<PAGE>
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
----------------------------
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1999 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition period from to
--------------------------
COMMISSION FILE NUMBER 0-13305
--------------------------
PARALLEL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-1971716 75-1971716
(State of other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Marienfeld Place, Suite 465,
Midland, Texas 79701
(Address of principal executive offices) (Zip Code)
(915) 684-3727
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes 'X' No
At August 1, 1999, there were 18,331,858 shares of the Registrant's Common
Stock, $0.01 par value, outstanding.
===============================================================================
<PAGE>
2
INDEX
PART I. - FINANCIAL INFORMATION
Page No.
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to the succeeding pages for the following
financial statements:
- Consolidated Balance Sheet as of December 31, 1998 and
June 30, 1999 (unaudited) 3
- Unaudited Consolidated Statements of Operations for the
three months ended June 30, 1998 and 1999 and six months ended
June 30, 1998 and 1999 5
- Unaudited Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1999 6
- Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
<PAGE>
3
PARALLEL PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31, June 30, 1999
ASSETS 1998* (Unaudited)
- ------------- ------------ --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,178,819 $ 1,218,599
Accounts receivable:
Oil and gas 1,432,659 1,366,385
Others, net of allowance for doubtful accounts
of $71,358 in 1998 and 1999 247,740 405,776
Affiliate 11,844 --
------------ ------------
1,692,243 1,772,161
Other assets 61,504 28,012
------------ ------------
Total current assets 2,932,566 3,018,772
------------ ------------
Property and equipment, at cost:
Oil and gas properties, full cost method 65,565,466 87,117,125
Other 287,586 496,463
------------ ------------
65,853,052 87,613,588
Less accumulated depreciation and depletion 22,279,355 24,140,149
------------ ------------
Net property and equipment 43,573,697 63,473,439
------------ ------------
Other assets, net of accumulated amortization of
$86,917 in 1998 and $95,248 in 1999 58,519 68,289
------------ ------------
$ 46,564,782 $ 66,560,500
============ ============
</TABLE>
<PAGE>
4
PARALLEL PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
December 31, June 30, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY 1998* (Unaudited)
- ------------------------------------ ------------ -------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities:
Current portion of affiliate's long-term
debt (Note 3) $ -- $ 506,250
Subordinated notes payable (Note 4) -- 3,600,000
Trade 2,803,539 2,142,738
Affiliate 214 6,423
Preferred stock dividend -- 24,362
------------ ------------
Total current liabilities 2,803,753 6,279,773
------------ ------------
Long-term debt:
Bank credit facility (Note 3) 18,035,889 18,815,889
Proportionate share of affiliate's long-
term debt, net of current portion(Note 3) -- 16,143,750
------------ ------------
Total long-term debt 18,035,889 34,959,639
Deferred income taxes -- --
Stockholders' equity:
Preferred stock - 6% convertible preferred stock -
par value $.10 per share(aggregate liquidation
preference of $10) authorized 10,000,000 shares,
issued and outstanding 974,500 in 1998 and 1999 97,450 97,450
Common stock - par value $.01 per share, authorized
60,000,000 shares, issued and outstanding
18,306,858 in 1998 and 18,331,858 in 1999 183,069 183,319
Additional paid-in surplus 32,341,971 32,042,197
Retained deficit (6,897,350) (7,001,878)
------------ ------------
Total stockholders' equity 25,725,140 25,321,088
Contingencies
------------ ------------
$ 46,564,782 $ 66,560,500
============ ============
</TABLE>
*The balance sheet as of December 31, 1998 has been derived from Parallel's
audited financial statements. The accompanying notes are an integral part of
these financial statements.
<PAGE>
5
PARALLEL PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
Three Months Ended Six Months Ended
---------------------- -----------------------
June 30, June 30,
---------------------- -----------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Oil and gas revenues $2,453,140 $1,991,727 $4,565,703 $3,954,816
---------- --------- ---------- ----------
Cost and expenses:
Lease operating expense 613,053 551,142 1,170,691 1,064,964
General and administrative 199,117 220,911 419,505 424,148
Depreciation, depletion
and amortization 1,063,466 956,958 1,994,283 1,860,794
---------- --------- --------- ---------
1,875,636 1,729,011 3,584,479 3,349,906
---------- --------- --------- ---------
Operating income 577,504 262,716 981,224 604,910
---------- --------- --------- ---------
Other income (expense), net:
Interest income 395 13,695 470 26,971
Other income 37,552 6,606 51,111 13,229
Interest expense (341,817) (376,057) (646,095) (747,128)
Other expense (4,195) (1,204) (8,577) (2,509)
---------- --------- ---------- ---------
Total other expense, net (308,065) (356,960) (603,091) (709,437)
---------- --------- ---------- ---------
Income (loss) before income taxes 269,439 (94,244) 378,133 (104,527)
Income tax expense -deferred 88,826 -- 124,695 --
---------- --------- ---------- ---------
Net income (loss) $ 180,613 $ (94,244) $ 253,438 $ (104,527)
========== ========= ========== =========
Cumulative preferred stock dividend $ 68,000 $ 146,175 $ 68,000 $ 316,713
========== ========= ========== =========
Net income (loss) available
to common stockholders $ 112,613 $(240,419) $ 185,438 $(421,240)
========== ========= ========== =========
Net income (loss) per common share
Basic $ .006 $ (.013) $ .010 $ (.023)
========== ========= ========== =========
Diluted $ .009 $ (.013) $ .013 $ (.023)
========== ========= ========== =========
Weighted average common shares
Outstanding - diluted 19,531,844 18,331,858 19,161,431 18,120,194
========== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
6
PARALLEL PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Six Months Ended June 30,
---------------------------------
1998 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 253,438 $ (104,527)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation, depletion and amortization 1,994,283 1,860,794
Incomes taxes 124,695 --
Other, net (5,702) (9,770)
Changes in assets and liabilities:
Decrease in trade receivables (53,602) (79,918)
(Increase) decrease in prepaid expenses
and other (73,701) 33,492
Decrease in accounts payable
and accrued liabilities (1,419,721) (630,230)
Increase in current portion of affiliate
long-term debt -- 506,250
Increase in subordinated notes payable -- 3,600,000
----------- -----------
Net cash provided by operating
activities 819,690 5,176,091
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (12,953,814) (22,015,776)
Proceeds from disposition of property and equipment -- 255,240
----------- -----------
Net cash used in investing
activities (12,953,814) (21,760,536)
----------- -----------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt 13,343,000 16,923,750
Payment of long-term debt (7,234,000) --
Proceeds from exercise of options and warrants 53,438 17,188
Stock offering costs (80,851) --
Proceeds from preferred stock issuance 6,000,000 --
Payment of preferred stock dividend (68,000) (316,713)
----------- -----------
Net cash provided by financing
activities 12,013,587 16,624,225
----------- -----------
Net increase (decrease) in cash
and cash equivalents (120,537) 39,780
Beginning cash and cash equivalents 597,149 1,178,819
----------- -----------
Ending cash and cash equivalents $ 476,612 $ 1,218,599
=========== ===========
Non-cash financing activities:
Accrued preferred stock dividend $ -- $ 24,362
=========== ===========
The accompanying notes are an integral part of these financials.
</TABLE>
<PAGE>
7
PARALLEL PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Parallel and, with respect to our consolidated balance sheet as of June 30,
1999, our pro rata share of the assets and liabilities associated with our 22.5%
membership interest in First Permian, LLC. First Permian is a Delaware limited
liability company formed on June 25, 1999 for the purpose of acquiring a wholly
owned, indirect subsidiary of Fina Oil and Chemical Company. See Note 2 to
Consolidated Financial Statements.
There is no reportable income or expense associated with our interest in
First Permian for the current reporting period. In subsequent reporting periods,
our statements of operations and cash flows will be consolidated to reflect our
pro rata share of the income and expenses of First Permian.
The financial information included herein, with the exception of the
balance sheet as of December 31, 1998, is unaudited. However, such information
includes all adjustments (consisting solely of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair statement of the
results of operations for the interim periods. The results of operations for the
interim period are not necessarily indicative of the results to be expected for
an entire year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q Report pursuant to certain
rules and regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with the financial statements and notes
included in Parallel's 1998 Annual Report and 1998 Form 10-K.
NOTE 2. RECENT EVENTS
On June 30, 1999, First Permian and a wholly owned, indirect subsidiary of
Fina Oil and Chemical Company consummated a cash merger. First Permian was the
surviving entity. The transaction was accounted for as a purchase. The assets
acquired consisted primarily of producing oil and gas properties located in the
Permian Basin of west Texas. After giving effect to purchase price adjustments,
First Permian paid to Fina cash in the aggregate amount of approximately $92.0
million. Our proportionate share of the book value of the assets acquired
through the cash merger is approximately $20.0 million and is reflected in the
June 30, 1999 consolidated balance sheet.
First Permian is owned by Parallel, Baytech, Inc., Tejon Exploration
Company and Mansefeldt Investment Corporation. Baytech, Tejon and Mansefeldt are
privately held oil and gas companies. Parallel and Baytech are the managers of
First Permian and each owns a 22.5% membership interest. Tejon Exploration and
Mansefeldt Investment each own a 27.5% interest in First Permian. If certain
conditions are met regarding the prepayment of $16.0 million aggregate principal
amount of subordinated unsecured notes made by First Permian and payable to
Tejon and Mansefeldt, the proceeds of which were used to help finance the
acquisition, Parallel's interest in First Permian could increase to 37.5% for a
nominal fee per membership unit.
The purchase was financed, in part, with the proceeds of the revolving
credit facility provided by Bank One, Texas, N.A. to First Permian. On June 30,
1999, Parallel and Baytech entered into a credit agreement with Bank One, Texas,
N.A. that established the $110.0 million revolving credit facility. The
principal amount of the initial loan from Bank One is $74.0 million. Parallel's
obligation is limited to a guaranty of $10.0 million of the bank borrowings. See
Note 3 to Consolidated Financial Statements for further discussion of the credit
facility.
Additional financing for the cash merger was obtained through subordinated
debt borrowings, which included $8.0 million borrowed from Tejon Exploration
Company and $8.0 million borrowed from Mansefeldt Investment. The terms of the
subordinated debt and the effect on Parallel's balance sheet are discussed in
Note 4 to Consolidated Financial Statements.
<PAGE>
8
NOTE 3. LONG TERM DEBT
Our long term debt at June 30, 1999 consisted of the following:
Revolving credit facility note payable to bank at the bank's
base lending rate plus .25% (8.0% at June 30, 1999) $18,815,889
Affiliate debt: Parallel's proportionate share (22.5%)
of the First Permian, LLC revolving credit facility
note payable to bank at bank's base lending rate plus
1.5% (9.25% at June 30, 1999) 16,650,000
-----------
$35,465,889
Less: Parallel's proportionate share of current
maturities of affiliate debt 506,250
-----------
Total long term debt $34,959,639
===========
Scheduled maturities of Parallel's debt and our proportionate
share of affiliate's debt at June 30, 1999 are as follows:
2000 $ 506,250
2001 19,490,889
2002 15,468,750
-----------
$35,465,889
===========
Revolving Credit Facility. At June 30, 1999, Parallel was a party to a loan
agreement with Bank One, Texas, N.A. Under terms of the loan agreement, we may
borrow up to the lesser of $30,000,000 or the "borrowing base" then in effect.
The borrowing base in effect at June 30, 1999 was $18,815,889 (the Revolving
Facility). The borrowing base was subject to reduction by a monthly commitment
reduction of $380,000. However, effective March 23, 1999, the monthly commitment
reduction was suspended by the bank until May 1, 1999 at which time the
borrowing base and monthly commitment reduction were scheduled for
redetermination. The loan agreement provides for a redetermination of the
borrowing base and monthly commitment reduction every six months on April 1 and
October 1 of each year or at such other times as the bank elects. As of the date
of this Form 10-Q Report, we had not received notice from the bank of the
redetermined borrowing base or monthly reduction amount. At June 30, 1999, we
had borrowed all the funds currently available under the Revolving Facility. All
indebtedness under the Revolving Facility matures July 1, 2001. The loan is
secured by substantially all of our 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 of the Revolving Facility bears interest at
our election at a rate equal to (i) the bank's base lending rate plus .25% or
(ii) the bank's Eurodollar rate plus a margin of 2.5%. Interest under the
Revolving Facility is due and payable monthly. At June 30, 1999, the interest
rate was the bank's base rate plus .25% or 8.0%.
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, (3) prohibiting payment of
dividends on common stock, and (4) prohibiting the payment of dividends on
preferred stock when an event of default under the loan agreement is in
existence.
At June 30, 1999 we were in default under our loan agreement for events of
noncompliance with certain covenants of the loan agreement. We have obtained a
waiver of the default from our bank lender.
Long Term Debt of Affiliate. On June 30, 1999, Parallel, Baytech and First
Permian entered into a credit agreement with Bank One, Texas, N.A. that
established a $110.0 million revolving credit facility to finance, in part, the
merger of a wholly owned, indirect subsidiary of Fina Oil and Chemical Company
into First Permian. The principal amount of the initial loan from Bank One was
$74.0 million. Under terms of the credit agreement, dated June 30, 1999, as of
<PAGE>
9
August 12, 1999, the principal amount outstanding under the revolving credit
facility bears interest, at First Permian's election, at Bank One's base rate
plus 1.50% or the Eurodollar rate plus 4.50% until such time that subordinated
debt in the principal amount of $16.0 million has been paid in full. See Note 4
to Consolidated Financial Statements. When these subordinated unsecured loans
have been paid in full, the revolving credit facility will bear interest at Bank
One's base rate or the Eurodollar rate plus 2.50%.
The credit facility provides for revolving loans subject to a borrowing
base and a monthly commitment reduction. The initial borrowing base is $74.0
million and the initial monthly commitment reduction amount is $250,000. The
monthly commitment reduction commences on October 1, 1999 and continues with a
like reduction on the first day of each following month. The borrowing base and
the monthly commitment reduction amount may be redetermined by the bank on
January 1 and July 1 of each year or at other times requested by First Permian.
All outstanding principal under the revolving credit facility is due and payable
on July 1, 2002. Interest is payable on the last day of each month. The loan is
secured by substantially all of the oil and gas properties First Permian
acquired from Fina Oil and Chemical Company. Parallel and Baytech each
guaranteed $10.0 million of the loans from Bank One. Our proportionate share of
First Permian's long term debt is $16,650,000.
NOTE 4. AFFILIATE SUBORDINATED UNSECURED LOANS
In addition to the $74.0 million loan from Bank One, First Permian borrowed
$8.0 million from Tejon Exploration Company and $8.0 million from Mansefeldt
Investment Corporation to help finance the acquisition of oil and gas properties
from Fina Oil and Chemical Company. Under terms of an Intercreditor Agreement,
dated June 30, 1999, the loans made by Tejon and Mansefeldt are unsecured and
subordinate in all respects to the senior loans made by Bank One.
Each loan requires a principal payment of $2.5 million on December 31, 1999
and $5.5 million on June 30, 2000. Principal payments on the subordinated loans
are subject to certain restrictions. Our proportionate share of the subordinated
debt is $3.6 million and is reflected on our June 30, 1999 balance sheet as
subordinated notes payable.
NOTE 5. PREFERRED STOCK
We have outstanding 974,500 shares of 6% Convertible Preferred Stock, $0.10
par value per share. Cumulative annual dividends of $0.60 per share are payable
semi-annually on June 15 and December 15 of each year. 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 preferred stock has a liquidation preference
of $10 per share and has no voting rights, except as required by law.
We may redeem the preferred stock, in whole or part, after October 20,
1999, for $10 per share plus accrued and unpaid dividends.
NOTE 6: FULL COST CEILING TEST
We use the full cost method to account for our oil and gas producing
activities. Under the full cost method of accounting, the net book value of oil
and gas properties, less related deferred income taxes, may not exceed a
calculated "ceiling." The ceiling limitation is the discounted estimated
after-tax future net revenues from proved oil and gas properties. In calculating
future net revenues, current prices and costs are generally held constant
indefinitely. The net book value, less related deferred income taxes, is
compared to the ceiling on a quarterly and annual basis. Any excess of the net
book value, less related deferred income taxes, is generally written off as an
expense. Under rules and regulations of the SEC, the excess above the ceiling is
not written off if, subsequent to the end of the quarter or year but prior to
the release of the financial results, prices increased sufficiently such that an
excess above the ceiling would not have existed if the increased prices were
used in the calculations.
During the fourth quarter of 1998, we recognized a non-cash impairment
charge of $15.0 million, or $12.0 million net of tax, related to our oil and gas
reserves and unproved properties. The impairment of oil and gas assets was
primarily the result of the effect of significantly lower oil and natural gas
prices on both proved and unproved oil and gas properties. At June 30, 1999, our
net book value of oil and gas, less related deferred income taxes, was below the
calculated ceiling. As a result, we were not required to record a reduction of
our oil and gas properties under the full cost method of accounting.
<PAGE>
10
NOTE 7. NET INCOME PER COMMON 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 options, 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.
<TABLE>
SIX MONTHS ENDED
JUNE 30,
-----------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Basic EPS Computation:
Numerator -
Net income (loss) $ 253,438 $ (104,527)
Preferred stock dividend (68,000) (316,713)
---------- ----------
Net income (loss)available to common stockholders 185,438 (421,240)
========== ==========
Denominator -
Weighted average common shares outstanding 18,121,533 18,120,194
---------- ----------
Basic EPS $ .010 $ (.023)
========== ==========
Diluted EPS Computation
Numerator -
Net income (loss) $ 253,438 $ (104,527)
Preferred stock dividends -- (316,713)
---------- ----------
Net income (loss) available to common stockholders 253,438 (421,240)
========== ==========
Denominator -
Weighted average common shares outstanding 18,121,533 18,120,194
Employee stock options 595,283 --
Warrants 14,712 --
Convertible preferred stock 429,903 --
---------- ----------
19,161,431 18,120,194
---------- ----------
Diluted EPS $ .013 $ (.023)
========== ==========
</TABLE>
Employee stock options to purchase shares of common stock and convertible
preferred stock were outstanding during the six-month period ended June 30, 1999
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 Parallel, (ii) the effect of the
assumed conversion of Parallel's preferred stock to common stock would be
antidilutive, or (iii) Parallel had a net loss from continuing operations and,
therefore, the effect would be antidilutive.
<PAGE>
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In addition to historical information contained herein, this Form 10-Q
Report contains forward-looking statements subject to various risks and
uncertainties that could cause our actual results to differ materially from
those in the forward-looking statements. Forward-looking statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "intend," "anticipate," "estimate," "continue," "present value,"
"future," "reserves" or other variations thereof or comparable terminology.
Factors, that could cause or contribute to such differences could include, but
are not limited to, those relating to our growth strategy, outstanding
indebtedness, changes in interest rates, dependence on weather conditions,
seasonality, expansion and other activities of competitors, changes in federal
or state environmental laws and the administration of such laws, and the general
condition of the economy and its effect on the securities market. While we
believe our forward-looking statements are based upon reasonable assumptions,
there are factors that are difficult to predict and that are influenced by
economic and other conditions beyond our control. Investors are directed to
consider such risks and other uncertainties discussed in documents filed by
Parallel with the Securities and Exchange Commission.
The following discussion and analysis should be read in conjunction with
our Financial Statements and the related notes.
OVERVIEW
Our long term business strategy is to increase our reserve base by
. using 3-D seismic and other advanced technologies to conduct our
exploratory activities,
. acquiring properties we believe can be enhanced by developing reserves
not previously produced,
. exploiting our existing producing properties, and
. maximizing the present value of our properties by accelerating
production of reserves consistent with prudent reservoir management.
As part of this business strategy, we have discovered oil and gas reserves
using 3-D seismic technology in the Horseshoe Atoll Reef Trend of West Texas and
the Yegua/Frio Gas Trend onshore the Gulf Coast of Texas. Additionally, we have
acquired oil and gas producing properties in the Permian Basin of West Texas.
Capital utilized to acquire such reserves has been provided primarily by secured
bank financing, sales of our equity securities and cash flow from operations.
Property Acquisitions. Our most recent property acquisition occurred on
June 30, 1999. As described in Note 3 to Consolidated Financial Statements, we
joined with three privately held oil and gas companies to acquire oil and gas
properties from Fina Oil and Chemical Company. The acquisition was effected
through the formation of First Permian which entered into a cash merger with a
wholly owned, indirect subsidiary of Fina Oil and Chemical Company. The primary
assets of the acquired subsidiary are oil and gas reserves and associated assets
in producing fields located in the Permian Basin of west Texas. After giving
effect to purchase price adjustments, First Permian paid to Fina Oil and
Chemical Company cash in the aggregate amount of approximately $92.0 million.
Our pro rata share of the book value of the assets acquired through the cash
merger is approximately $20.0 million and is reflected in the June 30, 1999
consolidated balance sheet.
First Permian is owned by Parallel, Baytech, Inc., Tejon Exploration
Company and Mansefeldt Investment Corporation. Baytech, Tejon and Mansefeldt are
privately held oil and gas companies. Parallel and Baytech are the managers of
First Permian and each owns a 22.5% membership interest. Tejon Exploration and
Mansefeldt Investment each own a 27.5% interest in First Permian. If certain
conditions are met regarding the prepayment of $16.0 million aggregate principal
amount of subordinated unsecured notes made by First Permian and payable to
Tejon and Mansefeldt, the proceeds of which were used to help finance the
acquisition, Parallel's interest in First Permian could increase to 37.5% for a
nominal fee per membership unit.
The purchase was financed, in part, with the proceeds of a $110.0 million
revolving credit facility provided by Bank One, Texas, N.A. to First Permian.
The principal amount of the initial loan was $74.0 million. The terms of First
Permian's revolving credit facility are discussed in Note 3 to Consolidated
Financial Statements. In addition, First Permian also borrowed $8.0 million from
Tejon Exploration Company and $8.0 million from Mansefeldt Investment
<PAGE>
12
Corporation to help finance the purchase. The terms of First Permian's
subordinated unsecured loans are discussed in Note 4 to Consolidated Corporation
to help finance the purchase. The terms of First Permian's subordinated
unsecured loans are discussed in Note 4 to Consolidated Financial Statements.
Operating Performance. Our operating performance is influenced by several
factors, the most significant of which are the prices we receive for our oil and
gas production volumes. The world price for oil has overall influence on the
prices we receive for our oil production. The prices received for different
grades of oil are based upon the world price for oil, which is then adjusted
based upon the particular grade. Typically, light oil is sold at a premium,
while heavy grades of crude are discounted. Gas prices we receive are primarily
influenced by seasonal demand, weather, hurricane conditions in the Gulf of
Mexico, availability of pipeline transportation to end users and proximity of
our wells to major transportation pipeline infrastructure and, to a lesser
extent, world oil prices. Additional factors influencing our operating
performance include production expenses, overhead requirements, and cost of
capital.
Our oil and gas exploration, development and acquisition activities require
substantial and continuing capital expenditures. Historically, the sources of
financing to fund our capital expenditures included:
. cash flow from operations,
. sales of our equity securities, and
. bank borrowings.
Because of the sustained deterioration in prices we receive for the oil and
gas we produce, the capital normally available to us from our cash flow and bank
borrowings has been significantly reduced. In January 1998, we were receiving
approximately $17.00 per barrel of oil and $2.70 per Mcf of gas for the oil and
gas we produced. Since then, oil prices have been as low as $10.00 per barrel.
At January 1, 1999, we were receiving approximately $10.50 per barrel of oil and
$2.00 per Mcf of gas.
For the six months ended June 30, 1999, the average sales price we received
for our crude oil production averaged $12.68 per barrel compared with $13.86 per
barrel at June 30, 1998 and $12.49 per barrel at December 31, 1998. The average
sales price for natural gas during this same period was $1.94 per mcf compared
with $2.18 per mcf at June 30, 1998 and $2.04 per mcf at December 31, 1998.
Primarily because of sustained low oil and gas prices, which adversely
affected the value of our proved oil and gas reserves, our available borrowing
capacity under our revolving credit facility was reduced from $21,000,000 to
$18,815,889. This means we have borrowed all the funds currently available under
our revolving credit agreement. We have also reduced our drilling activities
during this period of low oil and gas prices. If the prices we receive for oil
and gas production continue to improve, increasing cash flow, or if we are
successful in raising additional capital, 1999 planned drilling activity may be
accelerated.
Our oil and gas producing activities are accounted for using the full cost
method of accounting. Accordingly, we capitalize all costs incurred in
connection with the acquisition of oil and gas properties and the exploration
for and development of oil and gas reserves. See Note 6 to Consolidated
Financial Statements. These costs include lease acquisition costs, geological
and geophysical expenditures, costs of drilling both productive and
non-productive wells, and overhead expenses directly related to land acquisition
and exploration and development activities. Proceeds from the disposition of oil
and gas properties are accounted for as a reduction in capitalized costs, with
no gain or loss recognized unless such disposition involves a material change in
reserves, in which case the gain or loss is recognized.
Depletion of the capitalized costs of oil and gas properties, including
estimated future development costs, is provided using the equivalent
unit-of-production method based upon estimates of proved oil and gas reserves
and production, which are converted to a common unit of measure based upon their
relative energy content. Unproved oil and gas properties are not amortized, but
are individually assessed for impairment. The cost of any impaired property is
transferred to the balance of oil and gas properties being depleted.
Our production and results of operations vary from quarter to quarter. We
do not currently anticipate that our production volumes in 1999 will increase
significantly compared to our production volumes in the prior year as a result
of our drilling activities. However, because we will consolidate our
proportionate share of the production volumes from our membership interest in
First Permian, we anticipate this will have a material positive effect on our
production volumes for the remainder of 1999.
<PAGE>
13
RESULTS OF OPERATIONS
We acquired our membership interest in First Permian, LLC on June 28, 1999.
First Permian had no assets until consummating the cash merger with Fina's
subsidiary on June 30, 1999. Accordingly, the results of our operations for the
three and six months periods ended June 30, 1999 do not include any
proportionate share of the operations of First Permian.
Because of our ever-changing reserve base and sources of production, year
to year or quarter to quarter comparisons of our results of operations can be
difficult. This situation is further complicated by significant changes in
product mix (oil vs. gas volumes) and related price fluctuations for both oil
and gas. For these reasons, the table below compares the results of operations
on the basis of equivalent barrels of oil ("EBO") for the period indicated. An
EBO means one barrel of oil equivalent using the ratio of six Mcf of gas to one
barrel of oil.
<TABLE>
THREE MONTHS ENDED THREE MONTHS ENDED
------------------------------------- ------------------------
12-31-98 3-31-99 6-30-99 6-30-98 6-30-99
-------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Production and prices:
Oil (Bbls) 49,294 44,619 45,908 44,484 45,908
Natural gas (Mcf) 868,131 697,593 749,856 818,631 749,856
Equivalent barrels of oil(EBO) 193,982 160,884 170,884 180,923 170,884
Oil price (per Bbl) $10.36 $12.18 $13.17 $13.64 $13.17
Gas price (per Mcf) $ 1.59 $ 2.03 $ 1.85 $ 2.26 $ 1.85
Price per EBO $ 9.77 $12.20 $11.66 $13.56 $11.66
Results of operations per EBO
Oil and gas revenues $ 9.77 $12.20 $11.66 $13.56 $11.66
Costs and expenses:
Lease operating expense 3.31 3.19 3.23 3.39 3.23
General and administrative 1.30 1.26 1.29 1.10 1.29
Depreciation and depletion 14.73 5.62 5.60 5.88 5.60
Impairment of oil and
gas properties 76.07 .00 .00 .00 .00
------- ------ ------ ------ ------
Total costs and expenses 95.41 10.07 10.12 10.37 10.12
------- ------ ------ ------ ------
Operating income (loss) (85.64) 2.13 1.54 3.19 1.54
Interest expense, net (1.73) (2.22) (2.12) (1.89) (2.12)
Other income, net 1.49 .03 .03 .18 .03
------- ------ ------ ------ ------
Pretax income (loss) (85.88) (.06) (.55) 1.48 (.55)
Income tax (expense) benefit 16.94 .00 .00 (.49) .00
------- ------ ------ ------ ------
Net income (loss) $(68.94) $ (.06) $ (.55) $ .99 $ (.55)
------- ------ ------ ------ ------
Income before working
capital adjustments $ 4.92 $ 5.56 $ 5.05 $ 7.36 $ 5.05
======= ====== ====== ====== ======
</TABLE>
The following table sets forth for the periods indicated the percentage of
total revenues represented by each item reflected on our statements of
operations.
<PAGE>
14
<TABLE>
SIX MONTHS ENDED
-----------------------------------------------
6-30-97 6-30-98 6-30-99
------------ ------------- ------------
<S> <C> <C> <C>
Production and prices:
Oil (Bbls) 98,707 87,859 90,527
Natural gas (Mcf) 1,838,800 1,538,536 1,447,449
Equivalent barrels of oil (EBO) 405,174 344,281 331,768
Oil price (per Bbl) $20.05 $13.86 $12.68
Gas price (per Mcf) $ 2.56 $ 2.18 $ 1.94
Price per EBO $16.52 $13.26 $11.92
Results of operations per EBO
Oil and gas revenues $16.52 $13.26 $11.92
Costs and expenses:
Lease operating expense 3.80 3.40 3.21
General and administrative .73 1.22 1.28
Depreciation and depletion 4.48 5.79 5.61
------ ------ ------
Total costs and expenses 9.01 10.41 10.10
------ ------ ------
Operating income 7.51 2.85 1.82
------ ------ ------
Interest expense, net (.92) (1.88) (2.17)
Other expense .03 .12 .03
------ ------ ------
Pretax income (loss) 6.62 1.09 (.32)
Income tax expense - deferred 2.19 .36 .00
------ ------ ------
Net income (loss) $ 4.43 $ .73 $ (.32)
====== ====== ======
Net cash flow before working
capital adjustments $11.10 $ 6.88 $ 5.29
====== ====== ======
</TABLE>
The following table sets forth for the periods indicated the percentage of total
revenues represented by each item reflected on our statements of operations.
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------------- -------------------------
12-31-98 3-31-99 6-30-99 6-30-98 6-30-99
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Oil and gas revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Production costs 33.9 26.1 27.7 25.6 26.9
General and administrative 13.3 10.3 11.1 9.2 10.7
Depreciation, depletion and
amortization 150.8 46.0 48.0 43.7 47.1
Impairment of oil and gas
properties 778.6 .0 .0 .0 .0
------ ------ ------ ------ ------
Total costs and expenses 976.6 82.4 86.8 78.5 84.7
------ ------ ------ ------ ------
Operating income (loss) (876.6) 17.6 13.2 21.5 15.3
------ ------ ------ ------ ------
Interest expense, net (17.7) (18.2) (18.2) (14.1) (18.2)
Other income, net 15.3 .2 .2 .9 .3
------ ------ ------ ------ ------
Pretax income (loss) (879.0) (.4) (4.8) 8.3 (2.6)
Income tax (expense) benefit 173.4 .0 .0 2.7 .0
------ ------ ------ ------ ------
Net income (loss) (705.6)% (.4)% (4.8)% 5.6% (2.6)%
====== ====== ====== ====== ======
</TABLE>
<PAGE>
15
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1999:
Oil and Gas Revenues. Oil and gas revenues decreased $461,413, or 19%, to
$1,991,727 for the three months ended June 30, 1999, from $2,453,140 for the
same period of 1998. The decrease was primarily the result of a 14% decrease in
the average sales price per EBO. We received $11.66 per EBO in the three months
ended June 30, 1999 compared with $13.56 per EBO for the same period of 1998. In
addition, oil and gas production decreased 10,039 EBO, or 6%. Approximately 75%
of the decrease in revenues was attributable to the decrease in the average
sales price and approximately 25% of the decrease was attributable to a decrease
in oil and gas production volumes. Oil and gas production declined primarily as
a result of decreased drilling activity.
Production Costs. Production costs decreased $61,911, or 10%, to $551,142
during the second three months of 1999, compared with $613,053 for the same
period of 1998. Average production costs per EBO decreased 5%, to $3.23 for the
second three months in 1999 compared to $3.39 for the same period in 1998,
primarily a result of adding lower cost oil and gas production.
General and Administrative Expenses. General and administrative expenses
increased by $21,794 or 11%, to $220,911 for the second three months of 1999,
from $199,117 for the same period of 1998. The increase was primarily due to
accounting adjustments made in the prior year. General and administrative
expenses were $1.29 per EBO in the second three months of 1999 compared to $1.10
per EBO in the second three months of 1998. Future general and administrative
costs are expected to remain fairly stable with no material increases expected
in any particular category.
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense ("DD&A") decreased by $106,508, or 10%, to $956,958 for
the second three months of 1999 compared with $1,063,466 for the same period of
1998. As a percentage of revenues, the DD&A rate increased by 11% when compared
with the prior year three months, a result of decreased production volumes, a
decrease in the average sales price per EBO we received and a decrease in the
DD&A rate per EBO. The DD&A rate per EBO decreased to $5.60 for the three months
ended June 30, 1999 compared with $5.88 per EBO for the second three months of
1998. The decrease in the DD&A rate per EBO is attributable to a revision in our
proven reserve estimates, primarily the result of lower oil and gas prices in
effect at December 31, 1998 compared with prices in effect at December 31, 1997,
and a non-cash impairment charge incurred in the fourth quarter of 1998 that
reduced our full cost pool.
Historically, we have reviewed our estimates of proven reserve quantities
on an annual basis. However, due to the current uncertainty of oil and gas
prices, we conduct internal reviews of our estimated proven reserves on a more
frequent basis and make necessary adjustment to our DD&A rate accordingly. We
believe periodic reviews and adjustments, if necessary, will result in a more
accurate reflection of its DD&A rate during the year and minimize possible
year-end adjustments.
Net Interest Expense. Net interest expense increased $20,940, or 6%, to
$362,362 for the three months ended June 30, 1999 compared with $341,422 for the
same period of 1998, due principally to borrowings against our revolving line of
credit during 1998, when substantially lower oil and gas prices adversely
affected cash flow.
Net Income and Operating Cash Flow. Net income decreased $274,857, or 152%,
to $(94,244) for the three months ended June 30, 1999, compared to $180,613 for
the three months ended June 30, 1998. Operating cash flow decreased $470,191, or
35%, to $862,714 for the three months ended June 30, 1999 compared to $1,332,905
for the three months ended June 30, 1998. The decrease in net income and
operating cash flow resulted from a 19% decrease in oil and gas revenues and a
10% increase in interest expense. These increases were partially offset by a 10%
decrease in production costs and a 10% decrease in DD&A.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999:
Oil and Gas Revenues. Oil and gas revenues decreased $610,887, or 13%, to
$3,954,816 for the six months ended June 30, 1999, from $4,565,703 for the same
period of 1998. The decrease was primarily the result of a 10% decrease in the
average sales price per EBO. Parallel received $11.92 per EBO in the six months
ended June 30, 1999 compared with $13.26 per EBO for the same period of 1998. In
addition, oil and gas production decreased 12,513 EBO, or 4%. Approximately 76%
of the decrease in revenues was attributable to the decrease in the average
sales price and approximately 24% of the decrease was attributable to a decrease
in oil and gas production volumes.
<PAGE>
16
Production Costs. Production costs decreased $105,727, or 9%, to $1,064,964
during the first six months of 1999, compared with $1,170,691 for the same
period of 1998. Average production costs per EBO decreased 6%, to $3.21 for the
first six months in 1999 compared to $3.40 for the same period in 1998,
primarily a result of adding lower cost oil and gas production.
General and Administrative Expenses. General and administrative expenses
increased by $4,643, or 1%, to $424,148 for the first six months of 1999, from
$419,505 for the same period of 1998. General and administrative expenses were
$1.28 per EBO in the first six months of 1999 compared to $1.22 per EBO in the
first six months of 1998. Future general and administrative costs are expected
to remain fairly stable with no material increases expected in any particular
category.
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense ("DD&A") decreased by $133,489, or 7%, to $1,860,794
for the first six months of 1999 compared with $1,994,283 for the same period of
1998. As a percentage of revenues, the DD&A rate increased by 3% when compared
with the prior year six months, a result of decreased production volumes, a
decrease in the average sales price per EBO received by Parallel and a decrease
in the DD&A rate per EBO. The DD&A rate per EBO decreased to $5.61 for the six
months ended June 30, 1999 compared with $5.79 per EBO for the first six months
of 1998. The decrease in the DD&A rate per EBO is attributable to a revision in
our proven reserve estimates, primarily the result of lower oil and gas prices
in effect at December 31, 1998 compared with prices in effect at December 31,
1997, and a non-cash impairment charge incurred in the fourth quarter of 1998
that reduced our full cost pool.
Net Interest Expense. Net interest expense increased $74,532, or 11%, to
$720,157 for the six months ended June 30, 1999 compared with $645,625 for the
same period of 1998; due principally to borrowings against our revolving line of
credit during 1998, when substantially lower oil and gas prices adversely
affected cash flow.
Net Income and Operating Cash Flow. Net income decreased $357,965 or 141%,
to $(104,527) for the six months ended June 30, 1999, compared to $253,438 for
the six months ended June 30, 1998. Operating cash flow decreased $616,149, or
26%, to $1,756,267 for the six months ended June 30, 1999 compared to $2,372,416
for the six months ended June 30, 1998. The decrease in net income and operating
cash flow resulted from a 13% decrease in oil and gas revenues, and a 16%
increase in interest expense. These increases were partially offset by a 9%
decrease in production costs and a 3% decrease in DD&A.
LIQUIDITY AND CAPITAL RESOURCES
Our cash flow is highly dependent on oil and gas prices. Decreases in the
market price of oil and gas have reduced cash flow and also resulted in the
reduction of our borrowing base under our bank credit facility. These factors
have decreased the funds available to us for capital expenditures.
As described in Note 3 to Consolidated Financial Statements, we acquired a
22.5% membership interest in First Permian, LLC. On June 30, 1999, First Permian
acquired by cash merger a subsidiary of Fina Oil and Chemical Company. The
primary assets of the acquired subsidiary consist of oil and gas properties and
related assets in the Permian Basin of west Texas. We have elected to report our
interest in this entity using the proportional consolidated method of
accounting. As a result, our working capital decreased as of June 30, 1999
compared with December 31, 1998. Current liabilities exceeded current assets by
$3,261,001 at June 30, 1999 compared with working capital of $128,813 at
December 31, 1998. Current liabilities increased primarily because of the
consolidation of our proportionate share of the liabilities of First Permian,
which reflects the current portion of First Permian's long term debt of $506,250
and subordinated notes payable of $3,600,000. An increase of $653,336 in cash
and an increase in prepaid expenses of $37,679 partially offset the increase in
current liabilities.
We incurred net property costs of $21,760,536 for the six months ended June
30, 1999. Of this amount, $19,982,856 was associated with our proportionate
interest in First Permian. Funding of such amount was provided by borrowings
discussed in Notes 3 and 4 to Consolidated Financial Statements. The remaining
amount, $1,777,680, was expended on Parallel's 3-D seismic interpretation,
leasehold costs and drilling and completion activities. These activities were
financed by the utilization of our cash provided by operations, proceeds from
the sale of certain properties and cash provided by credit lines.
<PAGE>
17
At the present time, our cash flow from operations is adequate to meet
normal operating expenses, the interest expense under our credit facility and
preferred stock dividends. However, during a period of sustained price
downturns, we reduced exploration activities to match internally generated cash
flows. Therefore, without additional capital or an increase in our credit
facility borrowing base, our capital expenditure budget for the remainder of
1999 remains highly dependent on future oil and gas prices. If the prices we
receive for oil and gas production continue to improve, increasing cash flow, or
if we are successful in raising additional capital, 1999 planned drilling
activity may be accelerated.
TRENDS AND PRICES
Industry conditions deteriorated significantly during 1998 and the first
three months of 1999 as a result of declining oil prices and weakening gas
prices. While prices recovered somewhat during the second quarter of 1999,
prices for the first six months of 1999 are significantly lower than the
comparable period in 1998. There is substantial uncertainty regarding future oil
and gas prices and there can be no assurance that oil and gas prices will not
decline in the future.
Our revenues, cash flows and borrowing capacity are affected by changes in
oil and gas prices. The markets for oil and gas have historically been, and will
continue to be, volatile. Prices for oil and gas typically fluctuate in response
to relatively minor changes in supply and demand, market uncertainty, and
seasonal, political and other factors beyond our control. We are unable to
accurately predict domestic or worldwide political events or the effects of such
other factors on the prices we receive for oil and gas.
Historically, we have not entered into transactions to hedge against
changes in oil and gas prices. However, effective July 1, 1999, a portion of the
future crude oil production associated with our membership interest in First
Permian was hedged against price risks through the use of swap contracts. The
gains and losses on these instruments will be included as an adjustment to oil
and gas revenues. See "Item 3 - Quantitative and Qualitative Disclosures about
Market Risk" for a description of our hedging activities.
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 dates 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 the project includes:
. conducting an inventory of software, hardware and embedded systems
equipment;
. assessing the potential for failure and the associated risk;
. prioritizing the need for remediation, repairing or replacing
significant non-compliant items; and
. testing any modifications to ensure Year 2000 compliance.
Additionally, the 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.
<PAGE>
18
We believe our most significant risks will be in two areas:
. measuring the quantities of oil and natural gas produced; and
. receiving timely payment from the purchasers of its 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 the office building; and
. other equipment which may have embedded technology such as
microprocessors.
Many systems owned or controlled by third parties 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.
In December 1998, letters were mailed to 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.
Written assurances have been obtained from our bank lender, our major purchasers
of production, with the exception of one, and our accounting software provider
indicating that they are or will be Y2K compliant by the end of the year.
Efforts are being made to locate the Y2K coordinator of the one purchaser to
determine their Y2K compliance. 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
likelihood that we will also experience Y2K interruptions through a "ripple
effect" stemming from external forces.
The remedial phase of the 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 Parallel's
personal computers have confirmed their readiness for the Year 2000 or have
provided updates to correct most identified Year 2000 problems. Testing of our
local area network and a check for embedded systems have been completed. Minor
corrections to the local computers have been identified and will be corrected by
September 30, 1999.
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 the Year 2000
review and testing, which is currently expected to be 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 August 31, 1999 September 15, 1999
Software April 30, 1999 May 31, 1999 Completed
Hardware April 30, 1999 September 15,1999 September 30, 1999
Embedded Systems April 30, 1999 May 31, 1999 Completed
</TABLE>
<PAGE>
19
To date, only minor costs have been incurred 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, labor
costs incurred in connection with the project are expected to be minimal. Based
on current information, we do not anticipate that the costs associated with any
necessary in-house modifications will be material to its operations or financial
condition. The total cost of the project is expected to range from $10,000 to
$20,000.
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 Parallel's 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 its operations. However, the 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 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.
ITEM 3. QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
Our major market risk exposure is in the pricing applicable to our oil and
natural gas 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 oil and gas production
have been volatile and unpredictable.
Effective July 1, 1999, a portion of the future crude oil production
associated with our membership interest in First Permian was hedged against
price risks through the use of swap contracts. Settlements of gains and losses
on price swap contracts are realized monthly, generally based upon the
difference between the contract price and the average closing NYMEX price and
are reported as a component of oil and gas revenues and operating cash flows in
the period realized. There were no gains or losses at June 30, 1999.
While the use of these price risk management arrangements limits the
downside risk of adverse price movements, it may also limit future revenues from
favorable price movements. These hedging activities will be conducted with major
financial or commodities trading institutions that management believes entail
acceptable levels of market and credit risks.
The following table sets forth our pro rata share of First Permian's
outstanding oil hedge contracts, which were effective at July 1, 1999. At June
30, 1999, we did not have any hedging contracts in place.
<TABLE>
Type Volume/Month Term Price Commodity
- ---- ------------ ---- ----- ---------
<S> <C> <C> <C> <C>
Swap 22,700 barrels 7/1/99 - 12/31/99 $19.02 WTI NYMEX
Swap 21,600 barrels 1/1/00 - 12/31/00 $18.07 WTI NYMEX
Swap 20,475 barrels 1/1/01 - 6/30/01 $17.70 WTI NYMEX
Commodity Swap 11,250 barrels 8/1/99 - 12/31/99 $1.28 Differential between
Platts WTI /Platts WTS
Commodity Swap 11,250 barrels 8/1/99 - 12/31/99 $1.24 Differential between
Platts WTI /Platts WTS
</TABLE>
Our only financial instrument sensitive to changes in interest rates is
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 following table
shows principal cash flows and related weighted average interest rates by
expected maturity dates. Weighted average interest rates for the secured
revolving facility were determined using weighted average interest paid and
accrued in December 1998. Weighted average interest rates for the non-recourse
affiliate debt were determined using the interest rate in effect on June 30,
1999, the date of the Fina property acquisition.
<PAGE>
20
<TABLE>
Fair
Value 1999 2000 2001 2002 Total Value
- ------------------------------------------------------------- ----------- ---------- ---------- ---------- ---------- ----------
(in 000's, except interest rates)
<S> <C> <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%
Non-recourse affiliate debt - $506 $675 $15,469 $16,650 $16,650
Average interest rate 9.25% 9.25% 9.25%
</TABLE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Parallel's annual meeting of stockholders was held on June 23, 1999. At the
meeting, the following persons were elected to serve as Directors of Parallel
for a term of one year expiring in 2000 and until their respective successors
are duly qualified and elected: (1) Thomas R. Cambridge, (2) Ernest R. Duke, (3)
Myrle Greathouse, (4) Larry C. Oldham and (5) Charles R. Pannill. Set forth
below is a tabulation of votes with respect to each nominee for Director:
<TABLE>
NAME VOTES CAST FOR VOTES WITHHELD BROKER NON-VOTES
---- -------------- -------------- ---------------
<S> <C> <C> <C>
Thomas R. Cambridge 13,717,018 67,580 --
Ernest R. Duke 13,712,048 72,550 --
Myrle Greathouse 13,715,948 68,650 --
Larry C. Oldham 13,634,625 149,973 --
Charles R. Pannill 13,710,248 74,350 --
</TABLE>
In addition to electing Directors, our stockholders voted upon and ratified
the issuance and sale of up to 5,000,000 shares of common stock in privately
negotiated transactions. Set forth below is a tabulation of votes with respect
to the proposal for the issuance and sale of up to 5,000,000 shares of common
stock:
<TABLE>
VOTES CAST FOR VOTES CAST AGAINST ABSTENTIONS BROKER NON-VOTES
-------------- ------------------ ----------- ----------------
<S> <C> <C> <C>
7,625,906 757,136 44,224 5,357,332
</TABLE>
In addition to electing Directors, the stockholders also voted upon and
ratified the appointment of KPMG LLP to serve as our independent public
accountants for 1999. Set forth below is a tabulation of votes with respect to
the proposal to ratify the appointment of Parallel's independent public
accountants:
<TABLE>
VOTES CAST FOR VOTES CAST AGAINST ABSTENTIONS BROKER NON-VOTES
-------------- ------------------ ----------- ----------------
<S> <C> <C>
13,742,218 22,380 20,000 --
</TABLE>
<PAGE>
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of Registrant. (Incorporated by reference to
Exhibit 3.1 to Form 10-K of the Registrant for the fiscal year ended
December 31, 1998)
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)
10.1 Certificate of Formation of First Permian, L.L.C., dated June 24, 1999
(Incorporated by reference to Exhibit 10.1 to Form 8-K of the Registrant
dated July 14, 1999 and filed with the Securities and Exchange Commission
on July 15, 1999)
10.2 Limited Liability Company Agreement of First Permian, L.L.C., dated June
25, 1999 (Incorporated by reference to Exhibit 10.2 to Form 8-K of the
Registrant dated July 14, 1999 and filed with the Securities and Exchange
Commission on July 15, 1999)
10.3 Merger Agreement, dated June 25, 1999 (Incorporated by reference to Exhibit
10.3 to Form 8-K of the Registrant dated July 14, 1999 and filed with the
Securities and Exchange Commission on July 15, 1999)
10.4 Agreement and Plan of merger, dated June 30, 1999, of First Permian, L.L.C.
and Nash Oil Company, L.L.C. (Incorporated by reference to Exhibit 10.4 to
Form 8-K of the Registrant dated July 14, 1999 and filed with the
Securities and Exchange Commission on July 15, 1999)
10.5 Certificate of Merger of First Permian L.L.C. and Nash Oil Company, dated
June 30, 1999 (Incorporated by reference to Exhibit 10.5 to Form 8-K of the
Registrant dated July 14, 1999 and filed with the Securities and Exchange
Commission on July 15, 1999)
10.6 Credit Agreement, dated June 30, 1999, among First Permian, L.L.C., as
Borrower, and Parallel Petroleum Corporation and Baytech, Inc. as
Guarantors and Bank One, Texas, N.A. and the Institutions named Herein as
Banks and Bank One, Texas, N.A., as Agent (Incorporated by reference to
Exhibit 10.6 to Form 8-K of the Registrant dated July 14, 1999 and filed
with the Securities and Exchange Commission on July 15, 1999)
10.7 Limited Guaranty, dated June 30, 1999, by and among First Permian, L.L.C.,
Parallel Petroleum Corporation and Bank One, Texas N.A. (Incorporated by
reference to Exhibit 10.7 to Form 8-K of the Registrant dated July 14, 1999
and filed with the Securities and Exchange Commission on July 15, 1999)
10.8 Intercreditor Agreement, dated as of June 30, 1999, among First Permian,
L.L.C., Bank One, Texas, N.A., Tejon Exploration Company and Mansefeldt
Investment Corporation. (Incorporated by reference to Exhibit 10.8 to Form
8-K of the Registrant dated July 14, 1999 and filed with the Securities and
Exchange Commission on July 15, 1999)
10.9 Subordinated Promissory Note, dated June 30, 1999, among First Permian,
L.L.C. and Tejon Exploration Company (Incorporated by reference to Exhibit
10.9 to Form 8-K of the Registrant dated July 14, 1999 and filed with the
Securities and Exchange Commission on July 15, 1999)
<PAGE>
22
10.10Subordinated Promissory Note, dated June 30, 1999, among First Permian,
L.L.C. and Mansefeldt Investment Company (Incorporated by reference to
Exhibit 10.10 to Form 8-K of the Registrant dated July 14, 1999 and filed
with the Securities and Exchange Commission on July 15, 1999)
*27 Financial Data Schedule
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter ended June 30,
1999. On July 15, 1999, We filed a report on Form 8-K to report the
formation of First Permian, LLC and First Permian's acquisition of oil
and gas properties from Fina Oil and Chemical Company.
- -----------------------
* Filed herewith.
<PAGE>
23
SIGNATURES
Pursuant to the requirements of the Securities and 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
BY: /s/ THOMAS R. CAMBRIDGE
Date: August 16, 1999 ------------------------------------
Thomas R. Cambridge
Chairman of the Board of Directors
and Chief Executive Officer
Date: August 16, 1999 BY: /s/ LARRY C. OLDHAM
------------------------------------
Larry C. Oldham,
President(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,218,599
<SECURITIES> 0
<RECEIVABLES> 1,843,519
<ALLOWANCES> 71,358
<INVENTORY> 0
<CURRENT-ASSETS> 3,018,772
<PP&E> 87,613,588
<DEPRECIATION> 24,140,149
<TOTAL-ASSETS> 66,560,500
<CURRENT-LIABILITIES> 6,279,773
<BONDS> 34,959,639
0
97,450
<COMMON> 183,319
<OTHER-SE> 25,040,319
<TOTAL-LIABILITY-AND-EQUITY> 66,560,500
<SALES> 0
<TOTAL-REVENUES> 3,954,816
<CGS> 0
<TOTAL-COSTS> 3,349,906
<OTHER-EXPENSES> (10,720)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 720,157
<INCOME-PRETAX> (104,527)
<INCOME-TAX> 0
<INCOME-CONTINUING> (104,527)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (104,527)
<EPS-BASIC> (.023)
<EPS-DILUTED> (.023)
</TABLE>
