1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
----------------------------
(MARK ONE)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 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 incorporation or organization)
(I.R.S. Employer Identification 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 2, 2000, there were 20,331,858 shares of the Registrant's
Common Stock, $0.01 par value, outstanding.
================================================================================
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, 1999 and
September 30, 2000 (unaudited) 3
- Unaudited Statements of Operations for the three months
and nine months ended September 30, 1999 and 2000 5
- Unaudited Statements of Cash Flows for the nine
months ended September 30, 1999 and 2000 6
- Notes to Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
PART II. - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
3
PARALLEL PETROLEUM CORPORATION
BALANCE SHEETS
(UNAUDITED)
ASSETS DECEMBER 31, 1999* SEPTEMBER 30, 2000
------------------ ------------------
Current Assets:
Cash and cash equivalents $ 1,276,417 $ 3,075,827
Accounts receivable:
Oil and gas 1,312,923 2,205,510
Others, net of allowance for doubtful
accounts of $157,187 in 1999 and 2000 314,911 214,423
Affiliate 20,658 2,398
------------ ------------
1,648,492 2,422,331
------------ ------------
Other assets 39,677 11,170
Assets held for sale 2,127,734 -
------------ ------------
Total current assets 5,092,320 5,509,328
------------ ------------
Property and equipment, at cost:
Oil and gas properties, full cost method 65,136,783 68,983,180
Other 289,720 366,893
------------ ------------
65,426,503 69,350,073
Less accumulated depreciation and depletion 27,502,855 31,084,653
------------ ------------
Net property and equipment 37,923,648 38,265,420
------------ ------------
Investment in First Permian, LLC (Notes 1 and 6) 201,311 -
Other assets, net of accumulated amortization of $141,428 in
1999 and $92,639 in 2000 46,791 46,954
------------ ------------
$ 43,264,070 $ 43,821,702
============ ============
4
PARALLEL PETROLEUM CORPORATION
BALANCE SHEETS
(CONTINUED)
(Unaudited)
Liabilities and Stockholders' Equity December 31, 1999* September 30, 2000
----------------- ------------------
Current liabilities:
Current maturities of long-term debt (Note 3) $ 3,665,889 $ -
Investment liability in First Permian (Notes 1 and 6) - 366,765
Accounts payable and accrued liabilities:
Trade 1,471,013 2,259,295
Affiliate 2,702 1,070
Preferred stock dividend 24,363 170,537
------------- -------------
1,498,078 2,430,902
------------- -------------
Total current liabilities 5,163,967 2,797,667
------------- -------------
Long-term debt, excluding current maturities (Note 3) 12,300,000 13,100,000
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 1999 and 2000 97,450 97,450
Common stock - par value $.01 per share, authorized 60,000,000
shares, issued and outstanding 20,331,858 in 1999 and 2000 203,319 203,319
Additional paid-in surplus 34,847,141 34,384,254
Retained deficit (9,347,807) (6,760,988)
------------- -------------
Total stockholders' equity 25,800,103 27,924,035
Contingencies - -
------------- -------------
$ 43,264,070 $ 43,821,702
============= =============
*The balance sheet as of December 31, 1999 has been derived from Parallel's
audited financial statements. The accompanying notes are an integral part of
these financial statements.
5
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
1999 2000 1999 2000
------ ------ ------- ------
Oil and gas revenues $ 2,291,448 $ 4,162,667 $ 6,246,264 $ 10,133,872
------------ ------------ ------------ ------------
Cost and expenses:
Lease operating expense 598,586 738,929 1,663,550 1,971,315
General and administrative 218,731 182,250 642,879 640,209
Depreciation, depletion and amortization 1,422,119 1,299,187 3,282,913 3,581,798
------------ ------------ ------------ ------------
2,239,436 2,220,366 5,589,342 6,193,322
------------ ------------ ------------ ------------
Operating income 52,012 1,942,301 656,922 3,940,550
------------ ------------ ------------ ------------
Other income (expense), net:
Interest income 7,973 62,779 34,944 94,024
Other income 6,999 38,522 20,228 86,959
Interest expense (396,110) (337,519) (1,143,238 (1,029,266)
Other expense (2,351) (2,891) (4,861) (4,872)
------------ ------------ ------------ ------------
Total other expense, net (383,489) (239,109) (1,092,927) (853,155)
Equity in income (loss) of First Permian, LLC 181,108 (4,493) 181,108 (500,576)
------------ ------------ ------------ ------------
(202,381) (243,602) (911,819) (1,353,731)
------------ ------------ ------------ ------------
Income (loss) before income taxes (150,369) 1,698,699 (254,897) 2,586,819
Income taxes - - - -
------------ ------------ ------------ ------------
Net income (loss) $ (150,369) $ 1,698,699 $ (254,897) $ 2,586,819
============ ============ ============ ============
Cumulative preferred stock dividend $ 146,174 $ 146,174 $ 462,887 $ 462,887
============ ============ ============ ============
Net income (loss) available $ (296,543) $ 1,552,525 $ (717,784) $ 2,123,932
to common stockholders ============ ============ ============ ============
Net income (loss) per common share:
Basic $ (0.016) $ 0.076 $ (0.039) $ 0.105
============ ============ ============ ============
Diluted $ (0.016) $ 0.072 $ (0.039) $ 0.103
============ ============ ============ ============
Weighted average common shares
outstanding - diluted 18,331,858 23,511,753 18,329,759 20,635,568
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
6
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 2000
----------- ----------
Cash flows from operating activities:
Net income (loss) $ (254,897) $ 2,586,819
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and depletion 3,282,913 3,581,798
Equity in income (loss)from investments in First Permian, LLC (181,108) 500,576
Other, net (20,103) (163)
Changes in assets and liabilities:
Decrease (increase) in accounts receivables 40,969 (773,839)
Decrease (increase) in prepaid expenses and other 43,818 28,507
Decrease (increase) in accounts payable and accrued liabilities (1,149,730) 932,824
------------- ------------
Net cash provided by operating activities 1,761,862 6,856,522
------------- ------------
Cash flows from investing activities:
Additions to property and equipment (3,074,183) (4,797,991)
Proceeds from disposition of property and equipment 435,231 3,002,155
Investment in First Permian, LLC (2,250) -
Distribution from First Permian, LLC - 67,500
------------- ------------
Net cash provided by (used in) investing activities (2,641,202) (1,728,336)
------------- ------------
Cash flows from financing activities:
Borrowings from bank line of credit 780,000 -
Payments on bank line of credit - (2,865,889)
Proceeds from exercise of options and warrants 17,188 -
Payment of preferred stock dividend (462,887) (462,887)
------------- ------------
Net cash provided by (used in) financing activities 334,301 (3,328,776)
------------- ------------
Net increase (decrease) in cash and cash equivalents (545,039) 1,799,410
Beginning cash and cash equivalents 1,178,819 1,276,417
------------- ------------
Ending cash and cash equivalents $ 633,780 $ 3,075,827
============= ============
Non-cash financing activities:
Accrued preferred stock dividend $ 170,537 $ 170,537
============= ============
Transfer of assets held for sale to oil and gas property $ - $ 2,127,734
============= ============
The accompanying notes are an integral part of these financials.
7
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The financial information included herein, except the balance sheet as of
December 31, 1999, is unaudited. However, such information includes all
adjustments of management (consisting solely of normal recurring adjustments),
which are, in our opinion, necessary for a fair statement of the results of
operations for the interim periods. The results of operations for the interim
period are not necessarily indicative of the results to be expected for an
entire year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q Report pursuant to certain
rules and regulations of the Securities and Exchange Commission. These financial
statements should be read with the financial statements and notes included in
Parallel's 1999 Annual Report and 1999 Form 10-K.
We own an equity interest in First Permian, LLC, a Delaware limited
liability company. The founding members of First Permian were Parallel Petroleum
Corporation, Baytech, Inc., Tejon Exploration Company and Mansefeldt Investment
Corporation. Parallel, Baytech, Tejon and Mansefeldt each contributed cash for
initial members' interests of 22.5%, 22.5%, 27.5% and 27.5%, respectively, on
June 30, 1999. Effective May 31, 2000, First Permian's original limited
liability company agreement was amended and restated to provide for, among other
things, the admission of additional members, the issuance of a new class of
preferred membership units and the issuance of additional common membership
units in return for additional capital contributions totaling $20,000,000 from
new members. As a result of the issuance of additional common membership units,
our interest at September 30, 2000 was 28.665%. However, effective October 1,
2000, our interest increased to 30.675%. See "Recent Events: Change in Ownership
Interest of First Permian, LLC" on page 9 for additional information.
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 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 the
income (loss) of First Permian.
NOTE 2. RECENT EVENTS
Adoption of Rights Agreement
On October 5, 2000, the Board of Directors declared a dividend distribution
of one Right for each outstanding share of Parallel's common stock, $0.01 par
value (the "Common Stock"), to stockholders of record at the close of business
on October 16, 2000. Each Right entitles the registered holder to purchase from
Parallel one one-thousandth (1/1,000) of a share of Series A Preferred Stock,
par value $0.10 per share (the "Preferred Stock"), at a Purchase Price of $26.00
per one one-thousandth (1/1,000) of a share, subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between Parallel and Computershare Trust Company, Inc., as
Rights Agent (the "Rights Agent").
Initially, the Rights will be attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights Certificates will
be distributed. The Rights will separate from the Common Stock upon the earlier
of (i) ten (10) business days following a public announcement that a person or
group of affiliated or associated persons (an "Acquiring Person") has acquired,
or obtained the right to acquire, beneficial ownership of fifteen percent (15%)
or more of the outstanding shares of Common Stock (the "Stock Acquisition
Date"), or (ii) ten (10) 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."
8
Until the Distribution Date, (i) the Rights will be evidenced by the Common
Stock certificates and will be transferred with and only with such Common Stock
certificates, (ii) new Common Stock certificates issued after October 16, 2000
will contain a notation incorporating the Rights Agreement by reference, and
(iii) the surrender for transfer of any certificates for Common Stock
outstanding will also constitute the transfer of the Rights associated with the
Common Stock represented by such certificates. Pursuant to the Rights Agreement,
we reserve the right to require prior to the occurrence of a Triggering Event
(as defined below) that, upon any exercise of Rights, a number of Rights be
exercised so that only whole shares of Preferred Stock will be issued.
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
Parallel.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of the Common Stock as of the close of
business on the Distribution Date and, thereafter, the separate Rights
Certificates will represent the Rights. Except in connection with shares of
Common Stock issued or sold pursuant to the exercise of stock options under any
employee plan or arrangements, or upon the exercise, conversion or exchange of
securities hereafter issued by Parallel, or as otherwise determined by the Board
of Directors, only shares of Common Stock issued prior to the Distribution Date
will be issued with Rights.
At any time until the Stock Acquisition Date, Parallel may redeem the
Rights in whole, but not in part, at a price of $0.001 per Right (payable in
cash, shares of Common Stock or other consideration deemed appropriate by the
Board of Directors). Immediately upon the action of the Board of Directors
ordering redemption of the Rights, the Rights will terminate and the only right
of the holders of Rights will be to receive the $0.001 redemption price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of Parallel, including, without limitation, the right to
vote or to receive dividends. While the distribution of the Rights will not be
taxable to stockholders or to Parallel, stockholders may, depending upon the
circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Stock (or other consideration) of Parallel or for common
stock of an acquiring company as set forth above or in the event that the Rights
are redeemed.
Other than those provisions relating to the principal economic terms of the
Rights, any of the provisions of the Rights Agreement may be amended by the
Board of Directors of Parallel at any time during the period in which the Rights
are redeemable. At any time when the Rights are no longer redeemable, the
provisions of the Rights Agreement may be amended by the Board only if such
amendment does not adversely affect the interest of holders of Rights (excluding
the interest of any Acquiring Person); provided, however, that no amendment may
cause the Rights again to become redeemable.
Amendment of Bylaws
Also on October 5, 2000, the Board of Directors of Parallel adopted certain
amendments to our Bylaws. These amendments modify and add certain provisions
regarding the advance notice requirements for stockholder proposals before an
annual meeting of stockholders, the calling of special meetings of stockholders,
stockholder written consents and the procedures for nominating directors.
Contemplated Change in Credit Facility
On November 6, 2000, we signed a commitment letter with Bank United, Texas,
N.A to establish a new credit facility. The purpose of the credit facility is to
refinance our debt facility at Bank One, N.A., and to provide funds for the
acquisition of and development drilling on oil and gas properties and for
general corporate purposes. We expect to execute definitive loan documents on or
before December 1, 2000. As a result of the commitment with Bank United, Texas,
N.A., we classified debt on the balance sheet as long term with a maturity date
of October 1, 2003.
The loan agreement will provide for a reducing revolving credit facility
under which we may borrow up to the lesser of (a) $30,000,000 or (b) the
borrowing base then in effect. The initial borrowing base will be $15,500,000.
The borrowing base automatically reduces by $323,000 each month until the next
borrowing base redetermination, which will be scheduled six months from the date
of signing the final loan documents. We are not required to make principal
payments in the amount by which the borrowing base is reduced.
9
Subject to semi-annual borrowing base redeterminations and compliance with
the loan agreement covenants and representations, we may borrow, repay and
reborrow from time to time within the available revolving credit amount.
The unpaid principal balance of the credit facility bears interest at our
election at a fluctuating rate equal to the Wall Street Journal prime rate, or
the LIBOR rate plus 2.75%.
The loan will be secured by substantially all of our oil and gas
properties. Commitment fees of one-fourth of one percent are payable quarterly
in arrears on the difference between the borrowing base and the outstanding
balance of the loan.
The loan agreement will contain various restrictive covenants and
compliance requirements, including (1) maintenance of certain financial ratios,
(2) limitations on additional indebtedness, and (3) prohibiting payment of
dividends.
Change in Ownership Interest of First Permian, LLC
We own an equity interest in First Permian, LLC, a limited liability
company. Our interest in First Permian for the three months ended September 30,
2000 was 28.665%. Effective October 1, 2000, however, our interest in First
Permian increased to 30.675%. First Permian was the holder and payee of a $3.1
million note receivable from one of the other members of First Permian. The note
was collateralized by 80,000 common membership units of First Permian. The note
was canceled on September 30, 2000 and, in exchange, the 80,000 common
membership units held as collateral for the note were acquired by First Permian.
This transaction had the effect of reducing the total number of common
membership units outstanding, decreasing one member's pro rata interest and
increasing the interests of the remaining members of First Permian.
NOTE 3. LONG TERM DEBT
See discussion of Parallel's loan commitment with Bank United, Texas, N.A.
at page 8 under "Contemplated Change in Credit Facility." As a result of the
commitment with Bank United, Parallel has classified its debt on the balance
sheet as long term with a maturity date of October 1, 2003.
Revolving Credit Facility
At September 30, 2000, Parallel was party to a loan agreement with Bank
One, Texas, N.A. The loan agreement, as restated in December 1999, provided for
a revolving credit facility under which we could borrow up to the lesser of (a)
$30,000,000 or (b) the borrowing base then in effect. The borrowing base
automatically reduces by $300,000 each month, which requires us to make a
principal payment in the same amount by which the borrowing base was reduced.
The total outstanding principal amount of our bank borrowings was $18,815,889 at
September 30, 1999, $15,965,889 at December 31, 1999 and $13,100,000 at
September 30, 2000.
At September 30, 2000, we had borrowed all the funds currently available
under the revolving facility. All indebtedness under the revolving facility was
scheduled to mature July 1, 2001. However, as described above under "Recent
Events", proceeds from the new credit facility with Bank United will be used to
retire this debt.
The unpaid principal balance of the Bank One 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 3.0%. Interest
under the revolving facility is due and payable monthly. At September 30, 2000,
the interest rate was the bank's base rate plus .25% or 9.75%.
The loan agreement with Bank One 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.
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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
semiannually 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 1999, we recognized a noncash impairment
charge of $1,705,000 related to our oil and gas reserves and unproved
properties. The impairment of oil and gas assets was primarily the result of a
decrease in year- end proved reserves. At September 30, 2000, 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. LIABILITY IN FIRST PERMIAN, LLC
At September 30, 2000, our net investment in First Permian, LLC was a
liability as a result of recording our share of the losses of First Permian. We
have recorded a liability to the extent that we have guaranteed $10,000,000 of
the debt of First Permian, LLC. Effective October 25, 2000, we were released
from the $10,000,000 guarantee and have discontinued the equity method of
accounting for our share of losses of First Permian. When First Permian begins
to generate income, we will resume applying the equity method only after our
share in First Permian's net income equals the share of net losses not
recognized during the period the equity method was suspended.
NOTE 7. NET INCOME PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share is computed similarly to the previously
reported fully diluted earnings per share and reflects the assumed conversion of
all potentially dilutive securities. The following tables present per share net
income calculations for the periods indicated.
11
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1999 2000 1999 2000
--------- --------- ---------- --------
Basic EPS Computation:
Numerator -
Net income (loss) $ (150,369) $ 1,698,699 $ (254,897) $ 2,586,819
Preferred stock dividends (146,174) (146,174) (462,887) (462,887)
----------- ----------- ----------- -----------
Net income (loss) available to common stockholders $ (296,543) $ 1,552,525 $ (717,784) $ 2,123,932
=========== =========== =========== ===========
Denominator -
Weighted average common shares outstanding 18,331,858 20,331,858 18,329,759 20,331,858
=========== =========== =========== ===========
Basic earnings (loss) per share $ (0.016) $ 0.076 $ (0.039) $ 0.105
=========== =========== =========== ===========
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1999 2000 1999 2000
--------- --------- ---------- --------
Diluted EPS Computation:
Numerator -
Net income (loss) $ (150,369) $ 1,698,699 $ (254,897) $ 2,586,819
Preferred stock dividends (146,174) - (462,887) (462,887)
----------- ------------ ----------- -----------
Net income (loss) available to common stockholders $ (296,543) $ 1,698,699 $ (717,784) $ 2,123,932
=========== ============ =========== ===========
Denominator -
Weighted average common shares outstanding 18,331,858 20,331,858 18,329,759 20,331,858
Employee stock options - 393,359 - 303,710
Warrants - 2,292 - -
Preferred stock - 2,784,244 - -
----------- ------------ ----------- -----------
18,331,858 23,511,753 18,329,759 20,635,568
=========== ============ =========== ===========
Diluted earnings (loss) per share $ (0.016) $ 0.072 $ (0.039) $ 0.103
=========== ============ =========== ===========
Convertible preferred stock equivalents of 974,500 shares for the
three-month period ended March 31, 1999 and the nine-month periods ended
September 30, 2000 and 1999 that could potentially dilute basic earnings per
share in the future, were not included in the computation of diluted earnings
per share for the periods presented because to do so would have been
antidilutive.
NOTE 8: 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. SFAS No. 133 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.
Parallel will adopt SFAS No. 133 as required by SFAS 137, "Deferral of the
Effective Date of the FASB Statement No. 133" beginning in the first quarter of
2001. Although we have not fully assessed the implications of this new
statement, we do not believe Parallel has any free standing or embedded
derivative instruments that would need to be accounted for under SFAS 133.
12
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 Permiam. During 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, LLC, a limited liability company. First Permian 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.
The founding members of First Permian were Parallel Petroleum Corporation,
Baytech, Inc., Tejon Exploration Company and Mansefeldt Investment Corporation.
Parallel, Baytech, Tejon and Mansefeldt each contributed cash for initial
members' interests of 22.5%, 22.5%, 27.5% and 27.5%, respectively, on June 30,
1999. At March 31, 2000, Parallel, Baytech, Tejon and Mansefeldt and affiliates
owned member interests of 35%, 35%, 15% and 15%, respectively. Effective May 31,
2000, First Permian's original company agreement was amended and restated to
provide for, among other things, the admission of additional members, the
issuance of a new class of preferred membership units and the issuance of
additional common membership units in return for capital contributions totaling
$20,000,000. As a result of issuance of additional common units, our interest at
September 30, 2000 was 28.665%. However, effective October 1, 2000, our interest
increased to 30.675%. See "Recent Events: Change in Ownership Interest of First
Permian, LLC" on page 9 for additional information.
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.
13
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 infrastructures 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.
For the nine months ended September 30, 2000, the average sales price we
received for our crude oil production averaged $27.80 per barrel compared with
$15.09 per barrel at September 30, 1999 and $17.32 per barrel at December 31,
1999. The average sales price for natural gas during this same period was $3.37
per mcf compared with $2.10 per mcf at September 30, 1999 and $2.27 per mcf at
December 31, 1999.
Sustained low oil and gas prices in 1998 and 1999 limited the capital we
had available for drilling activities during this time, which adversely affected
the quantities and value of our proved oil and gas reserves. On November 6,
2000, we signed a commitment letter with Bank United, Texas, N.A to establish a
new credit facility. The purpose of the credit facility is to refinance our debt
facility at Bank One, N.A., and to provide funds for the acquisition and/or
development drilling on oil and gas properties and for general corporate
purposes. We expect to execute definitive loan documents on or before December
1, 2000.
The loan agreement will provide for a reducing revolving credit facility
under which we may borrow up to the lesser of (a) $30,000,000 or (b) the
borrowing base then in effect. The initial borrowing base will be set at
$15,500,000. The borrowing base automatically reduces by $323,000 each month
until the next borrowing base redetermination, which will be scheduled six
months from the date of signing the final loan documents. We are not required to
make principal payments in the amount by which the borrowing base is reduced.
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 2000 production volumes to increase significantly compared to
our production volumes in the prior year as a result of our drilling activities.
14
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.
Three Months Ended Three Months Ended
------------------------------- -------------------------
3-31-00 6-30-00 9-30-00 9-30-99 9-30-00
------- ------- ------- ------- -------
Production and prices:
Oil (Bbls) 39,283 44,753 42,317 31,991 42,317
Natural gas (Mcf) 570,504 657,039 733,621 645,301 733,621
Equivalent barrels of oil (EBO) 134,367 154,260 164,587 139,542 164,587
Oil price (per BBL) $26.70 $27.13 $29.53 $21.89 $29.53
Gas price (per Mcf) $ 3.02 $ 3.02 $ 3.97 $ 2.47 $ 3.97
Price per EBO $20.65 $20.72 $25.29 $16.42 $25.29
RESULTS OF OPERATIONS PER EBO:
Oil and gas revenues $20.65 $20.72 $25.29 $16.42 $25.29
Costs and expenses:
Lease operating expense 4.57 4.01 4.49 4.29 4.49
General and administrative 1.47 1.69 1.11 1.57 1.11
Depreciation and depletion 7.91 7.90 7.89 10.19 7.89
------ ------ ------ ------ ------
Total costs and expenses 13.95 13.60 13.49 16.05 13.49
------ ------ ------ ------ ------
Operating income (loss) 6.70 7.12 11.80 0.37 11.80
------ ------ ------ ------ ------
Interest expense, net (2.41) (2.18) (1.67) (2.78) (1.67)
Other income, net 0.04 0.27 0.22 0.03 0.22
------ ------ ------ ------ ------
(2.37) (1.91) (1.45) (2.75) (1.45)
Equity in earnings (loss) of
First Permian, LLC (2.88) (0.71) (0.03) 1.30 (0.03)
------ ------ ------ ------ ------
Net income (loss) $ 1.45 $ 4.50 $10.32 $(1.08) $10.32
====== ====== ====== ====== ======
Net operating cash flow before $12.24 $13.11 $18.24 $ 9.11 $18.24
working capital adjustments ====== ====== ====== ====== ======
15
Nine Months Ended
-------------------------------
9-30-98 9-30-99 9-30-00
--------- -------- ---------
Production and Prices:
Oil (Bbls) 136,180 122,518 126,353
Natural gas (Mcf) 2,407,751 2,092,750 1,961,164
Equivalent barrels of oil (EBO) 537,472 471,310 453,214
Oil price (per BBL) $ 13.25 $ 15.09 $ 27.80
Gas price (per Mcf) $ 2.20 $ 2.10 $ 3.37
Price per EBO $ 13.22 $ 13.25 $ 22.36
Results of operations per EBO:
Oil and gas revenues $ 13.22 $ 13.25 $ 22.36
Costs and expenses:
Lease operating expense 3.34 3.53 4.35
General and administrative 1.20 1.36 1.41
Depreciation and depletion 5.78 6.96 7.90
--------- --------- ---------
Total costs and expenses 10.32 11.85 13.66
--------- --------- ---------
Operating income 2.90 1.40 8.70
--------- --------- ---------
Interest expense, net (1.94) (2.35) (2.06)
Other income, net 0.09 0.03 0.18
--------- --------- ---------
(1.85) (2.32) (1.88)
Equity in earnings (loss) of First Permian, LLC 0.00 0.38 (1.10)
--------- --------- ---------
Net income(loss) before income taxes $ 1.05 $ (0.54) $ 5.72
--------- --------- ---------
Income tax expense - deferred 0.35 0.00 0.00
--------- --------- ---------
Net income (loss) $ 0.70 $ (0.54) $ 5.72
========= ========= =========
Net operating cash flow before working capital adjustments $ 6.83 $ 6.42 $ 14.72
========= ========= =========
The following table sets forth for the periods indicated the percentage of
total revenues represented by each item reflected on our statements of
operations.
Three Months Ended Nine Months Ended
--------------------------------- ---------------------
3-31-00 6-30-00 9-30-00 9-30-99 9-30-00
--------- --------- --------- --------- ---------
Oil and gas revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Lease operating expense 22.1 19.4 17.7 26.6 19.5
General and administrative 7.1 8.1 4.4 10.3 6.3
Depreciation and depletion 38.3 38.1 31.2 52.5 35.3
------ ------ ------ ------ ------
Total costs and expenses 67.5 65.6 53.3 89.4 61.1
------ ------ ------ ------ ------
Operating income 32.5 34.4 46.7 10.6 38.9
------ ------ ------ ------ ------
Interest expense, net (11.7) (10.5) (6.6) (17.7) (9.2)
Other income, net 0.2 1.3 0.8 0.2 0.8
------ ------ ------ ------ ------
(11.5) (9.2) (5.8) (17.5) (8.4)
Equity in earnings (loss) of First Permian, LLC (13.9) (3.4) (0.1) 2.9 (4.9)
------ ------ ------ ------ ------
(25.4) (12.6) (5.9) (14.6) (13.3)
------ ------ ------ ------ ------
Net income (loss) 7.1 21.8 40.8 (4.0) 25.6
====== ====== ====== ====== ======
16
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
Oil and Gas Revenues. Oil and gas revenues increased $1,871,219 or 82%, to
$4,162,667 for the three months ended September 30, 2000, from $2,291,448 for
the same period of 1999. The increase was primarily the result of a 54% increase
in the average sales price we received per EBO and an 18% increase in production
volumes. We received $25.29 per EBO in the three months ended September 30, 2000
compared with $16.42 per EBO for the same period of 1999.
Production Costs. Production costs increased $140,343 or 23%, to $738,929
during the third three months of 2000, compared with $598,586 for the same
period of 1999. Average production costs per EBO increased 5% to $4.49 for the
third three months in 2000 compared to $4.29 for the same period in 1999,
primarily a result of increased production taxes associated with higher oil and
gas revenues and a 18% increase in oil and gas production volumes.
General and Administrative Expenses. General and administrative expenses
decreased by $36,481 or 17% to $182,250 for the third three months of 2000, from
$218,731 for the same period of 1999. The decrease was primarily due to a
decrease in franchise taxes and receipt of management fees totaling $18,750
related to our ownership interest in First Permian. General and administrative
expenses were $1.11 per EBO in the third three months of 2000 compared to $1.57
per EBO in the third three months of 1999. The decrease per EBO is a result of
an 18% increase in production volumes in the third quarter of 2000 when compared
with the same period of the prior year and higher oil and gas prices. Future
general and administrative costs are expected to remain fairly stable with no
material increases expected in any particular category.
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense ("DD&A") decreased by $122,932 or 9%, to $1,299,187 for
the third three months of 2000 compared with $1,422,119 for the same period of
1999. The decrease is attributable to an increase in the amount of our
recoverable reserves, which resulted in a lower DD&A rate per EBO. As a
percentage of revenues, the DD&A rate decreased by 33% when compared with the
prior year third quarter. The DD&A rate per EBO decreased to $7.89 for the third
quarter of 2000 compared with $10.19 per EBO for the third quarter of 1999.
Historically, we have reviewed our estimates of proven reserve quantities
on an annual basis. However, due to the recent volatility of oil and gas prices,
we conduct internal reviews of our estimated proven reserves on a more frequent
basis and make necessary adjustments 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.
Equity in Earnings (Loss) of First Permian, LLC. Our share of the operating
results of First Permian resulted in a noncash loss of $4,493 for the three
months ended September 30, 2000, which reflects our pro rata share of First
Permian's loss for the three months ended September 30, 2000. For the three
months ended September 30, 1999, we reported noncash earnings of $181,108, which
reflected our pro rata share of First Permian's income for that period. When
comparing periods, First Permian's recorded a net loss in the current quarter
primarily because of:
(i) crude oil hedge payments totaling $3,889,056;
(ii) noncash charges totaling $262,827 associated with the amortization of
banking fees; and
(iii) payments of preferred dividends totaling $303,750.
As a term of providing financing for First Permian to acquire the assets of Fina
Oil and Chemical, the lending bank required First Permian to hedge a significant
portion of its monthly oil production volumes. The hedge expires on June 30,
2001.
Net Interest Expense. Net interest expense decreased $113,397 or 29%, to
$274,740 for the three months ended September 30, 2000 compared with $388,137
for the same period of 1999, due principally to decreased bank borrowings.
Net Income and Operating Cash Flow. We reported net income of $1,698,699
for the three months ended September 30, 2000 compared with a net loss of
$150,369 for the three months ended September 30, 1999. Operating cash flow
increased $1,911,737 or 125%, to $3,002,379 for the three months ended September
30, 2000 compared to $1,090,642 for the three months ended September 30, 1999.
The increase in net income and operating cash flow resulted from a 82% increase
in oil and gas revenues, a 54% increase in the average sales price per EBO, a
17% decrease in general and
17
administrative costs, a 9% decrease in DD&A expenses, a 29% decrease in net
interest expense and a 18% increase in production volumes. These factors were
partially offset by a 23% increase in production costs.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000:
Oil and Gas Revenues. Oil and gas revenues increased $3,887,608, or 62%, to
$10,133,872 for the nine months ended September 30, 2000, from $6,246,264 for
the same period of 1999. The increase was primarily the result of a 69% increase
in the average sales price per EBO. We received $22.36 per EBO in the nine
months ended September 30, 2000 compared with $13.25 per EBO for the same period
of 1999. Higher prices were partially offset by a 4% decrease in oil and gas
production.
Production Costs. Production costs increased $307,765 or 19%, to $1,971,315
during the first nine months of 2000, compared with $1,663,550 for the same
period of 1999. Average production costs per EBO increased 23%, to $4.35 for the
first nine months in 2000 compared to $3.53 for the same period in 1999,
primarily a result of increased production taxes associated with higher oil and
gas revenues, which was partially offset by a 4% decrease in oil and gas
production.
General and Administrative Expenses. General and administrative expenses
decreased by $2,670, or 1%, to $640,209 for the first nine months of 2000, from
$642,879 for the same period of 1999. The decrease was primarily due to
decreased franchise taxes and receipt of management fees totaling $56,250
related to our ownership interest in First Permian. General and administrative
expenses were $1.41 per EBO in the first nine months of 2000 compared to $1.36
per EBO in the first nine months of 1999. The increase per EBO is a result of a
4% decrease in oil and gas production volumes, when compared with the same
nine-month period of the prior year. Future general and administrative costs are
expected to remain fairly stable with no material increases expected in any
particular category.
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense ("DD&A") increased by $298,885, or 9%, to $3,581,798
for the first nine months of 2000 compared with $3,282,913 for the same period
of 1999. As a percentage of revenues, DD&A decreased by 33% when compared with
the prior year nine months, a result of an increase in the average sales price
per EBO we received in the first nine months of 2000. The DD&A rate per EBO
increased to $7.90 for the first nine months of 2000 compared with $6.96 per EBO
for the first nine months of 1999.
Historically, we have reviewed our estimates of proven reserve quantities
on an annual basis. However, due to the recent volatility of oil and gas prices,
we conduct internal reviews of our estimated proven reserves on a more frequent
basis and make necessary adjustments 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.
Equity in Earnings (Loss) of First Permian, LLC. Our share of the operating
results of First Permian resulted in a noncash charge of $500,576 for the nine
months ended September 30, 2000, which reflects our pro rata share of First
Permian's loss for the nine months ended September 30, 2000. Since First Permian
was formed on July 1, 1999, there are no comparable numbers for the nine months
ended September 30, 1999. First Permian recorded a loss for the nine-month
period ended September 30, 2000 primarily as a result of:
(i) crude oil hedge payments totaling $10,014,120;
(ii) noncash charges totaling $475,260 associated with the
amortization of banking fees;
(iii) payments of preferred dividends totaling $405,000, and
(iv) a noncash charge of $960,825 associated with the restructuring of
its debt, which was booked as a nonrecurring extraordinary item.
As a term of providing financing for First Permian to acquire the assets of
Fina Oil and Chemical, the lending bank required
First Permian to hedge a significant portion of its monthly oil production
volumes. The hedge expires on June 30, 2001.
Net Interest Expense. Interest expense decreased $173,052, or 16%, to
$935,242 for the nine months ended September 30, 2000 compared with $1,108,294
for the same period of 1999 due principally to decreased bank borrowings.
18
Net Income and Operating Cash Flow. We reported net income of $2,586,819
for the nine months ended September 30, 2000 compared to a net loss of $254,897
for the nine months ended September 30, 1999. Operating cash flow increased
$3,822,285, or 134%, to $6,669,193 for the nine months ended September 30, 2000
compared to $2,846,908 for the nine months ended September 30, 1999. The
increase in net income and operating cash flow resulted from a 62% increase in
oil and gas revenues, a 69% increase in the average sales price per EBO and a
16% decrease in interest expense. These factors were partially offset by a 19%
increase in production costs, a 9% increase in DD&A expenses and a 4% decrease
in production volumes. In addition, we recorded a net loss of $500,576
associated with our interest in First Permian. This is a noncash charge that
affects net income but does not affect operating cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Our capital resources consist primarily of cash flows from our oil and gas
properties and bank borrowings supported by our oil and gas reserves. Our level
of earnings and cash flows depends on many factors, including the price of oil
and natural gas.
Working capital increased $2,783,309 as of September 30, 2000 compared to
December 31, 1999. Current assets exceeded current liabilities by $2,711,661 at
September 30, 2000. As of December 31, 1999, current liabilities exceeded
current assets by $71,647. Current assets as of September 30, 2000 increased
primarily due to an increase in cash and cash equivalents and in accounts
receivable. Current liabilities as of September 30, 2000 decreased primarily as
a result of entering into a new banking facility, which eliminated current
maturities of long term debt totaling $3,665,889.
We incurred property costs of approximately $4.8 million, primarily for our
oil and gas property acquisition, development, and enhancement activities for
the nine months ended September 30, 2000. Such costs were financed by the
utilization of the cash provided by operations and proceeds from the sale of
certain undeveloped properties totaling approximately $3.2 million.
Based on our projected oil and gas revenues and related expenses, we
believe that our internally generated cash flow will be sufficient to fund
normal operations, interest expense and principal reduction payments on bank
debt and preferred stock dividends. We continually review and consider
alternative methods of financing.
TRENDS AND PRICES
Changes in oil and gas prices significantly affect our revenues, cash flows
and borrowing capacity. Markets for oil and gas have historically been, and will
continue to be, volatile. Prices for oil and gas typically fluctuate in response
to relatively minor changes in supply and demand, market uncertainty, seasonal,
political and other factors beyond our control. We are unable to accurately
predict domestic or worldwide political events or the effects of other such
factors on the prices we receive for our oil and gas. Historically, we have not
entered into transactions to hedge against changes in oil and gas prices, but we
may elect to enter into hedging transactions in the future to protect against
fluctuations in oil and gas prices.
Because of the prolonged deterioration in oil and gas prices experienced in
1998 and the first half of 1999, the capital normally available to us from our
cash flows and bank borrowings during that period was significantly reduced,
affecting our ability to fund future capital expenditures. Although oil and
natural gas prices have improved significantly since that time, our capital
expenditure budget for 2000 is still highly dependent on future oil and gas
prices and will be consistent with internally generated cash flows.
For the twelve months ended December 31, 1999, the average sales price we
received for our oil was approximately $17.32 per barrel while the average sales
price we received for natural gas was approximately $2.27 per thousand cubic
feet ("Mcf"). At September 30, 2000, the average price we received for our oil
production was approximately $29.53 per Bbl, while the average price received at
that same date for our natural gas production was approximately $3.97 per Mcf.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not trade in derivative financial instruments and do not have firmly
committed sales transactions. We have not entered into hedging arrangements and
do not have any delivery commitments. While hedging arrangements reduce exposure
to losses as a result of unfavorable price changes, they also limit our ability
to benefit from favorable market price changes.
Our major market risk exposure is in the pricing applicable to our oil and
natural gas production. Realized pricing is primarily driven by the prevailing
domestic price for crude oil and spot prices applicable to the region in which
we produce natural gas. Historically, prices received for oil and gas production
have been volatile and unpredictable. Pricing volatility is expected to
continue. Oil prices ranged from a monthly low of $21.12 per barrel to a monthly
high of $30.91 per barrel during third quarter 2000. The natural gas prices we
received during third quarter 2000 ranged from a monthly low of per $1.73 Mcf to
a monthly high of $6.30 per Mcf. A significant decline in the prices of oil and
natural gas could have a material adverse effect on our financial condition and
results of operations.
Our only financial instrument sensitive to changes in interest rates is
bank debt. Our annual interest costs in 2000 will fluctuate based on short-term
interest rates. As the interest rate is variable and reflects current market
conditions, the carrying value approximates the fair value. The table below
shows principal cash flows and related weighted average interest rates by
expected maturity dates. Weighted average interest rates were determined using
weighted average interest paid and accrued in December 1999.
2000 2001 2002 2003 TOTAL FAIR VALUE
---- ---- ---- ---- ----- ----------
(IN 000'S, EXCEPT INTEREST RATES)
Variable rate debt:
Revolving Facility (secured) $ - $ - $ - $ 13,100 $ 13,100 $13,100
Average interest rate 9.75% 9.75%
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Adoption of Rights Agreement
On October 5, 2000, the Board of Directors declared a dividend distribution
of one Right for each outstanding share of Parallel's common stock, $0.01 par
value (the "Common Stock"), to stockholders of record at the close of business
on October 16, 2000. Each Right entitles the registered holder to purchase from
Parallel one one-thousandth (1/1,000) of a share of Series A Preferred Stock,
par value $0.10 per share (the "Preferred Stock"), at a Purchase Price of $26.00
per one one- thousandth (1/1,000) of a share, subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between Parallel and Computershare Trust Company, Inc., as
Rights Agent (the "Rights Agent").
Initially, the Rights will be attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights Certificates will
be distributed. The Rights will separate from the Common Stock upon the earlier
of (i) ten (10) business days following a public announcement that a person or
group of affiliated or associated persons (an "Acquiring Person") has acquired,
or obtained the right to acquire, beneficial ownership of fifteen percent (15%)
or more of the outstanding shares of Common Stock (the "Stock Acquisition
Date"), or (ii) ten (10) 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."
Until the Distribution Date, (i) the Rights will be evidenced by the Common
Stock certificates and will be transferred with and only with such Common Stock
certificates, (ii) new Common Stock certificates issued after October 16, 2000
will contain a notation incorporating the Rights Agreement by reference, and
(iii) the surrender for transfer of any certificates for Common Stock
outstanding will also constitute the transfer of the Rights associated with the
Common Stock represented by such certificates. Pursuant to the Rights Agreement,
we reserve the right to require prior to the occurrence of
20
a Triggering Event (as defined below) that, upon any exercise of Rights, a
number of Rights be exercised so that only whole shares of Preferred Stock will
be issued.
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 Parallel
as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of the Common Stock as of the close of
business on the Distribution Date and, thereafter, the separate Rights
Certificates will represent the Rights. Except in connection with shares of
Common Stock issued or sold pursuant to the exercise of stock options under any
employee plan or arrangements, or upon the exercise, conversion or exchange of
securities hereafter issued by Parallel, or as otherwise determined by the Board
of Directors, only shares of Common Stock issued prior to the Distribution Date
will be issued with Rights.
In the event that (i) Parallel is the surviving corporation in a merger or
other business combination with an Acquiring Person (or any associate or
affiliate thereof) and our Common Stock remains outstanding and unchanged, (ii)
any person shall acquire beneficial ownership of more than fifteen percent (15%)
of the outstanding shares of Common Stock (except pursuant to (A) certain
consolidations or mergers involving Parallel or sales or transfers of the
combined assets, cash flow or earning power of Parallel and our subsidiaries or
(B) an offer for all outstanding shares of Common Stock at a price and upon
terms and conditions which the Board of Directors determines to be in the best
interests of Parallel and our stockholders), or (iii) there occurs a
reclassification of securities, a recapitalization of the company or any of
certain business combinations or other transactions (other than certain
consolidations and mergers involving Parallel and sales or transfers of the
combined assets, cash flow or earning power of the company and our subsidiaries)
involving Parallel or any of our subsidiaries which has the effect of increasing
by more than one percent (1%) the proportionate share of any class of the
outstanding equity securities of Parallel or any of our subsidiaries
beneficially owned by an Acquiring Person (or any associate or affiliate
thereof), each holder of a Right (other than the Acquiring Person and certain
related parties) will thereafter have the right to receive, upon exercise,
Common Stock (or, in certain circumstances, cash, property or other securities
of Parallel) having a value equal to two times the Purchase Price of the Right.
Notwithstanding any of the foregoing, following the occurrence of any of the
events described in this paragraph, all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by any
Acquiring Person will be null and void. The events described in this paragraph
are referred to as "Flip-in Events."
For example, at a Purchase Price of $26.00 per Right, each Right not owned
by an Acquiring Person (or by certain related parties or transferees) following
an event set forth in the preceding paragraph would entitle its holder to
purchase $52.00 worth of Common Stock (or other consideration, as noted above)
for $26.00.Assuming that the Common Stock had a per share market price of $5.20
at such time, the holder of each valid Right would be entitled to purchase 10
shares of Common Stock for $26.00.
In the event that, at any time following the Stock Acquisition Date, (i) we
enter into a merger or other business combination transaction in which we are
not the surviving corporation, (ii) Parallel is the surviving corporation in a
consolidation, merger or similar transaction pursuant to which all or part of
the outstanding shares of Common Stock are changed into or exchanged for stock
or other securities of any other person or cash or any other property or (iii)
more than 50% of the combined assets, cash flow or earning power of Parallel and
our subsidiaries is sold or transferred (in each case other than certain
consolidations with, mergers with and into, or sales of assets, cash flow or
earning power by or to subsidiaries of Parallel as specified in the Rights
Agreement), each holder of a Right (except Rights which previously have been
voided as set forth above) shall thereafter have the right to receive, upon
exercise, common stock of the acquiring company having a value equal to two
times the Purchase Price of the Right. The events described in this paragraph
are referred to as "Flip-over Events." Flip-in Events and Flip-over Events are
referred to collectively as "Triggering Events."
The Purchase Price payable, the number and kind of shares covered by each
Right and the number of Rights outstanding are subject to adjustment from time
to time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Preferred Stock, (ii) if
holders of the Preferred Stock are granted certain rights, options or warrants
to subscribe for Preferred Stock or securities convertible into Preferred Stock
at less than the current market price of the Preferred Stock, or (iii) upon the
distribution to holders of the Preferred Stock of evidences of indebtedness,
cash (excluding regular quarterly cash dividends), assets (other than dividends
payable in Preferred Stock) or subscription rights or warrants (other than those
referred to in (ii) immediately above).
21
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least one percent (1%) of the
Purchase Price. No fractional shares of Preferred Stock are required to be
issued (other than fractions which are integral multiples of one one-thousandth
(1/1,000) of a share of Preferred Stock) and, in lieu thereof, we may make an
adjustment in cash based on the market price of the Preferred Stock on the
trading date immediately prior to the date of exercise.
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of fifty percent (50%) or more of the
outstanding shares of Common Stock, the Board of Directors of Parallel may,
without payment of the Purchase Price by the holder, exchange the Rights (other
than Rights owned by such person or group, which will become void), in whole or
in part, for shares of Common Stock at an exchange ratio of one-half (1/2) the
number of shares of Common Stock (or in certain circumstances Preferred Stock)
for which a Right is exercisable immediately prior to the time of Parallel's
decision to exchange the Rights (subject to adjustment).
At any time until the Stock Acquisition Date, Parallel may redeem the
Rights in whole, but not in part, at a price of $0.001 per Right (payable in
cash, shares of Common Stock or other consideration deemed appropriate by the
Board of Directors). Immediately upon the action of the Board of Directors
ordering redemption of the Rights, the Rights will terminate and the only right
of the holders of Rights will be to receive the $0.001 redemption price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of Parallel, including, without limitation, the right to
vote or to receive dividends. While the distribution of the Rights will not be
taxable to stockholders or to Parallel, stockholders may, depending upon the
circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Stock (or other consideration) of Parallel or for common
stock of an acquiring company as set forth above or in the event that the Rights
are redeemed.
Other than those provisions relating to the principal economic terms of the
Rights, any of the provisions of the Rights Agreement may be amended by the
Board of Directors of Parallel at any time during the period in which the Rights
are redeemable. At any time when the Rights are no longer redeemable, the
provisions of the Rights Agreement may be amended by the Board only if such
amendment does not adversely affect the interest of holders of Rights (excluding
the interest of any Acquiring Person); provided, however, that no amendment may
cause the Rights again to become redeemable.
Amendment of Bylaws
Also on October 5, 2000, the Board of Directors of Parallel adopted certain
amendments to our Bylaws. These amendments modify and add certain provisions
regarding the advance notice requirements for stockholder proposals before an
annual meeting of stockholders, the calling of special meetings of stockholders,
stockholder written consents and the procedures for nominating directors.
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of Registrant. (Incorporated by
reference to Exhibit 3.1 to Form 10-K of the Registrant for
the fiscal year ended December 31, 1998)
3.2 Certificate of Designations, Preferences and Rights of
Serial Preferred Stock -Q of the Registrant for the fiscal
quarter ended September 30, 1998)
3.3 Form of Certificate of Designation, Preferences and Rights
of Series A Preferred Stock of the Registrant (Incorporated
by reference to Exhibit 2 of Form 8-A of the Registrant
dated October 9, 2000 and filed with the Securities and
Exchange Commission on October 10, 2000)
3.4 Bylaws of Registrant (Incorporated by reference to Exhibit 3
of Form 8-K of the Registrant dated October 5, 2000 and
filed with the Securities and Exchange Commission on October
10, 2000)
4.1 Rights Agreement, dated as of October 5, 2000, between the
Registrant and Computershare Trust Company, Inc., as Rights
Agent (Incorporated by reference to Exhibit 1 of Form 8-A of
the Registrant dated October 9, 2000 and filed with the
Securities and Exchange Commission on October 10, 2000)
4.2 Form of Rights Certificate (Incorporated by reference to
Exhibit 3 of Form 8-A of the Registrant dated October 9,
2000 and filed with the Securities and Exchange Commission
on October 10, 2000)
10.1 Restated Loan Agreement, dated December 27, 1999, between
the Registrant and Bank One, Texas, N.A. (Incorporated by
reference to Exhibit 10.8 to Form 10-K of the Registrant for
the fiscal year ended December 31, 1999)
*27. Financial Data Schedule
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter ended
September 30, 2000.
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* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PARALLEL PETROLEUM CORPORATION
BY: /s/ THOMAS R. CAMBRIDGE
Date: November 13, 2000
------------------------------------
Thomas R. Cambridge
Chairman of the Board of Directors
and Chief Executive Officer
Date: November 13, 2000 BY: /s/ LARRY C. OLDHAM
------------------------------------
Larry C. Oldham,
President and Principal Financial Officer