SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - K/A
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
[ ] Transition Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to ______.
Commission File Number: 0 - 13305
PARALLEL PETROLEUM CORPORATION
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 75-1971716
- ------------------------------- -----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
110 North Marienfeld Street
One Marienfeld Place, Suite 465
Midland, Texas 79701
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (915) 684-3727
Securities Registered Pursuant to Section 12(b) of the Exchange Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Common Stock Purchase Warrants
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the Registrant as of March 15, 1999 was approximately
$32,080,751, based on the last sale price of the common stock on the same date.
At March 15, 1999 there were 18,331,858 shares of common stock outstanding.
PAGE>
1
PART I
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ITEM 1. BUSINESS
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General
Parallel Petroleum is an independent energy company. Our primary business
is natural gas and oil exploration, development and production, and the
acquisition of producing properties.
We own interests in two core areas: the onshore gulf coast area of south
Texas and the Permian Basin of west Texas.
Throughout this report, we refer to some terms that are commonly used and
understood in the gas and oil industry. These terms are: Mcf, Bcf, Bbls and EBO.
Mcf refers to the quantity of one thousand cubic feet of natural gas and Bcf
means one billion cubic feet of natural gas. Bbls means barrels of oil or crude
oil condensate. An EBO is an equivalent barrel of oil, or 6 Mcf of natural gas
for one barrel of oil.
At December 31, 1998, our estimated proved reserves were approximately 26.0
Bcf of natural gas and 1.72 million Bbls of oil. The present value of our pretax
future net revenues was approximately $26.8 million. Approximately 72% of our
proved reserves are natural gas and approximately 67% are categorized as proved
developed reserves.
During 1998, we participated in drilling 23 gross (5.48 net) exploratory
and development wells. Thirteen gross (3.32 net) wells were productive and 10
gross (2.16 net) wells were dry holes.
Parallel was incorporated in Texas on November 26, 1979, and reincorporated
in the State of Delaware on December 18, 1984.
2
Our executive offices are located at 110 Marienfeld Place, Suite 465,
Midland, Texas 79701. Our telephone number is (915) 684-3727.
Business Strategies
In pursuing our goal of capital appreciation for our stockholders, we
emphasize the following strategies:
. focusing on exploration activities;
. using advanced technologies;
. serving as geophysical operator;
. emphasizing cost controls; and
. positioning for opportunity.
These strategies are discussed in more detail in the following paragraphs.
Focusing on Exploration Activities. We seek to increase our gas and oil
reserves and production through targeted exploration activities in our core
operating areas. We focus on prospects having the following characteristics:
. known geological and reservoir characteristics;
. located near existing wells so data from these wells can be correlated
with seismic data for prospects; and
. a potential to have a meaningful impact on our reserves.
3
When economic conditions are favorable and when we have sufficient capital
resources, we believe we can maximize the value of our properties by
accelerating drilling activities. This provides us an opportunity to replace
reserves at a more rapid pace than existing reserves are produced.
Using Advanced Technologies. We believe the use of 3-D seismic data and
other advanced technologies provides us with a risk management tool. Our use of
these technologies in exploring for and developing gas and oil properties can:
. reduce drilling risks;
. lower finding costs; and
. provide for more efficient production of natural gas and oil from our
properties.
Generally, 3-D seismic surveys provide more accurate and comprehensive
information to evaluate drilling prospects than conventional 2-D seismic
technology. We evaluate substantially all of our exploratory prospects using 3-D
seismic technology. On some exploratory prospects, we also use amplitude versus
offset, or AVO, analysis. AVO analysis shows the high contrast between sands and
shales and assists in determining the presence of natural gas in potential
reservoir sands.
It is our belief that using 3-D seismic and AVO technologies also gives us
a competitive advantage over companies that do not regularly use such
technologies because it increases the likelihood of successful drilling. When we
evaluate exploratory prospects in geographical areas where the use of 3-D
seismic and other advanced technologies are not likely to provide any
advantages, we use traditional evaluation methods, such as 2-D seismic
technology.
4
Serving as Geophysical Operator. We prefer to serve as the geophysical
operator of exploratory projects located in areas where we have experience using
3-D seismic technology. By doing so, we control the design, acquisition,
processing and interpretation of 3-D surveys and, in most cases, determine
drilling locations and well depths. The integrity of 3-D seismic analysis in our
projects is assured by emphasizing quality controls throughout the data
acquisition, processing and interpretation phases.
We retain experienced outside consultants and participate with experienced
joint working interest owners when we acquire, process and interpret 3-D seismic
surveys. When possible, we also attempt to correlate or model the
interpretations of 3-D seismic surveys with wells previously drilled on or near
the prospect being evaluated.
Emphasizing Cost Controls. We strive to maintain low general and
administrative expenses in our operations. Our concentrated geographic focus
allows us to manage a relatively large asset base with few employees. We believe
that this operational base enables us to add exploratory prospects and acquire
producing properties at relatively low incremental overhead costs.
We also pursue cost savings by using outside geological and geophysical
consultants for our exploration and development efforts. We use independent
contractors for all of our field operations.
Positioning for Opportunity. Because of intense competition among
independent oil and gas producers, we must be able to react quickly to available
exploration and acquisition opportunities. We attempt to position for these
opportunities by maintaining:
. adequate capital resources for projects in our primary areas of
operations;
. the technological capabilities to conduct a thorough evaluation of a
particular project; and
. a small staff that is able to respond swiftly to exploration and
acquisition opportunities.
5
We continually screen, review and evaluate potential leases and prospects.
Our sources for possible acquisitions include independent landmen, independent
oil and gas operators, geologists and engineers. We also evaluate properties
that become available for purchase from major oil companies. If our review of an
undeveloped lease or prospect or a producing property indicates that it may have
geological characteristics favorable for 3-D seismic analysis, we may decide to
acquire a working interest in the property or an option to acquire a working
interest. In the case of producing properties, we also seek properties that are
under-performing relative to their potential. To reduce our financial exposure
in any one prospect and participate in more prospects, we enter into
co-ownership arrangements with third parties under standard industry form
operating agreements. This is common in the industry and enables us to share the
drilling and related costs and dry-hole risks with other participants. From time
to time, we sell prospects to third parties or farm-out prospects and retain an
interest in revenues from these prospects.
Exploration and Development Activities in 1998
The scope of our exploration and development activities is affected by gas
and oil prices. Our 1998 capital expenditures were approximately 20% lower than
our capital expenditures in 1997. As oil and gas prices continued to deteriorate
during 1998, we decreased our drilling activity.
. Gulf Coast Area of South Texas
During 1998, our principal exploration and development activities were
concentrated in south Texas. Our activities were conducted in the
Yegua/Frio/Wilcox gas trend in the onshore gulf coast areas in Dewitt, Jackson,
Lavaca, Victoria and Wharton Counties. This trend has been our primary area of
activity since 1993.
6
We participated in drilling 23 wells in 1998, of which 22 were drilled in
the gulf coast area of south Texas. One dry hole was drilled in the Permian
Basin. The following table shows the results of our 1998 drilling activity in
the Yegua/Frio/Wilcox gas trend of south Texas.
1998 Drilling Activity
Yegua/Frio/Wilcox Gas Trend
Target No. of
Formation Depth Range (feet) Wells Drilled Productive Dry
- ------------------------------ ------------------------------ --------------------- -------------------- -----------
Yegua 6,300 - 13,000 11 10 1
Frio 6,400 - 8,400 5 1 4
Wilcox 13,200 - 17,500 6 2 4
--- --- ---
Total 22 13 9
=== === ===
At March 1, 1999, we owned interests in 77 gross wells in south Texas.
Our exploration activities in the Yegua/Frio/Wilcox gas trend are conducted
under exploration agreements with third party participants. These agreements
allow us to participate in the acquisition and ownership of:
. 3-D seismic surveys;
. options to acquire gas and oil leasehold interests; and
. undivided working interests in gas and oil leases.
7
Our exploration agreements include area of mutual interest provisions.
Generally, an AMI is an agreed upon area of land which is subject to rights of
first refusal among the participants. For example, if we acquire any minerals,
royalty, overriding royalty, gas and oil leasehold or other interests in the
AMI, we would then be obligated to offer the other participants the right to
purchase their pro rata share of the interest on the same terms that we acquired
the interest. If the other participants elect not to acquire their pro-rata
share, we would then typically be free to retain or sell our interest for our
own account.
The 3-D seismic survey data we obtain is confidential and shared only with
our participants. Typically, seismic data is obtained from seismic operations
conducted over large blocks of acreage. Our actual working interest ownership in
acreage surveys is less than the total area surveyed.
. Permian Basin of West Texas
Before entering the gulf coast area of south Texas in 1993, our principal
activities were focused on acquiring producing properties in the Permian Basin
of west Texas. These properties produce primarily crude oil. At December 31,
1998, we were operator of all our Permian Basin properties.
We emphasize an ongoing program of enhancement, remedial and development
drilling activities on our Permian Basin properties when oil prices are at
levels to support these activities. In 1998, because of the continued decline in
oil prices, we limited our capital expenditures on our Permian Basin properties
primarily to those activities necessary to maintain optimum well performance. We
drilled one well in the Permian Basin in 1998, which was a dry hole.
8
When oil prices recover to levels that will support enhancement, remedial
and development drilling activities on our Permian Basin properties, we intend
to allocate available funds for these activities. Enhancement and remedial
activities include:
. recompleting existing wellbores;
. restimulating producing reservoirs;
. identifying potential infill drilling locations;
. making mechanical improvements to surface facilities and downhole
equipment; and
. reviewing the practicality of applying new drilling and production
technologies that could either improve recovery potential or result
in the discovery of a new reservoir.
From time to time, we may also renegotiate gas purchase contracts or
reconfigure gathering lines. In connection with our enhancement operations, we
routinely review the performance and economics of our gas and oil properties.
When necessary, we take corrective action, such as:
. shutting-in temporarily uneconomic properties;
. plugging wells we believe to be permanently impaired or depleted;
. terminating gas and oil leases that are uneconomic under existing
operating conditions; and/or
. selling properties to third parties.
9
Drilling and Acquisition Costs
The table below shows our gas and oil property acquisition, exploration and
development costs for the periods indicated.
Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- --------- ---------- ---------- ----------
(in thousands)
Transfers from undeveloped leases held
for sale $ -- $ -- $ 60 $ 197 $ 339
Proved property acquisition costs 89 918 3,839 372 238
Unproved property acquisition costs 6,034 7,710 369 841 2,542
Exploration costs 8,556 9,604 8,669 1,519 3,400
Development costs 3,873 4,877 3,963 889 1,226
------------ -------- ---------- --------- ----------
$ 18,552 $ 23,109 $ 16,900 $ 3,818 $ 7,745
============ ======== ========== ========= ==========
Natural Gas and Oil Prices are Volatile
Industry conditions started deteriorating during the latter part of 1997
and continued throughout 1998, primarily because of declining oil prices.
Recently, there has been an excess supply of, and reduced demand for, crude oil
worldwide. This excess supply has placed downward pressures on oil prices in the
United States as well as worldwide. Natural gas prices also declined during this
period because of warm weather conditions, which reduced demand.
Our profitability and cash flows are highly dependent on the prices of
natural gas and oil. Current low oil prices and, to a lesser degree, natural gas
prices, continue to have a material adverse effect on our cash flows. If prices
remain depressed for a sustained period of time, this could have a material
adverse effect on our future operations and financial condition.
10
Natural gas and oil prices can fluctuate widely on a month-to-month basis
in response to a variety of factors that are beyond our control. These factors
include:
. weather conditions;
. the supply of foreign oil;
. the level of product demand;
. worldwide economic conditions; and
. the price and availability of alternative fuels.
The average prices we received for the natural gas and oil we produced
in 1998, 1997 and 1996 are shown in the table below:
Average Price Received for the
Year Ended December 31,
-------------------------------------
1998 1997 1996
------ ------ -------
Natural gas (Mcf) $ 2.04 $ 2.70 $ 2.55
Oil (Bbl) $12.49 $19.88 $21.83
The average natural gas price we received at March 15, 1999 was $1.75 per
Mcf. At the same date, the average price we were receiving for our oil sales was
approximately $12.50 per Bbl. At December 31, 1998, approximately 75% of our
daily production was natural gas and 25% was oil. There is substantial
uncertainty regarding future gas and oil prices and we can provide no assurance
that prices will not remain at current levels or decline further.
Part of Our Business is Seasonal in Nature
Weather conditions affect the demand for and prices of natural gas and can
also delay drilling activities, disrupting our overall business plans. Demand
for natural gas is typically higher during winter months.
11
Our Gas and Oil Operations Are Subject to Many Inherent Risks
Gas and oil drilling activities and production operations are highly
speculative and involve a high degree of risk. These operations are marked by
unprofitable efforts because of dry holes and wells that do not produce gas or
oil in sufficient quantities to return a profit. The success of our operations
depends, in part, upon the ability of our management and technical personnel.
There is no assurance that our gas and oil drilling or acquisition activities
will be successful, that any production will be obtained, or that any such
production, if obtained, will be profitable.
Our operations are subject to all of the operating hazards and risks
normally incident to drilling for and producing gas and oil. These hazards and
risks include:
. encountering unusual or unexpected formations and pressures;
. explosions, blowouts and fires;
. pipe and tubular failures and casing collapses;
. environmental pollution; and
. personal injuries.
We maintain general liability insurance and obtain insurance against
blowouts on a well-by-well basis. We do not carry insurance against pollution
risks. If we sustain an uninsured loss or liability, our ability to operate
could be materially adversely affected.
Our gas and oil operations are not subject to renegotiation of profits or
termination of contracts at the election of the federal government.
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Executive Officers of Parallel
At March 15, 1999, Parallel's executive officers were Thomas R. Cambridge
and Larry C. Oldham.
Mr. Cambridge, age 63, is the Chief Executive Officer and Chairman of the
Board of Directors of Parallel. He is an independent petroleum geologist engaged
in the exploration for, development and production of oil and natural gas. From
1970 until 1990, such activities were carried out primarily through Cambridge &
Nail Partnership, a Texas general partnership. Since 1990, such activities have
been carried out through Cambridge Production, Inc., a Texas corporation. Mr.
Cambridge has served as a Director of Parallel since February, 1985; as
President during the period from October, 1985 to October, 1994; and as Chairman
of the Board of Directors and Chief Executive Officer since October, 1985. He
received a Bachelors degree in geology from the University of Nebraska in 1958
and a Masters of Science degree in 1960.
Mr. Oldham, age 45, is a founder of Parallel. He has served as an officer
and Director since Parallel's formation in 1979. He served as Executive
Vice-President until October, 1994 when he became President. Mr. Oldham received
a Bachelor of Business Administration degree from West Texas State University in
1975. He is a member of the American Institute of Certified Public Accountants
and a member of the Permian Basin Landman's Association.
The term of both officers expires at Parallel's annual meeting of Directors
or when their respective successors are duly elected and qualified. There is no
family relationship between the executive officers.
Parallel is the beneficiary of a $1 million key-man life insurance policy
on the life of Mr. Cambridge and a $5 million key-man life insurance policy on
the life of Mr. Oldham.
13
Employees
At March 15, 1999, Parallel had seven full time employees. Mr. Thomas R.
Cambridge, the Chief Executive Officer and Chairman of the Board of Directors of
Parallel, serves in the capacity of a consultant, and not as a full-time
employee. Parallel also retains independent land, geological, geophysical and
engineering consultants and expects to continue to do so in the future.
Additionally, Parallel retains eight contract pumpers on a month-to-month basis.
We consider our employee relations to be satisfactory. None of our
employees are represented by a union and we have not experienced work stoppages
or strikes.
Wells Drilled
The following table shows certain information concerning the number of
gross and net wells we drilled during the three-year period ended December 31,
1998.
Exploratory Wells (1) Development Wells (2)
---------------------------------- -------------------------------------
Productive Dry Productive Dry
Year Ended --------------- --------------- --------------- ---------------
December 31, Gross Net Gross Net Gross Net Gross Net
----------------- ----- --- ----- --- ------ --- ----- ---
1998 9.0 2.16 8.0 1.71 4.0 1.16 2.0 .45
1997 19.0 4.45 17.0 4.08 7.0 6.54 1.0 .20
1996 20.0 5.20 9.0 2.38 3.0 1.40 1.0 .42
(1) An exploratory well is a well drilled to find and produce gas or oil in
an unproved area, to find a new reservoir in a field previously found
to be productive of gas or oil in another reservoir, or to extend a known
reservoir.
(2) A development well is a well drilled within the proved area of a gas or oil
reservoir to the depth of a stratigraphic horizon known to be productive.
14
All of our drilling is performed on a contract basis by third-party
drilling contractors. We do not own any drilling equipment.
At March 15, 1999, we were participating in the completion of two gross
(.31 net) gas wells in Wharton and Victoria, Counties, Texas. At that same date,
four gross (.87 net) gas wells were waiting on completion. These four wells are
located in Victoria, DeWitt and Jackson Counties, Texas.
Volumes, Prices and Lifting Costs
The following table shows certain information about our production,
including the volumes of gas and oil we produced, the average sales prices per
Mcf of gas and Bbl of oil produced, and the average production, or lifting, cost
per EBO for the three-year period ended December 31, 1998.
Year Ended December 31,
--------------------------------------------------------------------------
1998 1997 1996
-------- -------- ---------
Net Production:
Oil (Bbls) 185,474 175,246 221,499
Gas (Mcf) 3,275,882 3,383,190 3,654,897
EBO(1) 731,454 739,111 830,649
Average Sales Price:
Oil (per Bbl) $ 12.49 $ 19.88 $ 21.83
Gas (per Mcf) $ 2.04 $ 2.70 $ 2.55
EBO $ 12.31 $ 17.07 $ 17.06
Average Production
(lifting) Cost per
EBO
$ 3.33 $ 4.29 $ 3.23
Operating Margin
per EBO(2) $ 8.98 $ 12.78 $ 13.83
Depletion per EBO $ 8.07 $ 5.29 $ 4.47
(1) An EBO means one barrel of oil equivalent using the ratio of six Mcf
of gas to one barrel of oil.
(2) Operating margin is determined by deducting the average production
cost per EBO from the average sales price per EBO.
15
Our 1998 gas sales represented approximately 75% of our combined gas and
oil sales for the year ended December 31, 1998.
MARKETS AND CUSTOMERS
Substantially all of our gas and oil production is sold at the well site on
an as produced basis at floating or market related prices. We sell our gas and
oil production to purchasers on a month-to-month basis. In the table below, we
show the purchasers that accounted for 10% or more of our revenues during the
specified years.
1998 1997 1996
------- ------- -------
Enron Oil & Gas Transportation 11% 12% 11%
Cox & Perkins Exploration 24% 53% 46%
Allegro Investments 22% - -
Brayton Operating 18% - -
We do not believe the loss of any one of our purchasers would materially
affect our ability to sell gas or oil. Other purchasers are available in our
areas of operations.
Our business does not require us to maintain a backlog of products,
customer orders or inventory.
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OFFICE FACILITIES
Our corporate offices consist of approximately 5,776 square feet of leased
space in Midland, Texas. Our current rental rate is $3,461 per month until June
1, 1999 when the rental rate increases to $3,851 per month. The lease expires in
May, 2001.
COMPETITION
The gas and oil industry is highly competitive, particularly in the areas
of acquiring exploration and development prospects and producing properties. The
principal means of competing for the acquisition of gas and oil properties are
the amount and terms of the consideration offered. Our competitors include major
oil companies, independent oil and gas concerns and individual producers and
operators. Many of these competitors have financial resources, staffs and
facilities substantially greater than ours.
The principal resources we need for acquiring, exploring, developing,
producing and selling gas and oil are:
. leasehold prospects under which gas and oil reserves may be discovered;
. drilling rigs and related equipment to explore for such reserves; and
. knowledgeable personnel to conduct all phases of gas and oil operations.
17
GAS AND OIL REGULATIONS
Our operations are regulated by certain federal and state agencies. Gas and
oil production and related operations are or have been subject to:
. price controls;
. taxes; and
. environmental and other laws relating to the gas and oil industry.
We cannot predict how existing laws and regulations may be interpreted by
enforcement agencies or court rulings, whether additional laws and regulations
will be adopted, or the effect such changes may have on our business, financial
condition or results of operations.
Our gas and oil exploration, production and related operations are subject
to extensive rules and regulations that are enforced by federal, state and local
agencies. Failure to comply with these rules and regulations can result in
substantial penalties. The regulatory burden on the gas and oil industry
increases our cost of doing business and affects our profitability. Because
these rules and regulations are frequently amended or reinterpreted, we are not
able to predict the future cost or impact of complying with such laws.
Texas and many other states require drilling permits, bonds and operating
reports. Other requirements relating to the exploration and production of gas
and oil are also imposed. These states also have statutes or regulations
addressing conservation matters, including provisions for:
. the unitization or pooling of gas and oil properties;
. the establishment of maximum rates of production from gas and oil wells;
and
. the regulation of spacing, plugging and abandonment of wells.
18
Sales of natural gas we produce are not regulated and are made at market
prices. However, the Federal Energy Regulatory Commission regulates interstate
and certain intrastate gas transportation rates and services conditions, which
affect the marketing of our gas, as well as the revenues we receive for sales of
our production. Since the mid- 1980s, FERC has issued a series of orders,
culminating in Order Nos. 636, 636-A, 636-B and 636-C. These orders, commonly
known as Order 636, have significantly altered the marketing and transportation
service, including the unbundling by interstate pipelines of the sales,
transportation, storage and other components of the city-gate sales services
these pipelines previously performed.
One of FERC's purposes in issuing the orders was to increase competition in
all phases of the gas industry. Order 636 and subsequent FERC orders issued in
individual pipeline restructuring proceedings have been the subject of appeals,
the results of which have generally been supportive of the FERC's open-access
policy. In 1996, the United States Court of Appeals for the District of Columbia
Circuit largely upheld Order No. 636. Because further review of certain of these
orders is still possible, and other appeals remain pending, it is difficult to
predict the ultimate impact of the orders on Parallel and our gas marketing
efforts. Generally, Order 636 has eliminated or substantially reduced the
interstate pipelines' traditional role as wholesalers of gas, and has
substantially increased competition and volatility in gas markets. While
significant regulatory uncertainty remains, Order 636 may ultimately enhance our
ability to market and transport our gas, although it may also subject us to
greater competition.
Sales of oil we produce are not regulated and are made at market prices.
The price we receive from the sale of oil is affected by the cost of
transporting the product to market. Effective January 1, 1995, FERC implemented
regulations establishing an indexing system for transportation rates for
interstate common carrier oil pipelines, which, generally, would index such
rates to inflation, subject to certain conditions and limitations. These
regulations could increase the cost of transporting oil by interstate pipelines,
although the most recent adjustment generally decreased rates. These regulations
19
have generally been approved on judicial review. We are unable to predict with
certainty what effect, if any, these regulations will have on us. The
regulations may, over time, tend to increase transportation costs or reduce
wellhead prices for oil.
We are required to comply with various federal and state regulations
regarding plugging and abandonment of gas and oil wells.
ENVIRONMENTAL REGULATIONS
Various federal, state and local laws and regulations governing the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, health and safety, affect our operations and
costs. These laws and regulations sometimes:
. require prior governmental authorization for certain activities;
. limit or prohibit activities because of protected areas or species;
. impose substantial liabilities for pollution related to our operations or
properties; and
. provide significant penalties for noncompliance.
In particular, our exploration and production operations, our activities in
connection with storing and transporting oil and other liquid hydrocarbons, and
our use of facilities for treating, processing or otherwise handling
hydrocarbons and related exploration and production wastes are subject to
stringent environmental regulations. As with the industry generally, compliance
with existing and anticipated regulations increases our overall cost of
business. While these regulations affect our capital expenditures and earnings,
we believe that they do not affect our competitive position in the industry
because our competitors are also affected by environmental regulatory programs.
Since environmental regulations have historically been subject to frequent
change, we cannot predict with certainty the future costs or other future
20
impacts of environmental regulations on our future operations. A discharge of
hydrocarbons or hazardous substances into the environment could subject us to
substantial expense, including the cost to comply with applicable regulations
that require a response to the discharge, such as claims by neighboring
landowners, regulatory agencies or other third parties for costs of:
. containment or cleanup;
. personal injury;
. property damage; and
. penalties assessed or other claims sought for natural resource damages.
The following are examples of some environmental laws that potentially
impact our operations.
. WATER. The Oil Pollution Act, or OPA, was enacted in 1990 and amends
provisions of the Federal Water Pollution Control Act of 1972 and other
statutes as they pertain to prevention of and response to major oil
spills. The OPA subjects owners of facilities to strict, joint and
potentially unlimited liability for removal costs and certain other
consequences of an oil spill, where such spill is into navigable waters,
or along shorelines. In the event of an oil spill into such waters,
substantial liabilities could be imposed upon Parallel. States in which
Parallel operates have also enacted similar laws. Regulations are
currently being developed under the OPA and similar state laws that may
also impose additional regulatory burdens on Parallel.
The FWPCA imposes restrictions and strict controls regarding the
discharge of produced waters, other gas and oil wastes, any form of
pollutant, and, in some instances, storm water runoff, into waters of the
United States. The FWPCA provides for civil, criminal and administrative
penalties for any unauthorized discharges and, along with the OPA,
21
imposes substantial potential liability for the costs of removal,
remediation or damages resulting from an unauthorized discharge and,
along with the OPA, imposes substantial potential liability for the costs
of removal, remediation or damages resulting from an unauthorized
discharge. State laws for the control of water pollution also provide
civil, criminal and administrative penalties and liabilities in the case
of an unauthorized discharge into state waters. The cost of compliance
with the OPA and the FWPCA have not historically been material to our
operations, but there can be no assurance that changes in federal, state
or local water pollution control programs will not materially adversely
affect us in the future. Although no assurances can be given, we believe
that compliance with existing permits and compliance with foreseeable new
permit requirements will not have a material adverse effect on our
financial condition or results of operations.
. SOLID WASTE. Parallel generates non-hazardous solid wastes that fall
under the requirements of the Federal Resource Conservation and Recovery
Act and comparable state statutes. The EPA and the states in which we
operate are considering the adoption of stricter disposal standards for
the type of non-hazardous waste we generate. The Resource Conservation
and Recovery Act also governs the generation, management, and disposal of
hazardous wastes. At present, we are not required to comply with a
substantial portion of the Resource Conservation and Recovery Act
requirements because our operations generate minimal quantities of
hazardous wastes. However, it is anticipated that additional wastes,
which could include wastes currently generated during operations, could
in the future be designated as hazardous wastes. Hazardous wastes are
subject to more rigorous and costly disposal and management requirements
than are non-hazardous wastes. Such changes in the regulations may result
in Parallel incurring additional capital expenditures or operating
expenses.
22
. SUPERFUND. The Comprehensive Environmental Response, Compensation, and
Liability Act, sometimes called CERCLA or Superfund, imposes liability,
without regard to fault or the legality of the original act, on certain
classes of persons in connection with the release of a hazardous
substance into the environment. These persons include the current owner
or operator of any site where a release historically occurred and
companies that disposed or arranged for the disposal of the hazardous
substances found at the site. CERCLA also authorizes the EPA and, in some
instances, third parties to act in response to threats to the public
health or the environment and to seek to recover from the responsible
classes of persons the costs they incur. In the course of our ordinary
operations, we may have managed substances that may fall within CERCLA's
definition of a hazardous substance. We may be jointly and severally
liable under CERCLA for all or part of the costs required to clean up
sites where we disposed of or arranged for the disposal of these
substances. This potential liability extends to properties that we owned
or operated, as well as to properties owned and operated by others at
which disposal of Parallel's hazardous substances occurred.
Parallel may also fall into the category of the current owner or operator.
We currently own or lease numerous properties that for many years have been used
for exploring and producing gas and oil. Although we believe we use operating
and disposal practices standard in the industry, hydrocarbons or other wastes
may have been disposed of or released by us on or under properties that we have
owned or leased. In addition, many of these properties have been previously
owned or operated by third parties who may have disposed of or released
hydrocarbons or other wastes at these properties. Under CERCLA, and analogous
state laws, we could be required to remove or remediate previously disposed
wastes, including wastes disposed of or released by prior owners or operators,
to clean up contaminated property, including contaminated groundwater, or to
perform remedial plugging operations to prevent future contamination.
23
PART IV
================================================================================
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
================================================================================
(a) The following documents are filed as part of this report:
For a list of Financial Statements and
Schedules, see "Index to the Financial
Statements and Schedules" on page F-1, and
incorporated herein by reference.
(b) No reports on Form 8-K were filed by Parallel during the last
quarter of its fiscal year ended December 31, 1998.
(c) Exhibits:
Exhibit
No. Description of Exhibit
------ ----------------------
*3.1 Certificate of Incorporation of Registrant
3.2 Bylaws of Registrant (Incorporated by reference toExhibit 3.2
to Form 10-K of the Registrant for thefiscal year ended
December 31, 1995.)
4.1 Certificate of Designations, Preferences and Rightsof Serial
Preferred Stock - 6% Convertible PreferredStock (Incorporated
by reference to Exhibit 4.1 toForm 10-Q of the Registrant for
the fiscal quarterended September 30, 1998.)
24
Executive Compensation Plans and Arrangements
(Exhibit No.'s 10.1 through 10.7):
---------------------------------------------
10.1 1983 Incentive Stock Option Plan (Incorporated byreference to
Exhibit 10.2 to Form S-l of the Regis- trant (File No. 2-92397)
as filed with the Securitiesand 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 referenceto Exhibit
28.1 to Form S-8 of the Registrant (FileNo. 33-57348) as filed
with the Securities and Exchange Commission on January 25,
1993.)
10.3 Stock Option Agreement between the Registrant and Thomas R.
Cambridge dated December 11, 1991 (Incorporated by reference to
Exhibit 10.4 of Form 10-K of the Registrant for the fiscal year
ended December 31, 1992.)
10.4 Stock Option Agreement between the Registrant and Thomas R.
Cambridge dated October 18, 1993 (Incorporated by reference to
Exhibit 10.4(e) of Form 10-K of the Registrant for the fiscal
year ended December 31, 1993.)
10.5 Merrill Lynch, Pierce, Fenner & Smith IncorporatedPrototype
Simplified Employee Pension Plan (Incorporated by reference to
Exhibit 10.6 of theRegistrant's Form 10-K for the fiscal year
ended December 31, 1995.)
25
10.6 Non-Employee Directors Stock Option Plan (Incorporated by
reference to Exhibit 10.6 of theRegistrant's Form 10-K Report
for the fiscal yearended December 31, 1997).
*10.7 1998 Stock Option Plan
10.8 Loan Agreement dated July 1, 1996 between the Registrant and
Bank One Texas, N.A. (Incorporatedby reference to Exhibit 10.1
of Form 10-Q of the Registrant for the fiscal quarter ended
June 30, 1996.)
*10.9 Letter agreement, dated March 24, 1999, between the Registrant
and Bank One, Texas, N.A.
*23.1 Consent of Independent Auditors
*23.2 Consent of Independent Petroleum Engineers
*27 Financial Data Schedule
- ------------------------
* Previously filed.
F-1
PARALLEL PETROLEUM CORPORATION
Index to the Financial Statements
Page
----
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets at December 31, 1998 and 1997 F-3
Statements of Income for the years ended
December 31, 1998, 1997, and 1996 F-4
Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 F-5
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-6
Notes to Financial Statements F-7
All schedules are omitted, as the required information is inapplicable or the
information is presented in the financial statements or related notes.
F-2
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
Parallel Petroleum Corporation:
We have audited the financial statements of Parallel Petroleum Corporation
(the "Company") as listed in the accompanying index. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Parallel Petroleum Corporation
as of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
KPMG LLP
Midland, Texas
February 12, 1999
F-3
PARALLEL PETROLEUM CORPORATION
Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 1,178,819 597,149
Accounts receivable:
Oil and gas 1,432,659 1,649,350
Others, net of allowance for
doubtful accounts of $71,358 in
1998 and $28,130 in 1997 247,740 915,358
Affiliate 11,844 9,506
----------- ---------
1,692,243 2,574,214
Other assets 61,504 37,183
----------- ---------
Total current assets 2,932,566 3,208,546
----------- ---------
Property and equipment, at cost:
Oil and gas properties, full cost method
Note 11) 65,565,466 62,659,570
Other 287,586 433,922
---------- ----------
65,853,052 63,093,492
Less accumulated depreciation and depletion (22,279,355) (16,514,102)
---------- ----------
Net property and equipment 43,573,697 46,579,390
---------- ----------
Other assets, net of accumulated amortization
of $86,917 in 1998 and $59,085 in 1997 58,519 67,596
---------- ----------
$ 46,564,782 49,855,532
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities:
Trade $ 2,803,539 5,313,439
Affiliate 214 14,660
Income taxes payable - 42,586
---------- ----------
Total current liabilities 2,803,753 5,370,685
---------- ----------
Long-term debt (Note 3) 18,035,889 12,182,610
Deferred income taxes (Note 5) - 3,183,484
Stockholders' equity:
Preferred stock - $.60 cumulative
convertible preferred stock - par value
of $.10 per share, (aggregate liquidation
preference of $10) authorized 10,000,000
shares, issued and outstanding 974,500 in
1998 97,450 -
Common stock - par value of $.01 per share,
authorized 60,000,000 shares,issued and
outstanding 18,306,858 in 1998 and
18,114,358 in 1997 183,069 181,144
Additional paid-in surplus 32,341,971 22,839,049
Retained earnings (deficit) (6,897,350) 6,098,560
---------- ----------
Total stockholders' equity 25,725,140 29,118,753
Contingencies
---------- ----------
$ 46,564,782 49,855,532
========== ==========
See accompanying notes to financial statements.
F-4
PARALLEL PETROLEUM CORPORATION
Statements of Income
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
Oil and gas revenues $ 9,001,582 12,614,242 14,167,470
------------ ------------ ------------
Costs and expenses:
Lease operating expense 2,434,658 3,171,234 2,685,662
General and administrative 899,016 837,635 520,784
Depreciation, depletion and amortization 5,966,221 3,959,277 3,738,722
Impairment of oil and gas properties 14,757,028 - -
------------ ------------ ------------
Total costs and expenses 24,056,923 7,968,146 6,945,168
------------ ------------ ------------
Operating income (loss) (15,055,341) 4,646,096 7,222,302
------------ ------------ ------------
Other income (expense), net:
Interest income 2,771 8,984 8,165
Other income 395,683 33,512 65,757
Interest expense (1,381,103) (813,372) (1,245,891)
Other expense (57,947) (8,840) (1,566)
------------ ------------ ------------
Total other expense, net (1,040,596) (779,716) (1,173,535)
------------ ------------ ------------
Income (loss) before income taxes (16,095,937) 3,866,380 6,048,767
Income tax (expense) benefit 3,100,027 (1,122,450) (1,718,113)
------------ ------------ ------------
Net income (loss) $(12,995,910) 2,743,930 4,330,654
============ ============ ============
Cumulative preferred stock dividend $ (276,712) - -
------------- ------------ ------------
Net income (loss) available to
common stockholders $(13,272,622) 2,743,930 4,330,654
=========== ============ ============
Net income (loss) per common share:
Basic $ (.73) .15 .29
Diluted $ (.73) .15 .28
See accompanying notes to financial statements.
F-5
PARALLEL PETROLEUM CORPORATION
Statements of Stockholders' Equity
Years ended December 31, 1998, 1997, and 1996
Common stock Preferred stock Additional Retained Total
------------------- -------------------
Number of Number of paid-in earnings stockholders'
shares Amount shares Amount surplus (deficit) equity
------ ------ ------ ------ ------- --------- ------
Balance,
January 1, 1996 14,854,108 $ 148,540 - - 11,662,897 (976,024) 10,835,413
Issuance of stock, net 2,500,000 25,000 - - 9,395,630 - 9,420,630
Options exercised 12,250 123 - - 21,315 - 21,438
Warrants exercised 40,000 400 - - 109,600 - 110,000
Net income - - - - - 4,330,654 4,330,654
----------- --------- ------- ------- ----------- ----------- -----------
Balance,
December 31, 1996 17,406,358 174,063 - - 21,189,442 3,354,630 24,718,135
Options exercised 708,000 7,081 - - 1,633,404 - 1,640,485
Tax benefits related
to options - - - - 16,203 - 16,203
Net income - - - - - 2,743,930 2,743,930
----------- ---------- -------- ------- ----------- ----------- -----------
Balance,
December 31, 1997 18,114,358 181,144 - - 22,839,049 6,098,560 29,118,753
Issuance of stock, net - - 974,500 97,450 9,531,477 - 9,628,927
Options exercised 192,500 1,925 - - 164,700 - 166,625
Tax benefits related
to options - - - - 83,457 - 83,457
Net loss - - - - - (12,995,910) (12,995,910)
Dividends ($.60 per
share) - - - - (276,712) - (276,712)
---------- --------- ------- ------ ---------- ----------- ----------
Balance,
December 31, 1998 18,306,858 $ 183,069 974,500 97,450 32,341,971 (6,897,350) 25,725,140
========== ========= ======= ====== ========== ============ ==========
See accompanying notes to financial statements.
F-6
PARALLEL PETROLEUM CORPORATION
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(12,995,910) 2,743,930 4,330,654
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 5,966,221 3,959,277 3,738,722
Deferred income taxes (3,100,027) 1,079,864 1,706,048
Impairment of oil and gas properties 14,757,028 - -
Provision for losses on trade receivables 43,228 - -
Other, net 9,077 5,715 (32,317)
Changes in assets and liabilities:
Decrease (increase) in trade receivables 838,743 467,014 (2,274,978)
Decrease (increase) in prepaid expenses and
other (24,321) (29,643) 8,753
Increase (decrease) in accounts payable and
accrued liabilities 123,421 (67,078) 217,801
Income tax payable - 30,521 12,065
------------ ----------- -----------
Net cash provided by
operating activities 5,617,460 8,189,600 7,706,748
------------ ----------- -----------
Cash flows from investing activities:
Additions to property and equipment (21,300,419) (20,516,544) (15,271,761)
Proceeds from disposition of property and equipment 892,510 7,580,820 649,000
------------ ----------- -----------
Net cash used in
investing activities (20,407,909) (12,935,724) (14,622,761)
------------ ----------- -----------
Cash flows from financing activities:
Borrowings from bank line of credit 18,182,279 16,330,000 22,387,102
Payments on bank line of credit (12,329,000) (12,668,781) (25,540,336)
Proceeds from exercise of options and warrants 166,625 1,640,485 131,438
Stock offering costs (116,072) - (1,205,620)
Proceeds from common stock issuance - - 10,626,250
Proceeds from preferred stock issuance 9,744,999 - -
Payments of preferred stock dividend (276,712) - -
------------ ----------- -----------
Net cash provided by
financing activities 15,372,119 5,301,704 6,398,834
------------ ----------- -----------
Net increase (decrease) in cash
and cash equivalents 581,670 555,580 (517,179)
Beginning cash and cash equivalents 597,149 41,569 558,748
------------ ----------- -----------
Ending cash and cash equivalents $ 1,178,819 597,149 41,569
============ =========== ===========
See accompanying notes to financial statements.
F-7
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements
Years ended December 31, 1998, 1997 and 1996
(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,
with no gain or loss recognized.
Depletion is provided using the unit-of-production method based upon
estimates of proved oil and gas reserves with oil and gas production
being converted to a common unit of measure based upon their relative
energy content. Investments in unproved properties and major
development projects are not amortized until proved reserves
associated with the projects can be determined or until impairment
occurs. If the results of an assessment indicate that the properties
are impaired, the amount of the impairment is added to the capitalized
costs to be amortized.
In addition, the capitalized costs are subject to a "ceiling test",
which basically limits such costs to the aggregate of the "estimated
present value", discounted at a 10-percent interest rate of future net
revenues, net of income tax effects, from proved reserves, based on
current economic and operating conditions, plus the lower of cost or
fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments
of capitalized costs with no gain or loss recognized, unless such
adjustments would significantly alter the relationship between
capitalized costs and proved reserves of oil and gas, in which case
F-8
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
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 charged 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,
reflected in results of operations. 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.
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.
Revenue Recognition
-------------------
The Company uses the sales method of accounting for crude oil revenues.
To the extent that crude oil is produced but not sold, the oil in
tanks is not recorded as inventory on the financial statements. The
oil in tanks at December 31, 1998, 1997, and 1996 was not material.
F-9
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
The Company uses the sales method of accounting for natural gas
revenues. Under this method, revenues are recognized based on actual
volumes of gas sold to purchasers.
Gas Balancing
-------------
Deferred income associated with gas balancing is accounted for on the
entitlements method and represents amounts received for gas sold under
gas balancing arrangements in excess of the Company's interest in
properties covered by such agreements. The Company currently has no
significant amounts outstanding under gas balancing arrangements.
Net Income Per Share
--------------------
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 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 similarly to the
previously reported fully diluted earnings per share and reflects the
assumed conversion of all potentially dilutive securities. In
accordance with the provisions of FAS 128, the Company adopted FAS 128
in its year ended December 31, 1997 financial statements and all prior
period EPS information has been restated.
Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
Preparation of the accompanying financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash Management
---------------
The Company maintains a cash management system, whereby it maintains
minimum cash balances with any excess cash applied against its bank
line of credit.
Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers all
demand deposits,money market accounts and certificates of deposit
purchased with an original maturity of three months or less to be cash
equivalents.
F-10
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(2) Fair Value of Financial Instruments
-----------------------------------
The carrying amount of cash, accounts receivable, accounts payable, and
accrued liabilities approximates fair value because of the short
maturity of these instruments.
The carrying amount of long-term debt approximates fair value because
the Company's current borrowing rate does not differ from the existing
rate on the Company's long-term debt balance.
(3) Long-Term Debt
--------------
Long-term debt consists of the following at December 31:
1998 1997
---- ----
Revolving Facility note payable to bank,
at bank's base lending rate (7.5%
at December 31, 1998) (a) $ 16,623,889 12,182,610
Development Facility note payable to
bank, at bank's base lending rate
plus 5.5% (13% at December 31, 1998) 1,412,000 -
Less: current maturities - -
------------ ----------
$ 18,035,889 12,182,610
============ ==========
_________________
(a) The note payable is classified as long-term due to a maturity date of
July 1, 2001.
At December 31, 1998, the Company is party to a note agreement with a
bank. 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, 1998 of $21,100,000 includes (i) a
$19,100,000 revolving credit facility ("Revolving Facility") and (ii)
a $2,000,000 non-revolving line of credit ("Development Facility").
The borrowing base is reduced by a monthly commitment reduction of
$380,000 until April 1, 1999. The borrowing base and monthly
commitment reduction are subject to redetermination every six months
on April 1 and October 1 of each year, or at such other times as the
bank elects. The latest redetermination date was on September 1,
1998. Indebtedness under the Revolving Facility matures July 1, 2001
and indebtedness under the Development Facility is due and payable on
March 31, 1999. The note is secured by substantially all of the
Company's oil and gas properties. Commitment fees of .25% per annum
on the difference between the commitment and the average daily
amount outstanding are due quarterly.
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 less .25% or (ii) the bank's Eurodollar rate plus a
margin of 2.5%. The unpaid principal balance for the Development
F-11
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Facility bears interest at the bank's base lending rate plus 5.5%.
Interest under both Facilities is due and payable monthly.
The loan agreement contains various restrictive covenants and
compliance requirements, which include (1) maintenance of certain
financial ratios, (2) limiting the incurrence of additional
indebtedness, and (3) no payment of dividends for common stock.
On March 23, 1999, the Company entered into an agreement with its bank
amending certain terms of the note agreement. Under the amendment,
(i) the amount outstanding under the Development Facility of
$1,592,000 was rolled into the Revolving Facility (ii) the borrowing
base was redetermined at $18,900,000 (iii) the unpaid principal
balance for the Revolving Facility bears interest at the bank's prime
rate plus .25%, or 8% at March 23, 1999, and (iv) the monthly
commitment reduction was suspended until May 1, 1999, when the
borrowing base and monthly commitment reduction are scheduled for
redetermination by the bank.
(4) Stock Options and Warrants
--------------------------
At the election of the board of directors, the Company awards both
incentive stock options and nonqualified stock options to selected
key employees and officers. The options are awarded at an exercise
price based on the closing price of the Company's common stock on the
date of grant, a two-year and four-year vesting schedule and a
ten-year exercise period. As of December 31, 1998, options expire
beginning in the year-ended December 31, 2001 through 2008. Exercise
of the nonqualified stock options resulted in a deferred tax effect of
$83,457, $16,203, and $0 for the years ended December 31, 1998, 1997
and 1996, 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 and net income
per share would have been adjusted to the pro forma amounts indicated
below for the years ended December 31:
1998 1997 1996
---- ---- ----
Net income (loss) $ (13,452,020) $ 2,464,487 $ 4,295,248
Basic net income (loss)
per share $ (.74) $ .14 $ .29
Diluted net income (loss)
per share $ (.74) $ .13 $ .27
The pro forma net income and pro forma net income per share amounts
noted above are not likely to be representative of the pro forma
amounts to be reported in future years. The pro forma amounts for
1996 reflect
F- 12
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
the initial phase-in of FAS 123 and as a result do not
reflect any compensation expense for options granted prior to 1995.
Pro forma adjustments in future years will include compensation
expense associated with options granted beginning in 1995 plus
compensation expense associated with any options awarded in subsequent
years. As a result, such pro forma compensation expense is likely to
be higher than the levels experienced in 1996.
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
1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
Risk-free interest rate 5.61 6.41 6.15
Expected life 7 years 7 years 7 years
Expected volatility .71 .55 .64
A summary of the Company's stock option plans as of December 31, 1998,
1997 and 1996, 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, 1998 December 31, 1997 December 31, 1996
------------------ ------------------ ------------------
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 1,364,250 $ 3.06 1,207,250 $ 1.82 1,134,500 $ 1.55
Options granted 370,000 3.60 485,000 4.41 85,000 5.40
Options exercised (192,500) (.87) (323,000) .44 (12,250) 1.75
Options canceled - - (5,000) 4.53 - -
--------- ------ --------- ------ --------- ------
Outstanding at end
of year 1,541,750 $ 3.46 1,364,250 $ 3.06 1,207,250 $ 1.82
========= ====== ========= ====== ========= ======
Exercisable at end
of year 816,750 $ 2.97 775,500 $ 2.08 987,250 $ 1.35
========= ====== ========= ====== ========= ======
Weighted average fair
value of options
granted during the
year $ 2.58 $ 2.80 $ 3.70
========= ========= =========
The following table summarizes information about the Company's stock
options outstanding at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------------ ----------------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Prices December 31, 1998 Contractual Life Exercise Price December 31, 1998 Exercise Price
----------------- ---------------- -------------- ----------------- --------------
$.64 - $.69 175,000 4 years $ .65 175,000 $ .65
$1.03 - $1.75 123,000 4 years $1.18 105,500 $1.09
$3.19 - $5.50 1,243,750 9 years $3.01 536,250 $4.10
--------- -------
1,541,750 816,750
========= =======
F-13
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Stock Warrants
--------------
In connection with a common stock offering in 1996, an underwriter
received a five-year warrant to purchase 125,000 shares of common
stock at an exercise price of $5.10 per share. At December 31, 1998,
no shares have been purchased in connection with the five-year
warrant.
In connection with a private placement offering in 1994, a broker-
dealer responsible for introducing the Company to the Company's
principal placement agent received a five-year warrant to purchase
64,415 shares of common stock at a price of $2.75 per share. As of
December 31 1998 and 1997, 50,000 shares have been purchased in
connection with the five-year warrant.
The Company has outstanding at December 31, 1998 and 1997, 300,000
warrants. Each warrant allows the holder to buy one share of common
stock for $6.00. The warrants were issued as part of the Company's
initial public offering in 1980 and are exercisable for a 30 day
period commencing on the date a registration statement covering
exercise is declared effective. The warrants contain antidilution
provisions and in the event of liquidation,dissolution, or winding up
of the Company, the holders are not entitled to participate in the
assets of the Company.
(5) Income Taxes
------------
Federal income tax expense differs from the amount computed at the
Federal statutory rate as follows:
Year ended
December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
Income tax expense (benefit) at statutory
rate $ (5,472,619) $ 1,314,570 2,056,581
Change in valuation allowance for deferred
tax assets 2,530,196 - -
Statutory depletion (171,803) (241,274) (358,854)
Nondeductible expenses and other 14,199 49,154 20,386
------------ ----------- ---------
Income tax expense (benefit) $ (3,100,027) $ 1,122,450 1,718,113
============ =========== =========
Income tax expense is deferred, with the exception of $64,986 in 1997
related to alternative minimum tax ("AMT").
F-14
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31 are as follows:
1998 1997
---- ----
Noncurrent
----------
Deferred income tax assets:
Net operating loss carryforwards $ 5,309,428 2,124,284
Statutory depletion carryforwards 53,099 787,217
------------ ---------
Total noncurrent deferred tax assets 6,262,527 2,911,501
------------ ---------
Less valuation allowance (2,530,196) -
------------ ---------
Net deferred tax assets 3,732,331 2,911,501
------------ ---------
Deferred income tax liabilities:
Property and equipment, principally due to
differences in basis, expensing of intangible
drilling costs for tax purposes and depletion 3,732,331 6,094,985
------------ ---------
Total deferred income tax liabilities 3,732,331 6,094,985
------------ ---------
Net noncurrent deferred income tax
liability - 3,183,484
============ =========
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Due to
the uncertainty of future commodity prices and based on management's
intention to continue its drilling program (generating intangible
drilling costs which are projected to create future losses for tax
purposes), it does not appear more likely than not that the Company
will be able to utilize all the available carryforwards prior to
their ultimate expiration.
F-15
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
As of December 31, 1998, the Company had investment tax credit and net
operating loss carryforwards for regular tax purposes available to
reduce future taxable income and tax liability, respectively. These
carryforwards expire as follows:
Alternative
minimum tax
Net operating Investment net operating
loss tax credit loss
---- ---------- ----
1999 - 7,000 -
2000 - 15,000 -
2001 $ 498,000 24,000 -
2002 421,000 - -
2003 138,000 - -
2004 257,000 - -
2005 69,000 - -
2006 1,011,000 - -
2007 792,000 - -
2008 1,596,000 - 1,733,000
2009 2,170,000 - 1,974,000
2013 8,663,000 - 8,197,000
------------ ------ ----------
$ 15,615,000 46,000 11,904,000
============ ====== ==========
(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:
1998 1997 1996
---- ---- ----
Purchaser A 11% 12% 11%
Purchaser B 24% 53% 46%
Purchaser C 22% - -
Purchaser D 18% - -
F-16
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(7) Employee Pension Plan
---------------------
Effective September 1, 1988, the Company established a simplified
employee pension plan covering all salaried employees of the Company.
The employees voluntarily contribute a portion of their eligible
compensation, not to exceed $7,000, adjusted for inflation beginning
in 1988, to the plan. The Company's contribution, including the
employees contribution, cannot exceed the lesser of $30,000 or 15% of
compensation. During 1998, 1997 and 1996, the Company contributed an
aggregate of $11,632, $12,709, and $7,986, respectively, of which
$3,388, $3,129 and $2,963, respectively, was allocated to a Director
of the Company. The Company has no obligation to make contributions
to the plan.
(8) Statements of Cash Flows
------------------------
During 1998, 1997 and 1996, $0, $0, and $60,413 were transferred from
leases held for resale to oil and gas properties, respectively. These
transfers are considered non-cash transactions.
No Federal taxes were paid in 1998, 1997 and 1996, as a result of net
operating losses or loss carryforwards.
The Company made interest payments of $1,349,786, $794,079, and
$1,221,144 in 1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, there were $1,868,241 and $4,558,594,
respectively, of property additions accrued in accounts payable.
(9) Equity Transactions
-------------------
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
F-17
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
may redeem the Preferred Stock, in whole or part, after October 20,
1999, for $10 per share plus accrued dividends.
On October 30, 1998, the Company completed a private placement of
374,500 shares of its 6% Convertible Preferred Stock, $0.10 par value
per share ("Preferred Stock"). Each share of Preferred Stock may be
converted, at the option of the holder, into 2.8571 shares of common
stock at an initial conversion price of $3.50 per share, subject to
adjustment in certain events. The Company may redeem the Preferred
Stock, in whole or part, after October 20, 1999, for $10 per share
plus accrued dividends. Proceeds received, net of expenses, were
approximately $3,709,000. The net proceeds from the sale of the
Preferred Stock were used to reduce the indebtedness under the
Company's loan agreement.
Cumulative dividends of $0.60 are payable semi-annually on June 15 and
December 15 of each year, commencing on December 15, 1998.
(10) Related Party Transactions
--------------------------
During 1998 and 1997, the Company was charged $2,900 and $2,000,
respectively, for drilling services and lease operating expenses by
entities in which certain Directors are majority owners. These
Directors and their companies own interests in certain wells operated
by the Company. During 1998 and 1997, the Company charged $97,000 and
$45,000, respectively, for the lease operating expenses and drilling
costs and paid $62,000 and $122,000, respectively, in oil and gas
revenues to these related parties related to these wells.
An entity in which the Chief Executive Officer and Chairman of the
Board is the owner acted as the Company's agent in performing the
routine day to day operations of certain wells. In 1998 and 1997,
the Company was billed $70,000 and $498,000, respectively, for the
Company's pro rata share of lease operating and drilling expenses and
received $218,000 and $211,000 in 1998 and 1997, respectively, in oil
and gas revenues related to these wells.
An entity in which a certain Director of the Company is the sole
shareholder purchased a total of 110,000 shares of preferred stock of
the Company during 1998. In addition, during 1998, a Foundation,
where this same Director is the chairman of the board of directors of
the Foundation, and a Trust, where this same Director is trustee,
purchased a total of 55,000 shares each of preferred stock of the
Company. All of the shares of preferred stock of the Company were
purchased at a price of $10 per share on the same terms as all other
unaffiliated purchasers. (See Note 9) Total proceeds received of
$2,200,000 were used to reduce the Company's bank debt.
F-18
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(11) Oil and Gas Expenditures
------------------------
The following table reflects capitalized costs related to the oil and
gas producing activities as of December 31:
1998 1997
---- ----
Capitalized costs:
Proved properties $ 48,945,738 48,590,827
Unproved properties 16,619,728 14,068,743
------------ ----------
65,565,466 62,659,570
Accumulated depletion (22,122,758) (16,217,470)
------------ -----------
$ 43,442,708 46,442,100
============ ===========
Certain directly identifiable internal costs of property acquisition,
exploration and development activities are capitalized. Such costs
capitalized in 1998, 1997 and 1996 totaled $527,500, $461,537, and
$587,198, respectively.
Depletion per equivalent unit of production (BOE) was $8.07, $5.29, and
$4.47 for 1998, 1997 and 1996, respectively.
The following table reflects costs incurred in oil and gas property
acquisition, exploration and development activities for each of the
years in the three-year period ended December 31:
1998 1997 1996
---- ---- ----
Transfers from undeveloped leases
held for sale $ - - 60,413
Proved property acquisition costs 88,747 917,883 3,838,495
Unproved property acquisition costs 6,034,025 7,710,358 7,602,441
Exploration 8,555,741 9,604,035 1,435,933
Development 3,873,168 4,877,240 3,962,977
------------ ---------- ----------
$ 18,551,681 23,109,516 16,900,259
============ ========== ==========
(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 $14,757,000 (approximately $12,300,000 net of tax)
related to its oil and gas properties during the fourth quarter of
1998. No impairment was determined to exist in 1997.
F-19
PARALLEL 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:
1998 1997 1996
---- ---- ----
Numerator:
Net income (loss) $ (12,995,910) 2,743,930 4,330,654
Preferred stock dividend (276,712) - -
------------- --------- ---------
Net income (loss) and numerator for
basic and diluted net income (loss)
per share available to common
stockholders $ (13,272,622) 2,743,930 4,330,654
============= ========= =========
Denominator:
Weighted average common shares for
basic earnings (loss) per share 18,300,998 17,862,792 14,957,404
Effect of dilutive securities:
Employee stock options - 765,403 719,086
Warrants - 12,795 16,768
------------- ---------- ----------
Weighted average common shares for
diluted earnings (loss) per share
assuming conversions 18,300,998 18,640,990 15,693,258
============= ========== ==========
Basic net earnings (loss) per share $ (.73) 0.15 0.29
======== ==== ====
Diluted net earnings (loss) per share $ (.73) 0.15 0.28
======== ==== ====
Employee stock options to purchase shares of common stock and
convertible preferred stock were outstanding during 1998 but were not
included in the computation of diluted net loss per share because
either (i) the employee stock options' exercise price was greater than
the average market price of the common stock of the Company, (ii) the
effect of the assumed conversion of the Company's preferred stock to
common stock would be antidilutive, or (iii) the Company had a net
loss from continuing operations and, therefore, the effect would be
antidilutive.
F-20
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
(14) Supplemental Oil and Gas Reserve Data (Unaudited)
-------------------------------------------------
The estimates of the Company's proved oil and gas reserves, which are
all located in the United States are prepared by independent
petroleum engineers. Reserves were estimated in accordance with
guidelines established by the U.S. Securities and Exchange Commission
and the Financial Accounting Standards Board, which require that
reserve estimates be prepared under existing economic and operating
conditions with no provision for price and cost escalations except by
contractual arrangements. Information for oil is presented in barrels
(BBL) and for gas in thousands of cubic feet (MCF).
A summary of changes in reserve balances is presented below (in
thousands):
Total Proved Proved Developed
-------------- ----------------
BBL MCF BBL MCF
--- --- --- ---
Reserves as of January 1, 1996 1,503 26,124 1,255 20,854
Purchase of reserves in place 273 4,797 273 4,797
Extensions and discoveries 128 9,034 128 9,034
Revisions of previous estimates (42) (3,746) (40) (3,684)
Production (221) (3,655) (221) (3,655)
----- ------ ----- ------
Reserves as of December 31, 1996 1,641 32,554 1,395 27,346
Sales of reserves in place (461) (2,779) (461) (2,779)
Extensions and discoveries 1,063 14,477 243 9,623
Revisions of previous estimates (174) (10,319) (164) (10,478)
Production (175) (3,385) (176) (3,384)
----- ------ ----- -------
Reserves as of December 31, 1997 1,894 30,548 837 20,328
Extensions and discoveries 281 7,554 210 5,634
Revisions of previous estimates (265) (8,806) (9) (3,614)
Production (186) (3,275) (185) (3,276)
----- ------ --- ------
Reserves as of December 31, 1998 1,724 26,021 853 19,072
===== ====== === ======
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 1998, the average sales price received by the Company for its
oil was approximately $12.49 per Bbl, as compared to $19.88 in 1997,
while the average sales price for the Company's gas was approximately
$2.04 per Mcf in 1998, as compared to $2.70 per Mcf in 1997. At March
15, 1999, the price received by the Company for its oil production was
approximately $12.50 per Bbl, while the price received by the Company,
at that same date, for its gas production was approximately $1.75 per
Mcf.
F-21
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
The standardized measure of discounted future net cash flows, in
management's opinion, should be examined with caution. The basis
for this table are the reserve studies prepared by independent
petroleum consultants, which contain imprecise estimates of quantities
and rates of production of reserves. Revisions of previous year
estimates can have a significant impact on these results. Also,
exploration costs in one year may lead to significant discoveries in
later years and may significantly change previous estimates of proved
reserves and their valuation. Therefore, the standardized measure of
discounted future net cash flow is not necessarily a "best estimate"
of the fair value of the Company's proved oil and gas properties.
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
(In Thousands)
December 31,
-------------------------------
1998 1997 1996
---- ---- ----
Future cash flows $ 70,141 111,549 153,441
Future costs:
Production (20,706) (28,352) (39,296)
Development (5,740) (6,269) (2,790)
-------- ------ -------
Future net cash flows before income
taxes 43,695 76,928 111,355
Future income taxes - (8,891) (22,493)
-------- ------ -------
Future net cash flows 43,695 68,037 88,862
10% annual discount for estimated timing
of cash flows (16,872) (21,982) (31,513)
-------- ------ -------
Standardized measure of discounted net
cash flows $ 26,823 46,055 57,349
======== ====== ======
F-22
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements - (Continued)
Changes in Standardized Measure of
Discounted Future Net Cash Flows From Proved Reserves
(In Thousands)
Years ended December 31,
---------------------------
1998 1997 1996
---- ---- ----
Increase (decrease):
Sales of minerals in place $ - ( 6,491) -
Purchase of minerals in place - - 6,437
Extensions and discoveries and improved
recovery, net of future production and
development costs 8,916 25,530 23,660
Accretion of discount 4,642 6,701 2,589
Net change in sales prices net of
production costs (16,036) (18,293) 24,273
Changes in estimated future
development costs 664 (51) 40
Revisions of quantity estimates (8,325) (13,333) (6,043)
Net change in income taxes 365 9,300 (8,940)
Sales, net of production costs (6,588) (9,443) (11,482)
Changes of production rates (timing) and
other (2,870) (5,214) 1,650
-------- ------ ------
Net increase (decrease) (19,232) (11,294) 32,184
Standardized measure of discounted future
net cash flows:
Beginning of year 46,055 57,349 25,165
-------- ------ ------
End of year $ 26,823 46,055 57,349
======== ====== ======
S-1
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
April 30, 1999 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 April 30, 1999
- ----------------------- and Chairman of the
Thomas R. Cambridge Board of Directors
(Principal Executive
Officer)
/s/ Larry C. Oldham President and Treasurer April 30, 1999
- ---------------------- (Principal Financial and
Larry C. Oldham Accounting Officer)
/s/ Ernest R. Duke Director April 30, 1999
- ----------------------
Ernest R. Duke
/s/ Myrle Greathouse Director April 30, 1999
- ----------------------
Myrle Greathouse
/s/ Charles R. Pannill Director April 30, 1999
- ----------------------
Charles R. Pannill