PARALLEL PETROLEUM CORPORATION
Balance Sheets
December 31, 2001 and 2000
Assets 2001 2000
---- ----
Current assets:
Cash and cash equivalents $ 3,351,044 $ 2,000,826
Accounts receivable:
Oil and gas 1,420,859 4,057,527
Others, net of allowance for doubtful accounts of $0 in
2001 and $51,136 in 2000 263,819 319,818
Affiliate 16,687 19,569
----------- ------------
1,701,365 4,396,914
Other assets 207,120 27,166
----------- ------------
Total current assets 5,259,529 6,424,906
----------- ------------
Property and equipment, at cost:
Oil and gas properties, full cost method (Note 11) 85,132,345 72,316,384
Other 552,219 372,765
----------- ------------
85,684,564 72,689,149
Less accumulated depreciation and depletion (55,854,378) (32,742,060)
----------- ------------
Net property and equipment 29,830,186 39,947,089
----------- ------------
Net deferred tax asset (Note 5) 6,137,670 --
Investment in First Permian, LLC (Note 15) 473,764 --
Other assets, net of accumulated amortization of $131,139 in 2001
and $114,791 in 2000 58,754 84,442
----------- ------------
$ 41,759,903 $ 46,456,437
=========== ============
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt (Note 3) $ 2,400,000 $ 803,531
Investment liability in First Permian (Note 15) -- 366,765
Accounts payable and accrued liabilities 3,446,370 2,443,773
Income taxes payable (Note 5) -- 50,000
----------- ------------
Total current liabilities 5,846,370 3,664,069
----------- ------------
Long-term debt, excluding current maturities (Note 3) 9,600,000 11,624,000
Stockholders' equity:
Series A preferred stock - par value of $.10 per share (aggregate
liquidation preference of $26) authorized 50,000 shares -- --
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 97,450 97,450
974,500 in 2001 and 2000
Common stock - par value of $.01 per share, authorized 60,000,000
shares, issued and outstanding 20,663,861 in 2001 and 20,331,858 205,288 203,319
in 2000
Additional paid-in surplus 34,088,849 34,238,078
Accumulated deficit (8,078,054) (3,370,479)
----------- ------------
Total stockholders' equity 26,313,533 31,168,368
----------- ------------
Commitments and contingencies (Note 16)
$ 41,759,903 $ 46,456,437
=========== ============
See accompanying notes to financial statements.
F-3
PARALLEL PETROLEUM CORPORATION
Statements of Income (Loss)
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
Oil and gas revenues $ 17,840,024 $ 17,134,502 $ 8,974,041
---------- ---------- ---------
Costs and expenses:
Lease operating expense 3,920,840 3,099,534 2,353,732
General and administrative 1,346,454 1,191,527 805,934
Provision for losses on trade receivables -- -- 85,829
Depreciation and depletion 6,318,105 5,239,205 5,223,500
Impairment of oil and gas properties (Note 12) 16,819,813 -- 1,705,000
---------- ---------- ---------
Total costs and expenses 28,405,212 9,530,266 10,173,995
---------- ---------- ---------
Operating income (loss) (10,565,188) 7,604,236 (1,199,954)
---------- ---------- ---------
Other income (expense), net:
Equity in income (loss) of First Permian, LLC
(Note 15) 840,529 (500,576) 197,811
Interest income 142,948 220,280 65,333
Other income 93,922 130,368 26,847
Interest expense (802,017) (1,340,360) (1,534,540)
Other expense (529,317) (6,620) (5,954)
---------- ---------- ---------
Total other expense, net (253,935) (1,496,908) (1,250,503)
---------- ---------- ---------
Income (loss) before income taxes (10,819,123) 6,107,328 (2,450,457)
Income tax (expense) benefit 6,111,548 (130,000) --
---------- ---------- ---------
Net income (loss) $ (4,707,575) $ 5,977,328 $ (2,450,457)
Cumulative preferred stock dividend $ (609,063) $ (609,063) $ (609,063)
---------- ---------- ---------
Net income (loss) available to common
stockholders $ (5,316,638) $ 5,368,265 $ (3,059,520)
========== ========== =========
Net income (loss) per common share:
Basic $ (.26) $ .26 $ (.16)
========== ========== =========
Diluted $ (.26) $ .25 $ (.16)
========== ========== =========
See accompanying notes to financial statements.
F-4
PARALLEL PETROLEUM CORPORATION
Statements of Stockholders' Equity
Years ended December 31, 2001, 2000 and 1999
Common stock Preferred stock
------------------------ ---------------------- Additional Total
Number of Number of paid-in Accumulated stockholders'
Shares Amount Shares Amount surplus Deficit equity
------ ------ ------ ------ ------- ------- ------
Balance,
January 1, 1999 18,306,858 $ 183,069 974,500 $ 97,450 $ 32,341,971 $ (6,897,350) $ 25,725,140
Issuance of stock, 2,000,000 20,000 -- -- 3,097,295 -- 3,117,295
net
Options exercised,
including income
tax benefit 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
Net income -- -- -- -- -- 5,977,328 5,977,328
Dividends ($.60 per
share) -- -- -- -- (609,063) -- (609,063)
---------- ------- ------- ------- --------- --------- ----------
Balance,
December 31, 2000 20,331,858 203,319 974,500 97,450 34,238,078 (3,370,479) 31,168,368
---------- ------- ------- ------- ---------- --------- ----------
Options issued -- -- -- -- 99,000 -- 99,000
Options exercised,
including income
tax benefit 332,003 1,969 -- -- 360,834 -- 362,803
Net loss -- -- -- -- -- (4,707,575) (4,707,575)
Dividends ($.60 per
share) -- -- -- -- (609,063) -- (609,063)
---------- ------- ------- ------- ---------- --------- ----------
Balance,
December 31, 2001 20,663,861 $ 205,288 974,500 $ 97,450 $34,088,849 $ (8,078,054) $ 26,313,533
========== ======= ======= ======= ========== ========= ==========
See accompanying notes to financial statements.
F-5
Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (4,707,575) $ 5,977,328 $ (2,450,457)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and depletion 6,318,105 5,239,205 5,223,500
Equity loss (income) of First Permian, LLC (840,529) 500,576 (197,811)
Deferred income taxes (6,111,548) --
Loss on disposal of equipment (8,908) 1,000 --
Impairment of oil and gas properties 16,819,813 -- 1,705,000
Provision for losses on trade receivables -- -- 85,829
Stock-based financial advisory services 99,000 -- --
Other, net 25,688 (37,651) 11,728
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 2,695,549 (2,748,422) (42,078)
Decrease (increase) in prepaid expenses (179,954) 12,511 21,827
Increase (decrease) in accounts payable and accrued
liabilities (702,325) 1,773,692 (927,304)
------------ ------------ ------------
Net cash provided by
operating activities 13,407,316 10,718,239 3,430,234
------------ ------------ ------------
Cash flows from investing activities:
Additions to oil and gas property (13,125,716) (8,847,482) (4,896,081)
Proceeds from disposition of oil and gas property 1,964,677 3,017,618 1,111,525
Additions to other property and equipment (211,146) (84,045) --
Proceeds from disposition of other property and equipment 15,000 -- --
Distribution received from investment in First Permian, -- 67,500 --
LLC
Investment in First Permian, LLC -- -- (3,500)
------------ ------------ ------------
Net cash used in
investing activities (11,357,185) (5,846,409) (3,788,056)
------------ ------------ ------------
Cash flows from financing activities:
Borrowings from bank line of credit 2,000,000 12,427,531 780,000
Payments on bank line of credit (2,427,531) (15,965,889) (2,850,000)
Proceeds from exercise of options and warrants 336,681 -- 17,188
Stock offering costs -- -- (82,705)
Proceeds from common stock issuance -- -- 3,200,000
Payments of preferred stock dividend (609,063) (609,063) (609,063)
------------ ------------ ------------
Net cash provided by (used in)
financing activities (699,913) (4,147,421) 455,420
------------ ------------ ------------
Net increase in cash
and cash equivalents 1,350,218 724,409 97,598
Beginning cash and cash equivalents 2,000,826 1,276,417 1,178,819
------------ ------------ ------------
Ending cash and cash equivalents $ 3,351,044 $ 2,000,826 $ 1,276,417
============ ============ ============
See accompanying notes to financial statements.
F-6PARALLEL PETROLEUM CORPORATION Notes to Financial Statements December 31, 2001, 2000 and 1999 (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. Management and service fees received for contractual arrangements, if any, are treated as reimbursement of costs, offsetting the costs incurred to provide those services, with any excess of fees over costs credited to the full cost pool and recognized through lower cost amortization only as production occurs. 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. F-7PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved 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. 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. Derivative Instruments and Hedging Activities In June 1998 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Certain Hedging Activities." In June 2000 the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activity, an Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138 require that all derivative instruments be recorded on the balance sheet at their respective fair values. SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters of all fiscal years beginning after June 30, 2000; the F-8PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) Company adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001. There was no material impact to the financial statements. Environmental The Company is subject to extensive Federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments for the liability or component are fixed or reliably determinable. 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. The oil and gas reserve estimates are used in the determination of depletion expense and the full-cost ceiling test and are inherently imprecise. 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. F-9PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) 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. (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 is based on a variable market rate of interest. (3) Long-Term Debt Long-term debt consists of the following at December 31:
2001 2000
---- ----
Revolving Facility note payable to bank, at bank's base lending rate
(4.75% at December 31, 2001 and 9.5% at December 31, 2000) $ 12,000,000 $ 12,427,531
Less: current maturities 2,400,000 803,531
----------- -----------
$ 9,600,000 $ 11,624,000
=========== ===========
F-10PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) On December 18, 2000, the Company entered into a note agreement with a bank ("Revolving Facility") to refinance the outstanding indebtedness with its former lender. Pursuant to the note agreement, the Company may borrow $30,000,000 or the "borrowing base" then in effect. The borrowing base in effect at December 31, 2001 was $11,624,000. At December 31, 2001, the Company had an outstanding loan balance in excess of its borrowing base and had violated certain debt covenants. However, the outstanding balance was retired in connection with the New Revolving Facility on January 25, 2002. The borrowing base is reduced by a monthly commitment reduction of $323,000 beginning January 1, 2001. The borrowing base and monthly commitment reduction are subject to redetermination semi-annually, on or about May 1 and November 1 of each year, beginning May 1, 2001. The lender may require a redetermination of the Borrowing Base and Monthly Automatic Borrowing Base Reduction at any time in its sole discretion. Indebtedness under the Revolving Facility matures October 1, 2003. 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 revolving commitment and the average daily amount are due quarterly. The unpaid principal balance for the Revolving Facility bears interest at the election of the Company at a rate equal to (i) the bank's base lending rate, or (ii) the applicable adjusted Eurodollar rate plus a margin of 2.75% during the related Eurodollar Interest Period. Interest is due and payable on the day which the related Eurodollar Interest Period ends. The Revolving Facility 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. On January 25, 2002, the Company entered into a note agreement with a bank ("New Revolving Facililty") to refinance the outstanding indebtedness with its former lender. Pursuant to the note agreement, the Company may borrow the lesser of $30,000,000 or the "borrowing base" then in effect. The borrowing base at January 25, 2002 was $13,000,000. The borrowing base is reduced by a monthly commitment reduction of $300,000 beginning May 1, 2002. At the closing of the loan transaction, the outstanding balance was $12,065,589, bearing interest at 5.00%. The borrowing base and monthly commitment reduction are subject to redetermination semi-annually, on or about May 1 and November 1 of each year, beginning May 1, 2002. The lender may require a redetermination of the Borrowing Base and Monthly Automatic Borrowing Base Reduction at any time in its sole discretion. Indebtedness under the Revolving Facility matures January 25, 2006. Substantially all of our producing properties are pledged to the bank as collateral for the payment and performance of our liabilities and obligations under the loan agreement. The unpaid principal balance for the New Revolving Facility bears interest at the election of the Company at a rate equal to (i) the bank's base lending rate, or (ii) the applicable Adjusted Eurodollar Rate plus a margin of 2.75% during the related Eurodollar Interest Period. However, the interest rate may never be less than 5.00%. Interest is due and payable on the day which the related Eurodollar Interest Period ends. The New Revolving Facility agreement contains quarterly 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 F-11PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) Scheduled maturities of long-term debt at December 31, 2001, based on the New Revolving Facility entered into January 25, 2002, are as follows:
2002 $ 2,400,000
2003 3,600,000
2004 3,600,000
2005 2,400,000
-----------
$ 12,000,000
===========
(4) Stock Options, Warrants and Rights 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, 2001, options expire beginning in the current year and extending through 2009. Exercise of the nonqualified stock options resulted in a deferred tax benefit of $26,122 and $6,375 for the year ended December 31, 2001 and 1999, 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:
2001 2000 1999
---- ---- ----
Net income (loss) $ (4,496,924) $ 5,832,237 $ (3,107,170)
Basic net income (loss) per share $ (.27) $ .29 $ (.17)
Diluted net income (loss) per share $ (.27) $ .25 $ (.17)
F-12PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) 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 2001 and 1999. No options were granted in 2000.
2001 1999
---- ----
Risk-free interest rate 4.49 5.98
Expected life 8 years 8 years
Expected volatility .56 .74
A summary of the Company’s employee stock options as of December 31, 2001, 2000 and 1999, and changes during the years ended on those dates is presented below:
For the year ended For the year ended For the year ended
December 31, 2001 December 31, 2000 December 31, 1999
------------------ ------------------ -------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Shares Price of Shares Price of Shares Price
--------- -------- --------- -------- --------- ---------
Stock options:
Outstanding at
beginning of year 1,951,750 $ 3.13 1,951,750 $ 3.13 1,541,750 $ 3.46
Options granted 700,000 4.87 -- -- 435,000 1.29
Options exercised (325,500) (1.03) -- -- (25,000) (.69)
Options expired (222,500) 3.80 -- -- -- --
--------- ------- --------- -------- --------- --------
Outstanding at end of 2,103,750 $ 3.74 1,951,750 $ 3.13 1,951,750 $ 3.13
year ========= ======= ========= ======== ========= ========
Exercisable at end of 1,451,250 $ 3.54 1,689,250 $ 3.26 1,200,500 $ 3.35
year ========= ======= ========= ======== ========= ========
Weighted average fair value
of options granted
during the year $ 1.84 $ -- $ 1.40
========= ========= =========
The following table summarizes information about the Company’s employee stock options outstanding at December 31, 2001:
Options Oustanding Options Exercisable
---------------------------------------------------- ----------------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Prices December 31, 2001 Contractual Life Exercise Price December 31, 2001 Exercise Price
--------------- ----------------- ---------------- -------------- ----------------- --------------
$ 1.81 - $ 3.94 660,000 5 years $ 2.72 660,000 $ 2.72
$ 4.09 - $5.50 1,443,750 7 years $ 4.31 791,250 $ 4.23
--------- ---------
2,103,750 1,451,250
========= =========
F-13PARALLEL 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. These warrants expired unexercised in 2001. The Company has outstanding at December 31, 2001 and 2000, 300,000 warrants which were issued as part of the Company's initial public offering in 1980. Each warrant allows the holder to buy one share of common stock for $6.00. The warrants 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. The Company also has outstanding at December 31, 2001, an additional 275,000 warrants issued as partial payment for services rendered for financial and investment advice. The warrants have an exercise price equal to the average of the last bid and last asked price of the Company's common stock on the effective date of the issuance of the warrants and have a term of five years from date of issuance and a vesting period of one year. The expense related to these warrants in the amount of $99,000 has been recorded in other expenses in 2001 and is based on the estimated fair value on the date of grant using the Black-Scholes option pricing model. Stock Rights On October 5, 2000, the Board of Directors declared a dividend of one Right for each outstanding share of the Company's common stock, $0.01 par value, distributable to stockholders of record at the close of business on October 16, 2000. If a public announcement that a person has acquired 15% or more of the Company's common stock or a tender offer or exchange offer is made for 15% or more of the common stock, each Right will entitle the holder to purchase from the Company one one-thousandth of a share of Series A Preferred Stock, par value $0.10 per share, at an exercise price of $26.00 per one one-thousandth of a share, subject to adjustment. Initially, the Rights attach to all common stock certificates representing shares then outstanding, and no separate rights certificates will be distributed. The Rights separate from the common stock upon the earlier of (1) ten business days following a public announcement that a person or group of affiliated or associated persons has acquired or obtained the right to acquire, beneficial ownership of fifteen percent (15%) or more of the outstanding shares of common stock or (2) ten business days (or such later date as the Board of Directors shall determine) following the commencement of a tender or exchange offer that would result in a person or group beneficially owning fifteen percent (15%) or more of such outstanding shares of common stock. The date the Rights separate is referred to as the "distribution date". F-14PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) Undercertain circumstances the rights entitle the holders to buy the Company's stock at a 50% discount. In the event that (1) the Company is the surviving corporation in a merger or other business combination with an entity that owns 15% or more of the Company's outstanding stock; (2) any person shall acquire beneficial ownership of 15% of the Company's outstanding stock; or (3) there is any type of recapitalization of the Company that results in an increase by more than 1% the proportionate share of equity securities of the Company owned by a person who owns 15% or more of the Company's outstanding stock, each right holder will have the option to buy for the purchase price common stock of the Company having a value equal to two times the purchase price of the right. Undercertain circumstances the rights entitle the holders to buy shares of the acquiror's common stock at a 50% discount. In the event that, at any time after a person has acquired 15% or more of the Company's common stock, (1) the Company enters into a merger or other business combination transaction in which the Company is not the surviving corporation; (2) the Company is the surviving corporation in a transaction in which all or part of the common stock is exchanged for cash, property or securities of any other person; or (3) more than 50% of the assets, cash flow or earning power of the Company is sold, each right holder will have the option to buy for the purchase price stock of the acquiring company having a value equal to two times the purchase price of the right. The Rights are not exercisable until the distribution date and will expire at the close of business on October 5, 2010, unless earlier redeemed by the Company for $0.001 per right. (5) Income Taxes Federal income tax expense (benefit) differs from the amount computed at the Federal statutory rate as follows:
Year ended
December 31,
-------------------------------------------------
2001 2000 1999
---- ---- ----
Income tax expense (benefit) at statutory rate
$ (3,678,502) $ 2,076,492 $ (833,156)
Change in valuation allowance for deferred tax
assets (2,062,954) (2,185,526) 1,718,284
Adjustment to deferred tax liability for changes
in estimates -- 669,533 (649,920)
Statutory depletion (389,235) (445,941) (237,047)
Nondeductible expenses and other 19,143 15,442 1,839
----------- ---------- ----------
Income tax expense (benefit) $ (6,111,548) $ 130,000 $ --
=========== ========== ==========
F-15PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) Income tax expense is deferred, with the exception of $130,000 in 2000 related to alternative minimum tax (“AMT”). 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:
2001 2000
---- ----
Noncurrent
----------
Deferred tax assets:
Net operating loss carryforwards $ 6,370,720 $ 4,840,778
Statutory depletion carryforwards 2,025,166 1,635,931
Alternative minimum tax credit carryforward 118,074 125,523
Suspended loss carryforward in First Permian, LLC 2,893,244 124,700
Allowance for accounts receivable -- 17,386
Charitable contribution carryforward 7,713 --
----------- -----------
Total deferred tax assets 11,414,917 6,744,318
Less valuation allowance -- (2,062,954)
----------- -----------
Total deferred tax assets 11,414,917 4,681,364
----------- -----------
Deferred tax liabilities:
Equity investment in First Permian, LLC 3,054,324 --
Property and equipment, principally due to differences in
basis, expensing of intangible drilling costs for tax
purposes and depletion 2,222,923 4,681,364
----------- -----------
Total deferred tax liabilities 5,277,247 4,681,364
----------- -----------
Net noncurrent deferred income tax asset
$ 6,137,670 $ --
=========== ===========
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. At December 31, 2000, the Company established a valuation allowance against deferred tax assets of $2,062,954. This was due to the historical volatility in crude oil and gas prices, the uncertainty of future commodity prices, and the Company’s history of generating net losses. Management was unable to conclude that it is more likely than not that the Company will be able to utilize all the available carryforwards prior to their ultimate expiration. In 2001 the valuation allowance was reversed as the Company is expected to be able to utilize the available carryforwards prior to their expiration due to the impending sale of its investment in First Permian. (See Note 19) F-16PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) As of December 31, 2001, the Company had net operating loss carryforwards for regular tax purposes available to reduce future taxable income and tax liability, respectively. These carryforwards expire as follows:
Alternative
minimum tax
Net operating net operating
loss loss
---- ----
2009 $ 194,000
2018 8,658,000 $ 6,635,000
2019 5,250,000 5,022,000
2021 4,635,000 --
----------- -----------
$ 18,737,000 $ 11,657,000
=========== ============
As of December 31, 2001, the Company had approximately $118,000 of minimum tax credit available indefinitely. (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:
2001 2000 1999
---- ---- ----
Purchaser A 25% -- --
Purchaser B 6% 6% 14%
Purchaser C 38% 22% 27%
Purchaser D -- -- 26%
Purchaser E 23% 16% --
(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 2001, 2000 and 1999, the Company contributed an aggregate of $39,760, $36,077 and $14,338, respectively, of which $11,724, $9,750 and $3,750, respectively, on behalf of a Director of the Company. The Company has no obligation to make contributions to the plan. (8) Statements of Cash Flows During 2000, management of the Company made the decision to not sell its assets held for sale and $2,127,734 was transferred from assets held for sale to oil and gas properties. This transfer was a non-cash transaction. F-17PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) No Federal income taxes were paid in 2001, 2000 and 1999, as a result of net operating losses or loss carryforwards. The Company made interest payments of $802,017, $1,340,002 and $1,534,023 in 2001, 2000 and 1999, respectively. At December 31, 2001 and 2000, there were $2,366,795 and $711,873, 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 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. F-18PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) Cumulative dividends of $0.60 are payable semi-annually on June 15 and December 15 of each year, commencing on December 15, 1998. On October 5, 2000, the Company authorized 50,000 shares of $0.10 par Series A Preferred Stock. These shares will be issued upon the exercise of the Company’s Preferred Stock Purchase Rights. Subject to the rights of the holders of any series of preferred stock ranking prior and superior to the Series A preferred stock with respect to dividends, the holders of shares of the Series A Preferred Stock shall be entitled to receive, when, and if declared by the Board of Directors, quarterly dividends payable in cash on the first day of July, October, January and April, in each year beginning in 2001, commencing on the first quarterly dividend payment Date after the first issuance of a fraction of a share of Series A Preferred Stock. Each share of Series A Preferred Stock shall entitle the holder to one one-thousandth of a vote on all matters submitted to a vote of the stockholders of the Company. (10) Related Party Transactions Certain Directors and their companies own interests in certain wells operated by the Company. During 2001 and 2000, the Company charged $264,470 and $305,304, respectively, for lease operating expenses and drilling costs and paid $175,991 and $160,704, 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 2001 and 2000, the Company was billed $115,493 and $169,906, respectively, for the Company’s pro rata share of lease operating and drilling expenses and received $319,308 and $274,065 in 2001 and 2000, respectively, in oil and gas revenues related to these wells. During 2001 and 2000, the Company received from First Permian, LLC reimbursement of general and administrative expenses of $23,647 and $115,471, respectively, with the reimbursement netted against the costs incurred to provide those services. The Company received management fees of $68,750 and $75,000 from First Permian, LLC, in 2001 and 2000, respectively. These fees are not related to oil and gas exploration and development activities, but are reimbursement of general and administrative expenses and are properly recorded in other income. During 2000, the Company received a $67,500 cash distribution from First Permian, LLC for tax withholdings associated with the Company’s interest in First Permian. No such distribution was received in 2001 or 1999. A certain Director of the Company also serves as director of an entity which owns 110,000 shares of preferred stock of the Company. In addition, 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, owns 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. </FONT></P> F-19PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) In the current year, a certain Director of the Company acquired an interest in a portion of the warrants awarded to the Company’s investment advisor (see note 4) as the director acts a consultant for the investment advisor. The fair value of the warrants is estimated to be $33,000 using the Black-Scholes Option Pricing model. Also, the director received a portion of the quarterly fees paid to the investment advisor aggregating $18,750 in 2001. (11) Oil and Gas Expenditures The following table reflects capitalized costs related to the oil and gas properties as of December 31:
2001 2000
---- ----
Proved properties $ 76,248,443 $ 57,915,944
Unproved properties, not subject to
depletion 8,883,902 14,400,440
----------- -----------
85,132,345 72,316,384
Accumulated depletion (55,552,876) (32,495,930)
----------- -----------
$ 29,579,469 $ 39,820,454
=========== ===========
Certain directly identifiable internal costs of property acquisition, exploration and development activities are capitalized. Such costs capitalized in 2001, 2000 and 1999 totaled $782,450, $624,007 and $508,883, respectively. Depletion per equivalent unit of production (BOE) was $9.13, $8.18 and $8.30 for 2001, 2000 and 1999, respectively. F-20PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) 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:
2001 2000 1999
---- ---- ----
Transfers (to)/from assets held for sale $ -- $ 2,127,734 $ (2,127,734)
Proved property acquisition costs 26,970 23,291 41,768
Unproved property acquisition costs 3,420,455 3,371,898 1,978,964
Exploration 6,820,480 2,163,124 1,855,948
Development 1,202,889 1,087,424 638,845
----------- ---------- -----------
$ 11,470,794 $ 8,773,471 $ 2,387,791
=========== ========== ===========
(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 $16,820,000, of which $14,643,000 was recognized in the fourth quarter, and $1,705,000 related to its oil and gas properties during 2001 and 1999, respectively. There was no impairment recorded for 2000. F-21PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) (13) Earnings per Share In accordance with the provisions of FAS 128, the following table provides a reconciliation between basic and diluted earnings per share for the year ended December 31:
2001 2000 1999
---- ---- ----
Basic EPS Computation:
Numerator -
Net income (loss) $ (4,707,575) $ 5,977,328 $ (2,450,457)
Preferred stock dividend (609,063) (609,063) (609,063)
----------- ----------- -----------
Net income (loss) available to common
stockholders $ (5,316,638) $ 5,368,265 $ (3,059,520)
=========== =========== ===========
Denominator -
Weighted average common shares outstanding 20,457,697 20,331,858 18,549,214
=========== =========== ===========
Basic net earnings (loss) per share $ (.26) $ .26 $ (.16)
=========== =========== ===========
Diluted EPS Computation:
Numerator -
Net income (loss) $ (4,707,575) $ 5,977,328 $ (2,450,457)
Preferred stock dividend (609,063) -- (609,063)
----------- ----------- -----------
Net income (loss) available to common
stockholders $ (5,316,638) $ 5,977,328 $ (3,059,520)
=========== =========== ===========
Denominator -
Weighted average common shares for basic
earnings (loss) per share 20,457,697 20,331,858 18,549,214
Effect of dilutive securities:
Employee stock options -- 348,787 --
Warrants -- 603 --
Preferred stock -- 2,784,244 --
----------- ----------- -----------
Weighted average common shares for diluted
earnings (loss) per share assuming
conversions 20,457,697 23,465,492 18,549,214
=========== =========== ===========
Diluted net earnings (loss) per share $ (.26) $ .25 $ (.16)
=========== =========== ===========
F-22PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) Stock options to purchase shares of common stock and convertible preferred stock were outstanding during 2001 and 1999 but were not included in the computation of diluted net earnings (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) Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statements of Financial Accounting Standards No. 141 “Business Combinations” and No. 142 “Goodwill and Other Intangible Assets”. Statement 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and Statements 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. As of December 31, 2001 the Company expects no impact to the financial statements, upon adoption, as no business combinations have been entered into, thus the potential for associated goodwill does not currently exist. Also, the FASB has issued Statement No. 143 “Accounting for Asset Retirement Obligations” which establishes requirements for the accounting of removal-type costs associated with asset retirements. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company is currently assessing the impact on its financial statements. On October 3, 2001, the FASB issued Statements No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” This pronouncement supercedes FAS 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed” and eliminates the requirement of Statement 121 to allocate goodwill to long-lived assets to be tested for impairment. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The Company is currently assessing the impact to its financial statements. (15) 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. At December 31, 2001 and 2000, the Company’s interest in First Permian was 30.675%. F-23PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) 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. </FONT></P> At December 31, 2000, the Company has recorded a loss of $500,576 in its investment of First Permian, LLC to the extent that the Company had guaranteed $10,000,000 of the debt of First Permian. Effective October 25, 2000, the Company was released from its guarantee and discontinued the equity method of accounting for its share of losses in First Permian. In 2001 the Company resumed the equity method of accounting as their portion of First Permian’s net income exceeded the losses not recognized during the period the equity method was suspended. In 2001 the Company recorded equity in income of $840,529. On March 7, 2002, First Permian entered into an Agreement of Sale and Purchase to sell all of its oil and gas properties. See Note 19 for further discussion. First Permian adopted FASB Statement 133 and recorded a net transition adjustment loss of $6,105,108 in accumulated other comprehensive income on January 1, 2001. F-24PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) The following summarizes selected audited financial information for First Permian, LLC as of December 31:
Assets 2001 2000
------ ---- ----
Current assets:
Cash and cash equivalents $ 1,385,640 $ 3,836,840
Accounts receivable 4,159,239 6,337,595
Prepaids 99,106 61,218
----------- -------------
Total current assets 5,643,985 10,235,653
----------- -------------
Property and equipment, at cost:
Oil and gas properties, full cost method 108,256,338 87,527,750
Other property 1,479,885 1,086,427
----------- -------------
109,736,223 88,614,177
Less accumulated depletion and depreciation (14,459,797) (8,251,530)
----------- -------------
Net property and equipment 95,276,426 80,362,647
Other non-current assets, net of accumulated
amortization of $1,951,000 in 2001 and
$946,000 in 2000 594,704 1,664,528
----------- -------------
$101,515,115 $ 92,262,828
=========== =============
Liabilities and Members' Equity
Current liabilities:
Accounts payable and accrued liabilities-trade $ 6,342,325 $ 7,042,264
Liability for derivative instruments 773,780 58,450
----------- -------------
Total current liabilities 7,116,075 7,100,714
----------- -------------
Long-term debt, net of current maturities 73,000,000 67,400,000
Redeemable preferred units 15,549,085 14,224,946
Members' equity 5,849,955 3,537,168
----------- -------------
$101,515,115 $ 92,262,828
=========== =============
Revenues $ 31,094,044 $ 24,713,111
Cost and expenses 19,642,279 16,870,023
----------- -------------
Operating income 11,451,765 7,843,088
Other expense, net (6,855,768) (7,220,136)
----------- -------------
Net income before extraordinary item $ 4,595,997 $ 622,952
Extraordinary loss from debt restructure -- (960,825)
----------- -------------
Net income (loss) $ 4,595,997 $ (337,873)
Redeemable preferred unit dividends (1,324,199) (724,946)
----------- -------------
Net income (loss) available to common members $ 3,271,798 $ (1,062,819)
=========== =============
F-25PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) The following summarizes the Company’s 30.675% interest in First Permian LLC’s unaudited oil and gas reserve data (in thousands):
Changes in Reserve Balances
Total Proved Proved Developed
-------------------- ------------------
BBL MCF BBL MCF
--- --- --- ---
Reserves as of December 31, 1999 10,226 8,190 5,949 7,764
Purchase of reserves in place 1,266 246 1,266 246
Sales of reserves in place (3) (2,014) (3) (2,014)
Revisions of previous estimates 3,639 (4,253) 680 (4,395)
Production (386) (350) (386) (350)
------ ------ ------ ------
Reserves as of December 31, 2000 14,742 1,819 7,506 1,251
Purchase of reserves in place -- -- -- --
Sales of reserves in place -- -- -- --
Revisions of previous estimates (654) 636 1,219 502
Production (458) (168) (458) (168)
------ ------ ------ ------
Reserves as of December 31, 2001 13,630 2,287 8,267 1,585
====== ====== ====== ======
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
December 31,
--------------------------
2001 2000
---- ----
Future cash flows $ 238,050 $ 374,869
Future costs:
Production (84,644) (126,082)
Development (23,605) (28,728)
-------- ---------
Future net cash flows 129,801 220,059
10% annual discount for estimated timing of cash flows (83,336) (128,010)
-------- ---------
Standardized measure of discounted net cash flows $ 46,465 $ 92,049
======== =========
F-26PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) Changes in Standardized Measure of Discounted Future Net Cash Flows From Proved Reserves For the years ended December 31, 2001 and 2000
2001 2000
---- ----
Increase (decrease):
Sales of minerals in place $ -- $ (1,380)
Accretion of discount 9,204 7,367
Net change in sales prices net of production costs (5,635) 24,997
Purchase of minerals in place -- 9,755
Changes in estimated future development costs 1,834 (6,514)
Revisions of quantity estimates (44,573) (11,603)
Sales, net of production costs (6,414) (4,242)
------- -------
Net increase (decrease) (45,585) 18,380
Standardized measure of discounted net cash flows:
Beginning of year 92,049 73,669
------- -------
End of year $ 46,465 $ 92,049
======= =======
(16) Commitments and Contingencies At December 31, 2001, the Company is party to two legal actions arising incidental to its business. It is management's opinion that the ultimate outcome of these legal actions will not have a material adverse effect on the Company's operations or financial position. (17) 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. The Company has presented the reserve estimates utilizing an oil price of $18.98, $25.09 and $24.75 per Bbl and a gas price of $2.72, $10.18 and $2.20 per Mcf as of December 31, 2001, 2000 and 1999, respectively. Information for oil is presented in barrels (BBL) and for gas in thousands of cubic feet (MCF). F-27PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) A summary of changes in reserve balances is presented below (in thousands):
Total Proved Proved Developed
-------------------- -------------------
BBL MCF BBL MCF
--- --- --- ---
Reserves as of December 31, 1999 1,008 17,284 589 12,685
Sales of reserves in place -- (383) -- (383)
Extensions and discoveries 37 1,143 37 1,143
Revisions of previous estimates 94 464 111 953
Production (165) (2,822) (165) (2,822)
----- ------ ---- ------
Reserves as of December 31, 2000 974 15,686 572 11,576
Sales of reserves in place (1) -- (1) --
Extensions and discoveries 78 1,737 78 1,737
Revisions of previous estimates 4 (210) (20) (473)
Production (139) (3,266) (139) (3,266)
----- ------ ---- ------
Reserves as of December 31, 2001 916 13,947 490 9,574
===== ====== ==== ======
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 2001, the average sales price received by the Company for its oil was approximately $24.80 per Bbl, as compared to $28.88 in 2000, while the average sales price for the Company’s gas was approximately $4.41 per Mcf in 2001, as compared to $4.38 per Mcf in 2000. 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. F-28PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued)
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
(In Thousands)
December 31,
---------------------------------------------
2001 2000 1999
---- ---- ----
Future cash flows $ 47,648 $ 184,045 $ 62,967
Future costs:
Production (17,353) (35,550) (18,632)
Development (4,874) (4,228) (4,797)
--------- --------- --------
Future net cash flows before income taxes 25,421 144,267 39,538
Future income taxes (34) (24,321) --
--------- --------- --------
Future net cash flows 25,387 119,946 39,538
10% annual discount for estimated timing of
cash flows (8,312) (38,658) (14,039)
--------- --------- --------
Standardized measure of discounted net cash $ 17,075 $ 81,288 $ 25,499
flows ========= ========= ========
Changes in Standardized Measure of
Discounted Future Net Cash Flows From Proved Reserves
(In Thousands)
Years ended December 31,
-----------------------------------------
2001 2000 1999
---- ---- ----
Increase (decrease):
Sales of minerals in place $ (4) $ (136) $ (238)
Extensions and discoveries and improved
recovery, net of future production and 3,831 8,398 3,067
development costs
Accretion of discount 9,095 2,550 2,682
Net change in sales prices net of production (68,367) 66,306 11,882
costs
Changes in estimated future development costs 5 204 789
Revisions of quantity estimates (172) 4,496 (13,371)
Net change in income taxes 9,662 (9,662) --
Sales, net of production costs (13,919) (14,035) (6,620)
Changes of production rates (timing) and other (4,344) (2,332) 485
------ ------ ------
Net increase (decrease) (64,213) 55,789 (1,324)
Standardized measure of discounted future net cash flows:
Beginning of year 81,288 25,499 26,823
------ ------ ------
End of year $ 17,075 $ 81,288 $ 25,499
======= ====== ======
F-29PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) (18) Selected Quarterly Financial Results (Unaudited)
Quarter
----------------------------------------------------
First Second Third Fourth
----- ------ ----- ------
(in thousands, except per share data)
2001:
Oil and gas revenues $ 7,288 $ 4,791 $ 3,811 $ 1,949
Total costs and expenses 3,095 2,969 4,925 17,416
Net income 4,636 1,215 (491) (10,067)
Net income per common share $ .219 $ .052 $ .030 $ (.50)
Net income per common share -
assuming dilution $ .196 $ .051 $ .030 $ (.50)
2001 results include noncash charges of $2,177,128 and $14,642,685 during the third and fourth quarters,
respectively related to the impairment of oil and gas properties. (See Note 12)
2000:
Oil and gas revenues $ 2,775 $ 3,197 $ 4,163 $ 7,000
Total costs and expenses 1,875 2,098 2,220 3,337
Net income 194 695 1,699 3,389
Net income per common share $ .001 $ .027 $ .076 $ .16
Net income per common share -
assuming dilution $ .001 $ .027 $ .072 $ .14
1999:
Oil and gas revenues $ 1,963 $ 1,992 $ 2,291 $ 2,728
Total costs and expenses 1,621 1,729 2,239 4,585
Net income (loss) (10) (94) (150) (2,196)
Net income (loss) per common
share $ (.010) $ (.013) $ (.016) $ (.18)
Net income (loss) per common
share - assuming dilution $ (.010) $ (.013) $ (.016) $ (.16)
(19) Subsequent Events On March 7, 2002, First Permian entered into an Agreement of Sale and Purchase with an affiliate of Energen Corporation (Energen), to sell all of its oil and gas properties for $120 million in cash and 3,043,470 shares in Energen stock approximating $70 million in value. Energen is a publicly traded company listed on the NYSE. The stock consideration is subject to a collar ranging in value from $18.40 and $27.60 per share, aggregating from $56 million to $84 million. As a 30.675% interest owner in First Permian, the Company expects its prorata share of the net proceeds to be approximately $29 million in cash and Energen stock and result in a substantial gain. The closing of the transaction is anticipated to occur in April 2002, with an effective date of January 1, 2002. F-30PARALLEL PETROLEUM CORPORATION Notes to Financial Statements - (Continued) In January and February, 2002, the Company purchased put options on natural gas with a strike price of $2.40 for the period April 2002 through October 2002 related to 210,000 mcf per month of its gas production to protect the Company against declining gas prices. The put option will be stated at its fair value with changes in fair value charged or credited to earnings.F-31 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, 2002 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, 2002 Thomas R. Cambridge and Chairman of the Board of Directors (Principal Executive Officer) /s/ Larry C. Oldham Director, President and Treasurer March 28, 2002 Larry C. Oldham (Principal Financial and Accounting Officer) /s/ Dewayne E. Chitwood Director March 28, 2002 Dewayne E. Chitwood /s/ Martin B. Oring Director March 28, 2002 Martin B. Oring /s/ Charles R. Pannill Director March 28, 2002 Charles R. Pannill /s/ Jeffrey G. Shrader Director March 28, 2002 Jeffrey G. Shrader S-1INDEX TO EXHIBITS Exhibit No. Description of Exhibit ------ ---------------------- 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 to the Registrant's Form 8-K, dated October 9, 2000, as filed with the Securities and Exchange Commission on October 10, 2000) 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) 4.2 Certificate of Designation, Preferences and Rights of Series A Preferred Stock (Incorporated by reference to Exhibit 4.2 to Form 10-K of the Registrant for the fiscal year ended December 31, 2000) 4.3 Rights Agreement, dated as of October 5, 2000, between the Registrant and Computershare Trust Company, Inc., as Rights Agent (Incorporated by reference to Exhibit 4.3 to Form 10-K of the Registrant for the fiscal year ended December 31, 2000) Executive Compensation Plans and Arrangements (Exhibit No. 10.1 through 10.9): 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.) E-1Exhibit No. Description of Exhibit ------ ---------------------- 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 Form of Incentive Award Agreements, dated December 12, 2001, between the Registrant and Thomas R. Cambridge, Larry C. Oldham, Eric A. Bayley and John S. Rutherford granting 2,394 Unit Equivalent Rights to Mr. Cambridge; 9,564 Unit Equivalent Rights to Mr. Oldham; 2,869 Unit Equivalent Rights to Mr. Bayley; and 7,173 Unit Equivalent Rights to Mr. Rutherford. *10.9 Form of Change of Control Agreements, dated June 1, 2001, between the Registrant and Thomas R. Cambridge, Larry C. Oldham, Eric A. Bayley and John S. Rutherford. 10.10 Restated Loan Agreement dated December 27, 1999, between the Registrant and Bank One, Texas, N.A. (Incorporated by reference to Exhibit 10.8 of Form 10-K of the Registrant for the fiscal year ended December 31, 1999). 10.11 Loan Agreement dated December 18, 2000 between the Registrant and Bank United (Incorporated by reference to Exhibit 10.9 of Form 10-K of the Registrant for the fiscal year ended December 31, 2000). 10.12 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). 10.13 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). E-2Exhibit No. Description of Exhibit ------ ---------------------- 10.14 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). 10.15 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). 10.16 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). 10.17 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). 10.18 Amended and Restated Limited Liability Company Agreement of First Permian, L.L.C. dated as of May 31, 2000 (Incorporated by reference to Exhibit 10.16 of Form 10-K of the Registrant for the fiscal year ended December 31, 2000). 10.19 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). 10.20 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). 10.21 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). 10.22 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). E-3Exhibit No. Description of Exhibit ------ ---------------------- 10.23 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). 10.24 Second Restated Credit Agreement, dated October 25, 2000, among First Permian, L.L.C., Bank One, Texas, N.A., and Bank One Capital Markets, Inc. (Incorporated by reference to Exhibit 10.22 of Form 10-K of the Registrant for the fiscal year ended December 31, 2000). *10.25 Loan Agreement, dated January 25, 2002, between the Registrant and First American Bank, SSB *23.1 Consent of Independent Auditors *23.2 Consent of Independent Petroleum Engineers * Filed herewith. E-4