1
Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 30, 1999
PARALLEL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other
jurisdiction of incorporation)
0-13305 75-1971716
(Commission file (IRS employer
number) identification
number)
110 N. Marienfeld, Suite 465, Midland, Texas 79701
(Address of principal executive offices) (Zip code)
(915) 684-3727
(Registrant's telephone number including area code)
(Former name or former address, if changed since last report)
2
Item 2. Acquisition or Disposition of Assets.
Purchase of Assets
On June 30, 1999, Parallel Petroleum Corporation and three other
privately owned companies purchased all of the oil and gas properties
owned by Fina Oil and Chemical Company located in the Permian Basin
of west Texas (the "Properties"). The purchase price was $96.125 million.
To complete the acquisition of the Properties, Parallel and its three
partners formed First Permian, L.L.C., a Delaware limited liability
company. The owners and members of First Permian are Parallel
Petroleum Corporation, Baytech, Inc., Tejon Exploration Company and
Mansefeldt Investment Corporation. Parallel and Baytech each own a
22.5% interest in First Permian. Tejon Exploration Company and
Mansefeldt Investment Corporation each own a 27.5% interest in First
Permian. Parallel and Baytech are the managers of First Permian.
Following its formation, First Permian entered into a Merger
Agreement with Fina Oil and Chemical Company. Under terms of the
Merger Agreement, Fina transferred all of the Properties to an indirect
wholly owned subsidiary of Fina which was then merged into First
Permian. Upon consummating the merger, and after giving effect to the
purchase price adjustments required by the Merger Agreement, First
Permian paid to Fina cash in the aggregate amount of approximately $92
million.
The Properties consist of 24 properties operated by First Permian
and 5 non-operated properties with 821 producing wells located in the
Permian Basin of west Texas. Working interests range from 8.5 percent
to 100.0 percent. Additional assets include interests in 608,222 gross
(103,489 net) mineral acres and 484,509 gross (70,262 net) leasehold
acres and seismic data covering most of the leasehold acreage.
Senior Secured Loans
The purchase price was financed, in part, with the proceeds of a
revolving credit facility provided by Bank One, Texas, N.A. to First
Permian. The principal amount of the initial loan from Bank One was $74
million. Under terms of a Credit Agreement, dated June 30, 1999, among
3
First Permian, Parallel, Baytech and Bank One, as amended and restated
on August 16, 1999 (the "Credit Agreement"), the principal amount
outstanding under the revolving credit facility bears interest, at First
Permian's election, at (a) Bank One's base rate plus 1.50% or (b) the
Eurodollar rate plus 3.25% until such time as the subordinated
unsecured loans described below are paid in full. When these
subordinated loans have been paid in full, the revolving credit facility will
bear interest at First Permian's election at (a) Bank One's base rate plus
a margin ranging from .25% to .75%, depending upon the outstanding
principal balance of the borrowings under the Credit Agreement or (b) the
Eurodollar rate plus a margin ranging from 2.00% to 2.50% depending
upon the outstanding principal balance of the borrowings under the
Credit Agreement. The Credit Agreement provides for revolving loans
subject to a borrowing base and a monthly commitment reduction. The
initial borrowing base is $74 million and the initial monthly commitment
reduction amount is $250,000.00. The monthly commitment reduction
commences on October 1, 1999 and continues with a like reduction on the
first day of each following month. The borrowing base and the monthly
commitment reduction amount may be redetermined by the bank on
January 1 and July 1 of each year or at other times requested by First
Permian. All outstanding principal under the revolving credit facility is
due and payable on July 1, 2002. Interest is payable on the last day of
each month. The revolving credit facility is subject to an unused
commitment fee of .50% on the unadvanced portion of the borrowing base
amount.
The Credit Agreement also provides for the issuance of letters of
credit up to a maximum face amount of $5 million which, if used, are
considered as advances under the Credit Agreement.
The loan is secured by substantially all of the Properties. Parallel
and Baytech each guaranteed $10 million of the loans from Bank One.
Subordinated Unsecured Loans
In addition to the $74 million loan from Bank One, First Permian
also borrowed $8 million from Tejon Exploration Company and $8 million
from Mansefeldt Investment Corporation. Under terms of an Intercreditor
Agreement, dated June 30, 1999, among First Permian, Bank One, Texas,
N.A., Tejon Exploration Company and Mansefeldt Investment Corporation,
the loans made by Tejon and Mansefeldt are subordinate in all respects to
the senior loans made by Bank One.
4
The loans made by Tejon Exploration Company and Mansefeldt
Investment Corporation are unsecured. Each loan requires a principal
payment of $2.5 million on December 31, 1999 and $5.5 million on June
30, 2000. Principal payments on the subordinated loans can only be made
with:
. the net cash proceeds from the issuance of equity securities by
First Permian;
. advances under the Credit Agreement to the extent attributable to an
increase in the borrowing base above $74 million;
. proceeds from sales of assets of First Permian with the prior
written consent of Bank One, after Bank One determines a new borrowing base
(after giving effect to such sale of assets); or
. any other source of payment with the prior written consent of Bank
One.
Each principal payment on the subordinated loans can only be made
if:
. the full payment of all amounts then due and payable under the
Credit Agreement have been made or provided for in accordance with the
Credit Agreement; and
. no subordination event has occurred or would occur as a result of
such payment.
Tejon and Mansefeldt may, at their option and with the agreement of
First Permian, irrevocably convert any claims they have to the
subordinated loans to an equity interest in First Permian.
All unpaid principal and accrued but unpaid interest as of July 1,
2000 will be deemed to be principal and will be paid in twenty equal
quarterly payments of principal on March 31, June 30, September 30 and
December 31 of each year commencing September 30, 2000. Any
payments of principal or interest on the subordinated loans after June 30,
2000 may only be made with the prior written consent of Bank One.
5
Interest on the unpaid balance of the subordinated loans accrues
from June 30, 1999 until the earlier of the date of payment or June 30,
2000 at the prime rate of interest charged by Bank One. After June 30,
2000, interest accrues at the lowest prime rate of interest as published in
the Money Rates Section of the Wall Street Journal.
Interest on the subordinated loans is payable monthly in arrears on
the last day of each month, commencing July 31, 1999 and ending June
30, 2000, except that interest may accrue but not be paid on any unpaid
portion of the $2.5 million principal payment due on December 31, 1999
until the $2.5 million principal payment is made in full.
If certain conditions are met regarding the prepayment of the
subordinated loans, Parallel's interest in First Permian could increase to
37.5%.
Simultaneous Sale of Acquired Properties
In addition to the loans made to First Permian by Bank One, Tejon
and Mansefeldt, MDJ Minerals, L.L.P., a Texas limited liability partnership
controlled by Tejon and Mansefeldt, entered into a Purchase and Sale
Agreement, dated June 30, 1999, with First Permian, L.L.C. Under terms
of the Purchase and Sale Agreement, First Permian simultaneously sold
certain oil and gas mineral interests comprising part of the Properties
acquired by First Permian under the Merger Agreement. First Permian
sold the mineral interests to MDJ Minerals, L.L.P. for the cash purchase
price of $5 million. A portion of the sales proceeds were used by First
Permian in payment of the purchase price of the Properties acquired from
Fina under the Merger Agreement.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
The financial statements for the Properties acquired from Fina
Oil and Chemical Company are filed herewith beginning on page F-1.
(b) Pro Forma Financial Information.
6
Filed herewith, beginning on page F-9, are the unaudited pro
forma combined statements of operations of the Company as of the dates
and for the periods indicated.
The unaudited pro forma financial statements should be read
in conjunction with the separate financial statements and notes thereto for
the Properties and the Company's financial statements and notes thereto
included in its previously filed Form 10-K Report for its fiscal year ended
December 31, 1998 and its previously filed Form 10-Q Report for the six
months ended June 30, 1999. The unaudited pro forma financial
statements are not necessarily indicative of the financial position or
results of operations of the consolidated businesses that might have
occurred or as may occur in the future.
(c) Exhibits.
---------
Exhibit No. Description
- ----------- ------------
*10.1 Certificate of Formation of First
Permian, L.L.C.
*10.2 Limited Liability Company Agreement
of First Permian, L.L.C.
*10.3 Merger Agreement, dated June 25,
1999
*10.4 Agreement and Plan of Merger of First
Permian, L.L.C. and Nash Oil
Company, L.L.C.
*10.5 Certificate of Merger of First Permian,
L.L.C. and Nash Oil Company, L.L.C.
7
*10.6 Credit Agreement, dated June 30,
1999, by and among First Permian,
L.L.C., Parallel Petroleum
Corporation, Baytech, Inc., and Bank
One, Texas, N.A.
*10.7 Limited Guaranty, dated June 30,
1999, by and among First Permian,
L.L.C., Parallel Petroleum Corporation
and Bank One, Texas, N.A.
*10.8 Intercreditor Agreement, dated as of
June 30, 1999, among First Permian,
L.L.C., Bank One, Texas, N.A., Tejon
Exploration Company, and Mansefeldt
Investment Corporation
10.9 Subordinated Promissory Note, dated
June 30, 1999, in the original
principal amount of $8.0 million
made by First Permian, L.L.C. payable
to the order of Tejon Exploration
Company
*10.10 Subordinated Promissory Note, dated
June 30, 1999, in the original
principal amount of $8.0 million
made by First Permian, L.L.C. payable
to the order of Mansefeldt Investment
Corporation
**23.1 Consent of Independent Auditors
- --------------------
* Previously filed.
** Filed herewith.
F-1
PARALLEL PETROLEUM CORPORATION
Index to Financial Statements
Page
--------------
Independent Auditors' Report F-3
Financial Statements:
Statements of Revenues and Direct Operating
Expenses For the Years Ended December 31,
1997 and 1998 and For the Six Months
Ended June 30, 1998 and 1999 F-4
Unaudited Pro Forma Combined Statement of
Operations For the Year Ended December 31,
1998 F-10
Unaudited Pro Forma Combined Statement of
Operations For the Six Months Ended June
30, 1999 F-11
F-2
PARALLEL PETROLEUM CORPORATION
Fina Acquisition
Statements of Revenues and Direct Operating Expenses
December 31, 1997, 1998 and June 30, 1999
(With Independent Auditors' Report Thereon)
F-3
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Parallel Petroleum Corporation:
We have audited the accompanying statements of revenues and direct
operating expenses of the oil and gas properties acquired (the "Fina
Acquisition") by Parallel Petroleum Corporation (the "Company") for the years
ended December 31, 1997, 1998 and for the six months ended June 30, 1999. These
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 statement of revenues and direct
operating expenses 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.
The accompanying statements of revenues and direct operating expenses were
prepared to present revenues and direct operating expenses of the oil and gas
properties acquired by Parallel Petroleum Corporation and are not intended to be
a complete presentation of the Fina Acquisition revenues and expenses.
In our opinion, the statements of revenues and direct operating expenses
referred to above present fairly, in all material respects, the revenues and
direct operating expenses of the Fina Acquisition for the years ended December
31, 1997, 1998 and for the six months ended June 30, 1999, in conformity with
generally accepted accounting principles.
/S/ KPMG LLP
September 1, 1999
Midland, Texas
F-4
PARALLEL PETROLEUM CORPORATION
FINA ACQUISITION
Statements of Revenues and Direct Operating Expenses
(in thousands)
For the Years Ended December 31, 1997 and 1998 and
For the Six Months Ended June 30, 1998 and 1999
Six Months Ended
December 31, June 30,
--------------------- -------------------
1997 1998 1998 1999
------ ------ ------ ------
(unaudited)
Revenues:
Oil and condensate $ 6,199 $ 3,981 $ 2,008 $ 1,976
Natural gas 1,184 893 497 317
------- ------- ------- -------
7,383 4,874 2,505 2,293
Direct operating expenses:
Lease operating 2,505 2,494 1,167 1,073
Production taxes 345 245 124 85
------- ------- ------- -------
2,850 2,739 1,291 1,158
------- ------- ------- -------
Revenues in excess of direct
operating expenses $ 4,533 $ 2,135 $ 1,214 $ 1,135
======= ======= ======= =======
See the accompanying notes to these statements.
F-5
PARALLEL PETROLEUM CORPORATION
FINA ACQUISITION
Notes to Statements of Revenues and Direct Operating Expenses
(1) Basis of Presentation
On June 30, 1999, Parallel Petroleum Corporation (the "Company") and
three other privately owned companies acquired from Fina Oil and
Chemical Company ("Fina") certain oil and gas properties (the "Fina
Acquisition") for approximately $92 million. Parallel's proportionate
share of the acquisition price was $21 million. The accompanying
statements of revenues and direct operating expenses for Parallel's
proportionate share of the Fina Acquisition do not include general and
administrative expenses, interest income or expense, a provision for
depreciation, depletion and amortization, or any provision for income
taxes since these historical expenses incurred by Fina are not
necessarily indicative of the costs to be incurred by the Company.
Revenues in the accompanying statements of revenues and direct operating
expenses are recognized on the sales method. Under this method,
revenues are recognized based on actual volumes of oil and gas sold to
purchasers. Direct operating expenses are recognized on the accrual
method.
Preparation of the accompanying statements of revenues and direct operating
expenses requires management to make estimates and assumptions that
affect the reported amounts of revenues and direct operating expenses
during the reporting period. Actual results could differ from those
estimates.
Interim Statements of Revenues and Direct Operating Expenses
The interim financial information for the period ended June 30, 1998, is
unaudited. However, in the opinion of management, the interim
statement of revenues and direct operating expenses includes all the
necessary adjustments to fairly present the results of the interim
period and all such adjustments are of a normal recurring nature. The
interim statement of revenues and direct operating expenses should be
read in conjunction with the audited statement of revenues and direct
operating expenses for the years ended December 31, 1997 and 1998 and
for the six months ended June 30, 1999.
(2) Supplementary Financial Information for Oil and Gas Producing
Activities (Unaudited)
Estimated Quantities of Proved Oil and Gas Reserves
Reserve information presented below for the Fina Acquisition, as of January
1, 1997, December 31, 1997 and 1998 and June 30, 1999, is based on
reserve estimates prepared by the Company, using prices and costs in
effect at each date. Changes in reserve estimates were derived by
adjusting such quantities and values for actual production using
historical prices and costs.
F-6
Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty
to be recoverable in future years from known reservoirs under existing
economic and operating conditions. Proved developed reserves are those
which are expected to be recovered through existing wells with
existing equipment and operating methods. Oil and gas reserve quantity
estimates are subject to numerous uncertainties inherent in the
estimation of quantities of proved reserves and in the projection of
future rates of production and the timing of development expenditures.
The accuracy of such estimates is a function of the quality of
available data and of engineering and geological interpretation and
judgment. Results of subsequent drilling, testing and production may
cause either upward or downward revision of previous estimates.
Further, the volumes considered to be commercially recoverable
fluctuate with changes in prices and operating costs. The Company
emphasizes that reserve estimates are inherently imprecise and that
estimates of new discoveries are more imprecise than those of
currently producing oil and gas properties. Accordingly, these reserve
estimates are expected to change as additional information becomes
available in the future.
Beloware the net estimated quantities of proved reserves and proved
developed reserves for the Fina Acquisition:
Oil (Bbls) Gas (Mcf)
---------- ---------
Proved reserves at January 1, 1997 9,529,733 8,346,603
Production (345,284) (669,316)
Revisions of previous estimates (832,363) (98,245)
--------- ---------
Proved reserves at December 31, 1997 8,352,086 7,579,042
Production (330,526) (567,480)
Revisions of previous estimates (1,950,875) (528,707)
--------- ---------
Proved reserves at December 31, 1998 6,070,685 6,482,855
Production (162,110) (269,051)
Revisions of previous estimates 854,881 (196,792)
--------- ---------
Proved reserves at June 30, 1999 6,763,456 6,017,012
========= =========
Proved developed reserves:
January 1, 1997 6,101,050 8,157,699
========= =========
December 31, 1997 4,923,476 7,390,139
========= =========
December 31, 1998 2,735,880 6,299,582
========= =========
June 30, 1999 4,016,589 5,743,614
========= =========
F-7
PARALLEL PETROLEUM CORPORATION
FINA ACQUISTION
Notes to Statements of Revenues and Direct Operating Expense
Standardized Measure of Discounted Future Net Cash Flows of Proved Oil and Gas
Reserves
The Company has estimated the standardized measure of discounted future net
cash flows and changes therein relating to proved oil and gas reserves in
accordance with the standards established by the Financial Accounting
Standards Board through its Statement No. 69. The estimates of future cash
flows and future production and development costs are based on year-end
sales prices for oil and gas, estimated future production of proved
reserves, and estimated future production and development costs of proved
reserves, based on current costs and economic conditions. The estimated
future net cash flows are then discounted at a rate of 10%.
Discounted future net cash flow estimates like those shown below are not
intended to represent estimates of the fair market value of oil and gas
properties. Estimates of fair market value should also consider probable
reserves, anticipated future oil and gas prices, interest rates, changes in
development and production costs and risks associated with future
production. Because of these and other considerations, any estimate of fair
market value is necessarily subjective and imprecise.
The following are the Company's estimated standardized measure of discounted
future net cash flows from proved reserves attributable to the Fina
Acquisition:
December 31, June 30,
------------------------ ----------
1997 1998 1999
------ ------ ------
Future:
Cash inflows $ 138,265,740 $ 70,893,608 $ 117,166,431
Production and development costs (68,076,522) (40,831,108) (57,543,997)
Future net cash flows 70,189,218 30,062,500 59,622,434
10% annual discount for estimated
timing of cash flows (40,419,288) (17,238,924) (26,756,226)
============= ============ =============
Standardized measure of discounted
future net cash flows $ 29,769,930 $ 12,823,576 $ 32,866,208
============= ============ =============
F-8
PARALLEL PETROLEUM CORPORATION
FINA ACQUISTION
Notes to Statements of Revenues and Direct Operating Expenses
The following are the sources of changes in the standardized measure of
discounted net cash flows before income taxes:
Year ended December 31, June 30,
----------------------- --------
1997 1998 1999
------- ------- ------
Standardized measure, beginning of
period $ 53,597,160 $ 29,769,930 $ 12,823,576
Sales, net of production costs (4,532,663) (2,134,673) (1,135,092)
Net change in sales prices, net of
production costs (21,131,621) (11,540,489) 10,089,592
Revisions of quantity estimates (2,738,524) (4,586,894) 3,049,013
Accretion of discount 5,359,716 2,976,993 1,282,358
Changes in estimated future
development costs -- -- (20,782)
Changes of production rates, timing
and other (784,138) (1,661,291) 6,777,543
------------ ------------ ------------
Standardized measure, end of period $ 29,769,930 $ 12,823,576 $ 32,866,208
============ ============ ============
F-9
PARALLEL PETROLEUM CORPORATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined statements of operations have been
prepared to give effect to the 1999 Acquisition as if the transaction had taken
place as of January 1, 1998.
The unaudited pro forma combined financial statements included herein are
not necessarily indicative of the results that might have occurred had the
transactions taken place at the date specified and are not intended to be a
projection of future results. In addition, future results may vary significantly
from the results reflected in the accompanying unaudited pro forma combined
financial statements because of normal production declines, changes in product
prices, future acquisitions and divestitures, and other factors.
The following unaudited pro forma combined financial statements should be
read in conjunction with the consolidated financial statements and the related
notes of the Company and the 1999 Acquisition.
F-10
PARALLEL PETROLEUM CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Year ended December 31, 1998
Parallel's Pro forma
Member Combined Pro forma
Parallel Interest Adjustments Combined
-------- -------- ----------- ---------
Oil and gas revenues $ 9,001,582 $ 4,874,107 $ 13,875,689
Cost and expenses:
Lease operating expense 2,434,658 2,739,434 5,174,092
General and administrative 899,016 -- 364,500 (3) 1,263,516
Depletion, depreciation, and amortization 5,966,221 -- 732,867 (4) 6,699,088
Impairment of oil and gas properties 14,757,028 -- 14,757,028
------------- ------------ ------------
24,056,923 2,739,434 27,893,724
Operating income (loss) (15,055,341) 2,134,673 (14,018,035)
------------- ------------ ------------
Other income (expense), net:
Interest income 2,771 -- 2,771
Other income 395,683 -- 395,683
Interest expense (1,381,103) -- (1,540,919)(2)
(70,164)(1) (2,992,186)
Other expense (57,947) -- (57,947)
------------- ------------ ------------
Total other expense, net (1,040,596) -- (2,651,679)
Income (loss) before income taxes (16,095,937) 2,134,673 (16,669,714)
Income tax expense benefit 3,100,027 -- 2,567,676 (5) 5,667,703
------------- ------------ ------------
Net income (loss) $ (12,995,910) $ 2,134,673 $(11,002,011)
============= ============ ============
Cumulative preferred stock dividend $ 276,712 $ 276,712
============= ============
Net loss available to common stockholders $ (13,272,622) $(11,278,723)
============= ============
Net loss per common share
Basic $ (0.732) $ (0.622)
======== ========
Diluted $ (0.732) $ (0.622)
======== ========
Weighted average common shares outstanding:
Basic 18,120,194 18,120,194
========== ==========
Diluted 18,120,194 18,120,194
========== ==========
F-11
PARALLEL PETROLEUM CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Six months ended June 30, 1999
Parallel's Pro forma
Member Combined Pro forma
Parallel Interest Adjustments Combined
-------- -------- ----------- ---------
Oil and gas revenues $ 3,954,816 $ 2,292,903 $ 6,247,719
Cost and expenses:
Lease operating expense 1,064,964 1,157,811 2,222,775
General and administrative 424,148 -- 182,250 (3) 606,398
Depletion, depreciation, and amortization 1,860,794 -- 703,596 (4) 2,564,390
----------- ----------- -----------
3,349,906 1,157,811 5,393,563
Operating income 604,910 1,135,092 854,156
----------- ----------- -----------
Other income (expense), net:
Interest income 26,971 -- 26,971
Other income 13,229 -- 13,229
Interest expense (747,128) -- (837,613)(2)
(35,082)(1) (1,619,823)
Other expense (2,509) -- (2,509)
----------- ----------- -----------
Total other expense, net (709,437) -- (1,582,132)
=========== =========== ===========
Income (loss) before income taxes (104,527) 1,135,092 (727,976)
Income tax benefit -- -- 247,511 (5) 247,511
----------- ----------- -----------
Net income (loss) $ (104,527) $ 1,135,092 $ (480,465)
=========== =========== ===========
Cumulative preferred stock dividend $ 316,713 $ 316,713
=========== ===========
Net loss available to common stockholders $ (421,240) $ (797,178)
=========== ===========
Net loss per common share
Basic $ (0.023) $ (0.044)
======== ========
Diluted $ (0.023) $ (0.044)
======== ========
Weighted average common shares outstanding:
Basic 18,120,194 18,120,194
========== ==========
Diluted 18,120,194 18,120,194
========== ==========
F-12
PARALLEL PETROLEUM CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
December 31, 1998 and June 30, 1999
Note 1. Basis of Presentation
The unaudited pro forma combined financial statements have been prepared to
give effect to the 1999 Acquisition as if the transaction had taken place as of
January 1, 1998, with respect to the unaudited pro forma combined statements of
operations. The Acquisition is recorded using the purchase method of accounting.
Following is a description of the individual columns included in these
unaudited pro forma combined financial statements:
Parallel Represents the related statements of operations for the year ended
December 31, 1998 and the six months ended June 30, 1999 of Parallel Petroleum
Corporation.
Parallel's Member Interest Represents 22.5% of the revenues and direct
operating expenses of the properties acquired in the 1999 Acquisition for the
year ended December 31, 1998 and the six months ended June 30, 1999. The 22.5%
members interest represents the interest in First Permian, LLC that is owned by
the Company. The 22.5% members interest will be included in the pro forma
combined balance.
Note 2. Pro Forma Entries
(1) To adjust interest expense for Parallel's proportionate share of the
amortization of $935,526 in debt issuance costs incurred in the 1999
Acquisition. The debt issuance costs are being amortized over a period of 36
months.
(2) To adjust interest expense for Parallel's proportionate share of the
interest related to the Bank One, Texas, N.A. Credit Agreement, the Tejon
Exploration Company subordinated unsecured loan and the Mansefeldt Investment
Corporation subordinated unsecured loan incurred in the 1999 Acquisition. The
principal amount of the initial loan from Bank One was $74,000,000 and incurs
interest over 36 months at Bank One's base rate plus 1.50%, which currently
approximates 9.25%. The initial principal amount for both the Tejon Exploration
Company subordinated unsecured loan and the Mansefeldt Investment Corporation
subordinated unsecured loan was $8,000,000. The subordinated unsecured loans
both incur interest over 12 months at Bank One's base rate, which currently
approximates 7.75%.
(3) To record Parallel's proportionate share of the estimated incremental
general and administrative expenses necessary to administer the properties
acquired in the 1999 Acquisition of $1,620,000 per year.
(4) To adjust depletion expense for the additional basis allocated to the oil
and gas properties acquired in the 1999 Acquisition.
(5) To adjust for income taxes.
Note 3. Supplemental Oil and Gas Reserve Information (Unaudited)
The following unaudited pro forma supplemental information regarding the
oil and gas activities of the Company is presented pursuant to the disclosure
requirements promulgated by the Commission and Statement of Financial Accounting
Standards No. 69, "Disclosures About Oil and Gas Producing Activities". The pro
forma combined reserve information is presented as if the 1999 Acquisition had
occurred on January 1, 1998.
F-13
PARALLEL PETROLEUM CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
December 31, 1998 and June 30, 1999
Management emphasizes that reserve estimates are inherently imprecise and
subject to revision and that estimates of new discoveries are more imprecise
than those of producing oil and gas properties. Accordingly, the estimates are
expected to change as future information becomes available; such changes could
be significant.
Quantities of oil and gas reserves
Set forth below is a pro forma summary of the changes in the net quantities
of oil and natural gas reserves for the year ended December 31, 1998 and the six
months ended June 30, 1999.
Oil and
Condensate Natural Gas
(Bbls) (Mcf)
---------- -----------
Proved reserves at January 1, 1998 10,245,974 38,127,492
Revisions of previous estimates (2,216,295) (8,885,113)
Extensions and discoveries 280,766 7,554,488
Production (516,000) (4,293,362)
----------- ----------
Proved reserves at December 31, 1998 7,794,445 32,503,505
Revisions of previous estimates 979,585 90,005
Extensions and discoveries 140 841,702
Production (252,637) (1,716,500)
----------- ----------
Proved reserves at June 30, 1999 8,521,533 31,718,712
=========== ==========
Proved developed reserves
January 1, 1998 5,760,884 27,717,984
========== ==========
December 31, 1998 3,588,440 25,371,566
========== ==========
June 30, 1999 4,858,367 24,483,149
========== ==========
F-14
PARALLEL PETROLEUM CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
December 31, 1998 and June 30, 1999
Standardized measure of discounted future net cash flows
The pro forma combined standardized measure of discounted future net cash
flows is computed by applying year-end prices of oil and gas (with consideration
of price changes only to the extent provided by contractual arrangements) to the
estimated future production of oil and gas reserves less estimated future
expenditures (based on year-end costs) to be incurred in developing and
producing the proved reserves, discounted using a rate of 10% per year to
reflect the estimated timing of the future cash flows. Future income taxes are
calculated by comparing discounted future cash flows to the tax basis of oil and
gas properties, plus available carryforwards and credits, and applying the
current tax rate to the difference.
December 31, June 30,
1998 1999
------------ --------
Future cash inflows $ 141,034,378 $ 207,230,332
Future production and development costs (67,277,290) (87,640,324)
------------- -------------
73,757,088 119,590,008
Future income tax expense -- (11,254,389)
------------- -------------
73,757,008 108,335,619
10% annual discount factor (34,110,532) (38,276,811)
------------- -------------
Standardized measure of discounted
future net cash flows $ 39,646,556 $ 70,058,808
============= =============
Changes relating to the standardized measure of discounted future net cash flows
The principal sources of the change in the pro forma combined standardized
measure of discounted future net cash flows for the year ended December 31, 1998
and the six months ended June 30, 1999 are as follows:
December 31, June 30,
1998 1999
------------ --------
Standardized Measure, Beginning of year $ 73,598,747 $ 39,646,556
Revisions of previous quantity estimates (12,125,120) 5,144,795
Extensions and discoveries less related costs 8,915,522 1,246,993
Net changes in income tax 365,037 --
Net changes in prices and production costs (28,452,172) 20,801,492
Revisions of estimated future development costs 581,417 (22,086)
Sales, net of production costs (8,722,511) (4,024,945)
Accretion of discount 7,618,951 3,964,656
Other (2,133,315) 3,301,347
------------ ------------
Standardized Measure, End of year $ 39,646,556 $ 70,058,808
============ ============
S-1
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: September 13, 1999
PARALLEL PETROLEUM CORPORATION
By: /s/ Larry C. Oldham
------------------------------
Larry C. Oldham, President and
Principal Financial Officer
1
Exhibit 23.1
Consent of Independent Auditors
We consent to incorporation by reference in the registration statements (No.33-
46959, No. 33-57348 and No. 333-34617) on Forms S-8, and the registration
statements ( No. 33-90296 and No. 333-11021) on Forms S-3, of Parallel Petroleum
Corporation of our report dated September 1, 1999, relating to the statements of
revenues and direct operating expenses of the oil and gas properties acquired by
Parallel Petroleum Corporation for the years ended December 31, 1997, 1998, and
for the six months ended June 30, 1999, which appears in the June 30, 1999
current report on Form 8-K/A, Amendment No. 1, of Parallel Petroleum
Corporation.
/S/ KPMG LLP
Midland, Texas
September 13, 1999