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1
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 (Fee Required)
For the fiscal year ended December 31, 1997
[ ] Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934 (No Fee Required)
For the transition period from ______ to ______.
Commission File Number: 0 - 13305
PARALLEL PETROLEUM CORPORATION
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 75-191716
------------------------------- ---------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
110 North Marienfeld Street
One Marienfeld Place, Suite 465
Midland, Texas 79701
---------------------------------------- -------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, Including Area Code: (915) 684-3727
---------------
Securities Registered Pursuant to Section 12(b) of the Exchange Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Common Stock Purchase Warrants
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 16, 1998 was approximately $86,167,000, based on the
last sale price of the Company's Common Stock on the same date.
At March 17, 1998 there were 18,120,608 shares of Common Stock outstanding.
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FORM 10-K
PARALLEL PETROLEUM CORPORATION
TABLE OF CONTENTS
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Item No. Page
- -------- ----
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . 16
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . . . . . . . . 20
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . 21
Item 6. Selected Financial Data . . . . . . . . . . . . . . . 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 23
Item 8. Financial Statements and Supplementary Data . . . . . 31
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure . 31
PART III
Item 10. Directors and Executive Officers of the Registrant. . 32
Item 11. Executive Compensation. . . . . . . . . . . . . . . . 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . 43
Item 13. Certain Relationships and Related Transactions. . . . 45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . 46
Certain statements contained in this Form 10-K Report are forward-looking
statements, including statements with respect to the Company's oil and gas
reserves, future net revenues, presentvalues of future net revenues, and
budgeted or anticipated expenses. "Forward-looking statements" can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "intend," "anticipate," "estimate," "continue," "present value,"
"future" or "reserves" or other variations thereof or comparable terminology.
All of these statements involve assumptions of future events which may not
prove to be accurate and risks and uncertainties. These risks and
uncertainties include risks associated with the drilling of wells,
competition, financing availability, fluctuations in prices of oil and gas,
governmental regulation, and geological concentration of the Company's
reserves. For these and other reasons, actual results may differ materially
from those projected or implied.
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PART I
ITEM 1. BUSINESS
General
Parallel Petroleum Corporation (the "Company"), a Delaware corporation,
is engaged in, and its only industry segment is, the exploration for and the
acquisition, development and production of oil and natural gas. The Company's
primary operations are carried out in the onshore gulf coast area
of south Texas in Dewitt, Jackson, Lavaca, Victoria and Wharton Counties.
The Company also has operations in the Permian Basin of west Texas.
During 1997, the Company participated in the drilling of 44 gross
(15.3 net) exploratory wells, of which 26 gross (11 net) wells were
productive and 18 gross (4.3 net) were dry holes.
At December 31, 1997, the Company had net proved reserves of approximately
30.5 billion cubic feet ("Bcf") of natural gas and 1.89 million barrels
("Bbls") of oil. At December 31, 1997, the Company's future net revenues
(before income taxes) were $76.9 million and the present value of its future
net revenues (before income taxes) was $46.4 million. Approximately 73% of
the Company's proved reserves are natural gas and approximately 60% are
proved developed.
The Company was originally incorporated under the laws of the State of
Texas on November 26, 1979. On December 18, 1984, the Company was
reincorporated in the State of Delaware.
The executive offices of the Company are located at One Marienfeld Place,
Suite 465, Midland, Texas 79701, and its telephone number at that address is
(915) 684-3727.
Strategy
The Company's strategy is to increase reserves and production and improve
its financial results by emphasizing the strategies set forth below.
Continue Focus on Exploration Activities. The Company seeks to increase
its reserves and production through targeted exploration. The Company
primarily seeks exploration prospects which (i) have known geological and
reservoir characteristics, (ii) are located near existing wells that can
be correlated with seismic data for the prospect and (iii) could have a
meaningful impact on the Company's reserves. The Company believes it can
maximize the value of its properties by accelerating drilling activities.
This provides an opportunity for the Company to replace reserves at a more
rapid pace than existing reserves are produced; increased efficiency of
field operations; and cost controls.
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Utilization of Advanced Technology. The Company uses economically
available advanced technology in its exploration and development activities
in order to reduce risks, lower costs and more efficiently produce oil and
gas from its properties. The Company believes that the availability of cost
effective 3-D seismic surveys makes its use in exploration and development
activities attractive from a risk management perspective in certain areas and
that 3-D seismic surveys provide the Company with substantially more accurate
and comprehensive information for the evaluation of drilling prospects than
does conventional 2-D seismic and traditional evaluation methods. The Company
evaluates substantially all of its exploratory prospects using 3-D seismic
surveys.
In evaluating certain of its exploratory prospects, the Company also uses
amplitude versus offset ("AVO") analysis. AVO analysis can show the high
contrast between the sand and shales and provides for better interpretation
of the reservoir sands to determine the presence of natural gas.
The Company believes that its use of 3-D seismic and AVO analysis
provides it with a competitive advantage over other companies that do not
regularly use such technology by increasing the Company's likelihood of
exploration success. Nevertheless, in evaluating exploratory prospects
in areas in which the Company believes that using 3-D seismic is not
advantageous, the Company uses traditional evaluation methods.
Geophysical Operations. The Company seeks to serve as geophysical
operator whenever possible. By serving as geophysical operator, the Company
is able to control the design, acquisition, processing and interpretation of
3-D surveys. As geophysical operator the Company also determines drilling
locations and depths.
The Company retains experienced third-party consultants or participates
with experienced joint working interest owners to acquire, process and
interpret 3-D seismic surveys. When 3-D surveys are to be conducted, the
Company prefers to serve as geophysical operator of such projects because of
the Company's experience in using 3-D seismic technology in its primary
areas of operation. The Company attempts to ensure the integrity of the 3-D
seismic analysis in each of its projects by emphasizing quality control
throughout the data acquisition, processing and interpretation phases.
Whenever possible, the Company also attempts to correlate or "model" the
interpretations of 3-D seismic surveys with wells previously drilled on or
near the prospect being evaluated.
Continue Emphasis on Cost Controls. Throughout its operations, the
Company strives to maintain low general and administrative expenses. The
geographic focus of the Company's operations allows it to manage a relatively
large asset base with a small number of employees. The Company believes this
base of operations enables the Company to add exploratory prospects and
acquire producing properties at relatively low incremental overhead costs.
The Company also pursues cost savings through the use of outside geological
and geophysical consultants for its exploration and development efforts and
uses contractors for much of its field operations.
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Positioning for Opportunity. Because of the intense competition among
independent oil and gas producers such as the Company, the Company must be
able to react quickly to exploration and acquisition opportunities that
become available. The Company attempts to position itself for these
opportunities by maintaining adequate capital resources for projects in the
Company's areas of operations and by maintaining the technological capabilities
to conduct a thorough evaluation of a particular project. The Company
believes that, in certain circumstances, its small staff also gives it a
competitive advantage in swiftly responding to acquisition opportunities.
The Company continually screens, reviews and evaluates potential
producing property acquisitions and undeveloped leases and prospects
presented by independent landmen, geologists and engineers, as well as
properties available for purchase from major oil companies and other
independent oil and gas operators. If the review of a producing property or
undeveloped lease or prospect indicates that it may have attractive
geological characteristics favorable to 3-D seismic analysis, the Company
then attempts to acquire a working interest in the property or an option to
acquire a working interest. In the case of producing properties, the Company
also seeks properties that are under-performing relative to their potential.
To reduce the Company's financial exposure in any one prospect and to enable
it to participate in an increased number of prospects, the Company typically
enters into co-ownership arrangements with third parties under standard
industry form operating agreements. Such arrangements are common in the
industry and enable the Company to share the drilling and related costs and
dry-hole risks with other participants which, in turn, also enables the
Company to participate in the drilling of more wells. From time to time,
the Company may sell prospects to third parties or farm-out prospects,
retaining an interest in revenues from such prospects.
Exploration and Development Activities in 1997
Gulf Coast Area of South Texas
During 1997, the Company's principal exploration and development
activities continued to be focused in the Yegua/Frio/Wilcox gas trend in the
onshore gulf coast area of Dewitt, Jackson, Lavaca, Victoria and Wharton
Counties in south Texas, the Company's primary area of activities since 1993.
The Company participated in the drilling of a total of 44 wells in 1997, of
which 29 were drilled in the gulf coast area of South Texas. Ten of the 29
wells were dry holes and 19 were producing at March 1, 1998. Of the 19
producing wells, 11 were drilled to the Frio formation at a depth of
approximately 6,000 feet, 6 were drilled to the Yegua formation at a depth of
approximately 10,000 feet and 2 were drilled to the Wilcox formation at
depths of approximately 11,000 feet.
At March 1, 1998, the Company owned interests in a total of 57 gross
wells in this area of south Texas and, at that same date, such wells were
producing, net to the Company's interests, approximately 8,000 Mcf of natural
gas per day and approximately 260 barrels of oil and condensate per day.
6
In connection with its operations in the Yegua/Frio/Wilcox gas trend in
south Texas, the Company enters into exploration agreements with third party
participants to explore for oil and gas. Under these exploration agreements,
the Company participates in the acquisition and ownership of (i) 3-D seismic
surveys, (ii) options to acquire gas and oil leasehold interests and
(iii) undivided working interests in gas and oil leases. Substantially all
of the lands covered by the exploration agreements are subject to "area of
mutual interest" or "AMI" provisions. Generally, an AMI is an agreed upon
area of land, varying in areal extent, included and described in an oil and
gas exploration agreement which participants agree will be subject to rights
of first refusal as among themselves. If any participant acquires any
minerals, royalty, overriding royalty, oil and gas leasehold estates or
similar interests in the designated AMI, the participant would then be
obligated to offer the other participants the opportunity to purchase their
pro rata share of the interest so acquired on the same basis and cost as
purchased by the acquiring participant. If the other participants, after a
specific time period, elect not to acquire their pro-rata share, the
acquiring participant is typically then free to retain or sell such interest
for its own account.
Although the Company participates in the acquisition and ownership of
three-dimensional seismic survey data obtained from seismic operations
conducted on large blocks of acreage, the Company's actual working interest
ownership in such acreage is less than the total area surveyed.
Permian Basin of West Texas
Prior to the Company's entry into the gulf coast area of south Texas in
1993, the Company's principal activities were focused on acquisitions of
producing properties in the Permian Basin of west Texas. The Company's
acquisition activities resulted in the purchase of five producing properties
located in Schleicher, Crockett, Pecos and Nolan Counties, Texas. In June,
1997, the Company sold all of its interest in the North Nena Lucia Unit, a
producing oil property located in Nolan County, Texas, for approximately
$3.65 million. The net proceeds from the sale were used to reduce the
Company's outstanding bank debt under its revolving credit facility. The
Company has continued to pursue enhancement, remedial and development
drilling activities on these properties which, during 1997, included the
drilling of four vertical and three horizontal wells. At December 31, 1997,
the Company was operator of its Permian Basin properties.
Producing properties owned and operated by the Company are continually
subjected to rigorous production monitoring and evaluated for possible
enhancement opportunities. Enhancement activities include recompletions of
existing wellbores, restimulations of producing reservoirs, identifying
potential infill drilling locations, making mechanical improvements to
surface facilities and downhole equipment and reviewing the practicality of
applying new drilling and production technologies that could either improve
recovery potential or result in the discovery of a new reservoir. The
Company may also renegotiate gas purchase contracts or reconfigure gathering
lines. In connection with its enhancement operations, the Company routinely
reviews the performance and economics of its gas and oil properties and, when
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it deems necessary, takes corrective action, such as the shutting-in of
temporarily uneconomic properties, the plugging of wells deemed to be
permanently impaired or depleted, the termination of gas and oil leases
deemed uneconomic under then existing operating conditions and/or the sale
of properties to third parties.
Drilling and Acquisition Costs
The following table reflects costs incurred by the Company in its gas and
oil property acquisition, and exploration and development activities for each
of the years in the five-year period ended December 31, 1997.
Year Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(in thousands)
Transfer from undeveloped
leases held for sale $ -- $ 60 $ 197 $ 339 $ 705
Proved property acquisition 918 3,839 372 238 546
Unproved property acquisition
costs 7,710 369 841 2,542 720
Exploration 9,604 8,669 1,519 3,400 2,225
Development 4,877 3,963 889 1,226 1,173
------- ------- ------- ------- -------
$23,109 $16,900 $ 3,818 $ 7,745 $ 5,369
======= ======= ======= ======= =======
Industry Conditions
Industry conditions have deteriorated during the latter part of 1997 and
the first quarter of 1998 as a result of declining oil prices. Recently,
there has been an excess supply of, and reduced demand for, crude oil
worldwide. This excess supply has placed heavy pressures on oil prices in
the United States as well as worldwide. The average per barrel oil prices
received by the Company at December 31, 1995, 1996 and 1997 were $17.26,
$21.83 and $19.88, respectively. At March 17, 1998, the posted price for
the Company's oil was approximately $11.90 per barrel. At December 31, 1997,
approximately 25% of the Company's daily oil and gas production was oil and
75% was natural gas. During the three years ended December 31, 1997, the
average gas prices received by the Company have increased from $1.50 per Mcf
in 1995 to $2.70 per Mcf in 1997. However, during the first quarter of 1998
average gas prices have declined to approximately $2.25 per Mcf, primarily as
a result of seasonal weather conditions. There is substantial uncertainty
regarding future oil and gas prices and, accordingly, there can be no
assurance that prices will not further decline in the future.
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Seasonal Nature of Business
Weather conditions affect the demand for and prices of natural gas and
can also delay drilling activities, disrupting the Company's overall business
plans. Demand for natural gas is typically higher during winter months.
Risks of Company Operations
Oil and gas drilling and production operations are highly speculative and
involve a high degree of risk, and are marked by unprofitable efforts, not
only from dry holes but from wells that, though productive, do not produce
oil or gas in sufficient quantities to return a profit on the amounts expended.
Further, the success of the Company's operations depends, in part, upon the
ability of its management and technical personnel. Accordingly, there is no
assurance that the Company's 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.
The Company's operations are subject to all of the operating hazards and
risks normally incident to drilling for and producing oil and gas, such as
encountering unusual or unexpected formations and pressures, explosions,
blowouts, fire, pipe and tubular failures, casing collapses, environmental
pollution and personal injury. The Company maintains general liability
insurance, and obtains insurance against blowouts on a well-by-well basis,
but it has not obtained insurance against such operating hazards as pollution
risks. If the Company sustains an uninsured loss or liability, its ability
to operate may be materially adversely affected.
The Company's 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 the Registrant
At March 17, 1998, the executive officers of the Company were Thomas R.
Cambridge and Larry C. Oldham.
Mr. Cambridge, age 62, is the Chief Executive Officer and Chairman of the
Board of Directors of the Company. Mr. Cambridge 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 the
Company since February, 1985; as President during the period from October,
1985 to October, 1994; and as Chairman of the Board of Directors and Chief
Executive Officer since October , 1985. He received a Bachelors degree and
a Masters of Science degree in Geology from the University of Nebraska in
1958 and 1960, respectively.
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Mr. Oldham, age 44, a founder of the Company, has served as an officer
and Director of the Company since its formation in 1979. He served as
Executive Vice-President of the Company until October, 1994 when he became
President of the Company. Mr. Oldham received a Bachelor of Business
Administration degree from West Texas State University in 1975. He is a
member of the American Institute of Certified Public Accountants and a
member of the Permian Basin Landman's Association.
The term of both officers expires at the Company's annual meeting of
Directors or such other time as their respective successors are duly elected
and qualified. There is no family relationship between the executive
officers of the Company.
In February, 1997 the Company obtained key-man life insurance on the
lives of Messrs. Cambridge and Oldham in the amounts of $1 million and
$5 million, respectively.
Employees
At March 17, 1998, the Company had seven full time employees.
Mr. Thomas R. Cambridge, the Chief Executive Officer and Chairman of the
Board of Directors of the Company, serves the Company in the capacity of a
consultant, and not as a full-time employee. The Company also retains, from
time to time, independent land, geological, geophysical and engineering
consultants and expects to continue to do so in the future. Additionally,
the Company retains seven contract pumpers on a month-to-month basis.
The Company considers its employee relations to be satisfactory.
None of the Company's employees are represented by a union and the
Company has never experienced work stoppages or strikes as a result of
labor disputes.
10
Wells Drilled
The following table sets forth certain information concerning the number of
gross and net wells drilled by the Company during the three years ended
December 31, 1997.
Exploratory Wells (1) Development Wells (2)
------------------------------ ------------------------------
Productive Dry Productive Dry
Year Ended -------------- ------------ -------------- -------------
December 31, Gross Net Gross Net Gross Net Gross Net
- ------------ ----- ---- ----- ---- ----- ---- ----- ----
1997 19.0 4.45 17.0 4.08 7.0 6.54 1.0 .20
1996 20.0 5.20 9.0 2.38 3.0 1.40 1.0 .42
1995 19.0 2.71 7.0 1.19 2.0 .40 - -
__________________
(1) An exploratory well is a well drilled to find and produce oil or gas in
an unproved area, to find 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 the Company's drilling is performed on a contract basis by
third-party drilling contractors. The Company owns no drilling equipment.
At March 17, 1998, the Company was participating in the completion of 1
gross (.18 net) gas well in DeWitt County, Texas. At that same date, the
Company was also participating in the drilling of 1 gross (.215 net) gas
well in Jackson County, Texas, and in the completion of 2 gross (.35 net)
wells in Jackson and Scurry Counties, Texas.
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Volumes, Prices and Lifting Costs
The following table sets forth certain information regarding volumes of
the Company's net production of oil and gas, the average sales prices per
Bbl of oil and Mcf of gas produced, and the average production (lifting)
cost per equivalent barrel of oil ("EBO") for the three years ended
December 31, 1997.
Year Ended December 31,
------------------------------------------------------
1997 1996 1995
------------ ------------ ------------
Net Production:
Oil (Bbls) 175,246 221,499 132,579
Gas (Mcf) 3,383,190 3,654,897 1,616,105
EBO(1) 739,111 830,649 401,929
Average Sales Price:
Oil (per Bbl) $ 19.88 $ 21.83 $ 17.26
Gas (per Mcf) $ 2.70 $ 2.55 $ 1.50
EBO $ 17.07 $ 17.06 $ 11.72
Average Production
Cost per EBO $ 4.29 $ 3.23 $ 3.65
Operating Margin
per EBO(2) $ 12.78 $ 13.83 $ 8.07
Depletion per EBO $ 5.29 $ 4.47 $ 3.97
- -----------------------
(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.
The Company's 1997 gas sales represented approximately 72% of the Company's
combined gas and oil sales for the year ended December 31, 1997.
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Markets and Customers
Substantially all of the Company's oil and gas production is sold at the
well site on an "as produced" basis. During the year ended December 31, 1997,
Enron Oil Transportation & Trading Company and Cox & Perkins Exploration, Inc.,
purchasers of the Company's oil and gas, accounted for 12% and 53%,
respectively, of the Company's operating revenues for such period. The
Company believes the loss of any one of such purchasers would not materially
affect its ability to sell oil or gas, due to the availability of other
purchasers in the Company's areas of operations.
The nature of the Company's business is such that it does not maintain or
require a "backlog" of products, customer orders or inventory.
Office Facilities
The Company leases its corporate offices in Midland, Texas, which consist
of approximately 4,675 square feet of office space, at a rental rate of
$2,725 per month. The lease agreement expires by its own terms in June,
1999.
Competition
The oil and gas industry is highly competitive, particularly with respect
to the acquisition of development prospects and producing properties. The
principal means of competition for the acquisition of oil and gas properties
are the amount and terms of the consideration offered. Competitors include
the major oil companies, independent oil and gas concerns and individual
producers and operators, many of which have financial resources, staffs and
facilities substantially greater than those of the Company.
The principal raw materials and resources necessary for the exploration
for, and the acquisition, development, production and sale of, 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 personnel to conduct all phases of oil and gas operations.
The Company must compete for such raw materials and resources with both
major companies and independent oil operators.
Regulation
Oil and Gas
The Company's operations are regulated by certain federal and state
agencies. In particular, oil and gas production and related operations are
or have been subject to price controls, taxes and other laws relating to the
13
oil and gas industry. The Company cannot predict how existing laws and
regulations may be interpreted by enforcement agencies or court rulings,
whether additional laws and regulations will be adopted, or the effect such
changes may have on its business, financial condition or results of
operations.
The Company's oil and gas exploration, production and related operations
are subject to extensive rules and regulations promulgated by federal, state
and local agencies. Failure to comply with such rules and regulations can
result in substantial penalties. The regulatory burden on the oil and gas
industry increases the Company's cost of doing business and affects its
profitability. Because such rules and regulations are frequently amended or
reinterpreted, the Company is unable to predict the future cost or impact of
complying with such laws.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas.
Such states also have statues 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
the regulation of spacing, plugging and abandonment of such wells.
Sales of gas by the Company are not regulated and are made at market
prices. However, the Federal Energy Regulatory Commission ("FERC") regulates
interstate and certain intrastate gas transportation rates and services
condition, which affect the marketing of gas produced by the Company, as well
as the revenues received by the Company for sales of such production. Since
the mid-1980s, FERC has issued a series of orders, culminating in Order Nos.
636,636-A, and 636-B ("Order 636"), that 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 such pipelines previously performed. One of FERC's
purposes in issuing the orders was to increase competition within 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, et seq. 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 the Company and its gas marketing efforts. Generally, Order
636 has eliminated or substantially reduced the interstate pipelines'
traditional role as wholesales of gas, and has substantially increased
competition and volatility in gas markets. While significant regulatory
uncertainty remains, Order 636 may ultimately enhance the Company's ability
to market and transport its gas, although it may also subject the Company to
greater competition.
The sale of oil by the Company is not regulated and is made at market
prices. The price the Company receives from the sale of oil is affected by
the cost of transporting the product to market. Effective as of January 1,
1995, FERC implemented regulations establishing an indexing system for
transportation rates for interstate common carrier oil pipelines, which,
14
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. The Company is not able to predict with certainty what effect, if
any, these regulations will have on it, but, other factors being equal, the
regulations may, over time, tend to increase transportation costs or reduce
wellhead prices for oil.
The Company is required to comply with various federal and state
regulations regarding plugging and abandonment of oil and gas wells.
Environmental
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 the Company's
operations and costs. These laws and regulations sometimes require
governmental authorization before certain activities, limit or prohibit
other activities because of protected areas or species, impose substantial
liabilities for pollution related to Company operations or properties, and
provide penalties for noncompliance. In particular, the Company's
exploration and production operations, its activities in connection with
storage and transportation of oil and other liquid hydrocarbons, and its use
of facilities for treating, processing or otherwise handling hydrocarbons
and related exploration and production wastes are subject to stringent
environmental regulation. As with the industry generally, compliance with
existing and anticipated regulations increases the Company's overall cost of
business. While these regulations affect the Company's capital expenditures
and earnings, the Company believes that such regulations do not affect its
competitive position in the industry because its competitors are similarly
affected by environmental regulatory programs. Environmental regulations
have historically been subject to frequent change and, therefore, the Company
is unable to predict the future costs or other future impacts of environmental
regulations on its future operations. A discharge of hydrocarbons or
hazardous substances into the environment could subject the Company to
substantial expense, including the cost to comply with applicable
regulations that require a response to the discharge, such as containment
or cleanup, claims by neighboring landowners or other third parties for
personal injury, property damage or their response costs and claims by
neighboring landowners or other third parties for personal injury, property
damage or their response costs and penalties assessed, or other claims
sought by regulatory agencies for response cost or for natural resource
damages.
The following are examples of some environmental laws that potentially
impact the Company and its operations.
Water. The Oil Pollution Act ("OPA") was enacted in 1990 and amends
provisions of the Federal Water pollution Control Act of 1972 ("FWPCA") 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
15
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 the Company. States in which the Company
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 the Company.
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
with the OPA and the FWPCA have not historically been material to the
Company's operations, but there can be no assurance that changes in federal,
state or local water pollution control programs will not materially
adversely effect the Company in the future. Although no assurances can be
given, the Company believes that compliance with existing permits and
compliance with foreseeable new permit requirements will not have a material
adverse effect on the Company's financial condition or results of operations.
Air Emissions. Amendments to the Federal Clean Air Act enacted in late
1990 (the "1990 CAA Amendments") require or will require most industrial
operations in the United States to incur capital expenditures in order to
meet air emissions control standards developed by the Environmental
Protection Agency ("EPA") and state environmental agencies. Although no
assurances can be given, the Company believes implementation of the 1990 CAA
Amendments will not have a material adverse effect on the Company's financial
condition or results of operations.
Solid Waste. The Company generates non-hazardous solid wastes that are
subject to the requirements of the Federal Resource Conservation and Recovery
Act ("RCRA") and comparable state statutes. The EPA and the states in which
the Company operates are considering the adoption of stricter disposal
standards for the type of non-hazardous wastes generated by the Company. RCRA
also governs the generation, management, and disposal of hazardous wastes. At
present, the Company is not required to comply with a substantial portion of
the RCRA requirements because the Company's 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 additional capital expenditures or operating expenses by the Company.
Superfund. The Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA"), also known as "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"
16
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 its ordinary operations, the Company may have managed
substances that may fall within CERCLA's definition of a "hazardous substance".
The Company may be jointly and severally liable under CERCLA for all or part
of the costs required to clean up sites where the Company disposed of or
arranged for the disposal of these substances. This potential liability
extends to properties that the Company owned or operated, as well as to
properties owned and operated by others at which disposal of the Company's
hazardous substances occurred.
The Company may also fall into the category of the "current owner or
operator". The Company currently owns or leases numerous properties that
for many years have been used for the exploration and production of oil and
gas. Although the Company believes it has utilized operating and disposal
practices that were standard in the industry at the time, hydrocarbons or
other wastes may have been disposed of or released by the Company on or
under the properties owned or leased by the Company. 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, the Company could be
subject to certain liabilities and obligations, such as being 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.
ITEM 2. PROPERTIES
General
The principal properties of the Company consist of developed and
undeveloped gas and oil leases and the gas and oil reserves associated with
such leases. Generally, the terms of developed gas and oil leaseholds are
continuing and such leases remain in force by virtue of, and so long as,
production from lands under lease is maintained. Undeveloped gas and oil
leaseholds are generally for a primary term, such as five or ten years,
subject to maintenance with the payment of specified minimum delay rentals
or extension by production.
17
Producing Wells and Acreage
The following table summarizes the gross and net producing oil and gas
wells and the gross and net developed and undeveloped acreage in which the
Company owned an interest at December 31, 1997. Acreage in which the
Company's interest is limited to options to acquire leasehold interests,
royalty or similar interests is not included in the following table.
Producing Wells Acreage
----------------------------------- -------------------------------------
Oil Gas Developed Undeveloped
---------------- --------------- ----------------- -----------------
Gross Net (1) Gross Net (1) Gross Net (2) Gross Net (2)
----- ------- ----- ------- ----- ------- ----- -------
New Mexico - - - - - - 11,357 355
Texas 70 59.4 112 42.40 42,281 26,588 91,922 22,948
Oklahoma 1 .25 320 80 - -
--- ----- ---- ----- ------ ------ ------- ------
Total 70 59.4 113 42.65 42,601 26,668 103,279 23,303
=== ===== ==== ===== ====== ====== ======= ======
- -----------------
(1) Net wells are computed by multiplying the number of gross wells by the
Company's working interest in the gross wells.
(2) Net acres are computed by multiplying the number of gross acres by the
Company's working interest in the gross acres.
At December 31, 1997, in addition to the Company's interests in developed
and undeveloped acreage, the Company also owned options to acquire interests
in an additional 165,512 gross (52,774 net) acres in Texas.
Generally, developed oil and gas leases remain in force by virtue of, and
so long as, production from lands under lease is maintained. Undeveloped oil
and gas leaseholds are generally for a specified term, such as five or ten
years, with the payment of specified minimum delay rentals or extension by
production.
At December 31, 1997, the Company was serving as operator of 89 wells in
which it owned interests. Approximately 64% of the discounted present value
of the Company's gas and oil reserves at December 31, 1997 is attributable
to wells operated by the Company. As operator, the Company supervises the
drilling and completion of wells and production therefrom and the further
development of surrounding properties. The operator of a well has
significant control over its location and the timing of its drilling. In
addition, the operator of a well receives fees from other working interest
owners as reimbursement for the general and administrative expenses attendant
to the operation of the wells.
18
Except for its oil and gas leases with third parties, the Company has no
material patents, licenses, franchises, or concessions which it considers
significant to its oil and gas operations.
Title to Properties
As is customary in the oil and gas industry, the Company makes only a
cursory review of title to undeveloped oil and gas leases at the time they
are acquired by the Company. Such reviews, while consistent with industry
practices, are incomplete. The Company believes that it generally is not
economically feasible to review in depth every individual property that the
Company acquires, especially in the case of producing property acquisitions
covering a large number of leases. Ordinarily, when the Company acquires
producing properties, it will focus its 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. However, in the case of undeveloped leases or prospects acquired
by the Company, the Company will, before drilling is commenced, generally
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 prior to the time actual drilling of a well on the lease is
commenced. The Company believes that it has good title to its oil and gas
properties, some of which are subject to immaterial encumbrances, easements
and restrictions. The oil and gas properties owned by the Company are also
typically subject to royalty and other similar non-cost bearing interests
customary in the industry. The Company does not believe that any of these
encumbrances or burdens will materially affect the Company's ownership or use
of its properties.
19
Oil and Gas Reserves
The oil and gas reserves of the Company have been estimated as of
December 31, 1997 by Joe C. Neal and Associates, Midland, Texas. At December
31, 1997, the Company had estimated proved reserves of 30.5 Bcf of gas and
1.89 million Bbls of oil for a total of 6.98 million EBO.
The following table sets forth certain information regarding the Company's
proved reserves:
Proved Proved
Developed Undeveloped Total
--------- ----------- -------
Gas (Mcf). . . . . . . . . . . . . . . . . . . . . . 20,327 10,221 30,548
Oil (Bbls) (000's) . . . .. . . . . . . . . . . . . . 838 1,056 1,894
Future Net Revenue (before income taxes) (000's). . . $ 49,486 $ 27,442 $ 76,928
Present Value of Future Net Revenues (before income
taxes) (000's). . . . . . . . . . .. . . . . . $ 31,042 $ 15,378 $ 46,420
Additional information concerning the Company's estimated proved gas and
oil reserves at December 31, 1997 is included in Note 13 of the notes to
financial statements contained herein under Item 8. - Financial Statements
and Supplementary Data.
Except for the decline in oil prices after December 31, 1997, no major
discovery or other favorable or adverse event has occurred since January 1,
1998 which is believed to have caused a significant change in the estimated
proved oil and gas reserves of the Company as reported at December 31, 1997.
There are numerous uncertainties inherent in estimating natural gas and
oil reserves and their estimated values, including many factors beyond the
control of the producer. The reserve data set forth herein represent only
estimates. Reservoir engineering is a subjective process of estimating
underground accumulations of natural gas and oil that cannot be measured in
an exact manner. The accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological interpretation
and judgment. 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 subsequent to the date of such estimates.
Accordingly, reserve estimates are often different from the quantities of
natural gas and oil that are ultimately recovered. The meaningfulness of
such estimates is highly dependent upon the accuracy of the assumptions upon
which they were based.
In general, the volume of production from natural gas and oil properties
declines as reserves are depleted. Except to the extent the Company acquires
properties containing proved reserves or conducts successful exploration and
20
development activities, or both, the proved reserves of the Company will
decline as reserves are produced. The Company's future natural gas and oil
production is therefore highly dependent upon its level of success in
acquiring or finding additional reserves.
The Company has no reserves outside the United States.
The Company's 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 filed by the Company with the U.S.
Department of Energy, the Company's estimate of reserves has not been filed
with or included in reports to any federal agency other than the Securities
and Exchange Commission.
ITEM 3. LEGAL PROCEEDINGS
Except for ordinary routine litigation incidental to the Company's
business, the Company is not currently a party to any material pending
litigation, nor is it aware of any threatened litigation. The Company has
not been a party to any bankruptcy, receivership, reorganization, adjustment,
or similar proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The registrant did not submit any matter to a vote of its security holders
during the fourth quarter of its fiscal year ended December 31, 1997.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "PLLL." The following table sets forth, on a per share basis for
the periods indicated, the high and low closing sales prices for the Common
Stock as reported by Nasdaq.
Price
---------------
High Low
------ -----
1995
First quarter $3.19 $2.00
Second quarter $2.13 $1.38
Third quarter $2.50 $1.69
Fourth quarter $2.00 $1.44
1996
First quarter $2.75 $1.75
Second quarter $4.00 $2.50
Third quarter $5.56 $3.56
Fourth quarter $5.50 $4.25
1997
First quarter $5.81 $4.31
Second quarter $5.50 $3.88
Third quarter $6.88 $4.38
Fourth quarter $7.25 $5.25
The last sale price of the Company's Common Stock on March 16, 1998 was
$5.43 per share, as reported on the Nasdaq National Market.
As of March 16, 1998, there were approximately 2,258 stockholders of
record of the Company's Common Stock.
The Company has not in the past paid, and does not intend to pay in the
foreseeable future, cash dividends on its Common Stock. The Company
currently intends to retain earnings, if any, for the future operation and
22
development of its business. The Company's revolving credit facility contains
provisions prohibiting the payment of dividends. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data for
each of the years in the five-year period ended December 31, 1997. This data
should be read in conjunction with the Company's Financial Statements and
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under Item 7 below. The selected
financial data provided below are not necessarily indicative of the future
results of operations or financial performance of the Company:
Year Ended December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ----------- ----------- ------------
Operating revenues $ 12,614,242 $ 14,167,470 $ 4,713,748 $ 4,692,706 $ 3,466,003
Operating expenses $ 7,968,146 $ 6,945,168 $ 3,518,163 $ 3,339,478 $ 2,522,002
Income before extraordinary item
and cumulative effect of
accounting change $ 2,743,930 $ 4,330,654 $ 137,080 $ 444,360 $ 376,547
Net income $ 2,743,930 $ 4,330,654 $ 137,080 $ 444,360 $ 328,495(1)
Income before extraordinary item
and cumulative effect of
accounting change per common
share $ .15 $ .29 $ .01 $ .03 $ .03
Net income per common share $ .15 $ .29 $ .01 $ .03 $ .03
Cash dividends - common stock $ - $ - $ - $ - $ -
Weighted average common shares
and common stock equivalents
outstanding 17,862,792 14,957,404 14,860,332 14,088,073 12,323,744
Present value of proved oil and
gas reserves discounted at 10%
(before estimated federal
income taxes) $ 46,419,580 $ 67,015,980 $ 25,890,050 $ 20,462,420 $ 21,137,370
Working capital(2) $ (2,162,139) $ 351,517 $ 639,299 $ (233,460) $ (355,029)
Total assets $ 49,855,532 $ 38,098,169 $ 23,914,698 $ 22,760,729 $ 16,180,298
Total liabilities $ 20,736,779 $ 13,380,034 $ 13,079,285 $ 13,431,823 $ 7,463,224
Long-term debt, less current
maturities $ 12,182,610 $ 8,521,391 $ 11,674,625 $ 11,000,000 $ 5,809,000
Total stockholders' equity $ 29,118,753 $ 24,718,135 $ 10,835,413 $ 9,328,906 $ 8,717,074
- -----------------------
23
(1) In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes
(FAS 109)". The Company adopted FAS 109 in the first quarter of 1993.
Upon adoption of FAS 109, a net deferred tax liability of $48,052 was
recognized at January 1, 1993 reflecting the effects of a net book over
tax basis and limited utilization of the net operating loss carryforwards.
(2) Under the Company's current cash management practices, available cash funds
that are not required for operations are applied to the repayment of
borrowings under the Company's revolving credit facility.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Since 1992, the Company's primary focus has been exploratory drilling
through the use of 3-D seismic technology. The Company's long-term business
strategy is to increase the Company's reserve base by utilizing 3-D seismic
technology.
The Company intends to exploit its existing properties and acquire those
properties which it believes can be exploited by developing reserves not
previously produced. The Company undertakes projects only when it believes
the project has the potential for initial cash flow adequate to return the
project's capital expenditures within a short period of time, generally less
than 36 months. The Company also endeavors to maximize the present value of
its projects by accelerating production of its reserves consistent with
prudent reservoir management.
As part of this business strategy, the Company has acquired producing oil
and gas properties in the Permian Basin of west Texas and has discovered oil
and gas reserves through the use of 3-D seismic technology in the Horseshoe
Atoll Reef Trend of west Texas and the Yegua/Frio/Wilcox gas trend onshore
the gulf coast of Texas. Capital utilized to acquire such reserves has been
provided primarily by secured bank financing, sales of the Company's equity
securities and cash flow from operations.
The Company's operating performance is influenced by several factors, the
most significant of which are the prices received for its oil and gas and the
Company's production volumes. The world price for oil has overall influence
on the prices that the Company receives for its 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
24
the Company receives are primarily influenced by seasonal demand, weather,
hurricane conditions in the Gulf of Mexico, availability of pipeline
transportation to end users and proximity of the Company's wells to major
transportation pipeline infrastructure and, to a lesser extent, world oil
prices. Additional factors influencing operating performance include
production expenses, overhead requirements, and cost of capital.
The Company's oil and gas producing activities are accounted for using the
full cost method of accounting. Accordingly, the Company capitalizes all c
osts incurred in connection with the acquisition of oil and gas properties
and with the exploration for and development of oil and gas reserves.
Normal dispositions of oil and gas properties are accounted for as adjustments
to capitalized costs, with no gain or loss recognized. Certain directly
identifiable internal costs of property acquisition, exploration and
development activities are capitalized. Such costs capitalized in 1997, 1996
and 1995 totaled approximately $462,000, $587,000, and $512,000 respectively.
Depletion of such costs 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. Depletion per equivalent unit of production (EBO) was $5.29, $4.47,
and $3.97 for 1997, 1996 and 1995, respectively. Costs from unproved
properties are excluded from depletion until evaluated. In accordance with
the full cost method of accounting, the net capitalized costs of oil and gas
properties (full cost ceiling limitation) are not to exceed their related
estimated future net revenues discounted at 10%, and lower of cost or
estimated fair value of unproved properties, net of tax considerations.
25
Results of Operations
The Company's business activities are characterized by frequent, and
sometimes significant, changes in reserve base, sources of production,
product mix (gas versus oil volumes) and prices received by the Company for
its gas and oil. Consequently, year to year or other periodic comparisons
of the Company's results of operations can be difficult and may not fully
and accurately describe the Company's condition. The following table sets
forth selected operating data for the three years ended December 31, 1997:
Year Ended December 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
Production and Prices:
Oil (Bbls) 175,246 221,499 132,579
Natural gas (Mcf) 3,383,190 3,654,897 1,616,105
Oil price (per Bbl) $ 19.88 $ 21.83 $ 17.26
Gas price (per Mcf) $ 2.70 $ 2.55 $ 1.50
Ratio of oil to gas price 7.36/1 8.56/1 11.51/1
Equivalent barrels of oil (EBO)(1) 739,111 830,649 401,929
Increase (decrease) in production
volumes over prior year (11%) 107% 5%
Results of Operations per EBO:
Oil and gas revenues $ 17.07 $ 17.06 $ 11.72
Costs and expenses:
Production costs 4.29 3.23 3.65
General and administrative expense 1.13 .63 1.08
Depreciation, depletion and amortization 5.36 4.50 4.02
--------- --------- ---------
Total Costs and Expenses 10.78 8.36 8.75
--------- --------- ---------
Operating income 6.29 8.70 2.97
Interest expense, net 1.09 1.50 2.58
Other expense (income) (.03) (.08) (.12)
--------- --------- ---------
Pretax income per EBO $ 5.23 $ 7.28 $ .51
========= ========= =========
___________________
(1) An EBO (equivalent barrel of oil) means one barrel of oil equivalent using
the ratio of six Mcf of gas to one barrel of oil.
26
The following table sets forth for the periods indicated the percentage of
total revenues represented by each item reflected on the Company's statements of
operations.
Year Ended December 31,
----------------------------------
1997 1996 1995
------ ------ ------
Oil and gas revenues 100.0% 100.0% 100.0%
Costs and expenses:
Production costs 25.1 19.0 31.1
General and administrative expense 6.6 3.7 9.2
Depreciation, depletion and amortization 31.4 26.4 34.3
----- ----- -----
Total costs and expenses 63.1 49.1 74.6
----- ----- -----
Operating Income 36.9 50.9 25.4
Interest expense, net 6.4 8.2 2.0
Other expense (income) (.2) (.5) (.9)
----- ----- -----
Pretax income 30.7 42.7 4.3
Income tax expense 8.9 12.1 1.4
----- ----- -----
Net income 21.8% 30.6% 2.9%
Years Ended December 31, 1997 and December 31, 1996
Oil and Gas Revenues. Oil and gas revenues decreased $1.6 million, or 11%
to $12.6 million for the twelve months ended December 31, 1997, from $14.2
million for the same period of 1996. The decrease was primarily the result of a
92,000 EBO, or 11% decrease to 739,000 EBO in the Company's oil and gas
production in the twelve months ended December 31, 1997, compared to 831,000
EBO for the same period of 1996. The $1.6 million decrease in revenues was
attributable to decreased oil and gas production volumes from the Company's
Yegua/Frio/Wilcox gas trend properties which were drilled, completed and
began production during 1996. Drilling activity in 1997 was delayed because
of inclement weather which affected new production volumes.
Production Costs. Production costs increased $485,000 or 18%, to $3.2
million for the twelve months ended December 31, 1997, from $2.7 million for
the same period of 1996. The decrease in production of 92,000 EBO and an
overall increase in direct field operating expenses was responsible for the
increase in production costs. Production costs as a percentage of revenues
increased primarily because of the 11% decrease in oil and gas production
volumes. Additionally, average production costs per EBO increased 33% to
27
$4.29 for the twelve months ended December 31, 1997 compared to $3.23 in the
same period of 1996 as a result of decreased production volumes from the
Company's Yegua/Frio wells drilled in 1996. At December 31, 1997,
substantially all of the Company's oil wells employed artificial lift
(pumping) and have higher associated production costs than its gas wells,
which flow. As a result of its drilling efforts in the Yegua/Frio/Wilcox
gas trend during 1997 and 1996, the Company's production has become more
weighted toward gas production.
General and Administrative Expenses. General and administrative expenses
increased $317,000 or 61% to $838,000 for the year ended December 31, 1997,
from $521,000 for the same period of 1996. The increase was primarily due
to the Company capitalizing less of its general and administrative expenses,
increased public reporting costs and adding one additional employee. The
Company's general and administrative expenses as a percentage of revenues was
6.6% for the year ended December 31, 1997 and 3.7% for the same period in
1996.
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization ("DD&A") expense increased $221,000, or 6% to $4.0 million
in the year ended December 31, 1997, from $3.7 million for the same period of
1996. The increase in DD&A expense as a percentage of revenues is primarily
a result of the 11% decrease in production volumes and an increase in the
DD&A rate to $5.36 in the year ended December 31, 1997 from $4.50 in 1996.
The increase in the DD&A rate is attributable to increased exploration and
drilling activities associated with a 1% decrease in the Company's reserve
base in 1997 to 6.98 million EBO compared to 7.06 million EBO in 1996. The
reserve base decreased due to the following items: production of 739,000 EBO,
reserve additions of 3.5 million EBO, sale of reserves of 924,000 EBO and a
downward revision of 1.9 million EBO. Revisions were due to property
performance and oil and gas prices which were approximately 30% lower as of
December 31, 1997 compared to December 31, 1996. DD&A expenses increased 19%
per EBO, reflecting the Company's increased DD&A rate.
Net Interest Expense. Interest expense decreased $433,000 or 35%, to
$804,000 for the year ended December 31, 1997, from $1.2 million for the same
period of 1996, due principally to the decrease in average borrowings from
the Company's revolving line of credit facility. Such decrease resulted from
applying the proceeds received from the December, 1996 stock offering toward
the Company's revolving line of credit balance and the Company's cash
management system, whereby it maintains minimum cash balances with any
excess cash applied against the line of credit.
Income Tax Expense. The effective tax rates were 29% and 28% for the
years ended December 31, 1997 and 1996, respectively.
Net Income and Operating Cash Flow. Net income decreased $1.6 million,
or 37%, to $2.7 million for the year ended December 31, 1997, compared to
$4.3 million for the year ended December 31, 1996. Operating cash flow
decreased approximately $2.0 million, or 20%, to $7.8 million for the year
ended December 31, 1997 compared to $9.8 million for the year ended December
31, 1996. The net income and operating cash flow decreases were primarily
due to the 11% decrease in oil and gas revenues, the 18% increase in lease
operating expenses, the 61% increase in general and administrative expenses,
offset by the 35% decrease in interest expense.
28
Years Ended December 31, 1996 and December 31, 1995
Oil and Gas Revenues. Oil and gas revenues increased $9.5 million, or
201% to $14.2 million for the twelve months ended December 31, 1996, from
$4.7 million for the same period of 1995. The increase was primarily the
result of a 429,000 EBO, or 107% increase to 831,000 EBO in the Company's oil
and gas production, and an increase of 45% in the average sales price per EBO
from $11.72 in the twelve months ended December 31, 1995 to $17.06 for the
same period of 1996. Of the $9.5 million increase in revenues, $7.3 million
was attributable to increased oil and gas production volumes and $2.2 million
was attributable to the increase in average sales prices, primarily gas
prices. Of the increase in revenues, approximately $7.0 million, or 75%, was
due to production from the Yegua/Frio gas trend properties which were drilled,
completed and began production during 1996.
Production Costs. Production costs increased $1.2 million or 83%, to
$2.7 million for the twelve months ended December 31, 1996, from $1.5 million
for the same period of 1995. The increase in production of 429,000 EBO was
responsible for the increase in production costs. Production costs as a
percentage of revenues declined primarily because of the 45% increase in the
average sales price per EBO. Additionally, average production costs per EBO
declined 11% to $3.23 for the twelve months ended December 31, 1996 compared
to $3.65 in the same period of 1995 as a result of new production from the
Company's Yegua/Frio wells. At December 31, 1996, substantially all of the
Company's oil wells employed artificial lift (pumping) and have higher
associated production costs than its gas wells, which flow. As a result of
its successful drilling efforts in the Yegua/Frio gas trend during 1996, the
Company's production became more weighted toward gas production.
General and Administrative Expenses. General and administrative
expenses increased $89,000 or 20% to $521,000 for the year ended December 31,
1996, from $432,000 for the same period of 1995. As a result of the Company's
low administrative cost structure and the increase in revenues, the Company's
general and administrative expenses as a percentage of revenues decreased
from 9.2% for the year ended December 31, 1995 to 3.7% for the same period in
1996.
Depreciation, Depletion and Amortization Expense. DD&A expense
increased $2.1 million, or 131% to $3.7 million in the year ended December 31,
1996, from $1.6 million for the same period of 1995. The decrease in DD&A as
a percentage of revenues is primarily a result of the increase in prices
realized per EBO, partially offset by an increase in the DD&A rate to $4.50
in the year ended December 31, 1996 from $4.02 in 1995. The increase in the
DD&A rate is attributable to increased exploration and drilling activities.
During 1996, the Company added 1.24 million EBO to its reserve base, net of
831,000 EBO of production, an increase of 21% to its net reserves. DD&A
expenses increased 12% per EBO, reflecting the Company's success in drilling
activities.
Net Interest Expense. Interest expense increased $200,000 or 20%, to
$1.2 million for the year ended December 31, 1996, from $1.0 million for the
same period of 1995, due principally to increased borrowings under the
Company's revolving loan agreement, offset partially by a decrease in
interest rates.
29>
Income Tax Expense. The effective tax rates were 28% and 34% for the
years ended December 31, 1996 and 1995, respectively.
Net Income and Operating Cash Flow. Net income increased $4.2 million,
or 3059%, to $4.3 million for the year ended December 31, 1996, compared to
$137,000 for the year ended December 31, 1995. Operating cash flow increased
approximately $8.0 million, or 437%, to $9.8 million for the year ended
December 31, 1996 compared to $1.8 million for the year ended December 31,
1995. The net income and operating cash flow increases are primarily due to
a 201% increase in oil and gas revenues and, due to the Company's low
administrative cost structure, costs not increasing in proportion to the
increase in revenues.
Liquidity and Capital Resources
Working capital decreased $2.5 million as of December 31, 1997 compared
to December 31, 1996. Current liabilities exceeded current assets by $2.2
million at December 31, 1997, compared to current assets exceeding current
liabilities by $352,000 at December 31, 1996. Current assets increased
primarily due to an increase of $555,000 in cash, offset by a decrease in
accounts receivable of $467,000. Current liabilities increased due to an
increase in accounts payables of $2.6 million, resulting from the Company's
increased drilling and seismic activities in the fourth quarter of 1997.
The Company and its bank lender are parties to a loan agreement which
provides for a $30 million revolving credit facility. Loans are made to the
Company under the revolving credit facility pursuant to a promissory note
maturing July 1, 2001. The note is secured by substantially all of the
Company's oil and gas properties and bears interest at the election of the
Company at a rate equal to (i) the bank's base lending rate or (ii) the
bank's Eurodollar rate plus a margin of 2.5%. On December 31, 1997, the
interest rate in effect was the bank's base lending rate of 8.5%. Commitment
fees of .25% per annum on the difference between the borrowing base and the
average daily amount outstanding are due quarterly. Under terms of the
facility, the principal amount outstanding at any one time may never exceed
the "borrowing base" established by the bank which, at December 31, 1997,
was $17 million. The borrowing base reduces automatically each month at a
rate of $283,333 (the "monthly reduction amount") per month until April 1,
1998. The borrowing base and the monthly reduction amount are redetermined
by the bank on or about April 1 and October 1 of each year or at such other
times as the bank may elect. At December 31, 1997, the principal amount
outstanding under the revolving credit facility was $12.2 million.
The Company intends to borrow, repay and reborrow under the revolving
credit facility from time-to-time as necessary, subject to borrowing base
limitations, to fund 3-D seismic surveys, lease option exercises and drilling
activities on its properties in the Yegua/Frio/Wilcox gas trend,
developmental drilling on the Company's Permian Basin properties, other
drilling expenditures and acquisition opportunities and for general
corporate purposes.
30
The loan agreement contains various restrictive covenants and compliance
requirements, including (i) the maintenance of certain financial ratios, (ii)
limitations on additional indebtedness, and (iii) prohibiting the payment of
dividends.
On December 18, 1996, the Company consummated the sale of 2,500,000 shares
of its Common Stock at a price of $4.25 per share. Proceeds received, net of
related expenses, were approximately $9,421,000. In connection with the
Common Stock offering, the underwriters were granted an over-allotment option
to purchase an additional 375,000 shares of Common Stock. In January 1997,
the over-allotment option was exercised and an additional 375,000 shares of
Common Stock were sold at a price of $4.25 per share. Proceeds received by
the Company, net of related expenses, were approximately $1,470,000. The net
proceeds from the sale of the 2,875,000 shares of Common Stock were used to
reduce the indebtedness outstanding under the Company's revolving credit
facility.
In August, 1997, and after drilling one marginal infill well in March,
1997, the Company sold its interest in the North Nena Lucia Unit, located in
Nolan County, Texas, for approximately $3.65 million. However, the Company
retained all "deep" rights, being approximately 7,400 feet below the surfac
The proceeds from the sale of the property were used to reduce the outstanding
indebtedness under the Company's revolving credit facility.
The Company incurred costs of $23.1 million in its oil and gas property
acquisition and development activities for the year ended December 31, 1997.
Such costs were financed by the utilization of working capital in addition to
the sale of selected properties for $7.6 million, net cash provided by
operating activities of $8.2 million and net cash provided by financing
activities of $5.3 million, which was attributable to a net increase in bank
borrowings in the amount of $3.7 million and net proceeds of approximately
$1.6 million from the issuance of 708,000 shares of common stock.
The oil and gas industry is capital intensive. The Company makes, and
will continue to make, substantial capital expenditures for the exploration,
acquisition and development of oil and gas reserves. Historically, the
Company has financed these expenditures primarily with cash generated by
operations, proceeds from bank borrowings, and sales of equity securities.
The Company's cash flow from operations and the continued availability of
credit to it are subject to a number of variables, including the Company's
proved reserves and proved developed reserves, the level of oil and gas the
Company is able to produce from existing wells, the prices at which oil and
gas are sold and the Company's ability to acquire, locate and produce new
reserves, each of which can materially affect the borrowing base availability
under the Company's revolving credit facility, its only credit facility. The
Company may from time to time seek additional financing, either in the form
of increased bank borrowings, sales of the Company's securities or other
forms of financing. Except for the Company's revolving credit facility, the
Company has no agreements for any such financing and there can be no
assurance as to the availability or terms of any such financing.
31
Trends and Prices
The Company's revenues, cash flows and borrowing capacity are affected by
changes in oil and gas prices. The 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 the control
of the Company. The Company is unable to accurately predict domestic or
worldwide political events or the effects of such other factors on the prices
received by the Company for its oil and gas. The Company historically has
not entered into transactions to hedge against changes in oil and gas prices,
but may elect to enter into hedging transactions in the future to protect
against fluctuations in oil and gas prices.
During 1997, the average sales price received by the Company for its oil
was approximately $19.88 per Bbl, as compared to $21.83 in 1996, while the
average sales price for the Company's gas was approximately $2.70 per Mcf in
1997, as compared to $2.55 per Mcf in 1996. At March 17, 1998, the price
received by the Company for its oil production was approximately $11.90 per
Bbl, while the price received by the Company, at that same date, for its gas
production was approximately $2.25 per Mcf.
Information Systems for the Year 2000
The Company will be required to modify its information systems in order
to accurately process data referencing the year 2000. Because of the
importance of occurrence dates in the oil and gas industry, the consequences
of not pursuing these modifications could significantly affect the Company's
ability to manage and report operating activities. Currently, the Company
plans to purchase software modifications from third parties in order to
correct any existing deficiencies. The total cost will be approximately
$10,000 and the information systems are anticipated to be updated by the end
of 1998. Year 2000 issues as they relate to field operation programs,
suppliers and contractors remain to be evaluated by the Company. However,
based on current available information, the Company does not anticipate that
the costs associated with any necessary modifications will be material to the
Company's operations or financial condition.
Inflation
Inflation has not had a significant impact on the Company's comparative
results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and supplementary financial data,
which begin on page F-1, are included elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and executive officers of the Company at March 17, 1998 are
as follows:
Director
Name Age Since Position with Company
------ ----- --------- ---------------------
Thomas R. Cambridge 62 1985 Chairman of the Board of Directors
and Chief Executive Officer
Larry C. Oldham 44 1979 President, Treasurer and Director
Danny H. Conklin(1) 63 1985 Director
Ernest R. Duke(1) 70 1980 Director
Myrle Greathouse(2) 75 1993 Director
Charles R. Pannill(2) 72 1982 Director
______________________
(1) Member of Audit Committee
(2) Member of Compensation Committee
Mr. Cambridge 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 oil and gas
activities have been carried out through Cambridge Production, Inc., a Texas
corporation. He received a Bachelors degree and a Master of Science degree
in Geology from the University of Nebraska in 1958 and 1960, respectively.
Mr. Oldham, a founder of the Company, has served as an officer and
Director of the Company since its formation in 1979. Prior to the Company's
formation, Mr. Oldham was employed by Dorchester Gas Corporation during the
period 1976 to 1979 and by KPMG Peat Marwick LLP during 1975 and 1976. Mr.
Oldham became President of the Company in October, 1994, and served as
Executive Vice President of the Company prior to that time. Mr. Oldham is a
member of the American Institute of Certified Public Accountants and the
Permian Basin Landman's Association. He received a Bachelor of Business
Administration degree from West Texas State University in 1975.
33
Mr. Conklin is an independent petroleum geologist and a principal partner
in Philcon Development Co., a privately held oil and gas exploration
partnership. Mr. Conklin is a director of Boatmens' First National Bank of
Amarillo, Amarillo, Texas, a director of Southwestern Public Service Company,
Amarillo, Texas, and former Chairman of the Independent Petroleum Association
of America. Mr. Conklin received a Bachelor of Science degree in Geology
from Oklahoma State University in 1957.
Mr. Duke is a consultant to M I Drilling Fluids, LLC and the president and
majority shareholder of Mustang Mud, Inc., a privately held oil field service
company. He received a Bachelor of Science degree in Geology from Southern
Methodist University in 1950.
Mr. Greathouse is the chairman of the board of directors and sole
shareholder of Wes-Tex Drilling Company, a corporation engaged in contract
drilling of oil and gas wells and, to a lesser extent, oil and gas
exploration and production. Mr. Greathouse graduated from the University of
Oklahoma in 1949 with a degree in Business Administration.
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.
Directors of the Company 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 of the
Company are appointed annually by the Company's 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 the
Directors or officers of the Company.
Key Employees
In addition to the services provided by Messrs. Cambridge and Oldham, the
Company also relies extensively on the key employees identified below.
Eric A. Bayley, Manager of Engineering, has been a full-time employee of
the Company since October, 1993. From December, 1990 to October, 1993, Mr.
Bayley was an independent consulting engineer and devoted substantially all
of his time to the Company. Mr. Bayley graduated from Texas A&M University
in 1978 with a B.S. degree in Petroleum Engineering, and in 1984, Mr. Bayley
graduated from the University of Texas of the Permian Basin with a Master's
of Business Administration degree.
34
Rebecca A. Burrell, Manager of Accounting, has been a full-time employee
of the Company since January, 1985. Mrs. Burrell graduated from Jacksonville
College in 1974 with a degree in accounting and has worked in oil and gas
accounting since 1978.
John S. Rutherford, Manager of Land/Administration, has been employed by
the Company since October, 1993. From May, 1991 to October, 1993, Mr.
Rutherford served as a consultant to the Company, devoting substantially all
of his time to the Company'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. From April, 1988 to April, 1991, Mr. Rutherford was a
Vice President in the energy lending division of Texas Commerce Bank,
National Association, Midland, Texas.
Rhonda L. Wright, Manager of Investor Relations, has been a full-time
employee of the Company since August, 1997. From October 1991 to July 1997,
Ms. Wright served as President of Corporate Perspective, Inc., an independent
firm providing investor relations and corporate communication consulting
services to publicly owned companies. From January 1986 to September 1991,
Ms. Wright was Director of Investor Relations at Edisto Resources Corporation,
Dallas, Texas.
Consulting Arrangements
The Company continually attempts to maintain and control its general and
administrative expenses within parameters the Company believes to be
compatible with the size of the Company, its level of activities and
projected future activities, but without impairing the quality of services
and organizational structure necessary for the efficient administration of
the Company's business. In furtherance of its overall business strategy,
outside advisors and consultants are retained by the Company to provide
technical and administrative services and support in the operation of the
Company's business. From time to time, the Company grants to its consultants
overriding royalty interests, working interests, and options to acquire
working interests in wells in which the Company also owns an interest. The
Company believes these types of compensation arrangements enable it 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, among
other things, that the Company's Directors and officers file with the
Securities and Exchange Commission, at specified times, reports of beneficial
ownership and changes in beneficial ownership of the Company's Common Stock
and other equity securities. To the Company's knowledge, all Section 16(a)
filing requirements have been complied with during the year ended December 31,
1997, except that one transaction involving the purchase by Mr. Duke's wife
of a total of 4,000 shares of the Company's Common Stock was reported
thirteen days late.
35
ITEM 11. EXECUTIVE COMPENSATION
Summary of Annual Compensation
The Summary Compensation Table below sets forth for each of the three
fiscal years ended December 31, 1997, a summary of the types and amounts of
compensation paid to the executive officers of the Company.
Summary Compensation Table
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
--------------------------- ------------------------- -------
Other
Annual Restricted Securities
Compen- Stock Underlying LTIP All Other
Name and Principal Year Salary Bonus sation Awards Options/ Payouts Compensation
Position ($) ($) ($) ($) SARs(#) ($) ($)
- ------------------ ---- --------- ------ --------- ----------- ---------- ------- ------------
T.R. Cambridge, 1997 $ 70,686 $1,000 $ 825 0 100,000 0 0
Chief Executive
Officer and 1996 $ 66,402 $2,945 $ 825 0 0 0 0
Chairman of
the Board of 1995 $ 62,475 $3,560 $ 900 0 0 0 0
Directors
L.C. Oldham, 1997 $ 104,297 $1,000 $ 16,620(1) 0 100,000 0 $6,695(2)
President,
Treasurer 1996 $ 98,766 $4,346 $ 11,290(1) 0 0 0 $2,963(2)
and Director
1995 $ 92,181 $5,015 $ 11,521(1) 0 0 0 $2,765(2)
- -------------------
(1) Such amount includes insurance premiums for nondiscriminatory group life,
medical, disability and dental insurance as follows: $11,532 for 1997;
$10,417 for 1996; and $9,171 for 1995.
(2) For 1995 and 1996, such amounts represent contributions made by the
Company to Mr. Oldham's individual retirement account maintained under
the Company's 408(k) simplified employee pension plan/individual
retirement account ("SEP Account"). For 1997, such amount includes
$3,129 contributed by the Company to Mr. Oldham's SEP Account and the
reimbursement to Mr. Oldham of $3,566 for income tax preparation and
planning.
36
Stock Options
The Company has in the past utilized stock options as part of its overall
compensation of Directors, officers and employees. Narrative descriptions of
the Company's stock option plans and outstanding stock options are set forth
under the caption "Stock Option Plans" below.
The table below sets forth certain information with respect to stock
options granted to the named executive officers during the fiscal year ended
December 31, 1997.
Option/Sar Grants in Last Fiscal Year
Individual Grants
Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Annual Rates of Stock
Underlying Granted to Exercise or Price Appreciation for
Options Employees Base Price Expiration Option Term (1)
Name Granted (#) Fiscal Year ($/Sh) Date 5%($) 10%($)
- ---------------- ----------- -------------- ----------- ---------- -------- --------
T. R. Cambridge 100,000 (2) 66.67% $4.09 5-17-07 $257,670 $650,310
L.C. Oldham 100,000 (3) 66.67% $4.82 2-10-07 $303,660 $766,380
(1) These amounts are calculated based on the indicated annual rates of
appreciation and annual compounding from the date of grant to the end of
the option term. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Common Stock and overall stock
market conditions. There is no assurance that the amounts reflected in
this table will be achieved.
(2) A nonqualified stock option to purchase 100,000 shares of Common Stock
was granted to Mr. Cambridge on May 17, 1997 pursuant to the Company's
Non-employee Directors' Stock Option Plan. Such option is exercisable
in two equal annual installments, commencing May 17, 1998.
(3) On February 10, 1997 an incentive stock option to purchase 100,000 shares
of the Company's Common Stock was granted to Mr. Oldham pursuant to the
Company's 1992 Stock Option Plan. Such option is exercisable in five
equal annual installments, commencing February 10, 1998.
37
The following table sets forth certain information with respect to stock
option exercises during the fiscal year ended December 31, 1997 by the
executive officers of the Company and the value of each such executive
officer's unexercised stock options at December 31, 1997.
Aggregated Option/SAR Exercises in
Last Fiscal Year and Fiscal Year - End Option/SAR Values
Value of
Number of Securities Unexercised
Underlying Unexercised in-the-Money Options
Shares Value Options at Fiscal Year-End (#) at Fiscal Year-End ($)(1)
Acquired on Realized ------------------------------ ----------------------------
Name Exercise ($) (2) Exercisable Unexercisable Exercisable Unexercisable
- -------------- ----------- ----------- ----------- ------------- ----------- -------------
T.R. Cambridge 0 0 250,000 100,000 $ 1,197,750 $ 266,000
L. C. Oldham 290,000 $ 1,858,900 347,000 100,000 $ 1,752,590 $ 266,000
_______________
(1) Value of in-the-money options is equal to the fair market value of a
share of Common Stock at fiscal year-end ($6.75 per share), based on the
last sale price of the Company's Common Stock, less the exercise price.
(2) The value realized is equal to the fair market value of a share of
Common Stock on the date of exercise ($6.75 per share), based on the
last sale price of the Company's Common Stock, less the exercise price.
Change of Control Arrangements
The Company's outstanding stock options and stock option plans contain
certain "change of control" provisions which are applicable to the Company's
outstanding stock options, including the options held by Messrs. Cambridge
and Oldham, and other Directors of the Company. Such provisions include the
following: if (i) the Company is not the surviving entity in any merger or
consolidation, (ii) the Company sells, leases or exchanges all or
substantially all of its assets, (iii) the Company is to be dissolved and
liquidated, (iv) any person or group acquires beneficial ownership of more
than 50% of the Company's outstanding Common Stock, or (v) in connection with
a contested election of directors, the persons who were directors of the
Company before such election cease to constitute a majority of the Board of
Directors (each such event, a "Corporate Change"), then within (a) ten days
38
after approval by the stockholders of the Company of such merger,
consolidation, sale, lease or exchange of assets or dissolution or election
of directors or (b) thirty days of such change of control, the Compensation
Committee (the "Committee") of the Board of Directors shall effect one or
more of the following alternatives: (1) accelerate the time at which options
may be exercised, (2) require the mandatory surrender to the Company by
optionees of some or all of such options, in which event the Committee shall
cancel such options and pay to each the "Change of Control Value", (3) make
such adjustments to such options as the Committee deems appropriate to
reflect such Corporate Change, or (4) provide that thereafter upon any
exercise of an option theretofore granted the optionee shall be entitled to
purchase under such option, in lieu of the number of shares of Common Stock
as to which such option shall then be exercisable, the number and class of
shares of stock or other securities or property to which the optionee would
have been entitled pursuant to the terms of the agreement of merger,
consolidation or sale of assets and dissolution if, immediately prior to
such merger, consolidation or sale of assets and dissolution the optionee had
been the holder of record of the number of shares of Common Stock as to which
such option is then exercisable. The "Change of Control Value" is an amount
equal to, whichever is applicable, (i) the per share price offered to
stockholders of the Company in any merger, consolidation, sale of assets or
dissolution transaction, (ii) the price per share offered to stockholders
of the Company in any tender offer or exchange offer whereby a Corporate
Change takes place, or (iii) if such Corporate Change occurs other than
pursuant to a tender or exchange offer, the fair market value per share of
the shares into which such options being surrendered are exercisable, as
determined by the Committee as of the date determined by the Committee to be
the date of cancellation and surrender of such options.
Compensation of Directors
Danny H. Conklin, Ernest R. Duke, Myrle Greathouse and Charles R. Pannill,
non-employee Directors of the Company, each receive $1,000 for attendance at
meetings of the Board of Directors and $500 for attendance at meetings of
Board committees of which they are members. All Directors are reimbursed for
expenses incurred in connection with attending meetings.
The Company's 1992 Stock Option Plan provides for the granting of a
one-time option to purchase 25,000 shares of the Company's Common Stock to
each individual who was a non-employee director of the Company on March 1,
1992 and to each individual who becomes a non-employee director following
March 1, 1992. No options were granted in 1997 pursuant to this arrangement.
Directors who are not employees of the Company are eligible to
participate in the Non-Employee Directors Stock Option Plan. See "Stock
Option Plans". On May 17, 1997, each of Messrs. Conklin, Duke, Greathouse
and Pannill were granted an option to purchase 35,000 shares of Common Stock
and Mr. Cambridge was granted an option to purchase 100,000 shares of Common
Stock. All of the options were granted with an exercise price of $4.09 per
share, the fair market value of the Company's Common Stock on the date of
grant. The options are exercisable with respect to one-half of the shares on
May 17, 1998, and one-half on May 17, 1999. The options expire ten years
from the date of grant.
39
Stock Option Plans
1983 Incentive Stock Option Plan. In May, 1984, the Company's stockholders
approved and adopted the Company's 1983 Incentive Stock Option Plan (the
"1983 Plan"). Options granted under the 1983 Plan are intended to be
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), which, generally, provides
the holder of an "incentive" option with certain favorable tax benefits.
Under the terms of the 1983 Plan, all employees of the Company were eligible
to participate. The 1983 Plan authorized the granting of options to purchase
a total of 750,000 shares of the Company's Common Stock. The exercise price
of options granted under the 1983 Plan must be at least equal to the fair
market value of the Company's Common Stock on the date of grant. Options
under the 1983 Plan may not be exercised until one year from the date of
grant. Subject to the right of accumulation, each option is exercisable
as to one-third of the shares optioned one year after the date of grant, with
an additional one-third of the shares becoming exercisable at the end of each
year thereafter. Options are cumulative and, to the extent not exercised in
each annual period, may be exercised in whole or in part three years after
the date of grant. All options expire, in any event, ten years after the
date of grant. Although the 1983 Plan expired by its own terms on May 19,
1993, incentive stock options to purchase 537,000 shares of Common Stock,
which were granted prior to May 19, 1993, remain outstanding and subject to
all terms and conditions of the 1983 Plan. The 1983 Plan is administered by
the Compensation Committee of the Company's Board of Directors. Members of
the Compensation Committee are not eligible to participate in the 1983 Plan.
1992 Stock Option Plan. In May, 1992, the Company's stockholders approved
and adopted the Company's 1992 Stock Option Plan (the "1992 Plan"). The 1992
Plan provides for the granting to key employees (including officers and
Directors who are also key employees) of the Company and Directors who are
not employees of the Company of options to purchase up to an aggregate of
750,000 shares of Common Stock. Options granted under the 1992 Plan to
employees may be either incentive stock options within the meaning of Section
422 of the Code, or options which do not constitute incentive stock options.
Options granted to non-employee Directors will not be incentive stock options.
The 1992 Plan is administered by the Board's Compensation Committee, none
of whom are eligible to participate in the 1992 Plan except to receive a
one-time option to purchase 25,000 shares at the time he becomes a Director.
The Compensation Committee has the sole authority to select the employees who
are to be granted options, to establish the number of shares issuable under
each option and to establish such terms and conditions as may be approved by
the Compensation Committee, except that the purchase price of Common Stock
issued under each option shall not be less than the fair market value of the
stock subject to the option at the time of grant.
40
The 1992 Plan provides for the granting of an option to purchase 25,000
shares of Common Stock to each individual who was a non-employee Director of
the Company on March 1, 1992 and to each individual who becomes a
non-employee Director following March 1, 1992. Members of the Compensation
Committee are not eligible to participate in the 1992 Plan other than to
receive a non-qualified stock option to purchase 25,000 shares of Common
Stock as described above.
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 an agreement that
existed prior to the date such option is granted ("Prior Option"). An option
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
shall be determined by the Compensation Committee and, such purchase price
may, without limitation, be equal to the price for which the optionee could
have purchased Common Stock under the Prior Option.
The Board of Directors of the Company may amend or terminate the 1992
Plan at any time, but may not in any way terminate or restrict the rights of
a participant under an outstanding option without the consent of such
participant. The Board of Directors may not make any alteration or amendment
which would materially increase the benefits accruing to participants under
the 1992 Plan, increase the aggregate number of shares which may be issued
pursuant to the provisions of the 1992 Plan, change the class of individuals
eligible to receive options under the 1992 Plan, or extend the term of the
1992 Plan, without the approval of the stockholders of the Company.
The 1992 Plan will terminate upon and no further options may be granted
thereunder after the expiration of ten years from the date of its adoption by
the Board of Directors.
Non-Employee Directors Stock Option Plan. The Parallel Petroleum
Corporation Non-Employee Directors Stock Option Plan (the "Directors Plan")
was approved by the stockholders of the Company at the annual meeting of
stockholders held on May 14, 1997. The Plan provides for granting to
Directors who are not employees of the Company options to purchase up to an
aggregate of 500,000 shares of Common Stock of the Company. Options granted
under the Directors Plan will not be incentive stock options within the
meaning of the Code.
The Directors Plan is administered by the Compensation Committee of the
Board of Directors. The Compensation Committee has sole authority to select
the Non-Employee Directors who are to be granted options; to establish the
number of shares which may be issued to Non-Employee Directors under each
option; and to prescribe such terms and conditions, as the Committee shall
prescribe from time to time in accordance with the Plan. Under provisions of
the Directors Plan, the option exercise price must be the fair market value
of the stock subject to the option on the date the option is granted.
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.
41
The purchase price of shares as to which an option is exercised must be
paid in full at the time of exercise (i) in cash, (ii) by delivering to the
Company shares of stock having a fair market value equal to the purchase
price, or (iii) a combination of cash or stock, as established by the
Compensation Committee.
The Board may terminate the Directors Plan at any time in its discretion
with respect to any shares for which options have not theretofore been
granted. The Board also has the right to alter or amend the Directors Plan
or any part thereof from time to time, provided, that no change in any option
theretofore granted may be made which would impair the rights of the optionee
without the consent of such optionee.
Other Option Grants. In addition to the stock options granted pursuant
to the Company's stock option plans, the Company has, on two occasions,
granted stock options to Mr. Cambridge pursuant to the general corporate
powers of the Company, rather than pursuant to such plans. Upon
recommendation of the Company's Compensation Committee, the Board of
Directors of the Company granted a non-qualified stock option to Mr.
Cambridge to purchase 150,000 shares of Common Stock at an exercise price of
$.64 per share, the fair market value of the Common Stock on December 11,
1991, the date of grant. On October 18, 1993, and upon further recommendation
of the Company's Compensation Committee, the Board of Directors granted a
non-qualified stock 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 date of grant. Neither option is transferable
other than by will or the laws of descent and distribution and both options
terminate ten years from the date of grant.
Retirement Plan
The Company maintains under Section 408(k) of the Code a combination
simplified employee pension ("SEP") and individual retirement account ("IRA")
plan (the "SEP/IRA") for eligible employees. Generally, eligible employees
include all employees who are at least twenty-one years of age.
Company contributions to employee SEP accounts may be made from time to
time at the discretion of the Company, as authorized from time to time by the
Compensation Committee of the Board of Directors, and the percentage of such
contributions may also vary from time to time. However, the same percentage
contribution must be made for all participating employees. The Company is
not required to make annual contributions to the employees SEP accounts.
The Company may make tax-deductible contributions for each employee
participant of up to 15% of such participant's compensation or $30,000,
whichever is less. Under the prototype simplified employee pension plan
adopted by the Company, all of the Company's SEP contributions must be made
42
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 by the Company, employees may
make individual annual IRA contributions of up to the lesser of $2,000 or
100% 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.
The Company presently makes matching contributions to employee accounts
in an amount equal to the contribution made by each employee, not to exceed,
however, 3% of each such employee's salary during any calendar year. During
the fiscal year ended December 31, 1997, the Company contributed an aggregate
of $14,265 to the accounts of seven employee participants, of which $3,129
was allocated to the account of Mr. Oldham, the President and a Director of
the Company.
43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of March 17, 1998
with respect to the beneficial ownership of Common Stock by (i) each person
known to the Company to own beneficially more than five percent of the
outstanding Common Stock, (ii) each executive officer of the Company, (iii)
each Director of the Company, and (iv) all executive officers and Directors
of the Company as a group:
Percent
Name and Address Amount and Nature of of
of Beneficial Owner Beneficial Ownership (1) Class (2)
- ------------------- ------------------------- ---------
Thomas R. Cambridge 917,045 (3) 4.98%
216 Texas Commerce Bank Building
Amarillo, Texas 79109
Danny H. Conklin 143,124 (4) *
730 First National Place I
Amarillo, Texas 79101
Ernest R. Duke 252,473 (5) 1.39%
408 West Wall Street
Midland, Texas 79701
Myrle Greathouse 997,988 (6) 5.49%
401 Cypress, Suite 519
Abilene, Texas 79601
Larry C. Oldham 677,090 (7) 3.66%
One Marienfeld Place, Suite 465
Midland, Texas 79701
Charles R. Pannill 97,995 (8) *
3416 Acorn Run
Fort Worth, Texas 76019
Wes-Tex Drilling Company 932,488 (9) 5.15%
519 First National Bank Building West
Abilene, Texas 79601
All Executive Officers and Directors 3,085,715 (10) 16.30%
as a Group (6 persons)
__________________
* Less than one percent.
44
(1) Unless otherwise indicated, all shares of Common Stock are held directly
with sole voting nd 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.
(3) Includes 300,000 shares of Common Stock underlying presently exercisable
stock options.
(4) Includes 42,500 shares of Common Stock underlying presently exercisable
stock options.
(5) Includes 17,500 shares of Common Stock underlying a presently exercisable
stock option. Also included are 74,395 shares held by Duke and Cain
Partnership, a general partnership in which Mr. Duke is a partner, and
20,000 shares held in the name of Mr. Duke's wife. Mr. Duke has shared
voting and investment powers with respect to such shares.
(6) Includes 932,488 shares of Common Stock held directly by Wes-Tex Drilling
Company ("Wes-Tex"), a corporation. Mr. Greathouse is the chairman of
the board of directors and sole shareholder of Wes-Tex and, accordingly,
has shared voting and investment powers with respect to such shares.
Also included are 42,500 shares of Common Stock underlying presently
exercisable stock options, and 1,000 shares held by a twenty-two member
investment club, of which Mr. Greathouse is a member, and as to which Mr.
Greathouse has shared voting and investment powers. See note 9 below.
(7) Includes 367,000 shares of Common Stock underlying presently exercisable
stock options.
(8) Includes 25,000 shares of Common Stock underlying a presently exercisable
stock option. 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.
(9) Mr. Greathouse, a Director of the Company, is the chairman of the board
of directors and sole shareholder of Wes-Tex Drilling Company. Wes-Tex
has shared voting and investment powers with respect to such shares.
See note 6 above.
(10) Includes 812,000 shares of Common Stock underlying presently
exercisable stock options.
45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time, Wes-Tex Drilling Company ("Wes-Tex"), a corporation,
acquires undivided interests in oil and gas leasehold acreage from the
Company and participates with the Company and other interest owners in the
drilling and development of such acreage. Myrle Greathouse, a director and
the sole shareholder of Wes-Tex, has served as a Director of the Company since
December, 1993. Wes-Tex participates in such operations under standard form
operating agreements on the same or similar terms afforded by the Company to
nonaffiliated third parties. The Company invoices 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
the year ended December 31, 1997, the Company billed Wes-Tex the aggregate
amount of approximately $27,000 for Wes-Tex's proportionate share of lease
operating expenses incurred on properties operated by the Company. The
largest amount owed to the Company by Wes-Tex at any one time during the
year ended December 31, 1997 for its share of lease operating expenses was
approximately $9,000, and at December 31, 1997 Wes-Tex owed the Company
approximately $9,000 for such expenses. During the fiscal year ended
December 31, 1997, the Company disbursed approximately $75,000 to Wes-Tex in
payment of revenues attributable to Wes-Tex's pro rata share of the proceeds
from sales of gas and oil produced from properties in which Wes-Tex and the
Company owned interests.
During the year ended December 31, 1997, Cambridge Production, Inc. ("CPI"),
a corporation owned by Mr. Cambridge, served as operator of 18 wells on oil
and gas leases in which the Company owned an interest. Generally, the
operator of a well is responsible for the day to day operations on the lease,
overseeing of production, employment of field personnel, maintenance of
production and other records, determining the location and timing of
drilling of wells, gas contract administration, joint interest billings,
revenue distribution, making various regulatory filings, reporting to working
interest owners and other matters. During 1997, CPI billed the Company
approximately $498,000, which included $73,000 for the Company's pro rata
share of lease operating expenses and $425,000 for the Company's pro rata
share of drilling and workover expenses. Of the total amount billed to the
Company, approximately $476,000 was paid by the Company to CPI during 1997.
The largest amount owed by the Company to CPI at any one time during 1997 was
approximately $45,000. At December 31, 1997, CPI owed the Company approximately
$15,000. CPI's billings to the Company are made monthly on the same basis as
made to all other working interest owners in the wells. The Company's pro
rata share of oil and gas sales during 1997 from the wells operated by CPI
was approximately $211,000.
Management of the Company believes that each of the above referenced
transactions was made on terms no less favorable than if such transactions
had been entered into with an unrelated party.
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
For a list of Financial Statements and Schedules, see "Index
to the Financial Statements and Schedules" on page F-1, and
incorporated herein by reference.
(b) No reports on Form 8-K were filed by the Company during the last
quarter of its fiscal year ended December 31, 1997.
(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, 1988.)
3.2 Bylaws of Registrant (Incorporated by reference to Exhibit
3.2 to Form 10-K of the Registrant for the fiscal year
ended December 31, 1995.)
4.1 Certificate of Merger merging Parallel Petroleum Corporation,
a Texas corporation, into Registrant (Incorporated by
reference to Exhibit 4.1 to Form 10-K of the Registrant as
filed with the Securities and Exchange Commission
on April 1, 1985.)
4.2 Agreement and Plan of Merger Dated July 17, 1984 between
Parallel Petroleum Corporation, a Texas corporation, and the
Registrant (Incorporated by reference to Exhibit 2.1 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.)
47
Executive Compensation Plans and Arrangements (Exhibit No.'s
10.1 through 10.6):
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.
10.7 Loan Agreement dated July 1, 1996 between the Registrant and
Bank One Texas, N.A. (Incorporated by reference to Exhibit
10.1 of Form 10-Q of the Registrant for the fiscal quarter
ended June 30, 1996.)
*23.1 Consent of Independent Auditors
*23.2 Consent of Independent Petroleum Engineers
*27 Financial Data Schedule
_________________________
* Filed herewith.
S-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PARALLEL PETROLEUM CORPORATION
March 19, 1998 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 and Chairman March 19, 1998
------------------- of the Board of Directors (Principal
Executive Officer)
/s/ Larry C. Oldham President and Treasurer March 19, 1998
------------------ (Principal Financial Officer)
Larry C. Oldham
/s/ Danny H. Conklin Director March 19, 1998
------------------
Danny H. Conklin
/s/ Ernest R. Duke Director March 19, 1998
------------------
Ernest R. Duke
/s/ Myrle Greathouse Director March 19, 1998
------------------
Myrle Greathouse
/s/ Charles R. Pannill Director March 19, 1998
------------------
Charles R. Pannill
F-1
PARALLEL PETROLEUM CORPORATION
Index to the Financial Statements
Page
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets at December 31, 1997 and 1996 F-3
Statements of Income for the years ended
December 31, 1997, 1996 and 1995 F-4
Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995 F-5
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6
Notes to Financial Statements F-7
All schedules are omitted, as the required information is inapplicable or the
information is presented in the financial statements or related notes.
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Parallel Petroleum Corporation:
We have audited the financial statements of Parallel Petroleum Corporation
(the "Company") as listed in the accompanying index. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Parallel Petroleum
Corporation as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Midland, Texas
February 3, 1998
F-3
PARALLEL PETROLEUM CORPORATION
Balance Sheets
December 31, 1997 and 1996
Assets 1997 1996
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 597,149 41,569
Accounts receivable:
Oil and gas 1,649,350 2,888,400
Others, net of allowance for doubtful
accounts of $28,130 in 1997 and 1996 915,358 127,837
Affiliate 9,506 24,991
------------ -----------
2,574,214 3,041,228
Other assets 37,183 7,540
------------ -----------
Total current assets 3,208,546 3,090,337
Property and equipment, at cost:
Oil and gas properties, full cost method
(Note 11) 62,659,570 47,130,874
Other 433,922 380,207
------------ -----------
63,093,492 47,511,081
Less accumulated depreciation and depletion (16,514,102) (12,576,560)
------------ -----------
Net property and equipment 46,579,390 34,934,521
------------ -----------
Other assets, net of accumulated amortization
of $59,085 in 1997 and $33,263 in 1996 67,596 73,311
----------- -----------
$ 49,855,532 38,098,169
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable and accrued liabilities:
Trade $ 5,313,439 2,723,574
Affiliate 14,660 3,181
Income taxes payable 42,586 12,065
----------- -----------
Total current liabilities 5,370,685 2,738,820
Long-term debt (Note 3) 12,182,610 8,521,391
Deferred income taxes (Note 5) 3,183,484 2,119,823
Stockholders' equity:
Preferred stock - par value of $.10 per share,
authorized 40,000,000 shares, none issued - -
Common stock - par value of $.01 per share,
authorized 100,000,000 shares,
issued and outstanding 18,114,358
in 1997 and 17,406,358 in 1996 181,144 174,063
Additional paid-in surplus 22,839,049 21,189,442
Retained earnings 6,098,560 3,354,630
----------- -----------
Total stockholders' equity 29,118,753 24,718,135
Contingencies
----------- -----------
$ 49,855,532 38,098,169
=========== ===========
See accompanying notes to financial statements.
F-3
PARALLEL PETROLEUM CORPORATION
Statements of Income
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Oil and gas revenues $ 12,614,242 14,167,470 4,713,748
Lease operating expense 3,171,234 2,685,662 1,467,893
General and administrative 837,635 520,784 432,341
Depreciation, depletion and
amortization 3,959,277 3,738,722 1,617,929
----------- ----------- -----------
Total costs and expenses 7,968,146 6,945,168 3,518,163
----------- ----------- -----------
Operating income 4,646,096 7,222,302 1,195,585
----------- ----------- -----------
Other income (expense), net:
Interest income 8,984 8,165 316
Other income 33,512 65,757 51,313
Interest expense (813,372) (1,245,891) (1,035,093)
Other expense (8,840) (1,566) (7,537)
----------- ----------- -----------
Total other expense, net (779,716) (1,173,535) (991,001)
----------- ----------- -----------
Income before income taxes 3,866,380 6,048,767 204,584
Income tax expense 1,122,450 1,718,113 67,504
----------- ----------- -----------
Net income $ 2,743,930 4,330,654 137,080
=========== =========== ===========
Net income per common share:
Basic $ .15 .29 .01
====== ==== ====
Diluted $ .15 .28 .01
====== ==== ====
Weighted average shares
outstanding 17,862,792 14,957,404 14,860,332
========== ========== ==========
See accompanying notes to financial statements.
F-5
PARALLEL PETROLEUM CORPORATION
Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
Common stock Additional Retained Total
Number of Paid-in earnings stockholders'
shares Amount surplus (deficit) equity
------------ -------- --------- --------- -------------
Balance,
January 1, 1995 14,174,888 $ 141,749 10,300,261 (1,113,104) 9,328,906
Issuance of stock, net 644,220 6,441 1,314,679 - 1,321,120
Options exercised 35,000 350 35,700 - 36,050
Tax benefits related to
options - - 12,257 - 12,257
Net income - - - 137,080 137,080
---------- ---------- ---------- ---------- -----------
Balance,
December 31, 1995 14,854,108 148,540 11,662,897 (976,024) 10,835,413
Issuance of stock, net 2,500,000 25,000 9,395,630 - 9,420,630
Options exercised 12,250 123 21,315 - 21,438
Warrants exercised 40,000 400 109,600 - 110,000
Net income - - - 4,330,654 4,330,654
Balance,
December 31, 1996 17,406,358 174,063 21,189,442 3,354,630 24,718,135
Options exercised 708,000 7,081 1,633,404 - 1,640,485
Tax benefits related to
options - - 16,203 - 16,203
Net income - - - 2,743,930 2,743,930
Balance, ----------- ---------- ---------- ---------- -----------
December 31, 1997 18,114,358 $ 181,144 22,839,049 6,098,560 29,118,753
=========== ========== ========== ========== ===========
See accompanying notes to financial statements.
F-6
PARALLEL PETROLEUM CORPORATION
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 2,743,930 4,330,654 137,080
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 3,959,277 3,738,722 1,617,929
Deferred income taxes 1,079,864 1,706,048 67,504
Other, net 5,715 (32,317) 8,058
Changes in assets and liabilities:
Decrease (increase) in trade receivables 467,014 (2,274,978) (51,015)
Decrease (increase) in prepaid expenses and
other (29,643) 8,753 (3,712)
Increase (decrease) in accounts payable and
accrued liabilities (67,078) 217,801 (281,439)
Income tax payable 30,521 12,065 -
----------- ---------- -----------
Net cash provided by
operating activities 8,189,600 7,706,748 1,494,405
----------- ---------- -----------
Cash flows from investing activities:
Additions to property and equipment (20,516,544) (15,271,761) (4,517,692)
Proceeds from disposition of property and
equipment 7,580,820 649,000 596,733
Acquisition of undeveloped leases held for sale - - (523,573)
Proceeds from disposition of undeveloped leases
held for sale - - 730,500
----------- ---------- -----------
Net cash used in
investing activities (12,935,724) (14,622,761) (3,714,032)
----------- ---------- -----------
Cash flows from financing activities:
Borrowings from bank line of credit 16,330,000 22,387,102 2,285,000
Payments on bank line of credit (12,668,781) (25,540,336) (1,610,375)
Proceeds from exercise of options and warrants 1,640,485 131,438 36,050
Stock offering costs - (1,205,620) (141,785)
Proceeds from common stock issuance - 10,626,250 1,611,020
----------- ---------- -----------
Net cash provided by
financing activities 5,301,704 6,398,834 2,179,910
----------- ---------- -----------
Net increase (decrease) in cash
and cash equivalents 555,580 (517,179) (39,717)
Beginning cash and cash equivalents 41,569 558,748 598,465
----------- ---------- -----------
Ending cash and cash equivalents $ 597,149 41,569 558,748
=========== ========== ===========
See accompanying notes to financial statements.
F-7
PARALLEL PETROLEUM CORPORATION
Notes to Financial Statements
(1) Summary of Significant Accounting Policies
------------------------------------------
Nature of Operations
--------------------
Parallel Petroleum Corporation (the "Company"), a Delaware corporation,
is primarily engaged in, and its only industry segment is, the
acquisition of, and the exploration for, development, production and
sale of, crude oil and natural gas. The Company's business activities
are carried out primarily in Texas. The Company's activities in Texas
are focused in the onshore Gulf Coast area of Jackson, Wharton, Lavaca,
Dewitt and Victoria Counties, Texas, and in the Permian Basin of West
Texas.
Concentration of Credit Risk
----------------------------
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of unsecured accounts receivable from
unaffiliated working interest owners and crude oil and natural gas
purchasers.
Property and Equipment
----------------------
The Company's oil and gas producing activities are accounted for using
the full cost method of accounting. Accordingly, all costs associated
with acquisition, exploration, and development of oil and gas reserves,
including directly related overhead costs, are capitalized, with no
gain or loss recognized.
Depletion is provided using the unit-of-production method based upon
estimates of proved oil and gas reserves with oil and gas production
being converted to a common unit of measure based upon their relative
energy content. Investments in unproved properties and major
development projects are not amortized until proved reserves associated
with the projects can be determined or until impairment occurs. If the
results of an assessment indicate that the properties are impaired, the
amount of the impairment is added to the capitalized costs to be
amortized.
In addition, the capitalized costs are subject to a "ceiling test," which
basically limits such costs to the aggregate of the "estimated present
value," discounted at a 10-percent interest rate of future net revenues
from proved reserves, based on current economic and operating conditions,
plus the lower of cost or fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments
of capitalized costs with no gain or loss recognized, unless such
adjustments would significantly alter the relationship between
capitalized costs and proved reserves of oil and gas, in which case the
F-8
gain or loss is recognized in income. Abandonments of properties are
accounted for as adjustments of capitalized costs with no loss
recognized.
Maintenance and repairs are charged to operations; renewals and
betterments are charged to the appropriate property and equipment
accounts.
Upon retirement or disposition of assets other than oil and gas properties,
the cost and related accumulated depreciation are removed from the
accounts with the resulting gains or losses, if any, reflected in
results of operations. Depreciation of other property and equipment
is computed using the straight-line method based on their estimated
useful lives.
Income Taxes
------------
The Company accounts for federal income taxes using Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109").
Under the asset and liability method of FAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Under FAS 109, the effect on
previously recorded deferred tax assets and liabilities resulting from a
change in tax rates is recognized in earnings in the period in which the
change is enacted.
Environmental
-------------
The Company is subject to extensive Federal, state and local environmental
laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may require
the Company to remove or mitigate the environmental effects of the
disposal or release of petroleum or chemical substances at various sites.
Environmental expenditures are expensed or capitalized depending on
their future economic benefit. Expenditures that relate to an existing
condition caused by past operations and that have no future economic
benefits are expensed. Liabilities for expenditures of a noncapital
nature are recorded when environmental assessment and/or remediation is
probable, and the costs can be reasonably estimated. Such liabilities
are generally undiscounted unless the timing of cash payments for the
liability or component are fixed or reliably determinable.
Revenue Recognition
-------------------
The Company uses the sales method of accounting for crude oil revenues.
To the extent that crude oil is produced but not sold, the oil in tanks
is not recorded as inventory on the financial statements. The oil in
tanks at December 31, 1997, 1996 and 1995 was not material.
F-9
The Company uses the sales method of accounting for natural gas revenues.
Under this method, revenues are recognized based on actual volumes of
gas sold to purchasers.
F-10
Gas Balancing
-------------
Deferred income associated with gas balancing is accounted for on the
entitlements method and represents amounts received for gas sold under
gas balancing arrangements in excess of the Company's interest in
properties covered by such agreements. The Company currently has no
significant amounts outstanding under gas balancing arrangements.
Net Income Per Share
--------------------
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128").
FAS 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive
effects of option, warrants and convertible securities and is computed
by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share is computed similarly to the previously reported
fully diluted earnings per share and reflects the assumed conversion of
all potentially dilutive securities. In accordance with the provisions
of FAS 128, the Company adopted FAS 128 in its year ended December 31,
1997 financial statements and all prior period EPS information has been
restated.
Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
Preparation of the accompanying financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash Management
---------------
The Company maintains a cash management system, whereby it maintains
minimum cash balances with any excess cash applied against its bank
line of credit.
Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers all
demand deposits, money market accounts and certificates of deposit
purchased with an original maturity of three months or less to be cash
equivalents.
F-11
Reclassification
----------------
Certain reclassifications have been made to the 1996 amounts to conform
to the 1997 presentation.
F-12
(2) Fair Value of Financial Instruments
-----------------------------------
The carrying amount of cash, accounts receivable, accounts payable, and
accrued liabilities approximates fair value because of the short
maturity of these instruments.
The carrying amount of long-term debt approximates fair value because the
Company's current borrowing rate does not differ from the existing
rate on the Company's long-term debt balance.
(3) Long-Term Debt
--------------
Long-term debt consists of the following at December 31:
1997 1996
---- ----
Note payable to bank, at bank's base lending
rate (8.5% at December 31, 1997) (a) $ 12,182,610 8,521,391
Less: current maturities - -
------------ ---------
$ 12,182,610 8,521,391
============ =========
_________________
(a) The note payable is classified as long-term due to a maturity date of
July 1, 2001.
At December 31, 1997, the Company is party to a revolving line of credit
note with a bank. The note provides for a revolving credit facility of
$30,000,000 with a current borrowing base of $17,000,000 reduced by a
monthly commitment reduction of $283,333 until April 1, 1998. The note
matures July 1, 2001. The borrowing base and monthly commitment
reduction are subject to redetermination every six months on April 1
and October 1 of each year, or at such other times as the bank elects.
The latest redetermination date was on October 1, 1997. The note is
secured by substantially all of the Company's oil and gas properties.
Commitment fees of .25% per annum on the difference between the
commitment and the average daily amount outstanding are due quarterly.
The unpaid principal balance on the note bears interest at the election
of the Company at a rate equal to (i) the bank's base lending rate or
(ii) the bank's Eurodollar rate plus a margin of 2.5%. On December 31,
1997, the interest rate in effect was the bank's base lending rate of
8.5%.
The new loan agreement contains various restrictive covenants and
compliance requirements, which include (1) maintenance of certain
financial ratios, (2) limiting the incurrence of additional
indebtedness, and (3) no payment of dividends.
F-13
(4) Stock Options and Warrants
--------------------------
At the election of the board of directors, the Company awards both
incentive stock options and nonqualified stock options to selected key
employees and officers. The options are awarded at an exercise price
based on the closing price of the Company's common stock on the date of
grant, a two-year and four-year vesting schedule and a ten-year
exercise period. As of December 31, 1997, options expire beginning in
the year-ended December 31, 2000 through 2007. Exercise of the
nonqualified stock options resulted in a deferred tax effect of
$16,203, $0 and $12,257 for the years ended December 31, 1997, 1996
and 1995, respectively.
The Company applies APB 25 and related Interpretations in accounting for
its stock option awards. No compensation expense has been recognized
for its stock option awards. If compensation expense for the stock
option awards had been determined consistent with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), the Company's net income and net income
per share would have been adjusted to the pro forma amounts indicated
below for the years ended December 31:
1997 1996 1995
---- ---- ----
Net income $ 2,464,487 $ 4,295,248 $ 127,873
Basic net income per share $ .14 $ .29 $ .01
Diluted net income per share $ .13 $ .27 $ .01
The pro forma net income and pro forma net income per share amounts noted
above are not likely to be representative of the pro forma amounts to
be reported in future years. The pro forma amounts for 1996 and 1995
reflect the initial phase-in of FAS 123 and as a result do not reflect
any compensation expense for options granted prior to 1995. Pro forma
adjustments in future years will include compensation expense
associated with the options granted beginning in 1995 plus compensation
expense associated with any options awarded in subsequent years. As a
result, such proforma compensation expense is likely to be higher than
the levels experienced in 1996 and 1995.
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 1997, 1996
and 1995:
1997 1996 1995
---- ---- ----
Risk-free interest rate 6.41 6.15 6.06
Expected life 7 years 7 years 7 years
Expected volatility .55 .64 .64
F-14
A summary of the Company's stock option plans as of December 31, 1997,
1996 and 1995, and changes during the years ended on those dates is
presented below:
For the year ended For the year ended For the year ended
December 31, 1997 December 31, 1996 December 31, 1995
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Shares Price of Shares Price of Shares Price
--------- ------- --------- -------- --------- --------
Stock options:
Outstanding at beginning
of year 1,207,250 $ 1.82 1,134,500 $ 1.55 1,239,500 $ 1.76
Options granted 485,000 4.41 85,000 5.40 70,000 1.75
Options exercised (323,000) .44 (12,250) 1.75 (35,000) 1.03
Options canceled (5,000) 4.53 - - (140,000) 3.67
---------- ------ ---------- ------ ---------- ------
Outstanding at end of year 1,364,250 $ 3.06 1,207,250 $ 1.82 1,134,500 $ 1.55
========== ====== ========== ====== ========== ======
Exercisable at end of year 775,500 $ 2.08 987,250 $ 1.35 909,500 $ 1.14
========== ====== ========== ====== ========== ======
Weighted average fair value
of options granted during
the year $ 2.80 $ 3.70 $ 1.20
====== ====== ======
The following table summarizes information about the Company's stock
options outstanding at December 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Prices December 31, 1997 Contratual Life Exercise Price December 31 1997 Exercise Price
- -------------- ----------------- --------------- -------------- ---------------- --------------
$.64 - .69 350,000 5 years $ .65 350,000 $ .65
$1.03 - 1.75 134,250 6 years $ 1.23 99,250 $ 1.05
$3.19 - 5.50 880,000 8 years $ 4.29 326,250 $ 3.93
--------- -------
1,364,250 775,500
========= =======
Stock Warrants
In connection with the common stock offering in December 1996 (See Note 9),
an underwriter received a five-year warrant to purchase 125,000 shares of
common stock at an exercise price of $5.10 per share.
In connection with a private placement offering in November 1994 (See Note
9), a broker-dealer responsible for introducing the Company to the
Company's principal placement agent received a five-year warrant to
purchase 64,415 shares of common stock at a price of $2.75 per share.
During 1997 and 1996, 40,000 and 10,000 shares, respectively, were
purchased in connection with the five-year warrant.
The Company has outstanding at December 31, 1997 and 1996, 300,000
warrants. Each warrant allows the holder to buy one share of common
stock for $6.00. The warrants were issued as part of the Company's
initial public offering in 1980 and are exercisable for a 30 day period
commencing on the date a registration statement covering exercise is
F-15
declared effective. The warrants contain antidilution provisions and
in the event of liquidation, dissolution, or winding up of the Company,
the holders are not entitled to participate in the assets of the
Company.
(5) Income Taxes
Federal income tax expense differs from the amount computed at the
Federal statutory rate as follows:
Year ended
December 31,
----------------------------------
1997 1996 1995
------ ------ ------
Income tax expense at statutory rate $ 1,314,570 2,056,581 69,559
Statutory depletion (241,274) (358,854) (8,494)
Nondeductible expenses and other 49,154 20,386 6,439
----------- ---------- -------
Income tax expense $ 1,122,450 1,718,113 67,504
=========== ========= =======
Income tax expense is deferred, with the exception of $64,986 and $22,065
in 1997 and 1996, respectively, related to alternative minimum tax
("AMT").
F-16
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:
1997 1996
---- ----
Noncurrent
----------
Deferred income tax assets:
Net operating loss carryforwards $ 2,124,284 3,085,699
Statutory depletion carryforwards 787,217 545,462
----------- -----------
Total noncurrent deferred
income tax assets 2,911,501 3,631,161
----------- -----------
Deferred income tax liabilities:
Property and equipment, principally due
to differences in basis, expensing of
intangible drilling costs for tax
purposes and depletion 6,094,985 5,750,984
----------- -----------
Total deferred income tax
liabilities 6,094,985 5,750,984
----------- -----------
Net noncurrent deferred
income tax liability $ 3,183,484 2,119,823
=========== ===========
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Based on
expectations for the future and the availability of certain tax
planning strategies that would generate taxable income to realize the
net tax benefits, if implemented, management has determined that
taxable income of the Company will more likely than not be sufficient
to fully utilize available carryforwards prior to their ultimate
expiration.
F-17
As of December 31, 1997, the Company had investment tax credit and net
operating loss carryforwards for regular tax purposes available to
reduce future taxable income and tax liability, respectively. These
carryforwards expire as follows:
Alternative
minimum tax
Net operating Investment net operating
loss tax credit loss
---- ------ ----
1997 $ - 19,000 -
1998 - 8,000 -
1999 - 7,000 -
2000 - 15,000 -
2001 - 24,000 -
2002 215,000 - -
2003 138,000 - -
2004 257,000 - -
2005 69,000 - -
2006 1,011,000 - -
2007 792,000 - -
2008 1,596,000 - 861,000
2009 2,170,000 - 1,974,000
---------- -------- -----------
$ 6,248,000 73,000 2,835,000
========== ======== ===========
(6) Major Customers
---------------
The following purchasers accounted for 10% or more of the Company's
oil and gas sales for the years ended December 31:
1997 1996 1995
---- ---- ----
Purchaser A 12% 11% 28%
Purchaser B 53% 46% 16%
Purchaser C - - 10%
Purchaser D - - 10%
(7) Employee Pension Plan
---------------------
Effective September 1, 1988, the Company established a simplified
employee pension plan covering all salaried employees of the Company.
The employees voluntarily contribute a portion of their eligible
compensation, not to exceed $7,000, adjusted for inflation beginning
in 1988, to the plan. The Company's contribution, including the
employees contribution, cannot exceed the lesser of $30,000 or 15% of
compensation. During 1997, 1996 and 1995, the Company contributed an
aggregate of $12,709, $7,986 and $6,739, respectively, of which
$3,129, $2,963 and $2,765, respectively, was allocated to a Director
of the Company. The Company has no obligation to make contributions
to the plan.
(8) Statements of Cash Flows
------------------------
During 1997, 1996 and 1995, $0, $60,413 and $196,582 were transferred
from leases held for resale to oil and gas properties, respectively.
These transfers are considered non-cash transactions.
No Federal taxes were paid in 1997, 1996 and 1995, as a result of net
operating losses or loss carryforwards.
The Company made interest payments of $794,079, $1,221,144 and $1,027,461
in 1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, there were $4,558,594 and $1,890,172,
respectively, of property additions accrued in accounts payable.
(9) Common Stock Offerings
----------------------
On December 18, 1996, the Company closed on a common stock offering dated
December 12, 1996. The Company sold 2,500,000 shares of its common
stock at $4.25 per share. Proceeds received, net of related expenses,
were approximately $9,421,000. In connection with the offering, an
underwriter received an over-allotment option to exercise 375,000
shares of common stock at a price of $4.25 per share. In January 1997,
the options were exercised and 375,000 shares were sold. Proceeds
received by the Company, net of related expenses, were approximately
$1,470,000.
On February 7, 1995, the Company closed on a private placement offering
dated November 7, 1994. The Company sold 644,150 shares of its common
stock at $2.50 per share of which 50,000 shares were beneficially
purchased by certain Directors of the Company. Proceeds received, net
of related expenses, were approximately $1,321,000.
F-19
(10) Related Party Transactions
--------------------------
During 1997 and 1996, the Company was charged $2,000 and $256,000,
respectively, for drilling services and lease operating expenses by
entities in which certain Directors are majority owners. These
Directors and their companies own interests in certain wells operated
by the Company. During 1997 and 1996, the Company charged $45,000
and $89,000, respectively, for the lease operating expenses and
drilling costs and paid $122,000 and $141,000, respectively, in oil
and gas revenues to these related parties related to these wells.
An entity in which the Chief Executive Officer and Chairman of the
Board is the owner acted as the Company's agent in performing the
routine day to day operations of certain wells. In 1997 and 1996,
the Company was billed $498,000 and $199,000, respectively, for the
Company's pro rata share of lease operating and drilling expenses and
received $211,000 and $205,000 in 1997 and 1996, respectively, in oil
and gas revenues related to these wells.
(11) Oil and Gas Expenditures
------------------------
The following table reflects capitalized costs related to the oil and
gas producing activities as of December 31:
1997 1996
---- ----
Capitalized costs:
Proved properties $ 48,590,827 41,826,362
Unproved properties 14,068,743 5,304,512
----------- -----------
62,659,570 47,130,874
Accumulated depletion (16,217,470) (12,306,371)
----------- -----------
$ 46,442,100 34,824,503
=========== ===========
Certain directly identifiable internal costs of property acquisition,
exploration and development activities are capitalized. Such costs
capitalized in 1997, 1996 and 1995 totaled $461,537, $587,198 and
$512,000, respectively.
Depletion per equivalent unit of production (BOE) was $5.29, $4.47 and
$3.97 for 1997, 1996 and 1995, respectively.
F-20
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:
1997 1996 1995
---- ---- ----
Transfers from undeveloped leases
held for sale $ - 60,413 196,582
Proved property acquisition costs 917,883 3,838,495 372,204
Unproved property acquisition costs 7,710,358 7,602,441 841,321
Exploration 9,604,035 1,435,933 1,519,202
Development 4,877,240 3,962,977 889,155
----------- ----------- ----------
$ 23,109,516 16,900,259 3,818,464
=========== =========== ==========
(12) Earnings per Share
------------------
In accordance with the provisions of FAS 128, the following table
provides a reconciliation between basic and diluted earnings per
share for the year ended December 31:
1997 1996 1995
---- ---- ----
Net income for basic and dilutive
earnings per share - income
available to common
stockholders $ 2,743,930 4,330,654 137,080
Weighted average shares for basic
earnings per share 17,862,792 14,957,404 14,860,332
Effect of dilutive securities:
Options 765,403 719,086 535,445
Warrants 12,795 16,768 -
--------- ---------- ----------
Dilutive potential common shares 778,198 735,854 535,445
Weighted average shares for
dilutive earnings per share 18,640,990 15,693,258 15,395,777
========== ========== ==========
Basic earnings per share $ 0.15 0.29 0.01
====== ==== ====
Diluted earnings per share $ 0.15 0.28 0.01
====== ==== ====
F-21
(13) Supplemental Oil and Gas Reserve Data (Unaudited)
-------------------------------------------------
The estimates of the Company's proved oil and gas reserves, which are
all located in the United States are prepared by independent petroleum
engineers. Reserves were estimated in accordance with guidelines
established by the U.S. Securities and Exchange Commission and the
Financial Accounting Standards Board, which require that reserve
estimates be prepared under existing economic and operating conditions
with no provision for price and cost escalations except by contractual
arrangements. Information for oil is presented in barrels (BBL) and
for gas in thousands of cubic feet (MCF).
A summary of changes in reserve balances is presented below (in thousands):
Total Proved Proved Developed
--------------------- ------------------------
BBL MCF BBL MCF
--- --- --- ---
Reserves as of January 1, 1995 1,572 21,611 1,330 16,387
Purchase of reserves in place 5 147 5 147
Extensions and discoveries 147 7,097 147 7,097
Revisions of previous estimates (88) (1,115) (94) (1,161)
Production (133) (1,616) (133) (1,616)
----- ------ ----- ------
Reserves as of December 31, 1995 1,503 26,124 1,255 20,854
Purchase of reserves in place 273 4,797 273 4,797
Extensions and discoveries 128 9,034 128 9,034
Revisions of previous estimates (42) (3,746) (40) (3,684)
Production (221) (3,655) (221) (3,655)
------ ------ ------ ------
Reserves as of December 31, 1996 1,641 32,554 1,395 27,346
Sales of reserves in place (461) (2,779) (461) (2,779)
Extensions and discoveries 1,063 14,477 243 9,623
Revisions of previous estimates (174) (10,319) (164) (10,478)
Production (175) (3,385) (176) (3,384)
----- ------ ----- ------
Reserves as of December 31, 1997 1,894 30,548 837 20,328
====== ====== ===== ======
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 1997, the average sales price received by the Company for its oil
was approximately $19.88 per Bbl, as compared to $21.83 in 1996, while
the average sales price for the Company's gas was approximately $2.70
per Mcf in 1997, as compared to $2.55 per Mcf in 1996. At March 16,
1998, the price received by the Company for its oil production was
approximately $11.90 per Bbl, while the price received by the Company,
at that same date, for its gas production was approximately $2.25 per
Mcf.
F-22
The standardized measure of discounted future net cash flows, in
management's opinion, should be examined with caution. The basis for
this table are the reserve studies prepared by independent petroleum
consultants, which contain imprecise estimates of quantities and rates
of production of reserves. Revisions of previous year estimates can
have a significant impact on these results. Also, exploration costs
in one year may lead to significant discoveries in later years and
may significantly change previous estimates of proved reserves and
their valuation. Therefore, the standardized measure of discounted
future net cash flow is not necessarily a "best estimate" of the fair
value of the Company's proved oil and gas properties.
Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
(In Thousands)
December 31,
-------------------------------------
1997 1996 1995
---- ---- ----
Future cash flows $ 111,549 153,441 75,044
Future costs:
Production (28,352) (39,296) (25,356)
Development (6,269) (2,790) (2,853)
--------- --------- --------
Future net cash flows before income
taxes 76,928 111,355 46,835
Future income taxes (8,891) (22,493) (7,242)
Future net cash flows 68,037 88,862 39,593
10% annual discount for estimated timing
of cash flows (21,982) (31,513) (14,428)
-------- -------- -------
Standardized measure of discounted net
cash flows $ 46,055 57,349 25,165
======== ======== =======
F-23
Changes in Standardized Measure of
Discounted Future Net Cash Flows From Proved Reserves
(In Thousands)
Years ended December 31,
---------------------------
1997 1996 1995
---- ---- ----
Increase (decrease):
Sales of minerals in place $ (6,491) - -
Purchase of minerals in place - 6,437 182
Extensions and discoveries and improved
recovery, net of future production and
development costs 25,530 23,660 9,222
Accretion of discount 6,701 2,589 2,050
Net change in sales prices net of
production costs (18,293) 24,273 35
Changes in estimated future
development costs (51) 40 (323)
Revisions of quantity estimates (13,333) (6,043) (1,151)
Net change in income taxes 9,300 (8,940) 725
Sales, net of production costs (9,443) (11,482) (3,246)
Changes of production rates (timing) and
other (5,214) 1,650 (2,791)
------- ------- -------
Net increase (decrease) (11,294) 32,184 4,703
Standardized measure of discounted future
net cash flows:
Beginning of year 57,349 25,165 20,462
------- ------- -------
End of year $ 46,055 57,349 25,165
======= ======= ========
1
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, 1988.)
3.2 Bylaws of Registrant (Incorporated by reference to Exhibit 3.2 to
Form 10-K of the Registrant for the fiscal year ended December 31,
1995.)
4.1 Certificate of Merger merging Parallel Petroleum Corporation, a Texas
corporation, into Registrant (Incorporated by reference to Exhibit 4.1
to Form 10-K of the Registrant as filed with the Securities and
Exchange Commission on April 1, 1985.)
4.2 Agreement and Plan of Merger Dated July 17, 1984 between Parallel
Petroleum Corporation, a Texas corporation, and the Registrant
(Incorporated by reference to Exhibit 2.1 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.)
Executive Compensation Plans and Arrangements (Exhibit No.'s 10.1
through 10.6):
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.)
2
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.
10.7 Loan Agreement dated July 1, 1996 between the Registrant and Bank One
Texas, N.A. (Incorporated by reference to Exhibit 10.1 of Form 10-Q
of the Registrant for the fiscal quarter ended June 30, 1996.)
*23.1 Consent of Independent Auditors
*23.2 Consent of Independent Petroleum Engineers
*27 Financial Data Schedule
* Filed herewith.