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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002
[ ] 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
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(Exact Name of Registrant as Specified in its Charter)
Delaware 75-1971716
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
1004 N. Big Spring, Suite 400
Midland, Texas 79701
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(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 Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Common Stock Purchase Warrants
Rights to Purchase Series A Preferred Stock
(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. [ ]
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2).
Yes No X
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The aggregate market value of voting and non-voting common equity
held by non-affiliates of the Registrant as of June 28, 2002 was approximately
$48,563,073, based on the last sale price of the common stock on the same date.
At March 7, 2003 there were 21,143,406 shares of common stock
outstanding.
FORM 10-K
PARALLEL PETROLEUM CORPORATION
TABLE OF CONTENTS
Item No. Page
PART I
Item 1. Business.............................................. 1
Item 2. Properties............................................ 28
Item 3. Legal Proceedings..................................... 31
Item 4. Submission of Matters to a Vote of Security Holders.. 31
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................. 32
Item 6. Selected Financial Data................................ 34
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 35
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk................................... 52
Item 8. Financial Statements and Supplementary Data............ 56
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.. 56
PART III
Item 10. Directors and Executive Officers of the Registrant..... 57
Item 11. Executive Compensation................................. 60
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters ..... 71
Item 13. Certain Relationships and Related Transactions......... 74
Item 14 Controls and Procedures................................ 75
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K......................................... 76
(i)
Cautionary Statement Regarding Forward Looking Statements
Some statements contained in our Form 10-K report are "forward-looking
statements". All statements other than statements of historical facts included
in this report, including, without limitation, statements regarding planned
capital expenditures, the availability of capital resources to fund capital
expenditures, estimates of proved reserves, our financial position, business
strategy and other plans and objectives for future operations, are
forward-looking statements. You can identify forward-looking statements by the
use of forward-looking terminology like "may," "will," "expect," "intend,"
"anticipate," "budget", "estimate," "continue," "present value," "future" or
"reserves" or other variations or comparable terminology. We believe the
assumptions and expectations reflected in these forward-looking statements are
reasonable. However, we can't give any assurance that our expectations will
prove to be correct or that we will be able to take any actions that are
presently planned. All of these statements involve assumptions of future events
and risks and uncertainties. Risks and uncertainties associated with
forward-looking statements include, but are not limited to:
. fluctuations in prices of oil and gas;
. future capital requirements and availability of financing;
. geological concentration of our reserves;
. risks associated with drilling and operating wells;
. competition;
. general economic conditions;
. governmental regulations;
. receipt of amounts owed to us by purchasers of our production and
counterparties to our hedging contracts;
. hedging decisions, including whether or not to hedge;
. events similar to 911;
. actions of third party co-owners of interests in properties in
which we also own an interest; and
. fluctuations in interest rates and availability of capital.
For these and other reasons, actual results may differ materially from
those projected or implied. We caution you against putting undue reliance on
forward-looking statements or projecting any future results based on such
statements.
Before you invest in our common stock, you should be aware that there
are various risks associated with an investment. We have described some of these
risks in other sections of this annual report and under the Risk Factors
beginning on page 22.
(ii)
PART I
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ITEM 1. BUSINESS
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About Our Company
Parallel Petroleum Corporation is an independent oil and gas
exploration and production company. Our primary business is oil and natural gas
exploration, development and production, and the acquisition of producing oil
and gas properties. These activities are concentrated in three core areas:
. the Permian Basin of west Texas;
. Liberty County in east Texas; and
. the onshore gulf coast area of south Texas.
In 2002, excluding transfers of assets held for sale, we spent
approximately $60.9 million on oil and gas related capital expenditures, an
increase of approximately 431% over that expended in 2001. See Note 12 to the
Financial Statements. We acquired producing oil and gas properties located in
Andrews County, Texas for a total of $46.1 million, and approximately $14.8
million was spent on our Yegua /Frio/Wilcox gas project in the onshore Gulf
Coast area of south Texas, the Cook Mountain Gas Project in Liberty County,
Texas, our Permian Basin projects in west Texas and the acquisition of
undeveloped leases for future projects.
During 2002, we participated in drilling 19 gross (6.1 net) wells. Of
these wells, 15 gross (3.8 net) were exploratory wells. Twelve gross (3.1 net)
exploratory wells were productive and 3 gross (.7 net) exploratory wells were
dry. Four gross (2.3 net) development wells were drilled with 2 gross (1.2 net)
wells productive and 2 gross (1.1 net) wells waiting on completion at March 3,
2002. This compares with 31 gross (7.5) wells, all exploratory, drilled in 2001,
of which 18 gross (4.2 net) wells were productive.
As you read this report, it is important for you to understand our
relationship with First Permian, L.P., a Delaware limited partnership. Before
converting to a limited partnership in April, 2002, First Permian, L.P. was a
Delaware limited liability company known as First Permian, L.L.C. If you will
turn to page 10, you will find information about First Permian under the heading
First Permian, L.P. Unless we state that the information about Parallel in this
report includes Parallel's ownership interest in First Permian, you should keep
in mind that references to Parallel, we, our or similar terminology exclude
First Permian.
Throughout this report, we refer to some terms that are commonly used
and understood in the oil and gas industry. These terms are: Mcf, Bcf, Bbls and
EBO. Mcf refers to the quantity of one thousand cubic feet of natural gas. 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.
Parallel was incorporated in Texas on November 26, 1979, and
reincorporated in the State of Delaware on December 18, 1994.
Our executive offices are located at 1004 N. Big Spring, Suite 400,
Midland, Texas 79701. Our telephone number is (915) 684-3727.
Available Information
You may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov)
that contains reports, proxy and information statements, and other information
regarding issuers, including Parallel, that file electronically with the SEC.
Our Internet address is http://www.parallel-petro.com.
We make available free of charge on our Internet website our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the SEC.
We will provide electronic or paper copies of our SEC filings free of
charge upon request made to: Cindy Thomason, Manager of Investor Relations,
cindyt@parallel-petro.com, 1-800-299-3727.
Major Activities in 2002
First Permian Asset Sale. On March 8, 2002, we announced that First
Permian had entered into an Agreement of Sale and Purchase with Energen
Resources Corporation, a wholly owned subsidiary of Energen Corporation. Under
terms of the March 7, 2002 purchase agreement between First Permian and Energen,
First Permian agreed to sell all of its oil and gas properties to Energen
Resources Corporation for a total of $120 million in cash and 3,043,479 shares
of Energen Corporation common stock. The closing of the sale occurred on April
8, 2002, with an effective date of January 1, 2002. At the time of the sale, we
owned a 30.675% interest in First Permian. Net of purchase price adjustments,
First Permian's owners, including Parallel, received total cash in the amount of
$117,243,000 and 3,043,479 shares of Energen Corporation common stock. Our pro
rata share of the sales proceeds, net of our share of First Permian's
liabilities, was approximately $31.6 million, which included $6.05 million in
cash and 933,589 shares of Energen Corporation common stock having a market
value of $25.58 million, based on the closing sale price of $27.40 per share on
the closing date. Energen Corporation's common stock is listed on the New York
Stock Exchange under the symbol EGN. On August 6, 2002, we began selling our
shares of Energen stock and by December 26, 2002, all 933,589 shares had been
sold at prices ranging from $24.50 to $29.89. The total proceeds from these
sales, net of commissions, were $24,863,305.
Purchase of Fullerton Properties. On December 20, 2002, we purchased,
through our subsidiary, Parallel, L.P., 95% of the interest owned by
nonaffiliated sellers in producing oil and gas properties located in the
Fullerton Field of Andrews County, Texas in the Permian Basin of west Texas. The
acquisition was initially conducted under a competitive bid process and
completed under terms of a negotiated purchase and sale agreement with JMC
Exploration, Inc. and Arkoma Star L.L.C., the sellers of the property.
Throughout this report, we refer to
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these oil and gas properties as the Fullerton properties. The total purchase
price for our interest in the Fullerton properties was $46,075,000.00, of which
$45,075,000 was paid in cash and $1,000,000.00 was paid in the form of 454,545
shares of our common stock. The cash portion of the purchase price was financed
with loan proceeds drawn under our revolving credit facility . You can find a
description of our credit facility under the caption "Capital Resources and
Liquidity" beginning on page 45 of this report. For purposes of the acquisition,
the common stock was valued at $2.20 per share, the last sale price of
Parallel's common stock on the day immediately preceding Parallel, L.P.'s
execution of the purchase and sale agreement with the sellers of the properties.
The parties entered into the agreement on November 27, 2002. Texland Petroleum,
Inc., an unaffiliated third party, acquired the Sellers' remaining 5% interest
in the properties. Parallel's working interests in the Fullerton properties
range from 22% to 85%. Texland and Parallel will co-manage the properties, but
Texland is the named operator.
The Fullerton properties are currently producing approximately 1,150
equivalent barrels of oil per day, net to the interest acquired by Parallel. The
properties produce from the San Andres formation at a depth of approximately
4,400 feet and consist of 128 producing wells, supported by 80 water-injection
wells situated on nine contiguous leases containing approximately 3,640 gross
acres. The properties have an estimated reserve life of 45 years.
Proved Reserves as of December 31, 2002
Cawley Gillespie & Associates, Inc., an independent engineering firm,
estimated the total proved reserves attributable to our Fullerton properties in
Andrews County, Texas to be 9.12 million Bbls of oil and 1.93 Bcf of natural gas
as of December 31, 2002. Based on oil and gas prices at December 31, 2002 and
current operating and development costs, the present value of our pretax future
net revenues from the Fullerton properties, discounted at 10%, was estimated to
be approximately $85.1 million as of December 31, 2002.
Williamson Petroleum Consultants, Inc., an independent engineering
firm, estimated the total proved reserves attributable to all of our oil and gas
properties (other than the Fullerton properties) to be 1.15 million Bbls of oil
and 13.7 Bcf of natural gas as of December 31, 2002. Based on oil and gas prices
at December 31, 2002 and current operating and development costs, the present
value of our pretax future net revenues from these other properties, discounted
at 10%, was estimated to be approximately $37.8 million as of December 31, 2002.
Based on the reports of Cawley Gillespie & Associates, Inc. and
Williamson Petroleum Consultants, Inc., our combined proved reserves were
estimated to be 10.27 million Bbls of oil and 15.63 Bcf of natural gas as of
December 31, 2002. Based on oil and gas prices at December 31, 2002 and
projected operating and development costs, the combined present value of our
pretax future net revenues from all of our proved reserves, discounted at 10%,
was approximately $122.9 million as of December 31, 2002. The averaged realized
prices for our reserves as of December 31, 2002 were $29.21 per Bbl of oil and
$4.40 per Mcf of natural gas.
Approximately 80% of our proved reserves are oil and approximately 79%
are categorized as proved developed reserves.
About Our Strategy and Business
Although our activities during the last eight years have been
concentrated in south Texas, several developments in 2002 caused us to reexamine
and revise our business plan. These developments included:
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. $31 million of additional capital available to us as a result of
the receipt of our pro rata share of the net proceeds from First
Permian's sale of all of its oil and gas properties, including
the proceeds we received from selling the shares of Energen
common stock distributed to us;
. the utilization of substantially all of our net operating loss
carryforwards, a result of the First Permian sale; and
. our drilling results in the down dip Wilcox trend of south Texas.
In June of last year, we announced that our primary objective would be
to increase the per share net asset value of our common stock through increasing
reserves, production, cash flow and earnings. We shifted the balance of our
investments from properties having high rates of production in early years to
properties with more consistent production over a longer term. We now emphasize
reducing drilling risks by dedicating a smaller portion of our capital to high
risk projects, while reserving the majority of our available capital for
exploitation, enhancement and development drilling opportunities. Obtaining
positions in long-lived oil and gas reserves is given priority over properties
that might provide more cash flow in the early years of production, but which
have shorter reserve lives. Our risk reduction efforts also include emphasizing
acquisition possibilities over high risk exploration projects.
During the latter part of 2002, we reduced the emphasis on high risk
exploration efforts and started focusing on established geologic trends where we
can utilize the engineering, operational, financial and technical expertise of
our entire staff. Although we anticipate participating in exploratory drilling
activities in the future, reducing financial, reservoir, drilling and geological
risks and diversifying our property portfolio are important criteria in the
execution of our business plan.
In summary, our current business plan:
. focuses on projects having less geological risk;
. entails less exploratory activity in the down dip Wilcox trend of
our south Texas properties;
. emphasizes exploitation and enhancement activities;
. focuses on acquiring producing properties; and
. expands the scope of our operations by diversifying our
exploratory and development efforts, both in and outside of our
current areas of operation.
An integral part of our business strategy includes exploitation and
enhancement activities. Exploitation and enhancement activities include:
. operational enhancements, such as surface facility
reconfiguration, and the installation of new or additional
compression equipment;
. workovers;
. well recompletions;
. behind-pipe recompletions;
. refacing (restimulating a producing formation within an existing
wellbore to enhance production and add reserves);
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. installation of injection wells and related facilities;
. development well drilling (infill drilling);
. cost reduction programs; and
. secondary recovery operations, including waterfloods.
When we initiate exploitation and enhancement activities on our
existing producing properties, we first establish and maintain an ongoing
program of oil and gas well reviews with the objective of maximizing the output
of existing wells. Oil and gas wells usually generate their highest volumes
during the earlier stages of production after which production begins to
decline. Enhancement and remedial work can be undertaken to restore varying
amounts of the lost production or reduce the rate of production decline.
Our approach to producing property acquisitions, and the size and
timing of any acquisition, is dependent upon market conditions in the domestic
oil and gas industry. Generally, during periods of moderate to high prices for
oil and gas, we believe that oil and gas acquisition opportunities are not as
favorable to a prospective purchaser as they are when market conditions are
depressed.
Producing properties that we identify and attempt to acquire will
include properties that have proved undeveloped and behind-pipe reserves,
operational enhancement potential, long-lived reserves, multiple pay-zone
exploitation and development drilling opportunities, and the potential for
operating control. Selecting and acquiring producing properties having these
characteristics will diversify and improve the quality of our property
portfolio.
Although purchases of producing properties involve less risk than
drilling, there is a risk that estimates of future prices or costs, reserves,
production rates or other criteria upon which we have based our investment
decision may prove to be inaccurate.
In addition to acquisitions of producing properties, our business
strategy also includes seeking opportunities to negotiate and enter into work to
earn, joint venture and similar agreements with third parties for development
operations on producing properties.
Our sources for possible acquisitions of leases and prospects 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 we believe are
underperforming relative to their potential. To reduce our financial exposure in
any one prospect, we may enter into co-ownership arrangements with third
parties. These arrangements are common in the industry and enable us to
participate in more prospects and share the drilling and related costs and
dry-hole risks with other participants. From time to item, we sell prospects to
third parties or farm-out prospects and retain an interest in revenues from
these prospects.
As we have in the past, we will continue to:
(1) Use Advanced Technologies. We believe the use of 3-D seismic surveys
and other advanced technologies provides us with a risk management tool. We
believe that our use of these technologies in exploring for and developing oil
and gas properties can:
. reduce drilling risks;
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. lower finding costs;
. provide for more efficient production of oil and natural gas from
our properties; and
. increase the probability of locating reserves that might not
otherwise be discovered.
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.
We believe that using 3-D seismic, AVO and other technologies gives us
a competitive advantage because of the increased 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.
(2) Serve 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 enhanced by emphasizing quality controls throughout
the data acquisition, processing and interpretation phases.
We retain experienced outside consultants and participate with
knowledgable 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.
(3) Conduct Exploratory Activities. Although we do not intend to
emphasize exploratory drilling to the extent we have in the past, when we do
undertake exploratory projects, we will continue to focus on prospects:
. having known geological and reservoir characteristics;
. being in close proximity to existing wells so data from the
existing wells can be correlated with seismic data on or near the
prospect being evaluated; and
. having a potentially meaningful impact on our reserves.
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.
We continue our efforts, as we have in the past, to maintain low
general and administrative expenses relative to the size of our overall
operations, utilize advanced technologies, serve as operator in appropriate
circumstances, and reduce operating costs.
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Capital Investments for 2003
Our 2003 capital investment budget for properties we owned at March 26,
2003 is estimated to be approximately $12 million, which includes approximately
$1.0 million for the purchase of undeveloped leasehold acreage in our areas of
activity. The budget will be funded from our estimated operating cash flows,
which is based on anticipated commodity prices and forecasted production
volumes. The amount and timing of expenditures are subject to change based upon
market conditions, results of expenditures, new opportunities and other factors.
During 2003, we expect our principal exploration and development
activities will be concentrated in Liberty County of east Texas, the
Yegua/Frio/Wilcox gas trend in the onshore Gulf Coast area of south Texas and in
the Permian Basin of west Texas. On a geographic basis, approximately 60% of our
projected 2003 capital investment program will be directed toward oil reserves
in the Permian Basin of west Texas and 40% to gas reserves in east Texas and in
the Yegua/Frio/Wilcox gas trend onshore the Gulf Coast area of south Texas.
A breakdown of our 2003 capital investment program, excluding $1.0
million we have allocated for leasehold acquisition purposes, by geographic area
and anticipated projects is as follows:
Permian Basin of West Texas
.. Fullerton Field, Andrews County, Texas - We have budgeted approximately
$1.5 million for year 2003, net to our interest, for the stimulation of 40
to 50 of the existing producing wells in the San Andres formation at an
approximate depth of 4,400 feet. The stimulations are designed as large
water fracs with a small concentration of sand, and estimated costs are
approximately $30,000 per well, net to our interest. The operations are
scheduled to begin during the second quarter 2003, and we presently
anticipate fracture stimulating four to five wells per month. Our working
interest in the properties ranges from 22% to 85%.
.. Diamond M (Canyon Reef) and GCW (Clearfork) Units, Scurry County, Texas -
We assumed operations of Phase 1 of this 5,500-acre project effective
December 18, 2002. Phase 1 consisted of drilling four Canyon Reef test
wells to an estimated depth of 7,200 feet. As of March 27, 2003, three of
the four new wells had been completed and one well was testing additional
zones.
Phase 2 requires a capital investment of up to $20 million (approximately
$17.6 million net to our interest) over the next 3 years. We have budgeted
approximately $5.9 million for Phase 2 in 2003, net to our interest,
primarily for enhancement and operating activities in the Diamond M Unit.
Our working interest in this project is 66%. We assumed operations of Phase
2 effective March 1, 2003.
East Texas
.. Cook Mountain Gas Project, Liberty County, Texas - We have budgeted
approximately $2 million for year 2003, net to our interest, for the
drilling and completion of four Cook Mountain gas wells. We have identified
seven prospects based on 3-D seismic data. We anticipate drilling one well
per quarter in this project during 2003. We have an average 20% working
interest in each well.
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Onshore Gulf Coast of South Texas
.. Yegua/Frio Gas Project, Jackson County, Texas - We have budgeted
approximately $1.5 million for year 2003 for the drilling and completion of
approximately 8 Frio wells and 1 Yegua well. All of these prospects were
generated from our proprietary 3-D seismic data base. This drilling
activity is expected to start during the third quarter of 2003. Our average
working interest in this project is 40% in the Yegua trend and 50% in the
Frio trend.
Drilling, Production and Other Activities in 2002
Following are brief descriptions of our primary business activities
during the fiscal year ended December 31, 2002 and the areas in which these
activities were conducted.
Yegua/Frio/Wilcox Gas Trend
From 1993 until mid 2002, we concentrated our activities in the
Yegua/Frio/Wilcox gas trends in the onshore Gulf Coast area of south Texas.
These activities were conducted in the onshore gulf coast areas of south Texas
in Dewitt, Jackson, Lavaca, Victoria and Wharton Counties. Substantially all of
our drilling success in south Texas has been in the Yegua/Frio gas trend and we
intend to continue drilling additional lower risk 3-D seismic development wells
in this trend. Although the successful wells we drilled in the Yegua/Frio trend
provided quick payouts of our drilling and completion costs, the reserve lives
of the properties in this area have proven to be very short as compared to our
properties in the Permian Basin.
Consistent with our strategy of reducing geologic risk, our exploration
activities in the down dip Wilcox trend of south Texas were reduced in 2002 and
we began to diversify our exploration efforts away from this trend. However, and
as planned, we did remain active in this area in 2002 even though we drilled
three dry holes on our Wilcox prospects in the fourth quarter of 2001, and one
dry hole during the first quarter of, 2002. We presently expect that our future
activities in the down dip Wilcox trend and future exploration and development
of our acreage in this trend will be financed through sales of a portion of our
current interests and retention of carried working interests, farmout
agreements, joint venture and other similar agreements, reversionary interest or
other type of cost free interest.
During 2002, our principal exploration and development activities
continued to be concentrated in the onshore Gulf Coast area of south Texas.
The following table shows the results of our 2002 drilling activity in
the Yegua/Frio/Wilcox gas trend.
2002 Drilling Activity
Yegua/Frio/Wilcox Gas Trend
Target Number of
Formation Depth Range (feet) Wells Drilled Productive Dry
- --------------- ------------------------ ------------------- ---------------- ------
Yegua 6,300 - 13,000 3 2 1
Frio 6,400 - 8,400 7 7 -
Wilcox 13,200 - 17,500 1 - 1
------- ------- ----
11 9 2
======= ======= ====
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At March 1, 2003, we owned interests in 97 gross (29.4 net) 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 oil and gas leasehold interests; and
. undivided working interests in oil and gas leases.
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, oil and gas leasehold or other interests in the
AMI, we would be obligated to offer the other participants the right to purchase
their pro rata share of the interest we acquired 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 this interest
for our own account.
The 3-D seismic survey data we obtain is proprietary and shared only
with our working interest partners. Typically, seismic data is obtained from
seismic operations conducted over large blocks of acreage.
Since 1993, we have acquired more than 800 square miles of proprietary
3-D seismic data on 22 projects in the Yegua/Frio/Wilcox gas trend. This seismic
library is proprietary in the sense that only Parallel and our working interest
partners have access to the data. More importantly, Parallel is the only partner
with an interest in all 22 of the projects. With seismic data processing methods
continually improving, we believe this data library could yield new prospects.
Using this data base, we have generated a multi-year prospect inventory
ranging from lower risk/moderate impact to higher risk/higher impact prospects.
With the cost of seismic acquisition activities paid for, we can allocate most
of our future capital expenditure funds to data interpretation, drilling and
completion activities and leasehold acquisition.
Cook Mountain 3-D Gas Project of East Texas
In line with our diversification efforts in 2002, we identified ten 3-D
seismic gas prospects in east Texas targeting the Cook Mountain formation in
Liberty County, Texas at a depth of approximately 10,000 to 13,000 feet. We
leased four of the identified prospects and drilled three wells during 2002. Two
of the wells are on production and one well is shut-in waiting on pipeline
construction.
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.
We believe we can more fully develop our existing producing properties
in the Permian Basin of west Texas, which have been proven by previous drilling.
Collectively, our Permian Basin properties include approximately 39,122 gross
(28,901 net) developed acres, which will
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provide significant exploitation and development opportunities for both oil and
gas. Additionally, our Permian Basin properties have longer reserve lives than
our South Texas properties. Our exploitation and enhancement efforts are
conducted primarily on our properties in the Permian Basin of west Texas. We own
working interests in these properties ranging from 15.0% to 100%.
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 2000 and 2001, we limited our
capital expenditures on our Permian Basin properties because of our capital
commitments in the Yegua/Frio/Wilcox gas trend. Our activities in the Permian
Basin have been limited to maintaining existing well performance.
When funds are available for our Permian Basin activities, we use those
funds for:
. recompleting existing wellbores;
. restimulating producing reservoirs;
. identifying potential infill drilling locations;
. making mechanical improvements to surface facilities and downhole
equipment; and
. reviewing the feasibility 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. As part of our remedial and enhancement operations
in the Permian Basin, we routinely review the performance and economics of our
oil and gas 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 oil and gas leases that are uneconomic under existing
operating conditions; and/or
. selling properties to third parties.
First Permian, L.P.
In June, 1999, First Permian purchased from Fina Oil and Chemical
Company oil and gas working interests ranging from 2.60% to 100% in 22 producing
properties located in Andrews, Cochran, Ector, Gaines, Glasscock, Howard,
Lubbock, Mitchell, Pecos and Yoakum Counties, Texas. The properties were
purchased for cash in the aggregate amount of approximately $92 million. As
described on page 2 of this report, First Permian sold these properties on April
8, 2002, for $120 million in cash and 3,043,479 shares of common stock of
Energen Corporation. At the time First Permian sold all of its properties, we
owned 350,000 Common Units of First Permian, which represented 30.675% of the
total outstanding common partnership interests in First Permian. After
completing the sale, First Permian distributed the net sales proceeds to all of
its partners. Our pro rata share of the net sales proceeds consisted of
approximately $5.5 million in cash and 933,589 shares of Energen common stock.
-10-
Until First Permian sold its properties, we participated in First
Permian's infill drilling and major workover programs through our 30.675%
ownership interest in First Permian. First Permian's exploitation and production
activities were focused primarily on oil producing properties in the Permian
Basin of west Texas. The majority of these properties produce from shallow
intervals in the San Andres, Glorietta and Clearfork formations, ranging in
depths from 2,500 feet to 7,500 feet below the surface. These are mature,
long-lived reserves with low decline rates, predictable production profiles and
successful secondary and tertiary recovery programs.
Drilling and Acquisition Costs
The table below shows our oil and gas property acquisition, exploration
and development costs for the periods indicated.
Year Ended December 31,
--------------------------------------------------------------------
2002 2001 2000(1) 1999(1) 1998
---------- ----------- ------------- ------------ --------------
(in thousands)
Transfers from (to) undeveloped
leases held for sale (1) $ - $ - $2,128 $ (2,128) $ -
Proved property acquisition costs 48,044 27 23 42 89
Unproved property acquisition costs 2,295 3,420 3,372 1,979 6,034
Exploration costs 1,291 6,820 2,163 1,856 8,556
Development costs 9,308 1,203 1,087 639 3,873
------- ------- ------- -------- --------
$ 60,938 $11,470 $ 8,773 $ 2,388 $ 18,552
======= ======= ======= ======== ========
(1) Reflects costs associated with assets being held for sale in 1999 and
transferred back to oil and gas property in 2000. Actual capital
expenditures during 2000 and 1999, excluding transfers, were approximately
$6.6 million and $4.5 million, respectively.
Oil and Natural Gas Prices are Volatile
Our revenues, profitability and cash flows are highly dependent on the
prices we receive for our oil and natural gas. Generally, oil and natural gas
prices improved and stabilized during the period from mid-2000 to the third
quarter of 2001, when prices began to decline. During the first quarter of 2002,
prices began to increase again and this upward trend in price has continued.
If prices decline substantially from current levels for a sustained
period of time, this could have a material adverse effect on our future
operations and financial condition.
-11-
Oil and natural gas prices can fluctuate widely on a month-to-month
basis in response to a variety of factors beyond our control. These factors
include:
. weather conditions;
. the supply of foreign oil;
. the level of product demand;
. overall economic conditions;
. the price and availability of alternative fuels;
. changes in the supply of and demand for oil and natural gas in
domestic and foreign markets; and
. political and military conflicts in foreign nations and events
similar to September 11.
The average prices we received for the oil and natural gas we produced
in 2002, 2001 and 2000 are shown in the table below.
Average Price Received for the
Year Ended December 31,
----------------------------------------------------
2002 2001 2000
-------------- --------------- ---------------
Oil (Bbl) ......................... $24.59 $24.80 $28.88
Natural gas (Mcf)....................... $ 3.33 $ 4.41 $ 4.38
The average price we received for our oil sales at March 1, 2003 was
approximately $33.20 per Bbl, excluding our hedging activities. At the same
date, the average price we were receiving for our natural gas was approximately
$8.05 per Mcf, excluding our hedging activities.
There is substantial uncertainty regarding future oil and gas prices
and we can provide no assurance that prices will remain at current levels. We
have entered into hedge contracts in an attempt to reduce the risk of
fluctuating oil and gas prices and interest rates.
At December 31, 2002, approximately 77% of our daily production was
natural gas and 23% was oil.
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.
-12-
Our Oil and Gas Operations Are Subject to Many Inherent Risks
Oil and gas 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 oil or
gas in sufficient quantities to return a profit. The success of our operations
depends, in part, upon the ability of our management and technical personnel.
The cost of drilling, completing and operating wells is often uncertain. There
is no assurance that our oil and gas 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 oil and gas. 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.
Any one of these potential hazards could result in accidents,
environmental damage, personal injury, property damage and other harm that could
result in substantial liabilities to us.
As is customary in the industry, we maintain insurance against some,
but not all, of these hazards. We maintain general liability insurance and
obtain insurance against blowouts on a well-by-well basis. We do not carry
insurance against pollution hazards. If we sustain an uninsured loss or
liability, our ability to operate could be materially adversely affected.
Our oil and gas operations are not subject to renegotiation of profits
or termination of contracts at the election of the federal government.
Executive Officers of Parallel
At March 15, 2003, Parallel's executive officers were Thomas R.
Cambridge, Larry C. Oldham, Eric A. Bayley, John S. Rutherford, Donald E.Tiffin
and Steven D. Foster.
Thomas R. Cambridge, age 67, 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
-13-
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.
Larry C. Oldham, age 49, 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. Before Parallel's
formation, Mr. Oldham was employed by Dorchester Gas Corporation from 1976 to
1979 and KPMG Peat Marwick LLP during 1975 to 1976. He received a Bachelor of
Business Administration degree from West Texas State University in 1975. Mr.
Oldham is a member of the Permian Basin Landman's Association.
Eric A. Bayley, age 54, has been Vice President of Engineering and
Production of Parallel since July, 2001. From October, 1993 until July, 2001,
Mr. Bayley was employed as Manager of Engineering. From June, 1990 to October,
1993, Mr. Bayley was an independent consulting engineer and devoted
substantially all of his time to Parallel. Mr. Bayley graduated from Texas A&M
University in 1978 with a Bachelor of Science degree in Petroleum Engineering.
He graduated from the University of Texas of the Permian Basin in 1984 with a
Master's of Business Administration degree.
John S. Rutherford, age 43, has been Vice President of Land and
Administration of Parallel since July, 2001. From October, 1993 until July,
2001, Mr. Rutherford was employed as Manager of Land/Administration. From May,
1991 to October, 1993, Mr. Rutherford served as a consultant to Parallel,
devoting substantially all of his time to Parallel's business. Mr. Rutherford
graduated from Oral Roberts University in 1982 with a degree in Education, and
in 1986 he graduated from Baylor University with a Master's degree in Business
Administration.
Donald E. Tiffin, age 45, has been Vice President of Business
Development since June, 2002. From August, 1999 until May, 2002, Mr. Tiffin
served as General Manager of First Permian, L.P. From July, 1993 to July, 1999,
Mr. Tiffin was the Drilling and Production Manager in the Midland, Texas office
of Fina Oil and Chemical Company. Mr. Tiffin graduated from the University of
Oklahoma in 1979 with a Bachelor of Science degree in Petroleum Engineering.
Steven D. Foster, age 47, has been the Chief Financial Officer of
Parallel since June, 2002. From November, 2000 to May, 2002, Mr. Foster was the
Controller and Assistant Secretary of First Permian, L.P. From September, 1997
to November 2000, he was employed by Pioneer Natural Resources, USA in the
capacities of Director of Revenue Accounting and Manager of Joint Interest
Accounting. Mr. Foster graduated from Texas Tech University in 1977 with a
Bachelor of Business Administration degree in accounting. He is a certified
public accountant.
The term of our officers expires at Parallel's annual meeting of
Directors or when their respective successors are duly elected and qualified.
There are no family relationships among our executive officers.
Parallel is the beneficiary of a $1.0 million key-man life insurance
policy on the life of Mr. Cambridge and a $5.0 million key-man life insurance
policy on the life of Mr. Oldham.
-14-
Employees
Since June, 2002, we have added 10 new employees, almost tripling the
size of our staff. Eight of the new employees previously worked for First
Permian, L.P.,where they were involved in the enhancement, exploitation, infill
drilling and the eventual sale of First Permian's oil and gas properties. Since
joining Parallel, these new employees have assisted us in the implementation of
our revised business plan by adding operational, engineering and financial
management of our activities. We utilize the collective experience, expertise
and techniques of the new employee group primarily in the areas of acquisitions,
enhancements, waterfloods and divestitures. By utilizing an interdisciplinary
team approach, we believe we can maximize the identification and quantification
of opportunities and reduce risk through the application of complementary
experience, know-how and technology.
At March 15, 2003, Parallel had 17 full time employees. Mr. Cambridge
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 5 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,
2002.
Exploratory Wells (1) Development Wells (2)
--------------------------------------- --------------------------------------
Productive Dry Productive Dry
Year Ended ---------------- --------------- ----------------- ---------------
December 31, Gross Net Gross Net Gross Net Gross Net
- ------------- ------ ----- ------ ----- ----- ----- ------- -----
2002 12.0 3.10 3.0 .70 4.0 2.30 - -
2001 18.0 4.10 13.0 3.41 - - - -
2000 20.0 3.40 7.0 1.22 3.0 .56 2.0 .45
- ------------------------
(1) An exploratory well is a well drilled to find and produce oil or gas in an
unproved area, tofind a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known
reservoir.
(2) A development well is a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be
productive.
All of our drilling is performed on a contract basis by third-party
drilling contractors. We do not own any drilling equipment.
-15-
At March 3, 2003, we were participating in the completion of 4 gross
(1.61 net) gas wells in Jackson, Liberty and Scurry Counties, Texas. At that
same date, 2 gross (.5 net) gas wells in Jackson County, Texas were waiting on
completion.
Volumes, Prices and Lifting Costs
The following table shows certain information about our production,
including the volumes of oil and gas 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, 2002.
Year Ended December 31,
---------------------------------------------
2002 2001 2000
------------ ---------- -----------
Net Production:
Oil (Bbls) 130,810 138,243 165,137
Gas (Mcf) 2,669,983 3,266,350 2,821,815
EBO(1) 575,807 682,635 635,440
Average Sales Price:
Oil (per Bbl) $ 24.59 $ 24.80 $ 28.88
Gas (per Mcf) $ 3.33 $ 4.41 $ 4.38
EBO $ 21.03 $ 26.13 $ 26.96
Average Production
(Lifting) Cost per EBO $ 5.00 $ 5.74 $ 4.88
Operating Margin
per EBO(2) $ 16.03 $ 20.39 $ 22.08
Depletion per EBO $ 10.52 $ 9.13 $ 8.18
- ----------------------
(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.
Our gas sales in 2002 represented approximately 73% of our combined oil
and gas sales for the year ended December 31, 2002, as compared to 81% in 2001.
Markets and Customers
Our oil and gas production is sold at the well site on an as produced
basis at market- related prices in the areas where the producing properties are
located. We do not refine or process any of the oil or natural gas we produce
and all of our production is sold to unaffiliated purchasers on a month-to-month
basis.
-16-
In the table below, we show the purchasers that accounted for 10% or
more of our revenues during the specified years.
2002 2001 2000
-------- --------- ----------
Allegro Investments, Inc. 31% 38% 22%
Cox & Perkins Exploration, Inc. 3% 6% 6%
Pure Resources, Inc. 16% 23% 16%
Sue Ann Production 11% 25% -
We do not believe the loss of any one of our purchasers would
materially affect our ability to sell the oil and gas we produce. Other
purchasers are available in our areas of operations.
Our future ability to market our oil and gas production depends upon
the availability and capacity of gas gathering systems and pipelines and other
transportation facilities. We do not currently own or operate our own pipelines
or transportation facilities. We are dependent on third parties to transport our
products.
We are not obligated to provide a fixed and determinable quantity of
oil or natural gas under any existing arrangements or contracts.
Our business does not require us to maintain a backlog of products,
customer orders or inventory.
Office Facilities
In November, 2002, we relocated our corporate headquarters. Our current
headquarters consist of approximately 14,120 square feet of leased space in
Midland, Texas. Our current rental rate is $8,531 per month. The lease expires
August 31, 2006. Although we are still leasing our former office space at a
rental rate of $4,489 per month, we are actively attempting to sublease the
space. The lease agreement covering our former offices will expire by its own
terms on May 31, 2004.
Competition
The oil and gas 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 oil and gas
properties are the amount and terms of the consideration offered. Our
competitors include major oil companies, independent oil and gas firms and
individual producers and operators. Many of our competitors have financial
resources, staffs and facilities much larger than ours.
We are also affected by competition for drilling rigs and the
availability of related equipment. With relatively high oil and gas prices, the
oil and gas industry typically experiences shortages of drilling rigs,
equipment, pipe and qualified field personnel. We are unable to predict when or
to what extent our exploration and development activities will be affected by
rig, equipment or personnel shortages.
-17-
Intense competition among independent oil and gas producers requires us
to react quickly to available exploration and acquisition opportunities. We try
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 can respond quickly to exploration and
acquisition opportunities.
The principal resources we need for acquiring, exploring, developing,
producing and selling oil and gas are:
. leasehold prospects under which oil and gas reserves may be
discovered;
. drilling rigs and related equipment to explore for such reserves;
and
. knowledgeable and experienced personnel to conduct all phases of
oil and gas operations.
Oil and Gas Regulations
Our operations are regulated by certain federal and state agencies. Oil
and gas production and related operations are or have been subject to:
. price controls;
. taxes; and
. environmental and other laws relating to the oil and gas
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 interpretations or new laws and
regulations may have on our business, financial condition or results of
operations.
Our oil and gas 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 oil and gas
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 compliance with these laws.
Texas and many other states require drilling permits, bonds and
operating reports. Other requirements relating to the exploration and production
of oil and gas are also imposed. These states also have statutes or regulations
addressing conservation matters, including provisions for:
. the unitization or pooling of oil and gas properties;
. the establishment of maximum rates of production from oil and gas
wells; and
-18-
. the regulation of spacing, plugging and abandonment of wells.
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
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 oil and gas 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;
-19-
. 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 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 oil and gas 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, 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
-20-
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.
. 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 a current owner or
operator. We currently own or lease numerous properties that for many years have
been used for exploring and producing oil and gas. 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.
-21-
Risk Factors
Declining oil and gas prices may cause us to record ceiling test write-downs.
We use the full cost method of accounting to account for our oil and
gas operations. This means that we capitalize the costs to acquire, explore for
and develop oil and gas properties. Under full cost accounting rules, the
capitalized costs of oil and gas properties may not exceed a ceiling limit,
which is based on the present value of estimated future net revenues, net of
income tax effects, from proved reserves, discounted at 10%, plus the lower of
cost or fair market value of unproved properties. These rules generally require
pricing future oil and gas production at unescalated oil and gas prices in
effect at the end of each fiscal quarter. If capitalized costs of oil and gas
properties exceed the ceiling limit, we must charge the amount of the excess
against earnings. This is called a ceiling test write-down. This non-cash
impairment charge does not affect cash flow from operating activities, but it
does reduce stockholders' equity. Impairment charges can't be restored by
subsequent increases in the prices of oil and gas.
The risk that we will be required to write down the carrying value of
our oil and gas properties increases when oil and gas prices decline. In
addition, write-downs may occur if we experience substantial downward
adjustments to our estimated proved reserves.
During the fiscal quarter ended September 30, 2001, we recognized a
non-cash impairment charge of $2,177,128 related to our oil and gas reserves and
unproved properties. This impairment of oil and gas assets was primarily the
result of the effect of significantly lower oil and gas prices on both proved
and unproved oil and gas properties. During the fourth quarter of 2001, we
recognized an additional non-cash impairment charge of $14,642,685 related to
our oil and gas reserves and unproved properties. This impairment of our oil and
gas assets was also primarily attributable to lower oil and gas prices at year
end. We did not recognize an impairment in 2002. We cannot assure you that we
will not experience ceiling test write-downs in the future.
We are subject to many restrictions under our credit facility.
As required by our credit agreement with our bank lenders, we have
pledged substantially all of our oil and gas properties as collateral to secure
the payment of our loans. The credit agreement restricts our ability to obtain
additional financing, make investments, lease equipment, sell assets and engage
in business combinations. We are also required to comply with certain financial
covenants and maintain certain financial ratios. The credit agreement prohibits
us from declaring or paying dividends on our common stock, but we are permitted
to pay dividends on our outstanding shares of 6% convertible preferred stock if
we are not in default under the credit agreement. Although we are currently in
compliance with the loan covenants, in the past we have had to request waivers
from our banks because of our non-compliance with certain financial covenants
and ratios. Our ability to comply in the future with these restrictions and
covenants is uncertain and will be affected by the levels of cash flow from our
operations and events or circumstances beyond our control. Our failure to comply
with any of the restrictions and covenants under the credit agreement could
result in a default under the credit agreement, which could cause all of our
existing indebtedness to be immediately due and payable.
-22-
The credit agreement limits the amounts we can borrow to a borrowing
base amount, determined by the lenders in their sole discretion, based upon
projected revenues from the oil and gas properties securing our loan. The
Lenders can unilaterally adjust the borrowing base and the borrowings permitted
to be outstanding under the credit agreement. Any increase in the borrowing base
requires the consent of all lenders. If all lenders do not agree on an increase,
then the borrowing base will be the lowest borrowing base determined by each
lender. Outstanding borrowings in excess of the borrowing base must be repaid
immediately, or we must pledge other oil and gas properties as additional
collateral. We do not currently have any substantial unpledged properties and no
assurance can be given that we would be able to make any mandatory principal
prepayments required under the credit agreement.
Our producing properties are concentrated.
All of our producing properties are located in the State of Texas. At
December 31, 2002, approximately 69% of the discounted present value of our
proved reserves was attributable to our Fullerton properties; 18% to our other
Permian Basin properties; 8% to our properties in the onshore Gulf Coast area of
south Texas; and the remaining 5% to our properties in east Texas.
The occurrence of mechanical problems, adverse weather conditions, or
other events that cause curtailment or cessation of production from wells in
which we own an interest could have a material adverse effect on us. We will
remain vulnerable to a disproportionate impact of delays or interruptions of
production from these wells until we develop a more diversified production base.
Any material harm to the current producing reservoirs or any
significant governmental regulation with respect to these wells, including any
curtailment of production or interruption of transportation of oil or gas
produced from the wells could have a material adverse effect on our liquidity
and results of operations.
Our price risk management transactions create a risk of financial loss.
In order to manage our exposure to price risks in the marketing of our
oil and natural gas, we have in the past and expect to continue to enter into
oil and natural gas price risk management arrangements with respect to a portion
of our expected production. While intended to reduce the effects of volatility
of the price of oil and natural gas, these transactions may limit potential
gains if oil and natural gas prices rise over the price established by the
arrangement. In addition, these transactions may expose us to the risk of
financial loss in certain circumstances, including instances in which:
. production is less than expected;
. there is a widening of price differentials between delivery
points for our production and the delivery point assumed in the
arrangement;
. the counterparties to our future contracts fail to perform under
the contract; or
. a sudden, unexpected event materially impacts oil or natural gas
prices.
-23-
Terrorist activities may adversely affect our business.
Terrorist activities, including events of a nature similar to
September 11, and armed conflict involving the United States may adversely
affect our business activities and financial condition. If events of this nature
occur and persist, the attendant political and social instability and disruption
could reduce overall demand for oil and natural gas, potentially putting
downward pressure on prevaiing oil and gas prices and causing a reduction in our
revenues. Natural gas and oil production facilities, transportation systems and
storage facilities could be direct targets of terrorist attacks, and our
operations could be adversely impacted if infrastructure integral to our
operations is destroyed or damaged. Costs for insurance and other security may
increase as a result of these threats, and some insurance coverage may become
more difficult to obtain, if available at all.
We do not control all operations and development.
Substantially all of our business activities are conducted through
joint operating agreements under which we own partial interests in oil and gas
wells.
At December 31, 2002, we owned interests in 109 gross (100.9 net) oil
and gas wells for which we were the operator and 478 gross (194.5 net) oil and
gas wells where we were not the operator.
If we do not operate wells in which we own an interest, we do not have
control over normal operating procedures, expenditures or future development of
underlying properties.
Since we do not have a majority interest in most wells we do not
operate, we may not be in a position to remove the operator in the event of poor
performance.
We are highly dependent upon key personnel and a small management team.
Our success is highly dependent upon the services, efforts and
abilities of Thomas R. Cambridge, the Chairman of the Board of Directors and
Chief Executive Officer of our company, and Larry C. Oldham, the President and a
Director of our company. Our operations could be materially and adversely
affected if Mr. Cambridge or Mr. Oldham become unavailable for any reason.
We believe that our operations are dependent to some degree upon the
availability of outside advisors and consultants, including geophysicists who
provide 3-D seismic survey expertise.
We do not have employment agreements or long term contractual
arrangements with any of our officers, employees or consultants. In periods of
improving market conditions, our ability to obtain and retain qualified
consultants on a timely basis may be adversely affected.
Parallel is the owner and beneficiary of life insurance policies on the
lives of Mr. Cambridge and Mr. Oldham in the amounts of $1 million and $5
million, respectively.
-24-
Our future growth and profitability will also be dependent upon our
ability to attract and retain other qualified management personnel and to
effectively manage our growth. There can be no assurance that we will be
successful in doing so.
The oil and gas industry is capital intensive.
The oil and gas industry is capital intensive. We make substantial
capital expenditures for the acquisition, exploration for and development of oil
and gas reserves.
Historically, we have financed capital expenditures primarily with cash
generated by operations, proceeds from bank borrowings and sales of equity
securities. In addition, we may consider selling non-core assets to raise
additional operating capital. From time to time, we may also reduce our
ownership interests in 3-D seismic and other projects in order to reduce our
capital expenditure requirements, depending on our working capital needs.
Our cash flow from operations and access to capital are subject to a
number of variables, including:
. our proved reserves;
. the level of oil and gas we are able to produce from exiting
wells;
. the prices at which oil and gas are sold; and
. our ability to acquire, locate and produce new reserves.
Any one of these variables can materially affect the borrowing base
availability under our revolving credit facility with our bank lender.
If our revenues or the borrowing base under our loan agreement decrease
as a result of lower oil and gas prices, operating difficulties, declines in
reserves or for any other reason, we may have limited ability to obtain the
capital necessary to undertake or complete future drilling projects.
We may, from time to time, seek additional financing, either in the
form of increased bank borrowings, sales of debt or equity securities or other
forms of financing. We do not have any agreements at the present time for any
additional financing and there can be no assurance as to the availability or
terms of any additional financing.
We don't pay dividends on our common stock.
We have never paid dividends on our common stock, and do not intend to
pay cash dividends on the common stock in the foreseeable future. Net income
from our operations, if any, will be used for the development of our business,
including capital expenditures, to retire debt and to pay dividends on our
outstanding shares of preferred stock. Any decision to pay dividends on the
common stock in the future will depend upon our profitability at that time, the
available cash and other factors. Our ability to pay dividends on our common
stock is further limited by the terms of our loan agreement and the terms of our
preferred stock.
-25-
Changes in control may be discouraged.
Our certificate of incorporation, our bylaws and the Delaware General
Corporation Law contain provisions that may discourage other persons from
initiating a tender offer or takeover attempt that a stockholder might consider
to be in the best interests of all stockholders, including takeover attempts
that might result in a premium to be paid over the market price of our stock.
On October 5, 2000, our Board of Directors adopted a stockholder rights
plan. The plan is designed to protect Parallel from unfair or coercive takeover
attempts and to prevent a potential acquiror from gaining control of Parallel
without fairly compensating all of the stockholders. The plan authorized 50,000
shares of $0.10 par Series A Preferred Stock Purchase Rights. A dividend of one
Right for each share of our outstanding common stock was distributed to
stockholders of record at the close of business on October 16, 2000. If a public
announcement is made that a person has acquired 15% or more of Parallel's common
stock or a tender or exchange offer is made for 15% of more of the common stock,
each Right entitles the holder to purchase from the company one one-thousandth
of a share of Series A Preferred Stock, at an exercise price of $26.00 per one
one-thousandth of a share, subject to adjustment. In addition, under certain
circumstances, the rights entitle the holders to buy Parallel's stock at a 50%
discount. See Notes 4 and 10 to Financial Statements, on pages F-11 and F-17,
respectively, for additional information.
We are authorized to issue 10,000,000 shares of preferred stock,
974,500 shares of which are outstanding. Our Board of Directors has total
discretion in the issuance and the determination of the rights and privileges of
any shares of preferred stock which might be issued in the future, which rights
and privileges may be detrimental to the holders of the common stock. It is not
possible to state the actual effect of the authorization and issuance of a new
series of preferred stock upon the rights of holders of the common stock and
other series of preferred stock unless and until the Board of Directors
determines the attributes of any new series of preferred stock and the specific
rights of its holders. These effects might include:
. restrictions on dividends on common stock and other series of
preferred stock if dividends on any new series of preferred stock
have not been paid;
. dilution of the voting power of common stock and other series of
preferred stock to the extent that a new series of preferred
stock has voting rights, or to the extent that any new series of
preferred stock is convertible into common stock;
. dilution of the equity interest of common stock and other series
of preferred stock; and
. limitation on the right of holders of common stock and other
series of preferred stock to share in Parallel's assets upon
liquidation until satisfaction of any liquidation preference
attributable to any new series of preferred stock.
The issuance of preferred stock in the future could discourage, delay
or prevent a tender offer, proxy contest or other similar transaction involving
a potential change in control of Parallel that might be viewed favorably by
stockholders.
-26-
We may not be able to obtain adequate financing.
We may need additional financing to fund our exploration and
development activities and for future acquisitions. Any financing we do receive
may increase our debt or dilute your ownership in Parallel. We may need to incur
additional debt or issue equity in order to make any capital expenditure or
acquisition. We cannot assure you that financing will be available to us on
acceptable terms or at all. Our ability to make payments on and to refinance our
indebtedness, including future indebtedness, and to fund capital expenditures
and acquisitions will depend on our ability to generate cash in the future. Our
ability to generate cash is subject to general economic, financial, competitive
and other factors that are beyond our control. Furthermore, if we raise funds
through the issuance of debt or equity securities, the securities issued may
have rights and preferences and privileges senior to those of holders of our
common stock, and the terms of the securities may impose restrictions on our
operations or dilute your ownership in Parallel.
Hedging activities create a risk of financial loss.
From time to time, we reduce our exposure to the volatility of oil and
gas prices by hedging a portion of our production. In a typical hedge
transaction, the hedging party will have the right to receive from the
counterparty to the hedge, the excess of the fixed price specified in the hedge
over a floating price based on a market index, multiplied by the quantity
hedged. If the floating price exceeds the fixed price, the hedging party is
required to pay the counterparty this difference multiplied by the quantity
hedged. In this case, if we are the hedging party, we would be required to pay
the difference regardless of whether we had sufficient production to cover the
quantities specified in the hedge. Significant reductions in production at times
when the floating price exceeds the fixed price could require us to make
payments under the hedge agreements even though the payments are not offset by
sales of production. Hedging will also prevent us from receiving the full
advantage of increases in oil or gas prices above the fixed amount specified in
the hedge. In addition, hedging activities may expose us to financial loss if
counterparties to our contracts fail to perform or if our production is less
than expected.
-27-
- --------------------------------------------------------------------------------
ITEM 2. PROPERTIES
- --------------------------------------------------------------------------------
General
Our principal properties consist of developed and undeveloped oil and
gas leases and the reserves associated with these leases. Generally, developed
oil and gas leases remain in force so long as production is maintained.
Undeveloped oil and gas leaseholds are generally for a primary term of five or
ten years. In most cases, we can extend the term of our undeveloped leases by
paying delay rentals or by producing reserves that we discover under our leases.
Producing Wells and Acreage
We have presented the following table to provide you with a summary of
the producing oil and gas wells and the developed and undeveloped acreage in
which we owned an interest at December 31, 2002. We have not included in the
table acreage in which our interest is limited to options to acquire leasehold
interests, royalty or similar interests.
Producing Wells Acreage
--------------------------------------------- --------------------------------------------
Oil Gas Developed Undeveloped
------------------ ----------------- ----------------- ------------------
Gross Net (1) Gross Net (1) Gross Net (2) Gross Net (2)
----- ------- ----- ------- ----- ------- ----- -------
Texas 487 260.5 100 35.00 63,717 37,790 11,384 9,312
Utah - - - - - - 504 504
----- ----- ----- ------ ------ ------ ------ -----
Total 487 260.5 100 35.00 63,717 37,790 11,888 9,816
===== ===== ===== ====== ====== ======= ====== =====
- ---------------------------
(1) Net wells are computed by multiplying the number of gross wells by our
working interest in the gross wells.
(2) Net acres are computed by multiplying the number of gross acres by our
working interest in the gross acres.
At December 31, 2002, we were operating 109 gross wells in which we
also owned interests. Approximately 15% of the discounted present value of
our proved oil and gas reserves at December 31, 2002 is attributable to
wells operated by us. As operator, we supervise the drilling, completion and
production of wells and the further development of surrounding properties.
-28-
The operator of a well has significant control over its location
and the timing of its drilling. In addition, the operator receives fees
from other working interest owners as reimbursement for general and
administrative expenses for operating the wells.
Except for our oil and gas leases, we do not own any patents, licenses,
franchises or concessions which are significant to our oil and gas operations.
Title to Properties
As is customary in the oil and gas industry, we make only a cursory
review of title to undeveloped oil and gas leases at the time they are
acquired. These cursory title reviews, while consistent with industry practices,
are necessarily incomplete. We believe that it is not economically feasible to
review in depth every individual property we acquire, especially in the case of
producing property acquisitions covering a large number of leases. Ordinarily,
when we acquire producing properties, we focus our review efforts on properties
believed to have higher values and will sample the remainder. However, even an
in-depth review of all properties and records may not necessarily reveal
existing or potential defects nor will it permit a buyer to become sufficiently
familiar with the properties to assess fully their deficiencies and
capabilities. In the case of producing property acquisitions, inspections may
not always be performed on every well, and environmental problems, such as
ground water contamination, are not necessarily observable even when an
inspection is undertaken. In the case of undeveloped leases or prospects we
acquire, before any drilling commences, we will usually cause a more thorough
title search to be conducted, and any material defects in title that are found
as a result of the title search are generally remedied before drilling a well on
the lease commences. We believe that we have good title to our oil and gas
properties, some of which are subject to immaterial encumbrances, easements and
restrictions. The oil and gas properties we own are also typically subject to
royalty and other similar non-cost bearing interests customary in the industry.
We do not believe that any of these encumbrances or burdens will materially
affect our ownership or the use of our properties.
Oil and Gas Reserves
For the year ended December 31, 2002, our oil and gas reserves in the
Fullerton properties were estimated by Cawley Gillespie & Associates, Inc.
Fort Worth, Texas, and our oil and gas reserves in all other properties
were estimated by Williamson Petroleum Consultants, Inc., Midland, Texas
At December 31, 2002, our total estimated proved reserves were
approximately 10.27 million Bbls of oil and 15.63 Bcf of gas, or 12.88 million
EBOs.
The information in this table provides you with certain information
regarding the proved reserves attributable to our Fullerton properties, as
estimated by Cawley Gillespie & Associates, Inc., at December 31, 2002.
-29-
Proved Proved
Developed Undeveloped Total
------------- ------------ --------------
Oil (Bbls)..................................................... 7,513,351 1,605,891 9,119,242
Gas (Mcf)...................................................... 1,609,718 321,178 1,930,896
Future Net Revenues (before income taxes) ..................... $ 149,944,668 $ 32,893,238 $182,837,906
Present Value of Future Net Revenues
(before income taxes)........................................ $ 73,299,428 $ 11,775,939 $ 85,075,367
The information in the table below provides you with certain
information regarding our proved reserves, excluding the Fullerton properties,
as estimated by Williamson Petroleum Consultants, Inc. at December 31, 2002.
Proved Proved
Developed Undeveloped Total
------------- ------------ --------------
Oil (Bbls)..................................................... 749,612 402,156 1,151,768
Gas (Mcf)...................................................... 9,592,410 4,109,360 13,701,770
Future Net Revenues (before income taxes) ..................... $ 40,949,174 $ 16,016,287 $ 56,965,461
Present Value of Future Net Revenues
(before income taxes)....................................... $ 30,382,653 $ 7,476,296 $ 37,858,949
In accordance with applicable SEC requirements, estimates of our proved
reserves and future net revenues are made using sales prices and costs,
estimated to be in effect as of the date of such reserve estimates, that are
held constant throughout the life of the properties, except to the extent a
contract specifically provides for escalation. The average realized prices for
our reserves as of December 31, 2002 were $29.21 per Bbl of oil and $4.40 per
Mcf of natural gas.
For additional information concerning our estimated proved oil and gas
reserves, you should read Note 19 to the Financial Statements. See also Item 8 -
Financial Statements and Supplementary Data on page 56 of this report.
The reserve data in this report represent estimates only. Reservoir
engineering is a subjective process. There are numerous uncertainties inherent
in estimating our oil and natural gas reserves and their estimated values. Many
factors are beyond our control. Estimating underground accum ulations of oil and
natural gas cannot be measured in an exact manner. The accuracy of any reserve
estimate is a function of the quality of available data, engineering and
geological interpretation and judgment and the costs we actually incur in the
development of our reserves. As a result, estimates of different engineers often
vary. In addition, estimates of reserves are subject to revision by the results
of drilling, testing and production after the date of the estimates.
Consequently, reserve estimates are often different from the quantities of oil
and natural gas that are ultimately recovered. The meaningfulness of estimates
is highly dependent upon the accuracy of the assumptions upon which they were
based.
-30-
The volume of production from oil and natural gas properties declines
as reserves are produced and depleted. Unless we acquire properties containing
proved reserves or conduct successful drilling activities, our proved reserves
will decline as we produce our existing reserves. Our future oil and natural gas
production is highly dependent upon our level of success in acquiring or finding
additional reserves.
We do not have any gas or oil reserves outside the United States. Our
oil and gas reserves and production are not subject to any long term supply or
similar agreements with foreign governments or authorities.
Other than estimated reserve volumes we file with the U.S. Department
of Energy, our estimated reserves have not been filed with or included in
reports to any federal agency other than the SEC.
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
At March 1, 2003, we were involved in one lawsuit incidental to our
business. In the opinion of management, the ultimate outcome of this lawsuit
will not have a material adverse effect on Parallel. We are not aware of any
other threatened litigation. We have not been a party to any bankruptcy,
receivership, reorganization, adjustment or similar proceeding.
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
We did not submit any matter to a vote of our stockholders during the
fourth quarter of 2002.
-31-
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
Our common stock trades on the Nasdaq National Market under the symbol
PLLL. The following table shows, for the periods indicated, the high and low
closing sales prices for the common stock as reported by Nasdaq.
Price Per Share
-----------------------------
High Low
-------- ---------
2000
First quarter $ 4.19 $ 1.59
Second quarter $ 3.00 $ 1.75
Third quarter $ 4.69 $ 2.56
Fourth quarter $ 4.69 $ 3.00
2001
First quarter $ 4.93 $ 3.50
Second quarter $ 5.57 $ 4.20
Third quarter $ 4.18 $ 2.95
Fourth quarter $ 4.20 $ 2.77
2002
First quarter $ 4.38 $ 3.08
Second quarter $ 3.41 $ 2.60
Third quarter $ 2.95 $ 2.15
Fourth quarter $ 2.91 $ 2.03
The last sale price of our common stock on March 14, 2003 was $2.95 per
share, as reported on the Nasdaq National Market.
As of March 14, 2003, there were approximately 1,926 stockholders of
record.
Dividends
We have not paid, and do not intend to pay in the foreseeable future,
cash dividends on our common stock. The revolving credit facility we have with
our bank lenders prohibits the
-32-
payment of dividends on the common stock. Our 6% convertible preferred stock
also contains provisions that restrict us from paying dividends or making
distributions on our common stock if all dividends on the preferred stock have
not been paid in full. Any dividends on our preferred stock that are not
declared and paid will accumulate. All accumulated dividends must be paid in
full before dividends may be paid to holders of common stock. The credit
facility allows us to pay dividends on our outstanding shares of preferred
stock as long as we are not in default under the terms of the credit facility.
The holders of the preferred stock are entitled, as and when declared
by the Board of Directors, to receive an annual dividend of $.60 per share,
payable semi-annually on June 15 and December 15 of each year. See Risk Factors
on page 22 and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Capital Resources and Liquidity " on page 45.
Equity Compensation Plans
At December 31, 2002, a total of 2,896,250 shares of common stock were
authorized for issuance under our equity compensation plans. In the table below,
we describe certain information about these shares and the equity compensation
plans which provide for their authorization and issuance. You can find
additional information about our stock option plans beginning on page 61 of this
report.
Equity Compensation Plan Information
- ---------------------------------------------------------------------------------------------- ---------------------------
(a) (b) (c)
- -------------------------------- ------------------------------ ------------------------------ ---------------------------
Plan category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and rights future issuance under
warrants and rights equity compensation plans
(excluding securities
reflected in column (a))
- -------------------------------- ------------------------------ ------------------------------ ---------------------------
Equity compensation plans
approved by security holders 2,038,750 $3.66 282,500
- -------------------------------- ------------------------------ ------------------------------ ---------------------------
Equity compensation plans not
approved by security holders 575,000(1) $3.82 0
- -------------------------------- ------------------------------ ------------------------------ ---------------------------
Total 2,613,750 $3.70 282,500
- -------------------------------- ------------------------------ ------------------------------ ---------------------------
(1) These shares include an aggregate of 200,000 shares of common stock
underlying stock options granted in June 2001 to non-officer employees
pursuant to Parallel's Employee Stock Option Plan; 275,000 shares of common
stock underlying a stock purchase warrant we issued to an investment
banking firm in November, 2001; and 100,000 shares of common stock
underlying a stock option granted to Mr. Cambridge in 1993, which expires
in October, 2003.
-33-
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
In the table below, we provide you with selected historical financial
data. We have prepared this information using the audited financial statements
of Parallel for the five-year period ended December 31, 2002. It is important
that you read this data along with our financial statements and related notes,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 below. The selected financial data provided are not
necessarily indicative of our future results of operations or financial
performance.
Year Ended December 31
-------------------------------------------------------------------------------------------------
2002(1) 2001(2) 2000 1999(3) 1998(4)
----------------- ------------------ ----------------- ----------------- --------------------
Operating revenues $ 12,106,568 $ 17,840,024 $ 17,134,502 $ 8,974,041 $ 9,001,582
Operating expenses $ 11,250,458 $ 28,405,212 $ 9,530,266 $ 10,173,995 $ 24,056,923
Net Income (loss) $ 18,701,448 $ (4,707,575) $ 5,977,328 $ (2,450,457) $ (12,995,910)
Cumulative preferred stock
dividend $ (584,700) $ (584,700) $ (584,700) $ (584,700) $ (276,712)
Net income (loss) available to
common stockholders $ 18,116,748 $ (5,292,275) $ 5,392,628 $ (3,035,157) $ (13,272,622)
Net income (loss) per common
share
Basic $ 0.88 $ (0.26) $ 0.26 $ (0.16) $ (0.73)
Diluted $ 0.79 $ (0.26) $ 0.25 $ (0.16) $ (0.73)
Cash dividends - common stock - - - - -
Weighted average common stock
and common stock equivalents
outstanding
Basic 20,698,339 20,457,697 20,331,858 18,549,214 18,300,998
Diluted 23,567,210 20,457,697 23,465,492 18,549,214 18,300,998
Present value of proved oil and
gas reserves discounted at 10%
(before estimated federal
income taxes) $122,934,316 $ 17,074,502 $ 90,950,591 $ 25,498,996 $ 26,822,980
Working capital $ 8,539,383 $ (586,841) $ 2,760,837 $ (71,647) $ 128,813
Total assets $102,351,331 $ 41,759,903 $ 46,456,437 $ 43,264,070 $ 46,564,782
Total liabilities $ 56,851,187 $ 15,446,370 $ 15,288,069 $ 17,463,967 $ 20,839,642
Long-term debt, less
current maturities $ 45,604,167 $ 9,600,000 $ 11,624,000 $ 12,300,000 $ 18,035,889
Total stockholders' equity $ 45,500,144 $ 26,313,533 $ 31,168,368 $ 25,800,103 $ 25,725,140
(1) Results include a $31,044,452 gain attributable to equity in income of
First Permian, L.P. See Note 16 to the Financial Statements. Results also
include noncash charges of $717,034 on the sale of Energen stock, $508,721
for the change in fair value of derivatives and $439,574 for the change in
fair market value of our crude oil swaps.
-34-
(2) Results include noncash charges of $2,177, 128 in the fiscal quarter ended
September 30, 2001 and $14,642,685 in the fourth quarter ended December 31,
2001, in each case related to the impairment of oil and gas properties
incurred in 2001 and primarily a result of a decrease in year-end reserves
and lower oil and gas prices.
(3) Results include a non-cash charge of $1,705,000 related to the impairment
of oil and gas properties incurred in the fourth quarter of 1999, primarily
a result of a decrease in year-end reserves.
(4) Results include a non-cash charge of $14,757,028 related to the impairment
of oil and gas properties incurred in the fourth quarter of 1998, primarily
a result of low oil and gas prices at year-end.
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following discussion is intended to assist you in understanding our
financial position and results of operations for each year in the three-year
period ended December 31, 2002. You should read the following discussion and
analysis in conjunction with our financial statements and the related notes.
The following discussion contains forward-looking statements. For a
description of limitations inherent in forward-looking statements, see
"Cautionary Statement Regarding Forward-Looking Statements" on page (ii).
General
Since 1992, our primary focus has been exploratory drilling using 3-D
seismic technology. However, we described on page 3 of this report, we revised
our business plan last year. Generally, our revised business plan places less
emphasis on high risk exploration efforts. We now emphasize reducing drilling
risks by dedicating a smaller portion of our capital to high risk projects,
while reserving the majority of our available capital for exploitation,
enhancement and development drilling opportunities. Obtaining positions in
long-lived oil and gas reserves is given priority over properties that might
provide more cash flow in the early years of production, but which have shorter
reserve lives. Our risk reduction efforts also include emphasizing acquisition
possibilities over high risk exploration projects. Although we anticipate
participating in exploratory drilling activities in the future, reducing
financial, reservoir, drilling and geological risks and diversifying our
property portfolio are important criteria in the execution of our business plan.
In summary, our current business plan:
. focuses on projects having less geological risk;
. entails less exploratory activity in the down dip Wilcox trend of
our south Texas properties;
. emphasizes exploitation and enhancement activities;
. focuses on acquiring producing properties; and
. expands the scope of operations by diversifying our exploratory
and development efforts, both in and outside of our current areas
of operation.
-35-
Operating Performance
Our operating performance is influenced by several factors, the most
significant of which are the prices we receive for our oil and gas and our
production volumes. The world price for oil has overall influence on the prices
that we receive for our oil production. The prices received for different grades
of oil are based upon the world price for oil, which is then adjusted based upon
the particular grade. Typically, light oil is sold at a premium, while heavy
grades of crude are discounted. Gas prices we receive are influenced by:
. seasonal demand;
. weather;
. hurricane conditions in the Gulf of Mexico;
. availability of pipeline transportation to end users;
. proximity of our wells to major transportation pipeline
infrastructures; and
. to a lesser extent, world oil prices.
Additional factors influencing our overall operating performance
include:
. production expenses;
. overhead requirements; and
. costs of capital.
Our oil and gas exploration, development and acquisition activities
require substantial and continuing capital expenditures. Historically, the
sources of financing to fund our capital expenditures have included:
. cash flow from operations,
. sales of our equity securities, and
. bank borrowings.
Depletion per EBO in 2002 was $10.52 versus $9.13 in 2001 and $8.18 in
2000. The increase per EBO in 2002 was a result of an increase of approximately
$4.0 million in the net oil and gas properties depletable base.
Our oil and gas producing activities are accounted for using the full
cost method of accounting. Under this accounting method, we capitalize all costs
incurred in connection with the acquisition of oil and gas properties and the
exploration for and development of oil and gas reserves. See Note 1 to the
Financial Statements. These costs include lease acquisition costs, geological
and geophysical expenditures, costs of drilling productive and non-productive
wells, and overhead expenses directly related to land acquisition and
exploration and development activities. Proceeds from the disposition of oil and
gas properties are accounted for as a reduction in capitalized costs, with no
gain or loss recognized unless a disposition involves a material change in
reserves, in which case the gain or loss is recognized.
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Depletion of the capitalized costs of oil and gas properties, including
estimated future development costs, is provided using the equivalent
unit-of-production method based upon estimates of proved oil and gas reserves
and production, which are converted to a common unit of measure based upon their
relative energy content. Unproved oil and gas properties are not amortized, but
are individually assessed for impairment. The cost of any impaired property is
transferred to the balance of oil and gas properties being depleted.
Results of Operations
Our business activities are characterized by frequent, and sometimes
significant, changes in our:
. reserve base;
. sources of production;
. product mix (gas versus oil volumes); and
. the prices we receive for our oil and gas production.
[The remainder of this page intentionally left blank.]
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Year-to-year or other periodic comparisons of the results of our
operations can be difficult and may not fully and accurately describe our
condition. The following table shows selected operating data for each of the
three years ended December 31, 2002.
Year Ended December 31,
---------------------------------------------------------
2002 2001(1) 2000
----------- --------- ----------
Production and Prices:
Oil (Bbls) 130,810 138,243 165,137
Natural Gas (Mcf) 2,669,983 3,266,350 2,821,815
EBO (Bbls) 575,807 682,635 635,440
Oil Price (per Bbl) $ 24.59 $ 24.80 $ 28.88
Gas Price (per Mcf) $ 3.33 $ 4.41 $ 4.38
Ratio of oil price to gas price 7.38/1 5.62/1 6.59/1
Increase (decrease) in production
volumes over prior year (16)% 7% 3%
Results of Operations per EBO:
Oil and gas revenues $ 21.03 $ 26.13 $ 26.96
Costs and expenses:
Production costs 5.00 5.74 4.88
General and administrative 3.74 1.97 1.88
Depreciation, depletion and amortization 10.80 9.26 8.25
Impairment of oil and gas properties - 24.64 -
------------ ----------- -----------
Total Costs and Expenses $ 19.54 $ 41.61 $ 15.01
------------ ----------- -----------
Operating income (loss) $ 1.49 $ (15.48) $ 11.95
Equity interest in earnings (loss)
of First Permian, L.P. 53.91 1.23 (0.79)
Incentive Awards (2.40) - -
Loss on marketable securities (1.25) - -
Change in fair value of derivatives (1.64) - -
Interest and other income .16 .35 .55
Dividend income .64 - -
Interest expense (1.04) (1.17) (2.11)
Other expense (.58) (.79) (.01)
------------ ----------- -----------
Pretax income (loss) per EBO $ 49.29 $ (15.86) $ 9.59
============ =========== ===========
(1) Results include noncash charges of $2,177,128 and $14,642,685 during the
third and fourth quarters, respectively, related to the impairment of oil
and gas properties incurred in 2001, primarily a result of a decrease in
year-end reserves and lower oil and gas prices.
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The following table shows the percentage of total revenues represented
by each item reflected on our statements of income (loss) for the periods
indicated.
Year Ended December 31,
-------------------------------------------
2002 2001(1) 2000
--------- --------- ----------
Oil and gas revenues 100.0% 100.0% 100.0%
Costs and expenses:
Production costs 23.8 21.9 18.1
General and administrative 17.8 7.5 6.9
Depreciation, depletion and amortization 51.4 35.4 30.6
Impairment of oil and gas properties - 94.3 -
------ ------ -----
Total costs and expenses 93.0 159.1 55.6
------ ------ -----
Operating income (loss) 7.0 (59.1) 44.4
------ ------ -----
Interest and other income .7 1.3 2.0
Dividend income 3.1 - -
Interest expense (5.0) (4.5) (7.8)
Other expense (2.7) (2.9) -
------ ------ -----
Total (3.9) (6.1) (5.8)
------ ------ -----
Equity in earnings (loss)
of First Permian, L.P. 256.4 4.7 (2.9)
Incentive awards (11.4) - -
Loss on marketable securities (5.9) - -
Change in fair value of derivatives (7.8) - -
------ ------ -----
Total 231.3 4.7 (2.9)
------ ------ -----
Pretax income (loss) 234.4 (60.5) 35.7
Income tax (expense) benefit (80.0) 34.3 (0.8)
------ ------ -----
Net income (loss) 154.4% (26.2)% 34.9%
====== ====== =====
- ---------------
(1) Results include noncash charges of $2,177,128 in the fiscal quarter ended
September 30, 2001 and $14,642,685 in the fourth quarter ended December 31,
2001, in each case related to the impairment of oil and gas properties
incurred in 2001 and primarily a result of a decrease in year-end reserves
and lower oil and gas prices.
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Critical Accounting Policies and Practices
Full Cost. We account for our oil and natural gas exploration and
development activities using the full cost method of accounting. Under this
method, all costs incurred in the acquisition, exploration and development of
oil and natural gas properties are capitalized. Costs of non-producing
properties, wells in process of being drilled and significant development
projects are excluded from depletion until such time as the related project is
developed and proved reserves are established or impairment is determined. At
the end of each quarter, the net capitalized costs of our oil and natural gas
properties is limited to the lower of unamortized cost or a ceiling.
Provision for depletion of oil and gas properties, under the full cost
method, is calculated 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. The cost of any impaired property is transferred to the
balance of oil and gas properties being depleted.
Our discounted present value of proved oil and natural gas reserves is
a major component of the ceiling calculation, and represents the component that
requires the most subjective judgments. Estimates of reserves are forecasts
based on engineering data, projected future rates of production and the timing
of future expenditures. The process of estimating oil and natural gas reserves
requires substantial judgment, resulting in imprecise determinations,
particularly for new discoveries. Different reserve engineers may make different
estimates of reserve quantities based on the same data. Our reserve estimates
are prepared by outside consultants.
The passage of time provides more qualitative information regarding
estimates of reserves, and revisions are made to prior estimates to reflect
updated information. However, there can be no assurance that more significant
revisions will not be necessary in the future. If future significant revisions
are necessary that reduce previously estimated reserve quantities, it could
result in a full cost ceiling writedown. In addition to the impact of these
estimates of proved reserves on calculation of the ceiling, estimates of proved
reserves are also a significant component of the calculation of depreciation,
depletion and amortization.
While the quantities of proved reserves require substantial judgment,
the associated prices of oil and natural gas reserves that are included in the
discounted present value of the reserves do not require judgment. The ceiling
calculation dictates that prices and costs in effect as of the last day of the
period are held constant indefinitely. Because the ceiling calculation dictates
that we use prices in effect as of the last day of the applicable quarter, the
resulting value is not indicative of the true fair value of the reserves. Oil
and natural gas prices have historically been cyclical and, on any particular
day at the end of a quarter, can be either substantially higher or lower than
prices we actually receive in the long-term, which are a barometer for true fair
value.
SFAS No. 133 and SFAS No. 138 require that all derivative instruments
be recorded on the balance sheet at their respective values. SFAS No. 133 and
SFAS No. 138 are effective for all fiscal quarters of all fiscal years beginning
after June 30, 2000. We adopted SFAS No. 133 and SFAS No. 138 on January 1,
2001. As of December 31, 2002, we utilized mark to market accounting for
derivatives and the changes in fair value are recognized currently in earnings
with a respective offset in the balance sheet.
-40-
Impairment of Assets. Under the full cost accounting rules, the
capitalized costs of oil and gas properties may not exceed a "ceiling limit",
which is based on the present value of estimated future net revenues, net of
income tax effects, from proved reserves, discounted at 10%, plus the lower of
cost or fair market value of unproved properties. If the net capitalized costs
of our oil and gas properties exceed the ceiling, we are subject to a ceiling
test write-down to the extent of the excess. A ceiling test write-down is a
non-cash charge to earnings. It reduces earnings and impacts stockholders'
equity in the period of occurrence and results in lower depreciation, depletion
and amortization expense in future periods.
The risk that we will be required to write down the carrying value of
oil and gas properties increases when oil and gas prices decline. If commodity
prices deteriorate, it is possible that we could incur an impairment in 2002.
Deferred Tax Asset. The deferred tax asset represents future tax
deductions, tax credits and carryforwards that are expected to be realized by
reducing future income tax expense. A valuation allowance is provided when it is
more likely than not that some portion of the deferred tax asset will not be
realized. Our estimate of future taxable income is impacted by the historical
volatility in crude oil and gas prices, the uncertainty of future commodity
prices, and our history of generating net losses. In 2000, we were unable to
conclude that it was more likely than not that we would be able to utilize all
the available carryforwards prior to their ultimate expiration. In 2001, the
valuation allowance was reversed since we expected to be able to utilize the
carryforwards prior to their expiration due to the expected sale of First
Permian's properties, which occurred in April, 2002. There were no remaining net
deferred tax assets at December 31, 2002.
Years Ended December 31, 2002 and December 31, 2001
Oil and Gas Revenues. Our total oil and gas revenues for 2002 were
$12,106,568, a decrease of $5,733,456, or approximately 32%, from $17,840,024
for 2001. The decrease in revenues for 2002, compared to 2001, is related to a
20% decline in the average price we received for our oil and natural gas
production volumes, and a 16% decline in oil and natural gas production volumes
on an EBO basis.
Production. On an equivalent barrel basis, 2002 production totaled
575,807 EBO compared with 682,635 EBO in 2001, a 16% decrease, mainly resulting
from an 18% decrease in natural gas production. The decrease in natural gas
production was primarily due to production declines, which was partially offset
by our drilling activities in 2002.
Production Costs. The decrease in production costs for 2002, compared
with 2001, was primarily the result of decreased production volumes and, to a
lesser extent, reduction in ad valorem taxes and other direct operating
expenses. Production costs decreased $1,043,470 or 27%, to $2,877,370 for the
twelve months ended December 31, 2002, from $3,920,840 for the same period of
2001.
General and Administrative Costs. Overall general and administrative
expenses increased $806,455 or 60% to $2,152,909 for the year ended December 31,
2002. General and administrative expenses for the same period of 2001 were
$1,346,454. The increase in general and administrative expenses was primarily
due to increased public reporting costs, increased costs associated with our new
office and increased staffing needs associated with our new business plan. We
capitalized $1,467,647 of general and administrative expenses. Depreciation
Depletion and Amortization Expense. Depreciation, depletion and amortization
expenses for 2002 were slightly lower at $6,220,179, as compared to $6,318,105
Depreciation Depletion and Amortization Expense. Depreciation, depletion and
amortization expenses for 2002 were slightly lower at $6,220,179, as compared to
$6,318,105
-41-
in 2001. The decline was attributable to an increase in reserves as of December
31, 2002, which was partially offset by an increase in net depletable property
basis.
Impairment of Oil and Gas Properties. We recognized a noncash
impairment charge of $2,177,128 in the third quarter of 2001, and a noncash
impairment change of $14,642, 685 in the fourth quarter of 2001, in each case
related to our oil and gas reserves and unproved properties. The impairment of
oil and gas assets was primarily the result of the effect of significantly lower
oil and natural gas prices on both proved and unproved oil and gas properties.
We did not recognize an impairment in 2002.
Equity in Income of First Permian, L.P. As discussed in Note 16 to the
Financial Statements, First Permian, L.P. sold all of its oil and gas properties
on April 8, 2002. As the owner of a 30.675% interest in First Permian, we
received our prorata share of the net sales proceeds, or $5.5 million in cash
and 933,589 shares of common stock of Energen Corporation. Our pro rata share of
the net income and distributions for 2002 was $31,044,452.
First Permian Incentive Awards. The Incentive Awards reflect bonus
payments made to certain officers and employees in 2002 as a result of First
Permian's sale of all of its assets. Additional information about these awards
can be found under the caption "Incentive Award Agreements" on page 69 of this
report.
Loss on Marketable Securities. We recognized a loss in marketable
securities in the amount of $717,034, which resulted from our sales of 933,589
shares of Energen common stock during 2002. This loss represents the difference
in Energen's stock price of $27.40 per share at the time of the First Permian
sale and our realized net price of approximately $26.63 per share.
Change in Fair Value of Put Options. We also recognized a loss of
$508,721 which represents the decrease in fair value of our natural gas puts for
the period ended December 31, 2002. See Note 9 to the Financial Statements.
Change In Fair Value of Crude Oil Swap. A loss of $439,574 was
recognized in connection with marking to market our crude oil swaps that were
implemented on November 27, 2002 in association with our purchase of the
Fullerton properties. See Note 9 to the Financial Statements.
Dividend Income. Dividend income during 2002 was $371,040 associated
with our investment in and ownership of Energen common stock.
Net Interest Expense. Net Interest expense decreased $100,440 or 15% to
$558,629 for the year ended December 31, 2002, from $659,069 for the same period
of 2001. This decrease was principally a result of a decrease in average
borrowings with the sale of the Energen stock and lower interest rates.
Income Tax Benefit (Expense). For the period ended December 31, 2002,
we recorded federal and state income tax expense of $8,751,333 and $931,709,
respectively. See Note 5 to the Financial Statements.
Net Income (Loss) and Cash Flow From Operations. Our income, before
preferred stock dividends, was $18,701,448 for the year ended December 31, 2002,
compared with a loss of $4,707,575 for the year ended December 31, 2002. In
2002, income of $29,662,681 resulted entirely from the sale of First Permian's
oil and gas properties, net of incentive awards attributable to First Permian's
sale of its assets. Other items affecting net income included:
. a 32% decrease in oil and gas revenues related to a decline in
volumes and average price received;
-42-
. decreased production costs of approximately 27% primarily related
to decreased production volumes and, to a lesser extent,
reductions in ad valorem taxes and other direct operating
expenses,
. increased general and administrative expenses of 60%, increased
public reporting costs, increased costs associated with our new
office and increased staffing needs associated with our new
business plan; and
. non-cash charges associated with the sale of Energen stock, fair
market value of our put options and mark to market of the crude
oil swaps.
Cash flow from operations for 2002 declined approximately $11,856,056
or 89% to $1,526,897 compared with $13,407,316 for the year ended December 31,
2001. The decline is primarily due to declines in oil and gas volumes and
prices, an increase in current assets over current liabilities and an increase
in staffing needs associated with our new business plan.
Years Ended December 31, 2001 and December 31, 2000
Oil and Gas Revenues. Parallel's total oil and gas revenues for 2001
were $17,840,024, an increase of $705,522, or approximately 4%, from $17,134,502
for 2000. The increase in revenues for 2001, compared to 2000, is related to a
3% decline in the average prices we received for our oil and natural gas
production volumes, and to a 7% increase in production volumes.
Production. On an equivalent barrel basis, 2001 production totaled
682,635 EBO compared with 635,440 EBO in 2000, a 7% increase, resulting from a
16% increase in natural gas production. The increase in natural gas production
was primarily due to increased drilling activity in 2001.
Production Costs. The increase in production costs for 2001, compared
with 2000, was primarily the result of adding higher cost oil and gas
production, an increase in ad valorem taxes and, to a lesser degree, an increase
in production volumes. Production costs increased $821,306 or 26%, to $3,920,840
for the twelve months ended December 31, 2001, from $3,099,534 for the same
period of 2000. Production costs as a percentage of revenues increased primarily
because of slightly lower oil and gas prices. Average production costs per EBO
increased 18% to $5.74 for the twelve months ended December 31, 2001 compared to
$4.88 in the same period of 2000.
General and Administrative Expenses. General and administrative
expenses increased $154,927 or 13% to $1,346,454 for the year ended December 31,
2001, from $1,191,527 for the same period of 2000. The increase in general and
administrative expenses was primarily related to salary and benefit adjustments
and increased franchise taxes. General and administrative expenses as a
percentage of revenues increased to 8% for the year ended December 31, 2001
versus 7% for the same period in 2000. This increase is primarily a result of
the low oil and gas prices we received in 2001, which reduced revenues.
Depreciation, Depletion and Amortization Expense. Depreciation,
depletion and amortization expenses for 2001 increased $1,078,900, or 21% to
$6,318,105 from $5,239,205 for 2000. As a percentage of revenues, DD&A increased
to 35% compared to 31% in 2000. The DD&A rate per EBO increased to $9.26 for the
year ended December 31, 2001 from $8.25 for the same period of 2000. The
increase in the DD&A rate per EBO is attributable to an increase in net
depletable property basis and a decrease in reserves as of December 31, 2001.
Impairment of Oil and Gas Properties. During the third and fourth
quarters of 2001, we recognized a noncash impairment charge of $2,177,128 and
$14,642,685, respectively,
-43-
related to our oil and gas reserves and unproved properties. The impairment of
oil and gas assets was primarily the result of the effect of significantly lower
oil and natural gas prices on both proved and unproved oil and gas properties.
We did not recognize an impairment in 2000.
Under full cost accounting rules, each quarter we are required to
perform a ceiling test calculation. The full cost pool carrying values cannot
exceed a company's future net revenues from its proved reserves, discounted at
10% per annum using constant current product prices, and the lower of cost or
market of unproved properties.
At December 31, 2001, oil and natural gas prices were lower compared
with 2000 year-end prices, resulting in an impairment charge to the full cost
carrying value of our oil and gas properties. The ceiling test was computed
using the net present value of reserves at December 31, 2001 based on prices of
$16.75 per Bbl of oil and $2.72 per Mcf of natural gas.
Net Interest Expense. Net interest expense decreased $461,011 or 41%,
to $659,069 for the year ended December 31, 2001, from $1,120,080 for the same
period of 2000. This decrease was principally a result of a decrease in average
borrowings from our revolving line of credit facility and lower interest rates.
Income Tax Benefit (Expense). A valuation allowance is proved when it
is more likely than not that some portion of the deferred tax assets will not be
realized. At December 31, 2000, we established a valuation allowance against
deferred tax assets of $2,062,954. This was due to the historical volatility in
crude oil and gas prices, the uncertainty of future commodity prices, and our
history of generating net losses. Management was unable to conclude that it was
more likely than not that we would be able to utilize all the available
carryforwards prior to their ultimate expiration. In 2001 the valuation
allowance was reversed as we expected to be able to utilize the available
carryforwards prior to their expiration due to the impending sale of First
Permian's properties. We recognized a tax expense in 2000 of $130,000 related to
alternative minimum tax.
Our effective tax rate for 2001 was approximately 56% versus 2.1% in
2000 due to the deferred tax asset valuation allowance provided in 2000. You
should read Note 5 to the Financial Statements, for further discussion of our
income tax provisions and benefits.
Net Income (Loss) and Cash Flow From Operations. Our net loss, before
preferred stock dividends, was $4,707,575 for the year ended December 31, 2001,
compared with net income of $5,977,328 for the year ended December 31, 2000. The
2001 loss was primarily caused by a third and fourth quarter 2001 noncash
impairment charge to oil and gas properties totaling $16,819,813, the result of
slightly lower oil and gas prices at year-end 2001. Other factors contributing
to the loss included:
. a 21% increase in depreciation, depletion and amortization
expenses, again a result of the low commodity price environment
and an impairment charge to unproved properties, which increased
the full cost pool;
. a 41% decrease in net interest expense due to decreased bank
borrowings;
. a 3 % decrease in the average price we received for our
production; and
. a 7% increase in production volumes.
Cash flow from operations for 2001 increased approximately $2,689,077
or 25%, to $13,382,953 compared with $10,693,876 for the year ended December 31,
2000. The increase is primarily due to a $2,695,549 decrease in accounts
receivable offset by a $726,688 decrease in accounts payable and accrued
liabilities.
-44-
Capital Resources and Liquidity
Our level of earnings and cash flows depend on many factors, including
the prices of oil and natural gas. Typically, our capital resources consist
primarily of cash flows from our oil and gas properties and bank borrowings
supported by our oil and gas reserves. However, these resources were
supplemented last year with our share of proceeds from the sale of First
Permian's properties. Excluding the First Permian sale, our primary sources of
cash during 2002 were funds generated from operations and bank borrowings. Funds
from these two sources were used primarily for exploration and development
expenditures, dividend payments on our preferred stock and the repayment of
borrowings under our revolving credit facility. The additional capital resources
available to us as a result of the First Permian sale were used to repay part of
our bank debt, which created additional borrowing capacity under our revolving
credit facility. We used this additional borrowing capacity in December, 2002
when we borrowed $45.1 million which was used in partial payment of the purchase
price of the Fullerton properties.
During 2002, we spent approximately $60,938,000 on exploration and
development, seismic data processing and acquisitions. Long-term debt, excluding
current maturities, increased by $36,004,167 to $45,604,167. At December 31,
2002, Parallel had $11,811,704 in cash, which included part of the proceeds from
sales of our shares of Energen stock, and total assets of $102,351,331. We had
no availability for additional borrowings under our revolving credit facility at
December 31, 2002.
Bank Borrowings
On December 20, 2002, Parallel and its subsidiary, Parallel, L.P.,
entered into a First Amended and Restated Credit Agreement with First American
Bank, SSB, Western National Bank and BNP Paribas. We entered into the credit
agreement for the purposes of refinancing the outstanding indebtedness under our
prior credit agreement with First American Bank, and establishing a larger
credit facility to provide additional funds for the purchase of the Fullerton
properties. Before we closed the loan transaction, $ 8,150,000, bearing interest
at 4.75%, was outstanding under our prior credit facility. On December 20, 2002,
when we entered into our amended and restated credit agreement and closed the
purchase of the Fullerton properties, the initial borrowing base was established
by the banks at $50.0 million, based on the loan value attributed by the banks
to our oil and gas properties and shares of Energen stock. Our total borrowings
after purchasing the Fullerton properties were $49.75 million.
The credit facility provides for revolving loans. This means that we
can borrow, repay and reborrow funds drawn under the credit facility. However,
the aggregate amount that we can borrow and have outstanding at any one time is
subject to a borrowing base and a monthly commitment reduction. Generally, we
can borrow only up to the borrowing base in effect from time to time. The
monthly commitment reduction commences on August 31, 2003 and continues with a
like reduction on the last day of each following month. The amount of the
monthly commitment reduction is determined by dividing (a) the borrowing base on
the day immediately preceding the date of each monthly commitment reduction by
(b) the number of months remaining prior to July 1, 2008. The borrowing base and
the monthly commitment reduction amount will be redetermined by the banks on or
about April 30 and October 31 of each year or at other times requested by
Parallel. At March 7, 2003, the borrowing base had been reduced to $43 million
as a result of all of our shares of Energen stock having been sold. If, as a
result of the banks' redetermination of the borrowing base, the outstanding
principal amount of our loan exceeds the borrowing base, we must either provide
additional collateral to the banks or prepay the principal of the note in an
amount equal to the excess. If the outstanding principal amount of our loan
-45-
exceeds the borrowing base as a result of the monthly commitment reduction, we
must immediately repay to the bank an amount equal to the difference between the
outstanding principal balance of the loan and the borrowing base. We do not have
the option to pledge additional collateral in this circumstance. Except for the
principal payments that may be required because of our outstanding loans being
in excess of the borrowing base, interest only is payable monthly.
The principal amount outstanding under the revolving credit facility
bears interest at First American Bank's base rate or the libor rate, at our
election. Generally, First American Bank's base rate is equal to the prime rate
published in the Wall Street Journal, but not less than 4.50%. The libor rate is
generally equal to the sum of (a) the rate designated as "British Bankers
Association Interest Settlement Rates" and offered on one, two, three or six
month interest periods for deposits of $1,000,000, and (b) a margin ranging from
2.25% to 2.75%, depending upon the outstanding principal amount of the loans.
The interest rate we are required to pay, including the applicable margin, may
never be less than 4.50%. If the principal amount outstanding is equal to or
greater than 75% of the borrowing base established by the banks, the margin is
2.75%. If the principal amount outstanding is equal to or greater than 50%, but
less than 75% of the borrowing base, the margin is 2.50%. If the principal
amount outstanding is less than 50% of the borrowing base, the margin is 2.25%.
In the case of base rate loans, interest is payable on the last day of
each month. In the case of libor loans, interest is payable on the last day of
each applicable interest period.
If the total outstanding borrowings under the facility are less than
the borrowing base, an unused commitment fee is required to be paid to the bank
lenders. The amount of the fee is .25% of the daily average of the unadvanced
amount of the borrowing base. The fee is payable quarterly, commencing on March
31, 2003.
All outstanding principal under the revolving credit facility is due
and payable on December 20, 2006. The loan is secured by substantially all of
our oil and gas properties, including the properties Parallel, L.P. acquired
from JMC Exploration, Inc. and Arkoma Star, L.L.C. in December, 2002. Parallel,
L.L.C., a subsidiary of Parallel Petroleum Corporation, guaranteed payment of
the loans.
We are highly dependent on bank borrowings to fund our exploration and
drilling activities. Our borrowing base is generally equivalent to the loan
value of our producing oil and gas properties as determined by the bank in its
sole discretion. If our borrowing base declines significantly, our liquidity
would be suddenly and materially limited.
If the borrowing base is increased, we are required to pay a fee of
..25% on the amount of any increase in the borrowing base.
Our obligations to the bank are secured by substantially all of our oil
and gas properties. Our bank borrowings have been incurred to finance our
property acquisition, 3-D seismic surveys, enhancement and drilling activities.
In addition to customary affirmative covenants, the credit agreement
contains various restrictive covenants and compliance requirements, including:
. maintaining certain financial ratios;
. limitations on incurring additional indebtedness;
-46-
. prohibiting the payment of dividends on our common stock;
. limitations on the disposition of assets; and
. prohibiting liens (other than in favor of the lenders) to exist
on any of our properties.
If we have borrowing capacity under our credit agreement, we intend to
borrow, repay and reborrow under the revolving credit facility from time to time
as necessary, subject to borrowing base limitations, to fund:
. interpretation and processing of 3-D seismic survey data;
. lease acquisitions;
. drilling activities on properties in our Cook Mountain project in
Liberty County, Texas, and in the Yegua/Frio/Wilcox gas trend of
south Texas;
. developmental drilling on our Permian Basin properties, when
economically feasible;
. other drilling expenditures and acquisition opportunities; and
. general corporate purposes.
At December 31, 2002 we had 974,500 shares of 6% convertible preferred
stock outstanding. The preferred stock:
. requires us to pay dividends of $.60 per annum, semi-annually on
June 15 and December 15 of each year.
. is convertible into common stock at any time, at the option of
the holder, into 2.8751 shares of common stock at an initial
conversion price of $3.50 per shares, subject to adjustment in
certain events.
. is redeemable at our option, in whole or in part, for $10 per
share, plus accrued dividends.
. has no voting rights, except as required by applicable law, and,
except that as long as any shares of preferred stock remain
outstanding, the holders of a majority of the outstanding shares
of the preferred stock may vote on any proposal to change any
provision of the preferred stock which materially and adversely
affects the rights, preferences or privileges of the preferred
stock.
. is senior to the common stock with respect to dividends and on
liquidation, dissolution or winding up of Parallel.
. has a liquidation value of $10 per share, plus accrued and unpaid
dividends.
Commodity Price Risk Management Transactions
Certain of our commodity price risk management arrangements have
required us to deliver cash collateral or other assurances of performance to the
counterparties in the event that our payment obligations with respect to our
commodity price risk management transactions exceed certain levels.
-47-
With the primary objective of achieving more predictable revenues and
cash flows and reducing the exposure to fluctuations in oil and natural gas
prices, we have entered into price risk management transactions of various kinds
with respect to both oil and natural gas. While the use of certain of these
price risk management arrangements limits the downside risk of adverse price
movements, it may also limit future revenues from favorable price movements. We
engage in transactions such as swaps and collars which are marked-to-market at
the end of the relevant accounting period. Since the futures market historically
has been highly volatile, these fluctuations may cause significant impact on the
results of any given accounting period. We have entered into price risk
management transactions with respect to a substantial portion of our estimated
production for the remainder of 2003 through 2006. We continue to evaluate
whether to enter into additional price risk management transactions for 2003 and
future years. In addition, we may determine from time to time to unwind our then
existing price management positions as part of our price risk management
strategy.
Future Capital Requirements
Our capital expenditure budget for 2003 is approximately $12 million
and is highly dependent on future oil and gas prices and the availability of
funding. These expenditures will be governed by the following factors:
. internally generated cash flows;
. availability of borrowing under our revolving credit facility;
. additional sources of financing; and
. future drilling successes.
In 2003, we intend to drill lower risk natural gas prospects that could
have a meaningful effect on our reserve base and cash flows. In selected cases,
we may elect to reduce our interest in higher risk, higher impact projects. We
may also sell certain non-core producing properties to raise funds for capital
expenditures.
The following table is a summary of significant contractual cash
obligations:
Obligation Due in Period
-------------------------------------------------------------------------
Contractual Cash Obligations 2003 2004 2005 2006 2007 2008 Total
---------------------------------- ------ ------ ------ ------ ------ ------ -------
(000's)
Revolving Credit Facility (secured) $4,146 $9,950 $9,950 $9,950 $9,950 $5,804 $49,750
Office Lease (formerly occupied) $ 54 $ 22 $ - $ - $ - $ - $ 76
Office Lease (presently occupied) $ 102 $ 102 $ 102 $ 68 $ - $ - $ 374
-48-
Outlook
The oil and gas industry is capital intensive. We make, and anticipate
that we will continue to make, substantial capital expenditures in the
exploration for, development and acquisition of oil and gas reserves.
Historically, our capital expenditures have been financed primarily with:
. internally generated cash from operations;
. proceeds from bank borrowings; and
. proceeds from sales of equity securities.
The continued availability of these capital sources depends upon a
number of variables, including:
. our proved reserves;
. the volumes of oil and gas we produce from existing wells;
. the prices at which we sell oil and gas; and
. our ability to acquire, locate and produce new reserves.
Each of these variables materially affects our borrowing capacity. We
may from time to time seek additional financing in the form of:
. increased bank borrowings; o sales of Parallel's securities;
. sales of non-core properties; or o other forms of financing.
We do not have agreements for any future financing and there can be no
assurance as to the availability or terms of any such financing.
Trends and Prices
Changes in oil and gas prices significantly affect our revenues, cash
flows and borrowing capacity. Markets for oil and gas have historically been,
and will continue to be, volatile. Prices for oil and gas typically fluctuate in
response to relatively minor changes in supply and demand, market uncertainty,
seasonal, political and other factors beyond our control. We are unable to
accurately predict domestic or worldwide political events or the effects of
other factors on the prices we receive for our oil and gas.
During 2002, the average sales price we received for our oil production
was approximately $24.59 per Bbl, as compared with $24.80 in 2001, while the
average sales price for our gas was approximately $3.33 per Mcf in 2002, as
compared with $4.41 per Mcf in 2001. At March 1, 2003, we were receiving an
average of $33.20 per Bbl for our oil production and $8.05 per Mcf for our gas
production, excluding our hedging activities.
-49-
Inflation
Inflation has not had a significant impact on our financial condition
or results of operations. We do not believe that inflation poses a material risk
to our business.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement
No. 143, "Accounting for Asset Retirement Obligations", which establishes
requirements for the accounting of removal-type costs associated with asset
retirements. The standard is effective for fiscal years beginning after June 15,
2002, with earlier application encouraged.
We used an expected cash flow approach to estimate our asset retirement
obligation under SFAS No. 143. Upon adoption on January 1, 2003, we recorded a
retirement obligation of $1,322,636, an increase in property cost of $835,291, a
reduction of accumulated depreciation, depletion and amortization of $394,230
and a cumulative effect of accounting change loss, net of tax, of $61,456. As a
result of adoption of SFAS No. 143, we estimated that in 2003 accretion of
discount expense will be approximately $140,502, and depreciation, depletion and
amortization expense will decrease approximately $184,858.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". Most significantly, this statement eliminates the requirement
under Statement 4 to aggregate all gains and losses from extinguishment of debt,
and if material, be classified as an extraordinary item. As a result, gains and
losses from extinguishment of debt should be classified as extraordinary items
only if they met the criteria in Opinion 30. Applying the provisions of Opinion
30 will distinguish transactions that are part of an entity's recurring
operations from those that are unusual or infrequent or that meet the criteria
for classification as an extraordinary item. There is no current impact to our
financial statements as there has been no early extinguishment of debt which
meets the criteria for an extraordinary item.
In July 2002, the FASB issued Statement No., 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The statement requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Statement No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. We expect no impact on our financial
statements since we do not anticipate exiting or disposing of any of our
activities.
Statement No. 148, Accounting for Stock Based Compensation-Transition
and Disclosure, which amended SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. The statement also amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
statement is required to be adopted for fiscal years ending after December 15,
2002.
-50-
We account for stock-based compensation in accordance with APB Opinion
No. 25 and do not currently plan to expense stock option awards pursuant to SFAS
123. We have implemented the disclosure requirements of SFAS No. 145. See Notes
1 and 4 to the Financial Statements.
FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for
Gurantees, Including Indirect Guarantees of Indebtedness of Others", requires
that a liability be recorded in the guarantor's balance sheet upon issuance of
certain guarantees. Initial recognition and measurement of the liability will be
applied on a prospective basis to guarantees issued or modified after December
31, 2002. FIN No. 45 also requires disclosures about guarantees in financial
statements for interim or annual periods ending after December 15, 2002.
FIN No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51", requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without financial support from other
parties. We do not expect the adoption of FIN No. 46 to have a material impact
on our consolidated financial statements.
Effects of Derivative Instruments
We use various derivative instruments to mitigate the volatility of
commodity prices. As of December 3, 2002, we entered into a 33 month oil swap
contract. Under the terms of the oil swap, we will receive certain fixed prices
averaging $23.37 per Bbl for approximately 75% of our estimated oil production
after the Fullerton acquisition. Subsequent to December 31, 2002, we entered
into various additional oil and gas hedge contracts. See Note 9 to the Financial
Statements.
As of January 10, 2003 we entered into a 45 month LIBOR fixed interest
rate swap contract. We will receive fixed 90-day LIBOR interest rates for the
45-month period beginning March 31, 2003 through December 20, 2006. You can find
more information about our interest rate swap, including notional amounts, in
the table appearing on page 53 of this report. As of December 31, 2002, our
derivative instruments were recorded using mark to market accounting, whereby
the instruments were recorded in the balance sheet as either an asset or
liability measured at its fair market value. A corresponding income or expense
is recorded in other income (expense) in the Statement of Income (loss).
Effective January 1, 2003, we have elected to apply hedge accounting to
the derivative instruments. For derivatives qualifying as hedges, the changes in
fair market value are recognized in stockholders' equity as other comprehensive
income (loss) and then reclassified to earnings when the transaction is settled.
We are exposed to credit risk in the event of nonperformance by the
counterparty in its derivative instruments. However, we try to assess "the
creditworthiness of the counterparty to mitigate this credit risk.
-51-
- --------------------------------------------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The following quantitative and qualitative information is provided
about derivative instruments to which Parallel was a party at December 31, 2002,
and from which Parallel may incur future earnings, gains or losses from changes
in market interest rates and commodity prices.
Our derivative instruments at December 31, 2002 are recorded in the
balance sheet as either an asset or liability measured at its fair market value.
For the year ended December 31, 2002, we used mark-to-market accounting for our
hedge contracts and changes in a derivative's fair value are recognized
currently in earnings.
Interest Rate Sensitivity
Our only financial instrument sensitive to changes in interest rates is
our bank debt. Our annual interest costs in 2003 will fluctuate based on
short-term interest rates. As the interest rate is variable and reflects current
market conditions, the carrying value approximates the fair value. The table
below shows principal cash flows and related weighted average interest rates by
expected maturity dates. Weighted average interest rates were determined using
weighted average interest paid and accrued in December, 2002. You should read
Note 3 to the Financial Statements for further discussion of our debt that is
sensitive to interest rates.
2003 2004 2005 2006 2007 2008 Total
-------- -------- -------- -------- -------- -------- --------
(in 000's, except interest rates)
Variable rate debt: $4,146 $9,950 $9,950 $9,950 $9,950 $5,804 $49,750
Revolving Facility (secured) 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% -
Average interest rate
At December 31, 2002, we had bank loans in the amount of $49.75 million
outstanding at an average interest rate of 4.50%. Borrowings under our credit
facility bear interest, at our election, at (i) the bank's base rate or (ii) the
libor rate, plus libor margin, but in no event less than 4.50%. As a result, our
annual interest cost in 2003 will fluctuate based on short-term interest rates.
Assuming no change in the amount outstanding during 2003, the impact on interest
expense of a one-half of one percent change in the average interest rate above
the 4.50% floor would be approximately $248,750. As the interest rate is
variable and is reflective of current market conditions, the carrying value
approximates the fair value.
-52-
In January, 2003, we entered into a 45-month libor fixed interest rate
swap contract with BNP Paribas. We will receive fixed 90-day libor interest
rates for the 45-month period beginning March 31, 2003 through December 20,
2006.
Under our credit facility, we may elect an interest rate based upon the
agent lender's base lending rate, or the libor rate, plus a margin ranging from
2.25% to 2.75% per annum, depending on our borrowing base usage. The interest
rate we are required to pay, including the applicable margin, may never be less
than 4.50%.
A recap for the period of time, notional amounts, libor fixed interest
rates, expected margin rates and expected fixed interest rates for the contract
are as follows:
Libor Expected Expected
Period of Time Notional Amounts (1) Fixed Interest Rates (2) Margin Rates (3) Fixed Interest Rates(4)
--------------- -------------------- ------------------------ ---------------- -----------------------
Mar 31, 2003 thru Dec 31,2003 $35,000,000 1.675% 2.750% 4.425%
Dec 31, 2003 thru Dec 31, 2004 $30,000,000 2.660% 2.500% 5.160%
Dec 31, 2004 thru Dec 31, 2005 $20,000,000 4.050% 2.250% 6.300%
Dec 31, 2005 thru Dec 20, 2006 $10,000,000 4.050% 2.250% 6.300%
-----------------
(1) Based on the anticipated principal reductions under our credit facility.
(2) Parallel's swap contract with BNP Paribas.
(3) Based on the anticipated borrowing base usage under our credit facility.
(4) Total of the libor fixed interest rate plus the expected margin rate under
our credit facility.
Commodity Price Sensitivity
Our major market risk exposure is in the pricing applicable to our oil
and natural gas production. Market risk refers to the risk of loss from adverse
changes in oil and natural gas prices. Realized pricing is primarily driven by
the prevailing domestic price for crude oil and spot prices applicable to the
region in which we produce natural gas. Historically, prices received for oil
and gas production have been volatile and unpredictable. We expect pricing
volatility to continue. Oil prices ranged from a monthly low of $14.26 per
barrel to a monthly high of $29.57 per barrel during 2002. Natural gas prices we
received during 2002 ranged from a monthly low of $1.05 per Mcf to a monthly
high of $4.94 per Mcf. A significant decline in the prices of oil or natural gas
could have a material adverse effect on our financial condition and results of
operations.
Put Options
Historically, we have not entered into hedging arrangements and have
not had any delivery commitments. While hedging arrangements reduce exposure to
losses as a result of unfavorable price changes, they may also limit the ability
to benefit from favorable market price changes. In January, 2002, our Board
determined that Parallel should hedge natural gas prices for approximately
one-half of its natural gas production. After reviewing alternative strategies,
we entered into commodity derivative contracts in the form of put options on
natural gas. These
-53-
put options create a sales price floor for part of our gasproduction. We believe
put floors provide us with the advantage of no margin requirements,
participating in the upside of potential increases in natural gas prices and
establishing a minimum selling price at a fixed cost. However, put floors can
also be expensive if markets do not change, and in most cases the protection of
a floor will not be immediately realized at current levels. These derivatives
are not held for trading purposes.
The following table illustrates our put options, which we entered into
in the first quarter of 2002.
Fair Value
Floor at
Period Commodity Mcf Volume Price Cost of Floor December 31, 2002
- ----------------------------- ------------ --------------- ----- -------------- ------------------
April 2002 thru October 2002 natural gas 1,470,000 $2.40 $ 391,105 $ -(1)
April 2003 thru October 2003 natural gas 700,000 $3.00 139,500 $ 21,884
--------- ------------
$ 530,605 $ 21,884
- --------------------------
(1) Expired.
Costless Collar
Collars are created by purchasing puts to establish a floor price and
then selling a call which establishes a maximum amount the producer will receive
for the oil or gas hedged. Calls are sold to offset or reduce the premium paid
for buying the put. We did not have any collars in place during 2002. However,
In January, 2003, we entered into a costless, seven-month Houston ship channel
gas collar. Under terms of the gas collar, we will receive no less than $4.25
per MMBtu and no greater than $5.30 per MMBtu for approximately 30% of our
estimated natural gas production for the seven-month period of April, 2003
through October, 2003. A majority of our natural gas production is sold based on
Houston ship channel prices. A recap for the period of time, number of MMBtu's,
and gas prices are as follows:
Houston Ship Channel
gas prices
-------------------------
MMBtu of
Period of Time Natural Gas Floor Cap
------------------------ ----------- -------- ------
April thru October 2003 642,000 $4.25 $5.30
Swaps
Generally, swaps are an agreement to buy or sell a specified commodity
for delivery in the future, but at an agreed fixed price. Swap transactions
convert a floating price into a fixed price. For any particular swap
transaction, the counterparty is required to make a payment to the hedge party
if the reference price for any settlement period is less than the swap price for
such hedge, and the hedge party is
-54-
required to make a payment to the counterparty if the reference price for any
settlement period is greater than the swap price for such hedge.
In December, 2002, we entered into a 33-month Nymex oil swap contract
with BNP Paribas in conjunction with our acquisition of the Fullerton
properties. Under terms of the oil swap contract, we will receive certain fixed
prices for approximately 75% of our estimated oil production for the 33-month
period of April 2003 through December 31, 2005. A recap for the period of time,
number of barrels and Nymex swap prices are as follows:
Barrels of Nymex Oil
Period of Time Oil Swap Prices
--------------------------- ----------- -----------
April thru December 2003 275,000 $24.58
January thru December 2004 329,000 $23.19
January thru December 2005 292,000 $22.77
In January and February, 2003, we entered into additional oil and gas
swap contracts with BNP Paribas. A recap for the period of time, number of
MMBtu's, number of barrels, and swap prices are as follows:
Barrels Houston Ship
of Nymex Oil MMBtu of Channel
Period of Time Oil Swap Price Natural Gas Gas Swap Price
--------------- --------------- ----------- ------------ --------------
February 1, 2003 thru March 31, 2003 88,500 $33.00 - -
March 1, 2003 thru March 31, 2003 - - 279,000 $ 5.45
April 1, 2003 thru October 31, 2003 - - 214,000 $ 4.87
April 1, 2003 thru October 31, 2003 - - 428,000 $ 4.83
January 1, 2006 thru December 20, 2006 265,500 $23.04 - -
-55-
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
Parallel's financial statements and supplementary financial data are
included in this report beginning on page F-1.
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
None.
-56-
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
The Directors and executive officers of Parallel at March 1, 2003 are as
follows:
Director
Name Age Since Position with Company
- ---------------------------- ------- --------- ---------------------------------------
Thomas R. Cambridge(1) 67 1985 Chairman of the Board of Directors and Chief
Executive Officer
Larry C. Oldham(1) 49 1979 Director, President and Treasurer
Dewayne E. Chitwood(2) 66 2000 Director
Martin B. Oring(1)(2)(3) 57 2001 Director
Charles R. Pannill(2)(3) 77 1982 Director
Jeffrey G. Shrader(1)(2)(3) 52 2001 Director
Eric A. Bayley 54 _ Vice President of Engineering and Production
John S. Rutherford 43 _ Vice President of Land and Administration
Donald E. Tiffin 45 _ Vice President of Business
Development
Steven D. Foster 47 _ Chief Financial Officer
- ----------------------
(1) Member of Hedge Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
Mr. Cambridge is an independent petroleum geologist engaged in the
exploration for, development and production of oil and gas. From 1970 until
1990, his activities were carried out primarily through Cambridge & Nail
Partnership. Since 1990, Mr. Cambridge's oil and gas activities have been
carried out through Cambridge Production, Inc. He received a Bachelors degree in
geology from the University of Nebraska in 1958 and a Master of Science degree
in geology from the University of Nebraska in 1960.
-57-
Mr. Oldham is a founder of Parallel and has served as an officer and
Director since its formation in 1979. Mr. Oldham became President of Parallel in
October, 1994, and served as Executive Vice President before becoming President.
Mr. Oldham received a Bachelor of Business Administration degree from West Texas
State University in 1975.
Mr. Chitwood is president, chief executive officer and a manager of
Wes-Tex Holdings, LLC, the general partner of Wes-Tex Drilling Company, L.P., a
partnership engaged in oil and gas exploration and production. During the
five-year period preceding Mr. Chitwood's association with Wes-Tex in 1997, he
was an owner and founder of CBS Insurance L.P., a general insurance agency.
Mr. Oring is the owner of Wealth Preservation, LLC, a financial
counseling firm founded by Mr. Oring in January, 2001. From 1998 to December,
2000, Mr. Oring was Managing Director Executive Services of Prudential
Securities Incorporated, and from 1996 to 1998, Mr. Oring was Managing Director
Capital Markets of Prudential Securities Incorporated. From 1989 to 1996, Mr.
Oring was Manager of Capital Planning for The Chase Manhattan Corporation. At
March 14, 2003, Mr. Oring was Chairman of the Audit Committee of the Board of
Directors of Parallel.
Mr. Pannill was employed by The Western Company of North America for
over thirty years until his retirement in February, 1982. During his employment
with The Western Company of North America, Mr. Pannill served in various
capacities, including those of an executive officer and director. He received a
Bachelor of Science degree in Geology from Texas A&M University in 1950.
Mr. Shrader has been a shareholder in the law firm of Sprouse Shrader
Smith, Amarillo, Texas, since January, 1993. He has also served as a director of
Hastings Entertainment, Inc. since 1992. At March 14, 2003, Mr. Shrader was
Chairman of the Compensation Committee of the Board of Directors of Parallel.
Mr. Bayley has been Vice President of Engineering and Production of
Parallel since July, 2001. From October, 1993 until July, 2001, Mr. Bayley was
employed by Parallel as Manager of Engineering. From December, 1990 to October,
1993, Mr. Bayley was an independent consulting engineer and devoted
substantially all of his time to Parallel. Mr. Bayley graduated from Texas A&M
University in 1978 with a Bachelor of Science degree in Petroleum Engineering.
He graduated from the University of Texas of the Permian Basin in 1984 with a
Master's of Business Administration degree.
Mr. Rutherford has been Vice President of Land and Administration of
Parallel since July, 2001. From October 1993 until July, 2001, Mr. Rutherford
was employed as Manager of Land/Administration. From May, 1991 to October, 1993,
Mr. Rutherford served as a consultant to Parallel, devoting substantially all of
his time to Parallel's business. Mr. Rutherford graduated from Oral Roberts
University in 1982 with a degree in Education, and in 1986 he graduated from
Baylor University with a Master's degree in Business Administration.
Mr. Tiffin has been Vice President of Business Development since June,
2002. From August, 1999 until May, 2002, Mr. Tiffin served as General Manager of
First Permian, L.P. From July, 1993 to July, 1999, Mr. Tiffin was the Drilling
and Production Manager in the Midland, Texas office of Fina Oil and Chemical
Company. Mr. Tiffin graduated from the University of Oklahoma in 1979 with a
Bachelor of Science degree in Petroleum Engineering.
-58-
Mr. Foster has been the Chief Financial Officer of Parallel since June,
2002. From November, 2000 to May, 2002, Mr. Foster was the Controller and
Assistant Secretary of First Permian, L.P. From September, 1997 to November
2000, he was employed by Pioneer Natural Resources, USA in the capacities of
Director of Revenue Accounting and Manager of Joint Interest Accounting. Mr.
Foster graduated from Texas Tech University in 1977 with a Bachelor of Business
Administration degree in accounting. He is a certified public accountant.
Directors hold office until the annual meeting of stockholders
following their election or appointment and until their respective successors
have been duly elected or appointed.
Officers are appointed annually by the Board of Directors to serve at
the Board's discretion and until their respective successors in office are duly
appointed.
There are no family relationships between any of Parallel's directors
or officers.
Consulting Arrangements
As part of our overall business strategy, we continually monitor our
general and administrative expenses. Decisions regarding our general and
administrative expenses are made within parameters we believe to be compatible
with our size, the level of our activities and projected future activities. Our
goal is to keep general and administrative expenses at acceptable levels,
without impairing the quality of services and organizational structure necessary
for conducting our business. In this regard, we retain outside advisors and
consultants to provide technical and administrative support services in the
operation of our business. From time to time, we grant consultants overriding
royalty interests, working interests, or options to acquire working interests,
in wells in which we own an interest. We believe these types of compensation
arrangements enable us to attract, retain and provide additional incentives to
qualified and experienced consultants.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires
Parallel's directors and officers to file periodic reports with the SEC. These
reports show the directors' and officers' ownership, and the changes in
ownership, of Parallel's common stock and other equity securities. To our
knowledge, all Section 16(a) filing requirements were complied with during 2002.
-59-
- --------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
Summary of Annual Compensation
The table below shows a summary of the types and amounts of
compensation for the last three fiscal years paid to our chief executive officer
and each of the four most highly compensated executive officers, based on salary
and bonus for 2002.
Summary Compensation Table
Long-Term Compensation
---------------------------------------
Annual Compensation Awards Payouts
---------------------------------------- --------------------------- ---------
Other All
Annual Restricted Securities Other
Compen- Stock Underlying LTIP Compen-
Name and Salary Bonus sation Awards Options/ Payouts sation
Principal Position Year ($) ($)(1) ($) ($) SAR(#) ($) ($)
- ------------------ ---- ---------- ---------- ---------- ----------- ------------ -------- ---------
T. R. Cambridge 2002 $106,284 $158,888 $ 450 0 0 0 0
Chief Executive 2001 $ 91,362 $ 26,000 $ 900 0 100,000 0 0
Officer and 2000 $ 77,755 $ 2,000 $ 900 0 0 0 0
Chairman of the
Board
L. C. Oldham 2002 $187,316 $555,674 $ 17,850(2) 0 0 0 $11,113(3)
President 2001 $170,392 $ 26,000 $ 17,922 0 200,000 0 $14,470
and Director 2000 $161,000 $ 2,000 $ 10,067 0 0 0 $12,230
E. A. Bayley 2002 $111,792 $172,178 $ 16,127(4) 0 0 0 $ 6,303(5)
Vice President 2001 $ 96,155 $ 13,000 $ 15,705 0 50,000 0 $ 6,489
J. S. Rutherford 2002 $110,384 $410,352 $ 16,540(6) 0 0 0 $ 6,488(7)
Vice President 2001 $103,411 $ 13,000 $ 15,028 0 50,000 0 $ 6,925
D. E. Tiffin 2002 $ 99,832 $ 47,421 $ 8,257(8) 0 50,000 0 $ 5,990(9)
Vice President
- ----------------------------------
(1) The bonuses paid to Messrs. Cambridge, Oldham, Bayley and Rutherford during
2002 include payments made to them under our Incentive Award Agreements as
a result of the sale of First Permian's assets. Under these agreements, Mr.
Cambridge received $132,480; Mr. Oldham - $529,266; Mr. Bayley - $158,770;
and Mr. Rutherford - $396,944. Additional information about these
agreements can be found under the caption "Incentive Award Agreements" on
page 69 of this report. We paid Mr. Tiffin a signing and inducement bonus
in the amount of $46,013 when he joined Parallel in June, 2002.
(2) These amounts include insurance premiums for nondiscriminatory group life,
medical, disability and
-60-
dental insurance as follows: $17,647 for 2002; $16,366 for 2001; and $7,058
for 2000.
(3) For 2002, such amount includes $11,113 contributed by Parallel to Mr.
Oldham's individual retirement account maintained under Parallel's 408(k)
simplified employee pension plan/individual retirement account, and the
reimbursement of $4,624 for income tax preparation and planning. For 2001,
such amount includes $11,482 contributed by Parallel to Mr. Oldham's
retirement account and the reimbursement to Mr. Oldham of $2,988 for income
tax preparation and planning. For 2000, such amount includes $9,750
contributed by Parallel to Mr. Oldham's retirement account and the
reimbursement to Mr. Oldham of $2,480 for income tax preparation and
planning.
(4) This amount includes insurance premiums for nondiscriminatory group life,
medical, disability and dental insurance as follows: $15,150 for 2002; and
$14,808 for 2001.
(5) This amount represents Parallel's contribution to Mr. Bayley's individual
retirement account maintained under the 408(k) simplified employee pension
plan/individual retirement account.
(6) This amount includes insurance premiums for nondiscriminatory group life,
medical, disability and dental insurance as follows: $14,221 for 2002; and
$13,155 for 2001.
(7) This amount represents Parallel's contribution to Mr. Rutherford's
individual retirement account maintained under the 408(k) simplified
employee premium plan/individual retirement account. (8) This amount
includes insurance premiums in the amount of $8,150 for nondiscriminatory
group life, medical, disability and dental insurance.
(9) This amount represents Parallel's contribution to Mr. Tiffin's individual
retirement account maintained under the 408(k) simplified employee premium
plan/individual retirement account.
Stock Options
Parallel uses stock options as part of the overall compensation of
directors, officers and employees. Summary descriptions of our stock option
plans are included in this report so you can review the types of options we have
granted and the significant features of our stock options.
In the following table, we show certain information with respect to the
only stock option granted in 2002 to any of the executive officers named in the
Summary Compensation Table.
Option/Sar Grants in Last Fiscal Year
Individual Grants
--------------------------------------------------------------------
Potential Realizable
Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Options Price Appreciation for
Underlying Granted to Exercise or Option Term(1)
Options Employees in Base Price Expiration ---------------------
Name Granted (#) Fiscal Year ($/Sh) Date 5%($) 10%($)
- -------------- ------------ --------------- ------------- ------------------ --------- ----------
D. E. Tiffin 50,000(2) 34.48% 2.18 November 14, 2012 $ 68,549 $173,718
- ----------------
(1) These amounts are calculated based on the indicated annual rates of
appreciation and annual
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compounding from the date of grant to the end of the option term. Actual
gains, if any, on stock option exercises are dependent on the future
performance of the common stock and overall stock market conditions. There
is no assurance that the amounts reflected in this table will be achieved.
(2) An incentive stock option to purchase 50,000 shares of common stock was
granted to Mr. Tiffin on November 14, 2002 under Parallel's 1998 Stock
Option Plan. The option is exercisable in two equal annual installments on
November 14, 2003 and November 14, 2004.
The following table shows certain information about stock options
exercised in 2002 and the value of unexercised stock options held by the named
executive officers at December 31, 2002.
Aggregated Option/SAR Exercises in
Last Fiscal Year and Fiscal Year - End Option/SAR Values
Number of Securities Value of
Underlying Unexercised Unexercised
Options at Fiscal in-the-Money Options
Year-End (#) at Fiscal Year-End ($) (2)
--------------------------------- ------------------------------
Shares Value
Acquired on Realized
Name Exercise ($)(1) Exercisable Unexercisable Exercisable Unexercisable
--------- --------------- ----------- -------------- ------------- ------------ -------------
T.R. Cambridge - - 400,000 - $ 46,000(3) $ -
L. C. Oldham - - 420,000 180,000 $ 92,700(4) $ - (4)
E. A. Bayley - - 230,000 25,000 $ 37,080(5) $ - (5)
J. S. Rutherford - - 133,750 25,000 $ 37,100(6) $ - (6)
D. E. Tiffin - - - 50,000 $ - $ 28,000
- ----------------------
(1) The value realized is equal to the fair market value of a share of common
stock on the date of exercise, less the exercise price of the stock options
exercised.
(2) The value of in-the-money options is equal to the fair market value of a
share of common stock at fiscal year-end ($2.74 per share), based on the
last sale price of Parallel's common stock, less the exercise price.
(3) At December 31, 2002, the exercise prices of exercisable options to
purchase a total of 350,000 shares of common stock held by Mr. Cambridge
exceeded $2.74, the fair market value of our common stock on that date.
(4) At December 31, 2002, the exercise prices of exercisable options to
purchase a total of 320,000 shares of common stock held by Mr. Oldham
exceeded $2.74, the fair market value of our common stock on that date. In
addition, an unexercisable stcck option to purchase 180,000 shares of
common stock was held by Mr. Oldham at fiscal year-end, which also had an
exercise price greater than $2.74.
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(5) At December 31, 2002, the exercise prices of exercisable options to
purchase a total of 190,000 shares of common stock held by Mr. Bayley
exceeded $2.74, the fair market value of our common stock on that date. In
addition, an unexercisable stock option to purchase 25,000 shares of common
stock was held by Mr. Bayley at fiscal year-end, which also had an exercise
price greater than $2.74.
(6) At December 31, 2002, the exercise prices of exercisable options to
purchase a total of 93,750 shares of common stock held by Mr. Rutherford
exceeded $2.74, the fair market value of our common stock on that date. In
addition, an unexercisable stock option to purchase 25,000 shares of common
stock was held by Mr. Rutherford at fiscal year-end, which also had an
exercise price greater than $2.74.
Change of Control Arrangements
Stock Option Plans
Parallel's outstanding stock options and stock option plans contain
certain change of control provisions which are applicable to Parallel's
outstanding stock options, including the options held by our officers and
Directors. For purposes of our options, a change of control occurs if:
. Parallel is not the surviving entity in a merger or
consolidation;
. Parallel sells, leases or exchanges all or substantially all of
its assets;
. Parallel is to be dissolved and liquidated;
. any person or group acquires beneficial ownership of more than
50% of Parallel's common stock; or
. in connection with a contested election of directors, the persons
who were directors of Parallel before the election cease to
constitute a majority of the Board of Directors.
If a change of control occurs, the Compensation Committee of the Board
of Directors can:
. accelerate the time at which options may be exercised;
. require optionees to surrender some or all of their options and
pay to each optionee the change of control value;
. make adjustments to the options to reflect the change of control;
or
. permit the holder of the option to purchase, instead of the
shares of common stock as to which the option is then
exercisable, the number and class of shares of stock or other
securities or property which the optionee would acquire under the
terms of the merger, consolidation or sale of assets and
dissolution if, immediately before the merger, consolidation or
sale of assets or dissolution, the optionee had been the holder
of record of the shares of common stock as to which the option is
then exercisable.
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The change of control value is an amount equal to, whichever is
applicable:
. the per share price offered to Parallel's stockholders in a
merger, consolidation, sale of assets or dissolution transaction;
. the price per share offered to Parallel's stockholders in a
tender offer or exchange offer where a change of control takes
place; or
. if a change of control occurs, other than from a tender or
exchange offer, the fair market value per share of the shares
into which the options being surrendered are exercisable, as
determined by the Committee.
Change of Control Agreements
In June, 2001, Parallel entered into Change of Control Agreements with
Mr. Cambridge, Mr. Oldham, Mr. Bayley, Mr. Rutherford and four other employees.
Unless extended, these agreements will expire by their own terms in June, 2003.
These agreements provide that upon the occurrence of a Change of Control, each
person will receive a single lump sum cash payment in an amount equal to one
year's salary. The agreements also provide for continued participation in
Parallel's medical, dental, disability and life insurance and retirement plans
for a period of twelve months after a Change of Control. A Change of Control
occurs when:
. any person becomes the beneficial owner of Parallel's voting
shares entitling that person to 20% or more of the voting power
of Parallel;
. the stockholders of Parallel approve a transaction providing for
(1) Parallel to be merged, consolidated or otherwise combined
with another person, (2) the sale of all or substantially all the
assets or stock of Parallel or (3) the liquidation or dissolution
of Parallel; or
. less than a majority of the members of the Board are continuing
directors. A continuing director means a director of Parallel who
either (1) was a director of Parallel on June 1, 2001, the date
of the Change of Control Agreements or (2) is an individual whose
appointment, election, or nomination for election, as a director
of Parallel was approved by a vote of at least a majority of the
directors of Parallel then still in office who were continuing
directors (other than an individual whose initial assumption of
office is in connection with an actual or threatened election
contest relating to the election of the directors of Parallel).
Compensation of Directors
Parallel's nonemployee Directors each receive $1,500 for attending
meetings of the Board of Directors. Nonemployee Directors who are members of a
Board committee also receive the following fees:
. $750 per meeting for service on the Compensation Committee, with
the Chairman of the Compensation Committee being entitled to
receive an additional fee of $5,000 per year;
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. $750 per meeting for service on the Audit Committee, with the
Chairman of the Audit Committee being entitled to receive an
additional fee of $10,000 per year and each other Audit Committee
member receiving $5,000 per year; and
. $750 per meeting for service on the Hedge Committee.
Under these arrangements, during 2002, Mr. Pannill received $41,750;
Mr. Chitwood - $29,250; Mr. Shrader - $41,750; and Mr. Oring - $46,750. All
Directors are reimbursed for expenses incurred in connection with attending
meetings.
Directors who are not employees of Parallel are eligible to participate
in Parallel's 1997 Nonemployee Directors Stock Option Plan and the 2001
Nonemployee Directors Stock Option Plan. On December 18, 2002, Messrs. Oring,
Shrader, Pannill and Chitwood were each granted an option to purchase 50,000
shares of common stock under the 2001 Nonemployee Directors Stock Option Plan.
All of the options have an exercise price of $2.80, the fair market value of the
common stock on the grant date. The options become exercisable as to one-half of
the shares on December 18, 2003 and the remaining one-half become exercisable on
December 18, 2004. The options expire ten years from the grant date.
Before expiring by its own terms on March 1, 2002, Parallel's 1992
Stock Option Plan provided for the grant of a one-time stock option to purchase
25,000 shares of common stock to each person who became a nonemployee director
after March 1, 1992. The 1992 Stock Option Plan remains in effect only for
purposes of outstanding options previously granted under the plan. No options
under this plan were granted during 2002 to any nonemployee director and none
are available for grant.
Stock Option Plans
1992 Stock Option Plan. In May, 1992, our stockholders approved and
adopted the 1992 Stock Option Plan. As described above, the 1992 Plan expired by
its own terms on March 1, 2002, but remains effective for purposes of
outstanding options. The 1992 Plan provided for granting to key employees,
including officers and Directors who were also key employees of Parallel, and
Directors who were not employees, options to purchase up to an aggregate of
750,000 shares of common stock. Options granted under the 1992 Plan to employees
are either incentive stock options or options which do not constitute incentive
stock options. Options granted to nonemployee Directors are not incentive stock
options.
The 1992 Plan is administered by the Board's Compensation Committee,
none of whom were eligible to participate in the 1992 Plan, except to receive a
one-time option to purchase 25,000 shares at the time he or she became a
Director. The Compensation Committee selected the employees who were granted
options and established the number of shares issuable under each option and
other terms and conditions approved by the Compensation Committee. The purchase
price of common stock issued under each option is the fair market value of the
common stock at the time of grant.
The 1992 Plan provideed for the granting of an option to purchase
25,000 shares of common stock to each individual who was a nonemployee Director
of Parallel on March 1, 1992 and to each individual who became a nonemployee
Director following March 1, 1992. Members of the Compensation Committee were not
eligible to participate in the 1992 Plan other than to receive a nonqualified
stock option to purchase 25,000 shares of common stock as described above.
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An option may be granted in exchange for an individual's right and
option to purchase shares of common stock pursuant to the terms of a prior
option agreement. An agreement that grants an option in exchange for a prior
option must provide for the surrender and cancellation of the prior option. The
purchase price of common stock issued under an option granted in exchange for a
prior option is determined by the Compensation Committee and may be equal to the
price for which the optionee could have purchased common stock under the prior
option.
At March 1, 2002, 65,000 shares of common stock remained authorized for
issuance under the 1992 Plan. However, the 1992 Plan prohibited the grant of
options after March 1, 2002. Consequently, no additional options are available
for grant under the 1992 Plan.
At March 1, 2003, options to purchase a total of 508,750 shares of
common stock were outstanding under the 1992 Plan.
1997 Nonemployee Directors Stock Option Plan. The Parallel Petroleum
1997 Non-Employee Directors Stock Option Plan was approved by our stockholders
at the annual meeting of stockholders held in May, 1997. This plan provides for
granting to Directors who are not employees of Parallel options to purchase up
to an aggregate of 500,000 shares of common stock. Options granted under the
plan will not be incentive stock options within the meaning of the Internal
Revenue Code.
This Plan is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee has sole authority to select the
nonemployee Directors who are to be granted options; to establish the number of
shares which may be issued to nonemployee Directors under each option; and to
prescribe the terms and conditions of the options in accordance with the plan.
Under provisions of the plan, the option exercise price must be the fair market
value of the stock subject to the option on the grant date. Options are not
transferable other than by will or the laws of descent and distribution and are
not exercisable after ten years from the date of grant.
The purchase price of shares as to which an option is exercised must be
paid in full at the time of exercise in cash, by delivering to Parallel shares
of stock having a fair market value equal to the purchase price, or a
combination of cash or stock, as established by the Compensation Committee.
Options may not be granted under this plan after March 27, 2007. At
March 1, 2003, options to purchase a total of 320,000 shares of common stock
were outstanding under this plan.
At March 1, 2003, options to purchase 142,500 shares of common stock
were available for future grants under this plan.
1998 Stock Option Plan. In June, 1998, our stockholders adopted the
1998 Stock Option Plan. The 1998 Plan provides for the granting of options to
purchase up to 850,000 shares of common stock. Stock options granted under the
1998 Plan may be either incentive stock options or stock options which do not
constitute incentive stock options.
The 1998 Plan is administered by the Compensation Committee of the
Board of Directors. Members of the Compensation Committee are not eligible to
participate in the 1998 Plan. Only employees are eligible to receive options
under the 1998 Plan. The Compensation
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Committee selects the employees who are granted options and establishes the
number of shares issuable under each option.
Options granted to employees contain terms and conditions that are
approved by the Compensation Committee. The Compensation Committee is empowered
and authorized, but is not required, to provide for the exercise of options by
payment in cash or by delivering to Parallel shares of common stock having a
fair market value equal to the purchase price, or any combination of cash or
common stock. The purchase price of common stock issued under each option must
not be less than the fair market value of the common stock at the time of grant.
Options granted under the 1998 Plan are not transferable other than by will or
the laws of descent and distribution and are not exercisable after ten years
from the date of grant.
Options may not be granted under the 1998 Plan after March 11, 2008. At
March 1, 2003, options to purchase a total of 810,000 shares of common stock
were outstanding under this plan.
At March 1, 2003, there were available for future grant under the 1998
Stock Option Plan options to purchase 40,000 shares of common stock.
2001 Nonemployee Directors Stock Option Plan. The Parallel Petroleum
2001 Non-employee Directors Stock Option Plan was approved by our stockholders
at the annual meeting of stockholders held in June, 2001. This plan provides for
granting to Directors who are not employees of Parallel options to purchase up
to an aggregate of 500,000 shares of common stock. Options granted under the
plan will not be incentive stock options within the meaning of the Internal
Revenue Code.
This Plan is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee has sole authority to select the
nonemployee Directors who are to be granted options; to establish the number of
shares which may be issued to nonemployee Directors under each option; and to
prescribe such terms and conditions as the Committee prescribes from time to
time in accordance with the plan. Under provisions of the plan, the option
exercise price must be the fair market value of the stock subject to the option
on the grant date. Options are not transferable other than by will or the laws
of descent and distribution and are not exercisable after ten years from the
date of grant.
The purchase price of shares as to which an option is exercised must be
paid in full at the time of exercise in cash, by delivering to Parallel shares
of stock having a fair market value equal to the purchase price, or a
combination of cash or stock, as established by the Compensation Committee.
Options may not be granted under this plan after May 2, 2011. At March
1, 2003, options to purchase 400,000 shares of common stock were outstanding
under this plan.
At March 1, 2003, there were available for future grant under this plan
options to purchase 100,000 shares of common stock.
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Employee Stock Option Plan. In June, 2001, our Board of Directors
adopted the Parallel Petroleum Employee Stock Option Plan. This plan authorized
the grant of options to purchase up to 200,000 shares of common stock, or less
than 1.00% of our outstanding shares of common stock. Directors and officers are
not eligible to receive options under this plan. Only employees are eligible to
receive options. Stock options granted under this plan are not incentive stock
options.
This plan was implemented without stockholder approval.
The Employee Stock Option Plan is administered by the Compensation
Committee of the Board of Directors. The Compensation Committee selects the
employees who are granted options and establishes the number of shares issuable
under each option.
Options granted to employees contain terms and conditions that are
approved by the Compensation Committee. The Compensation Committee is empowered
and authorized, but is not required, to provide for the exercise of options by
payment in cash or by delivering to Parallel shares of common stock having a
fair market value equal to the purchase price, or any combination of cash or
common stock. The purchase price of common stock issued under each option must
not be less than the fair market value of the common stock at the time of grant.
Options granted under this plan are not transferable other than by will or the
laws of descent and distribution.
The Employee Stock Option Plan will expire on June 20, 2011. Unless
some of the options that have been granted under the plan are forfeited and
again become available for future grant, no additional options may be granted
under this plan.
At March 1, 2003, options to purchase 200,000 shares of common stock
were outstanding under this plan.
Other Option Grants. The Board of Directors granted a nonqualified
stock option to Mr. Cambridge in October, 1993 under the general corporate
powers of Parallel, without stockholder approval. Upon recommendation of the
Board's Compensation Committee, the Board granted the option to Mr. Cambridge to
purchase 100,000 shares of common stock at an exercise price of $3.9375 per
share, the fair market value of the common stock on the grant date. The option
is not transferable, except by will or the laws of descent and distribution. The
option expires in October, 2003.
Retirement Plan
Parallel maintains under Section 408(k) of the Internal Revenue Code a
combination simplified employee pension and individual retirement account plan
for eligible employees. Generally, eligible employees include all employees who
are at least twenty-one years of age.
Contributions to employee SEP accounts may be made at the discretion of
Parallel, as authorized by the Compensation Committee of the Board of Directors.
The percentage of contributions may vary from time to time. However, the same
percentage contribution must be made for all participating employees. Parallel
is not required to make annual contributions to
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the SEP accounts. Parallel may make tax-deductible contributions for each
employee participant of up to 15% of a participant's compensation, or $30,000,
whichever is less. Under the prototype simplified employee pension plan adopted
by Parallel, all of the SEP contributions must be made to SEP/IRAs maintained
with the sponsor of the plan, a national investment banking firm. All
contributions to employees' accounts are immediately 100% vested and become the
property of each employee at the time of contribution, including employer
contributions, income-deferral contributions and IRA contributions. Generally,
earnings on contributions to an employee's SEP/IRA account are not subject to
federal income tax until withdrawn.
In addition to receiving SEP contributions made by Parallel, employees
may make individual annual IRA contributions of up to the lesser of $10,500 or
15% of compensation. Each employee is responsible for the investment of funds in
his or her own SEP/IRA and can select investments offered through the sponsor of
the plan.
Distributions may be taken by employees at any time and must commence
by April 1st following the year in which the employee attains age 70 1/2.
Parallel presently makes matching contributions to employee accounts in
an amount equal to the contribution made by each employee, not to exceed,
however, 6% of each employee's salary during any calendar year. During 2002,
Parallel contributed an aggregate of $56,467 to the accounts of 13 employee
participants. Of this amount, $11,113 was allocated to Mr. Oldham's account;
$6,303 was allocated to Mr. Bayley's account; $6,488 was allocated to Mr.
Rutherford's account; $5,990 to Mr. Tiffin's account; and $3,710 to Mr. Foster's
account.
Incentive Award Agreements
Following meetings of Parallel's Board of Directors and its
Compensation Committee in May and August, 2000, the Board of Directors at a
meeting held in September, 2000 authorized Parallel to enter into Incentive
Award Agreements with Mr. Cambridge, Mr. Oldham, Mr. Bayley, Mr. Rutherford and
four other employees. These agreements, which were entered into in December,
2001, are intended to provide an incentive to the participants and to reward
outstanding efforts and achievements by them when a material contribution to
Parallel's success resulted from an Award Event. An Award Event generally meant
an acquisition of First Permian, a sale of substantially all of First Permian's
assets, or Parallel's sale or other disposition of its 30.675% ownership
interest in First Permian. The agreements awarded Unit Equivalent Rights to the
recipients. A Unit Equivalent Right was essentially equivalent to a Common Unit
of common membership interest in First Permian. At March 1, 2002, First Permian
had outstanding 1,140,992 Common Units and 1,350,000 Preferred Units. Parallel
owned 350,000 Common Units of First Permian. The Unit Equivalent Rights entitled
the recipient to a one-time cash bonus. Payment of the bonus was triggered by
the occurrence of an Award Event. The amount of a bonus payment was defined as
the difference between $30.00 per Common Unit and the price per Common Unit
received by First Permian's holders of Common Units in a transaction
constituting an Award Event, multiplied by the number of Unit Equivalent Rights
granted to the recipient. To illustrate, assuming the holders of First Permian's
Common Units received $100.00 per Common Unit from a sale of assets, a recipient
of 1,000 Unit Equivalent Rights would be entitled to receive a cash payment
equal to $70.00 ($100.00 minus $30.00) multiplied by 1,000, or $70,000.00. Under
these Incentive Award
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Agreements, 9,565 Unit Equivalent Rights were granted to Mr. Oldham; 2,394 were
granted to Mr. Cambridge; 2,869 to Mr. Bayley; 7,173 to Mr. Rutherford; and a
total of 2,500 Unit Equivalent Rights were granted to four other employees.
The incentive award agreements also contemplated cash payments upon a
Change of Control of Parallel, defined as:
. any person becoming the owner of 20% or more of Parallel's voting
securities;
. less than a majority of the members of Parallel's Board of
Directors continuing to serve as a Director; or
. approval by Parallel's stockholders of a transaction providing
for (1) Parallel to be merged, consolidated or otherwise combined
with another person, (2) the sale of all or substantially all of
the assets of Parallel, or (3) the liquidation or dissolution of
Parallel.
Upon the occurrence of a Change of Control, each holder of Unit
Equivalent Rights would receive a cash payment in an amount equal to the number
of Unit Equivalent Rights owned, multiplied by the Per Unit Change of Control
Value. The Per Unit Change of Control Value was defined as the quotient of (a)
the sum of (1) the remainder of (A) the discounted future net income of First
Permian's total proved reserves using SEC requirements, minus (B) the sum of (i)
all liabilities of First Permian as set forth in its balance sheet as of the
most recent date preceding the Change of Control plus (ii) the liquidation
amount of First Permian's outstanding Preferred Units (approximately $13,500,000
plus cumulated but unpaid cash dividends), (2) plus all current assets of First
Permian as set forth in its balance sheet, divided by (b) the total number of
First Permian's outstanding Common Units.
In April, 2002, an Award Event occurred when First Permian sold all of
its oil and gas properties, and the following cash bonuses were paid:
Name Bonus Payment
------------------------------- -----------------
Thomas R. Cambridge $ 132,480
Larry C. Oldham $ 529,266
Eric A. Bayley $ 158,770
John S. Rutherford $ 396,944
Four Other Employees $ 138,348
Because shares of Energen Corporation's common stock were a component
of the total purchase price for First Permian's properties, the portion of the
bonus payments attributable to the Energen stock was based upon the price at
which we sold our shares of Energen stock.
The Incentive Award Agreements automatically terminated upon payment of
the bonuses.
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- --------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
This table shows information as of March 12, 2003 about the beneficial
ownership of common stock by: (1) each person known by us to own beneficially
more than five percent of our outstanding common stock; (2) the executive
officers named in the Summary Compensation Table in this report; (3) each
director of Parallel; and (4) all of Parallel's executive officers and directors
as a group.
Name and Address Amount and Nature Percent
of of of
Beneficial Owner Beneficial Ownership (1) Class (2)
------------------ ------------------------ ---------
Thomas R. Cambridge 1,157,045 (3) 5.37%
2201 Civic Circle, Suite 216
Amarillo, Texas 79109
Dewayne E. Chitwood 1,631,057 (4) 7.49%
400 Pine St., Suite 700
Abilene, Texas 79601
Larry C. Oldham 977,090 (5) 4.53%
1004 N. Big Spring, Suite 400
Midland, Texas 79701
Martin B. Oring 165,666 (6) *
706 Cinnamon Lane
Franklin Lakes, New Jersey 07417
Charles R. Pannill 148,495 (7) *
3416 Acorn Run
Fort Worth, Texas 76019
Jeffrey G. Shrader 75,000 (8) *
801 S. Filmore, Suite 600
Amarillo, Texas 79105
Eric A. Bayley 249,490 (9) 1.17%
1004 N. Big Spring, Suite 400
Midland, Texas 79701
John S. Rutherford 138,300 (10) *
1004 N. Big Spring, Suite 400
Midland, Texas 79701
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Name and Address Amount and Nature Percent
of of of
Beneficial Owner Beneficial Ownership (1) Class (2)
------------------ ------------------------ ---------
Donald E. Tiffin 10,415 (11) *
1004 N. Big Spring, Suite 400
Midland, Texas 79701
Wes-Tex Drilling Company, L.P. 1,246,773 (12) 5.81%
519 First National Bank Building West
Abilene, Texas 79601
Julia Jones Matthews 1,942,856 (13) 8.72%
400 Pine, Suite 900
Abilene, Texas 79601
Dodge Jones Foundation 1,371,428 (14) 6.20%
400 Pine, Suite 900
Abilene, Texas 79601
All Executive Officers and Directors 4,578,558 (15) 19.61%
as a Group (10 persons)
------------------
* Less than one percent.
(1) Unless otherwise indicated, all shares of common stock are held directly
with sole voting and investment powers.
(2) Securities not outstanding, but included in the beneficial ownership of
each such person, are deemed to be outstanding for the purpose of computing
the percentage of outstanding securities of the class owned by such person,
but are not deemed to be outstanding for the purpose of computing the
percentage of the class owned by any other person. Shares of common stock
that may be acquired within sixty days upon exercise of outstanding stock
options and warrants or upon conversion of preferred stock are deemed to be
outstanding.
(3) Includes 757,045 shares of common stock held indirectly through Cambridge
Collateral Services, Ltd., a limited partnership of which Mr. Cambridge and
his wife are the general partners. Also included are 400,000 shares of
common stock underlying presently exercisable stock options held by Mr.
Cambridge.
(4) Includes 932,488 shares of common stock held directly by Wes-Tex Drilling
Company, L.P., a limited partnership, and 314,285 shares of common stock
that may be acquired by Wes-Tex Drilling Company, L.P. upon conversion of
110,000 shares of preferred stock. In his capacity as president, chief
executive officer and a manager of Wes-Tex Holdings, LLC, the general
partner of Wes-Tex Drilling Company, L.P., Mr. Chitwood may be deemed to
have shared voting and investment powers with respect to such shares. See
note 12 below. Also included are 20,000 shares of common stock held by the
Estate of Myrle Greathouse (the "Estate"); 157,142 shares that may be
acquired by the Greathouse Charitable Remainder Trust (the "Trust") upon
conversion of 55,000 shares of preferred stock; and 157,142 shares of
common stock that may be acquired by the Greathouse Foundation (the
"Foundation") upon conversion of 55,000 shares of preferred stock. Mr.
Chitwood is the executor (but not a beneficiary) of the Estate, the trustee
(but not a beneficiary) of the Trust and the executive director and a
director of the Foundation. In these capacities, Mr. Chitwood may also be
deemed to have shared voting and investment powers with respect to the
shares of common stock beneficially owned by the Estate, the Trust and the
Foundation. However, Mr. Chitwood disclaims beneficial ownership of all
shares of common stock held by Wes-Tex Drilling
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Company, L.P., the Estate, Trust and Foundation. Also included are 50,000
shares of common stock underlying presently exercisable stock options held
by Mr. Chitwood.
(5) Includes 200,000 shares of common stock held indirectly through Oldham
Properties, Ltd., a limited partnership of which Mr. Oldham is the general
partner and he and his wife are the limited partners. Also included are
440,000 shares of common stock underlying presently exercisable stock
options held by Mr. Oldham.
(6) Of the total number of shares shown, 24,000 shares are held directly by Mr.
Oring's wife; 50,000 shares may be acquired by Mr. Oring upon exercise of
stock options held by Mr. Oring; and 91,666 shares may be acquired upon
exercise of a stock purchase warrant.
(7) Includes 110,000 shares of common stock underlying presently exercisable
stock options. Also included are 1,300 shares held by Mr. Pannill as
custodian for the benefit of two minor grandchildren and as to which Mr.
Pannill disclaims beneficial ownership.
(8) Includes 50,000 shares of common stock underlying presently exercisable
stock options.
(9) Includes 230,000 shares of common stock underlying presently exercisable
stock options. A total of 6,790 shares of common stock are held indirectly
by Mr. Bayley through individual retirement accounts and Parallel's 408(K)
Plan.
(10) Includes 133,750 shares of common stock underlying presently exercisable
stock options. Also included are 2550 shares held indirectly by Mr.
Rutherford through his 408(k) Plan.
(11) Of the total number of shares shown 6,500 shares are held indirectly
through Mr. Tiffin's individual retirement account.
(12) Includes 314,285 shares of common stock that may be acquired upon
conversion of 110,000 shares of preferred stock. See note 4 above.
(13) Includes 400,000 shares of common stock owned directly by the Julia Jones
Matthews Family Trust and 171,428 shares of common stock that may be
acquired by the Trust upon conversion of 60,000 shares of preferred stock
held directly by the Trust. By virtue of her position as the President and
a Director of the Dodge Jones Foundation, Matthews has shared voting and
investment powers with respect to, and may also be deemed to be the
beneficial owner of, 971,428 shares of common stock that may be acquired by
the Dodge Jones Foundation upon conversion of 340,000 shares of preferred
stock held by it, and 400,000 shares of common stock that are owned
directly by the Dodge Jones Foundation. Matthews disclaims beneficial
ownership of all shares of common stock beneficially owned by the Dodge
Jones Foundation. See note 14.
(14) Includes 971,428 shares that may be acquired upon conversion of 340,000
shares of preferred stock. The Dodge Jones Foundation has shared voting and
investment powers with respect to such shares of common stock. See note 13.
(15) Includes 1,579,416 shares of common stock underlying stock options that are
presently exercisable or that become exercisable within sixty days and
628,569 shares of common stock that may be acquired upon conversion of
220,000 shares of preferred stock.
-73-
- --------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
Mr. Chitwood , a director of Parallel, has been the Chief Executive
Officer of Wes-Tex Drilling Company, L.P. since January 30, 2001. He was
appointed to Parallel's Board on December 19, 2000 to fill a vacancy created by
the death of a former director of Parallel. The former director was also the
sole owner of Wes-Tex Drilling Company, L.P. before his death. From time to
time, Wes-Tex Drilling Company, L.P. acquires undivided interests in oil and gas
leasehold acreage from our company and participates with us and other interest
owners in our drilling and development operations. Wes-Tex has participated in
these operations under standard form operating agreements on the same or similar
terms afforded by Parallel to nonaffiliated third parties. We invoice all
working interest owners, including Wes-Tex, on a monthly basis, without
interest, for their pro rata share of lease acquisition, drilling and operating
expenses. During 2002, we billed Wes-Tex $27,170 for its proportionate share of
lease operating expenses incurred on properties we operate. The largest amount
owed to us by Wes-Tex at any one time during 2002 for its share of lease
operating expenses was $6,949. At December 31, 2002, Wes-Tex owed us $1,600 for
these expenses. During 2002, we disbursed $53,263 to Wes-Tex in payment of
revenues attributable to Wes-Tex's pro rata share of the proceeds from sales of
oil and gas produced from properties in which Wes-Tex and Parallel owned
interests. Mr. Chitwood is not an owner of Wes-Tex and has no interest in these
transactions other than in his capacity as an officer of Wes-Tex.
During 2002, Cambridge Production, Inc., a corporation owned by Mr.
Cambridge, served as operator of 2 wells on oil and gas leases in which we also
owned an interest. Generally, the operator of a well is responsible for the day
to day operations on the lease, overseeing production, employing field
personnel, maintaining production and other records, determining the location
and timing of drilling of wells, administering gas contracts, joint interest
billings, revenue distribution, making various regulatory filings, reporting to
working interest owners and other matters. During 2002, Cambridge Production
billed us $103,362 for our pro rata share of lease operating expenses and
drilling and workover expenses. We paid $105,340 to Cambridge Production during
2002, which included amounts remaining unpaid and owed to Cambridge Production
at the end of 2001. The largest amount we owed Cambridge Production at any one
time during 2002 was $17,230. At December 31, 2002, no amounts were due to us
from Cambridge Production. Our pro rata share of oil and gas sales during 2002
from the wells operated by Cambridge Production was $186,833. At December 31,
2002, we owed Cambridge Production less than $1,000. Cambridge Production's
billings to Parallel are made monthly on the same basis as all other working
interest owners in the wells.
Cambridge Production, Inc. maintains an office in Amarillo, Texas from
which Mr. Cambridge performs his duties and services as Chairman of the Board
and Chief Executive Officer of Parallel. We reimburse Cambridge Production, Inc.
$3,000 per month for office and administrative expenses incurred on behalf of
Parallel. During 2002 we reimbursed Cambridge Production, Inc. a total of
$21,000.
Martin B. Oring, a Director of Parallel, is the owner of Wealth
Preservation, L.L.C., a financial consulting services firm. One of Wealth
Preservation's clients is Stonington
-74-
Corporation, an investment banking firm we engaged in November, 2001 for the
purpose of obtaining general corporate financial advisory services and financial
advisory services in the placement of debt or equity securities. Under Wealth
Preservation's consulting agreement with Stonington, Wealth Preservation agreed
to assist Stonington in providing financial advice to Parallel. During 2002,
Wealth Preservation received $12,500 from Stonington under terms of its
agreement with Stonington. The agreement between Wealth Preservation and
Stonington expired by its own terms in June, 2002.
During 2002, we paid $67,202 to First Permian for reimbursement of
general and administrative expenses. First Permian paid $1,007 to us for
reimbursement of general and administrative expenses. At December 31, 2002, no
amounts were owed First Permian or Parallel.
We believe the transactions described above were made on terms no less
favorable than if we had entered into the transactions with an unrelated party.
- --------------------------------------------------------------------------------
ITEM 14. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
On October 18, 2002, we supplemented our existing internal controls
with the adoption and implementation of certain disclosure controls and
procedures. The purpose of these additional disclosure controls and procedures
is to help ensure that information we are required to disclose in reports that
we file with the SEC is accumulated and communicated to our management and
recorded, processed, summarized and reported within the time periods described
by the SEC. The effectiveness of these disclosure controls and procedures has
been evaluated by our chief executive officer, Thomas R. Cambridge, and our
chief financial officer, Steven D. Foster. Mr. Cambridge and Mr. Foster have
concluded that our disclosure controls and procedures are effective for their
intended purposes. As part of their evaluation, Mr. Cambridge and Mr. Foster
also determined that there were no significant changes in internal controls or
other factors that could significantly affect internal controls after the date
of their evaluation. No corrective actions were required to be taken with regard
to significant deficiencies or material weaknesses. Following the signature page
of this report, you will find certifications signed by Mr. Cambridge and Mr.
Foster.
-75-
- --------------------------------------------------------------------------------
ITEM 15. 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) We filed one Current Report on Form 8-K on December 23, 2002
pursuant to Item 2 (Acquisition or Disposition of Assets) and
Item 7 (Financial Statements and Exhibits).
We also filed a Current Report on Form 8-K/A on March 7, 2003
pursuant to Item 7 (Financial Statements and Exhibits).
(c) Exhibits:
Exhibit
No. Description of Exhibit
------- ----------------------
3.1 Certificate of Incorporation of Registrant (Incorporated by
reference to Exhibit 3.1 to Form 10-K of the Registrant for the
fiscal year ended December 31, 1998)
3.2 Bylaws of Registrant (Incorporated by reference to Exhibit 3 to
the Registrant's Form 8-K, dated October 9, 2000, as filed with
the Securities and Exchange Commission on October 10, 2000)
4.1 Certificate of Designations, Preferences and Rights of Serial
Preferred Stock - 6% Convertible Preferred Stock (Incorporated
by reference to Exhibit 4.1 to Form 10-Q of the Registrant for
the fiscal quarter ended September 30, 1998)
4.2 Certificate of Designation, Preferences and Rights of Series A
Preferred Stock (Incorporated by reference to Exhibit 4.2 to
Form 10-K of the Registrant for the fiscal year ended December
31, 2000)
4.3 Rights Agreement, dated as of October 5, 2000, between the
Registrant and Computershare Trust Company, Inc., as Rights
Agent (Incorporated by reference to Exhibit 4.3 to Form 10-K of
the Registrant for the fiscal year ended December 31, 2000)
-76-
Exhibit
No. Description of Exhibit
------- ----------------------
Executive Compensation Plans and Arrangements (Exhibit No. 10.1
through 10.9):
------------------------------------------------------
10.1 1983 Incentive Stock Option Plan (Incorporated by reference to
Exhibit 10.2 to Form S-l of the Registrant (File No. 2-92397) as
filed with the Securities and Exchange Commission on July 26,
1984, as amended by Amendments No. 1 and 2 on October 5, 1984,
and October 25, 1984, respectively)
10.2 1992 Stock Option Plan (Incorporated by reference to Exhibit
28.1 to Form S-8 of the Registrant (File No. 33-57348) as filed
with the Securities and Exchange Commission on January 25, 1993)
10.3 Stock Option Agreement between the Registrant and Thomas R.
Cambridge dated December 11, 1991 (Incorporated by reference to
Exhibit 10.4 of Form 10-K of the Registrant for the fiscal year
ended December 31, 1992)
10.4 Stock Option Agreement between the Registrant and Thomas R.
Cambridge dated October 18, 1993 (Incorporated by reference to
Exhibit 10.4(e) of Form 10-K of the Registrant for the fiscal
year ended December 31, 1993)
10.5 Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype
Simplified Employee Pension Plan (Incorporated by reference to
Exhibit 10.6 of the Registrant's Form 10-K for the fiscal year
ended December 31, 1995)
10.6 Non-Employee Directors Stock Option Plan (Incorporated by
reference to Exhibit 10.6 of the Registrant's Form 10-K Report
for the fiscal year ended December 31, 1997)
10.7 1998 Stock Option Plan (Incorporated by reference to Exhibit
10.7 of Form 10-K of the Registrant for the fiscal year ended
December 31, 1998)
10.8 Form of Incentive Award Agreements, dated December 12, 2001,
between the Registrant and Thomas R. Cambridge, Larry C. Oldham,
Eric A. Bayley and John S. Rutherford granting 2,394 Unit
Equivalent Rights to Mr. Cambridge; 9,564 Unit Equivalent Rights
to Mr. Oldham; 2,869 Unit Equivalent Rights to Mr. Bayley; and
7,173 Unit Equivalent Rights to Mr. Rutherford (Incorporated by
reference to Exhibit 10.8 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2001)
-77-
Exhibit
No. Description of Exhibit
------- ----------------------
10.9 Form of Change of Control Agreements, dated June 1, 2001,
between the Registrant and Thomas R. Cambridge, Larry C. Oldham,
Eric A. Bayley and John S. Rutherford (Incorporated by reference
to Exhibit 10.9 of Form 10-K of the Registrant for the fiscal
year ended December 31, 2001)
10.10 Restated Loan Agreement, dated December 27, 1999, between the
Registrant and Bank One, Texas, N.A. (Incorporated by reference
to Exhibit 10.8 of Form 10-K of the Registrant for the fiscal
year ended December 31, 1999)
10.11 Loan Agreement, dated December 18, 2000, between the Registrant
and Bank United (Incorporated by reference to Exhibit 10.9 of
Form 10-K of the Registrant for the fiscal year ended December
31, 2000)
10.12 Letter agreement, dated March 24, 1999, between the Registrant
and Bank One, Texas, N.A. (Incorporated by reference to Exhibit
10.9 of Form 10-K of the Registrant for the fiscal year ended
December 31, 1998)
10.13 Certificate of Formation of First Permian, L.L.C. (Incorporated
by reference to Exhibit 10.1 of the Registrant's Form 8-K Report
dated June 30, 1999)
10.14 Limited Liability Company Agreement of First Permian, L.L.C.
(Incorporated by reference to Exhibit 10.2 of the Registrant's
Form 8-K Report dated June 30, 1999)
10.15 Merger Agreement, dated June 25, 1999 (Incorporated by reference
to Exhibit 10.3 of the Registrant's Form 8-K Report dated June
30, 1999)
10.16 Agreement and Plan of Merger of First Permian, L.L.C. and Nash
Oil Company, L.L.C. (Incorporated by reference to Exhibit 10.4
of the Registrant's Form 8-K Report dated June 30, 1999)
10.17 Certificate of Merger of First Permian, L.L.C. and Nash Oil
Company, L.L.C. (Incorporated by reference to Exhibit 10.5 of
the Registrant's Form 8-K Report dated June 30, 1999)
-78-
Exhibit
No. Description of Exhibit
------- ----------------------
10.18 Amended and Restated Limited Liability Company Agreement of
First Permian, L.L.C. dated as of May 31, 2000 (Incorporated by
reference to Exhibit 10.16 of Form 10-K of the Registrant for
the fiscal year ended December 31, 2000)
10.19 Credit Agreement, dated June 30, 1999, by and among First
Permian, L.L.C., Parallel Petroleum Corporation, Baytech, Inc.,
and Bank One, Texas, N.A. (Incorporated by reference to Exhibit
10.6 of the Registrant's Form 8-K Report dated June 30, 1999)
10.20 Limited Guaranty, dated June 30, 1999, by and among First
Permian, L.L.C., Parallel Petroleum Corporation and Bank One,
Texas, N.A. (Incorporated by reference to Exhibit 10.7 of the
Registrant's Form 8-K Report dated June 30, 1999)
10.21 Intercreditor Agreement, dated as of June 30, 1999, among First
Permian, L.L.C., Bank One, Texas, N.A., Tejon Exploration
Company, and Mansefeldt Investment Corporation (Incorporated by
reference to Exhibit 10.8 of the Registrant's Form 8-K Report
dated June 30, 1999)
10.22 Subordinated Promissory Note, dated June 30, 1999, in the
original principal amount of $8.0 million made by First Permian,
L.L.C. payable to the order of Tejon Exploration Company
(Incorporated by reference to Exhibit 10.9 of the Registrant's
Form 8-K Report dated June 30, 1999)
10.23 Subordinated Promissory Note, dated June 30, 1999, in the
original principal amount of $8.0 million made by First Permian,
L.L.C. payable to the order of Mansefeldt Investment Corporation
(Incorporated by reference to Exhibit 10.10 of the Registrant's
Form 8-K Report dated June 30, 1999).
10.24 Second Restated Credit Agreement, dated October 25, 2000, among
First Permian, L.L.C., Bank One, Texas, N.A., and Bank One
Capital Markets, Inc. (Incorporated by reference to Exhibit
10.22 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2000)
10.25 Loan Agreement, dated January 25, 2002, between the Registrant
and First American Bank, SSB (Incoporated by reference to
Exhibit 10.25 of Form 10-K of the Registrant for the fiscal year
ended December 31, 2001)
-79-
Exhibit
No. Description of Exhibit
------- ----------------------
10.26 Purchase and Sale Agreement, dated as of November 27, 2002,
among JMC Exploration, Inc., Arkoma Star L.L.C., Parallel, L.P.
and Texland Petroleum, Inc. (Incorporated by reference to
Exhibit 10.1 of Form 8-K of the Registrant, dated December 20,
2002)
10.27 First Amended and Restated Credit Agreement, dated December 20,
2002, by and among Parallel Petroleum Corporation, Parallel,
L.P., Parallel, L.L.C., First American Bank, SSB, Western
National Bank and BNP Paribas (Incorporated by reference to
Exhibit 10.2 of Form 8-K of the Registrant, dated December 20,
2002)
10.28 Guaranty dated December 20, 2002, between Parallel, L.L.C. and
First American Bank, SSB, as Agent (Incorporated by reference to
Exhibit 10.3 of Form 8-K of the Registrant dated December 20,
2002)
*21 Subsidiaries
*23.1 Consent of Independent Auditors
*23.2 Consent of Williamson Petroleum Consultants, Inc., Independent
Petroleum Engineers
*23.3 Consent of Cawley Gillespie & Associates, Inc., Independent
Petroleum Engineers
*99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes
- Oxley Act of 2002.
*99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes
Oxley Act of 2002.
----------------
* Filed herewith.
-80-
PARALLEL PETROLEUM CORPORATION
Consolidated Financial Statements
December 31, 2002 and 2001
(With Independent Auditors' Report Thereon)
PARALLEL PETROLEUM CORPORATION
Index to the Financial Statements
Page
Independent Auditors' Report F-1
Financial Statements:
Consolidated Balance Sheets at December 31, 2002 and 2001 F-2
Consolidated Statements of Income (Loss) for the years
ended December 31, 2002, 2001, and 2000 F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2002, 2001, and 2000 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000 F-5
Notes to Consolidated Financial Statements F-6
All schedules are omitted, as the required information is inapplicable or the
information is presented in the consolidated financial statements or related
notes.
Independent Auditors' Report
The Board of Directors and Stockholders
Parallel Petroleum Corporation:
We have audited the accompanying consolidated balance sheets of Parallel
Petroleum Corporation and subsidiaries (the Company) as of December 31, 2002 and
2001, and the related consolidated statements of income (loss), stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Parallel Petroleum
Corporation and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Midland, Texas
March 14, 2003
F-1
PARALLEL PETROLEUM CORPORATION
Consolidated Balance Sheets
December 31, 2002 and 2001
Assets 2002 2001
--------------- ----------------
Current assets:
Cash and cash equivalents $ 11,811,704 $ 3,351,044
Accounts receivable:
Oil and gas 3,071,315 1,420,859
Others, net of allowance for doubtful accounts of $12,681
in 2002 and $0 in 2001 236,443 263,819
Affiliate 2,084 16,687
--------------- --------------
3,309,842 1,701,365
Income tax receivable 832,590 -
Other assets 78,675 207,120
Fair market value of derivative instruments 21,884 -
--------------- --------------
Total current assets 16,054,695 5,259,529
--------------- --------------
Property and equipment, at cost:
Oil and gas properties, full cost method (note 12) 146,679,503 85,132,345
Other 1,083,282 552,219
--------------- --------------
147,762,785 85,684,564
Less accumulated depreciation and depletion (62,074,559) (55,854,378)
--------------- --------------
Net property and equipment 85,688,226 29,830,186
--------------- --------------
Net deferred tax asset (note 5) - 6,137,670
Investment in First Permian, LLC (note 16) - 473,764
Other assets, net of accumulated amortization of $78,520 in 2002 and
$131,139 in 2001 608,410 58,754
--------------- --------------
$ 102,351,331 $ 41,759,903
=============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt (note 3) $ 4,145,833 $ 2,400,000
Current maturity of crude oil swap 335,829 -
Accounts payable and accrued liabilities 3,033,650 3,422,007
--------------- --------------
Total current liabilities 7,515,312 5,822,007
--------------- --------------
Long-term debt, excluding current maturities (note 3) 45,604,167 9,600,000
Long-term maturity of crude oil swap 103,745 -
Deferred tax liability 3,627,963 -
Stockholders' equity:
Series A preferred stock - par value of $0.10 per share (aggregate liquidation
preference of $26) authorized 50,000 shares - -
Preferred stock - $0.60 cumulative convertible preferred stock - par value
of $0.10 per share, (aggregate liquidation preference of $10) authorized
10,000,000 shares, issued and outstanding of 974,500 shares in 2002 and 2001 97,450 97,450
Common stock - par value of $0.01 per share, authorized 60,000,000 shares,
issued and outstanding 21,143,406 in 2002 and
20,663,861 in 2001 211,434 206,639
Additional paid-in surplus 34,567,866 34,111,861
Accumulated earnings (deficit) 10,623,394 (8,078,054)
--------------- --------------
Total stockholders' equity 45,500,144 26,337,896
--------------- --------------
Commitments and contingencies (note 17)
--------------- --------------
$ 102,351,331 $ 41,759,903
=============== ==============
See accompanying Notes to Consolidated Financial Statements.
F-2
PARALLEL PETROLEUM CORPORATION
Consolidated Statements of Income (Loss)
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
--------------- -------------- --------------
Oil and gas revenues $ 12,106,568 $ 17,840,024 $ 17,134,502
Costs and expenses:
Lease operating expense 2,877,370 3,920,840 3,099,534
General and administrative 2,152,909 1,346,454 1,191,527
Depreciation and depletion 6,220,179 6,318,105 5,239,205
Impairment of oil and gas properties (note 13) - 16,819,813 -
-------------- ------------- --------------
Total costs and expenses 11,250,458 28,405,212 9,530,266
-------------- ------------- --------------
Operating income (loss) 856,110 (10,565,188) 7,604,236
-------------- ------------- --------------
Other income (expense), net:
Equity in income (loss) of First Permian, LP
(note 16) 31,044,452 840,529 (500,576)
Incentive awards attributable to the sale
of First Permian, LP (1,381,771) - -
Loss on sale in marketable securities (717,034) - -
Change in fair market value of derivatives (948,295) - -
Interest and other income 93,073 236,870 350,648
Dividend income 371,040 - -
Interest expense (601,322) (802,017) (1,340,360)
Other expense (331,763) (529,317) (6,620)
-------------- ------------- --------------
Total other income (expense), net 27,528,380 (253,935) (1,496,908)
-------------- ------------- --------------
Income (loss) before income taxes 28,384,490 (10,819,123) 6,107,328
Income tax (expense) benefit, deferred (9,683,042) 6,111,548 (130,000)
-------------- ------------- --------------
Net income (loss) 18,701,448 (4,707,575) 5,977,328
Cumulative preferred stock dividend (584,700) (584,700) (584,700)
-------------- ------------- --------------
Net income (loss) available to
common stockholders $ 18,116,748 $ (5,292,275) $ 5,392,628
============== ============= ==============
Net income (loss) per common share:
Basic $ 0.88 $ (0.26) $ 0.26
Diluted $ 0.79 $ (0.26) $ 0.25
See accompanying Notes to Consolidated Financial Statements.
F-3
PARALLEL PETROLEUM CORPORATION
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2002, 2001 and 2000
Common stock Preferred stock
------------------------------- ---------------------------- Additional Accumulated Total
Number of Number of paid-in deficit stockholders'
shares Amount shares Amount surplus surplus equity
-------------- ------------- -------------- ------------ ------------ ------------ -------------
Balance,
January 1, 2000 20,331,858 $ 203,319 974,500 $ 97,450 $ 34,822,778 $ (9,347,807) $ 25,775,740
Net income - - - - - 5,977,328 5,977,328
Dividends
($0.60 per share) - - - - (584,700) - (584,700)
---------- ----------- ------- --------- ------------ ------------ -----------
Balance,
December 31, 2000 20,331,858 203,319 974,500 97,450 34,238,078 (3,370,479) 31,168,368
Options issued - - - - 99,000 - 99,000
Options exercised,
including income
tax benefit 332,003 3,320 - - 359,483 - 362,803
Net loss - - - - - (4,707,575) (4,707,575)
Dividends
($0.60 per share) - - - - (584,700) - (584,700)
---------- ---------- ------- --------- ----------- ------------ ------------
Balance,
December 31, 2001 20,663,861 206,639 974,500 97,450 34,111,861 (8,078,054) 26,337,896
Common stock issued as
part of asset purchase 454,545 4,545 - - 995,455 - 1,000,000
Options exercised,
including income
tax benefit 25,000 250 - - 45,250 - 45,500
Net income - - - - - 18,701,448 18,701,448
Dividends
($0.60 per share) - - - - (584,700) - (584,700)
---------- ---------- -------- ---------- ------------ ------------ ------------
Balance,
December 31, 2002 21,143,406$ 211,434 974,500$ 97,450 $ 34,567,866 $ 10,623,394 $ 45,500,144
========== ========== ======= ========= ============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
F-4
PARALLEL PETROLEUM CORPORATION
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
--------------- --------------- -------------
Cash flows from operating activities:
Net income (loss) $ 18,701,448 $ (4,707,575) $ 5,977,328
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and depletion 6,220,179 6,318,105 5,239,205
Equity in income of First Permian, L.P., (31,044,452) (840,529) 500,576
Loss on sale of marketable securities 717,034
Deferred income taxes 9,683,042 (6,111,548) -
Change in fair value of derivative instruments 948,295 - -
Loss on disposal of equipment - (8,908) 1,000
Impairment of oil and gas properties - 16,819,813 -
Stock-based financial advisory services - 99,000 -
Changes in assets and liabilities:
Other, net (549,656) 25,688 (37,651)
Decrease (increase) in accounts receivable (1,608,477) 2,695,549 (2,748,422)
Decrease (increase) in prepaid expenses (621,554) (179,954) 12,511
Increase (decrease) in accounts payable and accrued liabilities (388,357) (726,688) 1,749,329
Purchase of derivative instruments (530,605) - -
------------- ------------- -------------
Net cash provided by operating activities 1,526,897 13,382,953 10,693,876
------------- ------------- -------------
Cash flows from investing activities:
Additions to oil and gas property (61,239,607) (13,125,716) (8,847,482)
Proceeds from disposition of oil and gas property 692,450 1,964,677 3,017,618
Proceeds from disposition of Energen stock 24,863,305 - -
Additions to other property and equipment (531,063) (211,146) (84,045)
Proceeds from disposition of other property and equipment - 15,000 -
Distribution received from investment in First Permian, LLC 5,937,878 - 67,500
------------- ------------- -------------
Net cash used in investing activities (30,277,037) (11,357,185) (5,846,409)
------------- ------------- -------------
Cash flows from financing activities:
Borrowings from bank line of credit 53,435,589 2,000,000 12,427,531
Payments on bank line of credit (15,685,589) (2,427,531) (15,965,889)
Proceeds from exercise of options and warrants 45,500 336,681 -
Payments of preferred stock dividend (584,700) (584,700) (584,700)
------------- ------------- -------------
Net cash provided by (used in) financing activities 37,210,800 (675,550) (4,123,058)
------------- ------------- -------------
Net increase in cash and cash equivalents 8,460,660 1,350,218 724,409
Beginning cash and cash equivalents 3,351,044 2,000,826 1,276,417
------------- ------------- -------------
Ending cash and cash equivalents $ 11,811,704 $ 3,351,044 $ 2,000,826
============= ============= =============
Non-Cash financing and investing activities:
(Non-Cash) proceeds from sale of investment of First Permian, L.P. $ (25,580,339) $ -- $ --
Accrued stock dividend $ 24,363 $ 24,363 $ 24,363
Issuance of stock for purchase of oil and gas property $ 1,000,000 $ -- $ --
See accompanying Notes to Consolidated Financial Statements.
F-5
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(1) Summary of Significant Accounting Policies
(a) 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, East Texas and in the Permian Basin of
West Texas.
(b) 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.
(c) Property and Equipment
The Company's oil and gas producing activities are accounted for
using the full cost method of accounting. Accordingly, all costs
associated with acquisition, exploration, and development of oil
and gas reserves, including directly related overhead costs, are
capitalized.
Management and service fees received for contractual arrangements,
if any, are treated as reimbursement of costs, offsetting the
costs incurred to provide those services.
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% 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 estimated 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 oil and gas reserves, in
which case the gain or loss is recognized in income. Abandonments
of properties are accounted for as adjustments of capitalized
costs subject to amortization.
Maintenance and repairs are charged to operations; renewals and
betterments are capitalized to the appropriate property and
equipment accounts.
(Continued)
F-6
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
Upon retirement or disposition of assets other than oil and gas
properties, the cost and related accumulated depreciation are
removed from the accounts with the resulting gains or losses, if
any, recognized in income. Depreciation of other property and
equipment is computed using the straight-line method based on the
estimated useful lives of the property and equipment.
(d) 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.
(e) Investments
Investments in affiliated companies with a 20% to 50% ownership
interest are accounted for on the equity basis and, accordingly,
net income includes the Company's share of their income or loss.
(f) 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.
(g) Derivative Instruments and Hedging Activities
In June 1998 the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Certain Hedging
Activities. In June 2000 the FASB issued SFAS No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activity,
an Amendment of SFAS 133. SFAS No. 133 and SFAS No. 138 require
that all derivative instruments be recorded on the balance sheet
at their respective fair values. SFAS No. 133 and SFAS No. 138 are
effective for all fiscal quarters of all fiscal years beginning
after June 30, 2000; the Company adopted SFAS No. 133 and SFAS No.
138 on January 1, 2001. There was no material impact to the
financial statements.
(h) Stock-Based Compensation
In accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, no compensation is
recorded for stock options or other stock-based awards that are
granted to employees or non-employee directors with an exercise
price equal to or above the common stock price on the grant date.
Compensation related to performance share grants with time vesting
conditions is based on the fair value of the award at the grant
date and recognized over the vesting period. Compensation related
to performance shares with price target vesting is recognized when
the price target is reached. See Note 4.
(Continued)
F-7
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
As required to be disclosed pursuant to SFAS No. 148, Accounting
for Stock Based Compensation-Transition and Disclosure, is as
follows:
Year Ended December 31,
---------------------------------------
2002 2001 2000
---------- -------- ---------
(in thousands, except per share data)
Net income (loss) as reported $18,701,448 $(4,707,575) $ 5,977,328
Deduct:
Total stock-based employee compensation expense
determined under fair value method for all awards,
net of related tax effects (757,115) (239,349) (145,041)
----------- ----------- -----------
Pro forma net income (loss) $17,944,333 $(4,946,924) $ 5,832,287
=========== =========== ===========
Earnings per share:
Basic - as reported $ 0.88 $ (0.26) $ 0.26
=========== =========== ===========
Basic - pro forma $ 0.87 $ (0.26) $ 0.26
=========== =========== ===========
Diluted - as reported $ 0.79 $ (0.26) $ 0.25
=========== =========== ===========
Diluted - pro forma $ 0.84 $ (0.26) $ 0.25
=========== =========== ===========
(i) 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.
(Continued)
F-8
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(j) Net Income Per Share
Basic earnings per share excludes any dilutive effects of option,
warrants and convertible securities and is computed by dividing
income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted
earnings per share are computed similar to basic earnings per
share, however fully diluted earnings per share reflects the
assumed conversion of all potentially dilutive securities.
(k) Use of Estimates in the Preparation of Financial Statements
Preparation of the accompanying financial statements in conformity
with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. The oil and gas reserve estimates
used in the determination of depletion expense and the full-cost
ceiling test and are inherently imprecise. Actual results could
differ from those estimates.
(l) 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.
(m) 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.
(n) Reclassifications
Certain reclassifications have been made to 2000 and 2001 amounts
to conform to the 2002 presentation.
(2) Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable, and
accrued liabilities approximates fair value because of the short maturity
of these instruments.
The carrying amount of long-term debt approximates fair value because the
Company's current borrowing rate is based on a variable market rate of
interest.
(Continued)
<
F-9
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(3) Long-Term Debt
Long-term debt consists of the following at December 31:
2002 2001
---------------- ----------------
Revolving Facility note payable to bank, at bank's base lending rate
(4.5% at December 31, 2002 and 4.75% at
December 31, 2001) $ 49,750,000 $ 12,000,000
Less current maturities 4,145,833 2,400,000
---------------- ---------------
$ 45,604,167 $ 9,600,000
================ ===============
Revolving Credit Facility
On July 19, 2002, the Company entered into a loan agreement with First
American Bank SSB to refinance its outstanding indebtedness. Under the
new facility, the Company may borrow the lesser of $100,000,000 or the
"borrowing base" then in effect. The loan agreement was amended and
restated on December 20, 2002, at the time of the Fullerton acquisition.
The facility became syndicated with First American Bank SSB as the Joint
Lead Arranger and Administrative Agent, BNP Paribas as Joint Lead
Arranger and Syndication Agent, and Western National Bank as a Lender.
The borrowing base at December 20, 2002, was $50,000,000 which at that
date was collateralized with the Company's oil and gas reserves and its
Salomon Smith Barney account, which held the remaining cash and Energen
stock from the First Permian distribution. The borrowing base
attributable to the Salomon Smith Barney account was $7,000,000. The
total outstanding principal amount of the Company's bank indebtedness at
December 31, 2002 and 2001 was $49,750,000 and $12,000,000, respectively.
Borrowings attributable to the oil and gas reserves are subject to
redetermination semi-annually, on or about May 1 and November 1 of each
year, beginning November 1, 2002. The bank may require a redetermination
of the borrowing base and monthly commitment reduction at any time in its
sole discretion. Monthly Commitment Reductions begin August 31, 2003 in
an amount equal to the amount of the borrowing base on the day
immediately preceeding the date of each such Monthly Commitment Reduction
divided by the number of months then remaining prior to July 31, 2008.
All indebtedness under the new Revolving Facility matures December 20,
2006.
The unpaid principal balance for the Revolving Facility bears interest at
the election of the Company at a rate equal to (i) the bank's base
lending rate, or (ii) the 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%; 2.25% per annum
whenever the Borrowing Base Usage is less than 50%.
However, the interest rate may never be less than 4.50%. Interest is due
and payable on the day which the related libor interest period ends.
The Company is required to pay a commitment fee of one-quarter of one
percent times the daily average of the unadvanced amount of the
commitment. The commitment fee shall be payable quarterly in arrears on
the last day of each calendar quarter beginning March 31, 2003.
(Continued)
F-10
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
In addition to customary affirmative covenants, the loan agreement
contains various restrictive covenants and compliance requirements,
including:
Maintaining certain financial requirements;
Limitation on additional indebtedness;
Prohibiting the payment of dividends on our common stock;
Limitations on the disposition of assets;
Prohibiting liens (other than in favor of the bank) to exist on any
of our properties;
Limitations on investments, mergers, forming subsidiaries, affiliate
transactions, changes in accounting methods, rental and lease payments
and derivative transactions
Limitations on the purchase, redemption or retirement of stock; and
Limitations on hedging activities.
As of December 31, 2002 the Company was in compliance with all covenants.
Scheduled maturities of long-term debt at December 31, 2002, based on the
New Revolving Facility entered into July 19, 2002, are as follows:
2003 $ 4,145,833
2004 9,950,000
2005 9,950,000
2006 9,950,000
2007 9,950,000
2008 5,804,167
------------
$ 49,750,000
============
(4) Stock Options, Warrants and Rights
At the election of the board of directors, the Company awards both
incentive stock options and nonqualified stock options to selected key
employees and officers. The options are awarded at an exercise price
based on the closing price of the Company's common stock on the date of
grant, a two-year and four-year vesting schedule and a ten-year exercise
period. As of December 31, 2002, options expire beginning in the current
year and extending through 2012. Exercise of the nonqualified stock
options resulted in a deferred tax benefit of $5,865 and $26,122 for the
year ended December 31, 2002 and 2001, respectively.
(Continued)
F-11
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
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 2002 and 2001.
No options were granted in 2001.
2002 2001
--------------- ----------------
Risk-free interest rate 2.5% 4.49%
Expected life 8 years 8 years
Expected volatility 45.2% 56.0%
A summary of the Company's employee stock options as of December 31,
2002, 2001 and 2000, and changes during the years ended on those dates is
presented below:
Year ended Year ended Year ended
December 31, 2002 December 31, 2001 December 31, 2000
------------------------- ------------------------- ---------------------------
Number of Weighted Number of Weighted Number of Weighted
shares average price shares average price shares average price
-------- ------------- ---------- ------------- ----------- -------------
Stock options:
Outstanding at beginning of year 2,103,750 $ 3.74 1,951,750 $ 3.13 1,951,750 $ 3.13
Options granted 345,000 2.54 700,000 4.87 - -
Options exercised (25,000) (1.82) (325,500) (1.03) - -
Options expired (85,000) (1.75) (222,500) 3.80 - -
--------- ---------- --------- ----------- -------- ------------
Outstanding at end of year 2,338,750 $ 2.71 2,103,750 $ 3.74 1,951,750 $ 3.13
========= ========== ========= =========== ========= ============
Exercisable at end of year 1,656,250 $ 2.82 1,451,250 $ 3.54 1,689,250 $ 3.26
========== ========== ========= =========== ========= ============
Weighted average fair value of
options granted during the year $ 1.66 $ 3.18 $ -
The following table summarizes information about the Company's employee
stock options outstanding at December 31, 2002:
Options outstanding Options exercisable
---------------------------------------------- ---------------------------
Number Weighted Number
Outstanding at average Weighted exercisable at Weighted
Range of December 31, remaining average December 31, average
exercise prices 2002 contractual life exercise price 2002 exercise price
------------------------------------ ----------- ---------------- -------------- ------------- --------------
$1.81 - $3.94 1,250,000 6 years $ 2.85 917,500 $ 2.99
$4.09 - $5.50 1,088,750 7 years $ 4.83 738,750 $ 6.06
----------- ----------
2,338,750 1,656,250
=========== ==========
(a) Stock Warrants
In connection with a common stock offering in 1996, an underwriter
received a five-year warrant to purchase 125,000 shares of common
stock at an exercise price of $5.10 per share. These warrants
expired unexercised in 2001.
(Continued)
F-12
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
The Company has outstanding at December 31, 2002 and 2001,
300,000, warrants which were issued as part of the Company's
initial public offering in 1980. Each warrant allows the holder to
buy one share of common stock for $6.00. The warrants are
exercisable for a 30 day period commencing on the date a
registration statement covering exercise is declared effective.
The warrants contain antidilution provisions and in the event of
liquidation, dissolution, or winding up of the Company, the
holders are not entitled to participate in the assets of the
Company.
The Company also has outstanding at December 31, 2002 and 2001; an
additional 275,000 warrants issued as partial payment for services
rendered for financial and investment advice. The warrants have an
exercise price equal to the average of the last bid and last asked
price of the Company's common stock on the effective date of the
issuance of the warrants and have a term of five years from date
of issuance and a vesting period of one year. The expense related
to these warrants in the amount of $99,000 was recorded in other
expenses in 2001 and is based on the estimated fair value on the
date of grant using the Black-Scholes option pricing model.
(b) Stock Rights
On October 5, 2000, the board of directors declared a dividend of
one Right for each outstanding share of the Company's common
stock, $0.01 par value, distributable to stockholders of record at
the close of business on October 16, 2000. If a public
announcement that a person has acquired 15% or more of the
Company's common stock or a tender offer or exchange offer is made
for 15% or more of the common stock, each Right will entitle the
holder to purchase from the Company one one-thousandth of a share
of Series A Preferred Stock, par value $0.10 per share, at an
exercise price of $26.00 per one one-thousandth of a share,
subject to adjustment.
Initially, the Rights attach to all common stock certificates
representing shares then outstanding, and no separate rights
certificates will be distributed. The Rights separate from the
common stock upon the earlier of (1) ten business days following a
public announcement that a person or group of affiliated or
associated persons has acquired or obtained the right to acquire,
beneficial ownership of 15% or more of the outstanding shares of
common stock or (2) ten business days (or such later date as the
board of directors shall determine) following the commencement of
a tender or exchange offer that would result in a person or group
beneficially owning 15% or more of such outstanding shares of
common stock. The date the Rights separate is referred to as the
"distribution date".
Under certain circumstances the rights entitle the holders to buy
the Company's stock at a 50% discount. In the event that (1) the
Company is the surviving corporation in a merger or other business
combination with an entity that owns 15% or more of the Company's
outstanding stock; (2) any person shall acquire beneficial
ownership of 15% of the Company's outstanding stock; or (3) there
is any type of recapitalization of the Company that results in an
increase by more than 1% the proportionate share of equity
securities of the Company owned by a person who owns 15% or more
of the Company's outstanding stock, each right holder will have
the option to buy for the purchase price common stock of the
Company having a value equal to two times the purchase price of
the right.
(Continued)
F-13
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
Under certain circumstances the rights entitle the holders to buy
shares of the acquirer's common stock at a 50% discount. In the
event that, at any time after a person has acquired 15% or more of
the Company's common stock, (1) the Company enters into a merger
or other business combination transaction in which the Company is
not the surviving corporation; (2) the Company is the surviving
corporation in a transaction in which all or part of the common
stock is exchanged for cash, property or securities of any other
person; or (3) more than 50% of the assets, cash flow or earning
power of the Company is sold, each right holder will have the
option to buy for the purchase price stock of the acquiring
company having a value equal to two times the purchase price of
the right.
The Rights are not exercisable until the distribution date and
will expire at the close of business on October 5, 2010, unless
earlier redeemed by the Company for $0.001 per right.
(5) Income Taxes
Federal income tax expense (benefit) differs from the amount computed at
the Federal statutory rate as follows:
Year ended December 31
---------------------------------------------
2002 2001 2000
------------- ------------ ------------
Income tax expense (benefit) at statutory rate $ 9,650,727 $ (3,678,502) $ 2,076,492
Change in valuation allowance for deferred tax assets - (2,062,954) (2,185,526)
Adjustment to deferred tax liability for changes in
estimates - - 669,533
Statutory depletion (359,792) (389,235) (445,941)
State tax, net of federal benefit 369,776 - -
Nondeductible expenses and other 22,331 19,143 15,442
------------- ------------ ------------
Income tax expense (benefit) $ 9,683,042 $ (6,111,548) $ 130,000
============= ============ ============
Income tax expense is deferred, with the exception of $130,000 in 2000
related to alternative minimum tax (AMT).
(Continued)
F-14
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
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:
2002 2001
--------------- ----------------
Noncurrent:
Deferred tax assets:
Net operating loss carryforwards, state and federal $ 4,264,427 $ 6,370,720
Statutory depletion carryforwards 1,418,318 2,025,166
Alternative minimum tax credit carryforward 118,074 118,074
Suspended loss carryforward in First Permian, LLC - 2,893,244
Equity investment in First Permian, LLC 58,722 -
Allowance for accounts receivable 4,723 -
Charitable contribution carryforward 164 7,713
Other 162,511 -
--------------- ----------------
Total deferred tax assets 6,026,939 11,414,917
--------------- ----------------
Deferred tax liabilities:
Equity investment in First Permian, LLC - (3,054,324)
Property and equipment, principally due to differences in
basis, expensing of intangible drilling costs for tax
purposes and depletion (9,654,902) (2,222,923)
=============== ================
Total deferred tax liabilities (9,654,902) (5,277,247)
--------------- ----------------
Net noncurrent deferred income tax (liability) asset $ (3,627,963) $ 6,137,670
============== ================
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. This was
due to the historical volatility in crude oil and gas prices, the
uncertainty of future commodity prices, and the Company's history of
generating net losses. Management was unable to conclude that it is more
likely than not that the Company will be able to utilize all the
available carryforwards prior to their ultimate expiration. In 2001 the
valuation allowance was reversed as the Company was able to utilize the
available carryforwards due to the sale of the assets of First Permian.
(See note 19)
(Continued)
F-15
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
As of December 31, 2002, the Company had net operating loss carryforwards
for regular tax purposes available to reduce future taxable income and
tax liability, respectively. These carryforwards expire as follows:
Alternative
minimum
Net operating tax net
loss operating loss
--------------- ----------------
2018 $ 1,756,028 $ 2,570,081
2019 5,250,285 4,882,783
2021 4,575,439 4,497,542
--------------- -------------
$ 11,581,752 $ 11,950,406
=============== ==============
As of December 31, 2002, the Company had approximately $118,074 of
minimum tax credit available indefinitely.
(6) Major Customers
The following purchasers accounted for 10% or more of the Company's oil
and gas sales for the years ended December 31:
2002 2001 2000
---------------- --------------- ---------------
Purchaser A 10% 25% -
Purchaser B 3% 6% 6%
Purchaser C 31% 38% 22%
Purchaser D 16% 23% 16%
(7) Employee Pension Plan
Effective September 1, 1988, the Company established a simplified
employee pension plan covering all salaried employees of the Company. The
employees voluntarily contribute a portion of their eligible
compensation, not to exceed $7,000, adjusted for inflation beginning in
1988, to the plan. The Company's contribution, including the employee's
contribution, cannot exceed $40,000. During 2002, 2001 and 2000, the
Company contributed an aggregate of $56,467, $39,760, and $36,077,
respectively, of which $11,113, $11,724 and $9,750, respectively, was on
behalf of a Director of the Company. The Company has no obligation to
make contributions to the plan.
(8) Statements of Cash Flows
No Federal income taxes were paid in 2002, 2001 and 2000, as a result of
net operating losses or loss carryforwards.
The Company made interest payments of $601,322, $802,017 and $1,340,360
in 2002, 2001 and 2000, respectively.
(Continued)
F-16
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
At December 31, 2002 and 2001, there were $301,591 and $2,366,795,
respectively, of property additions accrued in accounts payable.
(9) Derivative Instruments
Our derivative instruments are recorded in the balance sheet as either an
asset or liability measured at its fair market value. We use
mark-to-market accounting for our hedge contracts and changes in a
derivatives fair value are recognized in earnings. As of December 3,
2002, the Company entered into a 33-month NYMEX Oil Swap contract. The
Company uses these contracts to mitigate the volatility of commodity
prices. The following table sets forth the volumes and hedge prices of
the contracts:
Barrels of NYMEX
Period of Time Oil Prices
--------------------------------------- ---------- ---------------
April 2003 thru December 2003 275,000 $ 24.58
January thru December 2004 329,000 $ 23.19
January thru December 2005 292,000 $ 22.77
January 1, 2006 thru December 20, 2006 265,500 $ 23.04
(10) Equity Transactions
Preferred Stock
On April 8, 1998, the Company completed a private placement of 600,000
shares of its $0.60 Cumulative Convertible Preferred Stock, $0.10 par
value per share (Old Preferred Stock). Cumulative dividends of $0.60 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 $0.60
Cumulative Convertible Preferred Stock (Old Preferred Stock), issued in a
private placement transaction dated April 8, 1998, for 600,000 shares of
its 6% Convertible Preferred Stock, $0.10 par value per share (Preferred
Stock). Each share of Preferred Stock may be converted, at the option of
the holder, into 2.8571 shares of common stock at an initial conversion
price of $3.50 per share, subject to adjustment in certain events. The
Company may redeem the Preferred Stock, in whole or part, after October
20, 1999, for $10 per share plus accrued dividends.
On October 30, 1998, the Company completed a private placement of 374,500
shares of its 6% Convertible Preferred Stock, $0.10 par value per share
(Preferred Stock). Each share of Preferred Stock may be converted, at the
option of the holder, into 2.8571 shares of common stock at an initial
conversion price of $3.50 per share, subject to adjustment in certain
events. The Company may redeem the Preferred Stock,
(Continued)
F-17
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
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.
On October 5, 2000, the Company authorized 50,000 shares of $0.10 par
Series A Preferred Stock. These shares will be issued upon the exercise
of the Company's Preferred Stock Purchase Rights. Subject to the rights
of the holders of any series of preferred stock ranking prior and
superior to the Series A preferred stock with respect to dividends, the
holders of shares of the Series A Preferred Stock shall be entitled to
receive, when, and if declared by the board of directors, quarterly
dividends payable in cash on the first day of July, October, January and
April, in each year beginning in 2001, commencing on the first quarterly
dividend payment Date after the first issuance of a fraction of a share
of Series A Preferred Stock. Each share of Series A Preferred Stock shall
entitle the holder to one one-thousandth of a vote on all matters
submitted to a vote of the stockholders of the Company.
(11) Related Party Transactions
Certain Directors and their companies own interests in certain wells
operated by the Company. During 2002 and 2001, the Company charged
$34,485 and $264,470, respectively, for lease operating expenses and
drilling costs and paid $69,019 and $175,991, 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 2002 and 2001, the Company was
billed $85,131 and $115,493, respectively, for the Company's pro rata
share of lease operating and drilling expenses and received $186,833 and
$319,308 in 2002 and 2001, respectively, in oil and gas revenues related
to these wells.
During 2001, the Company received from First Permian, LLC reimbursement
of general and administrative expenses of $23,647, with the reimbursement
netted against the costs incurred to provide those services.
The Company received management fees of $0 and $68,750 from First
Permian, LLC, in 2002 and 2001, respectively. These fees are not related
to oil and gas exploration and development activities, but are
reimbursement of general and administrative expenses and are properly
recorded in other income.
A certain Director of the Company also serves as director of an entity
which owns 110,000 shares of preferred stock of the Company. In addition,
a Foundation, where this same Director is the chairman of the board of
directors of the Foundation, and a Trust, where this same Director is
trustee, owns a total of 55,000 shares each of preferred stock of the
Company. All of the shares of preferred stock of the Company were
purchased at a price of $10 per share on the same terms as all other
unaffiliated purchasers.
(Continued)
F-18
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
In 2001, a certain Director of the Company acquired an interest in a
portion of the warrants awarded to the Company's investment advisor (see
note 4) as the director acted as a consultant for the investment advisor.
The fair value of the warrants was estimated to be $33,000 using the
Black-Scholes Option Pricing model.
(12) Oil and Gas Expenditures
The following table reflects capitalized costs related to the oil and gas
properties as of December 31:
2002 2001
--------------- ----------------
Proved properties $ 144,786,580 $ 76,248,443
Unproved properties, not subject to depletion 1,892,923 8,883,902
--------------- ---------------
146,679,503 85,132,345
Accumulated depletion (61,613,647) (55,552,876)
--------------- ---------------
$ 85,065,856 $ 29,579,469
=============== ===============
Certain directly identifiable internal costs of property acquisition,
exploration, and development activities are capitalized. Such costs
capitalized in 2002, 2001 and 2000 totaled $1,335,167, $782,450 and
$624,007, respectively.
Depletion per equivalent unit of production (BOE) was $10.52, $9.13 and
$8.18 for 2002, 2001 and 2000, 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:
2002 2001 2000
---------------- --------------- ----------------
Transfers (to)/from assets held for sale $ - $ - $ 2,127,734
Proved property acquisition costs 48,043,656 26,970 23,291
Unproved property acquisitions costs 2,295,224 3,420,455 3,371,898
Exploration 1,291,054 6,820,480 2,163,124
Development 9,307,659 1,202,889 1,087,424
---------------- --------------- ----------------
$ 60,937,593 $ 11,470,794 $ 8,773,471
================ ============== ===============
(Continued)
F-19
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(13) 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% of future net revenues from
proved reserves plus lower of cost or fair market value of unproved
properties, the Company recognized an impairment of approximately
$16,820,000 in 2001. There was no impairment recorded for 2000 and 2002.
(Continued)
F-20
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(14) Earnings per Share
In accordance with the provisions of FAS 128, the following table
provides reconciliation between basic and diluted earnings per share for
the year ended December 31:
2002 2001 2000
---------------- --------------- ----------------
Basic EPS Computation:
Numerator:
Net income (loss) $ 18,701,448 $ (4,707,575) $ 5,977,328
Preferred stock dividend (584,700) (584,700) (584,700)
---------------- --------------- ----------------
Net income (loss) available to
common stockholders $ 18,116,748 $ (5,292,275) $ 5,392,628
================ ============== ===============
Denominator:
Weighted average common shares
outstanding 20,679,658 20,457,697 20,331,858
================ =============== ================
Basic net earnings (loss) per share $ 0.88 $ (0.26) $ 0.26
================ ============== ===============
Diluted EPS Computation:
Numerator:
Net income (loss) $ 18,701,448 $ (4,707,575) $ 5,977,328
Preferred stock dividend - (584,700) -
---------------- --------------- ----------------
Net income (loss) available to
common stockholders $ 18,701,448 $ (5,292,275) $ 5,977,328
================ ============== ===============
Denominator:
Weighted average common shares for
basic earnings (loss) per share 20,679,658 20,457,697 20,331,858
Effect of dilutive securities:
Employee stock options 84,627 - 348,787
Warrants - - 603
Preferred stock 2,784,244 - 2,784,244
---------------- --------------- ----------------
Weighted average common
shares for diluted earnings
(loss) per share assuming
conversions 23,548,529 20,457,697 23,465,492
================ =============== ================
Diluted net earnings (loss) per share $ .79 $ (0.26) $ 0.25
================ ============== ===============
(Continued)
F-21
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
Stock options to purchase shares of common stock and convertible
preferred stock were outstanding during 2002, 2001 and 2000 but were not
included in the computation of diluted net earnings (loss) per share
because either (i) the employee stock options' exercise price was greater
than the average market price of 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.
(15) Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement No.
143 Accounting for Asset Retirement Obligations which establishes
requirements for the accounting of removal-type costs associated with
asset retirements. The standard is effective for fiscal years beginning
after June 15, 2002, with earlier application encouraged.
The Company used an expected cash flow approach to estimate its asset
retirement obligation under SFAS No. 143. Upon adoption on January 1,
2003, the Company recorded a retirement obligation of $1,322,636, an
increase in property cost of $835,291, a reduction of accumulated
depreciation, depletion and amortization of $394,230 and a cumulative
effect of accounting change loss, net of tax, of $61,456. As a result of
adoption of SFAS No. 143, the Company estimated that in 2003 accretion of
discount expense will be approximately $140,502, and depreciation,
depletion and amortization expense will decrease approximately $184,858.
In April 2002, the FASB issued Statement No. 145, Rescission of FASB No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Most significantly, this Statement eliminates the
requirement under Statement 4 to aggregate all gains and losses from
extinguishment of debt, and if material, be classified as an
extraordinary item. As a result, gains and losses from extinguishment of
debt should be classified as extraordinary items only if they met the
criteria in Opinion 30. Applying the provisions of Opinion 30 will
distinguish transactions that are part of an entity's recurring
operations from those that are unusual or infrequent or that meet the
criteria for classification as an extraordinary item. There is no current
impact to the Company as there has been no early extinguishment of debt
which meets the criteria for an extraordinary item.
In July 2002, the FASB issued Statement No., 146, Accounting for Costs
Associated with Exit or Disposal Activities. The statement requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. Statement 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company
expects no impact to its financial statements as it does not anticipate
exiting or disposing of any of its activities.
(Continued)
F-22
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure, which amends SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for
stock-based employee compensation. The statement also amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The statement is required to be adopted
for fiscal years ending after December 15, 2002.
The Company accounts for stock-based compensation in accordance with APB
Opinion No. 25 and does not currently plan to expense stock option awards
pursuant to SFAS 123. The Company early implemented the disclosure
requirements of SFAS No. 145. See Notes 1 and 4 to Consolidated
Financial Statements.
FIN No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, FIN
No. 45 requires that a liability be recorded in the guarantor's balance
sheet upon issuance of certain guarantees. Initial recognition and
measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. FIN No. 45 also
requires disclosures about guarantees in financial statements for interim
or annual periods ending after December 15, 2002.
FIN No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51. FIN No. 46
requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without financial support from other parties. The Company does
not expect the adoption of FIN No. 46 to have a material impact on our
consolidated financial statements.
(16) Equity Investment
At December 31, 2000, the Company has recorded a loss of $500,576 in its
investment of First Permian, LLC to the extent that the Company had
guaranteed $10,000,000 of the debt of First Permian. Effective October
25, 2000, the Company was released from its guarantee and discontinued
the equity method of accounting for its share of losses in First Permian.
In 2002 the Company resumed the equity method of accounting as their
portion of First Permian's net income exceeded the losses not recognized
during the period the equity method was suspended. In 2002 the Company
recorded equity in loss of $416,221.
On March 7, 2002, First Permian entered into an Agreement of Sale and
Purchase with Energen Resources Corporation, a wholly owned subsidiary of
Energen Corporation (Energen), to sell all of First Permian's oil and gas
properties for $120 million in cash and 3,043,479 shares in Energen stock
approximating $70 million in value. Energen is a publicly traded company
listed on the NYSE. The transaction closed on April 8, 2002. As a 30.675%
interest owner in First Permian, the Company received its prorata share
of the net proceeds, $5.5 million in cash and 933,589 shares of Energen
common stock. All shares of Energen stock were sold prior to December 31,
2002 for $24.9 million; resulting in the total proceeds from the sale of
First Permian in the amount of $30.4 million.
(Continued)
F-23
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(17) Commitments and Contingencies
At December 31, 2002, the Company was party to one legal action arising
incidental to its business. It is management's opinion that the ultimate
outcome of these legal actions will not have a material adverse effect on
the Company's operations or financial position. The Company is not aware
of any other threatened litigation. The Company has not been a party to
any bankruptcy, receivership, reorganization, adjustments or similar
proceeding.
(18) Fullerton Acquisition
On December 20, 2002 we purchased through our subsidiary, Parallel, L.P.,
95% of the interest owned by non-affiliated sellers in producing oil and
gas properties located in the Fullerton Field of Andrews County, Texas in
the Permian Basin of west Texas. The total purchase price for our
interest in the Fullerton properties was $46,075,000.
The following table presents pro forma operating results as if the
purchase was effective on January 1, 2002.
As of December 31, 2002
-----------------------------------------------
Pro forma Pro forma
Parallel Fullerton Properties Combined
-------- -------------------- ------------
Revenues $ 12,106,568 $ 10,130,224 $ 22,236,792
Operating income $ 856,110 $ 6,436,430 $ 7,292,540
Net income available to common stockholders $ 18,116,748 $ 4,248,044 $ 22,364,792
Net income per common share:
Basic $ 0.88 $ 0.21 $ 1.09
Diluted $ 0.79 $ 0.18 $ 0.97
The pro forma results have been prepared for comparative purposes only.
They do not purport to present actual results that would have been
achieved or to be indicative of future results
(19) Supplemental Oil and Gas Reserve Data (Unaudited)
The estimates of the Company's proved oil and gas reserves, which are all
located in the United States, are prepared by independent petroleum
engineers. Reserves were estimated in accordance with guidelines
established by the U.S. Securities and Exchange Commission and the
Financial Accounting Standards Board, which require that reserve
estimates be prepared under existing economic and operating conditions
with no provision for price and cost escalations except by contractual
arrangements. The Company has presented the reserve estimates utilizing
an oil price of $29.21, $18.98 and $25.09 per Bbl and a gas price of
$4.40, $2.72 and $10.18 per Mcf as of December 31, 2002, 2001 and 2000,
respectively. Information for oil is presented in barrels (BBL) and for
gas in thousands of cubic feet (MCF).
(Continued)
F-24
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
Purchase of Fullerton Properties. On December 20, 2002, we purchased,
through our subsidiary, Parallel, L.P., 95% of the interest owned by
nonaffiliated sellers in producing oil and gas properties located in the
Fullerton Field of Andrews County, Texas in the Permian Basin of west
Texas. The total purchase price for our interest in the Fullerton
properties was $46,075,000. Proved reserves from the Fullerton properties
are estimated to be 9,441,000 BOE at December 31, 2002. The properties
have an estimated reserve life of 45 years.
A summary of changes in reserve balances is presented below (in
thousands):
Total proved Proved developed
-------------------------- ---------------------------
BBL MCF BBL MCF
------------ ---------- ----------- -----------
Reserves as of December 31, 2000 974 15,686 572 11,576
Sales of reserves in place (1) - (1) -
Extensions and discoveries 78 1,737 78 1,737
Revisions of previous estimates 4 (210) (20) (473)
Production (139) (3,266) (139) (3,266)
----------- ---------- ----------- -----------
Reserves as of December 31, 2001 916 13,947 490 9,574
Purchase of reserves in place 9,119 1,931 7,513 1,609
Sales of reserves in place - - - -
Extensions and discoveries 323 2,048 323 2,048
Revisions of previous estimates 43 376 67 640
Production (130) (2,669) (130) (2,669)
----------- ---------- ----------- -----------
Reserves as of December 31, 2002 10,271 15,633 8,263 11,202
============ ========== =========== ===========
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 2002, the average sales price received by the Company for its oil
was approximately $24.59 per Bbl, as compared to $24.80 in 2001, while
the average sales price for the Company's gas was approximately $3.33 per
Mcf in 2002, as compared to $4.41 per Mcf in 2001.
The standardized measure of discounted future net cash flows, in
management's opinion, should be examined with caution. The basis for this
table is 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.
(Continued)
F-25
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
(In thousands)
December 31
-------------------------------------------------------
2002 2001 2000
---------------- --------------- ----------------
Future cash flows $ 368,835 $ 47,648 $ 184,045
Future costs:
Production (103,924) (17,353) (35,550)
Development (9,440) (4,874) (4,228)
---------------- --------------- ----------------
Future net cash flows before
income taxes 255,471 25,421 144,267
Future income taxes (58,622) (34) (24,321)
---------------- --------------- ----------------
Future net cash flows 196,850 25,387 119,946
10% annual discount for estimated timing of
cash flows (97,233) (8,312) (38,658)
---------------- --------------- ----------------
Standardized measure of
discounted net cash flows $ 99,616 $ 17,075 $ 81,288
================ =============== ================
(Continued
F-26
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
Changes in Standardized Measure of
Discounted Future Net Cash Flows From Proved Reserves
(In thousands)
December 31
-------------------------------------------------------
2002 2001 2000
---------------- --------------- ----------------
Increase (decrease):
Sales of minerals in place $ - $ (4) $ (136)
Purchases of minerals in place 85,075 - -
Extensions and discoveries and improved
recovery, net of future production and
development costs 10,790 3,831 8,398
Accretion of discount 1,707 9,095 2,550
Net change in sales prices net of production
costs 16,619 (68,367) 66,306
Changes in estimated future development
costs (512) 5 204
Revisions of quantity estimates 1,218 (172) 4,496
Net change in income taxes (23,318) 9,662 (9,662)
Sales, net of production costs (9,170) (13,919) (14,035)
Changes of production rates (timing) and
other 132 (4,344) (2,332)
--------------- -------------- ---------------
Net increase (decrease) 82,541 (64,213) 55,789
Standardized measure of discounted future net cash flows:
Beginning of year 17,075 81,288 25,499
---------------- -------------- ---------------
End of year $ 99,616 $ 17,075 $ 81,288
================ ============== ===============
(Continued)
F-27
PARALLEL PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(20) Selected Quarterly Financial Results (Unaudited)
Quarter
---------------------------------------------------------
First Second Third Fourth
------------ ---------- ----------- -----------
(In thousands, except per share data)
2002:
Oil and gas revenues $ 1,971 $ 2,809 $ 2,710 $ 4,616
Total costs and expenses 2,254 4,029 2,319 4,030
Net income (769) 19,662 (398) 268
Net income per common share $ (0.04) $ 0.94 $ (0.03) $ 0.02
Net income per common share -
assuming dilution $ (0.04) $ 0.84 $ (0.03) $ 0.01
2002 results include a gain of $31,082,041 in the second quarter related
to the First Permian sale of assets.
2001:
Oil and gas revenues $ 7,288 $ 4,791 $ 3,811 $ 1,949
Total costs and expenses 3,095 2,969 4,925 17,416
Net income 4,636 1,215 (491) (10,067)
Net income per common share $ 0.219 $ 0.052 $ 0.030 $ (0.50)
Net income per common share -
assuming dilution $ 0.196 $ 0.051 $ 0.030 $ (0.50)
2001 results include noncash charges of $2,177,128 and $14,642,685
during the third and fourth quarters, respectively related to the
impairment of oil and gas properties. (See note 13)
2000:
Oil and gas revenues $ 2,775 $ 3,197 $ 4,163 $ 7,000
Total costs and expenses 1,875 2,098 2,220 3,337
Net income 194 695 1,699 3,389
Net income per common share $ 0.001 $ 0.027 $ 0.076 $ 0.16
Net income per common share -
assuming dilution $ 0.001 $ 0.027 $ 0.072 $ 0.14
F-28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PARALLEL PETROLEUM CORPORATION
March 28, 2003 By: /s/ Thomas R. Cambridge
--------------------------------
Thomas R. Cambridge, Chief
Executive Officer and
Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Thomas R. Cambridge Chief Executive Officer March 28, 2003
- ----------------------- and Chairman of the
Thomas R. Cambridge Board of Directors
(Principal Executive
Officer)
/s/ Larry C. Oldham Director, President and Treasurer March 28, 2003
- -----------------------
Larry C. Oldham
/s/ Steven D. Foster Chief Financial Officer March 28, 2003
- ----------------------- (Principal Financial and
Steven D. Foster Accounting Officer)
/s/ Dewayne E. Chitwood Director March 28, 2003
- -----------------------
Dewayne E. Chitwood
/s/ Martin B. Oring Director March 28, 2003
- -----------------------
Martin B. Oring
/s/ Charles R. Pannill Director March 28, 2003
- -----------------------
Charles R. Pannill
/s/ Jeffrey G. Shrader Director March 28, 2003
- -----------------------
Jeffrey G. Shrader
S-1
CERTIFICATIONS
I, Thomas R. Cambridge, certify that:
1. I have reviewed this annual report on Form 10-K of Parallel
Petroleum Corporation.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operation and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14, for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated March 28, 2003.
By /s/ Thomas R. Cambridge
---------------------------------------
Thomas R. Cambridge, Chairman
of the Board of Directors
CERTIFICATIONS
I, Steven D. Foster, certify that:
1. I have reviewed this annual report on Form 10-K of Parallel
Petroleum Corporation.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operation and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14, for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated March 28, 2003
By /s/ Steven D. Foster
-------------------------
Steven D. Foster, Chief
Financial Officer
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
------- ----------------------
3.1 Certificate of Incorporation of Registrant (Incorporated by
reference to Exhibit 3.1 to Form 10-K of the Registrant for the
fiscal year ended December 31, 1998)
3.2 Bylaws of Registrant (Incorporated by reference to Exhibit 3 to
the Registrant's Form 8-K, dated October 9, 2000, as filed with
the Securities and Exchange Commission on October 10, 2000)
4.1 Certificate of Designations, Preferences and Rights of Serial
Preferred Stock - 6% Convertible Preferred Stock (Incorporated
by reference to Exhibit 4.1 to Form 10-Q of the Registrant for
the fiscal quarter ended September 30, 1998)
4.2 Certificate of Designation, Preferences and Rights of Series A
Preferred Stock (Incorporated by reference to Exhibit 4.2 to
Form 10-K of the Registrant for the fiscal year ended December
31, 2000)
4.3 Rights Agreement, dated as of October 5, 2000, between the
Registrant and Computershare Trust Company, Inc., as Rights
Agent (Incorporated by reference to Exhibit 4.3 to Form 10-K of
the Registrant for the fiscal year ended December 31, 2000)
Executive Compensation Plans and Arrangements (Exhibit No.'s
10.1 through 10.9):
-------------------------------------------------------------
10.1 1983 Incentive Stock Option Plan (Incorporated by reference to
Exhibit 10.2 to Form S-l of the Registrant (File No. 2-92397) as
filed with the Securities and Exchange Commission on July 26,
1984, as amended by Amendments No. 1 and 2 on October 5, 1984,
and October 25, 1984, respectively)
10.2 1992 Stock Option Plan (Incorporated by reference to Exhibit
28.1 to Form S-8 of the Registrant (File No. 33-57348) as filed
with the Securities and Exchange Commission on January 25, 1993)
10.3 Stock Option Agreement between the Registrant and Thomas R.
Cambridge dated December 11, 1991 (Incorporated by reference to
Exhibit 10.4 of Form 10-K of the Registrant for the fiscal year
ended December 31, 1992)
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)
-1-
Exhibit
No. Description of Exhibit
------- ----------------------
10.5 Merrill Lynch, Pierce, Fenner & Smith Incorporated Prototype
Simplified Employee Pension Plan (Incorporated by reference to
Exhibit 10.6 of the Registrant's Form 10-K for the fiscal year
ended December 31, 1995)
10.6 Non-Employee Directors Stock Option Plan (Incorporated by
reference to Exhibit 10.6 of the Registrant's Form 10-K Report
for the fiscal year ended December 31, 1997)
10.7 1998 Stock Option Plan (Incorporated by reference to Exhibit
10.7 of Form 10-K of the Registrant for the fiscal year ended
December 31, 1998)
10.8 Form of Incentive Award Agreements, dated December 12, 2001,
between the Registrant and Thomas R. Cambridge, Larry C. Oldham,
Eric A. Bayley and John S. Rutherford granting 2,394 Unit
Equivalent Rights to Mr. Cambridge; 9,564 Unit Equivalent Rights
to Mr. Oldham; 2,869 Unit Equivalent Rights to Mr. Bayley; and
7,173 Unit Equivalent Rights to Mr. Rutherford (Incorporated by
reference to Exhibit 10.8 of Form 10-K of the Registrant for the
fiscal year ended December 31, 2001)
10.9 Form of Change of Control Agreements, dated June 1, 2001,
between the Registrant and Thomas R. Cambridge, Larry C. Oldham,
Eric A. Bayley and John S. Rutherford (Incorporated by reference
to Exhibit 10.9 of Form 10-K of the Registrant for the fiscal
year ended December 31, 2001)
10.10 Restated Loan Agreement, dated December 27, 1999, between the
Registrant and Bank One, Texas, N.A. (Incorporated by reference
to Exhibit 10.8 of Form 10-K of the Registrant for the fiscal
year ended December 31, 1999)
10.11 Loan Agreement, dated December 18, 2000, between the Registrant
and Bank United (Incorporated by reference to Exhibit 10.9 of
Form 10-K of the Registrant for the fiscal year ended December
31, 2000)
10.12 Letter agreement, dated March 24, 1999, between the Registrant
and Bank One, Texas, N.A. (Incorporated by reference to Exhibit
10.9 of Form 10-K of the Registrant for the fiscal year ended
December 31, 1998)
10.13 Certificate of Formation of First Permian, L.L.C. (Incorporated
by reference to Exhibit 10.1 of the Registrant's Form 8-K Report
dated June 30, 1999)
10.14 Limited Liability Company Agreement of First Permian, L.L.C.
(Incorporated by reference to Exhibit 10.2 of the Registrant's
Form 8-K Report dated June 30, 1999)
-2-
Exhibit
No. Description of Exhibit
------- ----------------------
10.15 Merger Agreement, dated June 25, 1999 (Incorporated by reference
to Exhibit 10.3 of the Registrant's Form 8-K Report dated June
30, 1999)
10.16 Agreement and Plan of Merger of First Permian, L.L.C. and Nash
Oil Company, L.L.C. (Incorporated by reference to Exhibit 10.4
of the Registrant's Form 8-K Report dated June 30, 1999)
10.17 Certificate of Merger of First Permian, L.L.C. and Nash Oil
Company, L.L.C. (Incorporated by reference to Exhibit 10.5 of
the Registrant's Form 8-K Report dated June 30, 1999)
10.18 Amended and Restated Limited Liability Company Agreement of
First Permian, L.L.C. dated as of May 31, 2000 (Incorporated by
reference to Exhibit 10.16 of Form 10-K of the Registrant for
the fiscal year ended December 31, 2000)
10.19 Credit Agreement, dated June 30, 1999, by and among First
Permian, L.L.C., Parallel Petroleum Corporation, Baytech, Inc.,
and Bank One, Texas, N.A. (Incorporated by reference to Exhibit
10.6 of the Registrant's Form 8-K Report dated June 30, 1999)
10.20 Limited Guaranty, dated June 30, 1999, by and among First
Permian, L.L.C., parallel Petroleum Corporation and Bank One,
Texas, N.A. (Incorporated by reference to Exhibit 10.7 of the
Registrant's Form 8-K Report dated June 30, 1999)
10.21 Intercreditor Agreement, dated as of June 30, 1999, among First
Permian, L.L.C., Bank One, Texas, N.A., Tejon Exploration
Company, and Mansefeldt Investment Corporation (Incorporated by
reference to Exhibit 10.8 of the Registrant's Form 8-K Report
dated June 30, 1999)
10.22 Subordinated Promissory Note, dated June 30, 1999, in the
original principal amount of $8.0 million made by First Permian,
L.L.C. payable to the order of Tejon Exploration Company
(Incorporated by reference to Exhibit 10.9 of the Registrant's
Form 8-K Report dated June 30, 1999)
10.23 Subordinated Promissory Note, dated June 30, 1999, in the
original principal amount of $8.0 million made by First Permian,
L.L.C. payable to the order of Mansefeldt Investment Corporation
(Incorporated by reference to Exhibit 10.10 of the Registrant's
Form 8-K Report dated June 30, 1999)
10.24 Second Restated Credit Agreement, dated October 25, 2000, among
First Permian, L.L.C., Bank One, Texas, N.A., and Bank One
Capital Markets, Inc. (Incorporated by reference to Exhibit
10.22 of Form 10-K of the Registrant for the fiscal year ended
December 31, 2000)
10.25 Loan Agreement, dated as of January 25, 2002, between the
Registrant and First American Bank, SSB (Incorporated by
reference to Exhibit 10.25 of Form 10-K of the Registrant for
the fiscal year ended December 31, 2001)
-3-
Exhibit
No. Description of Exhibit
------- ----------------------
10.26 Purchase and Sale Agreement, dated as of November 27, 2002,
among JMC Exploration, Inc., Arkoma Star L.L.C., Parallel, L.P.
and Texland Petroleum, Inc. (Incorporated by reference to
Exhibit 10.1 of Form 8-K of the Registrant, dated December 20,
2002)
10.27 First Amended and Restated Credit Agreement, dated December 20,
2002, by and among Parallel Petroleum Corporation, Parallel,
L.P., Parallel, L.L.C., First American Bank, SSB, Western
National Bank and BNP Paribas (Incorporated by reference to
Exhibit 10.2 of Form 8-K of the Registrant, dated December 20,
2002)
10.28 Guaranty dated December 20, 2002, between Parallel, L.L.C. and
First American Bank, SSB, as Agent (Incorporated by reference to
Exhibit 10.3 of Form 8-K of the Registrant, dated December 20,
2002)
*21 Subsidiaries
*23.1 Consent of Independent Auditors
*23.2 Consent of Williamson Petroleum Consultants, Inc., Independent
Petroleum Engineers
*23.3 Consent of Cawley Gillespie & Associates, Inc. Independent
Petroleum Engineers
*99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes
- Oxley Act of 2002.
*99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes
- Oxley Act of 2002.
- -----------------------
* Filed herewith.
-4-
Exhibit 21
Subsidiaries
Name Jurisdiction of Organization
- --------------------- ----------------------------
Parallel, L.P. Texas
Parallel, LLC Nevada
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors and Stockholders
Parallel Petroleum Corporation:
We consent to the incorporation by reference in the registration statements (No.
33-57348, No. 333-34617 and No. 333-66938) on Forms S-8, and the registration
statement ( No. 33-90296) on Form S-3, of Parallel Petroleum Corporation of our
report dated March 14, 2003, with respect to the balance sheets of Parallel
Petroleum Corporation as of December 31, 2002 and 2001, and the related
statements of income (loss), stockholders' equity, and cash flows for each of
the years in the three-year period ended December 31, 2002, which appears in the
December 31, 2002 annual report on Form 10-K of Parallel Petroleum Corporation.
/S/ KPMG LLP
Midland, Texas
March 28, 2003
Exhibit 23.2
CONSENT OF WILLIAMSON PETROLEUM CONSULTANTS, INC.
As independent oil and gas consultants, Williamson Petroleum Consultants, Inc.
hereby consents to the incorporation by reference in the registration statements
(No. 33-57348, No. 333-34617 and No. 333-66938) on Forms S-8, and the
registration statement (No. 33-90296) on Form S-3 of Parallel Petroleum
Corporation of information from our reserves report dated January 22, 2003
entitled "Evaluation of Oil and Gas Reserves to the Interest of Parallel
Petroleum Corporation, Effective December 31, 2002, for Disclosure to the
Securities and Exchange Commissiion, Williamson Project 2.8924" and all
references to our firm included in or made a part of the annual report on Form
10-K of Parallel Petroleum Corporation to be filed with the Securities and
Exchange Commission on or about March 31, 2003 for the fiscal year ended
December 31, 2002.
/S/ WILLIAMSON PETROLEUM CONSULTANTS, INC.
Midland, Texas
March 27, 2003
Exhibit 23.3
Consent of Cawley, Gillespie & Associates, Inc.
-----------------------------------------------
As independent petroleum engineers, we hereby consent to the
incorporation by reference in the registration statements (No. 33-57348, No.
333-34617 and No. 333-66938) on Forms S-8, and the registration statement (No.
33-90296) on Form S-3 of Parallel Petroleum Corporation of information from our
reserves report dated January 31, 2003 and all references to our firm included
in or made a part of the annual report on Form 10-K of Parallel Petroleum
Corporation for the fiscal year ended December 31, 2002.
/S/ CAWLEY, GILLESPIE & ASSOCIATES, INC.
Ft. Worth, Texas
March 19, 2003
Exhibit 99.1
CERTIFICATION
(Not filed pursuant to the Securities Exchange Act of 1934)
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, the undersigned, Thomas R. Cambridge, the
Chairman of the Board of Directors and Chief Executive Officer of Parallel
Petroleum Corporation ("Parallel"), hereby certifies that the Annual Report on
Form 10K of Parallel for the year ended December 31, 2002 fully complies with
the periodic reporting requirements of the Securities Exchange Act of 1934, as
amended, and the information contained in that Form 10K Report fairly presents,
in all material respects, the financial condition and results of operations of
Parallel.
Dated: March 28, 2003
/s/ Thomas R. Cambridge
-----------------------------------------
Thomas R. Cambridge, Chairman
of the Board of Directors and Chief
Executive Officer
Exhibit 99.2
CERTIFICATION
(Not filed pursuant to the Securities Exchange Act of 1934)
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, the undersigned, Steven D. Foster, Chief
Financial Officer of Parallel Petroleum Corporation ("Parallel"), hereby
certifies that the Annual Report on Form 10K of Parallel for the year ended
December 31, 2002 fully complies with the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, and the information contained in
that Form 10K Report fairly presents, in all material respects, the financial
condition and results of operations of Parallel.
Dated: March 28, 2003
/s/ Steven D. Foster
-----------------------------------------
Steven D. Foster, Chief Financial Officer