel Petroleum Corporation
By: /s/ Larry C. Oldham
Larry C. Oldham
President
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors and Stockholders
Parallel Petroleum Corporation:
We consent to incorporation by reference in the registration statements
(No. 33-46959, No. 33-57348 and No. 333-34617) on Forms S-8, and
the registration statements ( No. 33-90296 and No. 333-11021) on
Forms S-3, of Parallel Petroleum Corporation of our report dated
February 12, 1999, relating to the balance sheets of Parallel Petroleum
Corporation as of December 31, 1998 and 1997, and the related
statements of income, stockholders' equity, and cash flows for each of
the years in the three-year period ended December 31, 1998, which
appears in the December 31, 1998 annual report on Form 10-K of
Parallel Petroleum Corporation.
/S/ KPMG LLP
Midland, Texas
March 30, 1999
<PAGE> 1
Exhibit 23.2
Consent of Independent Petroleum Engineers
As independent petroleum engineers, we hereby consent to the
incorporation by reference in the registration statements (No. 33-
46959, No. 33-57348 and No. 333-34617) on Forms S-8, and the
registration statements (No. 33-90296 and No. 333-11021) on Forms S-
3 of Parallel Petroleum Corporation of our estimates of reserves,
included in the Annual Report on Form 10-K of Parallel Petroleum
Corporation for the fiscal year ended December 31, 1998, and to all
references to our firm.
/S/ JOE C. NEAL & ASSOCIATES
Midland, Texas
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,178,819
<SECURITIES> 0
<RECEIVABLES> 1,620,885
<ALLOWANCES> 71,358
<INVENTORY> 0
<CURRENT-ASSETS> 2,932,566
<PP&E> 65,853,052
<DEPRECIATION> 22,279,355
<TOTAL-ASSETS> 46,564,782
<CURRENT-LIABILITIES> 2,803,753
<BONDS> 18,035,889
<COMMON> 183,069
0
97,450
<OTHER-SE> 25,444,621
<TOTAL-LIABILITY-AND-EQUITY> 46,564,782
<SALES> 0
<TOTAL-REVENUES> 9,001,582
<CGS> 0
<TOTAL-COSTS> 24,056,923
<OTHER-EXPENSES> (337,736)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,378,332
<INCOME-PRETAX> (16,095,937)
<INCOME-TAX> (3,100,027)
<INCOME-CONTINUING> (12,995,910)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,995,910)
<EPS-PRIMARY> (.73)
<EPS-DILUTED> (.73)
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