<PAGE>
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
Amendment No. 2
----------------------------
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1999 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from to
--------------------------
COMMISSION FILE NUMBER 0-13305
--------------------------
PARALLEL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 75-1971716
(State of other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Marienfeld Place, Suite 465,
Midland, Texas 79701
(Address of principal executive offices) (Zip Code)
(915) 684-3727
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes 'X' No
At November 1, 1999, there were 18,331,858 shares of the Registrant's
Common Stock, $0.01 par value, outstanding.
================================================================================
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2
INDEX
PART I. - FINANCIAL INFORMATION
Page No.
ITEM 1. FINANCIAL STATEMENTS
Reference is made to the succeeding pages for the following
financial statements:
- Balance Sheets as of December 31, 1998 and September 30, 1999
(unaudited) 4
- Unaudited Statements of Operations for the three months ended
September 30, 1998 and 1999 and nine months ended
September 30, 1998 and 1999 6
- Unaudited Statements of Cash Flows for the nine months ended 7
September 30, 1998 and 1999
- Notes to Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
<PAGE>
3
EXPLANATORY NOTE
This amendment reflects the retroactive exclusion of Parallel's pro
rata share of the assets and liabilities and revenues and expenses with respect
to a 22.5% ownership interest in First Permian, L.L.C., as previously reported
in Form 10-Q for the quarter ended September 30, 1999. First Permian is a
Delaware limited liability company formed on June 25, 1999 to acquire the oil
and gas assets of a wholly owned subsidiary of Fina Oil and Chemical Company.
For the quarter ended September 30, 1999, we accounted for our interest
in First Permian under the pro rata method of consolidation. Under this method
of accounting, our pro rata share in the assets and liabilities and revenues and
expenses of First Permian were consolidated with the assets and liabilities and
revenues and expenses of Parallel. However, because of recent SEC
interpretations of accounting for consolidated investments, beginning with the
fourth quarter of 1999, we changed our method of accounting for our interest in
First Permian from the pro rata consolidation method to the equity method of
accounting and are restating the September 30, 1999 quarterly amounts. Under the
equity method of accounting, investments are recorded at cost and are increased
or reduced by the company's proportionate share of income or loss. Therefore,
Parallel's restated balance sheet as of September 30, 1999 does not include the
22.5% pro rata interest in the assets and liabilities of First Permian, as
previously reported. Instead, such interest is reported as an investment on the
balance sheet and our pro rata share of income is recognized on the income
statement as equity in earnings of First Permian.
<PAGE>
4
PARALLEL PETROLEUM CORPORATION
BALANCE SHEETS
<TABLE>
December 31, September 30, 1999
ASSETS 1998* (Unaudited)
- ------------- ------------- ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,178,819 $ 633,780
Accounts receivable:
Oil and gas 1,432,659 1,354,340
Others, net of allowance for doubtful accounts
of $71,358 in 1998 and 1999 247,740 296,326
Affiliate 11,844 608
------------ ------------
1,692,243 1,651,274
Other assets 61,504 17,686
------------ ------------
Total current assets 2,932,566 2,302,740
------------ ------------
Property and equipment, at cost:
Oil and gas properties, full cost method 65,565,466 68,202,581
Other 287,586 289,423
------------ ------------
65,853,052 68,492,004
Less accumulated depreciation and depletion 22,279,355 25,562,268
------------ ------------
Net property and equipment 43,573,697 42,929,736
------------ ------------
Investment in First Permian, LLC (Note 2) - 183,358
Other assets, net of accumulated amortization of
$86,917 in 1998 and $102,689 in 1999 58,519 78,622
------------ ------------
$ 46,564,782 $ 45,494,456
============ ============
</TABLE>
<PAGE>
5
PARALLEL PETROLEUM CORPORATION
BALANCE SHEETS
(Continued)
<TABLE>
December 31, September 30, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY 1998* (Unaudited)
- ------------------------------------ ------------ ------------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities:
Trade $ 2,803,539 $ 1,482,244
Affiliate 214 1,242
Preferred stock dividend -- 170,537
------------ ------------
Total current liabilities 2,803,753 1,654,023
------------ ------------
Long-term debt:
Bank credit facility (Note 3) 18,035,889 18,815,889
Deferred income taxes -- --
Stockholders' equity:
Preferred stock 6% convertible preferred stock
par value $.10 per share(aggregate liquidation
preference of $10) authorized 10,000,000 shares,
issued and outstanding 974,500 in 1998 and 1999 97,450 97,450
Common stock - par value $.01 per share, authorized
60,000,000 shares, issued and outstanding
18,306,858 in 1998 and 18,331,858 in 1999 183,069 183,319
Additional paid-in surplus 32,341,971 31,896,022
Retained deficit (6,897,350) (7,152,247)
------------ ------------
Total stockholders' equity 25,725,140 25,024,544
Contingencies
------------ ------------
$ 46,564,782 $ 45,494,456
============ ============
</TABLE>
*The balance sheet as of December 31, 1998 has been derived from Parallel's
audited financial statements. The accompanying notes are an integral part of
these financial statements.
<PAGE>
6
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
Three Months Ended Nine months Ended
September 30, September 30,
---------------------- ----------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Oil and gas revenues $2,540,809 $2,291,448 $7,106,512 $6,246,264
---------- ---------- ---------- ----------
Cost and expenses:
Lease operating expense 622,205 598,586 1,792,895 1,663,550
General and administrative 227,865 218,731 647,371 642,879
Depreciation, depletion
and amortization 1,114,438 1,422,119 3,108,721 3,282,913
---------- ---------- ---------- ----------
1,964,508 2,239,436 5,548,987 5,589,342
---------- ---------- ---------- ----------
Operating income 576,301 52,012 1,557,525 656,922
---------- ---------- ---------- ----------
Other income (expense), net:
Equity in earnings of
First Permian, LLC (Note 2) -- 181,108 -- 181,108
Interest income 403 7,973 873 34,944
Other income 8,226 6,999 59,337 20,228
Interest expense (396,682) (396,110) 1,042,777) (1,143,238)
Other expense (2,687) (2,351) (11,264) (4,861)
---------- ---------- ---------- ----------
Total other expense, net (390,740) (202,381) (993,831) (911,819)
---------- ---------- ---------- ----------
Income (loss) before income taxes 185,561 (150,369) 563,694 (254,897)
Income tax expense deferred 61,269 -- 185,964 --
---------- ---------- ---------- ----------
Net income (loss) $ 124,292 $ (150,369) $ 377,730 $ (254,897)
========== ========== ========== ==========
Cumulative preferred stock dividend $ 90,000 $ 146,174 $ 173,000 $ 462,887
========== ========== ========== ==========
Net income (loss) available
to common stockholders $ 34,292 $ (296,543) $ 204,730 $ (717,784)
========== ========== ========== ==========
Net income (loss) per common share
Basic $ .002 $ (.016) $ .011 $ (.039)
========== ========== ========== ==========
Diluted $ .002 $ (.016) $ .011 $ (.039)
========== ========== ========== ==========
Weighted average common shares
Outstanding - basic 18,381,967 18,331,858 18,207,852 18,329,759
========== ========== ========== ==========
Outstanding - diluted 18,756,045 18,331,858 18,751,500 18,329,759
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
7
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
<TABLE>
1998 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 377,730 $ (254,897)
Adjustments to reconcile net income (loss) to net cash
Provided by operating activities:
Depreciation, depletion and amortization 3,108,721 3,282,913
Equity in income from investment -- (181,108)
Income taxes 185,964 --
Other, net (4,531) (20,103)
Changes in assets and liabilities:
Decrease in trade receivables 16,622 40,969
(Increase) decrease in prepaid expenses and other (61,201) 43,818
Increase (decrease) in accounts payable and accrued
liabilities 612,545 (1,149,730)
----------- -----------
Net cash provided by operating activities 4,235,850 1,761,862
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (17,353,375) (3,074,183)
Proceeds from disposition of property and equipment 883,144 435,231
Investment in First Permian, LLC -- (2,250)
----------- -----------
Net cash used in investing activities (16,470,231) (2,641,202)
----------- -----------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt 14,307,390 780,000
Payment of long-term debt (8,584,000) --
Proceeds from exercise of options and warrants 70,625 17,188
Stock offering costs (80,851) --
Proceeds from common stock issuance - --
Proceeds from preferred stock issuance 6,000,000 --
Payment of preferred stock dividend (68,000) (462,887)
----------- -----------
Net cash provided by financing activities 11,645,164 334,301
----------- -----------
Net decrease in cash and cash equivalents (589,217) (545,039)
Beginning cash and cash equivalents 597,149 1,178,819
----------- -----------
Ending cash and cash equivalents $ 7,932 $ 633,780
=========== ===========
Non-cash financing activities:
Accrued preferred stock dividend $ -- $ 170,537
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financials.
<PAGE>
8
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial information included herein, with the exception of the
balance sheet as of December 31, 1998, is unaudited. However, such information
includes all adjustments (consisting solely of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair statement of the
results of operations for the interim periods. The results of operations for the
interim period are not necessarily indicative of the results to be expected for
an entire year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Form 10-Q Report pursuant to
certain rules and regulations of the Securities and Exchange Commission. These
consolidated financial statements should be read in conjunction with the
financial statements and notes included in Parallel's 1998 Annual Report and
1998 Form 10-K.
In June 1999, we acquired a 22.5% interest in First Permian, LLC, a
limited liability company. We account for our investment in First Permian on an
equity basis. Accordingly, our investment in First Permian is recorded at cost
and is increased or decreased by our proportionate share of First Permian's
income or loss. Our 22.5% interest is reported as an investment on the balance
sheet and our share of income or loss is recognized on the income statement as
equity in earnings of First Permian.
NOTE 2. RECENT EVENTS
On November 12, 1999, we terminated the offering period for a private
placement of 2,000,000 shares of common stock. Stock Purchase Agreements
covering a total of 2,000,000 shares were received from 22 accredited investors
and eight unaccredited investors. The offering price of the stock was $1.60 per
share. After deducting estimated expenses in the amount of $27,000 payable by us
and sales commissions in the amount of $26,000 payable to Netherland Securities,
Inc. and $4,000 payable to Everen Securities, Inc., net proceeds are estimated
to be $3,143,000, of which approximately $1,500,000 million will be used to
reduce bank debt and the remaining amount will be used to fund capital
expenditures and for general corporate purposes. Upon issuance of the 2,000,000
shares of common stock, we will have 20,331,858 shares of common stock
outstanding. The private placement was made in reliance on the exemptions from
registration under the Securities Act of 1933 pursuant to Section 4 (2) and Rule
506 of Regulation D under the Securities Act.
On June 30, 1999, First Permian, LLC and a wholly owned subsidiary of
Fina Oil and Chemical Company consummated a cash merger. First Permian was the
surviving entity. The transaction was accounted for as a purchase. The assets
acquired consisted primarily of producing oil and gas properties located in the
Permian Basin of west Texas. After giving effect to purchase price adjustments,
First Permian paid to Fina cash in the aggregate amount of approximately $92.0
million.
First Permian is owned by Parallel, Baytech, Inc., Tejon Exploration
Company and Mansefeldt Investment Corporation and affiliates. Baytech, Tejon and
Mansefeldt are privately held oil and gas companies. Parallel and Baytech are
the managers of First Permian and each owns a 22.5% membership interest. Tejon
Exploration and Mansefeldt Investment each own a 27.5% interest in First
Permian.
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.
In addition to the $74.0 million loan from Bank One, First Permian
borrowed $8.0 million from Tejon Exploration Company and $8.0 million from
Mansefeldt Investment Corporation to help finance the acquisition of oil and gas
properties from Fina Oil and Chemical Company. Under terms of an Intercreditor
Agreement, dated June 30, 1999, the loans made by Tejon and Mansefeldt are
unsecured and subordinate in all respects to the senior loans made by Bank One.
<PAGE>
9
Each subordinated loan requires a principal payment of $2.5 million on
December 31, 1999 and $5.5 million on September 30, 2000. Principal payments on
the subordinated loans are subject to certain restrictions.
NOTE 3. LONG TERM DEBT
Our long term debt at September 30, 1999 consisted of the following:
Revolving credit facility note payable to bank at the bank's
base lending rate plus .25% (8.5% at September 30, 1999) $18,815,889
===========
Revolving Credit Facility. At September 30, 1999, Parallel was a party
to a loan agreement with Bank One, Texas, N.A. which provides for a revolving
credit facility (the "Revolving Facility") under which we may borrow up to the
lesser of $30,000,000 or the "borrowing base" then in effect. The borrowing base
in effect at September 30, 1999 was $18,815,889. The borrowing base was subject
to reduction by a monthly commitment reduction of $380,000. However, effective
March 23, 1999, the monthly commitment reduction was suspended by the bank until
May 1, 1999 at which time the borrowing base and monthly commitment reduction
were scheduled for redetermination. The loan agreement provides for a
redetermination of the borrowing base and monthly commitment reduction every six
months on April 1 and October 1 of each year or at such other times as the bank
elects. As of the date of this Form 10-Q Report, we had not received from the
bank the redetermined borrowing base or monthly reduction amount. At September
30, 1999, we had borrowed all the funds currently available under the Revolving
Facility. All indebtedness under the Revolving Facility matures July 1, 2001.
The loan is secured by substantially all of our oil and gas properties.
Commitment fees of .25% per annum on the difference between the commitment and
the average daily amount outstanding are due quarterly.
The unpaid principal balance of the Revolving Facility bears interest
at our election at a rate equal to (i) the bank's base lending rate plus .25% or
(ii) the bank's Eurodollar rate plus a margin of 2.5%. Interest under the
Revolving Facility is due and payable monthly. At September 30, 1999, the
interest rate was the bank's base rate plus .25% or 8.5%.
The loan agreement contains various restrictive covenants and
compliance requirements, which include (1) maintenance of certain financial
ratios, (2) limiting the incurrence of additional indebtedness, (3) prohibiting
payment of dividends on common stock, and (4) prohibiting the payment of
dividends on preferred stock when an event of default under the loan agreement
is in existence.
NOTE 4. PREFERRED STOCK
We have outstanding 974,500 shares of 6% Convertible Preferred Stock,
$0.10 par value per share. Cumulative annual dividends of $0.60 per share are
payable semi-annually on June 15 and December 15 of each year. Each share of
Preferred Stock may be converted, at the option of the holder, into 2.8571
shares of common stock at an initial conversion price of $3.50 per share,
subject to adjustment in certain events. The preferred stock has a liquidation
preference of $10 per share and has no voting rights, except as required by law.
We may redeem the preferred stock, in whole or part, for $10 per share plus
accrued and unpaid dividends.
NOTE 5. FULL COST CEILING TEST
We use the full cost method to account for our oil and gas producing
activities. Under the full cost method of accounting, the net book value of oil
and gas properties, less related deferred income taxes, may not exceed a
calculated "ceiling." The ceiling limitation is the discounted estimated
after-tax future net revenues from proved oil and gas properties. In calculating
future net revenues, current prices and costs are generally held constant
indefinitely. The net book value, less related deferred income taxes, is
compared to the ceiling on a quarterly and annual basis. Any excess of the net
book value, less related deferred income taxes, is generally written off as an
expense. Under rules and regulations of the SEC, the excess above the ceiling is
not written off if, subsequent to the end of the quarter or year but prior to
the release of the financial results, prices increased sufficiently such that an
excess above the ceiling would not have existed if the increased prices were
used in the calculations.
During the fourth quarter of 1998, we recognized a non-cash impairment
charge of $15.0 million, or $12.0 million net of tax, related to our oil and gas
reserves and unproved properties. The impairment of oil and gas assets was
primarily the result of the effect of significantly lower oil and natural gas
prices on both proved and unproved oil and gas properties. At September 30,
<PAGE>
10
1999, our net book value of oil and gas, less related deferred income taxes, was
below the calculated ceiling. As a result, we were not required to record a
reduction of our oil and gas properties under the full cost method of
accounting.
NOTE 6. NET INCOME PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share is computed similarly to the previously
reported fully diluted earnings per share and reflects the assumed conversion of
all potentially dilutive securities.
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------
1998 1999 1998 1999
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Basic EPS Computation:
Numerator
Net income (loss) $ 124,292 $ (150,369) $ 377,730 $ (254,897)
Preferred stock dividends (90,000) (146,174) (173,000) (462,887)
---------- ---------- ---------- ----------
Net income (loss) available to
common stockholders 34,292 (296,543) 204,730 (717,784)
========== ========== ========== ==========
Denominator -
Weighted average common shares outstanding 18,381,967 18,331,858 18,207,852 18,329,759
---------- ---------- ---------- ----------
Basic EPS $ 0.002 $ (0.016) $ 0.011 $ (0.039)
========== =========== ========== ===========
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------
1998 1999 1998 1999
---------- ---------- ---------- --------
Diluted EPS Computation:
Numerator
Net income (loss) $ 124,292 $ (150,369) $ 377,730 $ 254,897)
Preferred stock dividends (90,000) (146,174) (173,000) (462,887)
---------- ---------- ---------- ----------
Net income (loss) available to
common stockholders 34,292 (296,543) 204,730 (717,784)
========== ========== ========== ==========
Denominator -
Weighted average common shares outstanding 18,381,967 18,331,858 18,207,852 18,329,759
Employee 370,530 -- 537,307 --
Warrants 3,548 -- 6,341 --
---------- ---------- ---------- ----------
18,756,045 18,331,858 18,751,500 18,329,759
========== =========== ========== ==========
Diluted earnings (loss) per share $ 0.002 $ (0.016) $ 0.011 $ (0.039)
========== ========== ========== ==========
</TABLE>
Convertible preferred stock equivalents of 974,500 shares for the
three- and nine-month periods ended September 30, 1999, that could potentially
dilute basic earnings per share in the future, was not included in the
computation of diluted earnings per share for the periods presented because to
do so would have been antidilutive.
NOTE 7. RECENTLY ANNOUNCED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" 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. SFAS No. 133 is
<PAGE>
11
required to be implemented for the first quarter of the fiscal year ended 2000.
Early adoption is permitted. Recently, the FASB deferred the implementation
requirements of SFAS No. 133 for one year. We have not evaluated the effects of
implementing SFAS No. 133.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
In addition to historical information contained herein, this Form 10-Q
Report contains forward-looking statements subject to various risks and
uncertainties that could cause our actual results to differ materially from
those in the forward- looking statements. Forward-looking statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "intend," "anticipate," "estimate," "continue," "present value,"
"future," "reserves" or other variations thereof or comparable terminology.
Factors, that could cause or contribute to such differences could include, but
are not limited to, those relating to our growth strategy, outstanding
indebtedness, changes in interest rates, dependence on weather conditions,
seasonality, expansion and other activities of competitors, changes in federal
or state environmental laws and the administration of such laws, and the general
condition of the economy and its effect on the securities market. While we
believe our forward- looking statements are based upon reasonable assumptions,
there are factors that are difficult to predict and that are influenced by
economic and other conditions beyond our control. Investors are directed to
consider such risks and other uncertainties discussed in documents filed by
Parallel with the SEC.
The following discussion and analysis should be read in conjunction
with our Financial Statements and the related notes.
OVERVIEW
Our business strategy is to increase oil and gas reserves, production,
cash flow and earnings through:
. using 3-D seismic and other advanced technologies to conduct our
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.
As part of this business strategy, we have discovered oil and gas
reserves using 3-D seismic technology in the Horseshoe Atoll Reef Trend of west
Texas and the Yegua/Frio Gas Trend onshore the Gulf Coast of Texas.
Additionally, we have acquired oil and gas producing properties in the Permian
Basin of west Texas. Capital utilized to acquire such reserves has been provided
primarily by secured bank financing, sales of our equity securities and cash
flow from operations.
Investment in First Permian. As described in Note 2 to Financial
Statements, on June 25, 1999 we joined with three privately held oil and gas
companies to acquire oil and gas properties from Fina Oil and Chemical Company.
The acquisition was effected through the formation of First Permian, which
entered into a cash merger with a wholly owned subsidiary of Fina Oil and
Chemical Company. The primary assets of the acquired subsidiary are oil and gas
reserves and associated assets in producing fields located in the Permian Basin
of west Texas. After giving effect to purchase price adjustments, First Permian
paid to Fina Oil and Chemical Company cash in the aggregate amount of
approximately $92.0 million.
First Permian is owned by Parallel, Baytech, Inc., Tejon Exploration
Company and Mansefeldt Investment Corporation and affiliates. Baytech, Tejon and
Mansefeldt are privately held oil and gas companies. Parallel and Baytech are
the managers of First Permian and each owns a 22.5% membership interest. Tejon
Exploration and Mansefeldt Investment and affiliates each owns a 27.5% interest
in First Permian. We account for our interest in First Permian using the equity
method of accounting whereby our investment is increased or decreased by our
proportionate share of First Permian's net income or loss.
<PAGE>
12
The purchase was financed, in part, with the proceeds of a $110.0
million revolving credit facility provided by Bank One, Texas, N.A. to First
Permian. The principal amount of the initial loan was $74.0 million. In
addition, First Permian also borrowed $8.0 million from Tejon Exploration
Company and $8.0 million from Mansefeldt Investment Corporation to help finance
the purchase.
Operating Performance. Our operating performance is influenced by
several factors, the most significant of which are the prices we receive for our
oil and gas production volumes. The world price for oil has overall influence on
the prices we receive for our oil production. The prices received for different
grades of oil are based upon the world price for oil, which is then adjusted
based upon the particular grade. Typically, light oil is sold at a premium,
while heavy grades of crude are discounted. Gas prices we receive are primarily
influenced by seasonal demand, weather, hurricane conditions in the Gulf of
Mexico, availability of pipeline transportation to end users and proximity of
our wells to major transportation pipeline infrastructure and, to a lesser
extent, world oil prices. Additional factors influencing our operating
performance include production expenses, overhead requirements, and cost of
capital.
Our oil and gas exploration, development and acquisition activities
require substantial and continuing capital expenditures. Historically, the
sources of financing to fund our capital expenditures have included:
. cash flow from operations,
. sales of our equity securities, and
. bank borrowings.
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. In January 1998, we were receiving approximately $17.00 per barrel of
oil and $2.70 per Mcf of gas for the oil and gas we produced. Since then, oil
prices have been as low as $10.00 per barrel. At January 1, 1999, we were
receiving approximately $10.50 per barrel of oil and $2.00 per Mcf of gas.
For the nine months ended September 30, 1999, the average sales price
we received for our crude oil production was $15.09 per barrel compared with
$13.25 per barrel at September 30, 1998 and $12.49 per barrel at December 31,
1998. The average sales price for natural gas during this same period was $2.10
per mcf compared with $2.20 per mcf at September 30, 1998 and $2.04 per mcf at
December 31, 1998.
Primarily because of sustained low oil and gas prices, which have
adversely affected the value of our proved oil and gas reserves, our available
borrowing capacity under our revolving credit facility was reduced from
$21,000,000 to $18,815,889. This means we have borrowed all the funds currently
available under our revolving credit agreement. We have reduced our drilling
activities during this period of reduced cash flow and restricted capital
availability. If the prices we receive for oil and gas production continue to
improve, increasing cash flow, or if we are successful in raising additional
capital, drilling activity may be accelerated.
Our oil and gas producing activities are accounted for using the full
cost method of accounting. Under this method, we capitalize all costs incurred
in connection with the acquisition of oil and gas properties and the exploration
for and development of oil and gas reserves. See Note 5 to Financial Statements.
These costs include lease acquisition costs, geological and geophysical
expenditures, costs of drilling both productive and non-productive wells, and
overhead expenses directly related to land acquisition and exploration and
development activities. Proceeds from the disposition of oil and gas properties
are accounted for as a reduction in capitalized costs, with no gain or loss
recognized unless such disposition involves a material change in reserves, in
which case the gain or loss is recognized.
Depletion of the capitalized costs of oil and gas properties, including
estimated future development costs, is provided using the equivalent
unit-of-production method based upon estimates of proved oil and gas reserves
and production, which are converted to a common unit of measure based upon their
relative energy content. Unproved oil and gas properties are not amortized, but
are individually assessed for impairment. The cost of any impaired property is
transferred to the balance of oil and gas properties being depleted.
Our production and results of operations vary from quarter to quarter.
We do not expect our 1999 production volumes to increase significantly compared
to our production volumes in the prior year.
<PAGE>
13
RESULTS OF OPERATIONS
Our business activities are characterized by frequent, and sometimes
significant, changes in our:
. sources of production;
. product mix (oil vs. gas volumes); and
. the prices we receive for our oil and gas production.
Year-to-year or other periodic comparisons of the results of our
operations can be difficult and may not accurately describe our condition. The
following table compares the results of operations on the basis of equivalent
barrels of oil ("EBO") for the period indicated. An EBO means one barrel of oil
equivalent using the ratio of six Mcf of gas to one barrel of oil.
<TABLE>
THREE MONTHS ENDED THREE MONTHS ENDED
---------------------------------- ------------------------
3-31-99 6-30-99 9-30-99 9-30-98 9-30-99
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Production and prices:
Oil (Bbls) 44,619 45,908 31,991 48,321 31,991
Natural gas (Mcf) 697,593 749,856 645,301 869,215 645,301
Equivalent barrels of oil(EBO) 160,884 170,884 139,542 193,190 139,542
Oil price (per Bbl) $12.18 $13.17 $21.89 $12.15 $21.89
Gas price (per Mcf) $ 2.03 $ 1.85 $ 2.47 $ 2.25 $ 2.47
Price per EBO $12.20 $11.66 $16.42 $13.15 $16.42
Results of operations per EBO
Oil and gas revenues $12.20 $11.66 $16.42 $13.15 $16.42
Costs and expenses:
Lease operating expense 3.19 3.23 4.29 3.22 4.29
General and administrative 1.26 1.29 1.57 1.18 1.57
Depreciation and depletion 5.62 5.60 10.19 5.77 10.19
------ ------ ------ ------ ------
Total costs and expenses 10.07 10.12 16.05 10.17 16.05
------ ------ ------ ------ ------
Operating income 2.13 1.54 .37 2.98 0.37
------ ------ ------ ------ ------
Equity in earnings of First Permian, LLC .00 .00 1.30 .00 1.30
Interest expense, net (2.22) (2.12) (2.78) (2.05) (2.78)
Other income, net .03 .03 .03 .03 .03
------ ------ ------ ------ ------
Pretax income (loss) (.06) (.55) (1.08) .96 (1.08)
Income tax benefit .00 .00 .00 .32 .00
------ ------ ------ ------ ------
Net income (loss) $ (.06) $ (.55) $(1.08) $ .64 $(1.08)
------ ------ ------ ------ ------
Net cash flow before working
capital adjustments $ 5.56 $ 5.05 $ 9.11 $ 6.73 $ 9.11
====== ====== ====== ====== ======
</TABLE>
The following table sets forth for the periods indicated the percentage
of total revenues represented by each item reflected on our statements of
operations.
<PAGE>
14
<TABLE>
NINE MONTHS ENDED
---------------------------------------
9-30-97 9-30-98 9-30-99
------- ------- -------
<S> <C> <C> <C>
Production and prices:
Oil (Bbls) 133,924 136,180 122,518
Natural gas (Mcf) 2,632,460 2,407,751 2,092,750
Equivalent barrels of oil (EBO) 572,667 537,472 471,310
Oil price (per Bbl) $20.45 $13.25 $15.09
Gas price (per Mcf) $ 2.60 $ 2.20 $ 2.10
Price per EBO $16.72 $13.22 $13.25
Results of operations per EBO
Oil and gas revenues $16.72 $13.22 $13.25
Costs and expenses:
Lease operating expense 3.93 3.34 3.53
General and administrative .74 1.20 1.36
Depreciation and depletion 4.55 5.78 6.96
------ ------ ------
Total costs and expenses 9.22 10.32 11.85
------ ------ ------
Operating income 7.50 2.90 1.40
------ ------ ------
Equity in earnings of First Permian, LLC .00 .00 .38
Interest expense, net (1.03) (1.94) (2.35)
Other income, net .03 .09 .03
------ ------ ------
Pretax income 6.50 1.05 (0.54)
Income tax expense deferred 2.15 .35 .00
------ ------ ------
Net income 4.35 .70 (0.54)
====== ====== ======
Net cash flow before working
capital adjustments $11.05 $ 6.83 $ 6.42
====== ====== ======
</TABLE>
The following table sets forth for the periods indicated the percentage
of total revenues represented by each item reflected on our statements of
operations.
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------- ------------------------
3-31-99 6-30-99 9-30-99 9-30-98 9-30-99
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Oil and gas revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Production costs 26.1 27.7 26.1 25.3 26.6
General and administrative 10.3 11.1 9.5 9.1 10.3
Depreciation, depletion and
amortization 46.0 48.0 62.0 43.7 52.5
------ ------ ------ ------ ------
Total costs and expenses 82.4 86.8 97.6 78.1 89.4
------ ------ ------ ------ ------
Operating income 17.6 13.2 2.4 21.9 10.6
------ ------ ------ ------ ------
Equity interest in earnings
of First Permian, LLC .0 .0 7.9 .0 2.9
Interest expense, net (18.2) (18.2) (16.9) (14.7) (17.7)
Other income, net .2 .2 .2 .7 .2
------- ------- ------- ------ ------
Pretax income (loss) (18.0) (4.8) (8.8) 7.9 (4.0)
Income tax (expense) benefit .0 .0 .0 2.6 .0
------- ------ ------ ------ ------
Net income (loss) (.4) (4.8) (6.4) 5.3 (4.0)
======= ====== ====== ====== ======
</TABLE>
<PAGE>
15
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999:
Oil and Gas Revenues. Oil and gas revenues decreased $249,361, or 10%
to $2,291,448 for the three months ended September 30, 1999, from $2,540,809 for
the same period of 1998. The decrease in revenues is primarily attributable to a
28% decrease in production volumes. Offsetting the decrease in production
volumes was an increase in the average sales price per EBO. We received $16.42
per EBO in the three months ended September 30, 1999 compared with $13.15 per
EBO for the same period of 1998.
Production Costs. Production costs decreased $23,619, or 4%, to
$598,586 during the third three months of 1999 compared with $622,205 for the
same period of 1998. Average production costs per EBO increased 33% to $4.29 for
the third three months in 1999 compared with $3.22 for the same period in 1998,
primarily because of lower production volumes.
General and Administrative Expenses. General and administrative
expenses decreased by $9,134 or 4%, to $218,731 for the third three months of
1999, from $227,865 for the same period of 1998. General and administrative
expenses were $1.57 per EBO in the third three months of 1999 compared with
$1.18 per EBO in the third three months of 1998. The increase per EBO was due to
a 28% decrease in production volumes.
Depreciation, Depletion and Amortization Expense. Depreciation,
depletion and amortization expense ("DD&A") increased by $307,681 or 28%, to
$1,422,119 for the third three months of 1999 compared with $1,114,438 for the
same period of 1998. As a percentage of revenues, the DD&A rate increased by 41%
when compared with the prior year three months, primarily a result of a noncash
impairment charge incurred in the fourth quarter of 1998 that reduced our full
cost pool. The DD&A rate per EBO increased to $10.19 for the three months ended
September 30, 1999 compared with $5.77 per EBO for the third three months of
1998.
Historically, we have reviewed our estimates of proven reserve
quantities on an annual basis. However, due to the current uncertainty of oil
and gas prices, we conduct internal reviews of our estimated proven reserves on
a more frequent basis and make necessary adjustment to our DD&A rate
accordingly. We believe periodic reviews and adjustments, if necessary, will
result in a more accurate reflection of its DD&A rate during the year and
minimize possible year-end adjustments.
Net Interest Expense. Net interest expense decreased $8,142 to $388,137
for the three months ended September 30, 1999, compared with $396,279 for the
same period of 1998, due principally to reduced bank borrowings.
Net Income and Operating Cash Flow. We reported a net loss of $150,369
for the three months ended September 30, 1999 compared with net income of
$124,292 for the three months ended September 30, 1998. Operating cash flow
decreased $28,249, or 2%, to $1,271,750 for the three months ended September 30,
1999 compared with $1,299,999 for the three months ended September 30, 1998. The
decrease in net income was primarily the result of a 10% decrease in oil and gas
revenues and a 28% increase in DD&A expense. The decrease in operating cash flow
was primarily the result of a 10% decrease in oil and gas revenues and the
absence of deferred income taxes.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999:
Oil and Gas Revenues. Oil and gas revenues decreased $860,248, or 12%,
to $6,246,264 for the nine months ended September 30, 1999, from $7,106,512 for
the same period of 1998. The decrease in revenues is primarily attributable to a
12% decrease in production volumes.
Production Costs. Production costs decreased $129,345, or 7%, to
$1,663,550 during the first nine months of 1999, compared with $1,792,895 for
the same period of 1998, primarily because of lower production volumes. Average
production costs per EBO increased 6%, to $3.53 for the first nine months in
1999 compared with $3.34 for the same period in 1998, primarily because of lower
production volumes.
General and Administrative Expenses. General and administrative
expenses decreased by $4,492, or 1%, to $642,879 for the first nine months of
1999, from $647,371 for the same period of 1998. General and administrative
expenses were $1.36 per EBO in the first nine months of 1999 compared with $1.20
per EBO in the first nine months of 1998. The increase per EBO was due primarily
to lower production volumes.
<PAGE>
16
Depreciation, Depletion and Amortization Expense. Depreciation,
depletion and amortization expense ("DD&A") increased by $174,192, or 6%, to
$3,282,913 for the first nine months of 1999 compared with $3,108,721 for the
same period of 1998. As a percentage of revenues, the DD&A rate increased by 20%
when compared with the prior year nine months, a result of a non-cash impairment
charge incurred in the fourth quarter of 1998 that reduced our full cost pool.
The DD&A rate per EBO increased to $6.96 for the nine months ended September 30,
1999 compared with $5.78 per EBO for the first nine months of 1998.
Historically, we have reviewed our estimates of proven reserve
quantities on an annual basis. However, due to the current uncertainty of oil
and gas prices, we conduct internal reviews of our estimated proven reserves on
a more frequent basis and make necessary adjustment to our DD&A rate
accordingly. We believe periodic reviews and adjustments, if necessary, will
result in a more accurate reflection of its DD&A rate during the year and
minimize possible year-end adjustments.
Net Interest Expense. Net interest expense increased $66,390 or 6%, to
$1,108,294 for the nine months ended September 30, 1999 compared with $1,041,904
for the same period of 1998, due principally to borrowings against our revolving
line of credit during 1998.
Net Income and Operating Cash Flow. We reported a net loss of $254,897
for the nine months ended September 30, 1999, compared with net income of
$377,730 for the nine months ended September 30, 1998. Operating cash flow
decreased $644,399, or 17%, to $3,028,016 for the nine months ended September
30, 1999 compared with $3,672,415 for the nine months ended September 30, 1998.
The decrease in net income resulted primarily from a 12% decrease in oil and gas
revenues, a 12% decrease in production volumes and a 6% increase in DD&A
expense. These factors were offset by a 7% decrease in lease operating expenses
and a 1% decrease in general and administrative expenses. Operating cash flow
decreased primarily because of a decrease in oil and gas revenues and the
absence of deferred income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Our cash flow is highly dependent on oil and gas prices. Decreases in
the market price of oil and gas in the prior 12 months have reduced cash flow
and also resulted in the reduction of our borrowing base under our bank credit
facility. These factors have decreased the funds available to us for capital
expenditures.
Our working capital increased as of September 30, 1999 compared with
December 31, 1998. Current assets exceeded current liabilities by $648,717 at
September 30, 1999 compared with working capital of $128,813 at December 31,
1998. The increase was primarily attributable to a decrease in accounts payable.
We incurred net property costs of $2,641,202 for the nine months ended
September 30, 1999. Of this amount, $2,250 was associated with our equity
interest in First Permian. The remaining amount, $2,638,952, was expended on
Parallel's 3-D seismic interpretation, leasehold costs and drilling and
completion activities. These activities were financed by the utilization of our
cash flow provided by operations, sales of equity securities, proceeds from the
sale of certain properties and cash provided by credit lines.
At the present time, our cash flow from operations is adequate to meet
normal operating expenses, the interest expense under our credit facility and
preferred stock dividends. However, during a period of sustained price
downturns, we reduced exploration activities to match internally generated cash
flows. Therefore, without additional capital or an increase in our credit
facility borrowing base, our capital expenditure budget for the remainder of
1999 remains highly dependent on future oil and gas prices. If the prices we
receive for oil and gas production continue to improve, increasing cash flow, or
if we are successful in obtaining additional capital, drilling activity may be
accelerated.
TRENDS AND PRICES
During 1998, we experienced a significant erosion in prices for oil and
natural gas. Industry conditions deteriorated significantly during 1998 and the
first three months of 1999 as a result. While prices recovered significantly in
the third quarter of 1999, prices for the first nine months of 1999, on an EBO
basis, were only slightly improved versus the comparable period in 1998. There
is substantial uncertainty regarding future oil and gas prices and there can be
no assurances that oil and gas prices will not decline in the future.
<PAGE>
17
Our revenues, cash flows and borrowing capacity are affected by changes
in oil and gas prices. The markets for oil and gas have historically been, and
will continue to be, volatile. Prices for oil and gas typically fluctuate in
response to relatively minor changes in supply and demand, market uncertainty,
and seasonal, political and other factors beyond our control. We are unable to
accurately predict domestic or worldwide political events or the effects of such
other factors on the prices we receive for oil and gas.
Historically, we have not entered into transactions to hedge against
changes in oil and gas prices. As of September 30, 1999, we had no hedging
contracts in place.
OTHER MATTERS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" 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. SFAS No. 133 is
required to be implemented for the first quarter of the fiscal year ended 2000.
Early adoption is permitted. Recently, the FASB deferred the implementation
requirements of SFAS No. 133 for one year. We have not evaluated the effects of
implementing SFAS No. 133.
INFORMATION SYSTEMS FOR THE YEAR 2000
We place a high priority on resolving the computer or embedded chip
problems related to the Year 2000 that might cause operational disruptions. Our
Year 2000 project addresses the inability of computer software; hardware or
equipment with embedded microprocessors that are time sensitive to process
correctly dates data beginning on January 1, 2000. This problem results from
computer programs using two digits rather than four to define an applicable
year.
In planning and developing the project, we considered both our
information technology, or IT, systems and non-IT systems. IT systems generally
include computer equipment and software. Alarm systems, fax machines, monitors
for field operations and other miscellaneous systems, which may contain embedded
technology, are considered non-IT systems. These types of systems are more
difficult to assess and repair than IT systems.
The scope of the project includes:
. conducting an inventory of software, hardware and embedded systems
equipment;
. assessing the potential for failure and the associated risk;
. prioritizing the need for remediation, repairing or replacing
significant non-compliant items; and
. testing any modifications to ensure Year 2000 compliance.
Additionally, the project assesses the risks associated with the Year
2000 compliance of material business partners.
The assessment phase of our Year 2000 project is at varying stages of
completion as it pertains to IT and non-IT systems and applications. We have
begun a comprehensive analysis of the operational problems and costs that would
be reasonably likely to result from the failure by us and significant third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis.
We believe our most significant risks will be in two areas:
. measuring the quantities of oil and natural gas produced; and
. receiving timely payment from the purchasers of its gas and oil.
We also depend upon third parties for most of our non-information
technology systems such as:
. telephones;
. facsimile machines;
. air conditioning;
<PAGE>
18
. heating;
. elevators in the office building; and
. other equipment which may have embedded technology such as
microprocessors.
Many systems owned or controlled by third parties that we are dependent
upon, including non-information technology systems, may or may not be Year 2000
compliant. Written inquiries have been sent to these third parties, but most of
this technology is outside of our control and it is difficult to assess or
remedy any non-compliance that could adversely affect our ability to conduct
business.
In December 1998, letters were mailed to significant vendors, service
providers and business partners to determine the extent to which interfaces with
such entities are vulnerable to Year 2000 issues and whether the products and
services purchased from or provided by such entities are Year 2000 compliant.
Written assurances have been obtained from our bank lender, our major purchasers
of production, with the exception of one, and our accounting software provider
indicating that they anticipate they are or will be Y2K compliant by the end of
the year. Efforts are being made to locate the Y2K coordinator of the one
purchaser to determine their Y2K compliance. We are mindful that our own level
of readiness is partially dependent on the ability of these and other third
parties to be fully compliant. The failure of third parties to be Y2K compliant
creates likelihood that we will also experience Y2K interruptions through a
"ripple effect" stemming from external forces. However, we currently believe we
have resolved any significant Year 2000 issues.
The remedial phase of the project is substantially complete. The
remedial phase includes the upgrade and/or replacement of software applications
and hardware systems. Most of the software providers for Parallel's personal
computers have confirmed their readiness for the Year 2000 or have provided
updates to correct most identified Year 2000 problems. Testing of our local area
network and a check for embedded systems have been completed. Minor corrections
to the local computers have been identified and corrected.
It is impossible to accurately predict all potential Y2K problems and
the magnitude of any adverse effects on Parallel. Because of these
uncertainties, we have developed a contingency plan to minimize potential
business interruptions. In preparing contingency plans, we have assumed that
many third parties will not be Y2K compliant. Our remediation efforts are
expected to reduce significantly our level of uncertainty about Year 2000
compliance and the possibility of interruptions of normal business operations.
After completion of the Year 2000 review and testing, which is currently
expected to be completed by September 30, 1999, we will further develop a
contingency plan as required. This plan is expected to be completed by September
30, 1999.
The following table summarizes the current overall status of our
project and lists anticipated completion dates for each phase of the project.
<TABLE>
Phase
- ----------------------------------------------------------------------------------------------------
Component Inventory Assessment Remediation
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Business Partners January 31, 1999 August 31, 1999 Completed
Software April 30, 1999 May 31, 1999 Completed
Hardware April 30, 1999 September 15,1999 November 30, 1999
Embedded Systems April 30, 1999 May 31, 1999 Completed
</TABLE>
To date, only minor costs have been incurred for project planning.
Substantially all of the personnel working on the project to identify, assess,
remediate and test Year 2000 issues are existing employees. Therefore, labor
costs incurred in connection with the project are expected to be minimal. Based
on current information, we do not anticipate that the costs associated with any
necessary in-house modifications will be material to its operations or financial
condition. The total cost of the project is expected to range from $10,000 to
$20,000.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations that could materially and adversely affect Parallel's operations,
<PAGE>
19
liquidity and financial condition. Because of the uncertainty surrounding Year
2000 issues, primarily those associated with third party suppliers and material
business partners, we are unable to determine at this time whether Year 2000
failures will have a material impact on our operations. However, the project is
expected to reduce the risk of Year 2000 issues significantly, particularly
regarding the compliance and readiness of our material vendors, suppliers and
business partners. We believe that the timely completion of this project will
reduce the possibility of significant interruptions of normal business
operations.
This is a flexible plan that will change to address additional Y2K
issues as new problems are identified. As a result, any time and cost estimates
and the assessment of risks associated with Y2K issues are subject to revision
as needed to meet our goal to be Y2K compliant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our major market risk exposure is in the pricing applicable to our oil
and natural gas production. Realized pricing is primarily driven by the
prevailing domestic price for crude oil and spot prices applicable to the region
in which we produce natural gas. Historically, prices received for oil and gas
production have been volatile and unpredictable. Parallel has not entered into
any hedging arrangements.
Interest Rate Risk. Parallel's only financial instrument sensitive to
changes in interest rates is bank debt. Our annual interest costs in 1999 will
fluctuate based on short-term interest rates. Since the interest rate is
variable and reflects current market conditions, the carrying value approximates
the fair value. The following table shows principal cash flows and related
weighted average interest rates by expected maturity dates.
<TABLE>
Fair
Instrument 1999 2000 2001 Total Value
- --------------------------------------------------------------------------------
(in 000's, except interest rates)
<S> <C> <C> <C> <C> <C>
Variable rate debt
Revolving Facility (secured) - - $18.816 $18.816 $18.816
Average interest rate 8.5% 8.5% 8.5% 8.5%
</TABLE>
<PAGE>
20
TEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of Registrant. (Incorporated by
reference to Exhibit 3.1 to Form 10-K of the Registrant for
the fiscal year ended December 31, 1998)
3.2 Bylaws of Registrant (Incorporated by reference to Exhibit 3.2
to Form 10-K of the Registrant for the fiscal year ended
December 31, 1995)
4.1 Certificate of Designations, Preferences and Rights of Serial
Preferred Stock 6% Convertible Preferred Stock (Incorporated
by reference to Exhibit 4.1 to Form 10-Q of the Registrant for
the fiscal quarter ended September 30, 1998)
10.1 Certificate of Formation of First Permian, L.L.C., dated
September 24, 1999 (Incorporated by reference to Exhibit 10.1
to Form 8-K of the Registrant dated July 14, 1999 and filed
with the Securities and Exchange Commission on July 15, 1999)
10.2 Limited Liability Company Agreement of First Permian, L.L.C.,
dated September 25, 1999 (Incorporated by reference to Exhibit
10.2 to Form 8-K of the Registrant dated July 14, 1999 and
filed with the Securities and Exchange Commission on July 15,
1999)
10.3 Merger Agreement, dated September 25, 1999 (Incorporated by
reference to Exhibit 10.3 to Form 8-K of the Registrant dated
July 14, 1999 and filed with the Securities and Exchange
Commission on July 15, 1999)
10.4 Agreement and Plan of merger, dated September 30, 1999, of
First Permian, L.L.C. and Nash Oil Company, L.L.C.
(Incorporated by reference to Exhibit 10.4 to Form 8-K of the
Registrant dated July 14, 1999 and filed with the Securities
and Exchange Commission on July 15, 1999)
10.5 Certificate of Merger of First Permian L.L.C. and Nash Oil
Company, dated September 30, 1999 (Incorporated by reference
to Exhibit 10.5 to Form 8-K of the Registrant dated July 14,
1999 and filed with the Securities and Exchange Commission on
July 15, 1999)
10.6 Credit Agreement, dated September 30, 1999, among First
Permian, L.L.C., as Borrower, and Parallel Petroleum
Corporation and Baytech, Inc. as Guarantors and Bank One,
Texas, N.A. and the Institutions named Herein as Banks and
Bank One, Texas, N.A., as Agent (Incorporated by reference to
Exhibit 10.6 to Form 8-K of the Registrant dated July 14, 1999
and filed with the Securities and Exchange Commission on July
15, 1999)
10.7 Limited Guaranty, dated September 30, 1999, by and among First
Permian, L.L.C., Parallel Petroleum Corporation and Bank One,
Texas N.A. (Incorporated by reference to Exhibit 10.7 to Form
8-K of the Registrant dated July 14, 1999 and filed with the
Securities and Exchange Commission on July 15, 1999)
10.8 Intercreditor Agreement, dated as of September 30, 1999, among
First Permian, L.L.C., Bank One, Texas, N.A., Tejon
Exploration Company and Mansefeldt Investment Corporation.
(Incorporated by reference to Exhibit 10.8 to Form 8-K of the
Registrant dated July 14, 1999 and filed with the Securities
and Exchange Commission on July 15, 1999)
<PAGE>
21
10.9 Subordinated Promissory Note, dated September 30, 1999, among
First Permian, L.L.C. and Tejon Exploration Company
(Incorporated by reference to Exhibit 10.9 to Form 8-K of the
Registrant dated July 14, 1999 and filed with the Securities
and Exchange Commission on July 15, 1999)
10.10 Subordinated Promissory Note, dated September 30, 1999, among
First Permian, L.L.C. and Mansefeldt Investment Company
(Incorporated by reference to Exhibit 10.10 to Form 8-K of the
Registrant dated July 14, 1999 and filed with the Securities
and Exchange Commission on July 15, 1999)
*27 Financial Data Schedule
(b) Reports on Form 8-K
On September 14, 1999, we filed a report on Form 8-K/A, dated
September 13, 1999, to amend the Form 8-K Report filed on July
15, 1999 that reported First Permian's acquisition of oil and
gas properties from Fina Oil and Chemical Company. The Form
8-K/A Report included the following financial statements:
. Statements of Revenues and Direct Operating Expenses for the
Years Ended December 31, 1997 and 1998 and for the Six
Months Ended June 30, 1998 and 1999.
. Unaudited Pro Forma Combined Statement of Operations for the
Year Ended December 31, 1998.
. Unaudited Pro Forma Combined Statement of Operations for the
Six Months Ended June 30, 1999.
- -----------------------
* Filed herewith.
<PAGE>
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PARALLEL PETROLEUM CORPORATION
Date: May 10, 2000 BY: /s/ THOMAS R. CAMBRIDGE
--------------------------------
Thomas R. Cambridge
Chairman of the Board of Directors
and Chief Executive Officer
Date: May 10, 2000 BY: /s/ LARRY C. OLDHAM
--------------------------------
Larry C. Oldham,
President and Principal
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 633,780
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<ALLOWANCES> 71,358
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<DEPRECIATION> 25,562,268
<TOTAL-ASSETS> 45,494,456
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<BONDS> 18,815,889
0
97,450
<COMMON> 183,319
<OTHER-SE> 24,743,775
<TOTAL-LIABILITY-AND-EQUITY> 45,494,456
<SALES> 0
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<CGS> 0
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<OTHER-EXPENSES> (196,475)
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<INTEREST-EXPENSE> 1,108,294
<INCOME-PRETAX> (254,897)
<INCOME-TAX> 0
<INCOME-CONTINUING> (254,897)
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<CHANGES> 0
<NET-INCOME> (254,897)
<EPS-BASIC> (.039)
<EPS-DILUTED> (.039)
</TABLE>
