SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ---------------------------- (Mark One) /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2002 or / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from to -------------------------- COMMISSION FILE NUMBER 0-13305 -------------------------- PARALLEL PETROLEUM CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 75-1971716 (State of other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) One Marienfeld Place, Suite 465, Midland, Texas 79701 (Address of principal executive offices) (Zip Code) (915) 684-3727 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _x_ No At August 12, 2002, 20,663,861 shares of the Registrant's Common Stock, $0.01 par value, were outstanding.
(audited) (unaudited)
December 31, June 30,
2001* 2002
----------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,351,044 $ 2,332,406
Accounts receivable:
Oil and gas 1,420,859 1,643,652
Others, net of allowance for doubtful account of $0 in
2001 and $13,660 in 2002 263,819 209,646
Affiliate 16,687 3,460
------------ ------------
1,701,365 1,856,758
Fair value of derivative instruments (Note 8) - 135,773
Other assets 207,120 869,372
Investment in Energen common stock-held for sale - 25,673,698
------------ ------------
Total current assets 5,259,529 30,868,007
------------ ------------
Property and equipment, at cost:
Oil and gas properties, full cost method 85,132,345 91,248,900
Other 552,219 644,762
------------ ------------
85,684,564 91,893,662
Less accumulated depreciation and depletion (55,854,378) (58,542,174)
------------ ------------
Net property and equipment 29,830,186 33,351,488
------------ ------------
Other assets, net of accumulated amortization of $131,139 in
2001 and $45,674 in 2002 58,754 34,330
Net deferred tax asset 6,137,670 -
Investment in First Permian, L.P. (Note 7) 473,764 157,471
------------ ------------
$ 41,759,903 $ 64,411,296
============ ============
*The balance sheet as of December 31, 2001 has been derived from Parallel's
audited financial statements. See accompanying notes to Financial Statements.
-3-
(audited) (unaudited)
December 31, June 30,
2001* 2002
--------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 2,400,000 $ -
Accounts payable and accrued liabilities:
Trade 3,446,370 2,603,098
Taxes payable - 2,569
Accrued bonus payable - 1,201,172
------------ ------------
Total current liabilities 5,846,370 3,806,839
------------ ------------
Long-term debt, excluding current maturities (Note 3) 9,600,000 12,150,000
Net deferred tax liability (Note 5) - 3,447,163
Stockholders' equity:
Series A preferred stock -- par value $.10 per share (aggregate liquidation
preference of $26) authorized 50,000 shares - -
Preferred stock -- $.60 cumulative convertible preferred stock -- par value
of $.10 per share (aggregate liquidation preference of $10) authorized
10,000,000 shares, issued and outstanding 974,500 in 2001 and 2002 (Note 4) 97,450 97,450
Common stock -- par value $.01 per share, authorized 60,000,000 shares,
issued and outstanding 20,663,861 in 2001 and 2002 206,639 206,639
Additional paid-in capital 34,087,498 33,795,148
Comprehensive income (Note 10) - 93,359
Retained earnings (deficit) (8,078,054) 10,814,698
------------ ------------
Total stockholders' equity 26,313,533 45,007,294
Commitments and contingencies (Note 11 and 12) - -
------------ ------------
$ 41,759,903 $ 64,411,296
============ ============
*The balance sheet as of December 31, 2001 has been derived from Parallel's
audited financial statements. See accompanying notes to Financial Statements.
-4-
Three Months Ended June 30 Six Months Ended June 30,
-------------------------- -------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Oil and gas revenues $ 4,791,063 $ 2,808,807 $ 12,079,265 $ 4,779,998
------------ ------------ ------------ ------------
Cost and expenses:
Lease operating expense 1,047,527 721,614 2,166,593 1,270,990
General and administrative, includes $1,471,000
for incentive awards in 2002 303,881 1,974,686 602,089 2,324,450
Depreciation, depletion and amortization 1,617,747 1,333,166 3,295,567 2,687,796
------------ ------------ ------------ ------------
2,969,155 4,029,466 6,064,249 6,283,236
------------ ------------ ------------ ------------
Operating income (expense) 1,821,908 (1,220,659) 6,015,016 (1,503,238)
------------ ------------ ------------ ------------
Other income (expense), net:
Equity in income of First Permian, L.P., includes a
$31,082,041 gain on sale of substantially all net assets - 31,082,041 - 30,765,748
Change in fair value of derivatives - (54,974) - (394,832)
Interest income 63,739 16,286 82,788 26,664
Other income 25,207 4,780 50,413 10,777
Dividend income - 163,378 - 163,378
Interest expense (247,655) (158,207) (474,511) (311,264)
Other expense (77,357) (107,582) (132,610) (279,648)
------------ ------------ ------------- -----------
Total other income (expense), net (236,066) 30,945,722 (473,920) 29,980,823
------------ ------------ ------------- -----------
Income before income taxes 1,585,842 29,725,063 5,541,096 28,477,585
Income tax expense (benefit), net 371,169 10,063,560 (309,499) 9,584,833
------------ ------------ ------------ -----------
Net income $ 1,214,673 $ 19,661,503 $ 5,850,595 $ 18,892,752
============ ============ ============ ============
Cumulative preferred stock dividend $ 146,175 $ 146,175 $ 292,350 $ 292,350
============ ============ ============ ============
Net income available to common stockholders $ 1,068,498 $19,515,328 $ 5,558,245 $ 18,600,402
============ ============ ============ ============
Net income per common share: (Note 9)
Basic $ 0.05 $ 0.94 $ 0.27 $ 0.90
============ ============ ============ ============
Diluted $ 0.05 $ 0.84 $ 0.25 $ 0.80
============ ============ ============ ============
Weighted average common shares outstanding
Basic 20,433,721 20,663,861 20,426,480 20,663,861
============ ============ ============ ============
Diluted 23,826,809 23,541,120 23,758,020 23,571,736
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
-5-
Six Months Ended June 30
-----------------------------
2001 2002
-------------- --------------
Cash flows from operating activities:
Net income $ 5,850,595 $ 18,892,752
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and depletion 3,295,567 2,687,796
Equity in income of First Permian, L.P., net of
cash distributions of $5,501,703 - (25,264,046)
Change in fair value of derivative instruments - 394,832
Income tax expense (benefit) (309,499) 9,584,833
Other, net (82,392) 24,424
Changes in assets and liabilties:
Decrease (increase) in accounts receivables 1,474,190 (155,393)
Increase in prepaid expenses and other (259,291) (662,252)
Increase (decrease) in accounts payable and accrued liabilities 554,104 (840,703)
Accrued bonus payable - 1,201,172
Purchase of derivative instruments - (530,605)
------------- -------------
Net cash provided by operating activities 10,523,274 5,332,810
------------- -------------
Cash flows from investing activities:
Additions to property and equipment (5,933,076) (6,781,897)
Proceeds from disposition of property and equipment - 572,799
------------- -------------
Net cash used in investing activities (5,933,076) (6,209,098)
------------- -------------
Cash flows from financing activities:
Borrowings from bank line of credit - 865,589
Payments on bank line of credit (1,427,531) (715,589)
Proceeds from exercise of options and warrants 125,723 -
Payment of preferred stock dividend (292,350) (292,350)
------------- -------------
Net cash used in financing activities (1,594,158) (142,350)
------------- -------------
Net increase (decrease) in cash and cash equivalents 2,996,040 (1,018,638)
Beginning cash and cash equivalents 2,000,826 3,351,044
------------- -------------
Ending cash and cash equivalents $ 4,996,866 $ 2,332,406
============= =============
Non-cash financing activities:
Non-cash proceeds from sale of investment $ - $ (25,580,339)
Unrealized gain on investment in securities - (93,359)
The accompany notes are an integral part of these financials.
-6-
Long-term debt consists of the following at June 30, 2002:
Revolving Note payable to bank, at bank's base lending
rate (5.00% at June 30, 2002) $ 12,150,000
Less: current maturities -
------------
$ 12,150,000
============
Scheduled maturities of long-term debt at June 30, 2002 are as follows:
June 30, 2002 $ -
June 30, 2003 3,712,500
June 30, 2004 4,050,000
June 30, 2005 4,050,000
June 30, 2006 337,500
-------------
$ 12,150,000
=============
Revolving Credit Facility
On July 19, 2002, Parallel entered into a loan agreement with First
American Bank, SSB ("New Revolving Facility") to refinance its outstanding
indebtedness. Pursuant to the New Revolving Facility, Parallel may borrow the
lesser of $100,000,000 or the "borrowing base" then in effect. The borrowing
base at July 19, 2002 was $22,222,000 and at August 6, 2002 the borrowing base
was $21,575,570. At the closing of the loan transaction, the outstanding
principal balance was $12,150,000, bearing interest at 4.75%. The total
outstanding principal amount of our bank indebtedness was $12,000,000 at
December 31, 2001 and $12,150,000 at June 30, 2002. The New Revolving Facility
is collateralized by substantially all of Parallel's oil and gas reserves and
933,589 shares of Energen Corporation common stock. The borrowing base
attributable to our oil and gas reserves is subject to redetermination
semi-annually, on or about April 30 and October 31 of each year, beginning
October 31, 2002. The borrowing base attributable to the Energen common stock is
redetermined monthly on or about the last day of the month. The borrowing base,
regardless of any redetermination, will automatically be reduced each month,
commencing on August 31, 2003, and continuing on the last day of each succeeding
month. This monthly commitment reduction will be in an amount equal to the
borrowing base on the day immediately preceding the date of each monthly
commitment reduction, divided by the number of months remaining prior to
maturity of the Revolving Note. The bank may require a redetermination of the
borrowing base and monthly commitment reduction at any time in its sole
discretion. If our repayment obligations to the bank ever exceed the borrowing
base, we will be required to either make a monthly prepayment of principal equal
to the amount of such excess or pledge additional assets as collateral for our
obligations. Indebtedness under the New Revolving Facility matures July 17,
2006.
The unpaid principal balance of the New Revolving Facility bears interest
at the election of Parallel at a rate equal to (i) the bank's base lending rate,
or (ii) the LIBOR rate plus a LIBOR margin of:
. 2.75% per annum whenever the borrowing base usage is equal to or
greater than 75%;
. 2.50% per annum whenever the borrowing base usage is equal to or
greater than 50%; but less than 75%; or
. 2.25% per annum whenever the borrowing base usage is less than 50%.
However, the interest rate may never be less than 4.75%. Interest is due
and payable on the day which the related LIBOR interest period ends.
-8-
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- ------------------------------
2001 2002 2001 2002
--------------- --------------- -------------- --------------
Net income $ 1,214,673 $ 19,661,503 $ 5,850,595 $18,892,752
Preferred stock dividend (146,175) (146,175) (292,350) (292,350)
------------ ------------ ----------- -----------
Net income available to common stockholders $ 1,068,498 $ 19,515,328 $ 5,558,245 $18,600,402
============ ============ =========== ===========
Denominator-
Weighted average common shares outstanding 20,433,721 20,663,861 20,426,480 20,663,861
============ ============ =========== ===========
Basic earnings per share $ 0.05 $ 0.94 $ 0.27 $ 0.90
============ ============ =========== ===========
Diluted EPS Computation:
Numerator-
Net income $ 1,214,673 $19,661,503 $ 5,850,595 $18,892,752
Preferred stock dividend - - - -
------------ ------------ ----------- -----------
Net income available to common stockholders $ 1,214,673 $19,661,503 $ 5,850,595 $18,892,752
============ ============ =========== ===========
Denominator-
Weighted average common shares outstanding 20,433,721 20,663,861 20,426,480 20,663,861
Employee stock options 608,844 93,015 547,296 123,631
Preferred stock 2,784,244 2,784,244 2,784,244 2,784,244
------------ ------------ ----------- -----------
23,826,809 23,541,120 23,758,020 23,571,736
============ ============ =========== ===========
Diluted earnings per share $ 0.05 0.84 0.25 0.80
============ ============ =========== ===========
NOTE 10. COMPREHENSIVE INCOME
Comprehensive income consists of net income and other gains and losses
affecting stockholders' equity that, under generally accepted accounting
principles, are excluded from net income. For Parallel, such items consist
primarily of unrealized gains on its investment in 933,589 shares of Energen
Common Stock with a per share price of $27.50 as of June 30, 2002.
As of August 12, 2002 we had sold 136,400 shares of Energen common stock at
a weighted average price of $25.02 per share. This gives Parallel cash proceeds
realized of $3,412,839 and a book loss of $338,161 in relationship to the June
30, 2002 market price of the Energen stock. To the extent that we sell Energen
stock at a price below $27.50 per share, we will incur a loss equal to the
difference between $27.50 and the sales price.
NOTE 11. RECENTLY ANNOUNCED ACCOUNTING PRONOUNCEMENTS
In July 2001 the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141 "Business Combinations" and
No. 142 "Goodwill and Other Intangible Assets." Statement 141 requires that all
business combinations initiated after June 30, 2002 be accounted for under the
purchase method and Statement 142 requires that goodwill no longer be amortized
to earnings, but instead be reviewed for impairment. As of June 30, 2002 there
was no impact on Parallel's financial statements as we have not entered into any
business combination and have not
-11-
Three Months Ended
-------------------------------------------
12-31-01 3-31-02 6-30-02 6-30-01
---------- ---------- ---------- ----------
Production and prices:
Oil (Bbls) 28,021 30,161 33,126 39,098
Natural gas (Mcf) 589,263 590,650 609,812 934,951
Equivalent barrels of oil (EBO) 126,232 128,603 134,761 194,923
Oil price (per Bbl) $ 19.86 $ 21.20 $ 22.29 $ 26.50
Gas price (per Mcf) $ 2.37 $ 2.25 $ 3.39 $ 4.02
Price per EBO $ 15.44 $ 15.33 $ 20.84 $ 24.58
Results of operations per EBO:
Oil and gas revenues $ 15.44 $ 15.33 $ 20.84 $ 24.58
Costs and expenses:
Lease operating expense 7.11 4.27 5.35 5.37
General and administrative 3.02 2.72 14.65 1.56
Depreciation and depletion 11.85 10.53 9.89 8.30
Impairment of oil and gas properties 116.00 - - -
-------- -------- -------- --------
Total costs and expense 137.98 17.52 29.89 15.23
-------- -------- -------- --------
Operating income (loss) (122.54) (2.19) (9.05) 9.35
-------- -------- -------- --------
Interest expense, net (1.05) (1.11) (1.05) (0.94)
Other income, net (2.95) (1.29) (0.76) (0.27)
Dividend income - - 1.21 -
-------- -------- -------- --------
(4.00) (2.40) (0.60) (1.21)
-------- -------- -------- --------
Equity in income (loss) of First Permian,L.P. 3.16 (2.46) 230.65 -
Change in fair market value of put option - (2.64) (0.41) -
-------- ------- -------- --------
3.16 (5.10) 230.24 -
-------- ------- -------- --------
Pretax income per EBO (123.38) (9.69) 220.59 8.14
Income tax expense (benefit) (43.63) (3.72) 74.68 1.90
-------- ------- -------- --------
Net income per EBO $ (79.75) $ (5.97) $ 145.91 $ 6.24
======== ======= ======== ========
-15-
Six Months Ended
----------------------------------------
6-30-00 6-30-01 6-30-02
--------- --------- ---------
Production and prices:
Oil (Bbls) 84,037 74,011 63,287
Natural gas (Mcf) 1,227,543 1,944,483 1,200,462
Equivalent barrels of oil (EBO) 288,627 398,092 263,364
Oil price (per Bbl) $ 26.93 $ 27.12 $ 21.77
Gas price (per Mcf) $ 3.01 $ 5.18 $ 2.83
Price per EBO $ 20.69 $ 30.34 $ 18.15
Results of operations per EBO:
Oil and gas revenues $ 20.69 $ 30.34 $ 18.15
Costs and expenses:
Lease operating expense 4.27 5.44 4.83
General and administrative 1.59 1.51 8.83
Depreciation and depletion 7.91 8.28 10.21
------- ------- -------
Total costs and expense 13.77 15.23 23.87
------- ------- -------
Operating income (loss) 6.92 15.11 (5.72)
------- ------- -------
Interest expense, net (2.29) (0.98) (1.08)
Other income, net 0.16 (0.21) (1.02)
Dividend income - - 0.62
------- -------- --------
(2.13) (1.19) (1.48)
------- -------- -------
quity in income (loss) of First Permian, L.P. (1.72) - 116.82
Change in fair market value of put option - - (1.50)
------- -------- --------
(1.72) - 115.32
------- -------- --------
Pretax income per EBO 3.07 13.92 108.12
Income tax expense (benefit) - (0.78) 36.39
------- ------- -------
Net income per EBO $ 3.07 $ 14.70 $ 71.73
======= ======= =======
-16-
Three Months Ended Six Months Ended
----------------------------------- -----------------------
12-31-01 3-31-02 6-30-02 6-30-01 6-30-02
----------- ----------- ----------- ----------- -----------
Oil and gas revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Lease operating expense 46.1 27.9 25.7 17.9 26.6
General and administrative 19.5 17.7 70.3 5.0 48.6
Depreciation and depletion 76.7 68.7 47.5 27.3 56.2
Impairment of oil and gas properties 751.4 - - - -
--------- -------- -------- -------- --------
Total costs and expenses 893.7 114.3 143.5 50.2 131.4
--------- -------- -------- -------- --------
Operating income (793.7) (14.3) (43.5) 49.8 (31.4)
--------- -------- -------- -------- --------
Interest expense, net (6.8) (7.2) (5.1) (3.2) (6.0)
Other income, net (19.1) (8.4) (3.7) (0.7) (5.6)
Dividend income - - 5.8 - 3.4
--------- -------- -------- -------- --------
(25.9) (15.6) (3.0) (3.9) (8.2)
--------- -------- -------- -------- --------
Equity in earnings (loss) of First Permian, L.P. 20.4 (16.0) 1,106.6 - 643.6
Change in fair market value of put option - (17.2) (2.0) - (8.3)
--------- -------- -------- -------- --------
20.4 (33.2) 1,104.6 (3.9) 635.3
--------- -------- -------- -------- --------
Pretax income (799.2) (63.1) 1,058.1 45.9 595.7
Income tax expense (benefit) (282.6) (24.3) 358.3 (2.6) 200.5
--------- -------- -------- -------- --------
Net income (516.6) (38.8) 699.8 48.5 395.2
========= ======== ======== ======== ========
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2002:
Oil and Gas Revenues. Oil and gas revenues decreased $1,982,256 or 41%, to
$2,808,807 for the three months ended June 30, 2002, from $4,791,063 for the
same period of 2001. The decrease was primarily the result of a 31% decrease in
oil and gas production and a 15% decrease in the average sales price per EBO. We
received $20.84 per EBO in the three months ended June 30, 2002 compared with
$24.58 per EBO for the same period of 2001.
Production Costs. Production costs decreased $325,913, or 31%, to $ 721,614
during the three months ended June 30, 2002, compared with $1,047,527 for the
same period of 2001. The decrease was primarily attributable to lower production
taxes and ad valorem taxes associated with lower prices and volumes. Average
production costs remained relatively flat at $5.35 per EBO.
General and Administrative Expenses. General and administrative expenses
increased by $1,670,805, or 550%, to $1,974,686 for the three months ended June
30, 2002 from $303,881 for the same period of 2001. The increase was primarily
due to paid and accrued incentive award payments of approximately $1,471,000
related to the First Permian, L.P. divestiture. Excluding the incentive award
payment, general and administrative expenses were $3.74 per EBO for the three
months ended June 30, 2002, compared to $1.56 per EBO for the same period of
2001. The increase in general and administrative expense per EBO, excluding
incentive award payments, is primarily a result of a 31% decrease in production
volumes along with increased directors and officers insurance and legal costs.
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense ("DD&A") decreased by $284,581, or 18%, to
$1,333,166 for the three months
-17-
June June June June Fair
2003 2004 2005 2006 Total Value
------------ ------------ ------------- ------------ ------------ ------------
(In 000's, except interest rates)
Variable rate debt:
Revolving facility (secured) $3,713 $4,050 $4,050 $337 $12,150 $12,150
Average interest rate 4.75% 4.75% 4.75% 4.75%
At July 19, 2002, we had bank loans in the amount of $12,150,000
outstanding at an average interest rate of 4.75%. Borrowings under our new
credit facility bear interest, at our election, at (i) the
-20-
Floor Cost of Fair Value
Period Commodity Mcf Volume Price Floor @ 6-30-2002
- --------------------------------- --------------- ------------ ------ ---------- ------------
April 2002 thru October 2002 natural gas 1,470,000 $ 2.40 $ 391,105 $ 8,190
April 2003 thru October 2003 natural gas 700,000 $ 3.00 $ 139,500 $ 127,583
--------- ---------
$ 530,605 $ 135,773
========= =========
-21-
NAME VOTES CAST FOR VOTES WITHHELD
------------------- -------------- --------------
Thomas R. Cambridge 18,149,521 518,359
Dewayne E. Chitwood 18,158,706 509,174
Larry Oldham 18,149,776 518,104
Martin B. Oring 17,934,731 733,149
Charles R. Pannill 18,081,021 586,859
Jeffrey G. Shrader 18,246,501 421,379
In addition to electing Directors, the stockholders also voted upon and
ratified the appointment of KPMG LLP to serve as our independent public
accountants for 2002. Set forth below is a tabulation of votes with respect to
the proposal to ratify the appointment of Parallel's independent public
accountants:
VOTES CAST FOR VOTES CAST AGAINST ABSTENTIONS
-------------- ------------------ -----------
18,127,421 533,993 6,466
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
No. Description of Exhibit
-------- ----------------------
3.1 Certificate of Incorporation of Registrant (Incorporated by reference
to Exhibit 3.1 to Form 10-K of the Registrant for the fiscal year
ended December 31, 1998)
-22-