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, 1999
[ ] 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, 2000 was approximately $50.8
million, based on the last sale price of the common stock on the same date.
At March 15, 2000 there were 20,331,858 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 16
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote
of Security Holders 19
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 20
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 23
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 34
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 35
PART III
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners
and Management 44
Item 13. Certain Relationships and Related Transactions 46
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 47
<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 report, 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. You can identify forward-looking statements by the
use of forward-looking terminology such as "may," "will," "expect," "intend,"
"anticipate," "estimate," "continue," "present value," "future" or "reserves" or
other variations or comparable terminology. Although we believe the assumptions
and expectations reflected in these forward-looking statements are reasonable,
we can't give any assurance that our expectations will prove to be correct or
that we will be able to take any actions that are presently planned. All of
these statements involve assumptions of future events and risks and
uncertainties. Risks and uncertainties associated with forward-looking
statements include, but are not limited to:
. risks associated with the drilling of wells;
. competition;
. future capital requirements and availability of financing;
. fluctuations in prices of oil and gas;
. governmental regulations;
. geological concentration of our reserves; and
. general economic conditions.
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 oil and natural gas exploration, development and production, and the
acquisition of producing properties 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 oil and gas industry. These terms are: Mcf, Bcf, Bbls and EBO.
Mcf refers to the quantity of one thousand cubic feet of natural gas. 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.
As you read this report, it is important for you to understand our
relationship with First Permian, L.L.C., a Delaware limited liability company.
On June 25, 1999, we joined with three other companies and formed First Permian,
which acquired oil and gas properties from Fina Oil and Chemical Company. If you
will turn to page 4 of this report, you will find detailed information about
First Permian and its acquisition of properties under the heading Significant
Developments in 1999. Unless we state that the information about Parallel in
this report includes Parallel's 35% membership interest in First Permian, you
should keep in mind that references to Parallel, we, our or similar
terminologies exclude First Permian.
Proved Reserves as of December 31, 1999
At December 31, 1999, our estimated proved reserves were approximately 1.0
million Bbls of oil and 17.3 Bcf of natural gas. The present value of our pretax
future net revenues, discounted at 10%, was approximately $25.5 million.
Approximately 74% of our proved reserves are natural gas and approximately 70%
are categorized as proved developed reserves.
As of December 31, 1999, an independent engineering firm estimated that
First Permian had total proved reserves of 29.2 million Bbl of oil and 23.4 Bcf
of natural gas. Based on our 35% interest in First Permian's oil and gas
reserves, this represented 10.2 million Bbl of oil and 8.2 Bcf of natural gas,
net to Parallel's interest.
The First Permian properties complement our existing Permian Basin
production and reserves. The properties are long-lived with low decline rates,
which helps offset the higher decline rates of our reserve base in the
Yegua/Frio/Wilcox gas trend in south Texas. At December 31, 1999, the reserve
life of First Permian's properties (total estimated proved reserves divided by
the prior 12 months production) was approximately 35 years. This compares with a
reserve life of our existing proved reserves at December 31, 1999 of
approximately 6 years. At December 31, 1999, the reserve life of our properties,
after including our 35% share of First Permian's oil and gas reserves, increased
to approximately 16 years.
<PAGE>
2
During 1999, we participated in drilling 18 gross (5 net) exploratory and
development wells. Thirteen gross (3.3 net) wells were productive and 5 gross
(1.7 net) wells were dry holes.
Parallel was incorporated in Texas on November 26, 1979, and reincorporated
in the State of Delaware on December 18, 1984.
Our executive offices are located at 110 N. Marienfeld, Suite 465, Midland,
Texas 79701. Our telephone number is (915) 684-3727.
Business Strategies
Our business strategy is to increase oil and gas reserves, production, cash
flow and earnings by:
. using 3-D seismic and other advanced technologies to conduct exploratory
activities;
. investing in high-potential exploration prospects;
. acquiring producing properties we believe can add incremental value;
. exploiting our existing producing properties;
. emphasizing cost controls; and
. positioning for opportunity.
Following this strategy, we have discovered oil and gas reserves using 3-D
seismic technology in the Horseshoe Atoll Reef Trend of west Texas and in the
Yegua/Frio/Wilcox 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 used to acquire these properties has been provided primarily by
secured bank financing, sales of our equity securities and cash flow from
operations.
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
underperforming 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.
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.
<PAGE>
3
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 can respond quickly to exploration and acquisition
opportunities.
The steps we use to implement our business strategies include:
Focusing on Exploration Activities. We seek to increase our oil and gas
reserves and production through targeted exploration activities in our core
operating areas and 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.
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 oil and gas
properties can:
. reduce drilling risks;
. lower finding costs; and
. provide for more efficient production of oil and natural gas 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.
We believe that using 3-D seismic and AVO technologies also gives us a
competitive advantage 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.
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
<PAGE>
4
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.
Significant Developments in 1999
On June 25, 1999, we joined with three other oil and gas companies and
formed First Permian, L.L.C., a Delaware limited liability company, to acquire
oil and gas properties from Fina Oil and Chemical Company. The acquired assets
included oil and gas reserves and associated assets in producing fields located
in the Permian Basin of west Texas.
On June 30, 1999, First Permian entered into a Merger Agreement with Fina
Oil and Chemical Company. Under terms of the Merger Agreement, Fina transferred
all of the oil and gas properties to a wholly owned subsidiary of Fina which was
then merged into First Permian. Upon completing the merger, and after giving
effect to the purchase price adjustments required by the Merger Agreement, First
Permian paid to Fina cash in the aggregate amount of approximately $92.0
million.
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. providing for a $110.0 million revolving credit facility. The principal
amount of the initial loan from Bank One was $74.0 million. Parallel's
obligation is limited to a guaranty of $10.0 million of the bank borrowings.
Additional financing for the cash merger was obtained through subordinated
debt borrowings, which included an $8.0 million loan from Tejon Exploration
Company and an additional $8.0 million loan from Mansefeldt Investment.
Parallel and Baytech are the managers of First Permian and at December 31,
1999 each owned a 35% membership interest. Tejon Exploration, Mansefeldt
Investment and affiliates of Mansefeldt owned the remaining 30% interest at that
same date.
Senior Secured Loans - First Permian
The purchase price was financed, in part, with the proceeds of a revolving
credit facility provided by Bank One, Texas, N.A. to First Permian. The
principal amount of the initial loan from Bank One was $74.0 million. Under
terms of a Credit Agreement, dated June 30, 1999, among First Permian, Parallel,
Baytech and Bank One, as amended and restated on August 16, 1999, the principal
amount outstanding under the revolving credit facility bears interest, at First
Permian's election, at Bank One base rate plus 1.50% or the Eurodollar rate plus
3.25% until such time as the subordinated unsecured loans described below are
paid in full. When these subordinated loans have been paid in full, the
revolving credit facility will bear interest at First Permian's election at Bank
One's base rate plus a margin ranging from .25% to .75%, depending upon the
outstanding principal balance of the borrowings under the Credit Agreement, or
the Eurodollar rate plus a margin ranging fr 2.00% to 2.50%, depending upon the
outstanding principal balance of the borrowings under the Credit Agreement. The
revolving credit facility provides for revolving loans subject to a borrowing
base and a monthly commitment reduction amount of $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 Bank One 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 revolving
credit facility is subject to an unused commitment fee of .50% on the unadvanced
<PAGE>
5
portion of the borrowing base amount. The loan is secured by substantially all
of the oil and gas properties First Permian acquired from Fina. Parallel and
Baytech each guaranteed $10.0 million of the loans from Bank One.
Subordinated Unsecured Loans - First Permian
In addition to the $74.0 million loan from Bank One, First Permian also
borrowed $8.0 million from each of Tejon Exploration Company and Mansefeldt
Investment Corporation. Under terms of an Intercreditor Agreement, dated June
30, 1999, among First Permian, Bank One, Tejon Exploration Company and
Mansefeldt Investment Corporation, the loans made by Tejon and Mansefeldt are
subordinate in all respects to the senior loans made by Bank One.
The loans made by Tejon Exploration Company and Mansefeldt Investment
Corporation are unsecured. Each subordinated loan required a principal payment
of $2.5 million on December 31, 1999. On December 31, 1999, principal payments
in the aggregate amount of $8.5 million were made by First Permian on the
subordinated loans. In January 2000, First Permian made an additional principal
payment in the amount of $3.2 million. As of March 15 2000, the total amount of
outstanding subordinated debt was $4.3 million, which is payable on June 30,
2000.
During 1999, First Permian approved a plan to dispose of selected noncore
oil and gas properties. In December 1999 and January 2000, First Permian sold
certain properties and received net cash proceeds of approximately $20.6
million, which were used to reduce First Permian's outstanding senior and
subordinated debt.
In conjunction with the reduction of the subordinated debt, the members of
First Permian entered into an agreement that increased each of Parallel's and
Baytech's interest from 22.5% to 35%, effective December 31, 1999. Tejon,
Mansefeldt, and affiliates of Mansefeldt own the remaining 30% interest.
Principal payments on the subordinated loans can only be made with:
. the net cash proceeds from the issuance of equity securities by First
Permian;
. advances under the Credit Agreement to the extent attributable to an
increase in the borrowing base above $74.0 million;
. proceeds from sales of assets of First Permian with the prior written
consent of Bank One, after Bank One determines a new borrowing base
(after giving effect to the sale of assets); or
. any other source of payment with the prior written consent of Bank
One.
Each principal payment on the subordinated loans can only be made if:
. the full payment of all amounts then due and payable under the Credit
Agreement have been made or provided for in accordance with the Credit
Agreement; and
. no event of default has occurred or would occur as a result of such
payment.
All unpaid principal and accrued but unpaid interest as of July 1, 2000
will be deemed to be principal and will be paid in twenty equal quarterly
payments of principal on March 31, June 30, September 30 and December 31 of each
year commencing September 30, 2000. Any payments of principal or interest on the
subordinated loans after June 30, 2000 may only be made with the prior written
consent of Bank One. Tejon and Mansefeldt may, at their option and with the
agreement of First Permian, irrevocably convert any claims they have to the
subordinated loans to an equity interest in First Permian.
<PAGE>
6
Interest on the unpaid balance of the subordinated loans accrues from June
30, 1999 until the earlier of the date of payment or June 30, 2000 at the prime
rate of interest charged by Bank One. After June 30, 2000, interest accrues at
the lowest prime rate of interest as published in the Money Rates Section of the
Wall Street Journal.
Interest on the subordinated loans is payable monthly in arrears on the
last day of each month, commencing July 31, 1999 and ending June 30, 2000.
Simultaneous Sale of Acquired Properties - First Permian
In addition to the loans made to First Permian by Bank One, Tejon,
Mansefeldt and MDJ Minerals, L.L.P., a Texas limited liability partnership
controlled by Tejon and Mansefeldt, entered into a Purchase and Sale Agreement,
dated June 30, 1999, with First Permian. Under terms of the Purchase and Sale
Agreement, First Permian sold certain oil and gas mineral interests that were
simultaneously acquired by it in the merger. First Permian sold the properties
to MDJ Minerals, L.L.P. for the cash purchase price of $5.0 million. A portion
of the sales proceeds were used by First Permian in payment of the purchase
price of the properties acquired from Fina under the merger.
Exploration and Development Activities in 1999
The scope of our exploration and development activities is affected by oil
and gas prices. Our 1999 capital expenditures were approximately 77% lower than
our capital expenditures in 1998, primarily because of a reduction in our
drilling activities caused by low oil and gas prices in 1998 and the first part
of 1999. Additionally, capital expenditures for 3-D seismic acquisition costs
were significantly lower in 1999 because we completed and funded most of our 3-D
seismic activities in 1998. Although oil prices began increasing in mid-1999, we
are still recovering from a protracted period of low oil and gas prices.
Gulf Coast Area of South Texas
During 1999, our principal exploration and development activities continued
to be 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.
We participated in drilling 18 wells in 1999, all of which were drilled in
the gulf coast area of south Texas. The following table shows the results of our
1999 drilling activity in the Yegua/Frio/ Wilcox gas trend of south Texas.
<TABLE>
1999 Drilling Activity
Yegua/Frio/Wilcox Gas Trend
No. of
Target Depth Range Wells
Formation (feet) Drilled Productive Dry
------------------------------------------------------------
<S> <C> <C> <C> <C>
Yegua 6,300 - 13,000 3 2 1
Frio 6,400 - 8,400 15 11 4
Wilcox 13,200 - 17,500 0 0 0
---- ---- ----
Total 18 13 5
==== ==== ====
</TABLE>
At March 1, 2000, we owned interests in 84 gross (23.9 net) wells in south
Texas.
<PAGE>
7
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 oil and gas leasehold interests; and
. undivided working interests in oil and gas leases.
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, oil and gas 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,
1999, we were the 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 1999, because of cash flow restrictions,
we limited our capital expenditures on our Permian Basin properties primarily to
those activities necessary to maintain optimum well performance.
When funds are available to 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 oil and gas properties.
When necessary, we take corrective action, such as:
. shutting-in temporarily uneconomic properties;
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8
. plugging wells we believe to be permanently impaired or depleted;
. terminating oil and gas leases that are uneconomic under existing
operating conditions; and/or
. selling properties to third parties.
During the fourth quarter of 1999, we sold our 100% working interest (82%
net revenue interest) in the Chenot Gas Field, Pecos County, Texas. Net proceeds
from the sale were approximately $675,000 and were used to repay borrowings
under our revolving credit facility.
Drilling and Acquisition Costs
The following table shows our oil and gas property acquisition, exploration
and development costs for the periods indicated.
<TABLE>
Year Ended December 31,
------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Transfers from (to) undeveloped
leases held for sale (1) $ (2,128) $ - $ - $ 60 $ 197
Proved property acquisition costs 42 89 918 3,839 372
Unproved property acquisition costs 1,979 6,034 7,710 369 841
Exploration costs 1,856 8,556 9,604 8,669 1,519
Development costs 639 3,873 4,877 3,963 889
-------- -------- -------- ------- -------
$ 2,388 $ 18,552 $ 23,109 $16,900 $ 3,818
======== ======== ======== ======= =======
</TABLE>
- ------------------
(1) Reflects costs associated with assets classified as being held for sale.
The actual amount spent on capital expenditures during 1999, excluding this
transfer, was approximately $4.5 million.
Oil and Natural Gas Prices are Volatile
Industry conditions started deteriorating during the latter part of 1997
and continued throughout 1998 and into early 1999, primarily because of
declining oil prices. 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 we
receive for our oil and natural gas. Oil and natural gas prices have continued
to improve since mid -1999 but the effects of 18 months of low prices continue
to affect capital availability.
If prices should decline substantially from current levels for a sustained
period of time, this could have a material adverse effect on our future
operations and financial condition.
Oil and natural gas 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:
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9
. 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 oil and natural gas we produced in
1999, 1998 and 1997 are shown in the following table:
<TABLE>
Average Price Received for the
Year Ended December 31,
-------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Oil (Bbl).............. $ 17.32 $12.49 $19.88
Natural gas (Mcf)...... $ 2.27 $ 2.04 $ 2.70
</TABLE>
The average price we received for our oil sales at March 15, 2000 was
approximately $28.00 per Bbl. At the same date, the average price we were
receiving for our natural gas was $2.75 per Mcf. At December 31, 1999,
approximately 74% of our daily production was natural gas and 26% was oil. There
is substantial uncertainty regarding future oil and gas prices and we can
provide no assurance that prices will remain at current levels.
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.
Our Oil and Gas Operations Are Subject to Many Inherent Risks
Oil and gas 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 oil or
gas 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 oil and gas 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 oil and gas. These hazards and
risks include:
. encountering unusual or unexpected formations and pressures;
. explosions, blowouts and fires;
. pipe and tubular failures and casing collapses;
<PAGE>
10
. 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 oil and gas operations are not subject to renegotiation of profits or
termination of contracts at the election of the federal government.
Executive Officers of Parallel
At March 15, 2000, Parallel's executive officers were Thomas R. Cambridge
and Larry C. Oldham.
Mr. Cambridge, age 64, 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 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 46, 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. He received a
Bachelor of Business Administration degree from West Texas State University in
1975. Mr. Oldham is 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 $1.0 million key-man life insurance policy
on the life of Mr. Cambridge and a $5.0 million key-man life insurance policy on
the life of Mr. Oldham.
Employees
At March 15, 2000, 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 seven 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,
1999.
<PAGE>
11
<TABLE>
Exploratory Wells (1) Development Wells (2)
------------------------------ ----------------------------------
Productive Dry Productive Dry
Year Ended ---------------- --------------- ---------------- ----------------
December 31, Gross Net Gross Net Gross Net Gross Net
- ------------ ------- ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 11.0 2.50 5.0 1.70 2.0 .80 .0 .00
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
</TABLE>
- -------------------
(1) An exploratory well is a well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known
reservoir.
(2) A development well is a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be
productive.
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, 2000, we were participating in the completion of 3 gross (.48
net) gas wells in Wharton and Victoria, Counties, Texas. At that same date, 3
gross (.80 net) gas wells in Victoria, Dewitt and Jackson Counties, Texas were
waiting on completion.
Volumes, Prices and Lifting Costs
The following table shows certain information about our production,
including the volumes of oil and gas 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, 1999.
<TABLE>
Year Ended December 31,
----------------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Net Production
Oil (Bbls) 163,696 185,474 175,246
Gas (Mcf) 2,708,516 3,275,882 3,383,190
EBO(1) 615,115 731,454 739,111
Average Sales Price
Oil (per Bbl) $17.32 $12.49 $19.88
Gas (per Mcf) $ 2.27 $ 2.04 $ 2.70
EBO $14.59 $12.31 $17.07
Average Production
(lifting) Cost per EBO $ 3.83 $ 3.33 $ 4.29
Operating Margin
per EBO(2) $10.76 $ 8.98 $12.78
Depletion per EBO $ 8.30 $ 8.07 $ 5.29
</TABLE>
- -----------------------
(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.
<PAGE>
12
Our 1999 gas sales represented approximately 68% of our combined oil and
gas sales for the year ended December 31, 1999.
Markets and Customers
Our oil and gas production is sold at the well site on an as produced basis
at market-related prices in the areas where the producing properties are
located. We do not refine or process any of the oil or natural gas we produce
and all of our production is sold to unaffiliated 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
EOTT Energy Operating Limited Partnership 5% 11% 12%
Cox & Perkins Exploration, Inc. 14% 24% 53%
Allegro Investments, Inc. 27% 22% -
Brayton Operating Corp. 26% 18% -
</TABLE>
We do not believe the loss of any one of our purchasers would materially
affect our ability to sell the oil and gas we produce. Other purchasers are
available in our areas of operations.
We are not obligated to provide a fixed and determinable quantity of oil or
natural gas under any existing arrangements or contracts.
Our business does not require us to maintain a backlog of products,
customer orders or inventory.
Office Facilities
Our corporate offices consist of approximately 5,776 square feet of leased
space in Midland, Texas. Our current rental rate is $3,851 per month until May
31, 2001, when the lease expires.
Competition
The oil and gas 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 oil and gas 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 much larger than ours.
The principal resources we need for acquiring, exploring, developing,
producing and selling oil and gas are:
. leasehold prospects under which oil and gas reserves may be
discovered;
. drilling rigs and related equipment to explore for such reserves; and
<PAGE>
13
. knowledgeable and experienced personnel to conduct all phases of oil
and gas operations.
Oil and Gas Regulations
Our operations are regulated by certain federal and state agencies. Oil and
gas production and related operations are or have been subject to:
. price controls;
. taxes; and
. environmental and other laws relating to the oil and gas 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 oil and gas 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 oil and gas 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 oil
and gas are also imposed. These states also have statutes or regulations
addressing conservation matters, including provisions for:
. the unitization or pooling of oil and gas properties;
. the establishment of maximum rates of production from oil and gas
wells; and
. the regulation of spacing, plugging and abandonment of wells.
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
<PAGE>
14
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
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 oil and gas 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 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.
<PAGE>
15
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 oil and gas 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 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, alon 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 com 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.
. 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 hazard 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
<PAGE>
16
and operated by others at which disposal of Parallel's hazardous
substances occurred.
Parallel may also fall into the category of a current owner or operator. We
currently own or lease numerous properties that for many years have been used
for exploring and producing oil and gas. 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.
ITEM 2. PROPERTIES
General
Our principal properties consist of developed and undeveloped oil and gas
leases and the reserves associated with these leases. Generally, developed oil
and gas leases remain in force so long as production is maintained. Undeveloped
oil and gas 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 oil and gas wells and the developed and undeveloped acreage in which
we owned an interest at December 31, 1999. 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 77 60.5 98 36.25 37,829 25,109 59,201 10,239
New Mexico - - - - - - 11,357 340
Oklahoma - - 1 .25 - - - -
--- ---- --- ----- ------ ------ ------ ------
Total 77 60.5 99 36.50 37,829 25,109 70,558 10,579
=== ==== === ===== ====== ====== ====== ======
</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.
In addition to the interests we own in developed and undeveloped acreage,
at December 31, 1999 we also owned options to acquire interests in an additional
12,479 gross (1,247 net) acres in Texas.
<PAGE>
17
At December 31, 1999, we were operating 77 wells in which we also owned
interests. Approximately 44% of the discounted present value of our oil and gas
reserves at December 31, 1999 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 oil and gas leases, we do not own any patents, licenses,
franchises or concessions which are significant to our oil and gas operations.
Title to Properties
As is customary in the oil and gas industry, we make only a cursory review
of title to undeveloped oil and gas 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, 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
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 oil and gas properties, some of which are subject
to immaterial encumbrances, easements and restrictions. The oil and gas
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.
Oil and Gas Reserves
Our oil and gas reserves were estimated as of December 31, 1999 by
Williamson Petroleum Consultants, Inc., Midland, Texas.
At December 31, 1999, excluding our 35% interest in First Permian's oil and
gas reserves, our estimated proved reserves were approximately 1.0 million Bbls
of oil and 17.3 Bcf of gas, or 3.9 million EBOs.
The information in the following table provides you with certain
information regarding our proved reserves at December 31, 1999.
<PAGE>
18
<TABLE>
Proved Proved
Developed Undeveloped Total
--------------- --------------- --------------
<S> <C> <C> <C>
Oil (Bbls) 588,738 419,071 1,007,809
Gas (Mcf) 12,685,389 4,598,323 17,283,712
Future Net Revenues (before income taxes) $ 28,839,778 $ 10,698,131 $ 39,537,909
Present Value of Future Net Revenues (before income taxes) $ 20,899,986 $ 4,599,010 $ 25,498,996
</TABLE>
For additional information concerning our estimated proved oil and gas
reserves, you should read Note15 in the Financial Statements. See Item 8 -
Financial Statements and Supplementary Data.
The information in the following table provides you with certain
information regarding our 35% interest in First Permian's proved reserves at
December 31, 1999.
<TABLE>
Proved Proved
Developed Undeveloped Total
--------------- --------------- --------------
<S> <C> <C> <C>
Oil (Bbls) 5,948,916 4,277,388 10,226,304
Gas (Mcf) 7,764,555 425,957 8,190,512
Future Net Revenues (before income taxes) $ 85,681,495 $ 68,436,103 $154,117,598
Present Value of Future Net Revenues (before income taxes) $ 42,935,227 $ 30,734,215 $ 73,669,442
</TABLE>
For additional information concerning our 35% interest in First Permian's
reserves, you should read Note 14 in the Financial Statements. See Item 8 -
Financial Statements and Supplementary Data.
The reserve data in this report represent estimates only. Reservoir
engineering is a subjective process. There are numerous uncertainties inherent
in estimating our oil and natural gas reserves and their estimated values. Many
factors are beyond our control. Estimating underground accumulations of oil and
natural gas 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 oil and natural gas 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 oil and natural gas 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 oil and
natural gas production is highly dependent upon our level of success in
acquiring or finding additional reserves.
We do not have any oil or gas reserves outside the United States.
Our oil and gas reserves and production are not subject to any long term
supply or similar agreements with foreign governments or authorities.
<PAGE>
19
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 1999.
<PAGE>
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades 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>
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
1999
First quarter $1.87 $1.00
Second quarter $2.34 $1.25
Third quarter $3.00 $1.75
Fourth quarter $2.53 $1.37
</TABLE>
The last sale price of our common stock on March 15, 2000 was $2.50 per
share, as reported on the Nasdaq National Market.
As of March 15, 2000, there were approximately 2,100 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. Our 6%
convertible preferred stock also 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. Any dividends that are not
declared and paid will accumulate a all accumulated dividends must be paid in
full before dividends may be paid to holders of common stock. The credit
facility allows us to pay dividends on our outstanding shares of preferred stock
as long as we are not in default under the terms of the credit facility. 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 Capital
Resources and Liquidity" on page 31.
<PAGE>
21
On November 19, 1999, we completed the private sale of 2.0 million shares
of our common stock. In addition to sales made directly by Parallel, Everen
Securities, Inc., Netherland Securities, Inc. and Philip Proctor acted as
placement agents. The common stock was sold to 22 accredited investors and eight
unaccredited investors at a price of $1.60 per share. Commissions in the
aggregate amount of $30,000 were paid to the placement agents, which represented
5% of the proceeds from the sales of stock placed by the placement agents. The
common stock was sold in reliance on the exemptions from registration under Rule
506 of Regulation D and Section 4(2) of the Securities Act. The net proceeds
from the sale were approximately $3.1 million. Of this amount, $1.6 million was
applied to the reduction of bank debt and $1.5 million was added to our working
capital.
<PAGE>
22
ITEM 6. SELECTED HISTORICAL 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, 1999. 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 our future results of operations or financial
performance.
<TABLE>
Year Ended December 31,
---------------------------------------------------------------------
1999(1) 1998(2) 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 8,974,041 $ 9,001,582 $ 12,614,242 $ 14,167,470 $ 4,713,748
Operating expenses $ 10,173,995 $ 24,056,923 $ 7,968,146 $ 6,945,168 $ 3,518,163
Net income (loss) $ (2,450,457) $(12,995,910) $ 2,743,930 $ 4,330,654 $ 137,080
Cumulative preferred stock dividend $ (609,063) $ (276,712) $ - $ - $ -
Net income (loss) available to
common stockholders $ (3,059,520) $(13,272,622) $ 2,743,930 $ 4,330,654 $ 137,080
Net income (loss) per common share
Basic $ (.16) $ (.73) $ .15 $ .29 $ .01
Diluted $ (.16) $ (.73) $ .15 $ .28 $ .01
Cash dividends - common stock $ - $ - $ - $ - $ -
Weighted average common shares
and common stock equivalents
outstanding:
Basic 18,549,214 18,300,998 17,862,792 14,957,404 14,860,332
Diluted 18,549,214 18,300,998 18,640,990 15,693,258 15,395,777
Present value of proved oil and gas
reserves discounted at 10%
(before estimated federal
income taxes) $ 25,498,996 $ 26,822,980 $ 46,419,580 $ 67,015,980 $ 25,890,050
Working capital $ (71,647) $ 128,813 $ (2,162,139) $ 351,517 $ 639,299
Total assets $ 43,264,070 $ 46,564,782 $ 49,855,532 $ 38,098,169 $ 23,914,698
Total liabilities $ 17,463,967 $ 20,839,642 $ 20,736,779 $ 13,380,034 $ 13,079,285
Long-term debt, less current
maturities $ 12,300,000 $ 18,035,889 $ 12,182,610 $ 8,521,391 $ 11,674,625
Total stockholders' equity $ 25,800,103 $ 25,725,140 $ 29,118,753 $ 24,718,135 $ 10,835,413
</TABLE>
- ----------------
(1) Results include a noncash charge of $1,705,000 related to the impairment of
oil and gas properties incurred in the fourth quarter of 1999, primarily a
result of a decrease in year-end reserves.
(2) 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 oil and gas prices at year-end.
<PAGE>
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist you in understanding our
financial position and results of operations for each year in the three-year
period ended December 31, 1999. You should read the following discussion and
analysis in conjunction with our financial statements and the related notes.
The following discussion contains forward-looking statements. For a
description of limitations inherent in forward-looking statements, see
"Cautionary Statement Regarding Forward-Looking Statements" on page ii.
Basis of Presentation
We account for our interest in First Permian using the equity method of
accounting. Under the equity method of accounting, we record our investment in
First Permian at cost on the balance sheet. This is increased or reduced by our
proportionate share of First Permian's income or loss, which is presented as one
amount in the statements of operations. Our 35% share of First Permian's oil and
gas reserves is presented separately under our oil and gas reserve information
in Note 14 to the Financial Statements.
From June 30, 1999 until December 30, 1999, we owned a 22.5 % interest in
the assets, liabilities and operating results of First Permian. On December 31,
1999, our interest in First Permian increased to 35% and since that date we have
owned an equivalent interest in the assets, liabilities, operating results and
oil and gas reserves of First Permian.
Our results for the year ended December 31, 1999 do not include our pro
rata interest in the assets, liabilities, revenues and expenses of First
Permian. Instead, our interest is reported in a line item on the income
statement entitled "equity in earnings of First Permian". Our pro rata share of
oil and gas reserves is presented in a separate table.
General
Our business strategy is to increase oil and gas reserves, production, cash
flow and earnings by:
. using 3-D seismic and other advanced technologies to conduct our
exploratory and development activities;
. investing in high-potential exploration prospects;
. acquiring properties that we believe add incremental value;
. exploiting our existing producing properties;
. emphasizing cost controls; and
. positioning for opportunity.
<PAGE>
24
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 oil and gas 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. Additionally, we
have acquired producing oil and gas 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.
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 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 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 oil and gas exploration, development and acquisition activities require
substantial and continuing capital expenditures. Historically, the sources of
financing to fund our capital expenditures have included: cash flow from
operations,
. sales of our equity securities, and
. bank borrowings.
<PAGE>
25
Because of the sustained deterioration in prices we received for the oil
and gas we produced in 1998 and the first part of 1999, the capital normally
available to us from our cash flow and bank borrowings has been significantly
reduced.
The protracted period of low oil and gas prices and a decrease in our
drilling activity, which has adversely affected our ability to add new oil and
gas reserves, has resulted in a reduction in our available borrowing capacity
under our revolving credit facility. For more information regarding our
borrowing arrangements, see Capital Resources and Liquidity beginning on page
31.
Our oil and gas 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 oil and gas properties and with
the exploration and development of oil and gas reserves. See Note 11 to the
Financial Statements. These costs include lease acquisition costs, geological
and geophysical expenditures, cost of drilling both productive and
non-productive wells and overhead expenses directly related to land acquisition
and exploration and development activities. Proceeds from the dispositions 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. Certain
directly identifiable internal costs of property acquisition, exploration and
development activities are capitalized. In 1999, internal costs capitalized
totaled $508,883 compared with $527,500 in 1998 and $461,537 in 1997.
Depletion of capitalized costs is calculated using the unit-of-production
method based upon estimates of proved oil and gas reserves. Oil and gas
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 oil and gas properties, or the full cost ceiling
limitation, are 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 $8.30 in 1999 versus
$8.07 in 1998 and $5.29 in 1997. The increase per EBO was a result of a
combination of factors including:
. a decline in Parallel's reserve base during 1999 due to decreased
drilling activity, which affected our ability to add new reserves;
. 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 (oil versus gas volumes); and
. the prices we receive for our oil and gas production.
<PAGE>
26
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, 1999, 1998 and 1997.
<TABLE>
Year Ended December 31,
--------------------------------------
1999(1) 1998(2) 1997
----------- ------------ ----------
<S> <C> <C> <C>
Production and prices:
Oil (Bbls) 163,696 185,474 175,246
Natural gas (Mcf) 2,708,516 3,275,882 3,383,190
EBO (Bbls) 615,115 731,454 739,111
Oil price (per Bbl) $ 17.32 $ 12.49 $ 19.88
Gas price (per Mcf) $ 2.27 $ 2.04 $ 2.70
Ratio of oil to gas price 7.63/1 6.12/1 7.36/1
Increase (decrease) in production
volumes over prior year (16%) (1%) (11%)
Results of operations per EBO:
Oil and gas revenues $ 14.59 $ 12.31 $ 17.07
Costs and expenses:
Production costs 3.83 3.33 4.29
General and administrative 1.31 1.23 1.13
Provision for losses on trade receivables .14 - -
Depreciation, depletion and amortization 8.49 8.16 5.36
Impairment of oil and gas properties 2.77 20.17 -
--------- --------- -------
Total costs and expenses 16.54 32.89 10.78
--------- --------- -------
Operating income (loss) (1.95) (20.58) 6.29
Equity interest in earnings of
First Permian, L.L.C. 0.32 - -
Interest expense, net (2.39) (1.89) (1.09)
Other income, net .03 .46 .03
--------- --------- -------
Pretax income (loss) per EBO $ (3.99) $ (22.01) $ 5.23
========= ========= =======
</TABLE>
- ------------------
(1) Results include a noncash charge of $1,705,000 related to the impairment of
oil and gas properties incurred in the fourth quarter of 1999, primarily a
result of a decrease in year-end reserves.
(2) 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 oil and gas prices at year-end.
The following table shows the percentage of total revenues represented by
each item reflected on our statements of operations for the periods indicated.
<PAGE>
27
<TABLE>
Year Ended December 31,
----------------------------------
1999(1) 1998(2) 1997
------ ------- -----
<S> <C> <C> <C>
Oil and gas revenues 100.0% 100.0% 100.0%
Costs and expenses:
Production costs 26.2 27.0 25.1
General and administrative 8.9 9.5 6.6
Provision for loss on trade receivables 1.0 .5 -
Depreciation, depletion and
amortization 58.2 66.3 31.4
Impairment of oil and gas properties 19.0 163.9 -
------ ------ -----
Total costs and expenses 113.3 267.2 63.1
------ ------ -----
Operating income (loss) (13.3) (167.2) 36.9
Equity in earnings of
First Permian, L.L.C. 2.2 - -
Interest expense, net (16.4) (15.3) (6.4)
Other income, net .2 3.8 .2
------ ------ -----
Pretax income (loss) (27.3) (178.7) 30.7
Income tax (expense) benefit - 34.4 (8.9)
------ ------ -----
Net income (loss) (27.3)% (144.3)% 21.8%
====== ====== =====
</TABLE>
- -----------------
(1) Results include a noncash charge of $1,705,000 related to the impairment of
oil and gas properties incurred in the fourth quarter of 1999, primarily a
result of a decrease a year-end reserves.
(2) 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 oil and gas prices at year-end.
Years Ended December 31, 1999 and December 31, 1998
Oil and Gas Revenues. Our total oil and gas revenues for 1999 were
$8,974,041, a decrease of $27,541, or less than 1%, from $9,001,582 for 1998.
The decrease in revenues for 1999, compared to 1998, is related to a 16% decline
in production volumes, which was partially offset by higher oil and gas prices.
Production. On an equivalent barrel basis, 1999 production totaled 615,115
EBO compared with 731,454 EBO in 1998. The decrease in production was primarily
<PAGE>
28
due to normal production declines associated with producing wells and decreased
drilling activity in 1999, which affected our ability to replace oil and gas
produced during the year.
Production Costs. The decrease in production costs in 1999, compared with
1998, was primarily the result of a decrease in production volumes. Production
costs decreased $80,926 or 3%, to $2,353,732 for the twelve months ended
December 31, 1999, from $2,434,658 for the same period of 1998. Production costs
as a percentage of revenues decreased primarily because of higher oil and gas
prices. Average production costs per EBO increased 15% to $3.83 for the twelve
months ended December 31, 1999 compared to $3.33 in the same period of 1998,
primarily because of lower production volumes and the fixed costs associated
with producing wells.
General and Administrative Expenses. General and administrative expenses
decreased $49,854 or 6% to $805,934 for the year ended December 31, 1999, from
$855,788 for the same period of 1998. The decrease in general and administrative
expenses was primarily related to a decrease in property insurance costs and
legal expenses. General and administrative expenses as a percentage of revenues
decreased to 8.9% for the year ended December 31, 1999 versus 9.5% for the same
period in 1998. This decrease is primarily a result of higher oil and gas prices
and a 6% decline in general and administrative expenses.
Depreciation, Depletion and Amortization Expense. DD&A expenses for 1999
decreased $742,721, or 12% to $5,223,500 versus $5,966,221 in 1998. This
decrease was a result of lower production volumes. DD&A expense as a percentage
of revenues decreased primarily because of lower production volumes.
Impairment of Oil and Gas Properties. During the fourth quarter of 1999, we
recognized a noncash impairment charge of $1,705,000 related to our oil and gas
reserves and unproved properties. The impairment of oil and gas assets was
primarily the result of a decrease in our year-end proved reserves. We
recognized an impairment charge in 1998 of $14,757,028, or $12,269,834 net of
tax, related to our oil and gas reserves and unproved properties. The impairment
of oil and gas assets in 1998 was primarily the result of the effect of
significantly lower oil and natural gas prices on both proved and unproved oil
and gas properties.
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.
The ceiling test was computed using the net present value of reserves at
December 31, 1999 based on prices of $24.75 per Bbl of oil and $2.20 per Mcf of
natural gas. The prices used to compute the ceiling test in 1998 were $10.50 per
Bbl and $2.00 per Mcf.
Net Interest Expense. Net interest expense increased $90,875 or 6%, to
$1,469,207 for the year ended December 31, 1999, from $1,378,332 for the same
period of 1998. This increase was principally a result of an increase in average
borrowings from our revolving line of credit facility.
Income Tax Benefit (Expense). For the year ended December 31, 1999, we did
not recognize an income tax benefit or expense because we generated net tax
losses during the year. For the year ended December 31, 1998, we recognized
a tax benefit of $3,100,027. At December 31, 1999 and 1998, we reviewed our
deferred tax assets and, in light of the current economic conditions in the oil
and gas industry, the outlook for future commodity prices, and our expected
operational results in future period we believe that some of our net operating
losses may expire unused. Therefore, we established a valuation allowance
against them of $4,248,480 and $2,530,196 for 1999 and 1998, respectively.
<PAGE>
29
Our effective tax rate for 1999 was 0% versus 19% in 1998. You should read
Note 5 of 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 $2,450,457 for the year ended December 31, 1999 compared
with a net loss of $12,995,910 for the year ended December 31, 1998. The 1999
loss was primarily caused by a fourth quarter 1999 noncash impairment charge to
oil and gas properties totaling $1,705,000 as a result of a decrease in proved
reserves and a decline in production volumes. This compares with a fourth
quarter 1998 noncash impairment charge to oil and gas properties totaling
$14,757,028, the result of significantly lower oil and gas prices at year-end
1998.
Factors contributing to the net loss were partially offset by a 19%
increase in 1999 oil and gas prices, on an EBO basis, when compared with 1998
prices.
Operating cash flow for 1999 decreased approximately $149,269 or 3%, to
$4,478,043 compared with $4,627,312 for the year ended December 31, 1998. Other
sources of funds included net proceeds of $17,188 from the exercise of stock
options, net proceeds of $3,117,295, excluding offering costs, from the private
placement of common stock, net proceeds from property sales totaling $1,111,525
and bank borrowings under our credit facility.
Years Ended December 31, 1998 and December 31, 1997
Oil and Gas Revenues. Our 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 oil and natural gas 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 oil
and gas 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 oil and gas 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 oil and gas
prices we received in 1998, which reduced revenues.
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;
<PAGE>
30
. 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 oil and gas 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 oil and gas prices, which reduced revenues.
Impairment of Oil and Gas 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 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. 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.
At December 31, 1998, oil and natural gas prices were much lower compared
with 1997 year-end prices, resulting in an impairment charge to the full cost
carrying value of our oil and gas 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 oil and gas 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 oil and gas industry, the outlook for
future commodity prices, and our operational results in 1998, we believe that
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.
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
<PAGE>
31
loss was primarily caused by a fourth quarter 1998 noncash impairment charge to
oil and gas properties totaling $14,757,028, the result of significantly lower
oil and gas 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.
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.
Capital Resources and Liquidity
Our capital resources consist primarily of cash flows from our oil and gas
properties and bank borrowings supported by our oil and gas reserves. Our level
of earnings and cash flows depends on many factors, including the price of oil
and natural gas.
Our primary sources of cash during 1999 were funds generated from
operations, proceeds from the sale of noncore oil and gas properties, bank
borrowings and a private placement of common stock. Funds were used primarily
for exploration and development expenditures, dividend payments and the
repayment of borrowings under our bank credit facility.
On December 27, 1999, our loan agreement with the bank was restated in its
entirety. The loan agreement, as restated, currently provides for a revolving
credit facility under which we can borrow up to the lesser of (a) $30,000,000 or
(b) the borrowing base then in effect. When we entered into the restated loan
agreement, we were required to make monthly principal payments in the amount of
$300,000. After giving effect to these principal payments, the total outstanding
principal amount of our bank borrowings was $15,965,889 at December 31, 1999.
The borrowing base under the restated loan agreement was also established at
$15,965,889. The borrowing base reduces automatically each month, which means
that we are required to make a principal payment in the same amount by which the
borrowing base is reduced. Under this requirement, we made principal payments in
the total amount of $600,000 in the months of January and February, 2000. The
borrowing base will continue to reduce automatically at the rate of $300,000.00
per month, beginning March 1, 2000. The borrowing base and the borrowing base
reduction amount are required to be redetermined by the bank on February 1, 2000
and on May 1 and November 1 of each year, beginning May 1, 2000. Our borrowing
base is currently under review for redetermination.
Unless the bank increases the 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 oil and
gas 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:
<PAGE>
32
. 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:
. interpretation and processing of 3-D seismic survey data;
. 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.
At December 31, 1999, we had 974,500 shares of 6% convertible preferred
stock outstanding. The 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, 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, 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.
Future Capital Requirements
Our capital expenditure budget for 2000 is highly dependent on future oil
and gas prices and the availability of other sources of funding. These
expenditures will be governed by the following factors:
<PAGE>
33
. internally generated cash flows;
. availability of borrowing under our current credit facility;
. additional sources of financing; and
. future drilling successes.
In 2000, we intend to drill lower risk prospects that could have a
meaningful effect on our reserve base and cash flows. In selected cases, we may
elect to reduce our interests in higher risk, higher impact projects. We may
also sell certain non-core producing properties to raise funds for capital
expenditures.
Outlook
The oil and gas 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 oil and gas 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.
The continued availability of these capital sources depends upon a number
of variables, including:
. our proved reserves,
. the volumes of oil and gas we produce from existing wells;
. the prices at which we sell oil and gas; 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.
<PAGE>
34
Trends and Prices
Changes in oil and gas prices significantly affect our revenues, cash flows
and borrowing capacity. Markets for oil and gas have historically been, and will
continue to be, volatile. Prices for oil and gas typically fluctuate in response
to relatively minor changes in supply and demand, market uncertainty, seasonal,
political and other factors beyond 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 oil and gas. Historically, we have not entered
into transactions to hedge against changes in oil and gas prices, but we may
elect to enter into hedging transactions in the future to protect against
fluctuations in oil and gas prices.
During 1999, the average sales price we received for our oil production was
approximately $17.32 per Bbl, as compared with $12.49 in 1998, while the average
sales price for our gas was approximately $2.27 per Mcf in 1999, as compared
with $2.04 per Mcf in 1998. At March 15, 2000, we were receiving an average of
$28.00 per Bbl for our oil production and $2.75 per Mcf for our gas production.
Year 2000 Issues
We have not incurred any computer failures or problems related to the Year
2000 issue. However, we have no assurance that our business partners or
governmental agencies or other key third parties have not incurred Year 2000
issues that may ultimately affect us. We are continuing to monitor our systems
to identify and rectify any Year 2000 issues that may occur in the future.
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.
Recent Accounting Prenouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities ("FAS 133") which establishes standards for
derivative instruments including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. It establishes
conditions under which a derivative may be designated as a hedge, and
establishes standards for reporting changes in the fair value of a derivative.
FAS 133, as amended by FAS 137, is required to be implemented for all fiscal
quarters of all fiscal years beginning after June 15, 2000. Early adoption is
permitted. As of December 31, 1999, we had not entered into any contracts that
would need to be disclosed under FAS 133.
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
<PAGE>
35
arrangements and do not have any delivery 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 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. Pricing volatility is expected to
continue. Oil prices ranged from a monthly low of $12.18 per barrel to a monthly
high of $17.32 per barrel during 1999. Natural gas prices we received during
1999 ranged from a monthly low of $1.85 per Mcf to a monthly high of $2.27 per
Mcf. A significant decline in the prices of oil or natural gas 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 2000 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, 1999. You should read
Note 3 to the Financial Statements and Supplementary Data, for further
discussion of our debt that is sensitive to interest rates.
<TABLE>
2000 2001 Total Fair Value
-------- ------- ------- -----------
(in 000's, except interest rates)
<S> <C> <C> <C> <C>
Variable rate debt:
Revolving Facility (secured) $3,666 $12,300 $15,966 $15,966
Average interest rate 8.75% 8.75%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Parallel's financial statements and supplementary financial data are
included in this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and executive officers of Parallel at March 15, 2000 are as
follows:
<TABLE>
Director
Name Age Since Position with Company
---- --- ----- ----------------------
<S> <C> <C> <C>
Thomas R. Cambridge 64 1985 Chairman of the Board of Directors and Chief Executive
Officer
Larry C. Oldham 46 1979 President, Treasurer and Director
Ernest R. Duke(1)(2) 73 1980 Director
Myrle Greathouse(1) 77 1993 Director
Charles R. Pannill(2) 74 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. Since 1990, such oil and gas
activities have been carried out through Cambridge Production, Inc., a Texas
corporation. Mr. Cambridge 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, serving as Executive Vice President before that time.
He is a member of the Permian Basin Landman's Association. Mr. Oldham 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.
<PAGE>
37
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, He graduated from the
University of Texas of the Permian Basin with a Masters of Business
Administration degree.
Rebecca A. Burrell, Manager of Accounting, has been a full-time employee of
Parallel since January 1985. Ms. 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, Mrs. 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, Mrs. Keller was Director
of Investor Relations for Edisto Resources Corporation, Dallas, Texas.
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, N.A., Midland, Texas.
Consulting Arrangements
As part of our overall business strategy, we continually monitor and
control our general and administrative expenses. Decisions regarding 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 administrative expenses at acceptable levels,
without impairing the quality of services and organizational structure necessary
for conducting our business. In this regard, we retain outside advisors and
consultants to provide technical and administrative support services 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 securities. To our knowledge, all
Section 16(a) filing requirements have been complied with during 1999, except
that Charles R. Pannill, a director, did not timely file one Form 4 Report
covering one transaction in December 1999.
<PAGE>
38
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 Securities
Annual Compen- Restricted Underlying LTIP All Other
Name and Salary Bonus sation Stock Options/ Payouts Compensation
Principal Position Year ($) ($) ($) Awards ($) SARs(#) ($) ($)
- ------------------ ---- -------- ------- -------------- ----------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
T.R. Cambridge, 1999 $ 77,755 $ 1,000 $ 900 0 50,000 0 0
Chief Executive
Officer and 1998 $ 73,631 $ 500 $ 900 0 50,000 0 0
Chairman of
the Board 1997 $ 70,686 $ 1,000 $ 825 0 100,000 0 0
of Directors
L.C. Oldham, 1999 $125,000 $ 1,000 $ 20,221(1) 0 100,000 0 $ 5,771(2)
President,
Treasurer 1998 $112,923 $ 500 $ 23,150(1) 0 100,000 0 $ 5,139(2)
and Director
1997 $104,297 $ 1,000 $ 16,620(1) 0 100,000 0 $ 6,695(2)
</TABLE>
- --------------
(1) Such amount includes insurance premiums for nondiscriminatory group life,
medical, disability and dental insurance as follows: $18,534 in 1999;
$17,445 for 1998; and $11,532 for 1997.
(2) For 1997, such amount includes $3,129 contributed by Parallel to Mr.
Oldham's individual retirement account maintained under the 408(k)
simplified employee pension plan/individual retirement 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 retirement account and the reimbursement to Mr. Oldham of
$1,751 for income tax preparation and planning. The amount shown for 1999
includes Parallel's contribution of $3,750 to Mr. Oldham's retirement
account and reimbursement of $2,021 for income tax preparation.
Stock Options
Parallel uses stock options as part of the overall compensation of
Directors, officers and employees. We have included summary descriptions of our
stock option plans so you can review the types of options we have granted and
the significant features of our stock options.
<PAGE>
39
In the following table, we show certain information with respect to stock
options granted in 1999 to the named executive officers.
<TABLE>
Option/Sar Grants in Last Fiscal Year
Individual Grants
-----------------------------------------------------
Percent of
Total Potential Realizable
Number of Options Value at Assumed
Securities Granted to Annual Rates of Stock
Underlying Employees Exercise or Price Appreciation for
Options in Base Price Expiration Option Term (1)
Name Granted (#) Fiscal Year ($/Sh) Date 5%($) 10%($)
- ---------------- ----------- ------------ ----------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
T. R. Cambridge 50,000 (2) 16.13% $1.82 10-28-09 $ 57,330 $ 114,690
L.C. Oldham 100,000 (3) 32.25% $1.813 6-23-09 $ 114,219 $ 288,267
</TABLE>
- ---------------------
(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 October 28, 1999 pursuant to Parallel's
Non-employee Directors' Stock Option Plan. The option is exercisable in two
equal annual installments, commencing October 28, 2000.
(3) On June 23, 1999, an incentive stock option to purchase 100,000 shares of
common stock was granted to Mr. Oldham pursuant to the 1998 Stock Option
Plan. The option is exercisable in two equal annual installments,
commencing June 23, 2000.
The following table shows certain information about stock option exercises
in 1999 and the value of unexercised stock options held by Parallel's executive
officers at December 31, 1999.
<TABLE>
Aggregated Option/SAR Exercises in
Last Fiscal Year and Fiscal Year - End Option/SAR Values
Value of
Number of Securities Underlying Unexercised
Unexercised Options at Fiscal in-the-Money Options
Shares Value Year-End (#) at Fiscal Year-End ($) (1)
Acquired on Realized ---------------------------------- -----------------------------------
Name Exercise ($) Exercisable Unexercisable Exercisable Unexercisable
- -------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
T.R. Cambridge 0 0 225,000 75,000 $ 0(2) $ 0(2)
L. C. Oldham 0 0 437,000 210,000 $ 220,903 $ 0(3)
</TABLE>
- -----------------------
(1) The value of in-the money options is equal to the fair market value of a
share of common stock at fiscal year-end ($1.6875 per share), based on the
last sale price of Parallel's common stock, less the exercise price.
(2) At December 31, 1999, the exercise price of all the options held by Mr.
Cambridge exceeded $1.6875, the fair market value of our common stock on
that date.
(3) The exercise prices of all of Mr. Oldham's unexercisable options exceeded
the fair market value of our common stock on December 31, 1999.
<PAGE>
40
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.
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.
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 1999, Ernest R.
<PAGE>
41
Duke received $8,500, Myrle Greathouse received $7,500 and Charles R. Pannill
received $8,000. 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
1999 under this plan.
Directors who are not employees of Parallel are also eligible to
participate in the Non-Employee Directors Stock Option Plan. On October 28,
1999, Messrs. 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 $1.82 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 October 28, 2000, and one-half on October 28, 2001. The options expire
on October 28, 2009.
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 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 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.
<PAGE>
42
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.
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.
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.
<PAGE>
43
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.
Parallel currently makes matching contributions to employee accounts in an
amount equal to the contribution made by each employee, not to exceed, however,
6% of each employee's salary during any calendar year. During 1999, Parallel
contributed an aggregate of $14,338 to the accounts of seven employee
participants. Of this amount, $3,750 was allocated to Mr. Oldham's account.
<PAGE>
44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This table shows information as of March 15, 2000 about 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 Parallel's
executive officers and Directors as a group.
<TABLE>
Name and Address Amount and Nature
of of Percent of
Beneficial Owner Beneficial Ownership (1) Class (2)
------------------ ------------------------ ----------
<S> <C> <C>
Thomas R. Cambridge 979,545 (3) 4.77%
2201 Civic Circle, Suite 216
Amarillo, Texas 79109
Ernest R. Duke 282,473 (4) 1.39%
P.O. Box 1919
Midland, Texas 79702
Myrle Greathouse 1,656,557 (5) 7.88%
P.O. Box 379
Abilene, Texas 79604
Larry C. Oldham
One Marienfeld Place, Suite 465 747,090 (6) 3.59%
Midland, Texas 79701
Charles R. Pannill 91,995 (7) *
3416 Acorn Run
Fort Worth, Texas 76019
Wes-Tex Drilling Company 1,246,773 (8) 6.04%
P.O. Box 379
Abilene, Texas 79604
Dian Graves Owen 1,281,856 (9) 6.13%
400 Pine, Suite 1000
Abilene, Texas 79601
Julia Jones Matthews 1,942,856 (9) 9.05%
400 Pine, Suite 900
Abilene, Texas 79601
Dodge Jones Foundation 1,371,428 (10) 6.44%
400 Pine, Suite 900
Abilene, Texas 79601
All Executive Officers 3,757,660 (11) 17.24 %
and Directors
as a Group (5 persons)
</TABLE>
__________________
* Less than one percent.
(1) Unless otherwise indicated, all shares of common stock are held directly
with sole voting and investment powers.
<PAGE>
45
(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 212,500 shares of common stock underlying presently exercisable
stock options.
(4) Includes 47,500 shares of common stock underlying presently exercisable
stock options. 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.
(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 72,500 shares of common stock underlying presently exercisable
stock options, and 1,000 shares held by a 22-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 457,000 shares of common stock underlying presently exercisable
stock options.
(7) Includes 47,500 shares of common stock underlying presently exercisable
stock options. 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 700,000 shares of common stock held indirectly by the Dian Graves
Owen Trust and 285,714 shares of common stock that may be acquired by Mrs.
Owen upon conversion of 100,000 shares of preferred stock held directly by
her. Also included are 285,714 shares that may be acquired upon conversion
of 100,000 shares of preferred stock held directly by the Dian Graves Owen
Foundation, a non-profit organization. Mrs. Owen disclaims beneficial
ownership of all shares of common stock beneficially owned by the Dian
Graves Owen Foundation.
(10) Includes 400,000 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 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 11.
(11) 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 10.
(12) Includes 837,000 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.
<PAGE>
46
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 our company and
participates with us 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 1999, we billed Wes-Tex $33,922 for its 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 1999 for its share of lease operating
expenses was $3,760. At December 31, 1999, Wes-Tex owed us $3,118 for these
expenses. During 1999, we disbursed $36,790 to Wes-Tex in payment of revenues
attributable to Wes-Tex's pro rata share of the proceeds from sales of oil and
gas produced from properties in which Wes-Tex and Parallel owned interests.
During 1999, 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 1999, Cambridge Production
billed us $33,766 for our pro rata share of lease operating expenses and
drilling and workover expenses. We paid $31,287 to Cambridge Production during
1999, which included amounts remaining unpaid and owed to Cambridge Production
at the end of 1998. The largest amount we owed Cambridge Production at any one
time during 1999 was $11,565. At December 31, 1999, 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 1999 from the wells operated by
Cambridge Production was $197,325. At December 31, 1999, we owed Cambridge
Production $2,479.
During 1999, we paid $22,968 to First Permian for reimbursement of general
and administrative expense. First Permian paid $85,019 to us for reimbursement
of general and administrative expense. At December 31, 1999, we owed First
Permian $2,702. At that same date, First Permian owed us $1,110.
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>
47
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" 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, 1999.
(c) Exhibits:
Exhibit
No. Description of Exhibit
- ------- ----------------------
3.1 Certificate of Incorporation of Registrant (Incorporated by reference to
Exhibit 3.1 of 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.)
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>
48
Exhibit
No. Description of Exhibit
- ------- ----------------------
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 (Incorporated by reference to Exhibit 10.7 of
Form 10-K of the Registrant for the fiscal year ended December 31,
1998.)
*10.8 Restated Loan Agreement, dated December 27, 1999, between the Registrant
and Bank One, Texas, N.A.
10.9 Letter agreement, dated March 24, 1999, between the Registrant and Bank
One, Texas, N.A. (Incorporated by reference to Exhibit 10.9 of Form 10-K
of the registrant for the fiscal year ended December 31, 1998.)
10.10 Certificate of Formation of First Permian, L.L.C. (Incorporated by
reference to Exhibit 10.1 of the Registrant's Form 8-K Report dated June
30, 1999.)
10.11 Limited Liability Company Agreement of First Permian, L.L.C.
(Incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K
Report dated June 30, 1999.)
10.12 Merger Agreement, dated June 25, 1999 (Incorporated by reference to
Exhibit 10.3 of the Registrant's Form 8-K Report dated June 30, 1999.)
10.13 Agreement and Plan of Merger of First Permian, L.L.C. and Nash Oil
Company, L.L.C. (Incorporated by reference to Exhibit 10.4 of the
Registrant's Form 8-K Report dated June 30, 1999.)
10.14 Certificate of Merger of First Permian, L.L.C. and Nash Oil Company,
L.L.C. (Incorporated by reference to Exhibit 10.5 of the Registrant's
Form 8-K Report dated June 30, 1999.)
<PAGE>
49
Exhibit
No. Description of Exhibit
- ------- ----------------------
10.15 Credit Agreement, dated June 30, 1999, by and among First Permian,
L.L.C., Parallel Petroleum Corporation, Baytech, Inc., and Bank One,
Texas, N.A. (Incorporated by reference to Exhibit 10.6 of the
Registrant's Form 8-K Report dated June 30, 1999.)
10.16 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 of the Registrant's Form 8-K
Report dated June 30, 1999.)
10.17 Intercreditor Agreement, dated as of June 30, 1999, by and 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 of the Registrant's Form 8-K Report dated June 30, 1999.)
10.18 Subordinated Promissory Note, dated June 30, 1999, in the original
principal amount of $8.0 million made by First Permian, L.L.C. payable
to the order of Tejon Exploration Company (Incorporated by reference to
Exhibit 10.9 of the Registrant's Form 8-K Report dated June 30, 1999.)
10.19 Subordinated Promissory Note, dated June 30, 1999, in the original
principal amount of $8.0 million made by First Permian, L.L.C. payable
to the order of Mansefeldt Investment Corporation (Incorporated by
reference to Exhibit 10.10 of the Registrant's Form 8-K Report dated
June 30, 1999.)
*23.1 Consent of Independent Auditors
*23.2 Consent of Independent Petroleum Engineers
*23.3 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, 1999 and 1998 F-3
Statements of Income for the years ended
December 31, 1999, 1998, and 1997 F-4
Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997 F-5
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 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, 1999 and 1998, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1999, in conformity with generally accepted accounting principles.
KPMG LLP
Midland, Texas
February 9, 2000
<PAGE>
F-3
PARALLEL PETROLEUM CORPORATION
Balance Sheets
December 31, 1999 and 1998
<TABLE>
Assets 1999 1998
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,276,417 $ 1,178,819
Accounts receivable:
Oil and gas 1,312,923 1,432,659
Others, net of allowance for doubtful
accounts of $157,187 in 1999 and
$71,358 in 1998 314,911 247,740
Affiliate 20,658 11,844
----------- -----------
1,648,492 1,692,243
Other assets 39,677 61,504
Assets held for sale 2,127,734 --
----------- -----------
Total current assets 5,092,320 2,932,566
----------- -----------
Property and equipment, at cost:
Oil and gas properties, full cost
method (Note 11) 65,136,783 65,565,466
Other 289,720 287,586
----------- -----------
65,426,503 65,853,052
Less accumulated depreciation
and depletion (27,502,855) (22,279,355)
----------- -----------
Net property and equipment 37,923,648 43,573,697
----------- -----------
Investment in First Permian, LLC (Note 14) 201,311 --
Other assets, net of accumulated amortization
of $141,428 in 1999 and $86,917 in 1998 46,791 58,519
----------- -----------
$43,264,070 $46,564,782
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current maturities of long-term
debt (Note 3) $ 3,665,889 $ --
Accounts payable and accrued liabilities:
Trade 1,495,376 2,803,539
Affiliate 2,702 214
----------- -----------
1,498,078 2,803,753
Total current liabilities 5,163,967 2,803,753
----------- -----------
Long-term debt, excluding current
maturities (Note 3) 12,300,000 18,035,889
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 1999 and 1998 97,450 97,450
Common stock - par value of $.01 per share,
authorized 60,000,000 shares, issued and
outstanding 20,331,858 in 1999 and
18,306,858 in 1998 203,319 183,069
Additional paid-in surplus 34,847,141 32,341,971
Retained deficit (9,347,807) (6,897,350)
----------- -----------
Total stockholders' equity 25,800,103 25,725,140
Contingencies
----------- -----------
$43,264,070 $46,564,782
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
F-4
PARALLEL PETROLEUM CORPORATION
Statements of Income
Years ended December 31, 1999, 1998 and 1997
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Oil and gas revenues $ 8,974,041 $ 9,001,582 $12,614,242
----------- ------------ -----------
Costs and expenses:
Lease operating expense 2,353,732 2,434,658 3,171,234
General and administrative 805,934 855,788 837,635
Provision for losses on trade receivables 85,829 43,228 --
Depreciation and depletion 5,223,500 5,966,221 3,959,277
Impairment of oil and gas properties 1,705,000 14,757,028 --
----------- ------------ -----------
Total costs and expenses 10,173,995 24,056,923 7,968,146
----------- ------------ -----------
Operating income (loss) (1,199,954) (15,055,341) 4,646,096
----------- ------------ -----------
Other income (expense), net:
Equity in earnings of First Permian, LLC (Note 14) 197,811 -- --
Interest income 65,333 2,771 8,984
Other income 26,847 395,683 33,512
Interest expense (1,534,540) (1,381,103) (813,372)
Other expense (5,954) (57,947) (8,840)
----------- ------------ -----------
Total other expense, net (1,250,503) (1,040,596) (779,716)
----------- ------------ -----------
Income (loss) before income taxes (2,450,457) (16,095,937) 3,866,380
Income tax (expense) benefit -- 3,100,027 (1,122,450)
----------- ------------ -----------
Net income (loss) $(2,450,457) $(12,995,910) $ 2,743,930
=========== ============ ===========
Cumulative preferred stock dividend $ (609,063) $ (276,712) $ --
=========== ============ ===========
Net income (loss) available to common stockholders $(3,059,520) $(13,272,622) $ 2,743,930
=========== ============ ===========
Net income (loss) per common share:
Basic $ (.16) $ (.73) $ .15
======= ====== =======
Diluted $ (.16) $ (.73) $ .15
======= ====== =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
F-5
PARALLEL PETROLEUM CORPORATION
Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
<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>
Balance,
January 1, 1997 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 ($.60
per share) - - - - (276,712) - (276,712)
---------- -------- ------- ------- ----------- ---------- ------------
Balance,
December 31, 1998 18,306,858 183,069 974,500 97,450 32,341,971 (6,897,350) 25,725,140
Issuance of stock, net 2,000,000 20,000 - - 3,097,295 - 3,117,295
Options exercised 25,000 250 - - 16,938 - 17,188
Net loss - - - - - (2,450,457) (2,450,457)
Dividends ($.60
per share) - - - - (609,063) - (609,063)
---------- -------- ------- ------- ----------- ---------- ------------
Balance,
December 31, 1999 20,331,858 $203,319 974,500 $97,450 $34,847,141 $(9,347,807) $ 25,800,103
========== ======== ======= ======= =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
F-6
PARALLEL PETROLEUM CORPORATION
Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,450,457) $(12,995,910) $ 2,743,930
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and depletion 5,223,500 5,966,221 3,959,277
Equity in income from investment (197,811) - -
Deferred income taxes - (3,100,027) 1,079,864
Impairment of oil and gas properties 1,705,000 14,757,028 -
Provision for losses on trade receivables 85,829 43,228 -
Other, net 11,728 9,077 5,715
Changes in assets and liabilities:
Decrease (increase) in accounts receivables (42,078) 838,743 467,014
Decrease (increase) in prepaid expenses and other 21,827 (24,321) (29,643)
Increase (decrease) in accounts payable and
accrued liabilities (951,667) 123,421 (67,078)
Income tax payable - - 30,521
----------- ----------- -----------
Net cash provided by
operating activities 3,405,871 5,617,460 8,189,600
----------- ----------- -----------
Cash flows from investing activities:
Additions to oil and gas property (4,896,081) (21,237,837) (20,441,094)
Proceeds from disposition of oil and gas property 1,111,525 683,592 7,580,820
Additions to other property and equipment - (62,582) (75,450)
Proceeds from disposition of other property
and equipment - 208,918 -
Investment in First Permian, LLC (3,500) - -
----------- ----------- -----------
Net cash used in
investing activities (3,788,056) (20,407,909) (12,935,724)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings from bank line of credit 780,000 18,182,279 16,330,000
Payments on bank line of credit (2,850,000) (12,329,000) (12,668,781)
Proceeds from exercise of options and warrants 17,188 166,625 1,640,485
Stock offering costs (82,705) (116,072) -
Proceeds from common stock issuance 3,200,000 - -
Proceeds from preferred stock issuance - 9,744,999 -
Payments of preferred stock dividend (584,700) (276,712) -
----------- ----------- -----------
Net cash provided by
financing activities 479,783 15,372,119 5,301,704
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 97,598 581,670 555,580
Beginning cash and cash equivalents 1,178,819 597,149 41,569
----------- ----------- -----------
Ending cash and cash equivalents $ 1,276,417 $ 1,178,819 $ 597,149
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
F-7
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements
December 31, 1999, 1998 and 1997
(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.
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
<PAGE>
F-8
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
capitalized costs and proved oil and gas reserves, in which case 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 capitalized 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, recognized in
income. 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.
Investments
-----------
Investments in affiliated companies with a 20% to 50% ownership
interest are accounted for on an equity basis and, accordingly,
net income includes the Company's share of their income or loss.
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, 1999, 1998 and 1997
was not material.
The Company uses the entitlements method of accounting for natural
gas revenues. Under this method, revenues are recognized based on
actual volumes of gas sold to purchasers.
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
<PAGE>
F-9
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
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.
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
---------------------
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 similar to basic earnings per
share, however fully diluted earnings per share reflects the
assumed conversion of all potentially dilutive securities.
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)
Reclassifications
-----------------
Certain reclassifications have been made to the 1998 and 1997 amounts
to conform to the 1999 presentation.
(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>
1999 1998
---- ----
<S> <C> <C>
Revolving Facility note payable to bank, at
bank's base lending rate plus .25%
(8.75% at December 31, 1999) $ 15,965,889 $ 16,623,889
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 3,665,889 -
------------ ------------
$ 12,300,000 $ 18,035,889
============ ============
</TABLE>
On December 27, 1999, the Company restated its note agreement with a
bank ("Revolving Facility"). Pursuant to the restated note
agreement, the Company may borrow $30,000,000 or the "borrowing
base" then in effect. The borrowing base in effect at December
31, 1999 was $15,965,889. The borrowing base is reduced by a
monthly commitment reduction of $300,000 beginning January 1,
2000. The borrowing base and monthly commitment reduction are
subject to redetermination on or about February 1, 2000 and
thereafter every six months on May 1 and November 1 of each year,
or at such other times as the bank elects. The latest
redetermination date was on December 27, 1999. Indebtedness under
the Revolving Facility matures July 1, 2001. 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.
<PAGE>
F-11
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
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 plus .25% or (ii) the bank's
Eurodollar rate plus a margin of 3.0%. Interest is due and
payable monthly.
The restated note 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.
Scheduled maturities of long-term debt at December 31, 1999 are as
follows:
2000 $ 3,665,889
2001 12,300,000
-----------
$15,965,889
===========
(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, 1999, options expire beginning in the year-ended December 31,
2001 through 2009. Exercise of the nonqualified stock options
resulted in a deferred tax effect of $6,375, $83,457 and $16,203
for the years ended December 31, 1999, 1998 and 1997,
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 (loss) and net income (loss) per share would have been
adjusted to the pro forma amounts indicated below for the years
ended December 31:
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $(3,107,170) $ (13,452,020) $ 2,464,487
Basic net income (loss) per share $ (.17) $ (.74) $ .14
Diluted net income (loss) per share $ (.17) $ (.74) $ .13
</TABLE>
The pro forma net income (loss) and pro forma net income (loss) per
share amounts noted above are not likely to be representative of
the pro forma amounts to be reported in future years. Pro forma
adjustments in future years will include compensation expense
<PAGE>
F-12
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
1999, 1998 and 1997.
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 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Risk-free interest rate 5.98 5.61 6.41
Expected life 8 years 7 years 7 years
Expected volatility .74 .71 .55
A summary of the Company's stock option plans as of December 31,
1999, 1998 and 1997, 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, 1999 December 31, 1998 December 31, 1997
------------------------ ---------------------- ------------------------
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 1,541,750 $ 3.46 1,364,250 $ 3.06 1,207,250 $ 1.82
Options granted 435,000 1.29 370,000 3.60 485,000 4.41
Options exercised (25,000) (.69) (192,500) (.87) (323,000) (.44)
Options canceled - - - - (5,000) (4.53)
---------- -------- --------- ------ --------- ------
Outstanding at end of year 1,951,750 $ 3.13 1,541,750 $ 3.46 1,364,250 $ 3.06
========== ======== ========= ====== ========= ======
Exercisable at end of year 1,200,500 $ 3.35 816,750 $ 2.97 775,500 $ 2.08
========== ======== ========= ====== ========= ======
Weighted average fair value
of options granted during
the year $ 1.40 $ 2.58 $ 2.80
======= ====== ======
</TABLE>
The following table summarizes information about the Company's stock
options outstanding at December 31, 1999:
<TABLE>
Options Outstanding Options Exercisable
---------------------------------------------------------- ----------------------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Prices December 31, 1999 Contractual Life Exercise Price December 31, 1999 Exercise Price
- --------------- ----------------- ----------------- -------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
$.64 - $ .69 150,000 3 years $ .64 150,000 $ .64
$1.03 - $1.82 558,000 4 years $ 1.68 123,000 $ 1.18
$3.19 - $5.50 1,243,750 9 years $ 3.46 927,500 $ 4.07
--------- ---------
1,951,750 1,200,500
========= =========
</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,
1999, 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 1999 and 1998, 50,000 shares have been
purchased in connection with the five-year warrant.
The Company has outstanding at December 31, 1999 and 1998, 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 (benefit) differs from the amount computed
at the Federal statutory rate as follows:
<TABLE>
Year ended
December 31,
---------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income tax expense (benefit) at statutory
rate $ (833,156) $ (5,472,619) $ 1,314,570
Change in valuation allowance for deferred
tax assets 1,718,284 2,530,196 -
Adjustment to deferred tax liability for
changes in estimates (649,920) - -
Statutory depletion (237,047) (171,803) (241,274)
Nondeductible expenses and other 1,839 14,199 49,154
----------- ------------ -----------
Income tax expense (benefit) $ - $ (3,100,027) $ 1,122,450
=========== ============ ===========
</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>
1999 1998
---- ----
<S> <C> <C>
Noncurrent
----------
Deferred tax assets:
Net operating loss carryforwards $ 7,217,369 $ 5,309,428
Statutory depletion carryforwards 1,190,146 953,099
----------- -----------
Total deferred tax assets 8,407,515 6,262,527
Less valuation allowance (4,248,480) (2,530,196)
----------- -----------
Net deferred tax assets 4,159,035 3,732,331
----------- -----------
Deferred tax liabilities:
Equity income in First Permian, LLC 187,568 -
Property and equipment, principally due
to differences in basis, expensing
of intangible drilling costs for tax
purposes and depletion 3,971,467 3,732,331
----------- -----------
Total deferred tax liabilities 4,159,035 3,732,331
----------- -----------
Net noncurrent deferred income
tax liability $ - $ -
=========== ===========
</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, 1999, 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>
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 8,658,000 - 8,191,000
2014 5,616,000 - 5,274,000
----------- -------- -----------
$21,226,000 $ 39,000 $17,172,000
=========== ======== ===========
</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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Purchaser A 5% 11% 12%
Purchaser B 14% 24% 53%
Purchaser C 27% 22% -
Purchaser D 26% 18% -
</TABLE>
<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 1999, 1998
and 1997, the Company contributed an aggregate of $14,338,
$11,632 and $12,709, respectively, of which $3,750, $3,388 and
$3,129, 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 1999, 1998 and 1997, $2,127,734, $0, and $0 were transferred
from oil and gas properties to assets held for sale,
respectively. These transfers are considered non-cash
transactions.
No Federal taxes were paid in 1999, 1998 and 1997, as a result of
net operating losses or loss carryforwards.
The Company made interest payments of $1,534,023, $1,349,786 and
$794,079 in 1999, 1998 and 1997, respectively.
At December 31, 1999 and 1998, there were $1,489,870 and $1,868,241,
respectively, of property additions accrued in accounts payable.
(9) Equity Transactions
-------------------
Common Stock
On November 19, 1999, the Company completed a private placement of
2,000,000 shares of its common stock for a price of $1.60 per
share. Proceeds received, net of related expenses, were
approximately $3,117,000 and were used to pay down debt, fund
capital projects and pay for operations.
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
<PAGE>
F-17
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
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 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.
During 1999, the Company paid to, and received from, First Permian,
LLC $22,968 and $85,019, respectively, for reimbursement of
general and administrative expenses. At December 31, 1999, the
Company had an account receivable from and an account payable to
First Permian LLC of $1,110 and $2,702, respectively.
(10) Related Party Transactions
--------------------------
During 1999 and 1998, the Company was charged $0 and $2,900,
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 1999 and 1998, the Company
charged $114,000 and $97,000, respectively, for lease operating
expenses and drilling costs and paid $68,000 and $62,000,
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 1999 and 1998,
the Company was billed $34,000 and $70,000, respectively, for the
Company's pro rata share of lease operating and drilling expenses
and received $197,000 and $218,000 in 1999 and 1998,
respectively, in oil and gas revenues related to these wells.
<PAGE>
F-18
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
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.
(11) Oil and Gas Expenditures
------------------------
The following table reflects capitalized costs related to the oil and
gas properties as of December 31:
<TABLE>
1999 1998
---- ----
<S> <C> <C>
Proved properties $ 52,795,570 $ 48,945,738
Unproved properties 12,341,213 16,619,728
------------ ------------
65,136,783 65,565,466
Accumulated depletion (27,296,752) (22,122,758)
------------ -----------
$ 37,840,031 $ 43,442,708
============ ============
</TABLE>
Certain directly identifiable internal costs of property acquisition,
exploration and development activities are capitalized. Such
costs capitalized in 1999, 1998 and 1997 totaled $508,883,
$527,500 and $461,537, respectively.
Depletion per equivalent unit of production (BOE) was $8.30, $8.07 and
$5.29 for 1999, 1998 and 1997, 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Transfers to assets held for sale $ (2,127,734) $ - $ -
Proved property acquisition costs 41,768 88,747 917,883
Unproved property acquisition costs 1,978,964 6,034,025 7,710,358
Exploration 1,855,948 8,555,741 9,604,035
Development 638,845 3,873,168 4,877,240
------------ ----------- -----------
$ 2,387,791 $18,551,681 $23,109,516
============ =========== ===========
</TABLE>
<PAGE>
F-19
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(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 $1,705,000 and $14,757,000 related to
its oil and gas properties during 1999 and 1998, respectively.
(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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income (loss) $ (2,450,457) $(12,995,910) $ 2,743,930
Preferred stock dividend (609,063) (276,712) -
------------ ------------ -----------
Net income (loss) and numerator for
basic and diluted net income (loss)
per share available to common
stockholders $ (3,059,520) $(13,272,622) $ 2,743,930
============ ============ ===========
Denominator:
Weighted average common shares for
basic earnings (loss) per share 18,549,214 18,300,998 17,862,792
Effect of dilutive securities:
Employee stock options - - 765,403
Warrants - - 12,795
=========== ============ ===========
Weighted average common shares for
diluted earnings (loss) per share
assuming conversions 18,549,214 18,300,998 18,640,990
=========== ============ ===========
Basic net earnings (loss) per share $ (.16) $ (.73) $ 0.15
======= ======== ========
Diluted net earnings (loss) per share $ (.16) $ (.73) $ 0.15
======= ======== ========
</TABLE>
<PAGE>
F-20
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Employee stock options to purchase shares of common stock and
convertible preferred stock were outstanding during 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 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.
(14) Equity Investment
-----------------
On June 30, 1999, the Company acquired a 22.5% interest for $2,250
in First Permian, LLC ("First Permian"), a Delaware limited
liability company. First Permian is owned by the Company and
three other parties. On December 31, 1999, the Company's interest
in First Permian increased to 35% for an additional investment of
$1,250 as a result of First Permian meeting certain payment
requirements under its subordinated notes.
On June 25, 1999, First Permian and Fina Oil and Chemical Company
("Fina") entered into a Merger Agreement in which First Permian
purchased oil and gas properties located in the Permian Basin of
west Texas for $96,125,000. Under the Merger Agreement, the oil
and gas properties were conveyed to Nash Oil Company, LLC
("Nash"), a newly formed Delaware Limited Liability Company and a
wholly-owned subsidiary of Fina. Effective June 30, 1999, First
Permian and Nash were merged with the surviving limited liability
company being First Permian, LLC.
The purchase was financed primarily with a bank credit facility for
$74,000,000, subordinated notes totaling $16,000,000 and sale of
minerals for $5,000,000. The credit facility is collateralized by
substantially all of First Permian's oil and gas properties and
further guaranteed by the Company for $10,000,000 and by one
other party for an additional $10,000,000.
<PAGE>
F-21
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
The following summarizes selected audited financial information for
First Permian, LLC as of December 31, 1999:
<TABLE>
Assets
------
<S> <C>
Current assets:
Cash and cash equivalents $ 4,476,669
Accounts receivable 4,653,020
Prepaids 25,311
Assets held for sale 2,300,000
-----------
Total current assets 11,455,000
-----------
Property and equipment, at cost:
Oil and gas properties, full cost method 71,967,245
Other property 252,453
-----------
72,219,698
Less accumulated depletion and depreciation (2,974,973)
-----------
Net property and equipment 69,244,725
Other non-current assets, net of accumulated
amortization of $223,800 1,064,113
-----------
$81,763,838
===========
Liabilities and Members' Equity
-------------------------------
Current liabilities:
Current maturities of long-term debt $ 3,000,000
Accounts payable and accrued liabilities-trade 5,848,150
Liability for commodity swap 576,000
-----------
Total current liabilities 9,424,150
-----------
Long-term debt, net of current maturities 63,950,000
Notes payable to related parties 7,500,000
Members' equity and issuable warrants 889,688
-----------
$81,763,838
===========
Revenues $14,627,611
Cost and expenses 8,825,266
-----------
Operating income 5,802,345
Other expense, net (4,923,183)
-----------
Net income $ 879,162
===========
</TABLE>
<PAGE>
F-22
The Company accounts for its investment in First Permian, LLC using
the equity method and has recorded equity in income as of
December 31, 1999 for $197,811.
The following summarizes the Company's 35% interest in First Permian
LLC's unaudited oil and gas reserve data (in thousands):
Changes in Reserve Balances
<TABLE>
Total Proved Proved Developed
----------------------- -------------------------
BBL MCF BBL MCF
------- ------- ------ ------
<S> <C> <C> <C> <C>
Reserves as of June 30, 1999 (date of inception) _ _ _ _
Purchase of reserves in place 10,521 9,360 6,249 8,934
Sales of reserves in place (1,162) (533) (1,162) (533)
Revisions of previous estimates 1,115 (180) 1,110 (180)
Production (248) (457) (248) (457)
------ ------ ------ ------
Reserves as of December 31, 1999 10,226 8,190 5,949 7,764
====== ====== ====== ======
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil and Gas Reserves
Period June 30, 1999 (date of inception) through December 31, 1999
<TABLE>
<S> <C>
Future cash flows $ 238,996
Future costs:
Production (71,878)
Development (13,001)
---------
Future net cash flows 154,117
10% annual discount for estimated timing of cash flows (80,448)
---------
Standardized measure of discounted net cash flows $ 73,669
=========
</TABLE>
<PAGE>
F-23
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Changes in Standardized Measure of Discounted Future Net Cash Flows
From Proved Reserves
Period June 30, 1999 (date of inception) through December 31, 1999
<TABLE>
<S> <C>
Increase (decrease):
Sales of minerals in place $ (6,612)
Purchase of minerals in place 51,125
Changes in estimated future development costs (337)
Revisions of prices and costs 32,266
Sales, net of production costs (2,773)
---------
Net increase 73,669
Standardized measure of discounted net cash flows:
Beginning of year _
---------
End of year $ 73,669
=========
</TABLE>
<PAGE>
F-24
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(15) 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, 1997 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 20,328
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
Sales of reserves in place _ (241) _ (241)
Extensions and discoveries 28 2,167 28 1,910
Revisions of previous estimates (580) (7,903) (128) (5,296)
Production (164) (2,760) (164) (2,760)
------ ------ ------ ------
Reserves as of December 31, 1999 1,008 17,284 589 12,685
====== ====== ====== ======
</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 1999, the average sales price received by the Company for its
oil was approximately $17.32 per Bbl, as compared to $12.49 in
1998, while the average sales price for the Company's gas was
approximately $2.27 per Mcf in 1999, as compared to $2.04 per Mcf
in 1998. At March 15, 2000, the price received by the Company for
its oil production was approximately $28 per Bbl, while the price
received by the Company, at that same date, for its gas
production was approximately $2.75 per Mcf.
<PAGE>
F-25
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,
----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Future cash flows $ 62,967 $ 70,141 $111,549
Future costs:
Production (18,632) (20,706) (28,352)
Development (4,797) (5,740) (6,269)
-------- -------- --------
Future net cash flows before income
taxes 39,538 43,695 76,928
Future income taxes _ _ (8,891)
-------- -------- --------
Future net cash flows 39,538 43,695 68,037
10% annual discount for estimated timing
of cash flows (14,039) (16,872) (21,982)
-------- -------- --------
Standardized measure of discounted net
cash flows $ 25,499 $ 26,823 $ 46,055
======== ======== ========
</TABLE>
<PAGE>
F-26
Changes in Standardized Measure of
Discounted Future Net Cash Flows From Proved Reserves
(In Thousands)
<TABLE>
Years ended December 31,
--------------------------------------
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Increase (decrease):
Sales of minerals in place $ (238) $ - $ (6,491)
Extensions and discoveries and
improved recovery, net of
future production and development
costs 3,067 8,916 25,530
Accretion of discount 2,682 4,642 6,701
Net change in sales prices net
of production costs 11,882 (16,036) (18,293)
Changes in estimated future
development costs 789 664 (51)
Revisions of quantity estimates (13,371) (8,325) (13,333)
Net change in income taxes _ 365 9,300
Sales, net of production costs (6,620) (6,588) (9,443)
Changes of production rates (timing)
and other 485 (2,870) (5,214)
-------- ---------- ---------
Net decrease (1,324) (19,232) (11,294)
Standardized measure of discounted
future net cash flows:
Beginning of year 26,823 46,055 57,349
-------- ---------- ---------
End of year $ 25,499 $ 26,823 $ 46,055
======== ========== =========
</TABLE>
<PAGE>
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 28, 2000 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 28, 2000
- ----------------------- and Chairman of the
Thomas R. Cambridge Board of Directors
(Principal Executive
Officer)
/s/ Larry Oldham President and Treasurer March 28, 2000
- ----------------------- (Principal Financial and
Larry C. Oldham Accounting Officer)
- ----------------------- Director March 28, 2000
Ernest R. Duke
/s/ Myrle Greathouse Director March 28, 2000
- -----------------------
Myrle Greathouse
/s/ Charles R. Pannill Director March 28, 2000
- -----------------------
Charles R. Pannill
<PAGE>
1
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
- ------- ------------------------
3.1 Certificate of Incorporation of Registrant (Incorporated by reference to
Exhibit 3.1 of 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.)
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.)
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 (Incorporated by reference to Exhibit 10.7 of
Form 10-K of the Registrant for the fiscal year ended December 31,
1998.)
*10.8 Restated Loan Agreement, dated December 27, 1999 ,between the Registrant
and Bank One, Texas, N.A.
10.9 Letter agreement, dated March 24, 1999, between the Registrant and Bank
One, Texas, N.A. (Incorporated by reference to Exhibit 10.9 of Form 10-K
of the Registrant for the fiscal year ended December 31, 1998.)
10.10 Certificate of Formation of First Permian, L.L.C. (Incorporated by
reference to Exhibit 10.1 of the Registrant's Form 8-K report dated June
30, 1999.)
<PAGE>
2
Exhibit
No. Description of Exhibit
- ------- ----------------------
10.11 Limited Liability Company Agreement of First Permian, L.L.C.
(Incorporated by reference to Exhibit 10.2 of the Registrant's Form 8-K
Report dated June 30, 1999.)
10.12 Merger Agreement, dated June 25, 1999 (Incorporated by reference to
Exhibit 10.3 of the Registrant's Form 8-K Report dated June 30, 1999.)
10.13 Agreement and Plan of Merger of First Permian, L.L.C. and Nash Oil
Company, L.L.C. (Incorporated by reference to Exhibit 10.4 of the
Registrant's Form 8-K Report dated June 30, 1999.)
10.14 Certificate of Merger of First Permian, L.L.C. and Nash Oil Company,
L.L.C. (Incorporated by reference to Exhibit 10.5 of the Registrant's
Form 8-K Report dated June 30, 1999.)
10.15 Credit Agreement, dated June 30, 1999 by and among First Permian,
L.L.C., Parallel Petroleum Corporation, Baytech, Inc., and Bank One,
Texas, N.A. (Incorporated by reference to Exhibit 10.6 of the
Registrant's Form 8-K Report dated June 30, 1999.)
10.16 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 of the Registrant's Form 8-K
Report dated June 30, 1999.)
10.17 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 of the
Registrant's Form 8-K Report dated June 30, 1999.)
10.18 Subordinated Promissory Note, dated June 30, 1999, in the original
principal amount of $8.0 million made by First Permian, L.L.C. payable
to the order of Tejon Exploration Company (Incorporated by reference to
Exhibit 10.9 of the Registrant's Form 8-K Report dated June 30, 1999.)
10.19 Subordinated Promissory Note, dated June 30, 1999, in the original
principal amount of $8.0 million made by First Permian, L.L.C. payable
to the order of Mansefeldt Investment Corporation (Incorporated by
reference to Exhibit 10.10 of the Registrant's Form 8-K Report dated
June 30, 1999.)
*23.1 Consent of Independent Auditors
*23.2 Consent of Independent Petroleum Engineers
*23.3 Consent of Independent Petroleum Engineers
*27 Financial Data Schedule
- -----------------
* Filed herewith.
<PAGE>
EXHIBIT 10.8
RESTATED
LOAN AGREEMENT
DATED DECEMBER 27, 1999
by and between
PARALLEL PETROLEUM CORPORATION
as Borrower,
AND
BANK ONE, TEXAS, N.A.
as Lender
<PAGE> i
TABLE OF CONTENTS
Page No.
--------
ARTICLE I 1
Definitions 1
1.1 Certain Defined Terms 1
1.2 Other Definitional Provisions 8
ARTICLE II 8
Revolving Loan 8
2.1 Revolving Commitment 8
2.2 Manner of Borrowing 9
2.3 Commitment Fee 9
2.4 Note 10
2.5 Principal Payments 10
2.6 Interest Rate; Interest Payments 10
` 2.7 Capital Adequacy 11
2.8 Prepayments 11
2.9 Manner and Application of Payments 12
2.10 Rate Elections 12
2.11 Increased Cost of Eurodollar Portion 13
2.12 Availability 13
2.13 Funding Losses 14
2.14 Taxes 14
ARTICLE III 15
Borrowing Base and Required Prepayments Under Note 15
3.1 Borrowing Base 15
3.2 Redeterminations of Borrowing Base and
Monthly Automatic Borrowing Base Reduction 15
3.3 Standards for Redetermination 16
3.4 Borrowing Base Redetermination Fee 16
3.5 Mandatory Increase in Collateral or Prepayment
of Principal of the Note 16
3.6 Monthly Automatic Borrowing Base Reduction and
Prepayment of Principal of the Note 16
ARTICLE IV 16
Security and Assignment 16
ARTICLE V 17
Conditions Precedent 17
5.1 Renewal 17
5.2 All Advances 18
<PAGE> ii
ARTICLE VI 18
Representations and Warranties 18
6.1 Existence and Authority 18
6.2 Powers 19
6.3 Financial Statements 19
6.4 Liabilities 19
6.5 Litigation 19
6.6 Taxes 19
6.7 Purpose of Loan 19
6.8 Properties; Liens 20
6.9 Material Agreements 20
6.10 ERISA 21
6.11 Location of Records 21
6.12 Permits and Franchises, Etc. 21
6.13 Subsidiaries 21
6.14 Hazardous Wastes and Substances 21
6.15 Public Utility Holding Company Act 22
6.16 General 22
6.17 Year 2000 Compliance 22
ARTICLE VII 22
Affirmative Covenants 22
7.1 Financial Statements and Other Information 22
7.2 Taxes 24
7.3 Discharge of Contractual Obligations 24
7.4 Legal Status 24
7.5 Maintenance and Evidence of Priority of Bank Liens 24
7.6 Insurance 25
7.7 Reimbursement of Fees and Expenses 25
7.8 Indemnification 25
7.9 Curing of Defects 26
7.10 Inspection and Visitation 26
7.11 Notices 26
7.12 Bank Lien on Other Assets 26
7.13 Compliance 26
7.14 Compliance with Environmental laws 27
7.15 Use of Proceeds 27
7.16 Deposit Accounts 27
7.17 Title Curative 27
7.18 Year 2000 Compliance 27
ARTICLE VIII 27
Negative Covenants 27
8.1 Liens 28
<PAGE> iii
8.2 Indebtedness 29
8.3 ERISA Compliance 29
8.4 Investments 29
8.5 Mergers, Consolidations 30
8.6 Dividends and Distributions 30
8.7 Transactions with Affiliates 30
8.8 Accounting Method and Fiscal Year 30
8.9 Nature of Business 30
8.10 Disposition of Assets 30
8.11 Current Ratio 31
8.12 Leases 31
8.13 Net Worth 31
8.14 Debt Service Ratio 31
8.15 Derivatives 31
ARTICLE IX 31
Default and Remedies 31
9.1 Events of Default 31
9.2 Remedies 33
ARTICLE X 33
Miscellaneous 33
10.1 Survival of Representations and Warranties 33
10.2 Communications 33
10.3 Non-Waiver 34
10.4 Strict Compliance 34
10.5 Cumulative Rights 35
10.6 Governing Law 35
10.7 Choice of Forum; Consent to Service of Process
and Jurisdiction 35
10.8 Usury Savings Clause 35
10.9 Enforceability 36
10.10 Binding Effect 36
10.11 No Third Party Beneficiary 36
10.12 Delegation by Lender 36
10.13 Setoff 36
10.14 Additional Documents 37
10.15 Counterparts 37
10.16 Amendments 37
10.17 headings 37
10.18 Conflicts 37
10.19 entirety 37
10.21 Participations 37
10.22 Notice of Final Agreement 38
<PAGE> iv
Exhibit 2.2 - Request for Advance
Exhibit 2.4 - Promissory Note
Exhibit 2.10 - Form of Rate Election
Schedule 5.1 - Closing Documents
Schedule 6.9 - Material Agreements
Exhibit 7.1 - Compliance Certificate
<PAGE>
1
RESTATED
LOAN AGREEMENT
THIS RESTATED LOAN AGREEMENT (this "Agreement") is entered into this 27th
day of December, 1999 by and between PARALLEL PETROLEUM CORPORATION, a Delaware
corporation ("Borrower"); and BANK ONE, TEXAS, N.A., a national banking
association ("Lender").
Recitals
A. Borrower and Lender entered into that certain Loan Agreement dated July
1, 1996, as amended by First Amendment to Loan Agreement dated February 14,
1997, by Second Amendment to Loan Agreement dated March 30, 1998, by Third
Amendment to Loan Agreement dated September 1, 1998, and by Fourth Amendment to
Loan Agreement dated October 16, 1998 (as so amended, the "Prior Loan
Agreement").
B. Pursuant to the Prior Loan Agreement, Borrower executed and delivered to
Lender that certain promissory note dated July 1, 1996, in the original
principal amount of $30,000,000 payable to the order of Lender (the "Prior
Note").
C. Borrower has requested that Lender amend certain provisions of the Prior
Loan Agreement and that Lender renew the indebtedness evidenced by the Prior
Note, which Lender has agreed to do subject to the terms and conditions
contained herein. The parties hereto agree that this Agreement replaces the
Prior Loan Agreement and that this Agreement and the other Loan Papers shall
govern the terms of the loans made hereunder in their entirety and shall control
over the Prior Loan Agreement.
Agreement
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained and other good and valuable consideration, it is hereby agreed
between the parties as follows:
ARTICLE I
Definitions
1.1 Certain Defined Terms. For the purposes of this Agreement, the
following terms shall have the respective meanings assigned to them in this
section or in the section or recital referred to below:
<PAGE>
2
"Adjusted Eurodollar Rate" means, with respect to each particular
Eurodollar Portion and the associated Eurodollar Rate and Reserve Percentage,
the rate per annum calculated by Lender (rounded upwards, if necessary, to the
next higher 1/100th of 1%) determined on a daily basis pursuant to the following
formula:
AER = ER + EM
1.00 - RP
AER = Adjusted Eurodollar Rate
ER = Eurodollar Rate
RP = Reserve Percentage
EM = Eurodollar Margin
The Adjusted Eurodollar Rate shall change as the associated Reserve Percentage
changes.
"Advance" means any disbursement to or on behalf of Borrower under any of
the Loan Papers, including, without limitation, all amounts advanced under the
Prior Note or the Note.
"Agreement": the preamble.
"Bank Liens" means Liens in favor of Lender, securing all or any portion of
the Obligation, including, without limitation, Rights in any of the Collateral
created in favor of Lender, whether by mortgage, pledge, hypothecation,
assignment, transfer or other granting or creation of Liens.
"Base Rate" means the fluctuating per annum rate of interest from time to
time in effect equal to the rate of interest as publicly announced by Lender as
its "Prime Rate." Such rate is set by Lender as a general rate of interest,
taking into account such factors as Lender may deem appropriate, it being
understood that many of Lender's commercial or other loans are priced in
relation to such rate, that it is not necessarily the lowest or best rate
actually charged to any customer and that Lender may make various commercial or
other loans at rates of interest having no relationship to such rate. If
Lender's Prime Rate changes after the date hereof, the Base Rate shall be
automatically increased or decreased, as the case may be, without prior notice
to Borrower from time to time as of the effective time of each change in
Lender's Prime Rate.
"Base Rate Portion" means that portion of the unpaid principal balance of
the Revolving Loan which is not made up of Eurodollar Portions.
"Borrower": the preamble.
"Borrowing Base": Section 3. 1.
"Borrowing Base Redetermination Fee": Section 3.4.
<PAGE>
3
"Business Day" means a day on which commercial banks are open for business
with the public in the State of Texas. Any Business Day in any way relating to
Eurodollar Portions (such as the day on which a Eurodollar Interest Period
begins or ends) must also be a day on which, in the judgment of Lender,
significant transactions in Dollars are carried out in the London interbank
market.
"Cash Flow" means Borrower's Net Income for the most recent fiscal quarter
of Borrower, less preferred dividends paid by Borrower during such fiscal
quarter, plus depreciation, depletion and other non-cash charges of Borrower
during such fiscal quarter determined on an unconsolidated basis.
"Claims": Section 7.8.
"Collateral": Article IV.
"Commitment Fee": Section 2.3.
"Current Assets" of any person shall mean, as of any date, the current
assets that would be reflected on an unconsolidated balance sheet of such person
prepared as of such date in conformity with GAAP.
"Current Liabilities" of any person shall mean, as of any date, the current
liabilities that would be reflected on an unconsolidated balance sheet of such
person prepared as of such date in conformity with GAAP.
"Current Ratio" means, as of any date, the ratio of Borrower's Current
Assets (including., for purposes of this calculation, unused availability under
the Revolving Commitment) to its Current Liabilities (excluding, for purposes of
this calculation, current maturities of the Note).
"Debt Service Ratio" means, as of the end of each fiscal quarter of
Borrower in which the Total Monthly Automatic Borrowing Base Reductions are
greater than zero, the ratio of Borrower's Cash Flow to the Total Monthly
Automatic Borrowing Base Reductions, and means as of the end of each fiscal
quarter of Borrower in which the Total Monthly Automatic Borrowing Base
Reductions are zero, the ratio of Borrower's Cash Flow to one-twentieth (1/20)
of the then outstanding principal balance of the Note.
"Deed of Trust" means one or more mortgages, deeds of trust, assignments of
production and security agreements and financing statements in favor of Lender
encumbering every interest of Borrower in every oil and gas property owned by
Borrower and selected by Lender to be encumbered as security for the Obligation,
including, without limitation, any such property consisting of royalty
interests, overriding royalty interests and/or reversionary rights relating to
either developed or undeveloped leasehold acreage, it being specifically
recognized that if any such interest selected is in a state where a mortgage,
deed of trust, assignment of production and security agreement or financing
<PAGE>
4
statement is, or may be, ineffective, a document appropriate for use in that
state shall be required.
"Derivatives" means, foreign exchange transactions and commodity, currency
and interest rate swaps, floors, caps, collars, forward sales, options, other
similar transactions and combinations of the foregoing, including without
limitation, Rate Management Transactions.
"Dollars" and "$" mean lawful money of the United States of America.
"ERISA": Section 6.10.
"Eurodollar Interest Period" means, with respect to each particular
Eurodollar Portion, a period of thirty (30), sixty (60) or ninety (90) days, as
specified in the Rate Election applicable thereto, beginning on and including
the date specified in such Rate Election (which must be a Business Day), and
ending thirty (30), sixty (60) or ninety (90) days thereafter, provided that
each Eurodollar Interest Period which would otherwise end on a day which is not
a Business Day shall end on the next succeeding Business Day (unless such next
succeeding Business Day is in the next calendar month, in which case such
Eurodollar Interest Period shall end on the immediately preceding Business Day).
No Eurodollar Interest Period may be elected for any Eurodollar Portion which
would extend past the Revolving Maturity Date.
"Eurodollar Margin" means, with respect to each Eurodollar Portion of the
Revolving Loan, three percent (3%).
"Eurodollar Portion" means any portion of the unpaid principal balance of
the Revolving Loan which Borrower designates as such in a Rate Election.
"Eurodollar Rate" means, with respect to each particular Eurodollar Portion
for any Interest Period therefor, the rate of interest per annum at which
deposits in immediately available and freely transferrable funds in Dollars are
offered to Lender (at approximately 10:00 a.m. Dallas, Texas time three Business
Days prior to the first day of each Interest Period) in the London interbank
market for delivery on the first day of such Interest Period in an amount equal
to or comparable to the principal amount of the Eurodollar Portion to which such
Interest Period relates. Each determination of the Eurodollar Rate by Lender
shall, in the absence of error, be conclusive and binding.
"Event of Default": Section 9.1.
"GAAP" shall mean those generally accepted accounting principles and
practices that are recognized as such by the American Institute of Certified
Public Accountants acting through its Accounting Principles Board or by the
Financial Accounting Standards Board (or any other appropriate board or
committee thereof), applied on a basis consistent with that of prior periods so
as to properly reflect the financial condition, results of operations and cash
flows of a person, except that any accounting principle or practice required to
be changed by the said Accounting Principles
<PAGE>
5
Board or Financial Accounting Standards Board (or any other board or committee
thereof) in order to continue as a generally accepted accounting principle or
practice may so be changed and when so changed shall constitute generally
accepted accounting principles in accordance with the terms hereof.
"Highest Lawful Rate" means the maximum nonusurious rate of interest (or,
if the context so requires, an amount calculated at such rate) that Lender is
allowed to contract for, charge, take, reserve or receive under applicable law
after taking into account, to the extent required by applicable law, any and all
relevant payments or charges under the Loan Papers.
"Interest Period" means, with respect to any Eurodollar Portion, the
related Eurodollar Interest Period.
"Investments": Section 8.4.
"Lender": the preamble.
"Lien" means any lien, mortgage, security interest, charge, or encumbrance
of any kind, including, without limitation, the Rights of a vendor, lessor, or
similar party under any conditional sales agreement or other title retention
agreement or lease substantially equivalent thereto, any production payment, and
any other Right of, or arrangement with, any creditor to have his claim
satisfied out of any property or assets, or the proceeds therefrom, prior to the
general creditors of the owner thereof.
"Loan Papers" means (i) this Agreement, (ii) any and all notes, mortgages,
deeds of trust, security agreements, financing statements, guaranties, and other
agreements, documents, certificates, letters and instruments ever delivered or
executed pursuant to, or in connection with, this Agreement, as any of the same
may hereafter be amended, supplemented or restated (including, without
limitation, the Note and the Deed of Trust), (iii) any and all agreements,
documents and instruments ever delivered or executed pursuant to, or in
connection with, Rate Management Transactions, and (iv) any and all future
renewals and extensions or restatements of, or amendments or supplements to, all
or any part of the foregoing.
"Margin Regulations" means, as applicable, Regulations G, U and X of the
Board of Governors of the Federal Reserve System, as from time to time in
effect.
"Material Adverse Change" means any set of circumstances or events that (i)
will or could reasonably be expected to have any adverse effect upon the
validity, performance, or enforceability of any Loan Paper, (ii) is or could
reasonably be expected to be material and adverse to the financial condition or
business operations of Borrower, (iii) will or could reasonably be expected to
impair the ability of Borrower to fulfill its obligations under the terms and
conditions of the Loan Papers, or (iv) will or could reasonably be expected to
cause an Event of Default.
<PAGE>
6
"Material Agreement" of any person means any material written or oral
agreement, contract, commitment, or understanding to which such person is a
party, by which such person is directly or indirectly bound, or to which any
asset of such person may be subject, which is not cancelable by such person upon
30 days or less notice without liability for further payment other than nominal
penalty.
"Mineral Interests" means Rights, estates, titles, and interests in and to
oil, gas, sulphur, or other mineral (or any combination thereof) leases (and all
extensions, amendments, ratifications, and subleases thereof or thereunder) and
any mineral interests, royalty and overriding royalty interests, production
payment and net profits interests, mineral fee interests, and rights therein,
including, without limitation, any reversionary or carried interests relating to
the foregoing, together with Rights, titles, and interests created by or arising
under the terms of any unitization, communitization, and pooling agreements or
arrangements, and all properties, rights, and interests covered thereby, whether
arising by contract, by order, or by operation of law, which now or hereafter
include all or any part of the foregoing.
"Monthly Automatic Borrowing Base Reduction": Section 3.6.
"Net Income" means Borrower's unconsolidated net income, determined in
accordance with GAAP.
"Net Worth" means, as of any date, an amount equal to Borrower's
unconsolidated stockholders' equity, as determined in accordance with GAAP.
"Note": Section 2.4(a).
"Obligation" means all present and future indebtedness, obligations and
liabilities, and all renewals and extensions thereof, or any part thereof, now
or hereafter owed to Lender by Borrower, arising from, by virtue of, or pursuant
to any Loan Paper (including, without limitation, amounts owed to Lender by
Borrower on account of any letters of credit issued by Lender for the account of
Borrower and any and all obligations, contingent or otherwise, whether now
existing or hereafter arising, of Borrower to Lender arising under or in
connection with Rate Management Transactions), or otherwise, together with all
interest accruing thereon and reasonable costs, expenses, and attorneys' fees
incurred in the enforcement or collection thereof, whether such indebtedness,
obligations, and liabilities are direct, indirect, fixed, contingent,
liquidated, unliquidated, joint, several, or joint and several or were, prior to
acquisition thereof by Lender, owed to some other person.
"Prior Loan Agreement": Recital A.
"Prior Note": Recital B.
"Rate Election" has the meaning given it in Section 2.10.
<PAGE>
7
"Rate Management Transaction" means any transaction (including an agreement
with respect thereto) now existing or hereafter entered into between Borrower
and Lender which is a rate swap, basis swap, forward rate transaction, commodity
swap, commodity option, equity or equity index swap, equity or equity index
option, bond option, interest rate option, foreign exchange transaction, cap
transaction, floor transaction, collar transaction, forward transaction,
currency swap transaction, cross-currency rate swap transaction, currency option
or any other similar transaction (including any option with respect to any of
these transaction) or any combination thereof, whether linked to one or more
interest rates, foreign currencies, commodity prices, equity prices or other
financial measures.
"Regulation D" means Regulation D of the Board of Governors of the Federal
Reserve System, as from time to time in effect.
"Reserve Percentage" means, on any day with respect to each particular
Eurodollar Portion in a Tranche, the maximum reserve requirement, as determined
by Lender (including without limitation any basic, supplemental, marginal,
emergency or similar reserves), expressed as a decimal and rounded to the next
higher. 0 1 of I %, which would then apply to Lender under Regulation D or
successor regulations issued from time to time by the Board of Governors of the
Federal Reserve System with respect to "Eurocurrency liabilities" (as such term
is defined in Regulation D) equal in amount to Lender's Eurodollar Portion in
such Tranche, were Lender to have any such "Eurocurrency liabilities". If such
reserve requirement shall change after the date hereof, the Reserve Percentage
shall be automatically increased or decreased, as the case may be, from time to
time as of the effective time of each such change in such reserve requirement.
"Revolving Commitment": Section 2.1(a).
"Revolving Loan" means a loan or loans made under the Revolving Commitment
pursuant to Section 2.1(a).
"Revolving Maturity Date" means July 1, 2001.
"Rights" means rights, remedies, powers, privileges and benefits.
"Subsidiary" means any corporation fifty percent (50%) or more of the
Voting Shares of which is owned, directly or indirectly, by Borrower.
"Taxes" has the meaning given it in Section 2.14.
"Total Monthly Automatic Borrowing Base Reductions" means the sum of the
Monthly Automatic Borrowing Base Reductions during the most recent fiscal
quarter of Borrower, excluding $65,889.22 of the scheduled February 1, 2000
Monthly Automatic Borrowing Base Reduction.
Tranche" has the meaning given it in Section 2.10.
<PAGE> 8
"Voting Shares" of any corporation or other entity shall mean outstanding
shares of capital stock or other ownership interests of any class or classes
(however designated) having ordinary voting power for the election of at least a
majority of the members of the Board of Directors (or other governing body) of
such corporation or other entity, other than shares having such power only by
reason of the happening of a contingency.
1.2 Other Definitional Provisions.
(a) All terms defined in this Agreement shall have the above described
meanings when used in any other Loan Paper or in any certificate, report or
other document made or delivered pursuant to this Agreement, unless same
shall otherwise expressly require.
(b) Terms used herein in the singular shall import the plural and vice
versa.
(c) Terms not specifically defined herein shall have the meanings
accorded them under GAAP, customary oil and gas industry practices or the
Texas Uniform Commercial Code, as appropriate.
(d) The words "hereof," "herein," "hereto," "hereunder" and similar
terms when used in this Agreement shall refer to this Agreement as a whole
and not to any particular provision of this Agreement.
ARTICLE II
Revolving Loan
2.1 Revolving Commitment.
(a) Subject to the terms and conditions hereof, during the period
beginning on the date hereof and ending on the Revolving Maturity Date,
Lender agrees to extend to Borrower a revolving line of credit which shall
not exceed at any time outstanding the lesser of (i) $30,000,000, or (ii)
the Borrowing Base from time to time in effect (such lesser amount being
referred to herein as the"Revolving Commitment"). Subject to the foregoing
limitations and the requirements set forth herein and i Note, Borrower may
borrow, repay, and reborrow hereunder during the period beginning on the
date hereof and ending on the Revolving Maturity Date. Notwithstanding any
other provisions of this Agreement, no Advance shall be required to be made
hereunder if any Event of Default has occurred and is continuing.
(b) Borrower may at any time prior to the Revolving Maturity Date upon
at least one (1) Business Day's notice in writing to Lender reduce (in
$100,000 integer multiples) or terminate the Revolving Commitment. If the
Revolving Commitment is reduced, Lender shall thereafter have no obligation
to make any Advance that would result in the Revolving Loan exceeding the
Revolving Commitment as so reduced; if the Revolving Commitment is
terminated, no further Advance shall be made pursuant to Agreement.
Notwithstanding anything to the contrary contained herein, (i) once reduced
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9
or terminated, the Revolving Commitment may not be increased or reinstated
except upon the mutual written agreement of Borrower and Lender; and (ii)
Borrower shall not reduce the Revolving Commitment to an amount that is
less than the outstanding balance of the Revolving Loan on the effective
date of such reduction.
2.2 Manner of Borrowing.
(a) Each request by Borrower to Lender for an Advance shall be in the
form of Exhibit 2.2 hereto and shall specify the aggregate amount of such
requested Advance and the requested date of such Advance. Borrower shall
furnish to Lender each request for Advance not later than 10:00 a.m.
Midland, Texas time, (i) one (1) Business Day prior to the requested
borrowing date (which must be a Business Day) in the case of Advances to be
made as Base Rate Portions, and (ii) three (3) days prior t requested
borrowing date (which must be a Business Day) in the case of Advances to be
made as Eurodollar Portions; provided that, any Advance to be made as a
Eurodollar Portion shall require, in addition, a Rate Election as set forth
in Section 2.10. Subject to Section 2.10, each Advance shall be in the
minimum amount of $50,000 or the unadvanced portion of the Revolving
Commitment, whichever is less.
(b) Upon fulfillment of all applicable conditions set forth in Section
5.2 hereof (and assuming the prior satisfaction of all conditions pursuant
to Section 5.1 hereof), Lender shall before 2:00 o'clock p.m. (Midland,
Texas time) on the requested borrowing date, pay or deliver each Advance to
or upon the order of Borrower at the principal banking office of Lender in
Midland, Texas in immediately available funds.
2.3 Commitment Fee. In addition to the payments provided for in the Note,
Borrower shall pay to Lender a revolving credit loan commitment fee at the rate
of one-quarter percent (1 /4%) per annum on the difference between the Revolving
Commitment and the average daily amount of the Revolving Loan for each calendar
quarter (or portion thereof) during which the Revolving Commitment is in effect.
Such fee shall be payable on the first (1st) day of the second month following
each such calendar quarter, beginning February 1, 2000. The parties acknowledge
and agree that the commitment fees payable hereunder are bona fide commitment
fees and are intended as reasonable compensation to Lender for committing to
make funds available to Borrower as described herein and for no other purpose.
Upon the effective date of a change in the Revolving Commitment (whether
due to a reduction of the Revolving Commitment pursuant to Section 2. 1 (b), or
a change in the Borrowing Base pursuant to Section 3.2 or Section 3.6), the
commitment fee payable pursuant to this Section 2.3 shall be calculated on the
basis of the amount of the Revolving Commitment, as so changed. Upon the
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10
effective date of a termination or reduction of the Revolving Commitment
(pursuant to Section 2. 1 (b)), Borrower shall have no further liability for
such commitment fee (except for that portion of the quarter prior to termination
of the Revolving Commitment).
2.4 Note.
(a) The Advances made by Lender under the Revolving Loan shall be
evidenced by a promissory note (the "Note"), which shall be (i) dated as of
the date hereof, (ii) in the principal amount of $30,000,000, and (iii) in
the form of Exhibit 2.4 hereto with blanks appropriately completed in
conformity herewith. Notwithstanding the principal amount of the Note as
stated on the face thereof, the amount of principal actually owing on the
Note at any given time shall be the aggregate of all Advances theretofore
made to Borrower under the Revolving Loan, less all payments of principal
theretofore actually received by Lender and applied to the Note.
(b) It is expressly agreed that the Note is given, to the extent of
$15,965,889.22, in renewal and rearrangement, but not in extinguishment or
novation, of the unpaid principal balance of the Prior Note.
2.5 Principal Payments. The principal of the Note shall be due and payable
on the Revolving Maturity Date, unless earlier due in whole or in part pursuant
to the mandatory prepayment requirements of Section 3.5, Section 3.6 or the
other terms hereof.
2.6 Interest Rate, Interest Payments. The unpaid principal balance of the
Note shall bear interest from time to time and interest on the Note shall be
payable, as follows:
(a) Borrower agrees to pay interest on the Note calculated on the
basis of the actual days elapsed in a year consisting of 365 or, if
appropriate, 366 days with respect to the unpaid principal amount of each
Base Rate Portion during the term of the Note until maturity (whether by
acceleration or otherwise), at a varying rate per annum equal to the lesser
of (i) the Highest Lawful Rate, or (ii) the Base Rate plus one-quarter
percent (1/4%). Subject to the provisions of this Agreement an prepayment,
the principal of the Note representing Base Rate Portions shall be due and
payable as specified in Section 2.5 hereof and the interest in respect of
each Base Rate Portion shall be due and payable monthly on the I st day of
each month, commencing January 1, 2000. Past due principal and, to the
extent permitted by law, past due interest in respect to each Base Rate
Portion, shall bear interest, payable on demand, at a rate per annum equal
to the Highest Lawful Rate.
(b) Borrower agrees to pay interest calculated on the basis of a year
consisting of 360 days with respect to the unpaid principal amount of each
Eurodollar Portion during the term of the Note until maturity (whether by
acceleration or otherwise), at a varying rate per annum equal to the lesser
of (i) the Highest Lawful Rate, or (ii) the applicable Adjusted Eurodollar
Rate during the related Eurodollar Interest Period. Subject to the
provisions of this Agreement with respect to prepayme the principal of the
Note representing Eurodollar Portions shall be payable as specified in
Section 2.5 hereof and the interest with respect to each Eurodollar Portion
shall be due and payable on the day which the related Eurodollar Interest
<PAGE>
11
Period ends. Past due principal and, to the extent permitted by law, past
due interest in respect to each Eurodollar Portion, shall bear interest,
payable on demand, at a rate per annum equal to the Highest Lawful Rate.
2.7 Capital Adequacy. If at any time after the date hereof, and from time
to time, any law, rule, regulation or treaty now existing or hereafter
promulgated regarding capital adequacy, or any adoption thereof, ruling thereon,
change therein, or interpretation thereof now existing or hereafter made by any
governmental authority, central bank or comparable agency regarding capital
adequacy, or compliance by Lender with any request, directive, or requirement
now existing or hereafter imposed by any governmental authority, central bank or
comparable agency regarding capital adequacy (whether or not having the force of
law), shall result in Lender incurring a reduction in the rate of return on
Lender's capital as a consequence of Lender's obligations hereunder to a level
below that which Lender otherwise could have achieved in an amount deemed by
Lender to be material (and Lender may, in determining such amount, utilize such
assumptions and allocations of costs and expenses as Lender shall deem
reasonable and may use any reasonable averaging or attribution method), then,
Lender may, from time to time, notify Borrower and deliver to Borrower a
certificate setting forth in reasonable detail the calculation of the amount
necessary to compensate Lender for the reductions incurred. In such event,
Borrower agrees that it shall, within thirty (30) days, either (i) pay such
amount to Lender, or (ii) renegotiate the interest rate on the Note to a rate
mutually acceptable to Borrower and Lender. Failing Borrower's payment of such
amount pursuant to clause (i) above or the renegotiation of the interest rate
pursuant to clause (ii) above, Borrower agrees that it shall, within ninety (90)
days thereafter, pay the Obligation in full and terminate this Agreement.
2.8 Prepayments. Borrower may prepay any Base Rate Portion, in whole or in
part, without penalty or premium, provided, however, that the Revolving
Commitment shall be terminated if the unpaid principal balance of the Note is at
any time reduced to less than $ 1,000. No prepayment of any Eurodollar Portion
or any part thereof shall be permitted prior to the last day of the current
Interest Period therefor without the prior consent of Lender; provided, that if
Lender determines that it may not lawfully maintain a Eurodollar Portion to the
last day of the current Interest Period therefor, Borrower shall prepay such
Eurodollar Portion on the date required by Lender. If there is a permitted
prepayment of any Eurodollar Portion prior to the last day of the current
Interest Period therefor, whether by consent or requirement of Lender (including
without limitation pursuant to Section 3.5 or Section 3.6 hereof) or because of
acceleration or otherwise, Borrower shall, within fifteen (15) days of any
request by Lender, pay to Lender any loss or expense which Lender may incur or
sustain as a result of any such prepayment. A statement as to the amount of such
loss or expense, prepared in good faith and in reasonable detail by Lender and
submitted by Lender to Borrower, shall be conclusive and binding absent manifest
error in computation. Calculation of all amounts payable to Lender under this
Section 2.8 shall be made as though Lender shall have actually funded or
committed to fund the relevant Eurodollar Portion through the purchase of an
underlying deposit in an amount equal to the amount of such portion and having a
maturity comparable to the current Interest Period for such Eurodollar Portion;
provided, however, that Lender may fund any Eurodollar Portion in any manner it
sees fit and the foregoing assumption shall be utilized only for the purpose of
calculation of amounts payable under this Section 2.8.
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12
2.9 Manner and Application of Payments. All payments of principal and
interest on the Note shall be made by Borrower to Lender before 1:3 0 o'clock
p.m. (Midland, Texas time), in lawful money of the United States of America and
in immediately available funds at Lender's principal banking office in Midland,
Texas. In any case where a payment of principal or interest on the Note, or any
commitment or other fee, is due on a day other than a Business Day, the maturity
thereof shall be extended to the next succeeding Business Day, but interest
shall continue to accrue until the payment is in fact made. All payments and
prepayments on the Obligation, including proceeds from the exercise of any
Rights under the Loan Papers or proceeds of any of the Collateral, shall be
applied to the Obligation in the order deemed appropriate by Lender, but Lender
shall always retain the right to apply same in the following order: (i) to
expenses for which Lender shall not have been reimbursed under the Loan Papers
and then to all indemnified amounts due Lender under the terms of the Loan
Papers; (ii) to accrued and unpaid interest on the Note; (iii) to Base Rate
Portions of the Loan; (iv) to Eurodollar Portions of the Loan; and (v) to the
remaining Obligation. Subject to the foregoing, payments of principal of the
Note shall be applied to the Eurodollar Portions as Borrower shall select;
provided, however, that Borrower shall select Eurodollar Portions to be repaid
subject to the terms of Section 2.8 hereof, and in a manner designed to minimize
the consequential loss to Lender, if any, resulting from such payments; and
provided further that, if Borrower shall fail to select the Eurodollar Portions
to which such payments are to be applied, or if an Event of Default has occurred
and is continuing at the time of such payment, then Lender shall be entitled to
apply the payment to such Eurodollar Portions in the manner it shall deem
appropriate.
2.10 Rate Elections. Borrower may from time to time designate all or any
portions of the Revolving Loan (including any yet to be made Advances which are
to be made prior to or at the beginning of the designated Interest Period but
excluding any portions of the Revolving Loan which are required to be repaid
prior to the end of the designated Interest Period) as a "Tranche", which term
refers to a set of Eurodollar Portions with identical Interest Periods. Lender
shall not be required to give effect to such election during the continuance of
an Event of Default, and Borrower may make such an election with respect to
already existing Eurodollar Portions only if such election will take effect at
or after the termination of the Interest Period applicable thereto. Each
election by Borrower of a Tranche shall:
(a) Be made in writing in the form and substance of Exhibit 2.10
attached hereto, duly completed, herein called a "Rate Election";
(b) Specify the aggregate amount of the Revolving Loan which Borrower
desires to designate as such Tranche, the first day of the Interest Period
which is to apply thereto, and the length of such Interest Period; and
(c) Be received by Lender not later than 10:00 a.m. Midland, Texas
time, on the third Business Day preceding the first day of the specified
Interest Period.
Each Rate Election shall be irrevocable. Borrower may make no Rate Election
which does not specify an Interest Period complying with the definition of
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13
"Eurodollar Interest Period" in Section 1.1, and the aggregate amount of the
Tranche elected in any Rate Election must be $1,000,000 or a higher integral
multiple of $100,000. Upon the termination of each Interest Period the portion
of the Revolving Loan within the related Tranche shall, unless the subject of a
new Rate Election then taking effect, automatically become a part of the Base
Rate Portion of the Revolving Loan and become subject to all provisions of the
Loan Papers governing such Base Rate Portion. Borrower shall have no more than
four (4) Tranches in effect at any time.
2.11 Increased Cost of Eurodollar Portion. If any applicable domestic or
foreign law, treaty, rule, directive or regulation (whether now in effect or
hereinafter enacted or promulgated, including Regulation D) or any
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof (whether or not having the
force of law):
(a) shall change the basis of taxation of payments to Lender of any
principal, interest, or other amounts attributable to any Eurodollar
Portion of the Revolving Loan, or otherwise due under this Agreement in
respect of any Eurodollar Portion of the Revolving Loan (other than taxes
imposed on the overall net income of Lender or any lending office of Lender
by any jurisdiction in which Lender or any such lending office is located);
(b) shall change, impose, modify, apply or deem applicable any
reserve, special deposit or similar requirements in respect of any
Eurodollar Portion (excluding those for which Lender is fully compensated
pursuant to adjustments made in the definition of Adjusted Eurodollar Rate)
or against assets of, deposits with or for the account of, or credit
extended by, Lender; or
(c) shall impose on Lender or the London interbank market any other
condition affecting any Eurodollar Portion;
and the result of any of the foregoing (a) through (c) is to (1) increase the
cost to Lender of funding or maintaining any Eurodollar Portion, or (2) to
reduce the amount of any sum receivable by Lender in respect of any Eurodollar
Portion by an amount reasonably deemed by Lender to be material; then (i) Lender
shall promptly notify Borrower in writing of the happening of such event, (ii)
Borrower shall thereafter upon demand pay to Lender such additional amount or
amounts as will compensate Lender for such additional cost or reduction, subject
to the provisions of Section 2.13, and (iii) Borrower may elect, by giving to
Lender not less than three (3) Business Days' notice, to convert all (but not
less than all) of any such Eurodollar Portion into a part of the Base Rate
Portion, subject to the provisions of Section 2.13.
2.12 Availability. If (a) any change in applicable laws, treaties, rules or
regulations or in the interpretation or administration thereof in any
jurisdiction whatsoever, domestic or foreign, shall make it unlawful or
impracticable for Lender to fund or maintain Eurodollar Portions, or shall
materially restrict the authority of Lender to purchase or take offshore
deposits of dollars (i.e., "eurodollars"), or (b) Lender determines that
<PAGE>
14
matching deposits appropriate to fund or maintain any Eurodollar Portion are not
available to it, or (c) Lender determines that the formula for calculating the
Adjusted Eurodollar Rate does not fairly reflect the cost to Lender of making or
maintaining loans based on such rate, then, upon notice by Lender to Borrower,
Borrower's right to elect Eurodollar Portions shall be suspended to the extent
and for the duration of such illegality, impracticability, restriction or
condition, and all Eurodollar Portions (or portions thereof) which are then
outstanding or are then the subject of any Rate Election and which cannot
lawfully or practicably be maintained or funded shall immediately become or
remain part of the Base Rate Portions of the Loan, subject to the provisions of
Section 2.13. Borrower agrees to indemnify Lender and hold it harmless against
all costs, expenses, claims, penalties, liabilities and damages which may result
from any such change in law, treaty, rule, regulation, interpretation or
administration.
2.13 Funding Losses. In addition to its other obligations hereunder,
Borrower will indemnify Lender against, and reimburse Lender on demand for, any
loss or expense incurred or sustained by Lender, as a result of (a) any payment
or prepayment (whether authorized or required hereunder or otherwise) of all or
a portion of a Eurodollar Portion on a day other than the day on which the
applicable Interest Period ends, (b) any payment or prepayment (whether required
hereunder or otherwise) of the Revolving Loan made after the delivery, but
before the effective date, of a Rate Election, if such payment or prepayment
prevents such Rate Election from becoming fully effective, (c) the failure of
any Advance to be made or of any Rate Election to become effective due to any
condition precedent to an Advance not being satisfied, due to the inability of
Lender (acting reasonably and in accordance with Section 2.12) to determine the
Adjusted Eurodollar Rate for a Eurodollar Portion, or due to any other action or
inaction of Borrower, or (d) any conversion (whether authorized or required
hereunder or otherwise) of all or any portion of any Eurodollar Portion into a
Base Rate Portion on a day other than the day on which the applicable Interest
Period ends.
2.14 Taxes. All payments by Borrower of principal of, and interest on, the
Revolving Loan, and all other amounts payable hereunder shall be made free and
clear of and without deduction for any present or future income, excise, stamp
or franchise taxes and other taxes, fees, duties, withholdings or other charges
of any nature whatsoever imposed by any taxing authority, but excluding
franchise taxes and taxes imposed on or measured by Lender's net income or
receipts (such non-excluded items being called "Taxes"). In the event that any
withholding or deduction from any payment to be made by Borrower hereunder is
required in respect of any Taxes pursuant to any applicable law, rule or
regulation, then, Borrower will:
(a) pay directly to the relevant authority the full amount required to
be so withheld or deducted;
(b) promptly forward to Lender an official receipt or other
documentation satisfactory to Lender evidencing such payment to such
authority; and
(c) pay to Lender such additional amount(s) as is necessary to ensure
that the net amount actually received by Lender will equal the full amount
such Lender would have received had no such withholding or deduction been
required.
<PAGE>
15
If any Taxes are directly asserted against Lender with respect to any payment
received by Lender hereunder, Lender may pay such Taxes and Borrower will
promptly pay such additional amounts to Lender (including any penalties,
interest or expenses) as is necessary in order that the net amount received by
such person after the payment of such Taxes (including any taxes on such
additional amount) shall equal the amount such person would have received had no
such Taxes been asserted. If Borrower fails to pay any Taxes when due to the
appropriate taxing authority or fail to remit to Lender the required receipts or
other required documentary evidence, Borrower shall indemnify Lender for any
Taxes, interest or penalties that may become payable by Lender as a result of
any such failure.
ARTICLE III
Borrowing Base and Required Prepayments Under Note
3.1 Borrowing Base. The "Borrowing Base" is initially set at the sum of
$15,965,889.22 but shall be subject to redetermination as further provided in
this Article.
3.2 Redeterminations of Borrowing Base and Monthly Automatic Borrowing Base
Reduction. Lender shall redetermine the Borrowing Base and Monthly Automatic
Borrowing Base Reduction on or about February 1, 2000, and thereafter
semi-annually, on or about May I and November 1 of each year, beginning May 1,
2000. Lender may require a redetermination of the Borrowing Base and Monthly
Automatic Borrowing Base Reduction at any time in its sole discretion. In
addition, Borrower may request that Lender redetermine the Borrowing Base and
Monthly Automatic Borrowing Base Reduction at any time, and Lender agrees to
respond to each such request within thirty (30) days after Lender has received
from Borrower the requisite information for such redetermination; provided,
however, that Borrower may request no more than one Borrowing Base and Monthly
Automatic Borrowing Base Reduction redetermination during the six-month period
between each scheduled Borrowing Base redetermination. Promptly following each
redetermination of the Borrowing Base or the Monthly Automatic Borrowing Base
Reduction, Lender shall notify Borrower of any change in the amount of the
Borrowing Base or the Monthly Automatic Borrowing Base Reduction. Until such
time as Lender has notified Borrower in writing of a change in the amount of the
Borrowing Base or the Monthly Automatic Borrowing Base Reduction, the Borrowing
Base and Monthly Automatic Borrowing Base Reduction will remain unchanged.
Borrower shall furnish to Lender, no later than thirty (30) days prior to
each redetermination date hereunder (or within thirty (30) days after receipt of
notice from Lender that it has elected to make a non-scheduled Borrowing Base
and Monthly Automatic Borrowing Base Reduction redetermination), as directed by
Lender, such information as Lender may request, in form and substance acceptable
to Lender, requisite to Lender's redetermination of the Borrowing Base and
Monthly Automatic Borrowing Base Reduction.
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16
3.3 Standards for Redetermination. All Borrowing Base and Monthly Automatic
Borrowing Base Reduction redeterminations shall be made by Lender in the
exercise of its sole discretion in accordance with its customary practices and
standards for loans in similar amounts to borrowers similarly situated, at the
time and under the circumstances then prevailing.
3.4 Borrowing Base Redetermination Fee. In addition to the payments
provided for in the Note, Borrower shall pay to Lender as a Borrowing Base
redetermination fee the sum of $750 at the time Lender provides the notice
required by Section 3.2 and at any time that Borrower requests a non-scheduled
Borrowing Base redetermination pursuant to Section 3.2; provided, however, that
Borrowing Base redetermination fees payable by Borrower hereunder shall not
exceed $3 000 during any calendar year. The parties acknowledge and agree that
the Borrowing Base redetermination fees payable hereunder are intended as
reasonable compensation to Lender for its efforts in redetermining the Borrowing
Base during the term of the Revolving Loan and for no other purpose.
3.5 Mandatory Increase in Collateral or Prel2gyment of Principal of the
Note. In the event that the Obligation shall, at the time of notification of the
Borrowing Base by Lender to Borrower pursuant to Section 3.2, be in excess of
the Revolving Commitment, Borrower shall, at Borrower's option, either (i)
within thirty (30) days thereafter, by instruments satisfactory in form and
substance to Lender, provide Lender with additional collateral with value in
amounts satisfactory to Lender, in its sole discretion, in order to increase the
Borrowing Base by an amount at least equal to such excess, or (ii) within thirty
(30) days thereafter, prepay the principal of the Note (together with accrued
interest on the principal amount so prepaid) in an amount at least equal to such
excess.
3.6 Monthly Automatic Borrowing Base Reduction and Prepayment of Principal
of the Note. The Borrowing Base shall automatically reduce by $300,000 on
January 1, 2000, by $365,889.22 on February 1, 2000, and by $300,000 on the
first day of each month thereafter during the term of the Revolving Commitment
(each a "Monthly Automatic Borrowing Base Reduction"), subject to Lender's
right, in its sole discretion, to redetermine the Monthly Automatic Borrowing
Base Reduction in conjunction with a Borrowing Base redetermination pursuant to
Section 3.2 above. In the event that the Obligation shall be in excess of the
Borrowing Base on the date of any Monthly Automatic Borrowing Base Reduction,
then on said date Borrower shall prepay the principal of the Note in an amount
equal to such excess, in addition to the payment of accrued interest on the Note
that may be due on such date. The provisions of Section 3.5 above shall be
applicable to scheduled and non-scheduled redeterminations of the Borrowing Base
but shall not apply to a Monthly Automatic Borrowing Base Reduction.
ARTICLE IV
Security and Assignment
To secure full and complete payment and performance of the Obligation,
Borrower hereby grants and conveys to and creates in favor of Lender Bank Liens
in, to and on all of the following items and types of property (referred to
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17
collectively herein as the "Collateral"), all as more particularly described in
the Loan Papers:
(a) all present and future interest now owned or hereafter acquired by
Borrower in the Mineral Interests identified in the Deed of Trust, together
with all proceeds of production therefrom;
(b) all present and future increases, profits, combinations,
reclassifications, improvements and products of, accessions, attachments,
and other additions to, tools, parts and equipment used in connection with,
and substitutes and replacements for, any of the Collateral;
(c) all cash and noncash proceeds and other Rights arising from or by
virtue of, or from the voluntary or involuntary sale, lease or other
disposition of, or collections with respect to, or insurance proceeds
payable with respect to, or proceeds payable by virtue of warranty or other
claims against manufacturers of, or claims against any other person with
respect to, any of the Collateral;
(d) all present and future security for the payment to Borrower for
any of the Collateral;
(e) all goods which gave or will give rise to any of the Collateral or
are evidenced, identified or represented therein or thereby; and
(f) all certificates of title, manufacturer's statements of origin, or
other documents, accounts and chattel paper arising from or related to any
of the Collateral.
All Bank Liens created in favor of Lender pursuant to the Prior Loan
Agreement are hereby ratified, renewed and extended in favor of Lender, without
lapse or interruption of perfection or priority.
ARTICLE V
Conditions Precedent
5.1 Renewal. The obligation of Lender to accept the Note in renewal and
rearrangement of the Prior Note shall be subject to satisfaction of each of the
following conditions precedent:
(a) There shall have been executed, where appropriate, and delivered
by Borrower (and/or any other requisite party thereto) (i) the documents
listed on Schedule 5.1 hereto, all of which shall be in form and substance
satisfactory to Lender and its counsel, and (ii) such other documents or
instruments as Lender may reasonably require.
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(b) All requirements of notice necessary to perfect each Bank Lien
shall have been accomplished or arrangements made therefor to the
satisfaction of Lender and its counsel.
(c) Lender shall have received from Borrower's legal counsel a
favorable legal opinion in form and substance satisfactory to Lender and
its counsel respecting the matters set forth in Section 6.1, 6.2, 6.5 and
6.15 hereof.
(d) No Material Adverse Change shall have occurred in the financial
condition, assets or business prospects of Borrower since September 30,
1999.
(e) All fees due and payable to Lender and all accrued and unpaid
interest on the Prior Note shall have been paid up to the date hereof.
(f) Borrower shall have made principal payments on the Prior Note
reducing the outstanding principal balance thereof to an amount not to
exceed $15,965,889.22.
(g) Lender shall have received from Borrower acceptable title
information covering not less than ninety percent (90%) of the engineered
value of Borrower's Mineral Interests.
5.2 All Advances. The obligation of Lender to make any Advance hereunder
shall be subject to satisfaction of each of the following conditions precedent:
(a) An authorized individual shall have requested such Advance in
accordance with the requirements of Section 2.2(a) hereof.
(b) No Event of Default shall have occurred that has not been waived
in writing by Lender, and there shall exist no condition or event that,
with the giving of notice or lapse of time or both, would constitute an
Event of Default.
(c) Borrower shall have observed, performed and complied with all
covenants, agreements, duties and obligations contained in the Loan Papers.
ARTICLE VI
Representations and Warranties
In order to induce Lender to enter into this Agreement, Borrower represents
and warrants to Lender as of the date hereof, which representations and
warranties shall survive the delivery of the Note, as follows:
6.1 Existence and Authority. Borrower is (i) a corporation duly organized,
legally existing and in good standing under the laws of the State of Delaware,
and (ii) duly qualified as a foreign corporation and in good standing in the
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19
State of Texas. Except to the extent that the failure to qualify would not cause
or result in a Material Adverse Change, there are no other states or
jurisdictions wherein Borrower's operations, transaction of business or
ownership of property makes such qualification necessary.
6.2 Powers. Borrower is duly authorized and empowered to create and issue
the Note and to execute and deliver this Agreement, the other Loan Papers and
all other instruments referred to or mentioned herein, and all action (corporate
or otherwise) on Borrower's part requisite for the due creation, issuance and
delivery of the Note and the due execution and delivery of this Agreement and
the other Loan Papers has been duly and effectively taken. This Agreement is,
and the other Loan Papers when duly executed and delivered will be, legal, valid
and binding obligations of Borrower enforceable in accordance with their terms
(subject to any applicable bankruptcy, insolvency or other laws generally
affecting the enforcement of creditors' rights). The Loan Papers do not violate
any provisions of Borrower's articles of incorporation or bylaws or of any
contract, partnership or other agreement, law or regulation to which Borrower is
subject, and the same do not require the consent or approval of any other person
or entity, including without limitation, any regulatory authority or
governmental body of the United States, of any state or of any political
subdivision of the United States or of any State.
6.3 Financial Statements. The unconsolidated financial statements of
Borrower for the three (3) months ended September 30, l999, which have been
delivered to Lender, are complete and correct, have been prepared in conformity
with GAAP, and fairly present the financial condition and results of operations
of Borrower as of the dates and for the periods stated. No Material Adverse
Change in the financial condition of Borrower has occurred since September 30,
1999.
6.4 Liabilities. As of the date hereof, Borrower has no material
liabilities, direct or contingent, other than those set forth in the financial
statements of Borrower referred to in Section 6.3 hereof. Borrower knows of no
fact, circumstance, act, condition or development that will or could cause a
Material Adverse Change.
6.5 Litigation. Borrower is not involved in, nor is aware of the threat of,
any material litigation, nor are there any outstanding or unpaid judgments
against Borrower.
6.6 Taxes. All tax returns required to be filed by Borrower in all
jurisdictions have been filed, and all taxes, assessments, fees and other
governmental charges upon Borrower or upon any of its property, income or
franchises, which are due and payable, have been paid, or adequate reserves
determined in conformity with GAAP have been provided for payment thereof.
6.7 Purpose of Loan. The proceeds of any Advances (a) are not and will not
be used directly or indirectly for the purpose of purchasing or carrying, or for
the purpose of extending credit to others for the purpose of purchasing or
carrying, any "margin stock" as that term is defined in Regulation U of the
Board of Governors of the Federal Reserve System, as amended; and (b) will be
otherwise used for lawful purposes.
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20
6.8 Properties; Liens.
(a) With regard to the Mineral Interests included in the Deed of
Trust, (i) Borrower has good and marketable title to all such Mineral
Interests, free and clear of all Liens except Liens permitted under Section
8.1 hereof, and has full authority to create Bank Liens thereon; and (ii)
all such Mineral Interests are valid, subsisting and in full force and
effect, and all rentals, royalties and other amounts due and payable in
respect thereof have been duly paid.
(b) Borrower has good and marketable title to all of its other
respective properties reflected on the financial statements referred to in
Section 6.3 hereof, and, except for the Liens permitted under Section 8. 1,
there is no Lien on any asset of Borrower.
(c) Subject to the Liens permitted under Section 8.1 and Liens that
neither materially detract from the marketability of the property nor
impair the use of the property, and except as may be limited or otherwise
affected by bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally, upon execution, delivery and
recording, or filing, as appropriate, the Loan Papers will be effective to
create in favor of Lender a legal, valid and continuing first Lien on
property (real and personal, tangible and intangible) described therein,
prior and superior to all other existing or future Liens, and, upon the
filing of the appropriate notice documents, will be enforceable as such
against creditors and purchasers from Borrower, and no other filings,
recordings or other actions are necessary or desirable in order to
establish, preserve, protect and perfect such Lien in favor of Lender as a
valid and perfected first Lien on such property, except a continuation
statement may be required under the Uniform Commercial Code.
(d) None of the Collateral is or will be subject to a gas balancing
arrangement under which a material imbalance exists with respect to which
imbalance Borrower is in an overproduced status and is required to (i)
permit one or more third parties to take a portion of the production
attributable to such Collateral without payment (or without full payment)
therefor, and/or (ii) make payment in cash in order to correct such
imbalance.
6.9 Material Agreements. Except for the Loan Papers, the Material
Agreements described on Schedule 6.9, agreements, documents and instruments
giving rise to Mineral Interests, farmout agreements, gas contracts and
operating and joint operating agreements related to any Mineral Interests, there
are no Material Agreements of Borrower. The performance by Borrower under any
Material Agreement will not cause a Material Adverse Change. Borrower is not,
nor will the execution, delivery and performance of and compliance with the
terms of the Loan Papers cause Borrower to be, in default (nor has any potential
default occurred) under any Material Agreement, any agreement, document or
instrument giving rise to Mineral Interests, farmout agreements, gas contracts
or any operating or joint operating, or unitization agreements related to
Mineral Interests, other than in each case such defaults or potential defaults
which could not, individually or collectively, cause a Material Adverse Change.
A default by Borrower under any operating or joint operating agreement related
to any Mineral Interests it owns will not result in any loss or diminution of
any other Mineral Interests it owns.
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21
6.10 ERISA. All plans maintained by Borrower are in compliance with all
funding and other requirements of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and none have been terminated or have accrued any
funding deficiency for which Borrower would be liable under said statute.
6.11 Location of Records. The records of Borrower concerning the Collateral
are kept at the following location: 110 North Marienfeld, Suite 465, Midland,
Texas 79701.
6.12 Permits and Franchises, Etc. Borrower has all rights, licenses,
permits, franchises, patents, patent rights, trademarks, trademark rights and
copyrights that are required in order for it to conduct its business as now
conducted without known conflict with the rights of others. Borrower is not
aware of any fact or condition that might cause any of such rights not to be
renewed in due course.
6.13 Subsidiaries. Borrower presently has no Subsidiary and owns no stock
or other ownership interest in any other corporation, limited liability company
or association other than First Permian, LLC. Borrower is not a member of any
general or limited partnership, joint venture or association of any type
whatsoever except associations, joint ventures or other relationships (a) that
are established pursuant to a standard form operating agreement or similar
agreement or that are partnerships for purposes of federal income taxation only,
(b) that are not corporations or partnerships (or subject to the Uniform
Partnership Act) under applicable state law, and (c) whose businesses are
limited to the exploration, development and operation of oil, gas or mineral
properties and interests owned directly by the parties in such associations,
joint ventures or relationships.
6.14 Hazardous Wastes and Substances. Borrower and its properties are in
compliance with applicable state and federal environmental laws and regulations
and Borrower is not aware of and has not received any notice of any violation of
any applicable state or federal environmental law or regulation and, except as
previously disclosed in writing to Lender, there has not heretofore been filed
any complaint, nor commenced any administrative procedure, against Borrower or
any of its predecessors, alleging a violation of any environmental law or
regulation. Except in substantial compliance with relevant environmental laws,
Borrower has not installed, used, generated, stored or disposed of any hazardous
waste, toxic substance, asbestos or related material ("Hazardous Materials") on
its properties. For the purposes of this Agreement, Hazardous Materials shall
include, but shall not be limited to, substances defined as "hazardous
substances" or "toxic substances" in the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended, 42 U.S.C. 9061, et seq.,
Hazardous Materials Transportation Act, 49 U.S.C. 1802, et seq., and the
Resource Conservation and Recovery Act, 42 U.S.C. 6901, et seq., or as
"hazardous substances," "hazardous waste" or "pollutant or contaminant" in any
other, applicable federal, state or local environmental law or regulation. There
do not exist upon any property owned by Borrower any underground storage tanks
or facilities, and to the knowledge of Borrower, none of such property has ever
been used for the treatment, storage, recycling, or disposal of any Hazardous
Materials.
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22
6.15 Public Utility Holding- Company Act. Borrower is not a "holding
company," or "subsidiary company" of a "holding company," or an "affiliate" of a
"holding company".or of a "subsidiary company" of a "holding company" or a
"public utility" within the meaning of the Public Utility Holding Company Act of
1935, as amended.
6.16 General. There are no significant material facts or conditions
relating to the Loan Papers, any of the Collateral, or the financial condition
or business of Borrower that could, collectively or individually, cause a
Material Adverse Change and that have not been related, in writing, to Lender as
an attachment to this Agreement; and all writings heretofore or hereafter
exhibited or delivered to Lender by or on behalf of Borrower are and will be
genuine and in all respects what they purport and appear to be.
6.17 Year 2000 Compliance. Borrower has (i) initiated a review and
assessment of all areas within its business and operations (including those
affected by suppliers and vendors) that could be adversely affected by the "Year
2000 Problem" (that is, the risk that computer applications used by it (or its
suppliers and vendors) may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any date after
December 31, 1999), (ii) developed a plan and time line for addressing the Year
2000 Problem on a timely basis, and (iii) to date, implemented that plan in
accordance with that timetable. Borrower reasonably believes that all computer
applications (including those of its suppliers and vendors) that are material to
its business and operations will on a timely basis be able to perform properly
date-sensitive functions for all dates before and after January 1, 2000 (that
is, be "Year 2000 Compliant"), except to the extent that a failure to do so
could not reasonably be expected to cause a Material Adverse Change.
ARTICLE VII
Affirmative Covenants
As an inducement to Lender to enter into this Agreement, Borrower covenants
and agrees that, from the date hereof and until termination of this Agreement
and payment in full of the Obligation (except as otherwise provided in this
Article), unless otherwise agreed to by Lender in writing:
7.1 Financial Statements and Other Information. Borrower will promptly
furnish to Lender copies of (i) such information regarding its business and
affairs and financial condition as Lender may reasonably request, and (ii)
without request, the following:
(a) as soon as available and in any event within ninety (90) days
after the end of each fiscal year of Borrower, a consolidated and an
unconsolidated balance sheet of Borrower as of the close of such fiscal
year and the related consolidated and unconsolidated statements of income,
cash flows and stockholders' equity of Borrower for such year, which shall
be audited and accompanied by the unqualified opinion and report thereon
issued by Borrower's independent public accountants;
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23
(b) as soon as available and in any event within forty-five (45) days
after the end of each fiscal quarter of Borrower, a consolidated and
unconsolidated balance sheet of Borrower as of the close of such fiscal
quarter and the related consolidated and unconsolidated statements of
income, cash flows and stockholders' equity for such fiscal quarter;
(c) as soon as available and in any event within forty-five (45) days
after the end of each fiscal quarter of Borrower, a report summarizing
production, gross revenues, expenses, and net revenues from all of
Borrower's Mineral Interests for such quarter on a field by field basis
and, if requested by Lender, on a lease by lease basis;
(d) on or before March 31 of each year, an oil and gas reserve
evaluation as of the close of the immediately preceding fiscal year
covering all of Borrower's Mineral Interests under the defined categories
of proved developed producing, proved developed nonproducing, and proved
undeveloped, prepared by independent petroleum engineers selected by
Borrower and satisfactory to Lender;
(e) within forty-five (45) days after the end of each fiscal quarter
of Borrower, the Compliance Certificate in the form of Exhibit 7.1 hereto
signed by the President or Chief Financial Officer of Borrower;
(f) as soon as available, copies of all filings by Borrower with the
Securities and Exchange Commission;
(g) immediately upon becoming aware of the existence of, or any
material change in the status of, any litigation which could create a
Material Adverse Change if determined adversely against Borrower, a written
communication to Lender of such matter;
(h) immediately upon becoming aware of an Event of Default or the
existence of any condition or event that constitutes, or with notice or
lapse of time, or both, would constitute an Event of Default, a verbal
notification to Lender specifying the nature and period of existence
thereof and what action Borrower is taking or proposes to take with respect
thereto and, immediately thereafter, a written confirmation to Lender of
such matters;
(i) immediately upon becoming aware that any person has given notice
or taken any other action with respect to a claimed default under any
material indenture, mortgage, deed of trust, promissory note, loan
agreement, note agreement, drilling contract, operating or joint venture
agreement or any other Material Agreement or undertaking to which Borrower
is a party, a verbal notification to Lender specifying the notice given or
action taken by such person and the nature of the claimed defa and what
action Borrower is taking or proposes to take with respect thereto and,
immediately thereafter, a written communication to Lender of such matters;
and
(j) immediately upon becoming aware of the commencement of any
material action or material proceeding against Borrower or any of its
properties by any governmental agency, including, without limitation, the
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24
Internal Revenue Service, the Environmental Protection Agency, the U.S.
Department of Energy or the Federal Energy Regulatory Commission, a written
communication to Lender of such matter.
All financial statements, schedules and other financial information delivered
hereunder shall be prepared in conformity with GAAP and shall be certified as
true and correct by the President or Chief Financial Officer of Borrower by
signature and date thereon.
7.2 Taxes. Borrower will pay and discharge or cause to be paid and
discharged all taxes, assessments and governmental charges or levies imposed
upon it or upon its income and profits or upon any of its property, real,
personal or mixed, or upon any part thereof, before the same shall become in
default, as well as all lawful claims for labor, materials and supplies or
otherwise, which, if not paid, might become a Lien upon such properties or any
part thereof; provided that Borrower shall not be required to pay and discharge
or cause to be paid or discharged any such tax, assessment, charge, levy or
claim contested by it in good faith by appropriate proceedings if Borrower shall
have set up adequate reserves therefor, if required, under GAAP; and provided,
further, that the immediately preceding provision shall not apply to any Lien
imposed by the U.S. Government for failure to pay income, payroll, FICA or
similar taxes, and payment with respect to any such tax, assessment, charge,
levy or claim shall be made before any property of Borrower shall be seized and
sold in satisfaction thereof.
7.3 Discharge of Contractual Obligations. Borrower will do and perform
every act and discharge all of the obligations provided to be performed and
discharged under the Loan Papers, and any and all of the instruments or
documents referred to or mentioned herein at the time or times and in the manner
required.
7.4 Legal Status. Borrower will do or cause to be done all things necessary
to preserve, renew and keep in full force and effect its existence, rights,
licenses, permits and franchises and comply with all laws and regulations
applicable to it, and, further, comply with all applicable laws and regulations,
whether now in effect or hereafter enacted or promulgated by any governmental
authority having jurisdiction over any of its assets or properties,
noncompliance with which would cause a Material Adverse Change.
7.5 Maintenance and Evidence of Priority of Bank Liens. Borrower shall
perform such acts and duly authorize, execute, acknowledge, deliver, file, and
record (or cause to be filed and recorded) such additional assignments, security
agreements, deeds of trust, mortgages and other agreements, documents,
instruments and certificates as Lender may reasonably deem necessary or
appropriate in order to perfect and maintain the Bank Liens and preserve and
protect the Rights of Lender in respect of all present and future Collateral,
and cause to be furnished to Lender such opinions of counsel as Lender may
request regarding the priority of Borrower's title to, and the Bank Liens upon,
the assets of Borrower, all of which opinions shall be prepared by such law firm
or firms as may be acceptable to Lender.
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25
7.6 Insurance. Borrower presently maintains and will continue to maintain
such policies of liability, hazard, damage, business interruption and workmen's
compensation insurance as are customarily carried by companies similarly
situated. If requested by Lender, any such policies of insurance shall show
Lender therein as loss payee. Upon request by Lender, Borrower will furnish
Lender with certificates and policies necessary to give Lender reasonable
assurance of the existence of such coverage. Borrower agrees to notify promptly
Lender of any termination or other material change in Borrower's insurance
coverage, and to provide Lender, upon request, with all information about the
renewal of each policy at least 15 days prior to the expiration thereof.
7.7 Reimbursement of Fees and Expenses. Borrower agrees to pay, on demand,
all reasonable out-of-pocket fees and expenses incurred by Lender or its
designated representatives in connection with the negotiation, preparation and
execution of this Agreement, all renewals hereof, the other Loan Papers or other
transactions pursuant hereto or to the Loan Papers, as well as all costs of
filing and recordation, all legal and accounting fees, costs associated with
Borrowing Base redeterminations as provided in Section 3.4, all inspection,
environmental audit and similar costs related to the evaluation of the
Collateral, all costs associated with enforcing any of Lender's Rights under the
Loan Papers (including, without limitation, costs of repossessing, storing,
transporting, preserving and insuring any of the Collateral), all court costs
associated with enforcing or defending any Rights against Borrower or any third
party challenging said Rights and any other cost or expense incurred by Lender
or its designated representatives in connection herewith or with the other Loan
Papers, together with interest at the Highest Lawful Rate per annum on each such
amount commencing 10 days after the date notice of such expenditure is given to
Borrower by Lender until the date it is repaid to Lender.
7.8 Indemnification. Borrower agrees to indemnify Lender, its officers,
directors, shareholders, employees, and affiliates (collectively "Indemnitee"),
from and against any and all liabilities, obligations' claims, losses, damages,
penalties, actions, judgments, suits, remedial actions, costs, expenses or
disbursements (collectively, "Claims") of any kind or nature whatsoever that may
be imposed on, incurred by, or asserted against Indemnitee growing out of or
resulting from (i) the Loan Papers and the transactions and events at any time
associated therewith (including, without limitation, the enforcement of the Loan
Papers and the defense of Indemnitee's actions and inactions in connection with
the Loan), except to the limited extent such Claims are proximately caused by
Indemnitee's gross negligence or willful misconduct; (ii) the presence of any
Hazardous Materials on or under the properties covered by the Deed of Trust; or
(iii) any activity carried on or undertaken on or off the properties covered by
the Deed of Trust, whether prior to or during the term hereof and whether by
Borrower or by any third person, in connection with the treatment, storage,
recycling, removal, handling or disposal of Hazardous Materials at any time
located on or under the properties covered by the Deed of Trust. Indemnitee
shall have the right to defend any such Claims, employing its attorneys
therefor. While Borrower shall also be entitled to employ its own attorneys and
to participate in the defense of any such Claims, Indemnitee shall, if not
furnished with reasonable indemnity, have the right to compromise and adjust all
such Claims. The covenants and conditions of this section shall at all times be
construed to be personal covenants in favor of Indemnitee and shall not run with
the lands; provided, however, that such covenants and indemnity shall remain in
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26
full force and effect notwithstanding the payment in full of the Obligation and
the release, either partially or wholly, of the Bank Liens or any foreclosure
thereunder. All such Claims as may be paid by Indemnitee shall bear interest at
the Highest Lawful Rate per annum until paid by Borrower and shall be part of
the Obligation secured by the Bank Liens. THE PARTIES HERETO INTEND FOR THE
PROVISIONS OF THIS PARAGRAPH TO APPLY TO AND PROTECT EACH INDEMNIFIED PARTY FROM
THE CONSEQUENCES OF STRICT LIABILITY IMPOSED OR THREATENED TO BE IMPOSED ON ANY
INDEMNIFIED PARTY AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE (EXCEPT
GROSS NEGLIGENCE), WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING OR
CONCURRING CAUSE OF ANY CLAIMS INDEMNIFIED AGAINST IN THIS PARAGRAPH.
7.9 Curing of Defects. Borrower will promptly cure any material defects in
the execution and delivery of any of the Loan Papers, and in any other
instrument or document referred to or mentioned herein. Borrower will
immediately execute and deliver to Lender, upon request, all such other and
further instruments as may be reasonably required or desired by Lender from time
to time in compliance with or accomplishment of the covenants and agreements of
Borrower made in the Loan Papers.
7.10 Inspection and Visitation. Borrower will grant Lender access to all of
its books and records, as well as to all of the Collateral, and allow inspection
and copying of same by Lender or its designated representatives at any time
during normal business hours or such other time as Lender may reasonably
request.
7.11 Notices. Borrower will give prompt written notice to Lender of any
proceedings instituted against it by or in any federal or state court or before
any commission or other regulatory body, federal, state or local, which, if
adversely determined, would cause a Material Adverse Change.
7.12 Bank Lien on Other Assets. If requested by Lender, Borrower shall
execute and deliver to Lender one or more mortgages, deeds of trust, assignments
of production, security agreements, financing statements, pledge agreements, or
other security documents in favor of Lender covering every interest in every
asset or property (including, without limitation, Mineral Interests) owned by
Borrower, whether now owned or hereafter acquired, which shall become part of
the Collateral.
7.13 Compliance. Borrower will observe and comply with:
(a) all laws, statutes, codes, acts, ordinances, rules, regulations,
directions and requirements of all federal, state, county, municipal and
other governments, departments, commissions, boards, courts, authorities,
officials and officers, domestic and foreign, where the failure to observe
or comply would cause a Material Adverse Change; and
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27
(b) all orders, judgments, decrees, injunctions, certificates,
franchises, permits, licenses and authorizations of all federal, state,
county, municipal and other governments, departments, commissions, boards,
courts, authorities, officials and officers, domestic and foreign, where
the failure to observe or comply would cause a Material Adverse Change and
against which it shall maintain such reserves as are appropriate under
GAAP.
7.14 Compliance with Environmental Laws. The Borrower is and will remain in
substantial compliance with all state and federal environmental laws and
regulations and Borrower will not place nor permit to be placed any Hazardous
Materials on any of its properties in violation of applicable state and federal
environmental laws. In the event Borrower should discover any Hazardous
Materials on any of its properties which could result in a breach of the
foregoing covenant, Borrower shall notify Lender within three (3) days after
such discovery. Borrower shall dispose of all material amounts of Hazardous
Materials generated by the Borrower only at facilities and/or with carriers that
maintain valid governmental permits under the Resource Conservation and Recovery
Act, 42 U.S.C. 6901. In the event of any notice or filing of any complaint or
commencement of any administrative hearing or procedure against the Borrower
alleging a violation of any environmental law or regulation, Borrower shall give
notice to Lender within five (5) days after Borrower has received notice of such
notice or filing.
7.15 Use of Proceeds. Borrower will use the proceeds of the Revolving Loan
for refinancing the Prior Note, financing oil and gas acquisitions or capital
expenditures, or working capital in Borrower's oil and gas business.
7.16 Deposit Accounts. Borrower agrees to maintain all of its significant
operating demand deposit accounts with Lender.
7.17 Title Curative. As soon as practicable after receipt by Borrower from
Lender or its counsel of written notice of material title defects Lender
reasonably requires to be cured, Borrower shall use its best efforts to provide
such curative information, in form and substance satisfactory to Lender.
7.18 Year 2000 Compliance. Borrower will promptly notify Lender in the
event Borrower discovers or determines that any computer application (including
those of its suppliers and vendors) that is material to its business and
operations will not be Year 2000 Compliant on a timely basis, except to the
extent that such failure could not reasonably be expected to cause a Material
Adverse Change.
ARTICLE VIII
Negative Covenants
As an inducement to Lender to enter into this Agreement, Borrower hereby
covenants and agrees that, from the date hereof and until termination of this
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28
Agreement and payment in full of the Obligation (except as otherwise provided in
this Article), unless otherwise agreed to by Lender in writing:
8.1 Liens. Borrower will not create, assume or suffer to exist any Lien
upon any of its properties or assets now owned or hereafter acquired securing
any indebtedness other than the Obligation or acquire or agree to acquire any
property under any conditional sale agreement or other title retention
agreement, excluding, however, from the operation of this section:
(a) deposits or pledges to secure payments of workmen's compensation,
unemployment insurance, old age pensions or other social security;
(b) deposits or pledges to secure performance of bids, tenders,
contracts (other than contracts for the payment of money), leases, public
or statutory obligations, surety or appeal bonds, or other deposits or
pledges for purposes of like general nature in the ordinary course of
business;
(c) Liens for taxes, assessments or other governmental charges or
levies that are not delinquent or that are in good faith being contested or
litigated, if such reserve as shall be required by GAAP shall have been
made therefor, provided, that this exception shall not allow any Lien
imposed by the U.S. Government for failure to pay income, payroll, FICA or
similar taxes;
(d) mechanics', carriers', workmen's, repairman's or other like Liens
arising in the ordinary course of business securing obligations less than
ninety (90) days from the date of invoice, and on which no suit to
foreclose has been filed, or which are in good faith being contested or
litigated, if such reserve as shall be required by GAAP shall have been
made therefor;
(e) Liens created by or resulting from any litigation or legal
proceeding that is currently being contested in good faith by appropriate
proceedings, if such reserve as shall be required by GAAP shall have been
made therefor;
(f) Liens, charges and encumbrances incidental to the conduct of its
business or the ownership of its properties or assets, which were not
incurred in connection with the borrowing of money or the obtaining of
advances or credit and that do not materially detract from the value of
such property or assets or materially impair the use thereof in the
operation of its business;
(g) landlords' Liens for rental not yet due and payable and which, to
the extent the same encumbers any of the Collateral, are subordinate to the
Bank Liens;
(h) Liens arising in the normal course of business under operating
agreements covering oil and gas properties and interests therein, including
such Liens as may arise thereunder because of the default of other parties
to the operating agreement; or
(i) the Bank Liens.
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29
8.2 Indebtedness. Borrower will not create, assume, incur or have
outstanding, or in any manner become or be liable directly or indirectly
(whether by way of guaranty or otherwise) in respect of, any indebtedness for
borrowed money or the purchase price of any property (including direct, indirect
and capitalized leases), excluding, however, from the operation of this section:
(a) the Note;
(b) accounts payable for services furnished and for the purchase price
of materials and supplies acquired in the ordinary course of its business,
not more than ninety (90) days from the date of invoice;
(c) indebtedness of Borrower in respect of any Derivatives permitted
by Section 8.15;
(d) indebtedness of Borrower to Lender and the other financial
institutions which are a party to that certain Restated Credit Agreement
dated August 16, 1999, among First Permian, L.L.C., Lender, certain other
financial institutions, Borrower and Baytech, Inc., pursuant to that
certain Limited Guaranty dated June 30,1999, executed by Borrower and
guaranteeing indebtedness of First Permian, L.L.C. in an amount not to
exceed $10,000,000; and
(e) other indebtedness not to exceed an aggregate amount of $100,000
at any time outstanding.
8.3 ERISA Compliance. Borrower will not at any time permit any plan subject
to ERISA maintained by it to (i) engage in any "prohibited transaction" as such
term is defined in Section 4975 of the Internal Revenue Code of 1986, as
amended; (ii) incur any "accumulated funding deficiency" as such term is defined
in Section 302 of ERISA; or (iii) terminate any such plan in a manner which
could result in the imposition of a lien on its property pursuant to Section
4068 of ERISA.
8.4 Investments. Borrower will not make or commit to make, any advance,
loan, extension of credit or capital contribution to, or purchase of any stock,
bonds, notes, debentures or other securities of, or make any other investment in
any person, or accept any item in satisfaction of indebtedness (all of the
aforesaid transactions being herein called "Investments"), except:
(a) Investments in accounts, contract rights and chattel paper (as
defined in the Uniform Commercial Code), and notes receivable, arising or
acquired in the ordinary course of business;
(b) Investments with maturities of not more than 180 days in direct
obligations of the United States of America, or obligations, the principal
and interest of which are unconditionally guaranteed by the United States
of America;
(c) certificates of deposit maintained with Lender;
<PAGE>
30
(d) Borrower's existing Investment in First Permian, L.L.C.; and
(e) other Investments not to exceed $50,000 in the aggregate at any
time outstanding.
8.5 Mergers, Consolidations. Borrower will not (i) amend or otherwise
modify its corporate charter or otherwise change its structure in any manner
that would cause a Material Adverse Change; (ii) form any new subsidiary
company; or (iii) consolidate with or merge into, or acquire any party or permit
any party to consolidate with or merge into, or acquire it.
8.6 Dividends and Distributions. Neither Borrower nor any Subsidiary will
declare, 1)av or make any loans, advances, dividends or distributions, of any
kind, to its stockholders or other equity owners, or make any other distribution
on account of, or purchase, acquire or redeem or retire any stock or other
security issued by it, except that Borrower may pay cash dividends on its
outstanding shares of 6% Convertible Preferred Stock in accordance with the
provisions of Borrower's Certificate of Designations, Preferences and Rights of
Serial Preferred Stock - 6% Convertible Preferred Stock dated October 19, 1998,
provided that no Event of Default exists at the time of declaration or payment
of such dividends and the payment of such dividends would not cause an Event of
Default.
8.7 Transactions with Affiliates. Borrower will not, directly or
indirectly, enter into any transaction (including, but not limited to, the sale
or exchange of property or the rendering of services) with any of its
affiliates, other than in the ordinary course of business and upon fair and
reasonable terms no less favorable than Borrower could obtain or could become
entitled to in an arm's length transaction with a person that was not an
affiliate.
8.8 Accounting Method and Fiscal Year. Borrower will not make any change in
its present accounting method unless such changes are required for conformity
with GAAP.
8.9 Nature of Business. Borrower will not make any substantial change in
the nature of its businesses as now conducted.
8.10 Disposition of Assets. Borrower will not sell, transfer, lease,
exchange, alienate or otherwise dispose of any of its property or assets except,
to the extent not otherwise forbidden under the Deed of Trust:
(a) equipment that is worthless or obsolete or which is replaced by
equipment of equal suitability and value;
(b) inventory that is sold in the ordinary course of business; and
(c) interests in oil and gas leases, or portions thereof, so long as
no well situated on any such lease or located on any unit containing all or
any part thereof, is capable (or is subject to being made capable through
<PAGE>
31
commercially feasible operations) of producing oil, gas or other
hydrocarbons or minerals in commercial quantities.
8.11 Current Ratio. At all times during the term hereof, Borrower's Current
Ratio shall not be less than 1.00 to 1.
8.12 Leases. Borrower shall not pay or become liable to pay rentals or
lease payments on any lease (excluding oil and gas leases), sublease or similar
arrangement in an amount exceeding $250,000 in the aggregate in any fiscal year.
8.13 Net Worth. At all times during the term hereof, Borrower's Net Worth
shall not be less than (a) $25,000,000, plus (b) seventy-five percent (75%) of
the net proceeds of any equity offering by the Borrower on or after December 27,
1999, plus (c) fifty percent (50%) of Borrower's Adjusted Net Income for each
fiscal quarter, if positive, and zero percent (0%) if negative, determined on a
cumulative basis, for the period beginning January 1, 2000, and ending on the
last day of the most recent fiscal quarter as of the time in question. As used
in this Section 8.13, Borrower's Adjusted Net Income means for any period,
Borrower's Net Income for such period, provided there shall be excluded from
such Net Income (to the extent otherwise included therein) the cumulative effect
of a change in accounting principles and the after-tax net effect of any
non-recurring non-cash charges, including, without limitation, any charges under
Financial Accounting Standard Board Statement No. 121, as amended, supplemented
or modified from time to time.
8.14 Debt Service Ratio. At all times during the term hereof, Borrower's
Debt Service Ratio shall not be less than 1.1 to 1.
8.15 Derivatives. Borrower shall not enter into any Derivatives other than
oil and/or gas price Derivatives related to bona fide hedging activities so long
as (i) the aggregate notional amounts of such Derivatives during any calculation
period do not exceed seventy-five percent (75%) of Borrower's estimated
production from proved producing reserves existing as of the date of the
execution thereof based upon the then most current reserve evaluation required
pursuant to Section 7. 1 (d) above, (ii) such Derivatives do not contain terms
or provisions which could require margin calls, (iii) the counterparty to any
such Derivatives have a minimum rating of "A" by Standard & Poors' Corporation
or "A3 " by Moody's Investors Service, Inc., (iv) such Derivatives are for a
term of eighteen (18) months or less, and (v) such Derivatives have the economic
effect of assuring the receipt by Borrower of a price equal to or greater than
that under Lender's then current pricing policy.
ARTICLE IX
Default and Remedies
9.1 Events of Default. If any one or more of the following shall occur and
shall not have been remedied in the period, if any, provided, an "Event of
Default" shall be deemed to have occurred hereunder and with respect to all of
the Obligation, unless waived in writing by Lender:
<PAGE>
32
(a) default shall occur in the payment when due of the Obligation
including, without limitation, any principal or interest due on the Note or
any commitment or other fee due hereunder;
(b) any representation, warranty or statement made by Borrower herein,
in any of the other Loan Papers or in any certificate furnished to Lender
hereunder shall be breached or shall prove to be untrue or misleading in
any material respect at the time when made;
(c) default shall occur in the performance or observance of any
covenant, agreement, duty or obligation of Borrower contained herein or in
any of the other Loan Papers; provided, that breach of the covenant
contained in Sections 8.11, 8.13 or 8.14 hereof shall not constitute an
Event of Default unless the same shall continue for a period of thirty (30)
days;
(d) Borrower shall (i) apply for or consent to the appointment of a
receiver, trustee or liquidator of it or of all or a substantial part of
its assets; (ii) be unable, or admit in writing its inability, to pay its
debts as they become due; (iii) make a general assignment for the benefit
of creditors; (iv) be adjudicated a bankrupt or insolvent or file a
voluntary petition in bankruptcy; (v) file a petition or an answer seeking
reorganization or an arrangement with creditors or to take advantage of any
bankruptcy or insolvency law; (vi) file an answer admitting the material
allegations of, or consent to, or default in answering, a petition filed
against it in any bankruptcy, reorganization or insolvency proceedings; or
(vii) take any action (corporate or otherwise) for the purpose of effecting
any of the foregoing;
(e) an order, judgment or decree shall be entered by any court of
competent jurisdiction approving a petition seeking reorganization of
Borrower or appointing a receiver, trustee or liquidator of Borrower
or of all or a substantial part of its assets, and such order,
judgment or decree shall continue unstayed in effect for any period of
thirty (30) consecutive days;
(f) any Lien for failure to pay income, payroll, FICA or similar
taxes shall be filed by the U.S. Government or any agent or
instrumentality thereof against Borrower or any of its assets;
(g) there shall occur any acceleration, notice of default, filing
of suit or notice of breach by any other party to any Material
Agreement to which Borrower is a party wherein the amount involved or
claimed exceeds $ 100,000, following the passage of any grace period
provided for thereunder;
(h) default shall occur in the payment of any indebtedness of
Borrower aggregating $100,000 or more under any note, loan agreement
or credit agreement and such default shall continue for more than the
period of grace, if any, specified therein, or any such indebtedness
shall become due before its stated maturity by acceleration of the
maturity thereof or shall become due by its terms and shall not be
promptly paid or extended;
<PAGE>
33
(i) any final judgment or judgments for the payment of money in
the amount of $100,000 or more, in the aggregate, shall be rendered
against Borrower and shall not be satisfied or discharged at least
thirty (30) days prior to the date on which any of its assets could be
lawfully sold to satisfy such judgment or judgments;
(j) the good faith belief by Lender that the prospect of payment
or performance of the Obligation is materially impaired, or that the
value of the Collateral has, or will be, materially decreased;
(k) a Material Adverse Change has occurred with respect to
Borrower;
(l) a majority of the individuals comprising the current Board of
Directors of Borrower shall resign, be declared incompetent or
otherwise be removed (voluntarily or involuntarily) or cease to serve
as members of the Board of Directors of Borrower; or
(m) the occurrence or existence of any default, event of default
or other similar condition or event (however described) with respect
to any Rate Management Transaction.
9.2 Remedies. Upon the occurrence of any Event of default, Lender shall
have no further obligation to advance funds under the Note, and Lender may
declare all of the Obligation to be forthwith due and payable, whereupon the
same shall forthwith become due and payable without further presentment, demand,
protest, notice of acceleration or the intent to accelerate, or other notice of
any kind, all of which Borrower hereby expressly waives, anything contained
herein, in the Note or in any of the other Loan Papers to the contrary
notwithstanding; provided that any default under subsections (d) or (e) of
Section 9.1 shall result in all of the Obligation becoming immediately due and
payable in full without the necessity of any act by Lender. Further, Lender may,
in its discretion. but shall not be required to, exercise such Rights as are
provided it in any of the Loan Papers or at law or in equity. Nothing contained
in this Article shall be construed to limit or amend in any way the Events of
Default enumerated in the Loan Papers or any other document executed in
connection with the transactions contemplated herein. Further, in such event,
Lender shall have all other Rights afforded to it with respect to Borrower or
any of the Collateral under any of the Loan Papers or under any applicable law
or in equity.
ARTICLE X
Miscellaneous
10.1 Survival of Representations and Warranties. All representations and
warranties of Borrower herein, and all covenants, agreements, duties and
obligations of Borrower herein not fully performed on or before the date of this
Agreement, shall survive such date.
10.2 Communications. Unless specifically provided otherwise, whenever any
Loan Paper requires or permits any consent, approval, notice, request, or demand
<PAGE>
34
from one party to another, such communication must be in writing to be effective
and shall be deemed to have been given on the day actually delivered or, if
mailed, on the third day (or if such third day is not a Business Day, then on
the next succeeding Business Day) after it is enclosed in an envelope, addressed
to the party to be notified at the address stated below, properly stamped,
sealed, and deposited in the appropriate official postal service. Until changed
by notice pursuant hereto, the address for each party for purposes hereof is as
follows:
BORROWER: PARALLEL PETROLEUM CORPORATION
110 North Marienfeld, Suite 465
Midland, Texas 79701
LENDER: BANK ONE, TEXAS, N.A.
2301 West Wall Street
Midland County
Midland, Texas 79701
Attention: Michael J. Davis
10.3 Non-Waiver.
(a) The acceptance by Lender at any time and from time to time of part
payment on the Obligation shall not operate as a waiver of any Event of
Default then existing.
(b) No waiver by Lender of any Event of Default shall operate as a
waiver of any other then existing or subsequent Event of Default.
(c) No delay or omission by Lender in exercising any Right shall
impair such Right or operate as a waiver thereof, nor shall any single or
partial exercise of any such Right preclude other or further exercise
thereof, or the exercise of any other Right under the Loan Papers or
otherwise.
(d) No notice or demand given by Lender in any case shall operate as a
waiver of Lender's right to take other action in the same, similar or other
instances without such notice or demand.
(e) No Advance hereunder shall operate as a waiver by Lender of (i)
the representations, warranties and covenants of Borrower under the Loan
Papers; (ii) any Event of Default; or (iii) any of the conditions to
Lender's obligation, if any, to make further Advances.
10.4 Strict Compliance. If any action or failure to act by Borrower
violates any covenant of Borrower contained herein or in any other Loan Paper,
then such violation shall not be excused by the fact that such action or failure
to act would otherwise be permitted by any covenant (or exception to any
covenant) other than the covenant violated.
<PAGE>
35
10.5 Cumulative Rights. The Rights of Lender under the Loan Papers are in
addition to all other Rights provided by law, whether or not the Obligation is
due and payable and whether or not Lender has instituted any suit for collection
or other action in connection with the Loan Papers.
10.6 Governing Law. This Agreement has been prepared, is being executed and
delivered, and is intended to be performed, in the State of Texas. The
substantive laws of such state and the applicable federal laws of the United
States of America shall govern the validity, construction, enforcement and
interpretation of this Agreement and the other Loan Papers, without regard to
principles of conflicts of law, PROVIDED, HOWEVER, THAT THE RIGHTS PROVIDED IN
THE LOAN PAPERS WITH REFERENCE TO PROPERTIES SITUATED IN OTHER STATES MAY BE
GOVERNED BY THE LAWS OF SUCH OTHER STATES.
10.7 Choice of Forum: Consent to Service of Process and Jurisdiction. Any
suit, action or proceeding against Borrower arising out of or relating to any of
the Loan Papers or any judgment entered by any court in respect thereof, may be
brought or enforced in the courts of the State of Texas, County of Midland, or
in the United States courts located in the State of Texas, County of Midland, or
in the United States courts located in the State of Texas, as Lender in its sole
discretion may elect, and Borrower hereby submits to the nonexclusive
jurisdiction of such courts for the purpose of any such suit, action or
proceeding. Borrower hereby irrevocably consents to service of process in any
suit, action or proceeding in any of said courts by the mailing thereof by
Lender by registered or certified mail, postage prepaid, to Borrower, at its
address set forth herein. Borrower hereby irrevocably waives any objections that
it may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to any of the other Loan Papers brought in
any of said courts and hereby further irrevocably waives any claim that any such
suit, action or proceeding brought in any such court has been brought in an
inconvenient forum.
10.8 Usury Savings Clause. Nothing contained in this Agreement, the Note,
any other Loan Paper or in any other Agreement or undertaking relating hereto or
to the Obligation shall be construed to obligate Borrower, under any
circumstances whatsoever, to pay interest at a rate in excess of the Highest
Lawful Rate. All sums paid hereunder or under the Note that are deemed to be
interest shall be spread and prorated over the entire period for which the Note
is outstanding. In the event that any sums received hereunder from Borrower are
at any time under applicable law deemed or held to provide a rate of interest in
excess of the Highest Lawful Rate, the effective rate of interest on the
Obligation shall be deemed reduced to and shall be the Highest Lawful Rate, and
Borrower and any other parties hereby agree to accept as their sole remedy under
such circumstances either the return of any sums of interest that may have been
collected in excess of the Highest Lawful Rate or the application of these sums
as a credit against the unpaid principal amount of the Note, whichever remedy
may be elected by Lender. In addition, in the event that the maturity of the
Note is accelerated by reason of the election by Lender hereunder, then earned
interest may never include more than the amount calculated pursuant to the
Highest Lawful Rate, and if unearned interest is provided for in the Note or the
other Loan Papers, Borrower and any other parties liable on said documents
hereby agree to accept as their sole remedy under such circumstances either (a)
the cancellation of said unearned interest, or (b) if theretofore paid, either
the return to Borrower or the crediting of said unearned interest on the
principal amount due under the Note or other documents, whichever action may be
<PAGE>
36
elected by Lender. To the extent the Highest Lawful Rate is determined by
reference to the laws of the State of Texas, same shall be the weekly ceiling
provided for in Chapter 303 of the Texas Finance Code and in Article 5069-ID.002
of the Revised Civil Statutes of Texas, in each case as amended, provided that
Lender may, by notice to Borrower, elect such other reference as is allowed by
said statutes.
10.9 Enforceability. If one or more of the provisions contained in the Loan
Papers shall, for any reason, be held to be invalid, illegal or unenforceable in
any respect, such in validity, illegality, or unenforceability shall not affect
any other provision of the Loan Papers or any other instrument referred to
herein.
10.10 Binding Effect. The Loan Papers shall be binding upon and inure to
the benefit of Borrower and Lender and their respective successors and assigns;
provided, however, that Borrower shall not assign any Rights, duties or
obligations under the Loan Papers without the prior written consent of Lender.
10.11 No Third Party Beneficiaries.
(a) The parties do not intend the benefits of the Loan Papers to inure
to any third party, nor shall the Loan Papers be construed to make or
render Lender liable to any third party, including, without limitation, any
materialman, supplier, contractor, subcontractor, purchaser, lessor or
lessee having a claim against Borrower. Notwithstanding anything contained
in the Loan Papers, or any conduct or course of conduct by any or all of
the parties hereto, whether before or after signing th Agreement or any
other Loan Paper, no Loan Paper shall be construed as creating any right,
claim or cause of action against Lender in favor of any third party,
including, without limitation, any materialman, supplier, contractor,
subcontractor, purchaser, lessor or lessee having a claim against Borrower.
(b) All conditions to the obligation of Lender to make Advances
hereunder are imposed solely and exclusively for the benefit of Lender, and
no other person shall have standing to require satisfaction of such
conditions in accordance with their terms or be entitled to assume that
Lender will make or refuse to make Advances in the absence of strict
compliance therewith, and any or all of such conditions may be freely
waived in whole or in part by Lender at any time if Lender, in its sole
absolute discretion, deems it advisable to do so.
10.12 Delegation by Lender. Lender may perform any of its duties or
exercise any of its Rights by or through its officers, directors, employees,
attorneys, agents or other representatives.
10.13 Setoff. Borrower hereby grants to Lender (and to each participant to
whom Lender has conveyed or may hereafter convey a participation in the Note)
the right of setoff to secure payment of the Obligation upon any and all moneys,
securities or other property of Borrower and the proceeds therefrom, now or
hereafter held or received by or in transit to, Lender or any such participant
or any agent of Lender or such participant, from or for the account of Borrower,
<PAGE>
37
whether for safekeeping, custody, pledge, transmission, collection or otherwise,
and also upon any and all deposits (general or specific) and credits of Borrower
and any and all claims of Borrower against Lender or any such participant at any
time existing. Notwithstanding the foregoing, nothing contained herein shall
grant to Lender the right of setoff against an account if Lender has actual
knowledge that any person other than Borrower or any Subsidiary of Borrower has
an ownership interest in such account.
10.14 Additional Documents. It is contemplated that there may be certain
supplementary and/or corrective mortgages, deeds of trust, security agreements
and similar items prepared by Lender to be executed by Borrower subsequent
hereto, as well as certain other corrective and additional documentation not
executed concurrently with this Agreement because of the unavailability of
information such as property and collateral descriptions at the time of the
execution hereof. Borrower hereby agrees to cooperate with Lender and provide
such information in connection therewith as Lender may reasonably request, and
to execute and deliver such other and further documentation as Lender shall
reasonably request so as to provide Lender with a Bank Lien on the Collateral.
10.15 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same instrument.
10.16 Amendments. Neither this Agreement nor any provision hereof may be
changed, waived, discharged or terminated orally but only by an instrument in
writing signed by Borrower and Lender.
10.17 Headings. All headings used herein are for convenience and reference
purposes only and shall not affect the substance of this Agreement.
10.18 Conflicts. In the event that there exists any conflict or
inconsistency between the terms hereof and the terms of any other Loan Paper,
the terms hereof shall govern and control, provided that the fact that any
representation, warranty or covenant contained in any other Loan Paper is not
contained herein shall not be, or be deemed to be, a conflict or inconsistency.
10.19 Entirety. This Agreement and the other Loan Papers embody the entire
agreement among the parties and supersede and supplant all prior agreements and
understandings with respect to the matters contained herein.
10.21 Participations. Lender may at any time, or from time to time, sell or
agree to sell to one or more other persons a participation in all or any part of
the Obligation, in which event each such other participant shall be entitled to
the rights and benefits under this Agreement and the other Loan Papers. It is
understood and agreed that Lender may provide to participants and prospective
participants financial information and reports and data concerning Borrower and
<PAGE>
38
Borrower's properties and operations as have been provided to Lender pursuant to
this Agreement.
10.22 Notice of Final Agreement. THIS WRITTEN AGREEMENT AND THE OTHER LOAN
PAPERS 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 AGREEMENTS BETWEEN THE
PARTIES.
EXECUTED as of the date first above written.
PARALLEL PETROLEUM CORPORATION,
a Delaware corporation
By: /S/ Larry C. Oldham
-----------------------
Larry C. Oldham
President
BANK ONE, TEXAS, N.A.
By: /S/ Michael J. Davis
----------------------
Michael J. Davis
Vice President
<PAGE>
Exhibit 2.2
REQUEST FOR ADVANCE
TO: Bank One, Texas, N.A.
Pursuant to the provisions of that certain Restated Loan Agreement (the
"Loan Agreement") dated December 27, 1999, between Parallel Petroleum
Corporation ("Borrower") and Bank One, Texas, N.A. ("Lender"), Borrower hereby
requests an Advance in the amount of $_________ to be paid on ________________,
19___.
The undersigned hereby certifies, represents and warrants on behalf of
Borrower that (i) as of the date hereof, and as a result of making the requested
Advance, there does not exist and will not exist any Event of Default, (ii)
Borrower has observed, performed and complied with all covenants, agreements,
duties and obligations contained in the Loan Papers, and (iii) the
representations and warranties contained in the Loan Agreement and in the other
Loan Papers are true and correct in all material respects as of the date hereof
and shall be true and correct upon the making of the Advance, with the same
force and effect as though made on and as of the date hereof and thereof.
Capitalized terms used but not defined herein shall have the respective
meanings ascribed thereto in the Loan Agreement.
Parallel Petroleum Corporation
By:______________________
Name:____________________
Title: __________________
<PAGE>
1
EXHITBIT 2.4
PROMISSORY NOTE
$30,000,000.00 Midland, Texas December 27, 1999
FOR VALUE RECEIVED, the undersigned PARALLEL PETROLEUM CORPORATION, a
Delaware corporation (referred to herein as "Borrower"), hereby unconditionally
promises to pay to the order of BANK ONE, TEXAS, N.A., a national banking
association ("Lender"), at 2301 West Wall Street, Midland County, Midland, Texas
79701, or such other address as Lender shall designate in writing to Borrower,
the principal sum of THIRTY MILLION AND NO/100 DOLLARS ($30,000,000.00), or if
less, so much thereof as may be advanced pursuant to the Loan Agreement (as
hereinafter defined), in lawful money of the United States of America, together
with interest from the date hereof until paid at the rates specified in the Loan
Agreement.
The principal and all accrued interest on this Note shall be due and
payable in accordance with the terms and provisions of the Loan Agreement.
This Note is executed pursuant to that certain Restated Loan Agreement
dated of even date herewith between Borrower and Lender (herein, as from time to
time amended, modified or restated, called the "Loan Agreement"), and is the
Note referred to therein. All capitalized terms used but not specifically
defined herein shall have the meanings ascribed thereto in the Loan Agreement.
Reference is made to the Loan Agreement and the other Loan Papers for a
statement of the prepayment rights and obligations of Borrower, a description of
the properties mortgaged and assigned as security, the nature and extent of such
security and the rights of the parties under the Loan Papers in respect to such
security, for a statement of the terms and conditions under which the due date
of this Note I may be accelerated and for statements regarding other matters
affecting this Note (including without limitation the obligations of the holder
hereof to advance funds hereunder, principal and interest payment due dates,
voluntary and mandatory prepayments, exercise of rights and remedies, payment of
attorneys' fees, court costs and other costs of collection and certain waivers
by Borrower and others now or hereafter obligated for payment of any sums due
hereunder). Upon the occurrence of an Event of Default, as that term is defined
in the Loan Agreement or the other Loan Papers, the holder hereof shall have all
rights and remedies of the Lender under the Loan Agreement and the other Loan
Papers.
Nothing contained in this Note, the Loan Agreement, any other Loan Paper or
in any other agreement or undertaking relating hereto or to the Obligation shall
be construed to obligate Borrower, under any circumstances whatsoever, to pay
interest at a rate in excess of the Highest Lawful Rate. All sums paid under the
Loan Agreement or under this Note that are deemed to be interest shall be spread
and prorated over the entire period for which this Note is outstanding. In the
event that any sums received hereunder or under the Loan Agreement from Borrower
are at any time under applicable law deemed or held to provide a rate of
interest in excess of the Highest Lawful Rate, the effective rate of interest on
the Obligation shall be deemed reduced to and shall be the Highest Lawful Rate,
and Borrower and any other parties hereby agree to accept as their sole remedy
under such circumstances either the return of any sums of interest that may have
been collected in excess of the Highest Lawful Rate or the application of these
sums as a credit against the unpaid principal amount of this Note, whichever
remedy may be elected by Lender. In addition, in the event that the maturity of
this Note is accelerated by reason of the election by Lender hereunder or under
the Loan Agreement, then earned interest may never include more than the amount
calculated pursuant to the Highest Lawful Rate, and if unearned interest is
provided for in this Note or the other Loan Papers, Borrower and any other
parties liable on said documents hereby agree to accept as their sole remedy
under such circumstances either (a) the cancellation of said unearned interest,
or (b) if theretofore paid, either the return to Borrower or the crediting of
said unearned interest on the principal amount due under this Note or other
documents, whichever action may be elected by Lender. To the extent the Highest
Lawful Rate is determined by reference to the laws of the State of Texas, same
shall be the weekly ceiling provided for in Chapter 303 of the Texas Finance
Code and in Article 5069-lD.001 of the Revised Civil Statutes of Texas, in each
case as amended, provided that Lender may, by notice to Borrower, elect such
other reference as is allowed by said statutes.
<PAGE>
2
If any payment of principal or interest on this Note shall become due on a
day other than a Business Day, such payment shall be made on the next succeeding
Business Day and such extension of time shall in such case be included in
computing interest in connection with such payment.
If this Note is placed in the hands of an attorney for collection, or if it
is collected through any legal proceeding at law or in equity or in bankruptcy,
receivership or other court proceedings, Borrower agrees to pay all costs of
collection, including, but not limited to, court costs and reasonable attorneys'
fees.
Borrower and each surety, endorser, guarantor and other party ever liable
for payment of any sums of money payable on this Note, jointly and severally
waive presentment and demand for payment, notice of acceleration or the
intention to accelerate the maturity, protest, notice of protest and nonpayment,
as to this Note and as to each and all installments hereof, and agree that their
liability under this Note shall not be affected by any renewal or extension in
the time of payment hereof, or in any indulgences, or by any release or change
in any security for the payment of this Note, and hereby consent to any and all
renewals, extensions, indulgences, releases or changes.
This Note shall be governed by and construed in accordance with the
applicable laws of the United States of America and the laws of the State of
Texas, except that Chapter 346 of the Texas Finance Code (which regulates
certain revolving credit loan accounts and revolving tri-party accounts) shall
not apply to this Note.
This Note is given, to the extent of $15,965,889.22, in renewal and
rearrangement, but not in extinguishment or novation, of the unpaid principal
balance of the certain promissory note dated July 1, 1996, in the original
principal amount of $30,000,000, executed by Borrower and payable to the order
of Lender.
<PAGE>
3
THIS WRITTEN NOTE, THE LOAN AGREEMENT AND THE OTHER LOAN PAPERS 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 AGREEMENTS BETWEEN THE PARTIES.
EXECUTED this 27th day of December, 1999.
BORROWER:
PARALLEL PETROLEUM CORPORATION,
a Delaware corporation
By: /S/ Larry C. Oldham
-------------------------
Larry C. Oldham
President
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors and Stockholders
Parallel Petroleum Corporation
We 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 report dated February 9, 2000, relating to the balance sheets
of Parallel Petroleum Corporation as of December 31, 1999 and 1998, and the
related statements of income, stockholders' equity, and cash flows for each of
the years in the three-year period ended December 31, 1999, which appears in the
December 31,1999 annual report on Form 10-K of Parallel Petroleum Corporation.
/s/ KPMG LLP
Midland, Texas
March 30, 2000
<PAGE>
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, 1999.
JOE C. NEAL AND ASSOCIATES
Midland, Texas
March 28, 2000
<PAGE>
Exhibit 23.3
Consent of Independent Petroleum Engineers
As independent petroleum engineers, Williamson Petroleum Consultants, Inc.
hereby consents to (i) the use of our reserve report and all references to our
firm included in or made part of the Parallel Petroleum Corporation annual
report on Form 10-K for the fiscal year ended December 31, 1999 to be filed with
the Securities and Exchange Commission on or about March 30, 2000 and (ii) to
the incorporation by reference of the Form 10-K 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.
/s/ WILLIAMSON PETROLEUM CONSULTANTS, INC.
Midland, Texas
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,276,417
<SECURITIES> 0
<RECEIVABLES> 1,805,679
<ALLOWANCES> 157,187
<INVENTORY> 0
<CURRENT-ASSETS> 5,092,320
<PP&E> 65,426,503
<DEPRECIATION> 27,502,855
<TOTAL-ASSETS> 43,264,070
<CURRENT-LIABILITIES> 5,163,967
<BONDS> 12,300,000
0
97,450
<COMMON> 203,319
<OTHER-SE> 25,499,334
<TOTAL-LIABILITY-AND-EQUITY> 43,264,070
<SALES> 0
<TOTAL-REVENUES> 8,974,041
<CGS> 0
<TOTAL-COSTS> 10,173,995
<OTHER-EXPENSES> (20,893)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,469,207
<INCOME-PRETAX> (2,450,457)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,450,457)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,450,457)
<EPS-BASIC> (.016)
<EPS-DILUTED> (.016)
</TABLE>
