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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION NO. 0-22915
CARRIZO OIL & GAS, INC.
(Exact name of registrant as specified in its charter)
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TEXAS 76-0415919
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14811 ST. MARY'S LANE, SUITE 148
HOUSTON, TEXAS 77079
(Principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (281) 496-1352
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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. [ ]
At March 25, 1998, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $26.9 million
based on the closing price of such stock on such date of $6.75.
At March 25, 1998, the number of shares outstanding of registrant's Common
Stock was 10,375,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Registrant's 1998 Annual
Meeting of Shareholders to be held on May 20, 1998 are incorporated by reference
in Part III of this Form 10-K. Such definitive proxy statement will be filed
with the Securities and Exchange Commission not later than 120 days subsequent
to December 31, 1997.
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TABLE OF CONTENTS
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PAGE
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PART I...................................................... 1
Item 1. and Item 2. Business and Properties............... 1
Item 3. Legal Proceedings................................. 23
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 23
Executive Officers of the Registrant...................... 23
PART II..................................................... 24
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters.................................... 24
Item 6. Selected Financial Data........................... 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of
Operations....................................... 28
Item 8. Financial Statements and Supplementary Data....... 34
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure............... 34
PART III.................................................... 35
Item 10. Directors and Executive Officers of the
Registrant............................................. 35
Item 11. Executive Compensation........................... 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................... 35
Item 13. Certain Relationships and Related Party
Transactions........................................... 35
PART IV..................................................... 35
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.................................... 35
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PART I
ITEM 1. AND ITEM 2. BUSINESS AND PROPERTIES
GENERAL
Carrizo Oil & Gas, Inc. ("Carrizo" or the "Company") is an independent oil
and gas company engaged in the exploration, development, exploitation and
production of natural gas and crude oil. The Company's operations are currently
focused onshore in proven oil and gas producing trends along the Gulf Coast,
primarily in Texas and Louisiana in the Frio, Wilcox and Vicksburg trends. The
Company believes that the availability of economic onshore 3-D seismic surveys
has fundamentally changed the risk profile of oil and gas exploration in these
regions. Recognizing this change, the Company has aggressively sought to control
significant prospective acreage blocks for targeted, proprietary, 3-D seismic
surveys. As of December 31, 1997, the Company had assembled approximately
419,953 gross acres under lease or option. The Company typically seeks to
acquire seismic permits from landowners that include options to lease the
acreage prior to conducting proprietary surveys. In other circumstances,
including when the Company participates in 3-D group shoots, the Company
typically seeks to obtain leases or farm-ins rather than lease options.
Approximately 60% of the Company's current acreage position is covered by
3-D seismic data that the Company has acquired, or is in the process of
acquiring, in its first 18 seismic surveys. The Company expects to acquire or
cause to be acquired additional 3-D seismic data during the remainder of 1998
that will cover approximately 80% of its remaining current acreage position.
From the data generated by its first seven proprietary seismic surveys, covering
200 square miles (128,000 acres), 94 drillsites were identified. The Company's
capital budget for 1998 of approximately $43.3 million includes amounts for the
acquisition of additional 3-D seismic data and for the drilling of approximately
150 gross wells (71.8 net) in 1998 with an anticipated 48% average working
interest. In addition, the Company anticipates that as its existing 3-D seismic
data is further evaluated, and 3-D seismic data is acquired over the balance of
its acreage, additional prospects will be generated for drilling beyond 1998.
The Company's primary drilling targets have been shallow (from 4,000 to
7,000 feet), normally pressured reservoirs that generally involve moderate cost
(typically $200,000 to $500,000 per completed well) and risk. Many of these
drilling prospects also have secondary, deeper, over-pressured targets which
have greater economic potential but generally involve higher cost (typically $1
million to $2 million per completed well) and risk. The Company often seeks to
sell a portion of these deeper prospects to reduce its exploration risk and
financial exposure while still allowing the Company to retain significant upside
potential. The Company operates the majority of its projects through the
exploratory phase but may relinquish operator status to qualified partners in
the production phase to control costs and focus resources on the higher-value
exploratory phase. As of December 31, 1997, the Company operated 69 producing
oil and gas wells, which accounted for 43% of the wells in which the Company had
an interest.
The Company has experienced rapid increases in reserves, production and
EBITDA since its inception in 1993 due to the growth of its 3-D based drilling
and development activities. From January 1, 1996 to December 31, 1997, the
Company participated in the drilling of 90 gross wells (34.6 net) with a
commercial well success rate of approximately 69%. This drilling success
contributed to the Company's total proved reserves as of December 31, 1997 of
approximately 43.2 Bcfe, with a PV-10 Value of $26.1 million. From inception
through December 31, 1997, the Company's average finding and development cost
was approximately $.95 per Mcfe. The Company's production has increased 79% from
1,916 MMcfe for the year ended December 31, 1996 to 3,424 MMcfe for the year
ended December 31, 1997. EBITDA has also increased significantly from $2,296,000
for the year ended December 31, 1996 to $4,787,000 for the year ended December
31, 1997.
Certain terms used herein relating to the oil and natural gas industry are
defined in "Glossary of Certain Industry Terms" below.
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EXPLORATION APPROACH
The Company generally seeks to rapidly accumulate large amounts of 3-D
seismic data along prolific, producing trends of the onshore Gulf Coast after
obtaining options to lease areas covered by the data. The Company then uses this
data to identify or evaluate prospects before drilling the prospects that fit
its risk/ reward criteria. The Company typically seeks to explore in locations
within its core areas of expertise that it believes have (i) numerous
accumulations of normally pressured reserves at shallow depths and in geologic
traps that are difficult to define without the interpretation of 3-D seismic
data and (ii) the potential for large accumulations of deeper, over-pressured
reserves.
As a result of the increased availability of economic onshore 3-D seismic
surveys and the improvement and increased affordability of data interpretation
technologies, the Company has relied almost exclusively on the interpretation of
3-D seismic data in its exploration strategy. The Company generally does not
invest any substantial portion of the costs for an exploration well without
first interpreting 3-D seismic data. The principal advantage of 3-D seismic data
over traditional 2-D seismic analysis is that it affords the geoscientist the
ability to interpret a three dimensional cube of data representing a specific
project area as compared to interpreting between widely separated two
dimensional vertical profiles. As a consequence, the geoscientist is able to
more fully and accurately evaluate prospective areas, improving the probability
of drilling commercially successful wells in both exploratory and development
drilling. The use of 3-D seismic allows the geoscientist to identify and use
areas of irregular sand geometry to augment or replace structural interpretation
in the identification of potential hydrocarbon accumulations. Additionally,
detailed analysis and correlation of the 3-D seismic response to lithology and
contained fluids assist geoscientists in identifying and prioritizing drilling
targets. Because 3-D analysis is completed over an entire target area cube,
shallow, intermediate and deep objectives can be analyzed. Additionally, the
more precise structural definition allowed by 3-D seismic data combined with
integration of available well and production data assists in the positioning of
new development wells.
The Company has sought to obtain large volumes of 3-D seismic data either
by participating in large seismic data acquisition programs either alone or
pursuant to joint venture arrangements with other energy companies, or through
"group shoots" in which the Company shares the costs and results of seismic
surveys. By participating in joint ventures and group shoots, the Company is
able to share the up-front costs of seismic data acquisition and interpretation,
thereby enabling it to participate in a larger number of projects and diversify
exploration costs and risks. Substantially all of the Company's operations are
conducted through joint operations with industry participants. As of December
31, 1997, the Company was actively involved in 40 project areas. The Company
intends to further increase the number and size of seismic data acquisition
projects in which it participates to accelerate its exploration activities.
The Company's primary strategy for acreage acquisition is to obtain leasing
options covering large geographic areas in connection with 3-D seismic surveys.
Prior to conducting proprietary surveys, the Company typically seeks to acquire
seismic permits that include options to lease the acreage, thereby ensuring the
price and availability of leases on drilling prospects that may result upon
completing a successful seismic data acquisition program over a project area.
The Company generally attempts to obtain these options covering at least 80% of
the project area for these proprietary surveys. The size of these surveys has
ranged from 10 to 70 square miles. When the Company participates in 3-D group
shoots, it generally seeks prospective leases as quickly as possible following
interpretation of the survey. In connection with some group shoots in which the
Company believes that competition for acreage may be especially strong, the
Company may seek to obtain lease options or leases in prospective areas prior to
the receipt or interpretation of 3-D seismic data.
The Company maintains a flexible and diversified approach to project
identification by focusing on the estimated financial results of a project area
rather than limiting its focus to any one method or source for obtaining leads
for new project areas. The Company's current project areas resulted from leads
developed by its project generation network that includes small, independent
"prospect generators", the Company's joint venture partners and the Company's
internal staff. The Company believes that it has been able to increase the
number of potential projects and reduce its costs through the use of these
outside sources of project generation. Similarly, in identifying specific
drillsites from within a project area, the Company has relied upon
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outside contract geoscientists and joint venture partners who have worked with
the Company's own geoscientists. As of December 31, 1997, over 20 geoscientists
from this network were devoting some or all of their time to identifying project
areas or evaluating drillsites in which the Company expects to have an interest.
Similarly, the Company also utilizes outside independent landmen with expertise
in a particular project area. This outsourcing strategy has enabled the Company
to control costs without maintaining a large internal land and exploration
department.
OPERATING APPROACH
The Company's management team has extensive experience in the development
and management of projects along the Texas and Louisiana Gulf Coast. The Company
believes that the experience of its management in the development of 3-D
projects in its core operating areas is a competitive advantage for the Company.
The Company's technical and operating employees have an average of 15 years of
industry experience, in many cases with major and large independent oil
companies, including Shell Oil Company, Vastar Resources, Inc., Pennzoil Company
and Tenneco Inc.
The Company generally seeks to obtain lease operator status and control
over field operations, and in particular seeks to control decisions regarding
3-D survey design parameters and drilling and completion methods. In some cases,
the Company may thereafter relinquish its operator status in order to
concentrate its resources on exploration activities, especially if the Company
has had successful prior experience with an industry partner acting as operator.
As of December 31, 1997, the Company operated 69 producing oil and natural gas
wells, which ranged in depth from 450 feet to greater than 6,100 feet.
The Company emphasizes preplanning in project development to lower capital
and operational costs and to efficiently integrate potential well locations into
the existing and planned infrastructure, including gathering systems and other
surface facilities. In constructing surface facilities, the Company seeks to use
reliable, high quality, used equipment in place of new equipment to achieve cost
savings. The Company also seeks to minimize cycle time from drilling to hook-up
of wells, thereby accelerating cash flow and improving ultimate project
economics.
The Company seeks to use advanced production techniques to exploit and
expand its reserve base. Following the discovery of proved reserves, the Company
typically continues to evaluate its producing properties through the use of 3-D
seismic data to locate undrained fault blocks and identify new drilling
prospects and performs further reserve analysis and geological field studies
using computer aided exploration techniques. The Company seeks to integrate its
3-D seismic data with reservoir characterization and management systems through
the use of geophysical workstations which are compatible with industry standard
reservoir simulation programs.
SIGNIFICANT PROJECT AREAS
The Company is currently evaluating approximately 40 exploration project
areas. As of December 31, 1997, the Company had an existing 3-D seismic database
of 930 square miles and was acquiring an additional 240 square miles of data
(totaling 1,170 square miles of 3-D seismic data). To date, all project areas
for which seismic data has been interpreted have yielded multiple prospects and
drillsites. The Company is continuing to receive and interpret data covering
these project areas and believes that each project area has the potential for
additional prospects and drillsites.
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1998 EXPLORATION PROGRAM
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SQ. MILES OF 3-D
GROSS SEISMIC DATA AT
ACREAGE DECEMBER 31, 1997
LEASED OR -----------------------
UNDER BUDGETED 1998 AVERAGE
OPTION AT EXISTING FOR BUDGETED AVERAGE NET
DEC. 31, OR BEING ACQUISITION GROSS WORKING REVENUE
PROJECT AREAS 1997 ACQUIRED 1998 WELLS(1) INTEREST(2) INTEREST(2)
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TEXAS
Starr/Hidalgo........... 9,186 340(3) -- 6 50.0% 37.5%
Encinitas/Kelsey........ 9,300 32 -- 3 27.5% 23.0%
Buckeye................. 34,303 62 -- 14 50.0% 39.0%
La Rosa................. 8,249 22 -- 6 31.5% 23.6%
Mexican Sweetheart...... 30,795 40 -- 4 25.0% 18.8%
McFaddin Ranch.......... 5,374 15 -- 4 37.5% 28.1%
Cologne................. 18,200 40 -- 23 25.0% 18.8%
South Cabeza Creek...... 7,128 -- 78 4 52.5% 39.4%
Western 325............. -- 320(3) -- 2 50.0% 37.5%
Lance................... 18,536 30 -- 1 25.0% 19.3%
Highway 59.............. 4,995 -- 20 4 20.0% 15.0%
Geronimo................ 29,358 107 -- 4 15.0% 11.3%
RPP Welder.............. 31,182 60 -- 9 15.0% 11.3%
Midway.................. 1,235 -- 15 2 100.0% 75.0%
Lost Bridge............. 5,065 16 -- 6 50.0% 37.5%
Drake 202............... 3,877 20 -- 8 100.0% 80.0%
Metro................... 11,349 20 -- 4 25.0% 18.7%
North Heyser............ 8,100 13 -- 3 47.0% 34.7%
Victoria................ 21,288 -- 60 5 57.0% 42.75%
Matagorda............... 16,093 -- 51 6 87.5% 64.75%
Driscoll Ranch.......... 23,135 -- 80 7 50.0% 37.0%
Other (16 Areas)........ 110,042 33 268 17 66.0% 48.8%
LOUISIANA
North Chalkley.......... 1,130 -- -- 0 18.0% 13.5%
Atchafalaya............. 3,611 -- -- 1 55.4% 41.5%
Live Oak................ 350 -- -- 1 15.0% 10.8%
Other (5 Areas)......... 8,072 -- 14 6 28.7% 21.7%
------- ----- --- ---
Total........... 419,953 1,170 586 150
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(1) Consists of (i) identified drill sites included in the Company's 1998
capital budget that are fully evaluated, leased and have been or are
scheduled to be drilled in 1998 and (ii) wells included in the Company's
1998 capital budgets, but as to which 3-D seismic data has either not been
obtained or fully evaluated, or for which the Company has not yet acquired
leases or option rights. A portion of the number of wells indicated is based
upon statistical results of drilling activities in 3-D project areas that
the Company believes are geologically similar.
(2) Anticipated interests based upon ownership or contractual rights as of
December 31, 1997.
(3) Represents non-proprietary "group shoots" in which the Company is a
participant.
Set forth below are descriptions of the Company's key project areas where
it is actively exploring for potential oil and natural gas prospects and in some
cases currently has production. The 3-D surveys the Company is using to analyze
its project areas range from regional, non-proprietary "group shoots" to single
field proprietary surveys. The Company has, in many cases, participated in these
project areas with industry partners to share the up-front costs associated with
obtaining option arrangements with landowners, seismic
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data acquisition and related data interpretation, to mitigate its exploration
risk and to increase the number of projects in which it is able to participate.
Although the Company is currently pursuing prospects within the project
areas described below, and has budgeted to drill the number of wells set forth
in the preceding table, there can be no assurance that these prospects will be
drilled at all or within the expected time frame. In particular, budgeted wells
that are based upon statistical results of drilling activities in other project
areas are subject to greater uncertainties than wells for which drillsites have
been identified. The final determination with respect to the drilling of any
identified drillsites or budgeted wells will be dependent on a number of
factors, including (i) the results of exploration efforts and the acquisition,
review and analysis of the seismic data, (ii) the availability of sufficient
capital resources by the Company and the other participants for the drilling of
the prospects, (iii) the approval of the prospects by other participants after
additional data has been compiled, (iv) the economic and industry conditions at
the time of drilling, including prevailing and anticipated prices for oil and
natural gas and the availability of drilling rigs and crews, (v) the financial
resources and results of the Company and (vi) the availability of leases on
reasonable terms and permitting for the prospect. There can be no assurance that
these projects can be successfully developed or that the identified drillsites
or budgeted wells discussed will, if drilled, encounter reservoirs of
commercially productive oil or natural gas.
The success of the Company will be materially dependent upon the success of
its exploratory drilling program. Exploratory drilling involves numerous risks,
including the risk that no commercially productive oil or natural gas reservoirs
will be encountered. The cost of drilling, completing and operating wells is
often uncertain, and drilling operations may be curtailed, delayed or canceled
as a result of a variety of factors, including unexpected drilling conditions,
pressure or irregularities in formations, equipment failures or accidents,
adverse weather conditions, compliance with governmental requirements and
shortages or delays in the availability of drilling rigs and the delivery of
equipment. Although the Company believes that its use of 3-D seismic data and
other advanced technologies should increase the probability of success of its
exploratory wells and should reduce average finding costs through elimination of
prospects that might otherwise be drilled solely on the basis of 2-D seismic
data, exploratory drilling remains a speculative activity. Even when fully
utilized and properly interpreted, 3-D seismic data and other advanced
technologies only assist geoscientists in identifying subsurface structures and
do not enable the interpreter to know whether hydrocarbons are in fact present
in such structures. In addition, the use of 3-D seismic data and other advanced
technologies requires greater predrilling expenditures than traditional drilling
strategies and the Company could incur losses as a result of such expenditures.
The Company's future drilling activities may not be successful, and if
unsuccessful, such failure will have a material adverse effect on the Company's
results of operations and financial condition. There can be no assurance that
the Company's overall drilling success rate or its drilling success rate for
activity within a particular project area will not decline. The Company may
choose not to acquire option and lease rights prior to acquiring seismic data
and, in many cases, the Company may identify a prospect or drilling location
before seeking option or lease rights in the prospect or location. Although the
Company has identified or budgeted for numerous drilling prospects, there can be
no assurance that such prospects will ever be leased or drilled (or drilled
within the scheduled or budgeted time frame) or that oil or natural gas will be
produced from any such prospects or any other prospects. In addition, prospects
may initially be identified through a number of methods, some of which do not
include interpretation of 3-D or other seismic data. Wells that are currently
included in the Company's capital budget may be based upon statistical results
of drilling activities in other 3-D project areas that the Company believes are
geologically similar, rather than on analysis of seismic or other data. Actual
drilling and results are likely to vary from such statistical results and such
variance may be material. Similarly, the Company's drilling schedule may vary
from its capital budget because of future uncertainties, including those
described above. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The reserve data set forth below is based upon the reserve report (the
"Ryder Scott Report") dated February 26, 1998 prepared by Ryder Scott Company,
independent petroleum engineers ("Ryder Scott"), and the reserve report (the
"Fairchild Report" and collectively with the Ryder Scott Report, the "Reserve
Reports") dated February 25, 1998 prepared by Fairchild, Ancell & Wells, Inc.,
independent petroleum
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engineers ("Fairchild"). There are numerous uncertainties in estimating
quantities of proved reserves, including many factors beyond the control of the
Company. See "-- Oil and Natural Gas Reserves."
TEXAS
Starr/Hidalgo Project Area: Frio and Vicksburg Formations
The Starr/Hidalgo Project Area is located in Starr and Hidalgo Counties,
Texas in the Frio and Vicksburg formations. The Company and a partner licensed
approximately 340 square miles of non-proprietary 3-D seismic data that was
delivered during August 1995 and June 1996. More than 70 prospects have been
identified in the shallow Frio trend and the deeper, structurally complex
Vicksburg trend, as well as two large prospects in the relatively unexplored
Eocene trend. As of December 31, 1997, the Company and its partner had leases
covering 9,186 acres in this project area and currently control 25 of these
prospects (11 Frio, 13 Vicksburg and one Eocene). The Company sold a portion of
its interest in six of the deeper and riskier Vicksburg and Eocene prospects to
industry partners. During the six months ended June 30, 1997, the Company's
share of production from wells in this production area was approximately 36
Bbls/d of oil and 3.4 MMcf/d of natural gas. Primarily as a result of the
curtailment of production by the wells in the Wheeler area by the Texas Railroad
Commission, during the quarter ended December 31, 1997, the Company's share of
production from wells in this project area was approximately 12 Bbls/d of oil
and 0.8 MMcf/d natural gas. As of December 31, 1997, the Company and its
partners had drilled a total of 23 wells in this project area, resulting in 15
producing wells. The estimated proved reserves net to the Company for this
project area was 130 MBbls of oil and 1.6 BCF of natural gas at December 31,
1997. The Company and its partners have identified 6 locations that have been or
are budgeted to be drilled during 1998. The Company believes that continuing
interpretation and seismic processing of the Starr/Hidalgo Project Area 3-D
seismic data will result in additional prospects and drilling locations.
Encinitas/Kelsey Project Area: Frio and Vicksburg Formations
The Encinitas/Kelsey Project Area is located in Brooks County, Texas in the
Frio and Vicksburg formations. The Company acquired an interest in leases
covering 9,300 acres in this area in December 1994 to re-develop the property.
Upon acquisition of its interests in this project area, the Company undertook a
comprehensive petrophysical study and acquired a 32 square mile 3-D seismic
survey. This effort has resulted in the identification of numerous Frio and
Vicksburg prospects. During the quarter ended December 31, 1997, the Company's
share of production from wells in this project area was approximately 33 Bbls/d
of oil, 86 Bbls/d of natural gas liquids and 2.5 MMcf/d of natural gas. As of
December 31, 1997, the Company and its partners had drilled a total of 12 wells
in this project area, resulting in 10 producing wells. The estimated proved
reserves net to the Company for this project area was 27.8 MBbls of oil, 192.3
MBbls of natural gas liquids and 3.6 BCF of natural gas at December 31, 1997.
The Company and its partners have identified three locations that are budgeted
to be drilled in 1998.
Buckeye Project Area: Wilcox, Hockley, Pettus and Yegua Formations
The Buckeye Project Area is located in Live Oak County, Texas. As of
December 31, 1997, the Company and its partner held 13,492 acres under lease and
20,811 acres under option and have acquired an approximately 62 square mile 3-D
seismic survey. The exploration objectives for the Buckeye Project Area are the
shallow zones of the Hockley, Pettus and Yegua formations and the deep zones of
the expanded Upper Wilcox formation. The data for this project area was received
from processing in 1997 and initial interpretation has generated 38 shallow
prospects. During the quarter ended December 31, 1997, the Company's share of
production from wells in this project area was approximately 125 Bbls/d of oil
and 1.7 MMcf/d of natural gas. As of December 31, 1997, the Company and its
partners have drilled 24 wells in this project area, resulting in 17 producing
wells. The estimated proved reserves net to the Company for this project area
was 118.3 MBbls of oil and 1.4 BCF of natural gas at December 31, 1997. The
remaining prospects are planned to be drilled in 1998.
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La Rosa Project Area: Frio Formation
The La Rosa Project Area is located in Refugio County, Texas over a
producing field leasehold of 3,689 acres. The area covers Frio
barrier/strandplain sands productive down to 8,200 feet. Data is currently being
integrated from a 3-D seismic survey over 22 square miles that was conducted by
the Company during the first quarter of 1997. As of December 31, 1997, the
Company's leases covered 3,689 acres and its seismic options covered 4,560 acres
in this project area. During the quarter ended December 31, 1997, the Company's
share of production from wells in this project area was approximately 8 Bbls/d
of oil and 0.2 MMcf/d natural gas. As of December 31, 1997, the Company and its
partners have drilled one well in this project area, resulting in one producing
well. The estimated proved reserves net to the Company for this project area was
10.2 MBbls of oil and 0.2 BCF of natural gas at December 31, 1997. Additional
drilling opportunities within and peripheral to the producing field exist and
are being evaluated for 1998 drilling.
Mexican Sweetheart Project Area: Frio Formation
The Mexican Sweetheart Project Area is located in southwestern Jackson
County, Texas in the Frio producing trend. Secondary objectives for this project
area include the shallow Miocene trend, the downdip Yegua and Wilcox trends. The
area is directly south of successful 3-D seismic projects conducted by the
Company's partners in this project and covers historical field discoveries. The
Company has planned and directed a 40 square mile 3-D seismic survey covering
the project area. The Company will seek to use the 3-D seismic data to identify
shallow objectives, delineate reservoir compartments for drilling of bypassed
reserves and identify flank prospects and deeper, higher risk prospects in the
Yegua and Upper Wilcox trends, which the Company would seek to explore with an
industry partner. As of December 31, 1997, the Company's leases covered 848
acres and its seismic options covered 29,947 acres in this project area.
Interpretation of the 3-D has led to four initial prospects budgeted to be
drilled in 1998.
McFaddin Ranch Project Area: Miocene and Frio Formations
The McFaddin Ranch Project Area is located in Victoria County, Texas in the
Miocene and Frio formations. Data is currently being interpreted from a 15
square mile 3-D seismic survey conducted in the first quarter of 1997. The
Company has identified and budgeted to drill four initial prospects in this
project area during 1998. As of December 31, 1997, the Company's leases in this
project area covered 5,374 acres.
Cologne Project Area: Frio Formation
The Cologne Project Area is located in Goliad and Victoria Counties, Texas
in the Frio formation. A secondary objective for this project area is Wilcox
formations. The area covers several historical field discoveries. A 40 square
mile 3-D seismic survey has been shot over the project area, has been
interpreted and yielded drillsites to evaluate prospectively from the Frio
through the Wilcox formations. As of December 31, 1997, the Company's multiple
seismic options covered 18,200 acres in this project area. Drilling on the 23
identified prospects is expected to begin in April, 1998.
South Cabeza Creek Project Area: Frio Formation to Lower Wilcox Sands
The South Cabeza Creek Project Area is located in Goliad County, Texas in
an area having significant production in the shallow Frio and lower Wilcox
trends. The Company is currently in the process of acquiring seismic options and
leases for participation in a 78 square mile non-exclusive 3-D seismic shoot in
the project area that is currently scheduled to seek to begin in the second
quarter of 1998. The Company intends to use the 3-D seismic data to identify
potential Frio, Vicksburg and Yegua opportunities and to verify and optimize a
Wilcox prospect. The Company currently has 525 acres under lease and 6,603 acres
under seismic option in this project area.
Western 325 Project Area: Wilcox and Jackson-Yegua Formations
The Western 325 Project Area is located in Webb and Duval Counties, Texas
in the Wilcox and Jackson-Yegua formations. The Company and a partner have
joined others in underwriting a non-proprietary 3-D
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seismic data shoot covering approximately 320 square miles in the project area.
Multiple prospects have been identified from data covering approximately 160
square miles that was delivered in 1997. The remainder of the data is currently
expected to be delivered in 1998. The Company has budgeted to drill two wells in
this project area during the second quarter of 1998. The Company believes that
experience gained in the Starr/Hidalgo Project Area may assist in exploration
efforts in the Western 325 Project Area.
Lance Project Area: Frio and Vicksburg Formations
The Lance Project Area is located in Bee County, Texas in an area of
prolific shallow Frio production. The primary exploration objectives in this
project area are the Frio/Vicksburg trends, with secondary objectives in the
deeper Vicksburg, Jackson and Yegua formations. The Company is currently
interpreting data from a 30 square mile 3-D seismic survey completed in the
second half of 1996. As of December 31, 1997, the Company and its partners held
500 acres in leases and 18,036 acres in options. During the quarter ended
December 31, 1997, the Company's share of production from wells in this project
area was approximately 0.03 MMcf/d of natural gas. As of December 31, 1997, the
Company and its partners have drilled six wells in this project area, resulting
in three producing wells. The estimated proved reserves net to the Company for
this project area was 0.09 BCF of natural gas at December 31, 1997. A deeper
Yegua well is planned for May 1998.
Highway 59 Project Area: Frio, Yegua and Wilcox Formations
The Highway 59 Project Area is located in Fort Bend and Wharton Counties,
Texas in an area of several historical field discoveries and production in the
Frio and Yegua formations and in the highly competitive Wharton County Wilcox
trend. A survey design has been completed for a 20 square mile 3-D seismic
survey in the project area, and fieldwork is expected to begin during the third
quarter of 1998. The Company and two large independent industry partners will
seek to use the 3-D seismic data to identify shallow opportunities and to
delineate Yegua and Wilcox prospects identified through the interpretation of
2-D seismic data. As of December 31, 1997, the Company's leases in this project
area covered 4,995 acres.
Geronimo Project Area: Frio Formation
The Geronimo Project Area is located in San Patricio County, Texas in an
area of predominantly Frio production. Numerous fault systems run through the
area, particularly in the basal Frio and Vicksburg formations. A 67 square mile
3-D seismic survey was conducted in 1996, with the initial interpretation of
data generating five prospects. A northeast extension of the initial 3-D seismic
survey covering an additional 40 square miles was later acquired. As of December
31, 1997, the Company's leases covered 10,278 acres and its seismic options
covered 19,080 acres in this project area. During the quarter ended December 31,
1997, the Company's share of production from wells in this project area was
approximately 16 Bbls/d of oil and 0.3 MMcf/d of natural gas. As of December 31,
1997, the Company and its partners had drilled three wells in this project area,
resulting in two producing wells. The estimated proved reserves net to the
Company for this project area was 10.4 MBbls of oil and 0.4 BCF of natural gas
at December 31, 1997. Four additional wells are planned for 1998.
RPP Welder Project Area: Frio and Vicksburg Formations
The RPP Welder Project Area is located in San Patricio and Refugio
Counties, Texas in an area of predominantly upper Frio production and is
adjacent to the Geronimo, Midway and LaRosa Project Areas. Numerous fault
systems run through the area, particularly at the relatively unexplored basal
Frio and Vicksburg levels. The primary producing formations in this area have
historically been Miocene and upper Frio oil objectives. Field operations for a
60 square mile 3-D seismic survey commenced during the second quarter of 1997.
Data was received from processing in March 1998 and interpretation has been
initiated. The Company's leases cover 1,127 acres and its options cover 30,055
acres in this project area.
8
<PAGE> 11
Midway Project Area: Frio Formation
The Midway Project Area is located in San Patricio County, Texas in an area
of predominantly Frio production. The area is a southwest extension of the
Geronimo Project Area and includes the Company's producing properties from the
Midway Field along with contiguous leases and seismic option areas. The Company
has designed a 15 square mile 3-D seismic survey in this project area, and field
operations are planned to commence in the third quarter of 1998. As of December
31, 1997, the Company's leases covered 1,235 acres in this project area.
Lost Bridge Project Area: Frio, Yegua and Wilcox Formations
The Lost Bridge Project Area is located in northern Jackson County, Texas
in the Frio, Yegua and Wilcox formations. The area covers several historical
field discoveries and recent Wilcox production. The Company began work in the
third quarter of 1997 on a 16 square mile 3-D seismic survey. The Company will
seek to use the 3-D seismic data to delineate a Yegua prospect identified with
2-D seismic data, identify shallow opportunities and image the deeper Wilcox
trend. The Company's strategy is to drill Frio and Yegua prospects and sell a
portion of its interest in any Wilcox prospects while retaining a carried
interest. The Company is currently interpreting the seismic data over the
project area and has 751 acres under lease and 4,314 acres under option to date.
Drake 202 Project Area: Frio and Vicksburg Formations
The Drake 202 Project Area is located in Bee County, Texas adjacent to the
Lance Project Area. Primary exploration objectives for this project area are the
Frio and Vicksburg formations, as well as deeper, higher risk prospects in the
Yegua formation. In this project area, the Company has seismic options covering
3,877 acres. A 20 square mile 3-D seismic survey is scheduled for April, 1998.
Metro Project Area: Frio, Yegua and Wilcox Formations
The Metro Project Area is located in Dewitt County, Texas in the active
Wilcox producing trend. Target reservoirs include the Frio, Yegua, upper and
middle Wilcox ranging in depth from 3,500 feet to 14,500 feet. A 20 square mile
3-D seismic program has been completed and numerous drilling opportunities have
been identified. The first well was drilled to a depth of 14,500 feet in the
first quarter of 1998 and is currently being completed in the Wilcox formation.
The Company has 2,064 acres under lease and 9,285 gross acres under option.
North Heyser: Miocene And Frio Formations
The North Heyser Project Area is located in Victoria County, Texas. The 3-D
seismic shoot area covers significant historical production and targets
primarily Basal Frio structural traps and extensions to existing area
production. A 13 square mile 3-D seismic program was completed in the fourth
quarter of 1997 and is currently being interpreted. As of December 31, 1997 the
Company had 8,100 acres under seismic option in this project area.
Victoria Project Area: Miocene and Frio Formation
The Victoria Project Area is located in Victoria County, Texas and is
targeting the Miocene to Basal Frio formations. The area includes several
historical field discoveries. A 3-D seismic shoot of approximately 60 square
miles has been initiated with expected completion in May of 1998. Interpretation
of processed data and identification of potential drillsites is scheduled for
the fourth quarter of 1998. As of December 31, 1997, the Company had 5,492 acres
under lease and 15,796 under seismic option in this project area.
Matagorda Project Area: Frio Formations
The Matgorda Project Area is located in Matagorda County, Texas covering
numerous Middle Frio structural opportunities in addition to the Lower Frio
shelf edge expanded section. The Company has
9
<PAGE> 12
committed to a non exclusive 3-D seismic shoot covering 51 square miles that is
expected to be initiated in the first quarter of 1998. Interpretation of the 3-D
data and initial drilling is expected to begin in the late third quarter of
1998. The Company has acquired 16,093 acres of seismic options in the project
area.
Driscoll Ranch Project Area: Frio through Yegua Formations
The Driscoll Ranch Project Area is located in Jim Wells and Duval Counties,
Texas. Industry activity in this area is high with substantial activity to the
north and east. Existing 2-D seismic data has generated several leads in the
project area and is being used to optimize the 3-D parameters. Target reservoirs
include the Frio Formation to the Hockley/Pettus/Yegua intervals between 5,000
feet and 8,000 feet. The anticipated area of a planned seismic shoot is
approximately 80 square miles, with acquisition beginning mid 1998. The Company
had 23,135 acres under seismic option as of December 31, 1997 in this project
area.
South Texas Syndicate
The South Texas Syndicate Project Area is located in LaSalle and McMullen
Counties, Texas. Seismic options covering over 88,000 acres are being negotiated
and are expected to be finalized by the first quarter of 1998. Industry activity
in the area has been initiated with 3-D seismic projects both east and west
along trend. Target reservoirs include the Cook Mountain, Queen City, Wilcox,
Edwards and Sligo, ranging in depth from 1,100 feet to 14,500 feet. An initial
phase of 3-D coverage covering approximately 40 square miles is planned for
1998.
LOUISIANA
North Chalkley Project Area: Miogyp Sand
The North Chalkley Project Area is located in Calcasieu and Cameron
Parishes, Louisiana in an area of production from the Miogyp sand trend. The
Company's leases in this project area cover 1,130 acres and control both
upthrown and expanded Miogyp closures against the regional Camerina/Miogyp
expansion fault. An upthrown 2-D supported opportunity was sold to two large
independent oil and natural gas companies for cash and carried working interest
in 1997. The well logged gas pay but was not adequately tested due to mechanical
problems. The Company now has a 45% working interest in the subject leases and
is planning to acquire 3-D seismic data for delineation of drilling future
prospects.
Atchafalaya Project Area: Cib Op-C Sand
The Atchafalaya Project Area is located in Atchafalaya Bay in Louisiana. In
1991, a well was drilled in this fault block resulting in a field discovery at
approximately 17,500 feet. The Company and its partners control 3,611 acres in
this project area under a farm-in agreement and two state leases. The Company's
partners have access to 20 square of 3-D seismic data covering this project
area. As of March 31, 1997, the Company's net estimated proved reserves in this
project area were 308 MBbls of oil and 5.8 Bcf of natural gas, all of which are
undeveloped. The Company subsequently sold down to an approximately 10% carried
interest in the first well that has been spudded in March 1998.
Live Oak Project Area: Chris II Sand
The Live Oak Project Area is located in Vermillion Parish, Louisiana. In
1996, the Company and its partners acquired access to a 20 square mile 3-D
seismic survey. The Company promoted its interest in the project area to two
independents and will be carried to casing point for a 12% interest in the first
well, which should be completed in April 1998. The Company's leases in this
project area cover an aggregate of approximately 350 acres. The well is drilling
as of March 1998.
OTHER PROJECT AREAS
In addition to the project areas described above, the Company had over 23
additional project areas in various stages of development as of December 31,
1997. These project areas are located in the onshore Texas
10
<PAGE> 13
and Louisiana Gulf Coast region, as well as one project area in the Cotton
Valley Lime Reef trend. The Company is in the process of evaluating and
acquiring interests with respect to most of these project areas and as of
December 31, 1997 had acquired leases and seismic options covering 118,114
acres. 3-D seismic surveys covering an aggregate of approximately 282 square
miles in these areas are budgeted for acquisition during 1998.
SIGNIFICANT DEVELOPMENT PROJECT -- CAMP HILL
The Company owns interests in eight leases totaling approximately 900 acres
in the Camp Hill field in Anderson County, Texas. The Company currently operates
six of these leases. During the year ended December 31, 1997, the project
produced 110 Bbls/d of 19 API gravity oil. The project produces from a depth of
500 feet and utilizes a tertiary steam drive as an enhanced oil recovery
process. Although efficient at maximizing oil recovery, the steam drive process
is relatively expensive to operate because natural gas or produced crude is
burned to create the steam injectant. Lifting costs during the year ended
December 31, 1997 averaged $15.54 per barrel ($2.59 per Mcfe). Because
profitability increases when natural gas prices drop relative to oil prices, the
project is a natural hedge against decreases in natural gas prices relative to
oil prices. The crude oil produced, although viscous, commands a higher price
(an average premium of $.71 per barrel during the year ended December 31, 1997)
than West Texas intermediate crude due to its suitability as a lube oil
feedstock. As of December 31, 1997, the Company had 4,697 MBbls of oil of proved
reserves in this project, with 902 MBbls of oil currently developed. The Company
anticipates that it will drill additional wells and increase steam injection to
develop the proved undeveloped reserves in this project, with the timing and
amount of expenditures depending on the relative prices of oil and natural gas.
The Company has an average working interest of 92.5% in its leases in this field
and an average net revenue interest of 74.0%.
OIL AND NATURAL GAS RESERVES
The following table sets forth estimated net proved oil and natural gas
reserves of the Company and the PV-10 Value of such reserves as of December 31,
1997. The reserve data and the present value as of December 31, 1997 were
prepared by Ryder Scott Company and Fairchild, Ancell & Wells, Inc., Independent
Petroleum Engineers. For further information concerning Ryder Scott's and
Fairchild's estimate of the proved reserves of the Company at December 31, 1997,
see the Reserve Reports included as exhibits to this Annual Report on Form 10-K.
The PV-10 Value was prepared using constant prices as of the calculation date,
discounted at 10% per annum on a pretax basis, and is not intended to represent
the current market value of the estimated oil and natural gas reserves owned by
the Company. For further information concerning the present value of future net
revenue from these proved reserves, see Note 10 of Notes to Financial
Statements.
<TABLE>
<CAPTION>
PROVED RESERVES
-----------------------------------
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Oil and condensate (MBbls).......................... 1,146 4,023.5 5,169.5
Natural gas (MMcf).................................. 9,299 2,843 12,142
Total proved reserves (MMcfe)....................... 16,173 26,986 43,159
PV-10 Value(1)...................................... $18,515 $ 7,556 $26,071
</TABLE>
- ---------------
(1) The PV-10 Value as of December 31, 1997 is pre-tax and was determined by
using the December 31, 1997 sales prices, which averaged $16.37 per Bbl of
oil, $2.56 per Mcf of natural gas and $10.90 per Bbl of NGL.
No estimates of proved reserves comparable to those included herein have
been included in reports to any federal agency other than the Commission.
In accordance with Commission regulations, the reserve reports used oil and
natural gas prices in effect at December 31, 1997. The prices used in
calculating the estimated future net revenue attributable to proved reserves do
not necessarily reflect market prices for oil and natural gas production
subsequent to December 31, 1997. There can be no assurance that all of the
proved reserves will be produced and sold within the periods
11
<PAGE> 14
indicated, that the assumed prices will actually be realized for such production
or that existing contracts will be honored or judicially enforced.
There are numerous uncertainties inherent in estimating oil and natural gas
reserves and their estimated values, including many factors beyond the control
of the producer. The reserve data set forth in this Annual Report on Form 10-K
represent only estimates. Reservoir engineering is a subjective process of
estimating underground accumulations of oil and natural gas that cannot be
measured in an exact manner. Estimates of economically recoverable oil and
natural gas reserves and of future net cash flows necessarily depend upon a
number of variable factors and assumptions, such as historical production from
the area compared with production from other producing areas, the assumed
effects of regulations by governmental agencies and assumptions concerning
future oil and natural gas prices, future operating costs, severance and excise
taxes, development costs and workover and remedial costs, all of which may in
fact vary considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and natural gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery, and estimates of the future net cash flows expected therefrom
prepared by different engineers or by the same engineers but at different times
may vary substantially and such reserve estimates may be subject to downward or
upward adjustment based upon such factors. Actual production, revenues and
expenditures with respect to the Company's reserves will likely vary from
estimates, and such variances may be material. In addition, the 10% discount
factor, which is required by the Commission to be used in calculating discounted
future net cash flows for reporting purposes, is not necessarily the most
appropriate discount factor based on interest rates in effect from time to time
and risks associated with the Company or the oil and natural gas industry in
general.
In general, the volume of production from oil and natural gas properties
declines as reserves are depleted, with the rate of decline depending on
reservoir characteristics. Except to the extent the Company conducts successful
exploration and development activities or acquires properties containing proved
reserves, or both, the proved reserves of the Company will decline as reserves
are produced. The Company's future oil and natural gas production is, therefore,
highly dependent upon its level of success in finding or acquiring additional
reserves. The business of exploring for, developing or acquiring reserves is
capital intensive. To the extent cash flow from operations is reduced and
external sources of capital become limited or unavailable, the Company's ability
to make the necessary capital investment to maintain or expand its asset base of
oil and natural gas reserves would be impaired. The failure of an operator of
the Company's wells to adequately perform operations, or such operator's breach
of the applicable agreements, could adversely impact the Company. In addition,
there can be no assurance that the Company's future exploration, development and
acquisition activities will result in additional proved reserves or that the
Company will be able to drill productive wells at acceptable costs. Furthermore,
although the Company's revenues could increase if prevailing prices for oil and
natural gas increase significantly, the Company's finding and development costs
could also increase. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
12
<PAGE> 15
VOLUMES, PRICES AND OIL & GAS OPERATING EXPENSE
The following table sets forth certain information regarding the production
volumes of, average sales prices received for and average production costs
associated with the Company's sales of oil and natural gas for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
PRODUCTION VOLUMES
Oil (MBbls)................................................. 78 107 113
Natural gas (MMcf).......................................... 565 1,273 2,749
Natural gas equivalent (MMcfe).............................. 1,033 1,915 3,424
AVERAGE SALES PRICES
Oil (per Bbl)............................................... $19.64 $21.54 $18.66
Natural gas (per Mcf)....................................... 1.60 2.27 2.41
Natural gas equivalent (per Mcfe)........................... 2.36 2.71 2.54
AVERAGE COSTS (PER MCFE)
Camp Hill operating expenses................................ $ 2.06 $ 3.15 $ 2.59
Other operating expenses.................................... 1.63 0.94 0.54
Total operating expenses(1)................................. 1.76 1.24 0.68
</TABLE>
- ---------------
(1) Includes direct lifting costs (labor, repairs and maintenance, materials and
supplies), workover costs and the administrative costs of production
offices, insurance and property and severance taxes.
FINDING AND DEVELOPMENT COSTS
From inception through December 31, 1997, the Company has incurred total
gross development, exploration and acquisition costs of approximately $47.4
million. Total exploration, development and acquisition activities from
inception through December 31, 1997 have resulted in the addition of
approximately 49.7 Bcfe, net to the Company's interest, of proved reserves at an
average finding and development cost of $.95 per Mcfe.
The Company's finding and development costs have historically fluctuated on
a year-to-year basis. Finding and development costs, as measured annually, may
not be indicative of the Company's ability to economically replace oil and
natural gas reserves because the recognition of costs may not necessarily
coincide with the addition of proved reserves.
DEVELOPMENT, EXPLORATION AND ACQUISITION CAPITAL EXPENDITURES
The following table sets forth certain information regarding the gross
costs incurred in the purchase of proved and unproved properties and in
development and exploration activities.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1995 1996 1997
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Acquisition costs
Unproved prospects........................................ $ 317 $ 51 $ --
Proved properties......................................... 3,588 1,908 14,820
Exploration................................................. 2,364 4,724 14,223
Development................................................. 209 1,956 2,257
------ ------ -------
Total costs incurred(1)................................ $6,478 $8,639 $31,300
====== ====== =======
</TABLE>
- ---------------
(1) Excludes capitalized interest on unproved properties of $117,288,
$422,493 and $699,625 for the years ended December 31, 1995, 1996 and
1997, respectively.
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<PAGE> 16
DRILLING ACTIVITY
The following table sets forth the drilling activity of the Company for the
years ended December 31, 1995, 1996 and 1997. In the table, "gross" refers to
the total wells in which the Company has a working interest and "net" refers to
gross wells multiplied by the Company's working interest therein. As shown
below, the Company's drilling activity from January 1, 1995 to December 31, 1997
has resulted in a commercial success rate of approximately 69%.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997
------------ ------------ -------------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Exploratory Wells
Productive.................................... -- -- 16 6.0 39 15.7
Nonproductive................................. -- -- 4 1.1 23 9.4
----- --- ----- ----
Total................................. -- -- 20 7.1 62 25.1
===== === ===== ====
Development Wells
Productive.................................... -- -- -- -- 7 1.8
Nonproductive................................. -- -- -- -- 1 0.6
----- ----
Total................................. -- -- -- -- 8 2.4
===== ====
</TABLE>
PRODUCTIVE WELLS
The following table sets forth the number of productive oil and natural gas
wells in which the Company owned an interest as of December 31, 1997.
<TABLE>
<CAPTION>
COMPANY OPERATED OTHER
---------------- ------------- TOTAL
GROSS NET GROSS NET GROSS NET
-------- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Oil........................................ 56 54.4 24 8.7 80 63.1
Natural gas................................ 13 8.2 68 23.7 81 31.9
--- ---- ---- ---- ---- ----
Total.................................... 69 62.6 92 32.4 161 95.0
=== ==== ==== ==== ==== ====
</TABLE>
ACREAGE DATA
The following table sets forth certain information regarding the Company's
developed and undeveloped lease acreage as of December 31, 1997. Developed acres
refers to acreage within producing units and undeveloped acres refers to acreage
that has not been placed in producing units. Leases covering substantially all
of the undeveloped acreage in the following table will expire within the next
three years. In general, the Company's leases will continue past their primary
terms if oil or natural gas in commercial quantities is being produced from a
well on such leases.
<TABLE>
<CAPTION>
DEVELOPED ACREAGE UNDEVELOPED ACREAGE TOTAL
------------------- --------------------- ----------------
GROSS NET GROSS NET GROSS NET
--------- ------ ----------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Louisiana...................... -- -- 7,310 2,770 7,310 2,770
Texas.......................... 28,245 11,609 83,130 26,582 111,375 38,191
------ ------ ------ ------ ------- ------
Total................ 28,245 11,609 90,440 29,352 118,685 40,961
====== ====== ====== ====== ======= ======
</TABLE>
The table does not include 301,268 gross acres (127,915 net) that the
Company had a right to acquire pursuant to various seismic option agreements at
December 31, 1997. Under the terms of its option agreements, the Company
typically has the right for a period of one year, subject to extensions, to
exercise its option to lease the acreage at predetermined terms. The Company's
lease agreements generally terminate if wells have not been drilled on the
acreage within a period of three years.
14
<PAGE> 17
MARKETING
The Company's production is marketed to third parties consistent with
industry practices. Typically, oil is sold at the wellhead at field-posted
prices plus a bonus and natural gas is sold under contract at a negotiated price
based upon factors normally considered in the industry, such as distance from
the well to the pipeline, well pressure, estimated reserves, quality of natural
gas and prevailing supply/demand conditions.
The Company's marketing objective is to receive the highest possible
wellhead price for its product. The Company is aided by the presence of multiple
outlets near its production in the Texas and Louisiana Gulf Coast. The Company
takes an active role in determining the available pipeline alternatives for each
property based upon historical pricing, capacity, pressure, market
relationships, seasonal variances and long-term viability.
There are a variety of factors which affect the market for oil and natural
gas, including the extent of domestic production and imports of oil and natural
gas, the proximity and capacity of natural gas pipelines and other
transportation facilities, demand for oil and natural gas, the marketing of
competitive fuels and the effects of state and federal regulations on oil and
natural gas production and sales. The Company has not experienced any
difficulties in marketing its oil and natural gas. The oil and natural gas
industry also competes with other industries in supplying the energy and fuel
requirements of industrial, commercial and individual customers. The
availability of a ready market for the Company's oil and natural gas production
depends on the proximity of reserves to, and the capacity of, oil and natural
gas gathering systems, pipelines and trucking or terminal facilities. The
Company delivers natural gas through gas gathering systems and gas pipelines
that it does not own. Federal and state regulation of natural gas and oil
production and transportation, tax and energy policies, changes in supply and
demand and general economic conditions all could adversely affect the Company's
ability to produce and market its oil and natural gas.
The Company from time to time markets its own production where feasible
with a combination of market-sensitive pricing and forward-fixed pricing.
Forward pricing is utilized to take advantage of anomalies in the futures market
and to hedge a portion of the Company's production deliverability at prices
exceeding forecast. All of such hedging transactions provide for financial
rather than physical settlement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General Overview."
Despite the measures taken by the Company to attempt to control price risk,
the Company remains subject to price fluctuations for natural gas sold in the
spot market due primarily to seasonality of demand and other factors beyond the
Company's control. Domestic oil prices generally follow worldwide oil prices,
which are subject to price fluctuations resulting from changes in world supply
and demand. The Company continues to evaluate the potential for reducing these
risks by entering into, and expects to enter into, additional hedge transactions
in future years. In addition, the Company may also close out any portion of
hedges that may exist from time to time as determined to be appropriate by
management. At December 31, 1997, natural gas sold under such swap arrangements
was 364,000 MMBtu at an average price of $2.86 per MMBtu relating to first
quarter of 1998 production. Total natural gas purchased and sold under such swap
arrangements during the years ended December 31, 1995, 1996 and 1997 were 40,000
MMBtu, 60,000 MMBtu and 210,000 MMBtu, respectively. Gains (losses) realized by
the Company under such swap arrangements were ($23,466), ($26,887) and $48,000
for the years ended December 31, 1995, 1996 and 1997, respectively. The Company
did not engage in hedging prior to 1995.
COMPETITION AND TECHNOLOGICAL CHANGES
The Company encounters competition from other oil and natural gas companies
in all areas of its operations, including the acquisition of exploratory
prospects and proven properties. The Company's competitors include major
integrated oil and natural gas companies and numerous independent oil and
natural gas companies, individuals and drilling and income programs. Many of its
competitors are large, well-established companies with substantially larger
operating staffs and greater capital resources than those of the Company and
which, in many instances, have been engaged in the oil and natural gas business
for a much longer time than the Company. Such companies may be able to pay more
for exploratory prospects and productive oil and
15
<PAGE> 18
natural gas properties and may be able to identify, evaluate, bid for and
purchase a greater number of properties and prospects than the Company's
financial or human resources permit. In addition, such companies may be able to
expend greater resources on the existing and changing technologies that the
Company believes are and will be increasingly important to the current and
future success of oil and natural gas companies. The Company's ability to
explore for oil and natural gas prospects and to acquire additional properties
in the future will be dependent upon its ability to conduct its operations, to
evaluate and select suitable properties and to consummate transactions in this
highly competitive environment. The Company believes that its exploration,
drilling and production capabilities and the experience of its management
generally enable it to compete effectively. Many of the Company's competitors,
however, have financial resources and exploration and development budgets that
are substantially greater than those of the Company, which may adversely affect
the Company's ability to compete with these companies.
The oil and gas industry is characterized by rapid and significant
technological advancements and introductions of new products and services
utilizing new technologies. As others use or develop new technologies, the
Company may be placed at a competitive disadvantage, and competitive pressures
may force the Company to implement such new technologies at substantial cost. In
addition, other oil and gas companies may have greater financial, technical and
personnel resources that allow them to enjoy technological advantages and may in
the future allow them to implement new technologies before the Company. There
can be no assurance that the Company will be able to respond to such competitive
pressures and implement such technologies on a timely basis or at an acceptable
cost. One or more of the technologies currently utilized by the Company or
implemented in the future may become obsolete. In such case, the Company's
business, financial condition and results of operations could be materially
adversely affected. If the Company is unable to utilize the most advanced
commercially available technology, the Company's business, financial condition
and results of operations could be materially and adversely affected.
REGULATION
The availability of a ready market for oil and gas production depends upon
numerous factors beyond the Company's control. These factors include regulation
of oil and natural gas production, federal and state regulations governing
environmental quality and pollution control, state limits on allowable rates of
production by well or proration unit, the amount of oil and natural gas
available for sale, the availability of adequate pipeline and other
transportation and processing facilities and the marketing of competitive fuels.
For example, a productive natural gas well may be "shut-in" because of an
oversupply of natural gas or lack of an available natural gas pipeline in the
areas in which the Company may conduct operations. State and federal regulations
generally are intended to prevent waste of oil and natural gas, protect rights
to produce oil and natural gas between owners in a common reservoir, control the
amount of oil and natural gas produced by assigning allowable rates of
production and control contamination of the environment. Pipelines are subject
to the jurisdiction of various federal, state and local agencies. The Company is
also subject to changing and extensive tax laws, the effects of which cannot be
predicted. The following discussion summarizes the regulation of the United
States oil and gas industry. The Company believes that it is in substantial
compliance with the various statutes, rules, regulations and governmental orders
to which the Company's operations may be subject, although there can be no
assurance that this is or will remain the case. Moreover, such statutes, rules,
regulations and government orders may be changed or reinterpreted from time to
time in response to economic or political conditions, and there can be no
assurance that such changes or reinterpretations will not materially adversely
affect the Company's results of operations and financial condition. The
following discussion is not intended to constitute a complete discussion of the
various statutes, rules, regulations and governmental orders to which the
Company's operations may be subject.
Regulation of Oil and Natural Gas Exploration and Production. The Company's
operations are subject to various types of regulation at the federal, state and
local levels. Such regulation includes requiring permits for the drilling of
wells, maintaining bonding requirements in order to drill or operate wells and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled, the
plugging and abandoning of wells and the disposal of fluids used in connection
with operations. The Company's operations are also subject to various
conservation laws and regulations. These
16
<PAGE> 19
include the regulation of the size of drilling and spacing units or proration
units and the density of wells that may be drilled in and the unitization or
pooling of oil and gas properties. In this regard, some states allow the forced
pooling or integration of tracts to facilitate exploration while other states
rely primarily or exclusively on voluntary pooling of lands and leases. In areas
where pooling is voluntary, it may be more difficult to form units, and
therefore more difficult to develop a project if the operator owns less than
100% of the leasehold. In addition, state conservation laws establish maximum
rates of production from oil and natural gas wells, generally prohibit the
venting or flaring of natural gas and impose certain requirements regarding the
ratability of production. The effect of these regulations may limit the amount
of oil and natural gas the Company can produce from its wells and may limit the
number of wells or the locations at which the Company can drill. The regulatory
burden on the oil and gas industry increases the Company's costs of doing
business and, consequently, affects its profitability. Inasmuch as such laws and
regulations are frequently expanded, amended and reinterpreted, the Company is
unable to predict the future cost or impact of complying with such regulations.
Regulation of Sales and Transportation of Natural Gas. Historically, the
transportation and sale for resale of natural gas in interstate commerce have
been regulated pursuant to the Natural Gas Act of 1938 (the "NGA"), the Natural
Gas Policy Act of 1978 (the "NGPA") and the regulations promulgated thereunder
by the Federal Energy Regulatory Commission (the "FERC"). Maximum selling prices
of certain categories of natural gas sold in "first sales," whether sold in
interstate or intrastate commerce, were regulated pursuant to the NGPA. The
Natural Gas Wellhead Decontrol Act (the "Decontrol Act") removed, as of not
later than January 1, 1993, all remaining federal price controls from natural
gas sold in "first sales." The FERC's jurisdiction over natural gas
transportation was unaffected by the Decontrol Act. Although sales by producers,
such as the Company, of natural gas and all sales of crude oil, condensate and
natural gas liquids can currently be made at market prices, Congress could
reenact price controls in the future.
The Company's sales of natural gas are affected by the availability, terms
and cost of transportation. The price and terms for access to pipeline
transportation are subject to extensive regulation. In recent years, the FERC
has undertaken various initiatives to increase competition within the natural
gas industry. As a result of initiatives like FERC Order 636, issued in April
1992, the interstate natural gas transportation and marketing system has been
substantially restructured to remove various barriers and practices that
historically limited non-pipeline natural gas sellers, including producers, from
effectively competing with interstate pipelines for sales to local distribution
companies and large industrial and commercial customers. The most significant
provisions of Order No. 636 require that interstate pipelines provide
transportation separate or "unbundled" from their sales service, and require
that pipelines provide firm and interruptible transportation service on an open
access basis that is equal for all natural gas supplies. In many instances, the
result of Order No. 636 and related initiatives have been to substantially
reduce or eliminate the interstate pipelines' traditional role as wholesalers of
natural gas in favor of providing only storage and transportation services.
The FERC has announced several important transportation-related policy
statements and proposed rule changes, including a statement of policy and a
request for comments concerning alternatives to its traditional cost-of-service
ratemaking methodology to establish the rates interstate pipelines may charge
for their services. A number of pipelines have obtained FERC authorization to
charge negotiated rates as one such alternative. In February 1997, the FERC
announced a broad inquiry into issues facing the natural gas industry to assist
the FERC in establishing regulatory goals and priorities in the post-Order No.
636 environment. Similarly, the Texas Railroad Commission has been reviewing
changes to its regulations governing transportation and gathering services
provided by intrastate pipelines and gatherers and recently implemented a code
of conduct intended to prevent undue discrimination by intrastate pipelines and
gatherers in favor of their marketing affiliates. Although the changes being
considered by these federal and state regulators would affect the Company only
indirectly, they are intended to further enhance competition in natural gas
markets.
The Company owns certain natural gas pipelines that it believes meet the
standards the FERC has used to establish a pipeline's status as a gatherer not
subject to FERC jurisdiction under the NGA. State regulation of gathering
facilities generally includes various safety, environmental, and in some
circumstances, nondiscriminatory take requirements, but does not generally
entail rate regulation. Natural gas gathering may receive greater regulatory
scrutiny at both state and federal levels in the post-Order No. 636 environment.
17
<PAGE> 20
The Company cannot predict what further action the FERC or state regulators
will take on these matters; however, the Company does not believe that it will
be affected by any action taken materially differently than other natural gas
producers with which it competes.
Additional proposals and proceedings that might affect the natural gas
industry are pending before Congress, the FERC, state commissions and the
courts. The natural gas industry historically has been very heavily regulated;
therefore, there is no assurance that the less stringent regulatory approach
recently pursued by the FERC and Congress will continue.
Oil Price Controls and Transportation Rates. Sales of crude oil, condensate
and gas liquids by the Company are not currently regulated and are made at
market prices. The price the Company receives from the sale of these products
may be affected by the cost of transporting the products to market. Effective
January 1995, the FERC implemented regulations establishing an indexing system
under which oil pipelines will be able to change their transportation rates,
subject to prescribed ceiling limits. The indexing system generally indexes such
rates to inflation, subject to certain conditions and limitations. The Company
is not able at this time to predict the effects of these regulations, if any, on
the transportation costs associated with oil production from the Company's oil
producing operations.
Environmental Regulations. The Company's operations are subject to numerous
federal, state and local laws and regulations governing the discharge of
materials into the environment or otherwise relating to environmental
protection. These laws and regulations may require the acquisition of a permit
before drilling commences, restrict the types, quantities and concentration of
various substances that can be released into the environment in connection with
drilling and production activities, limit or prohibit drilling activities on
certain lands within wilderness, wetlands and other protected areas, require
remedial measures to mitigate pollution from former operations, such as pit
closure and plugging abandoned wells, and impose substantial liabilities for
pollution resulting from production and drilling operations. Public interest in
the protection of the environment has increased dramatically in recent years.
The trend of more expansive and stricter environmental legislation and
regulations applied to the oil and natural gas industry could continue,
resulting in increased costs of doing business and consequently affecting
profitability. To the extent laws are enacted or other governmental action is
taken that restricts drilling or imposes more stringent and costly waste
handling, disposal and cleanup requirements, the business and prospects of the
Company could be adversely affected.
The Company generates wastes that may be subject to the federal Resource
Conservation and Recovery Act ("RCRA") and comparable state statutes. The U.S.
Environmental Protection Agency ("EPA") and various state agencies have limited
the approved methods of disposal for certain hazardous and nonhazardous wastes.
Furthermore, certain wastes generated by the Company's oil and natural gas
operations that are currently exempt from treatment as "hazardous wastes" may in
the future be designated as "hazardous wastes," and therefore be subject to more
rigorous and costly operating and disposal requirements.
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 that it has used good operating and waste disposal
practices, prior owners and operators of these properties may not have used
similar practices, and hydrocarbons or other wastes may have been disposed of or
released on or under the properties owned or leased by the Company or on or
under locations where such wastes have been taken for disposal. In addition,
many of these properties have been operated by third parties whose treatment and
disposal or release of hydrocarbons or other wastes was not under the Company's
control. These properties and the wastes disposed thereon may be subject to the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
RCRA and analogous state laws as well as state laws governing the management of
oil and gas wastes. Under such laws, the Company could be required to remove or
remediate previously disposed wastes (including wastes disposed of or released
by prior owners or operators) or property contamination (including groundwater
contamination) or to perform remedial plugging operations to prevent future
contamination.
The Company's operations may be subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Amendments to the CAA were adopted in
1990 and contain provisions that may result in the gradual imposition of certain
pollution control requirements with respect to air emissions from the
18
<PAGE> 21
operations of the Company. The EPA and states have been developing regulations
to implement these requirements. The Company may be required to incur certain
capital expenditures in the next several years for air pollution control
equipment in connection with maintaining or obtaining operating permits and
approvals addressing other air emission-related issues. However, the Company
does not believe its operations will be materially adversely affected by any
such requirements.
Federal regulations require certain owners or operators of facilities that
store or otherwise handle oil, such as the Company, to prepare and implement
spill prevention, control, countermeasure ("SPCC") and response plans relating
to the possible discharge of oil into surface waters. The Company has
acknowledged the need for SPCC plans at certain of its properties and believes
that it will be able to develop and implement these plans in the near future.
The Oil Pollution Act of 1990, ("OPA") contains numerous requirements relating
to the prevention of and response to oil spills into waters of the United
States. The OPA subjects owners of facilities to strict joint and several
liability for all containment and cleanup costs and certain other damages
arising from a spill, including, but not limited to, the costs of responding to
a release of oil to surface waters. The OPA also requires owners and operators
of offshore facilities that could be the source of an oil spill into federal or
state waters, including wetlands, to post a bond, letter of credit or other form
of financial assurance in amounts ranging from $10 million in specified state
waters to $35 million in federal outer continental shelf waters to cover costs
that could be incurred by governmental authorities in responding to an oil
spill. Such financial assurances may be increased by as much as $150 million if
a formal risk assessment indicates that the increase is warranted. Noncompliance
with OPA may result in varying civil and criminal penalties and liabilities.
Operations of the Company are also subject to the federal Clean Water Act
("CWA") and analogous state laws. In accordance with the CWA, the state of
Louisiana has issued regulations prohibiting discharges of produced water in
state coastal waters effective July 1, 1997. The Company plans to drill a well
in Louisiana coastal waters. Assuming that production from the planned well is
feasible, the Company will be obligated to comply with these regulations.
Pursuant to other requirements of the CWA, the EPA has adopted regulations
concerning discharges of storm water runoff. This program requires covered
facilities to obtain individual permits, participate in a group permit or seek
coverage under an EPA general permit. While certain of its properties may
require permits for discharges of storm water runoff, the Company believes that
it will be able to obtain, or be included under, such permits, where necessary,
and make minor modifications to existing facilities and operations that would
not have a material effect on the Company. Like OPA, the CWA and analogous state
laws relating to the control of water pollution provide varying civil and
criminal penalties and liabilities for releases of petroleum or its derivatives
into surface waters or into the ground.
CERCLA, also known as the "Superfund" law, and similar state laws impose
liability, without regard to fault or the legality of the original conduct, on
certain classes of persons that are considered to have contributed to the
release of a "hazardous substance" into the environment. These persons include
the owner or operator of the disposal site or sites where the release occurred
and companies that disposed or arranged for the disposal of the hazardous
substances found at the site. Persons who are or were responsible for releases
of hazardous substances under CERCLA may be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have been
released into the environment, for damages to natural resources and for the
costs of certain health studies, and it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by the hazardous substances released into the
environment.
The Company also is subject to a variety of federal, state and local
permitting and registration requirements relating to protection of the
environment. Management believes that the Company is in substantial compliance
with current applicable environmental laws and regulations and that continued
compliance with existing requirements will not have a material adverse effect on
the Company.
OPERATING HAZARDS AND INSURANCE
The oil and natural gas business involves a variety of operating hazards
and risks such as well blowouts, craterings, pipe failures, casing collapse,
explosions, uncontrollable flows of oil, natural gas or well fluids, fires,
formations with abnormal pressures, pipeline ruptures or spills, pollution,
releases of toxic gas and other environmental hazards and risks. These hazards
and risks could result in substantial losses to the Company
19
<PAGE> 22
from, among other things, injury or loss of life, severe damage to or
destruction of property, natural resources and equipment, pollution or other
environmental damage, cleanup responsibilities, regulatory investigation and
penalties and suspension of operations. In addition, the Company may be liable
for environmental damages caused by previous owners of property purchased and
leased by the Company. As a result, substantial liabilities to third parties or
governmental entities may be incurred, the payment of which could reduce or
eliminate the funds available for exploration, development or acquisitions or
result in the loss of the Company's properties. In accordance with customary
industry practices, the Company maintains insurance against some, but not all,
of such risks and losses. The Company does not carry business interruption
insurance or protect against loss of revenues. There can be no assurance that
any insurance obtained by the Company will be adequate to cover any losses or
liabilities. The Company cannot predict the continued availability of insurance
or the availability of insurance at premium levels that justify its purchase.
The occurrence of a significant event not fully insured or indemnified against
could materially and adversely affect the Company's financial condition and
operations. The Company may elect to self-insure if management believes that the
cost of insurance, although available, is excessive relative to the risks
presented. In addition, pollution and environmental risks generally are not
fully insurable. The occurrence of an event not fully covered by insurance could
have a material adverse effect on the financial condition and results of
operations of the Company. The Company participates in a substantial percentage
of its wells on a non-operated basis, which may limit the Company's ability to
control the risks associated with oil and natural gas operations.
TITLE TO PROPERTIES; ACQUISITION RISKS
The Company believes it has satisfactory title to all of its producing
properties in accordance with standards generally accepted in the oil and
natural gas industry. The Company's properties are subject to customary royalty
interests, liens incident to operating agreements, liens for current taxes and
other burdens which the Company believes do not materially interfere with the
use of or affect the value of such properties. As is customary in the industry
in the case of undeveloped properties, little investigation of record title is
made at the time of acquisition (other than a preliminary review of local
records). Investigations, including a title opinion of local counsel, are
generally made before commencement of drilling operations. The Company's
revolving credit facility is secured by substantially all of its oil and natural
gas properties.
The successful acquisition of producing properties requires an assessment
of recoverable reserves, future oil and natural gas prices, operating costs,
potential environmental and other liabilities and other factors. Such
assessments are necessarily inexact and their accuracy inherently uncertain. In
connection with such an assessment, the Company performs a review of the subject
properties that it believes to be generally consistent with industry practices,
which generally includes on-site inspections and the review of reports filed
with various regulatory entities. Such a review, however, will not reveal all
existing or potential problems nor will it permit a buyer to become sufficiently
familiar with the properties to fully assess their deficiencies and
capabilities. Inspections may not always be performed on every well, and
structural and environmental problems are not necessarily observable even when
an inspection is undertaken. Even when problems are identified, the seller may
be unwilling or unable to provide effective contractual protection against all
or part of such problems. There can be no assurances that any acquisition of
property interests by the Company will be successful and, if unsuccessful, that
such failure will not have an adverse effect on the Company's future results of
operations and financial condition.
EMPLOYEES
At December 31, 1997, the Company had 22 full-time employees, including
four geoscientists and three engineers. As drilling and production activities
increase, the Company intends to hire additional technical, operational and
administrative personnel as appropriate. The Company believes that its
relationships with its employees are good.
In order to optimize prospect generation and development, the Company
utilizes the services of independent consultants and contractors to perform
various professional services, particularly in the areas of 3-D seismic data
mapping, acquisition of leases and lease options, construction, design, well
site surveillance, permitting and environmental assessment. Field and on-site
production operation services, such as pumping,
20
<PAGE> 23
maintenance, dispatching, inspection and testing, are generally provided by
independent contractors. The Company believes that this use of third party
service providers has enhanced its ability to contain general and administrative
expenses.
The Company depends to a large extent on the services of certain key
management personnel, the loss of any of which could have a material adverse
effect on the Company's operations. The Company does not maintain key-man life
insurance with respect to any of its employees.
GLOSSARY OF CERTAIN INDUSTRY TERMS
The definitions set forth below shall apply to the indicated terms as used
herein. All volumes of natural gas referred to herein are stated at the legal
pressure base of the state or area where the reserves exist and at 60 degrees
Fahrenheit and in most instances are rounded to the nearest major multiple.
After payout. With respect to an oil or gas interest in a property, refers
to the time period after which the costs to drill and equip a well have been
recovered.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
Bbls/d. Stock tank barrels per day.
Bcf. Billion cubic feet.
Bcfe. Billion cubic feet equivalent, determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Before payout. With respect to an oil or gas interest in a property, refers
to the time period before which the costs to drill and equip a well have been
recovered.
Btu or British Thermal Unit. The quantity of heat required to raise the
temperature of one pound of water by one degree Fahrenheit.
Completion. The installation of permanent equipment for the production of
oil or gas or, in the case of a dry hole, the reporting of abandonment to the
appropriate agency.
Developed acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
Development well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
Dry hole or well. A well found to be incapable of producing hydrocarbons in
sufficient quantities such that proceeds from the sale of such production exceed
production expenses and taxes.
Exploratory well. A well drilled to find and produce oil or gas reserves
not classified as proved, 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.
Farm-in or farm-out. An agreement whereunder the owner of a working
interest in an oil and natural gas lease assigns the working interest or a
portion thereof to another party who desires to drill on the leased acreage.
Generally, the assignee is required to drill one or more wells in order to earn
its interest in the acreage. The assignor usually retains a royalty or
reversionary interest in the lease. The interest received by an assignee is a
"farm-in" while the interest transferred by the assignor is a "farm-out."
Field. An area consisting of a single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.
Finding costs. Costs associated with acquiring and developing proved oil
and natural gas reserves which are capitalized by the Company pursuant to
generally accepted accounting principles, including all costs involved in
acquiring acreage, geological and geophysical work and the cost of drilling and
completing wells.
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<PAGE> 24
Gross acres or gross wells. The total acres or wells, as the case may be,
in which a working interest is owned.
MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.
MBbls/d. One thousand barrels of crude oil or other liquid hydrocarbons per
day.
Mcf. One thousand cubic feet.
Mcf/d. One thousand cubic feet per day.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
MMBbls. One million barrels of crude oil or other liquid hydrocarbons.
MMBtu. One million British Thermal Units.
Mmcf. One million Cubic feet.
MMcf/d. One million cubic feet per day.
MMcfe. One million cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids,
which approximates the relative energy content of crude oil, condensate and
natural gas liquids as compared to natural gas. Prices have historically been
higher or substantially higher for crude oil than natural gas on an energy
equivalent basis.
Net acres or net wells. The sum of the fractional working interests owned
in gross acres or gross wells.
Normally pressured reservoirs. Reservoirs with a formation-fluid pressure
equivalent to 0.465 psi per foot of depth from the surface. For example, if the
formation pressure is 4,650 psi at 10,000 feet, then the pressure is considered
to be normal.
Over-pressured reservoirs. Reservoirs subject to abnormally high pressure
as a result of certain types of subsurface formations.
Petrophysical study. Study of rock and fluid properties based on well log
and core analysis.
Present value. When used with respect to oil and natural gas reserves, the
estimated future gross revenue to be generated from the production of proved
reserves, net of estimated production and future development costs, using prices
and costs in effect as of the date indicated, without giving effect to
nonproperty-related expenses such as general and administrative expenses, debt
service and future income tax expense or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
Productive well. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
Proved developed nonproducing reserves. Proved developed reserves expected
to be recovered from zones behind casing in existing wells.
Proved developed producing reserves. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and able to produce to market.
Proved developed reserves. Proved reserves that can be expected to be
recovered from existing wells with existing equipment and operating methods.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved undeveloped location. A site on which a development well can be
drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.
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<PAGE> 25
Proved undeveloped reserves. Proved reserves that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion.
PV-10 Value. The present value of estimated future revenues to be generated
from the production of proved reserves calculated in accordance with Commission
guidelines, net of estimated production and future development costs, using
prices and costs as of the date of estimation without future escalation, without
giving effect to non-property related expenses such as general and
administrative expenses, debt service, future income tax expense and
depreciation, depletion and amortization, and discounted using an annual
discount rate of 10%.
Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reservoir. A porous and permeable underground formation containing a
natural accumulation of producible oil and/or gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
Royalty interest. An interest in an oil and natural gas property entitling
the owner to a share of oil or gas production free of costs of production.
3-D seismic data. Three-dimensional pictures of the subsurface created by
collecting and measuring the intensity and timing of sound waves transmitted
into the earth as they reflect back to the surface.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and natural gas regardless of whether such acreage contains proved
reserves.
Working interest. The operating interest that gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
Workover. Operations on a producing well to restore or increase production.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is a party to various legal proceedings
arising in the ordinary course of business. The Company is not currently a party
to any litigation that it believes could have a material adverse effect on the
financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to Instruction 3 to Item 401(b) of Regulation S-K and General
Instruction G(3) to Form 10-K, the following information is included in Part I
of this Form 10-K.
The following table sets forth certain information with respect to
executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
S.P. Johnson IV....................... 41 President and Chief Executive Officer
Frank A. Wojtek....................... 42 Chief Financial Officer, Vice
President, Secretary and Treasurer
George F. Canjar...................... 39 Vice President of Exploration
Development
Kendall A. Trahan..................... 47 Vice President of Land
</TABLE>
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<PAGE> 26
Set forth below is a description of the backgrounds of each of the
executive officers of the Company:
S.P. Johnson IV has served as the President, Chief Executive Officer
and a director of the Company since December 1993. Prior to that, he worked
15 years for Shell Oil Company. His managerial positions included
Operations Superintendent, Manager of Planning and Finance and Manager of
Development Engineering. Mr. Johnson is a Registered Petroleum Engineer and
has a B.S. in Mechanical Engineering from the University of Colorado.
Frank A. Wojtek has served as the Chief Financial Officer, Vice
President, Secretary, Treasurer and a director of the Company since 1993.
In addition, from 1992 to 1997, Mr. Wojtek was the Assistant to the
Chairman of the Board of Reading & Bates Corporation ("Reading & Bates", an
offshore drilling company). Mr. Wojtek also holds the positions of Vice
President and Secretary/Treasurer for Loyd and Associates, Inc. (a private
financial consulting and investment banking firm). Mr. Wojtek held the
positions of Vice President and Chief Financial Officer of
Griffin-Alexander Drilling Company from 1984 to 1987, Treasurer of
Chiles-Alexander International Inc. from 1987 to 1989 and Vice President
and Chief Financial Officer of India Offshore Inc. from 1989 to 1992, all
of which are companies in the offshore drilling industry. Mr. Wojtek is a
Certified Public Accountant and holds a B.B.A. in Accounting from the
University of Texas.
George F. Canjar has been head of the Company's exploration activities
since joining the Company in July 1996 and was elected Vice President of
Exploration Development in June 1997. Prior thereto he worked for over 15
years for Shell Oil Company and its overseas affiliates where he held
various technical and managerial positions, including Technical
Manager-Geology & Petrophysics, Section Head Geology & Seismology and Team
Leader for numerous integrated production, development, exploration and
project execution groups. Mr. Canjar is a Registered Petroleum Engineer,
Registered Geologist and has a B.S. in Geological Engineering from the
Colorado School of Mines.
Kendall A. Trahan has been head of the Company's land activities since
joining the Company in March 1997 and was elected Vice President of Land of
the Company in June 1997. From 1994 to February 1997, he served as a
Director of Joint Ventures Onshore Gulf Coast for Vastar Resources, Inc.
From 1982 to 1994, he worked as an Area Landman and then a Division Landman
and Director of Business Development for Arco Oil & Gas Company. Prior to
that, Mr. Trahan served as a Staff Landman for Amerada Hess Corporation and
as an independent landman. He is a Certified Professional Landman and holds
a B.S. degree from the University of Southwestern Louisiana.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
(a) The Company's common stock, par value $0.01 per share (the "Common
Stock"), has been publicly traded through the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol CRZO since the Company's initial public
offering (the "Offering") effective August 6, 1997. The following table sets
forth the quarterly high and low bid prices for each indicated quarter of fiscal
1997:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ---- -----
<S> <C> <C>
September 30, 1997.......................................... 15 10 15/16
December 31, 1997........................................... 17 1/4 7 7/8
</TABLE>
There were approximately 48 shareholders of record (excluding brokerage
firms and other nominees) of the Company's Common Stock as of March 25, 1998.
The Company has not paid any dividends in the past and does not intend to
pay cash dividends on its Common Stock in the foreseeable future. The Company
currently intends to retain any earnings for the future operation and
development of its business, including exploration, development and acquisition
activities. The Company's revolving line of credit with Compass Bank (the
"Company Credit Facility") and the terms of its 9% Series A Preferred Stock, par
value $.01 per share (the "Preferred Stock"), restrict the Company's ability
24
<PAGE> 27
to pay dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
(b) Use of Proceeds.
The Company's Registration Statement on Form S-1 (Registration No.
333-29187), as amended, with respect to the initial public offering of shares of
Company's Common Stock was declared effective by the Securities and Exchange
Commission on August 5, 1997. In the Offering, the Company sold 2,500,000 shares
of Common Stock on August 11, 1997 and 375,000 shares of Common Stock on
September 8, 1997 pursuant to the exercise of the underwriters' over-allotment
option.
The net proceeds to the Company from the Offering were $28.1 million. As of
December 31, 1997, the Company has used such net proceeds as follows: (i) to
repay $16.5 million of indebtedness outstanding under the Company's revolving
credit facilities, (ii) to repay $3.2 million of promissory notes outstanding to
certain of the Company's directors and officers and (iii) to provide $8.4
million for capital expenditures. Except as set forth in clause (ii), none of
such payments were direct or indirect payments to directors or officers of the
Company or their associates, to persons owning ten percent or more of any class
of equity securities of the Company or to affiliates of the Company.
RECENT SALES OF UNREGISTERED SECURITIES
On January 8, 1998, the Company consummated the transactions contemplated
by the Stock Purchase Agreement dated January 8, 1998 (the "Purchase Agreement")
among the Company, Enron Capital & Trade Resources Corp., a Delaware corporation
("Enron"), and Joint Energy Development Investments II, a Delaware limited
partnership ("JEDI II"). Such transactions included (i) the payment by Enron and
JEDI II of an aggregate purchase price of $30,000,000, (ii) the sale of 75,000
shares of Preferred Stock, the terms of which are set forth in the Statement of
Resolution Establishing Series of Shares designated 9% Series A Preferred Stock,
to Enron and 225,000 shares of Preferred Stock to JEDI II, (iii) the grant of
warrants (the "Warrants") to purchase 250,000 and 750,000 shares of Common Stock
to Enron and JEDI II, respectively, and (iv) the execution and delivery of the
Shareholders' Agreement dated January 8, 1998 among the Company, S.P. Johnson
IV, Frank A. Wojtek, Steven A. Webster, Paul B. Loyd, Jr., Douglas A.P.
Hamilton, DAPHAM Partnership L.P., the Douglas A.P. Hamilton 1997 GRAT, Enron
and JEDI II.
The Warrants are exercisable during the period beginning January 8, 1999
and ending January 8, 2005 for the purchase of an aggregate of 1,000,000 shares
of Common Stock (the "Warrant Shares") at an exercise price of $11.50 per share,
subject to certain adjustments. Each Warrant may be exercised by (i) paying the
exercise price (A) in cash or (B) by surrender to the Company of shares of
Preferred Stock or (ii) exercising the Warrant for a number of net Warrant
Shares equal to (x) the number of Warrant Shares issuable upon exercise of the
Warrant multiplied by the difference between the average market price of the
Common Stock during the 20 trading day period preceding the date of exercise and
the exercise price divided by (y) the average market price of the Common Stock
during the 20 trading day period preceding the date of exercise. In addition,
with the consent of the Company, the holder of the Warrant may receive a cash
payment equal to the number of Warrant Shares for which the Warrant is exercised
multiplied by the difference between the average market price of the Common
Stock during the 20 trading day period preceding the date of exercise and the
exercise price.
The number of Warrant Shares and exercise price are subject to adjustment
in certain circumstances, including (i) if the Company makes a distribution of
shares of Common Stock, subdivides or combines its outstanding shares of Common
Stock or issues any shares of its capital stock or distributes other assets in a
reclassification or reorganization of the Common Stock, (ii) if the Company
issues shares of Common Stock or securities exercisable or exchangeable for or
convertible into shares of Common Stock for no consideration or for less than
the market value of the Common Stock, subject to certain exceptions, and (iii)
if the Company engages in a consolidation, merger or business combination with,
or sells all or substantially all of its assets to, another corporation.
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<PAGE> 28
The sale of the shares of Preferred Stock and the Warrants pursuant to the
Purchase Agreement is exempt from the registration requirements of the
Securities Act of 1933, as amended, by virtue of Section 4(2) thereof as a
transaction not involving any public offering.
ITEM 6. SELECTED FINANCIAL DATA
The financial information of the Company set forth below for the period
from inception of operations (September 24, 1993) through December 31, 1993, and
for each of the four years ended December 31, 1997, has been derived from the
audited combined financial statements of the Company. The following table also
sets forth certain pro forma income taxes, net income and net income per share
information. The information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited financial statements of the Company and the related notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
PERIOD
ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------
1993 1994 1995 1996 1997
-------------- ------ ------- ------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Oil and natural gas revenues........ $ 5 $ 596 $ 2,428 $ 5,195 $ 8,712
Costs and expenses:
Oil and natural gas operating
expenses....................... 20 518 1,814 2,384 2,334
Depreciation, depletion and
amortization................... 1 98 488 1,136 2,358
General and administrative........ 24 238 425 515 1,591
----- ------ ------- ------- ----------
Total costs and
expenses................ 45 854 2,727 4,035 6,283
----- ------ ------- ------- ----------
Operating income (loss)............. (40) (258) (299) 1,160 2,429
Interest expense (net of amounts
capitalized)...................... -- (7) (192) (80) (98)
Other income........................ -- 6 24 20 --
----- ------ ------- ------- ----------
Income (loss) before income taxes... (40) (259) (467) 1,100 2,331
----- ------ ------- ------- ----------
Deferred income taxes(1)............ -- -- -- -- 2,300
----- ------ ------- ------- ----------
Net income (loss)(1)................ $ (40) $ (259) $ (467) $ 1,100 $ 31
===== ====== ======= ======= ==========
Basic (loss) earnings per
share(1).......................... $0.00 $(0.04) $ (0.07) $ 0.15 $ 0.00
===== ====== ======= ======= ==========
Diluted (loss) earnings per
share(1).......................... $0.00 $(0.04) $ (0.07) $ 0.15 $ 0.00
===== ====== ======= ======= ==========
Basic weighted average shares
outstanding....................... 5,210 6,501 7,021 7,476 8,639
Diluted weighted average shares
outstanding....................... 5,210 6,501 7,021 7,545 8,810
STATEMENTS OF CASH FLOW DATA:
Net cash provided by (used in)
operating activities.............. $ 12 $ (258) $ 406 $ 3,325 $ 3,068
Net cash used in investing
activities........................ (118) (819) (6,785) (8,221) (28,141)
Net cash provided by financing
activities........................ 106 1,183 6,343 6,319 26,255
OTHER OPERATING DATA:
EBITDA(2)(4)........................ $ (41) $ (158) $ 189 $ 2,296 $ 4,787
Operating cash flow(3)(4)........... (41) (159) 21 2,236 4,689
Capital expenditures................ 113 819 6,857 9,480 32,234
Debt repayments(5).................. -- -- -- 2,084 20,409
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996 1997
---- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................... $(52) $ 152 $ (265) $(1,025) $(2,276)
Property and equipment, net................... 113 803 6,960 15,206 45,083
Total assets.................................. 130 1,057 7,645 18,869 53,658
Long-term debt, including current
maturities.................................. -- 533 3,480 9,684 7,950
Equity........................................ 65 452 3,381 4,596 32,895
</TABLE>
- ---------------
(1) From inception of operation to May 16, 1997, Carrizo and the other entities
combined in a series of transactions pursuant to which a number of
affiliated entities were combined with the Company in connection with its
initial public offering (the "Combination Transactions") were not required
to pay federal income taxes due to their status as partnerships or S
corporations. The amounts shown reflect pro forma income taxes that
represent federal income taxes which would have been reported under
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes," had Carrizo and such entities been tax-paying entities during each
of the periods presented. See Notes 2 and 4 to the Company's financial
statements.
(2) EBITDA represents earnings before interest expense, income taxes,
depreciation, depletion and amortization.
(3) Operating cash flow represents cash flows from operating activities prior to
changes in assets and liabilities.
(4) Management of the Company believes that EBITDA and operating cash flow may
provide additional information about the Company's ability to meet its
future requirements for debt service, capital expenditures and working
capital. EBITDA and operating cash flow are financial measures commonly used
in the oil and gas industry and should not be considered in isolation or as
a substitute for net income, operating income, cash flows from operating
activities or any other measure of financial performance presented in
accordance with generally accepted accounting principles or as a measure of
a company's profitability or liquidity. Because EBITDA excludes some, but
not all, items that affect net income and because operating cash flow
excludes changes in assets and liabilities and these measures may vary among
companies, the EBITDA and operating cash flow data presented above may not
be comparable to similarly titled measures of other companies.
(5) Debt repayments include amounts refinanced.
Forward Looking Statements. The statements contained in all parts of this
document, (including any portion attached hereto) including, but not limited to,
those relating to the Company's schedule, targets, estimates or results of
future drilling, including the number, timing and results of wells, budgeted
wells, increases in wells, expected working or revenue interests, prospects
budgeted and other future capital expenditures, risk profile of oil and gas
exploration, acquisition of 3-D seismic data (including number, timing and size
of projects), use of proceeds from the Company's initial public offering and the
sale of shares of Preferred Stock and the warrants, expected production or
reserves, increases in reserves, acreage, working capital requirements, hedging
activities, the ability of expected sources of liquidity to implement its
business strategy, budgeted expenditures, future hiring, future exploration
activity and any other statements regarding future operations, financial
results, business plans and cash needs and other statements that are not
historical facts are forward looking statements. When used in this document, the
words "anticipate," "budgeted" "potential," "estimate," "expect," "may,"
"project," "believe" and similar expressions are intended to be among the
statements that identify forward looking statements. Such statements involve
risks and uncertainties, including, but not limited to, those relating to the
Company's dependence on its exploratory drilling activities, the volatility of
oil and natural gas prices, the need to replace reserves depleted by production,
operating risks of oil and natural gas operations, the Company's dependence on
its key personnel, factors that affect the Company's ability to manage its
growth and achieve its business strategy, risks relating to its limited
operating history, technological changes, significant capital requirements of
the Company, the potential impact of government regulations, litigation,
competition, the uncertainty of reserve information and future
27
<PAGE> 30
net revenue estimates, property acquisition risks and other factors detailed
herein and in the Company's other filings with the Securities and Exchange
Commission. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL OVERVIEW
The Company began operations in September 1993 and initially focused on the
acquisition of producing properties. As a result of the increasing availability
of economic onshore 3-D seismic surveys, the Company began to obtain 3-D seismic
data and options to lease substantial acreage in 1995 and began to drill its 3-D
based prospects in 1996. The Company drilled 20 wells in 1996 and 70 wells in
1997. The Company expects such increases to continue and has budgeted to drill a
total of 150 gross wells (71.8 net) in 1998. As a result, depreciation,
depletion and amortization, oil and gas operating expenses and production are
expected to increase. The Company has typically retained the majority of its
interests in shallow, normally pressured prospects and sold a portion of its
interests in deeper, over-pressured prospects.
The financial statements set forth herein are prepared on the basis of a
combination of Carrizo and the entities that were a party to the Combination
Transactions. Carrizo and the entities combined with it in the Combination
Transactions were not required to pay federal income taxes due to their status
as partnerships or Subchapter S corporations, which are not subject to federal
income taxation. Instead, taxes for such periods were paid by the shareholders
and partners of such entities. On May 16, 1997, Carrizo terminated its status as
an S corporation and thereafter became subject to federal income taxes. In
accordance with SFAS No. 109, "Accounting for Income Taxes," the Company was
required to establish a deferred tax liability in the second quarter of 1997
which resulted in a noncash charge to income of approximately $1.6 million.
The Company has primarily grown through the internal development of
properties within its exploration project areas, although the Company acquired
properties with existing production in the Camp Hill Project in late 1993, the
Encinitas Project in early 1995 and the La Rosa Project in 1996. The Company
made these acquisitions through the use of limited partnerships with Carrizo or
Carrizo Production, Inc. as the general partner. However, as operations have
expanded, the Company has increasingly funded its activities through bank
borrowings and cash flow from operations in order to retain a greater portion of
the interests it develops.
Prior to the Offering, Carrizo conducted its oil and natural gas operations
directly, with industry partners and through the following affiliated entities:
Carrizo Production, Inc., Encinitas Partners Ltd., La Rosa Partners Ltd.,
Carrizo Partners Ltd. and Placedo Partners Ltd. Concurrently with the closing of
the Offering, Combination Transactions were closed. The Combination Transactions
consisted of the following: (i) Carrizo Production, Inc. merged into Carrizo;
(ii) Carrizo acquired Encinitas Partners Ltd. in two steps: (a) Carrizo acquired
the limited partner interests in Encinitas Partners Ltd. held by certain of the
Company's directors and (b) Encinitas Partners Ltd. merged into Carrizo; (iii)
La Rosa Partners Ltd. merged into Carrizo; and (iv) Carrizo Partners Ltd. merged
into Carrizo. As a result of the merger of Carrizo and Carrizo Partners Ltd.,
Carrizo became the owner of all of the partnership interest in Placedo Partners
Ltd.
The Company uses the full-cost method of accounting for its oil and gas
properties. Under this method, all acquisition, exploration and development
costs, including any general and administrative costs that are directly
attributable to the Company's acquisition, exploration and development
activities, are capitalized in a "full-cost pool" as incurred. The Company
records depletion of its full-cost pool using the unit-of-production method. To
the extent that such capitalized costs in the full-cost pool (net of
depreciation, depletion and amortization and related deferred taxes) exceed the
present value (using a 10% discount rate) of estimated future net after-tax cash
flows from proved oil and gas reserves, such excess costs are charged to
operations. The Company has not been required to make any such write-downs. Once
incurred, a write-down of oil and gas properties is not reversible at a later
date. The ceiling test for many full cost companies, including Carrizo, could be
negatively impacted by prolonged unfavorable oil and gas prices. The
deterioration of prices from year-end levels could result in the Company
recording a first quarter 1998 non-cash charge to earnings related to its oil
and gas properties.
28
<PAGE> 31
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Oil and natural gas revenues for 1997 increased 68% to $8.7 million from
$5.2 million in 1996. Production volumes for natural gas in 1997 increased 116%
to 2,749.2 MMcf from 1,272.5 MMcf in 1996. Average natural gas prices increased
6% to $2.41 per Mcf in 1997 from $2.27 per Mcf in 1996. Production volumes for
oil in 1997 increased 5% to 112.5 MBbls from 107.3 MBbls in 1996. Average oil
prices decreased 13% to $18.66 per barrel in 1997 from $21.54 per barrel in
1996. The increase in oil and natural gas production was due primarily to new
wells being successfully drilled and completed during 1997, along with
recompletions of existing wells.
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1997 PERIOD COMPARED TO
1996 PERIOD
DECEMBER 31, -----------------------
----------------------- INCREASE % INCREASE
1996 1997 (DECREASE) (DECREASE)
---- ---- ---------- ----------
<S> <C> <C> <C> <C>
Production volumes
Oil and condensate (MBbls)......... 107.3 112.5 5.2 5%
Natural gas (MMcf)................. 1,272.5 2,749.2 1,476.7 116%
Average sales prices(1)
Oil and condensate (per Bbl)....... $ 21.54 $ 18.66 $ (2.88) (13)%
Natural gas (per Mcf).............. 2.27 2.41 0.14 6%
Operating revenues
Oil and condensate................. $2,310,798 $2,099,699 $ (211,099) (9)%
Natural gas........................ 2,883,911 6,611,955 3,728,044 129%
---------- ---------- ----------
Total...................... $5,194,709 $8,711,654 $3,516,945 68%
========== ========== ==========
</TABLE>
- ---------------
(1) Including impact of hedging.
Oil and natural gas operating expenses for 1997 decreased 2% to $2.3
million from $2.4 million in 1996. Oil and natural gas operating expenses
decreased primarily as a result of cost reductions in older wells and the
addition of lower cost production in new oil and gas wells drilled and completed
since December 31, 1995. Operating expenses per equivalent unit in 1997
decreased to $.68 per Mcfe from $1.24 per Mcfe in 1996. The per unit cost
decreased as a result of increased production of natural gas, which had lower
per unit operating costs.
DD&A expense for 1997 increased 118% to $2.4 million from $1.1 million in
1996. This increase was primarily due to the increased production, additional
seismic and drilling costs and depreciation on 3-D computer equipment and
related software.
General and administrative expense for 1997 increased 209% to $1.6 million
from $515,000 for 1996 reflecting ramp-up expenses relating to the hiring of
additional technical and administrative staff to handle the Company's increased
level of drilling and operations, and expenses related to the initial public
offering.
Interest expense for 1997 increased 90% to $151,000 from $80,000 in 1996.
This increase was primarily due to the increase in capital expenditures and
related debt levels in anticipation of the initial public offering.
As a result of the adoption of SFAS 109 in the second quarter of 1997, the
Company recorded a one-time non-cash charge to income of $1.6 million to
establish a deferred tax liability.
Net income for 1997 decreased to $31,000 from $1.1 million in 1996 as a
result of the factors described above.
29
<PAGE> 32
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Oil and natural gas revenues for 1996 increased 114% to $5.2 million from
$2.4 million in 1995. Production volumes for natural gas in 1996 increased 125%
to 1,272.5 MMcf from 565.3 MMcf in 1995. Average natural gas prices increased
42% to $2.27 per Mcf in 1996 from $1.60 per Mcf in 1995. Production volumes for
oil in 1996 increased 38% to 107.3 MBbls from 77.6 MBbls in 1995. Average oil
prices increased 10% to $21.54 per barrel in 1996 from $19.64 per barrel in
1995. The increase in oil and natural gas production was due primarily to new
wells being successfully drilled and completed during 1996, along with
recompletions of existing wells. Also contributing to the increase in oil and
gas revenues from 1995 to 1996 was the acquisition of the La Rosa properties.
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
years ended December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1996 PERIOD COMPARED
DECEMBER 31, TO 1995 PERIOD
----------------------- -----------------------
1995 1996 INCREASE % INCREASE
---- ---- ---------- ----------
<S> <C> <C> <C> <C>
Production volumes
Oil and condensate (MBbls)......... 77.6 107.3 29.7 38%
Natural gas (MMcf)................. 565.3 1,272.5 707.2 125%
Average sales prices(1)
Oil and condensate (per Bbl)....... $ 19.64 $ 21.54 $ 1.90 10%
Natural gas (per Mcf).............. 1.60 2.27 0.67 42%
Operating revenues
Oil and condensate................. $1,524,002 $2,310,798 $ 786,796 52%
Natural gas........................ 904,046 2,883,911 1,979,865 219%
---------- ---------- ----------
Total...................... $2,428,048 $5,194,709 $2,766,661 114%
========== ========== ==========
</TABLE>
- ---------------
(1) Including impact of hedging.
Oil and natural gas operating expenses for 1996 increased 31% to $2.4
million from $1.8 million in 1995. Oil and natural gas operating expenses
increased due to increased production generated from new oil and gas wells
drilled and completed since December 31, 1995, as well as the acquisitions of
the La Rosa and Encinitas properties. Operating expenses per equivalent unit in
1996 decreased to $1.24 per Mcfe from $1.76 per Mcfe in 1995. The per unit cost
decreased as a result of increased production of natural gas which had lower per
unit operating costs.
DD&A expense for 1996 increased 133% to $1.1 million from $488,000 in 1995.
This increase was due to the increase in oil and gas production as well as a 25%
increase in the depletion rate (to $0.59 per Mcfe in 1996 from $0.47 per Mcfe in
1995). The increased depletion rate was primarily caused by increased
exploration expenditures attributable to 3-D seismic surveys performed for new
wells drilled and completed since December 31, 1995.
General and administrative expense for 1996 increased 21% to $515,000 from
$425,000 for 1995 due primarily to an increase in salary expense as a result of
the addition of new employees.
Interest expense for 1996 decreased 59% to $80,000 from $192,000 in 1995.
This decrease was primarily due to the increase in interest capitalized
consistent with increases in capital expenditures.
Net income for 1996 increased to $1.1 million from a loss of $467,000 in
1995 as a result of the factors described above.
30
<PAGE> 33
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have included proceeds from the
Offering and from the sale of shares of Preferred Stock and the Warrants as
discussed below, funds generated by operations, equity capital contributions and
borrowings, primarily under revolving credit facilities.
Cash flows provided by operations (after changes in working capital) were
$406,000, $3.3 million and $3.1 million for 1995, 1996 and 1997, respectively.
The increase in cash flows provided by operations in 1996 as compared to 1995
was due primarily to increased revenues from production. The decrease in cash
flows provided by operations in 1997 as compared to 1996 was due primarily to
increase accounts receivable relating to joint interest billings and prepayments
on upcoming outside operated drilling projects.
The Company has budgeted capital expenditures in 1998 of approximately
$43.3 million. Of this amount, $18.6 million is expected to be used to fund 3-D
seismic surveys and land acquisitions and $24.7 million of which is expected to
be used for drilling activities in the Company's project areas. The Company
budgeted to drill approximately 150 gross wells (71.8 net) in 1998. Actual
amounts of capital expenditures and number of wells drilled may differ
significantly from such estimates.
The Company has continued to reinvest a substantial portion of its cash
flows into increasing its 3-D prospect portfolio, improving its 3-D seismic
interpretation technology and funding its drilling program. Oil and gas capital
expenditures were $6.6 million, $9.1 million and $32.0 million for 1995, 1996
and 1997, respectively. The Company's drilling efforts resulted in the
successful completion of 18 gross wells (6.9 net) in 1996 and 46 gross wells
(17.5 net) during 1997.
The Company has experienced and expects to continue to experience
substantial working capital requirements primarily due to the Company's active
exploration and development programs and, to a much lesser extent, its
technology enhancement programs. While the Company believes that the net
proceeds from the Offering, net proceeds from the sale of shares of Preferred
Stock and the Warrants, cash flow from operations and borrowings under the
Company's credit facility should allow the Company to implement its present
business strategy during 1998, additional financing may be required in the
future to fund the Company's growth, development and exploration program and
continued technological enhancement. In the event such capital resources are not
available to the Company, its exploration and other activities may be curtailed.
FINANCING ARRANGEMENTS
In connection with the Offering, the Company entered into an amended
revolving credit agreement with Compass Bank (the "Company Credit Facility"),
which provides for a maximum loan amount of $25 million, subject to borrowing
base limitations. Prior to the Offering, the Company utilized various credit
facilities as well as borrowings from certain directors and officers of the
Company. Except for the Company Credit Facility, all of these facilities and
borrowings were terminated with the close of the Offering. Under the Company
Credit Facility, the principal outstanding is due and payable upon maturity in
June 1999 with interest due monthly. The interest rate for borrowings is
calculated at a floating rate based on the Compass index rate or LIBOR plus 2
percent. The Company's obligations are secured by certain of its oil and gas
properties and cash or cash equivalents included in the borrowing base.
Under the Company Credit Facility, Compass, in its sole discretion, will
make semiannual borrowing base determinations based upon the proved oil and
natural gas properties of the Company. Compass may redetermine the borrowing
base and the monthly borrowing base reduction at any time and from time to time.
The Company may also request borrowing base redeterminations in addition to its
required semiannual reviews at the Company's cost. As of December 31, 1997, the
borrowing base was $5,450,000 and borrowings outstanding were $4,950,000.
Amounts outstanding under this facility were repaid in the first quarter of
1998.
The Company is subject to certain covenants under the terms of the Company
Credit Facility, including, but not limited to, (a) maintenance of specified
tangible net worth and (b) maintenance of a ratio of quarterly cash flow (net
income plus depreciation and other noncash charges, less noncash income) to
quarterly debt service (payments made for principal in connection with the
credit facility plus payments made for principal
31
<PAGE> 34
other than in connection with such credit facility) of no less than 1.25 to
1.00. The Company Credit Facility also places restrictions on, among other
things, (a) incurring additional indebtedness, loans and liens, (b) changing the
nature of business or business structure, (c) selling assets and (d) paying
dividends.
In December 1997, the Company and Compass entered into an amendment to the
Company Credit Facility that provides for a term loan of $3 million. Interest
for borrowings under the term loan was calculated at a floating rate based on
the Company's index rate plus 2 percent. The amount outstanding under the term
loan as of December 31, 1997 was $3 million. Amounts outstanding under the term
loan were repaid in January 1998.
In January 1998, the Company consummated the sale of 300,000 shares of
Preferred Stock and Warrants to purchase 1,000,000 shares of Common Stock to
affiliates of Enron Corp. The net proceeds received by the Company from this
transaction were approximately $28.8 million. A portion of the proceeds were
used to repay indebtedness, as described above. The remaining balance is
expected to be used primarily for oil and natural gas exploration and
development activities in Texas and Louisiana. The Preferred Stock provides for
annual cumulative dividends of $9.00 per share, payable quarterly in cash or, at
the option of the Company until January 15, 2002, in additional shares of
Preferred Stock.
The Preferred Stock is required to be redeemed by the Company (i) on
January 8, 2005, or (ii) after a request for redemption from the holders of at
least 30,000 shares of the Preferred Stock (or, if fewer than such number of
shares of Preferred Stock are outstanding, all of the outstanding shares of
Preferred Stock) and the occurrence of the following events: (a) the Company has
failed at any point in time to declare and pay any two dividends in the amount
then due and payable on or before the date the second of such dividends is due
and such dividends remain unpaid at such time, (b) the Company breaches certain
other covenants concerning the payment of dividends or other distributions on or
redemption or acquisition of shares of its capital stock ranking at parity with
or junior to the Preferred Stock, (c) for two consecutive fiscal quarterly
periods the quarterly Cash Flow (as defined below) of the Company is less than
the amount of the dividends accrued in respect to the Preferred Stock, (d) the
Company fails to pay certain amounts due on indebtedness for borrowed money or
there has otherwise been an acceleration of such indebtedness for borrowed
money, (e) there is a violation of the Shareholders' Agreement that is not
waived or (f) the Company sells, leases, exchanges or otherwise disposes of all
or substantially all of its property and assets which transaction does not
provide for the redemption of the Series A Preferred Stock. "Cash Flow" means
net income prior to preferred dividends and accretion (i) plus (to the extent
included in net income prior to preferred dividends and accretion) depreciation,
depletion and amortization and other non-cash charges and losses on the sale of
property (ii) minus non-cash income items and required principal payments on
indebtedness for borrowed money with a maturity from the original date of
incurrence of such indebtedness of six months or greater (excluding voluntary
prepayments and refinancings, but including prepayments (other than in
connection with refinancings) which would otherwise be due under such
indebtedness within a 60-day period following the date of such prepayment). The
Preferred Stock also may be redeemed at the option of the Company at any time in
whole or in part. All redemptions are at a price per share, together with
dividends accumulated and unpaid to the date of redemption, decreasing over time
from an initial rate of $104.50 per share to $100.00 per share.
A description of the Preferred Stock and the transactions relating to the
Purchase Agreement may be found in the Company's Current Report on Form 8-K
dated January 8, 1998.
EFFECTS OF INFLATION AND CHANGES IN PRICE.
The Company's results of operations and cash flows are affected by changing
oil and gas prices. If the price of oil and gas increases (decreases), there
could be a corresponding increase (decrease) in the operating cost that the
Company is required to bear for operations, as well as an increase (decrease) in
revenues. Inflation has had a minimal effect on the Company.
32
<PAGE> 35
ABILITY TO MANAGE GROWTH AND ACHIEVE BUSINESS STRATEGY
The Company's rapid growth has placed, and is expected to continue to
place, a significant strain on the Company's financial, technical, operational
and administrative resources. The Company has relied in the past and expects to
continue to rely on project partners and independent contractors that have
provided the Company with seismic survey planning and management, project and
prospect generation, land acquisition, drilling and other services. At December
31, 1997, the Company had 22 full-time employees. As the Company increases the
number of projects it is evaluating or in which it is participating, there will
be additional demands on the Company's financial, technical, operational and
administrative resources and continued reliance by the Company on project
partners and independent contractors, and these strains on resources, additional
demands and continued reliance may negatively affect the Company. The Company's
ability to continue its growth will depend upon a number of factors, including
its ability to obtain leases or options on properties for 3-D seismic surveys,
its ability to acquire additional 3-D seismic data, its ability to identify and
acquire new exploratory sites, its ability to develop existing sites, its
ability to continue to retain and attract skilled personnel, its ability to
maintain or enter into new relationships with project partners and independent
contractors, the results of its drilling program, hydrocarbon prices, access to
capital and other factors. Although the Company intends to continue to upgrade
its technical, operational and administrative resources and to increase its
ability to provide internally certain of the services previously provided by
outside sources, there can be no assurance that it will be successful in doing
so or that it will be able to continue to maintain or enter into new
relationships with project partners and independent contractors. The failure of
the Company to continue to upgrade its technical, operational and administrative
resources or the occurrence of unexpected expansion difficulties, including
difficulties in recruiting and retaining sufficient numbers of qualified
personnel to enable the Company to expand its seismic data acquisition and
drilling program, or the reduced availability of project partners and
independent contractors that have historically provided the Company seismic
survey planning and management, project and prospect generation, land
acquisition, drilling and other services, could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the Company has only limited experience operating and managing field
operations, and there can be no assurances that the Company will be successful
in doing so. Any increase in the Company's activities as an operator will
increase its exposure to operating hazards. See "Business and
Properties -- Operating Hazards and Insurance." There can be no assurance that
the Company will be successful in achieving growth or any other aspect of its
business strategy.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, which is a new standard of accounting for stock-based compensation that
establishes a fair value method of accounting for awards granted after December
31, 1995, under stock compensation plans. SFAS No. 123 encourages, but does not
require, companies to adopt the fair value method of accounting in place of the
existing method of accounting for stock-based compensation, whereupon
compensation costs are recognized only in situations where stock compensation
plans award intrinsic value to recipients at the date of grant. The Company has
elected not to adopt the fair value accounting of SFAS No. 123 and will account
for any plans under Accounting Principles Board (APB) Opinion No. 25, under
which no compensation costs have been recognized.
VOLATILITY OF OIL AND NATURAL GAS PRICES
The Company's revenues, future rate of growth, results of operations,
financial condition and ability to borrow funds or obtain additional capital, as
well as the carrying value of its properties, are substantially dependent upon
prevailing prices of oil and natural gas. Historically, the markets for oil and
natural gas have been volatile, and such markets are likely to continue to be
volatile in the future. Prices for oil and natural gas are subject to wide
fluctuation in response to relatively minor changes in the supply of and demand
for oil and natural gas, market uncertainty and a variety of additional factors
that are beyond the control of the Company. These factors include the level of
consumer product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions in the Middle East,
33
<PAGE> 36
the foreign supply of oil and natural gas, the price of foreign imports and
overall economic conditions. It is impossible to predict future oil and natural
gas price movements with certainty. Declines in oil and natural gas prices may
materially adversely affect the Company's financial condition, liquidity,
ability to finance planned capital expenditures and results of operations. Lower
oil and natural gas prices also may reduce the amount of oil and natural gas
that the Company can produce economically. See "Business and
Properties -- Marketing."
The Company periodically reviews the carrying value of its oil and natural
gas properties under the full cost accounting rules of the Commission. Under
these rules, capitalized costs of proved oil and natural gas properties may not
exceed the present value of estimated future net revenues from proved reserves,
discounted at 10%. Application of this "ceiling" test generally requires pricing
future revenue at the unescalated prices in effect as of the end of each fiscal
quarter and requires a write-down for accounting purposes if the ceiling is
exceeded, even if prices were depressed for only a short period of time. The
Company may be required to write down the carrying value of its oil and natural
gas properties when oil and natural gas prices are depressed or unusually
volatile. If a write-down is required, it would result in a charge to earnings,
but would not impact cash flow from operating activities. Once incurred, a
write-down of oil and natural gas properties is not reversible at a later date.
In order to reduce its exposure to short-term fluctuations in the price of
oil and natural gas, the Company periodically enters into hedging arrangements.
The Company's hedging arrangements apply to only a portion of its production and
provide only partial price protection against declines in oil and natural gas
prices. Such hedging arrangements may expose the Company to risk of financial
loss in certain circumstances, including instances where production is less than
expected, the Company's customers fail to purchase contracted quantities of oil
or natural gas or a sudden, unexpected event materially impacts oil or natural
gas prices. In addition, the Company's hedging arrangements limit the benefit to
the Company of increases in the price of oil and natural gas. Total natural gas
purchased and sold under swap arrangements during the years ended December 31,
1995, 1996 and 1997 was 40,000 MMBtu, 60,000 MMBtu and 210,000 MMBtu,
respectively. Income and (losses) realized by the Company under such swap
arrangements were ($23,466), ($26,887) and $48,000 for the years ended December
31, 1995, 1996 and 1997, respectively. The Company did not engage in hedging
prior to 1995. See "Business and Properties -- Marketing."
YEAR 2000
The Company is assessing the impact of the Year 2000 issue on its
operations, including the development and implementation of project plans and
cost estimates required to make its information systems infrastructure Year 2000
complaint. Based on existing information, the Company believes that anticipated
spending necessary to become Year 2000 compliant will not have a material effect
on the financial position, cash flows or results of operations of the Company,
nor will the Year 2000 issues cause any material adverse effect on the future
business operations of the Company. There can be no assurance, however, as to
the ultimate effect of the Year 2000 issue on the Company.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The requirements of Item 7A under regulations of the Securities and
Exchange Commission are at this time not required or are not applicable and
therefore have been omitted.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included elsewhere in this report.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
34
<PAGE> 37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
information under the caption "Proposal 1 -- Election of Directors" and to the
information under the caption "Section 16(a) Reporting Delinquencies" in the
Company's definitive Proxy Statement (the "1998 Proxy Statement") for its annual
meeting of shareholders to be held on May 20, 1998. The 1998 Proxy Statement
will be filed with the Securities and Exchange Commission (the "Commission") not
later than 120 days subsequent to December 31, 1997.
Pursuant to Item 401(b) of Regulation S-K, the information required by this
item with respect to executive officers of the Company is set forth in Part I of
this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the 1998 Proxy Statement, which will be filed with the Commission not later
than 120 days subsequent to December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the 1998 Proxy Statement, which will be filed with the Commission not later
than 120 days subsequent to December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information required by this item is incorporated herein by reference
to the 1998 Proxy Statement, which will be filed with the Commission not later
than 120 days subsequent to December 31, 1997.
35
<PAGE> 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
THE RESPONSE TO THIS ITEM IS SUBMITTED IN A SEPARATE SECTION OF THIS
REPORT.
(A)(2) FINANCIAL STATEMENT SCHEDULES
All schedules and other statements for which provision is made in the
applicable regulations of the Commission have been omitted because they are not
required under the relevant instructions or are inapplicable.
(A)(3) EXHIBITS
<TABLE>
<C> <S>
+2.1 -- Combination Agreement by and among the Company, Carrizo
Production, Inc., Encinitas Partners Ltd., La Rosa
Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr.,
Steven A. Webster, S.P. Johnson IV, Douglas A.P. Hamilton
and Frank A. Wojtek dated as of June 6, 1997
(Incorporated herein by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-1
(Registration No. 333-29187)).
3.1 -- Amended and Restated Articles of Incorporation of the
Company.
3.2 -- Statement of Resolution Establishing Series of Shares
designated 9% Series A Preferred Stock.
+3.3 -- Amended and Restated Bylaws of the Company, as amended by
Amendment No. 1 (Incorporated herein by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form 8-A (Registration No. 000-22915).
+4.1 -- First Amended, Restated, and Combined Loan Agreement
between the Company and Compass Bank dated August 28,
1997 (Incorporated herein by reference to Exhibit 4.1 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
4.2 -- First Amendment to First Amended, Restated, and Combined
Loan Agreement between the Company and Compass Bank dated
December 23, 1997.
4.3 -- Second Amendment to First Amended, Restated, and Combined
Loan Agreement between the Company and Compass Bank dated
December 30, 1997.
-- The Company is a party to several debt instruments under
which the total amount of securities authorized does not
exceed 10% of the total assets of the Company and its
subsidiaries on a consolidated basis. Pursuant to
paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, the
Company agrees to furnish a copy of such instruments to
the Commission upon request.
+10.1 -- Incentive Plan of the Company (Incorporated herein by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-29187)).
+10.2 -- Employment Agreement between the Company and S.P. Johnson
IV (Incorporated herein by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-1
(Registration No. 333-29187)).
+10.3 -- Employment Agreement between the Company and Frank A.
Wojtek (Incorporated herein by reference to Exhibit 10.3
to the Company's Registration Statement on Form S-1
(Registration No. 333-29187)).
+10.4 -- Employment Agreement between the Company and Kendall A.
Trahan (Incorporated herein by reference to Exhibit 10.4
to the Company's Registration Statement on Form S-1
(Registration No. 333-29187)).
</TABLE>
36
<PAGE> 39
<TABLE>
<C> <S>
+10.5 -- Employment Agreement between the Company and George Canjar (Incorporated herein by reference
to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (Registration No.
333-29187)).
10.6 -- Indemnification Agreement between the Company and each of its directors and executive
officers.
+10.7 -- Registration Rights Agreement by and among the Company, Paul B. Loyd, Jr., Steven A. Webster,
S.P. Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of June 6, 1997
(Incorporated herein by reference to Exhibit 10.7 to the Company's Registration Statement on
Form S-1 (Registration No. 333-29187)).
+10.8 -- S Corporation Tax Allocation, Payment and Indemnification Agreement among the Company and
Messrs. Loyd, Webster, Johnson, Hamilton and Wojtek (Incorporated herein by reference to
Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration No.
333-29187)).
+10.9 -- S Corporation Tax Allocation, Payment and Indemnification Agreement among Carrizo Production,
Inc. and Messrs. Loyd, Webster, Johnson, Hamilton and Wojtek (Incorporated herein by
reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (Registration
No. 333-29187)).
+10.10 -- Stock Purchase Agreement dated January 8, 1998 among the Company, Enron Capital & Trade
Resources Corp. and Joint Energy Development Investments II Limited Partnership.
(Incorporated herein by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K
dated January 8, 1998).
+10.11 -- Warrant Certificates (Incorporated herein by reference to Exhibit 4.2 to the Company's
Current Report on Form 8-K dated January 8, 1998.)
+10.12 -- Shareholders' Agreement dated January 8, 1998 among the Company, S.P. Johnson IV, Frank A.
Wojtek, Steven A. Webster, Paul B. Loyd, Jr., Douglas A.P. Hamilton, DAPHAM Partnership,
L.P., The Douglas A.P. Hamilton 1997 GRAT, Enron Capital & Trade Resources Corp. and Joint
Energy Development Investments II Limited Partnership. (Incorporated herein by reference to
Exhibit 99.2 to the Company's Current Report on Form 8-K dated January 8, 1998).
+10.13 -- Form of Amendment to Executive Officer Employment Agreement. (Incorporated herein by
reference to Exhibit 99.3 to the Company's Current Report on Form 8-K dated January 8, 1998).
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Ryder Scott Company Petroleum Engineers.
23.3 -- Consent of Fairchild, Ancell & Wells, Inc.
27.1 -- Financial Data Schedule.
99.1 -- Summary of Reserve Report of Ryder Scott Company Petroleum Engineers as of December 31, 1997.
99.2 -- Summary of Reserve Report of Fairchild, Ancell & Wells, Inc. as of December 31, 1997.
</TABLE>
- ---------------
+ Incorporated by reference as indicated.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this Annual Report on Form 10-K.
37
<PAGE> 40
CARRIZO OIL & GAS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Carrizo Oil & Gas, Inc. --
Report of Independent Public Accountants.................. F-2
Balance Sheets, December 31, 1996 and 1997................ F-3
Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997.................................... F-4
Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997....................... F-5
Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997.................................... F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
Carrizo Oil & Gas, Inc.:
We have audited the accompanying balance sheets of Carrizo Oil & Gas, Inc.
(a Texas corporation) as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. 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 the Company as of December
31, 1996 and 1997, and the results of its operations and cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 6, 1998
F-2
<PAGE> 42
CARRIZO OIL & GAS, INC
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,492,603 $ 2,674,837
Accounts receivable, trade................................ 1,654,032 1,794,175
Accounts receivable, joint interest owners................ 82,296 1,841,329
Accounts receivable from related parties.................. 79,578 --
Advances to operators..................................... -- 1,817,990
Other current assets...................................... 15,472 108,633
----------- -----------
Total current assets.............................. 3,323,981 8,236,964
PROPERTY AND EQUIPMENT, net (full-cost method of accounting
for oil and gas properties)............................... 15,205,587 45,082,833
OTHER ASSETS................................................ 339,789 338,638
----------- -----------
$18,869,357 $53,658,435
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade................................... $ 4,326,299 $10,433,479
Other current liabilities................................. 22,976 79,328
----------- -----------
Total current liabilities......................... 4,349,275 10,512,807
NOTES PAYABLE TO RELATED PARTIES............................ 2,773,935 --
LONG-TERM DEBT.............................................. 6,910,000 7,950,000
DEFERRED INCOME TAXES....................................... -- 2,300,267
OTHER LONG-TERM LIABILITIES................................. 240,197 --
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value (10,000,000 shares
authorized with none issued and outstanding)........... -- --
Common stock, $0.01 par value (40,000,000 shares
authorized with 7,500,000 and 10,375,000 issued and
outstanding at December 31, 1996 and 1997,
respectively).......................................... 75,000 103,750
Additional paid-in capital................................ 4,186,000 32,845,727
Retained earnings......................................... 334,950 365,690
Deferred compensation..................................... -- (419,806)
----------- -----------
4,595,950 32,895,361
----------- -----------
$18,869,357 $53,658,435
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 43
CARRIZO OIL & GAS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
OIL AND NATURAL GAS REVENUES............................ $2,428,048 $5,194,709 $8,711,654
COSTS AND EXPENSES:
Oil and natural gas operating expenses (exclusive of
depreciation shown separately below)............... 1,813,406 2,384,145 2,334,009
Depreciation, depletion and Amortization.............. 487,949 1,135,797 2,358,256
General and administrative............................ 425,198 514,644 1,590,358
---------- ---------- ----------
Total costs and Expenses...................... 2,726,553 4,034,586 6,282,623
---------- ---------- ----------
OPERATING INCOME (LOSS)................................. (298,505) 1,160,123 2,429,031
OTHER INCOME AND EXPENSES:
Interest income....................................... -- -- 53,417
Interest expense...................................... (274,585) (312,409) (713,999)
Interest expense, related parties..................... (35,059) (189,881) (137,067)
Capitalized interest.................................. 117,288 422,493 699,625
Other income.......................................... 24,251 19,525 --
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES....................... (466,610) 1,099,851 2,331,007
INCOME TAXES............................................ -- -- 2,300,267
---------- ---------- ----------
NET INCOME (LOSS)....................................... $ (466,610) $1,099,851 $ 30,740
========== ========== ==========
BASIC EARNINGS (LOSS) PER SHARE (Note 2)................ $ (0.07) $ 0.15 $ 0.00
========== ========== ==========
DILUTED EARNINGS (LOSS) PER SHARE (Note 2).............. $ (0.07) $ 0.15 $ 0.00
========== ========== ==========
BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (Note 2).................................. 7,020,951 7,475,650 8,638,699
========== ========== ==========
DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (Note 2).................................. 7,020,951 7,545,063 8,809,572
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 44
CARRIZO OIL & GAS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(NOTES 1 AND 2)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
--------------------- PAID-IN EARNINGS DEFERRED STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION EQUITY
---------- -------- ----------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995......... 6,590,601 $ 65,906 $ 684,094 $ (298,291) $ -- $ 451,709
Net loss....................... -- -- -- (466,610) -- (466,610)
Distributions.................. -- -- (104,000) -- -- (104,000)
Common stock issued to
unitholders.................. 860,699 8,607 3,491,393 -- -- 3,500,000
---------- -------- ----------- ---------- --------- -----------
BALANCE, December 31, 1995....... 7,451,300 74,513 4,071,487 (764,901) -- 3,381,099
Net income..................... -- -- -- 1,099,851 -- 1,099,851
Distributions.................. -- -- (335,000) -- -- (335,000)
Common stock issued to
unitholders.................. 48,700 487 449,513 -- -- 450,000
---------- -------- ----------- ---------- --------- -----------
BALANCE, December 31, 1996....... 7,500,000 75,000 4,186,000 334,950 -- 4,595,950
Net income..................... -- -- -- 30,740 -- 30,740
Distributions.................. -- -- (90,000) -- -- (90,000)
Public offering................ 2,875,000 28,750 28,050,049 -- -- 28,078,799
Deferred compensation related
to certain stock options..... -- -- 699,678 -- (699,678) --
Amortization of deferred
compensation................. -- -- -- -- 279,872 279,872
---------- -------- ----------- ---------- --------- -----------
BALANCE, December 31, 1997....... 10,375,000 $103,750 $32,845,727 $ 365,690 $(419,806) $32,895,361
========== ======== =========== ========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 45
CARRIZO OIL & GAS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ (466,610) $ 1,099,851 $ 30,740
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating
activities --
Depreciation, depletion and amortization....... 487,949 1,135,797 2,358,256
Deferred income taxes.......................... -- -- 2,300,267
Changes in assets and liabilities --
Accounts receivable............................ (245,365) (1,457,950) (1,819,598)
Other current assets........................... (9,433) 322 (93,161)
Accounts payable, trade........................ 518,166 2,422,257 475,268
Interest payable to related parties and other
current liabilities.......................... 120,946 125,164 (183,845)
----------- ----------- -----------
Net cash provided by operating
activities.............................. 405,653 3,325,441 3,067,927
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- accrual basis............. (6,857,057) (9,479,561) (32,234,351)
Adjustment to cash basis.......................... 71,664 1,258,132 5,911,784
Advances to operators............................. -- -- (1,817,990)
----------- ----------- -----------
Net cash used in investing activities..... (6,785,393) (8,221,429) (28,140,557)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of stock................... -- -- 28,078,799
Proceeds from debt issuance....................... 2,083,684 6,910,000 18,544,454
Debt repayments................................... -- (2,083,684) (20,408,934)
Proceeds from related party notes payable......... 863,696 1,377,739 130,545
Capital contributions............................. 3,500,000 450,000 --
Capital distributions............................. (104,000) (335,000) (90,000)
----------- ----------- -----------
Net cash provided by financing
activities.............................. 6,343,380 6,319,055 26,254,864
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... (36,360) 1,423,067 1,182,234
CASH AND CASH EQUIVALENTS, beginning of
year.............................................. 105,896 69,536 1,492,603
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year.............. $ 69,536 $ 1,492,603 $ 2,674,837
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest (net of amounts
capitalized)................................... $ 122,471 $ -- $ 151,441
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 46
CARRIZO OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS, COMBINATION AND OFFERING:
NATURE OF OPERATIONS
Carrizo Oil & Gas, Inc. (Carrizo, a Texas corporation; together with its
affiliates and predecessors, the Company) is an independent energy company
engaged in the exploration, development, exploitation and production of oil and
natural gas. It's operations are focused on Texas and Louisiana Gulf Coast
trends, primarily the Frio, Wilcox and Vicksburg trends. The Company has
acquired or is in the process of acquiring 1,170 square miles of 3-D seismic
data. Additionally, the Company has assembled approximately 419,953 gross acres
under lease or option.
THE COMBINATION
Carrizo was formed in 1993 and is the surviving entity after a series of
combination transactions (the Combination). The Combination included the
following transactions: (a) Carrizo Production, Inc. (a Texas corporation and an
affiliated entity with ownership identical to Carrizo) was merged into Carrizo
and the outstanding shares of capital stock of Carrizo Production, Inc. were
exchanged for an aggregate of 343,000 shares of common stock of Carrizo (the
Common Stock); (b) Carrizo acquired Encinitas Partners Ltd. (a Texas limited
partnership of which Carrizo Production, Inc. served as the general partner) as
follows: Carrizo acquired from the shareholders who serve as directors of
Carrizo (the Founders) their limited partner interests in Encinitas Partners
Ltd. for an aggregate consideration of 468,533 shares of Common Stock and, on
the same date, Encinitas Partners Ltd. was merged into Carrizo and the
outstanding limited partner interests in Encinitas Partners Ltd. were exchanged
for an aggregate of 860,699 shares of Common Stock; (c) La Rosa Partners Ltd. (a
Texas limited partnership of which Carrizo served as the general partner) was
merged into Carrizo and the outstanding limited partner interests in La Rosa
Partners Ltd. were exchanged for an aggregate of 48,700 shares of Common Stock;
and (d) Carrizo Partners Ltd. (a Texas limited partnership of which Carrizo
served as the general partner) was merged into Carrizo and the outstanding
limited partner interests in Carrizo Partners Ltd. were exchanged for an
aggregate of 569,068 shares of Common Stock.
The Combination was accounted for as a reorganization of entities as
prescribed by Securities and Exchange Commission (SEC) Staff Accounting Bulletin
47 because of the high degree of common ownership among, and the common control
of, the combining entities. Accordingly, the accompanying financial statements
have been prepared using the historical costs and results of operations of the
affiliated entities. There were no significant differences in accounting methods
or their application among the combining entities. All intercompany balances
have been eliminated. Certain reclassifications have been made to prior period
amounts to conform to the current period's financial statement presentation.
INITIAL PUBLIC OFFERING
Simultaneous with the Combination, the Company completed its initial public
offering (the Offering) of 2,875,000 shares of its common stock at a public
offering price of $11.00 per share. The Offering provided the Company with
proceeds of approximately $28.1 million, net of expenses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
OIL AND NATURAL GAS PROPERTIES
Investments in oil and natural gas properties are accounted for using the
full-cost method of accounting. All costs directly associated with the
acquisition, exploration and development of oil and natural gas properties are
capitalized. Such costs include lease acquisitions, seismic surveys, and
drilling and completion equipment. No general and administrative costs were
capitalized in 1995 or 1996. During the year ended December 31, 1997, the
Company capitalized as oil and natural gas properties $279,872 of deferred
compensation related to stock options granted to personnel directly associated
with exploration activities (See Note 7).
F-7
<PAGE> 47
CARRIZO OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Oil and natural gas properties are amortized based on the
unit-of-production method using estimates of proved reserve quantities.
Investments in unproved properties are not amortized until proved reserves
associated with the projects can be determined or until impairment occurs.
Unevaluated properties are evaluated quarterly for impairment on a
property-by-property basis. If the results of an assessment indicate that the
properties are impaired, the amount of impairment is added to the proved oil and
natural gas property costs to be amortized. The amortizable base includes
estimated future development costs and, where significant, dismantlement,
restoration and abandonment costs, net of estimated salvage values. The
depletion rate per thousand cubic feet equivalent (Mcfe) for 1995, 1996, 1997,
was $0.47, $0.59, and $0.69, respectively.
Dispositions of oil and gas properties are accounted for as adjustments to
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves.
The net capitalized costs of proved oil and gas properties are subject to a
"ceiling test," which limits such costs to the estimated present value,
discounted at a 10 percent interest rate, of future net cash flows from proved
reserves, based on current economic and operating conditions. If net capitalized
costs exceed this limit, the excess is charged to operations through
depreciation, depletion and amortization. No write-down of the Company's oil and
natural gas assets was necessary in 1995, 1996 or 1997.
Depreciation of other property and equipment is provided using the
straight-line method based on estimated useful lives ranging from five to 10
years.
FINANCING COSTS
Offering costs of $11,992 through December 31, 1997 have been deferred and
are anticipated to be applied against Preferred Stock offering proceeds (see
Note 9). Long-term debt financing costs of $47,194 and $226,247 as of December
31, 1996 and 1997, respectively, are capitalized as deferred assets and are
being amortized over the term of the loans.
STATEMENTS OF CASH FLOWS
For statement of cash flow purposes, all highly liquid investments with
original maturities of three months or less are considered to be cash
equivalents.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, receivables, payables
and long-term debt. The carrying amount of cash, receivables and payables
approximates fair value because of the short-term nature of these items. The
carrying amount of long-term debt approximates fair value as the individual
borrowings bear interest at floating market interest rates.
HEDGING ACTIVITIES
The Company periodically enters into hedging arrangements to manage price
risks related to oil and natural gas sales and not for speculative purposes. The
Company's hedging arrangements apply only to a portion of its anticipated
production, provide only partial price protection against declines in oil and
natural gas prices and limit potential gains from future increases in prices.
For financial reporting purposes, gains and losses related to hedging are
recognized as income when the hedged transaction occurs. Historically, gains and
losses from hedging activities have not been material. Total oil and natural gas
quantities hedged in 1995, 1996 and 1997 were 9,000 Bbls, 3,000 Bbls and 0 Bbls,
respectively, and 40,000 MMBtu, 60,000 MMBtu, and 210,000 MMBtu, respectively.
At December 31, 1997, the Company had 364,000 MMBtu of outstanding hedged
positions (at an average price of $2.86 per MMBtu for first quarter 1998
production.) These instruments had a fair value market of $250,000 as of
December 31, 1997.
F-8
<PAGE> 48
CARRIZO OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Through May 15, 1997, Carrizo and its affiliated entities either had
elected to be treated as S Corporations under the Internal Revenue Code or were
otherwise not taxed as entities for federal income tax purposes. The taxable
income or loss was therefore allocated to the equity owners of Carrizo and the
affiliated entities. Accordingly, no provision was made for income taxes in the
accompanying historical financial statements for the years ended December 31,
1995 and 1996.
On May 16, 1997, Carrizo terminated its status as an S corporation and
thereafter became subject to federal income taxes. The Company, beginning with
the termination of its tax exempt status, provides income taxes for the
difference in the tax and financial reporting bases of its assets and
liabilities in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." The termination of its tax
exempt status in 1997 required the Company to establish a deferred tax
liability, which resulted in a one-time noncash charge to income in 1997 of
$1,623,000. The Company has entered into tax indemnification agreements with the
founders of the Company pertaining to periods in which the Company was an S
Corporation. Had Carrizo been a taxpaying entity prior to May 17, 1997, its net
income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
PRO FORMA
------------------------
1996 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
Net income (after unaudited pro forma income taxes of
$395,946 and $816,852 in 1996 and 1997, respectively...... $ 703,905 $1,514,155
========== ==========
Basic and diluted earnings per share........................ $ 0.09 $ 0.17
========== ==========
Weighted average diluted number of common shares
outstanding............................................... 7,545,063 8,809,572
========== ==========
</TABLE>
USE OF ESTIMATES
The preparation of 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 periods. Actual results could differ from these estimates. Significant
estimates include depreciation, depletion and amortization of proved oil and
natural gas properties. Oil and natural gas reserve estimates, which are the
basis for unit-of-production depletion and the ceiling test, are inherently
imprecise and are expected to change as future information becomes available.
CONCENTRATION OF CREDIT RISK
Substantially all of the Company's accounts receivable result from oil and
natural gas sales or joint interest billings to third parties in the oil and
natural gas industry. This concentration of customers and joint interest owners
may impact the Company's overall credit risk in that these entities may be
similarly affected by changes in economic and other conditions. Historically,
the Company has not experienced credit losses on such receivables.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128 "Earnings Per Share." The Company adopted this standard effective
December 15, 1997. As a result of the simple nature of the Company's capital
structure, this adoption had no impact on the calculation of earnings per share.
F-9
<PAGE> 49
CARRIZO OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Basic earnings per share represents the amount of earnings available to
each share of common stock outstanding during the period. Diluted earnings per
share represents the amount of earnings for the period available to each share
of common stock outstanding during the period plus each share that would have
been outstanding assuming the issuance of common shares for all potentially
dilutive common shares outstanding during the period. For Carrizo, the
difference between basic and diluted earnings per share for all periods is stock
options. For certain periods in 1997, the Company had outstanding 250,000 stock
options which were antidilutive or have not been included in the calculation as
the exercise price exceeded the market value. Historical earnings per share for
the years 1995 and 1996 reflect the effects of the Company's stock split and the
issuance of shares in the Combination, applied retroactively to the date that
the corresponding partnership units were issued.
3. PROPERTY AND EQUIPMENT:
At December 31, 1996 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Proved oil and natural gas properties..................... $ 9,217,027 $26,994,076
Unproved oil and natural gas properties................... 7,455,698 21,678,368
Other equipment........................................... 62,073 225,069
----------- -----------
Total property and equipment.................... 16,734,798 48,897,513
Accumulated depreciation, depletion and amortization...... (1,529,211) (3,814,680)
----------- -----------
Property and equipment, net............................... $15,205,587 $45,082,833
=========== ===========
</TABLE>
Oil and natural gas properties not subject to amortization consist of the
cost of undeveloped leaseholds, undesignated seismic costs, exploratory wells in
progress, and secondary recovery projects before the assignment of proved
reserves. These costs are reviewed periodically by management for impairment,
with the impairment provision included in the cost of oil and natural gas
properties subject to amortization. Factors considered by management in its
impairment assessment include drilling results by the Company and other
operators, the terms of oil and natural gas leases not held by production,
production response to secondary recovery activities and available funds for
exploration and development. Of the $21,678,368 of unproved property costs at
December 31, 1997 being excluded from the amortizable base, $1,421,642,
$2,269,807 and $17,986,919 were incurred in 1995, 1996 and 1997, respectively.
The Company expects it will complete its evaluation of the properties
representing the majority of these costs within the next three years.
4. INCOME TAXES
Actual income tax expense differs from income tax expense computed by
applying the U. S. federal statutory corporate rate of 35 percent to pretax
income as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Provision at the statutory tax rate......................... $ 816,852
Increase resulting from election to forgo tax exempt
status.................................................... 1,483,415
----------
$2,300,267
==========
</TABLE>
F-10
<PAGE> 50
CARRIZO OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax assets and liabilities result from temporary
differences in the recognition of income and expenses for financial reporting
purposes and for tax purposes. At December 31, 1997, the tax effects of these
temporary differences, resulted principally from the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Deferred income tax asset:
Statutory depletion carryforward.......................... $ 78,159
Deferred income tax liabilities:
Intangible drilling costs................................. 1,944,634
Capitalized interest...................................... 433,792
----------
2,378,426
----------
Deferred income tax liability..................... $2,300,267
==========
</TABLE>
5. LONG-TERM DEBT:
At December 31, 1996 and 1997, notes payable and long-term debt consisted
of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Notes payable to shareholders (due April, 1998)............. $2,773,935 $ --
Bridge Loan payable to Compass Bank......................... -- 3,000,000
$10 million revolving credit facility (due June 1, 1998).... 2,910,000 --
$25 million revolving credit facility (due June 1, 1999).... 4,000,000 4,950,000
---------- ----------
$9,683,935 $7,950,000
========== ==========
</TABLE>
In June 1996, the Company entered into a $10 million revolving credit
facility with Compass Bank (the Encinitas Facility). Proceeds from this facility
were used to pay off an existing loan from Texas Commerce Bank (TCB) as well as
fund exploration and development activities. The facility was subject to a
borrowing base calculation and had a commitment of $3,350,000 with $2,910,000
outstanding at December 31, 1996. The facility was also available for letters of
credit, one of which was issued for $224,000. The Encinitas Facility was repaid
with proceeds from the Offering.
In December 1996, Carrizo entered into a separate $25 million revolving
credit facility with Compass Bank, which was subject to a borrowing base
determination, and total commitment was $6 million at December 31, 1996.
Interest on this facility was the prime rate as defined by Compass Bank plus .75
percent, and the borrowings were due on June 1, 1998.
In connection with the Offering, Carrizo amended the revolving credit
facility with Compass Bank, (the "Company Credit Facility"), to provide for a
maximum loan amount of $25 million, subject to borrowing base limitations. Under
the Company Credit Facility, the principal outstanding was due and payable upon
maturity in June 1999 with interest due monthly. The interest rate for
borrowings is calculated at a floating rate based on the Compass index rate or
LIBOR plus 2 percent. The Company's obligations are secured by certain of its
oil and gas properties and cash and cash equivalents included in the borrowing
base.
Under the Company Credit Facility, Compass, in its sole discretion, will
make semiannual borrowing base determinations based upon the proved oil and
natural gas properties of the Company. Compass may redetermine the borrowing
base and the monthly borrowing base reduction at any time and from time to time.
The Company may also request borrowing base redeterminations in addition to its
required semiannual reviews at the Company's cost.
F-11
<PAGE> 51
CARRIZO OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Proceeds from this facility were used to provide working capital for
exploration and development activity. Substantially all of Carrizo's oil and
natural gas property and equipment was pledged as collateral under this
facility. At December 31, 1996, and 1997, borrowings under this facility totaled
$4,000,000 and $4,950,000, respectively, with an additional $2,000,000 and
$276,000, respectively, available for future borrowings. The facility was also
available for letters of credit, one of which had been issued for $224,000 at
December 31, 1997. The weighted average interest rate for 1996 and 1997 on the
Facility was 9 percent.
The Company is subject to certain covenants under the terms of the Company
Credit Facility, including but not limited to (a) maintenance of specified
tangible net worth and (b) maintenance of a ratio of quarterly cash flow (net
income plus depreciation and other noncash expenses, less noncash net income) to
quarterly debt service (payments made for principal in connection with each
credit facility plus payments made for principal other than in connection with
such credit facility) of no less than 1.25 to 1.00. The Company Credit Facility
also place restrictions on, among other things, (a) incurring additional
indebtedness, guaranties, loans and liens, (b) changing the nature of business
or business structure, (c) selling assets and (d) paying dividends.
In December 1997, the Company entered into a term loan facility with
Compass Bank bearing interest at 10.5% and due June 1, 1998 (the Bridge Loan).
Proceeds from the facility were used to fund continuing exploration activities
until the Company had completed its Preferred Stock sale discussed in Note 9. At
December 31, 1997, $3,000,000 was outstanding under the Bridge loan. The Bridge
Loan was due the earlier of April 1998 or concurrent with the Preferred Stock
sale.
The Company had outstanding borrowings from certain shareholders totaling
$2,773,935 at December 31, 1996. These loans bore interest at the TCB prime
rate, and were repaid in August 1997 out of the proceeds of the Offering.
Accrued interest on shareholder borrowings at December 31, 1996 was included in
other long-term liabilities.
All amounts outstanding under the Company's debt facilities were refinanced
in January 1998 with the proceeds from the Preferred Stock sale. As a result,
all debt at December 31, 1997 has been classified as long term.
6. COMMITMENTS AND CONTINGENCIES:
From time to time, the Company is party to certain legal actions and claims
arising in the ordinary course of business. While the outcome of these events
cannot be predicted with certainty, management does not expect these matters to
have a materially adverse effect on the financial position or results of
operations of the Company.
At December 31, 1997, Carrizo was obligated under a noncancelable operating
lease for office space. Rent expense for the years ended December 31, 1995, 1996
and 1997, was $7,600, $14,900 and $80,000, respectively. Following is a schedule
of the remaining future minimum lease payments under this lease:
<TABLE>
<S> <C>
1998............................................. $ 108,700
1999............................................. $ 108,700
2000............................................. $ 54,350
</TABLE>
7. STOCKHOLDERS' EQUITY:
On June 4, 1997, the board of directors authorized a 521-for-1 split of the
Company's stock and increased the number of authorized shares to 40 million
shares of common stock and 10 million shares of preferred stock. All share
amounts presented in these financial statements are presented on a retroactive,
post-split basis.
F-12
<PAGE> 52
CARRIZO OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On July 19, 1996, and March 1, 1997, the Company entered into separate
stock option agreements (the "Pre-IPO Options") with two executives of Carrizo
whereby such employees were granted the option to purchase 138,825 shares and
83,295 shares of Carrizo common stock, respectively, at an exercise price of
$3.60 per share. The options vest ratably through August 1, 1998, and March 1,
1999, respectively.
The Company did not record any compensation expense related to the July,
1996 options because the related exercise price was at or above the estimated
fair value of Carrizo's common stock at the time such options were granted. In
connection with an initial public offering, the Company recorded deferred
compensation related to the March 1997 stock option agreement as additional
paid-in capital and an offsetting contra-equity account. This compensation
accrual is based on the difference between the option price and the fair value
of Carrizo's common stock when the options were granted (using an estimate of
the initial public offering common stock price as an estimate of fair value).
The deferred compensation is amortized in the period in which the options vest,
which resulted in $279,972 being recorded in the year ended December 31, 1997.
In June of 1997, the Company established the Incentive Plan of Carrizo Oil
& Gas, Inc. ("the Incentive Plan"). The Company accounts for this plan under APB
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost been determined consistent with SFAS No. 123 for all options,
the Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C> <C>
Net income (loss)..................... As reported $1,099,851 $ 30,740
Pro forma $1,038,490 $(193,722)
Diluted net income (loss) per share... As reported $ 0.14 $ --
Pro forma $ 0.13 $ (.02)
</TABLE>
The Company may grant options ("Incentive Plan Options") to purchase up to
1,000,000 shares under the Incentive Plan and has granted options on 250,000
shares through December 31, 1997. Under the Incentive Plan, the option exercise
price equals the stock market price on the date of grant. Options granted under
the plan vest ratably over three years and have a term of ten years. A summary
of the status of the Company's stock options at December 31, 1996 and 1997 is
presented in the table below:
<TABLE>
<CAPTION>
1996
-------------------------------------------
WEIGHTED AVERAGE RANGE OF
EXERCISE EXERCISE
SHARES PRICES PRICES
------- ---------------- --------
<S> <C> <C> <C>
Outstanding at beginning of year............. -- --
Granted (Pre-IPO Options).................... 138,825 $3.60 $0-3.60
------- -----
Outstanding at end of year................... 138,825 $3.60 $0-3.60
======= =====
Exercisable at end of year................... 46,275
Weighted average fair value per share of
options granted during the year............ $ 2.21
</TABLE>
F-13
<PAGE> 53
CARRIZO OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997
--------------------------------------
WEIGHTED
AVERAGE RANGE OF
EXERCISE EXERCISE
SHARES PRICES PRICES
------- -------- -----------
<S> <C> <C> <C>
Outstanding at beginning of year............... 138,825 $3.60 $ 0-3.60
Granted (Pre-IPO Options)...................... 83,295 $3.60 $ 0-3.60
Granted (Incentive Plan Options)............... 250,000 11.00 $ 0-11.00
------- -----
Outstanding at end of year..................... 472,120 $7.52 $3.60-11.00
======= =====
Exercisable at end of year..................... 120,315
Weighted average fair value per share of
options granted during the year.............. $ 6.91
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants in both 1996 and 1997: risk free interest rate of 6.82% and 6.26%
respectively, expected dividend yield of 0%, expected life of 10 years and
expected volatility of 30% and 39.4%, respectively.
8. RELATED-PARTY TRANSACTIONS:
In August 1996, the Company entered into the Master Technical Services
Agreement (the MTS Agreement) with Reading & Bates Development Co. (R&B), which
is a subsidiary of R&B Falcon Corporation, a company that was created by the
merger of Falcon Drilling Company, Inc. and Reading & Bates Corporation. Paul
Loyd, a member of the board of the Company, was the chairman of the board,
president, chief executive officer and a director of Reading & Bates
Corporation. Under the MTS Agreement, certain employees of the Company provide
engineering and technical services to R&B at market rates in connection with
R&B's technical service, procurement and construction projects in offshore
drilling and floating production. The Company billed $117,726 and $103,161 in
service fees under this agreement in 1996 and 1997, respectively.
The Company had an agreement with Loyd & Associates Inc., which is owned by
Paul Loyd, a director of Carrizo, and Frank Wojtek, vice president, chief
financial officer and a director of Carrizo, to provide certain financial
consulting and administrative services at market rates to the Company. Payments
were made monthly and total payments to Loyd & Associates Inc. for services
rendered were $60,000, $60,000 and $38,113 in 1995, 1996 and 1997, respectively.
These expenditures were included in general and administrative expenses for each
year. This arrangement was terminated in August, 1997 concurrent with the
Company's initial public offering.
9. SUBSEQUENT EVENT:
SALES OF PREFERRED STOCK AND WARRANTS
In January 1998, the Company consummated the sale of 300,000 shares of
Preferred Stock and Warrants to purchase 1,000,000 shares of Common Stock to
affiliates of Enron Corp. The net proceeds received by the Company from this
transaction were approximately $28.8 million. A portion of the proceeds were
used to repay indebtedness, as described in Note 5, above. The remaining
proceeds are expected to be used primarily for oil and natural gas exploration
and development activities in Texas and Louisiana. The Preferred Stock provides
for annual cumulative dividends of $9.00 per share, payable quarterly in cash
or, at the option of the Company until January 15, 2002, in additional shares of
Preferred Stock. The Warrants, which had a fair value at issuance of $0.30 per
share, will be accreted through the term of the Preferred Stock. Had the
F-14
<PAGE> 54
CARRIZO OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock sale been completed as of December 31, 1997, the Company's pro
forma capitalization would have been as follows:
<TABLE>
<CAPTION>
CAPITALIZATION AT
DECEMBER 31, 1997
---------------------------
ACTUAL PRO FORMA
----------- -----------
<S> <C> <C>
Bridge Loan................................................. $ 3,000,000 $ --
Company Credit Facility..................................... 4,950,000 --
Mandatorily Redeemable Preferred Stock...................... -- 28,500,000
----------- -----------
7,950,000 28,500,000
Stockholders' Equity........................................ 32,895,000 33,195,000
----------- -----------
Total Capitalization........................................ $40,845,000 $61,695,000
=========== ===========
</TABLE>
The Preferred Stock is required to be redeemed by the Company (i) on
January 8, 2005, or (ii) after a request for redemption from the holders of at
least 30,000 shares of the Preferred Stock (or, if fewer than such number of
shares of Preferred Stock are outstanding, all of the outstanding shares of
Preferred Stock) and the occurrence of certain events. The Preferred Stock also
may be redeemed at the option of the Company at any time in whole or in part.
All redemptions are at a price per share, together with dividends accumulated
and unpaid to the date of redemption, decreasing over time from an initial rate
of $104.50 per share to $100 per share. The Warrants (i) enable the holders to
purchase 1,000,000 shares of Common Stock at a price of $11.50 per share
(payable in cash, by "cashless exercise" and certain other methods), subject to
adjustments, (ii) expire after a seven-year term, and (iii) are exercisable
after one year.
10. SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND GAS EXPLORATION, DEVELOPMENT
AND PRODUCTION ACTIVITIES (UNAUDITED):
The following disclosures provide unaudited information required by SFAS
No. 69, "Disclosures About Oil and Gas Producing Activities."
COSTS INCURRED
Costs incurred in oil and natural gas property acquisition, exploration and
development activities are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Property acquisition costs --
Unproved...................................... $ 316,820 $ 50,720 $ --
Proved........................................ 3,588,173 1,907,890 14,820,049
Exploration cost................................ 2,364,056 4,724,102 14,222,674
Development costs............................... 208,696 1,955,917 2,257,375
---------- ---------- -----------
Total costs incurred(1)............... $6,477,745 $8,638,629 $31,300,098
========== ========== ===========
</TABLE>
- ---------------
(1) Excludes capitalized interest on unproved properties of $117,288, $422,493
and $699,625 for the years ended December 31, 1995, 1996 and 1997,
respectively.
OIL AND NATURAL GAS RESERVES
Proved reserves are estimated quantities of oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
F-15
<PAGE> 55
CARRIZO OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
economic and operating conditions. Proved developed reserves are proved reserves
that can reasonably be expected to be recovered through existing wells with
existing equipment and operating methods.
Proved oil and natural gas reserve quantities at December 31, 1996 and
1997, and the related discounted future net cash flows before income taxes are
based on estimates prepared by Ryder Scott Company and Fairchild, Ancell &
Wells, Inc., independent petroleum engineers. Such estimates have been prepared
in accordance with guidelines established by the Securities and Exchange
Commission. Amounts at December 31, 1995, and for the periods then ended were
rolled back from December 31, 1996, balances, ignoring the impact of revisions
of estimates during those periods, if any.
The Company's net ownership interests in estimated quantities of proved oil
and natural gas reserves and changes in net proved reserves, all of which are
located in the continental United States, are summarized below:
<TABLE>
<CAPTION>
BARRELS OF
OIL AND CONDENSATE
AT DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Proved developed and undeveloped reserves --
Beginning of year................................. 3,785,000 3,810,000 3,895,000
Purchases of oil and gas properties............... 103,000 12,000 --
Discoveries....................................... -- 180,000 285,000
Extensions........................................ -- -- 1,102,000
Production........................................ (78,000) (107,000) (112,500)
--------- --------- ---------
End of year......................................... 3,810,000 3,895,000 5,169,500
========= ========= =========
Proved developed reserves at end of year............ 1,100,000 1,048,000 1,146,000
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
THOUSANDS OF CUBIC FEET OF
NATURAL GAS
AT DECEMBER 31,
-----------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Proved developed and undeveloped reserves --
Beginning of year............................... 272,000 5,437,000 12,148,000
Purchases of oil and gas properties............. 5,730,000 338,000 7,696,000
Discoveries and extensions...................... -- 7,646,000 6,946,000
Revisions....................................... -- -- (7,190,000)
Sales of oil and gas properties................. -- -- (4,709,000)
Production...................................... (565,000) (1,273,000) (2,749,000)
--------- ---------- ----------
End of year....................................... 5,437,000 12,148,000 12,142,000
========= ========== ==========
Proved developed reserves at end of year.......... 3,810,000 8,110,000 9,299,000
========= ========== ==========
</TABLE>
F-16
<PAGE> 56
CARRIZO OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STANDARDIZED MEASURE
The standardized measure of discounted future net cash flows relating to
the Company's ownership interests in proved oil and natural gas reserves as of
year-end is shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Future cash inflows......................... $77,739,000 $126,155,000 $103,842,000
Future oil and natural gas operating
expenses.................................. 43,529,000 47,675,000 55,484,000
Future development costs.................... 7,918,000 9,375,000 13,230,000
Future income tax expenses.................. 7,163,000 19,864,000 6,870,000
----------- ------------ ------------
Future net cash flows....................... 19,129,000 49,241,000 28,258,000
10% annual discount for estimating timing of
cash flows................................ 7,148,000 16,220,000 7,285,000
----------- ------------ ------------
Standardized measure of discounted future
net cash flows............................ $11,981,000 $ 33,021,000 $ 20,973,000
=========== ============ ============
</TABLE>
Future cash flows are computed by applying year-end prices of oil and
natural gas to year-end quantities of proved oil and natural gas reserves.
Prices used in computing year end 1996 and 1997 future cash flows were $20.88
and $16.37 for oil, respectively and $3.69 and $2.56 for natural gas,
respectively. Such prices declined significantly in the first quarter of 1998.
The ceiling test for many full cost companies, including Carrizo, could be
negatively impacted by prolonged unfavorable oil and gas prices. A deterioration
of prices from year-end levels could result in the Company recording a first
quarter 1998 non-cash charge to earnings related to its oil and gas properties.
Future operating expenses and development costs are computed primarily by the
Company's petroleum engineers by estimating the expenditures to be incurred in
developing and producing the Company's proved oil and natural gas reserves at
the end of the year, based on the year-end costs and assuming continuation of
existing economic conditions.
Future income taxes are based on year-end statutory rates, adjusted for tax
basis and applicable tax credits. A discount factor of 10 percent was used to
reflect the timing of future net cash flows. The standardized measure of
discounted future net cash flows is not intended to represent the replacement
cost or fair market value of the Company's oil and natural gas properties. An
estimate of fair value would also take into account, among other things, the
recovery of reserves not presently classified as proved, anticipated future
changes in prices and costs, and a discount factor more representative of the
time value of money and the risks inherent in reserve estimates.
F-17
<PAGE> 57
CARRIZO OIL & GAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CHANGE IN STANDARDIZED MEASURE
Changes in the standardized measure of future net cash flows relating to
proved oil and natural gas reserves are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Changes due to current-year operations --
Sales of oil and natural gas, net of oil
and natural gas operating expenses.... $ (614,000) $(2,811,000) $ (6,378,000)
Extensions and discoveries............... -- 19,641,000 16,074,000
Purchases of oil and gas properties...... 2,770,000 2,079,000 6,954,000
Changes due to revisions in standardized
variables --
Prices and operating expenses............ 6,343,000 9,781,000 (29,115,000)
Income taxes............................. (1,307,000) (8,834,000) 11,410,000
Estimated future development costs....... -- (670,000) (2,683,000)
Quantities............................... -- -- (3,449,000)
Sales of reserves in place............... -- -- (3,933,000)
Accretion of discount.................... 968,000 1,647,000 4,634,000
Production rates (timing) and other...... (2,677,000) 207,000 (5,562,000)
----------- ----------- ------------
Net change................................. 5,483,000 21,040,000 (12,048,000)
Beginning of year.......................... 6,498,000 11,981,000 33,021,000
----------- ----------- ------------
End of year................................ $11,981,000 $33,021,000 $ 20,973,000
=========== =========== ============
</TABLE>
Sales of oil and natural gas, net of oil and natural gas operating
expenses, are based on historical pretax results. Sales of oil and natural gas
properties, extensions and discoveries, purchases of minerals in place and the
changes due to revisions in standardized variables are reported on a pretax
discounted basis.
F-18
<PAGE> 58
SUPPLEMENTAL QUARTERLY FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
1997
Revenues................................... $1,853,170 $ 2,311,854 $2,069,237 $2,477,393
Expenses, net.............................. 1,137,554 3,675,879 1,787,800 2,079,681
---------- ----------- ---------- ----------
Net Income................................. $ 715,616 $(1,364,025) $ 281,437 $ 397,712
========== =========== ========== ==========
Diluted Net Income (Loss) Per
Share(1)(2)............................. $ 0.09 $ (0.18) $ 0.03 $ 0.04
========== =========== ========== ==========
1996
Revenues................................... $ 790,513 $ 1,428,139 $1,588,354 $1,387,703
Expenses, net.............................. 646,166 1,085,439 1,085,781 1,277,472
---------- ----------- ---------- ----------
Net Income................................. $ 144,347 $ 342,700 $ 502,573 $ 110,231
========== =========== ========== ==========
Diluted Net Income Per Share(1)(2)......... $ 0.02 $ 0.04 $ 0.07 $ 0.01
========== =========== ========== ==========
</TABLE>
- ---------------
(1) The sum of individual quarterly net income per common share may not agree
with year-to-date net income per common share as each period's computation
is based on the weighted average number of common shares outstanding during
that period.
(2) Net income per common share amounts have been restated to conform to the
provisions of SFAS No. 128, "Earnings Per Share."
<PAGE> 59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CARRIZO OIL & GAS, INC.
By: /s/ FRANK A. WOJTEK
----------------------------------
Frank A. Wojtek
Chief Financial Officer, Vice
President,
Secretary and Treasurer
Date: March 31, 1998.
Pursuant to the requirements of the Securities and 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.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
---- -------- ----
<C> <S> <C>
/s/ S.P. JOHNSON IV President, Chief Executive Officer March 31, 1998
- ----------------------------------------------------- and Director (Principal
S.P. Johnson IV Executive Officer)
/s/ FRANK A. WOJTEK Chief Financial Officer, Vice March 31, 1998
- ----------------------------------------------------- President, Secretary, Treasurer
Frank A. Wojtek and Director (Principal
Financial Officer and Principal
Accounting Officer)
/s/ STEVEN A. WEBSTER Chairman of the Board March 31, 1998
- -----------------------------------------------------
Steven A. Webster
/s/ DOUGLAS A. P. HAMILTON Director March 31, 1998
- -----------------------------------------------------
Douglas A. P. Hamilton
/s/ PAUL B. LOYD, JR. Director March 31, 1998
- -----------------------------------------------------
Paul B. Loyd, Jr.
</TABLE>
<PAGE> 60
EXHIBIT INDEX
<TABLE>
<C> <S>
+2.1 -- Combination Agreement by and among the Company, Carrizo
Production, Inc., Encinitas Partners Ltd., La Rosa
Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr.,
Steven A. Webster, S.P. Johnson IV, Douglas A.P. Hamilton
and Frank A. Wojtek dated as of June 6, 1997
(Incorporated herein by reference to Exhibit 2.1 to the
Company's Registration Statement on Form S-1
(Registration No. 333-29187)).
3.1 -- Amended and Restated Articles of Incorporation of the
Company.
3.2 -- Statement of Resolution Establishing Series of Shares
designated 9% Series A Preferred Stock.
+3.3 -- Amended and Restated Bylaws of the Company, as amended by
Amendment No. 1 (Incorporated herein by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form 8-A (Registration No. 000-22915).
+4.1 -- First Amended, Restated, and Combined Loan Agreement
between the Company and Compass Bank dated August 28,
1997 (Incorporated herein by reference to Exhibit 4.1 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
4.2 -- First Amendment to First Amended, Restated, and Combined
Loan Agreement between the Company and Compass Bank dated
December 23, 1997.
4.3 -- Second Amendment to First Amended, Restated, and Combined
Loan Agreement between the Company and Compass Bank dated
December 30, 1997.
-- The Company is a party to several debt instruments under
which the total amount of securities authorized does not
exceed 10% of the total assets of the Company and its
subsidiaries on a consolidated basis. Pursuant to
paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, the
Company agrees to furnish a copy of such instruments to
the Commission upon request.
+10.1 -- Incentive Plan of the Company (Incorporated herein by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-29187)).
+10.2 -- Employment Agreement between the Company and S.P. Johnson
IV (Incorporated herein by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-1
(Registration No. 333-29187)).
+10.3 -- Employment Agreement between the Company and Frank A.
Wojtek (Incorporated herein by reference to Exhibit 10.3
to the Company's Registration Statement on Form S-1
(Registration No. 333-29187)).
+10.4 -- Employment Agreement between the Company and Kendall A.
Trahan (Incorporated herein by reference to Exhibit 10.4
to the Company's Registration Statement on Form S-1
(Registration No. 333-29187)).
+10.5 -- Employment Agreement between the Company and George
Canjar (Incorporated herein by reference to Exhibit 10.5
to the Company's Registration Statement on Form S-1
(Registration No. 333-29187)).
10.6 -- Indemnification Agreement between the Company and each of
its directors and executive officers.
+10.7 -- Registration Rights Agreement by and among the Company,
Paul B. Loyd, Jr., Steven A. Webster, S.P. Johnson IV,
Douglas A.P. Hamilton and Frank A. Wojtek dated as of
June 6, 1997 (Incorporated herein by reference to Exhibit
10.7 to the Company's Registration Statement on Form S-1
(Registration No. 333-29187)).
</TABLE>
<PAGE> 61
<TABLE>
<C> <S>
+10.8 -- S Corporation Tax Allocation, Payment and Indemnification
Agreement among the Company and Messrs. Loyd, Webster,
Johnson, Hamilton and Wojtek (Incorporated herein by
reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (Registration No. 333-29187)).
+10.9 -- S Corporation Tax Allocation, Payment and Indemnification
Agreement among Carrizo Production, Inc. and Messrs.
Loyd, Webster, Johnson, Hamilton and Wojtek (Incorporated
herein by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (Registration No.
333-29187)).
+10.10 -- Stock Purchase Agreement dated January 8, 1998 among the
Company, Enron Capital & Trade Resources Corp. and Joint
Energy Development Investments II Limited Partnership.
(Incorporated herein by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K dated January 8,
1998).
+10.11 -- Warrant Certificates (Incorporated herein by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K
dated January 8, 1998.)
+10.12 -- Shareholders' Agreement dated January 8, 1998 among the
Company, S.P. Johnson IV, Frank A. Wojtek, Steven A.
Webster, Paul B. Loyd, Jr., Douglas A.P. Hamilton, DAPHAM
Partnership, L.P., The Douglas A.P. Hamilton 1997 GRAT,
Enron Capital & Trade Resources Corp. and Joint Energy
Development Investments II Limited Partnership.
(Incorporated herein by reference to Exhibit 99.2 to the
Company's Current Report on Form 8-K dated January 8,
1998).
+10.13 -- Form of Amendment to Executive Officer Employment
Agreement. (Incorporated herein by reference to Exhibit
99.3 to the Company's Current Report on Form 8-K dated
January 8, 1998).
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Ryder Scott Company Petroleum Engineers.
23.3 -- Consent of Fairchild, Ancell & Wells, Inc.
27.1 -- Financial Data Schedule.
99.1 -- Summary of Reserve Report of Ryder Scott Company
Petroleum Engineers as of December 31, 1997.
99.2 -- Summary of Reserve Report of Fairchild, Ancell & Wells,
Inc. as of December 31, 1997.
</TABLE>
- ---------------
+ Incorporated by reference as indicated.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
CARRIZO OIL & GAS, INC.
ARTICLE ONE
Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"),
pursuant to the provisions of Article 4.07 of the Texas Business Corporation
Act, hereby adopts these Amended and Restated Articles of Incorporation, which
accurately copy the Articles of Incorporation of the Company in effect on the
date hereof, as further amended by these Amended and Restated Articles of
Incorporation as hereinafter set forth, and contain no other change in any
provisions thereof.
ARTICLE TWO
The Articles of Incorporation of the Company are amended by
these Amended and Restated Articles of Incorporation as follows:
The amendments made by these Amended and Restated Articles of
Incorporation (the "Amendments") alter or change Articles One through Eleven
and delete Article Twelve of the Articles of Incorporation. The full text of
each provision altered or added is as set forth in Article Five hereof.
The Amendments effect a 521 for 1 stock split of the
outstanding shares of the common stock, par value $0.01 per share, of the
Company (the "Common Stock") and increase the number of authorized shares of
capital stock of all classes from 100,000 to 50,000,000. Simultaneously with
the effective date of the Amendments (the "Effective Date"), each issued and
outstanding share of previously authorized Common Stock ("Old Common Stock"),
shall thereby and thereupon be reclassified, changed and split up into
5,210,000 validly issued, fully paid and nonassessable shares of Common Stock,
par value $0.01 per share, of the Company ("New Common Stock"). Each holder of
a certificate or certificates that immediately prior to the Effective Date
represented outstanding shares of Old Common Stock (the "Old Certificates,"
whether one or more) shall be entitled to receive upon surrender of such Old
Certificates to the Company for cancellation, a certificate or certificates
(the "New Certificates," whether one or more) representing the number of whole
shares of the New Common Stock into which and for which the shares of the Old
Common Stock formerly represented by such Old Certificates so surrendered, are
reclassified, changed and
1
<PAGE> 2
split up under the terms hereof. From and after the Effective Date, Old
Certificates shall represent only the right to receive New Certificates
pursuant to the provisions hereof. No certificates or scrip representing
fractional share interests in the New Common Stock will be issued, and no such
fractional share interest will entitle the holder thereof to vote, or to any
rights of a shareholder of the Company. Any fractional shares otherwise
issuable will be rounded up to the nearest whole share.
ARTICLE THREE
The Amendments have been effected in conformity with the
provisions of the Texas Business Corporation Act, and the Amended and Restated
Articles of Incorporation were duly adopted by all of the shareholders of the
Company pursuant to a written consent dated June 4, 1997.
ARTICLE FOUR
On that date there were 10,000 shares of Common Stock
outstanding, all of which were entitled to vote on the Amendments. All 10,000
shares of Common Stock were voted in favor of the Amendments.
ARTICLE FIVE
The Articles of Incorporation of the Company filed with the
Secretary of State of the State of Texas on September 24, 1993 are hereby
superseded by the following Amended and Restated Articles of Incorporation,
which accurately copy the entire text thereof as amended hereby:
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
CARRIZO OIL & GAS, INC.
ARTICLE ONE
The name of the corporation is Carrizo Oil & Gas, Inc.
2
<PAGE> 3
ARTICLE TWO
The period of its duration is perpetual.
ARTICLE THREE
The purpose or purposes for which the corporation is organized
is the transaction of all lawful business for which a corporation may be
incorporated under the corporation laws of the State of Texas.
ARTICLE FOUR
The aggregate number of shares that the corporation shall have
the authority to issue, is 50,000,000 shares, consisting of 40,000,000 shares
of Common Stock, par value $0.01 per share, and 10,000,000 shares of Preferred
Stock, par value $0.01 per share.
The descriptions of the different classes of capital stock of
the corporation and the preferences, designations, relative rights, privileges
and powers, and the restrictions, limitations and qualifications thereof, of
said classes of stock are as follows:
Division A
The shares of Preferred Stock may be divided into and issued
in one or more series, the relative rights and preferences of which series may
vary in any and all respects. The board of directors of the corporation is
hereby vested with the authority to establish series of Preferred Stock by
fixing and determining all the preferences, limitations and relative rights of
the shares of any series so established, to the extent not provided for in
these Articles of Incorporation or any amendment hereto, and with the authority
to increase or decrease the number of shares within each such series; provided,
however, that the board of directors may not decrease the number of shares
within a series below the number of shares within such series that is then
issued. The authority of the board of directors with respect to each such
series shall include, but not be limited to, determination of the following:
(1) the distinctive designation and number of shares of
that series;
(2) the rate of dividend (or the method of calculation
thereof) payable with respect to shares of that series, the dates,
terms and other conditions upon which such dividends shall be payable,
and the relative rights of priority of such dividends to dividends
payable on any other class or series of capital stock of the
corporation;
3
<PAGE> 4
(3) the nature of the dividend payable with respect to
shares of that series as cumulative, noncumulative or partially
cumulative, and if cumulative or partially cumulative, from which date
or dates and under what circumstances.
(4) whether shares of that series shall be subject to
redemption, and, if made subject to redemption, the times, prices,
rates, adjustments and other terms and conditions of such redemption
(including the manner of selecting shares of that series for
redemption if fewer than all shares of such series are to be
redeemed);
(5) the rights of the holders of shares of that series in
the event of voluntary or involuntary liquidation, dissolution or
winding up of the corporation (which rights may be different if such
action is voluntary than if it is involuntary), including the relative
rights of priority in such event as to the rights of the holders of
any other class or series of capital stock of the corporation;
(6) the terms, amounts and other conditions of any
sinking or similar purchase or other fund provided for the purchase or
redemption of shares of that series;
(7) whether shares of that series shall be convertible
into or exchangeable for shares of capital stock or other securities
of the corporation or of any other corporation or entity, and, if
provision be made for conversion or exchange, the times, prices,
rates, adjustments and other terms and conditions of such conversion
or exchange;
(8) the extent, if any, to which the holders of shares of
that series shall be entitled (in addition to any voting rights
provided by law) to vote as a class or otherwise with respect to the
election of directors or otherwise;
(9) the restrictions and conditions, if any, upon the
issue or reissue of any additional Preferred Stock ranking on a parity
with or prior to shares of that series as to dividends or upon
liquidation, dissolution or winding up;
(10) any other repurchase obligations of the corporation,
subject to any limitations of applicable law; and
(11) notwithstanding their failure to be included in (1)
through (10) above, any other designations, preferences, limitations
or relative rights of shares of that series.
Any of the designations, preferences, limitations or relative rights (including
the voting rights) of any series of Preferred Stock may be dependent on facts
ascertainable outside these Articles of Incorporation.
4
<PAGE> 5
Shares of any series of Preferred Stock shall have no voting
rights except as required by law or as provided in the preferences, limitations
and relative rights of such series.
Division B
1. Dividends. Dividends may be paid on the Common Stock
out of any assets of the corporation available for such dividends subject to
the rights of all outstanding shares of capital stock ranking senior to the
Common Stock in respect of dividends.
2. Distribution of Assets. In the event of any
liquidation, dissolution or winding up of the corporation, after there shall
have been paid to or set aside for the holders of capital stock ranking senior
to the Common Stock in respect of rights upon liquidation, dissolution or
winding up the full preferential amounts to which they are respectively
entitled, the holders of the Common Stock shall be entitled to receive, pro
rata, all of the remaining assets of the corporation available for distribution
to its shareholders.
3. Voting Rights. The holders of the Common Stock shall
be entitled to one vote per share for all purposes upon which such holders are
entitled to vote.
Division C
1. No Preemptive Rights. No shareholder of the
corporation shall by reason of his holding shares of any class have any
preemptive or preferential right to acquire or subscribe for any additional,
unissued or treasury shares of any class of the corporation now or hereafter to
be authorized, or any notes, debentures, bonds or other securities convertible
into or carrying any right, option or warrant to subscribe to or acquire shares
of any class now or hereafter to be authorized, whether or not the issuance of
any such shares, or such notes, debentures, bonds or other securities, would
adversely affect the dividends or voting or other rights of such shareholder,
and the board of directors may issue or authorize the issuance of shares of any
class, or any notes, debentures, bonds or other securities convertible into or
carrying rights, options or warrants to subscribe to or acquire shares of any
class, without offering any such shares of any class, either in whole or in
part, to the existing shareholders of any class.
2. Share Dividends. Subject to any restrictions in
favor of any series of Preferred Stock provided in the relative rights and
preferences of such series, the corporation may pay a share dividend in shares
of any class or series of capital stock of the corporation to the holders of
shares of any class or series of capital stock of the corporation.
3. No Cumulative Voting. Cumulative voting for the
election of directors is expressly prohibited as to all shares of any class or
series.
5
<PAGE> 6
ARTICLE FIVE
The corporation will not commence business until it has
received for the issuance of its shares consideration of the value of One
Thousand Dollars ($1,000.00), consisting of any tangible or intangible benefit
to the corporation, including cash, promissory notes, services performed,
contracts for services to be performed or other securities of the corporation.
ARTICLE SIX
The street address of the corporation's registered office is
14811 St. Mary's Lane, Suite 148, Houston, Texas 77079, and the name of its
registered agent at such address is Frank A. Wojtek.
ARTICLE SEVEN
1. Number and Term of Directors. The number of
directors shall be fixed by, or in the manner provided by, the bylaws of the
corporation. The number of directors constituting the current board of
directors is five, and the names and addresses of such persons constituting the
board of directors, who are to serve until their successors are elected and
qualified are as follows:
Name Address
---- -------
Steven A. Webster 14811 St. Mary's Lane, Suite 148
Houston, Texas 77079
S. P. Johnson, IV 14811 St. Mary's Lane, Suite 148
Houston, Texas 77079
Frank A. Wojtek 14811 St. Mary's Lane, Suite 148
Houston, Texas 77079
Douglas A. P. Hamilton 14811 St. Mary's Lane, Suite 148
Houston, Texas 77079
Paul B. Loyd, Jr. 14811 St. Mary's Lane, Suite 148
Houston, Texas 77079
2. Removal of Directors. No director of the Corporation
shall be removed from such office by vote or other action of the shareholders
of the Corporation or otherwise, except by the affirmative vote of holders of
at least a majority of the then outstanding Voting Stock (as defined below),
voting together as a single class. The term "Voting Stock" shall mean all
outstanding shares
6
<PAGE> 7
of all classes and series of capital stock of the Corporation entitled to vote
generally in the election of directors of the Corporation, considered as one
class; and, if the Corporation shall have shares of Voting Stock entitled to
more or less than one vote for any such share, each reference in these
Articles of Incorporation to a proportion or percentage of Voting Stock shall
be calculated by reference to the portion or percentage of votes entitled to be
cast by holders of such shares generally in the election of directors of the
Corporation. Prior to the date (the "Public Status Date") of the closing of
the Corporation's first offering of the Common Stock to the general public
registered under a registration statement filed by the Corporation with the
Securities and Exchange Commission, any such removal of a director of the
Corporation may be with or without cause. On and after the Public Status Date,
no director of the Corporation shall be removed from such office, except for
cause, which shall be deemed to exist only if: (i) such director has been
convicted, or such director is granted immunity to testify where another has
been convicted, of a felony by a court of competent jurisdiction (and such
conviction is no longer subject to direct appeal); (ii) such director has been
found by a court of competent jurisdiction (and such finding is no longer
subject to direct appeal) or by the affirmative vote of at least a majority of
the Whole Board (as defined below) at any regular or special meeting of the
board of directors called for such purpose to have been grossly negligent or
guilty of willful misconduct in the performance of his duties to the
Corporation in a matter of substantial importance to the Corporation; (iii)
such director has been adjudicated by a court of competent jurisdiction to be
mentally incompetent, which mental incompetency directly affects his ability to
perform as a director of the Corporation; or (iv) such director has been found
by a court of competent jurisdiction (and such finding is no longer subject to
direct appeal) or by the affirmative vote of at least a majority of the Whole
Board at any regular or special meeting of the board of directors called for
such purpose to have breached such director's duty of loyalty to the
Corporation or its shareholders or to have engaged in any transaction with the
Corporation from which such director derived an improper personal benefit. No
director of the Corporation so removed may be nominated, re-elected or
reinstated as a director of the Corporation so long as the cause for removal
continues to exist. The term "Whole Board" shall mean the total number of
authorized directors of the Corporation whether or not there exist any
vacancies in previously authorized directorships. This paragraph shall be
subject to the rights, if any, of holders of any class or series of stock to
elect directors and remove directors elected by them.
ARTICLE EIGHT
A director of the corporation shall not be liable to the
corporation or its shareholders for monetary damages for an act or omission in
the director's capacity as a director, except that this article does not
eliminate or limit the liability of a director for: (1) a breach of a
director's duty of loyalty to the corporation or its shareholders; (2) an act
or omission not in good faith that constitutes a breach of duty of that
director to the corporation or an act or omission that involves intentional
misconduct or a knowing violation of the law; (3) a transaction from which a
director received an improper benefit, whether or not the benefit resulted from
an action taken within the scope of the
7
<PAGE> 8
director's office; or (4) an act or omission for which the liability of a
director is expressly provided for by an applicable statute.
If the Texas Miscellaneous Corporation Laws Act or the Texas
Business Corporation Act (the "TBCA") is amended to authorize action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the corporation shall be eliminated or limited to the fullest
extent permitted by such statutes, as so amended. Any repeal or modification
of this article shall not adversely affect any right or protection of a
director of the corporation existing at the time of such repeal or
modification.
ARTICLE NINE
Prior to the Public Status Date, any action required or
permitted to be taken at any annual or special meeting of shareholders of the
Corporation may be taken without a meeting, without prior notice and without a
vote, if a consent or counterpart consents in writing, setting forth the action
so taken, shall be signed by the holder or holders of shares having not less
than the minimum number of votes that would be necessary to take such action at
a meeting at which the holders of all shares entitled to vote on the action
were present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to
those shareholders who did not consent in writing to the action.
ARTICLE TEN
The vote of shareholders required for approval of any
amendment of the articles of incorporation of the corporation for which the
TBCA requires a shareholder vote, shall be (in lieu of any greater vote
required by the TBCA) the affirmative vote of the holders of a majority of the
outstanding Voting Stock entitled to vote thereon, unless any class or series
of shares is entitled to vote as a class thereon, in which event the vote
required shall be the affirmative vote of the holders of a majority of the
outstanding shares within each class or series of shares entitled to vote
thereon as a class and at least a majority of the outstanding Voting Stock
otherwise entitled to vote thereon.
ARTICLE ELEVEN
Special meetings of shareholders may be called by the
corporation's chairman of the board, the president or the board of directors.
Subject to the provisions of the corporation's bylaws governing special
meetings, holders of not less than 50% of the outstanding shares of stock
entitled to vote at the proposed special meeting may also call a special
meeting of shareholders by furnishing the corporation a written request which
states the purpose or purposes of the proposed meeting in the manner set forth
in the bylaws.
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EXECUTED AND EFFECTIVE this 5th day of June, 1997.
CARRIZO OIL & GAS, INC.
By: /s/ S. P. JOHNSON, IV
-------------------------------
S. P. Johnson, IV
President
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EXHIBIT 3.2
CARRIZO OIL & GAS, INC.
STATEMENT OF RESOLUTION ESTABLISHING SERIES OF SHARES
DESIGNATED
9% SERIES A PREFERRED STOCK
Pursuant to Article 2.13 of the Texas Business Corporation Act
Carrizo Oil & Gas, Inc., a Texas corporation (the
"Corporation"), hereby certifies:
A. That, pursuant to the authority contained in Article
IV of the Restated Articles of Incorporation of the Corporation (the "Articles
of Incorporation") and in accordance with the provisions of Article 2.13 of the
Texas Business Corporation Act (the "TBCA"), the Board of Directors of the
Corporation has duly adopted, by unanimous written consent dated as of January
6, 1998, the following resolution creating and providing for the establishment
and issuance of a series of shares of Preferred Stock as hereinafter described,
providing for the designations, preferences, limitations and relative, voting,
redemption and other rights thereof and the qualifications, limitations or
restrictions thereof, in addition to those set forth in the Articles of
Incorporation, all in accordance with the provisions of Article 2.13 of the
TBCA.
RESOLVED, that pursuant to Article IV of the Articles of
Incorporation, which authorizes the issuance of 50,000,000 shares of stock,
consisting of 10,000,000 shares of preferred stock, par value of $.01 per share
(the "Preferred Stock"), none of which is outstanding, and 40,000,000 shares of
common stock, par value $.01 per share (the "Common Stock"), the Corporation
hereby provides for the issuance of a series of 500,000 shares of Preferred
Stock, designated as 9% Series A Preferred Stock ("Series A Preferred Stock"),
and hereby approves the designation, issuance and sale by this Corporation of
500,000 shares of the Series A Preferred Stock and hereby provides for the
following designations, preferences, limitations and relative, voting,
redemption and other rights thereof and the qualifications, limitations or
restrictions thereof:
1. Designation of the Series. There shall be a series
of Preferred Stock designated as "9% Series A Preferred Stock", par value $.01
per share, consisting of 500,000 shares. Each share of Series A Preferred
Stock shall be referred to herein as a "Series A Preferred Share" or "Share".
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2. Voting.
(a) Except as provided in this Section 2 or as otherwise
required by law, the Series A Preferred Stock shall not have any right to vote
for the election of directors or for any other purpose. So long as the Series
A Preferred Stock is outstanding, the Corporation shall not, without the
affirmative vote of the holders of a majority of the Shares entitled to vote
thereon (unless a higher percentage is required by law or the Articles of
Incorporation) or written consent of the holders of a majority of all
outstanding Shares, voting or consenting separately as a class:
(i) authorize or issue, or increase the authorized amount
of, (A) any Senior Stock (as defined herein) or Parity Stock (as
defined herein) or (B) any security convertible into or exchangeable
or exercisable for Senior Stock or Parity Stock; provided that the
foregoing shall not restrict the issuance of additional shares of
Series A Preferred Stock pursuant to the first two paragraphs of
Section 3 of this Statement of Resolution;
(ii) amend the Articles of Incorporation to: (A) increase
or decrease the aggregate number of authorized shares of Series A
Preferred Stock, (B) increase or decrease the par value of the shares
of Series A Preferred Stock, (C) effect an exchange, reclassification
or cancellation of all or part of the shares of Series A Preferred
Stock, (D) effect an exchange, or create a right of exchange, of all
or any part of the shares of another class into the shares of Series A
Preferred Stock, (E) change the designations, preferences,
limitations, or relative rights of the shares of Series A Preferred
Stock, (F) change the shares of Series A Preferred Stock into the same
or a different number of shares, either with or without par value, of
the same class or series or another class or series, (G) create a new
class or series of shares having rights and preferences equal, prior
or superior to the shares of Series A Preferred Stock, or increase the
rights and preferences of any class or series having rights and
preferences equal, prior or superior to the shares of Series A
Preferred Stock, or increase the rights and preferences of any class
or series having rights or preferences later or inferior to the shares
of Series A Preferred Stock in such a manner as to become equal, prior
or superior to the shares of Series A Preferred Stock or (H) cancel or
otherwise affect dividends on the shares of Series A Preferred Stock
which had accrued but had not been declared;
(iii) merge or effect a share exchange with any corporation
or other entity (as defined in Article 1.02 of the TBCA) if (A) the
plan of merger contains provisions that if contained in a proposed
amendment to the Articles of Incorporation would require approval
under clause (ii) above, (B) shares of Series A Preferred Stock are to
be exchanged pursuant to the plan of exchange or (C) the Corporation
is the sole surviving corporation in the merger and (1) the voting
power of the number of voting shares (as defined in Article 5.03 of
the TBCA) outstanding immediately after the merger, plus the voting
power of the number of voting shares
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issuable as a result of the merger (either by the conversion of
securities issued pursuant to the merger or the exercise of rights to
purchase securities issued pursuant to the merger), exceeds by more
than 30 percent the voting power of the total number of voting shares
of the Corporation outstanding immediately before the merger; or (2)
the number of participating shares (as defined in Article 5.03 of the
TBCA) outstanding immediately after the merger, plus the number of
participating shares issuable as a result of the merger (either by the
conversion of securities issued pursuant to the merger or the exercise
of rights to purchase securities issued pursuant to the
merger),exceeds by more than 30 percent the total number of
participating shares of the corporation outstanding immediately before
the merger; and
(iv) sell, lease, exchange or otherwise dispose (not
including any pledge, mortgage, deed of trust or trust indenture, but
including any sale, lease, exchange or other disposition in
foreclosure, liquidation or otherwise in any attempt to realize upon
the value of such pledge, mortgage, deed of trust or other trust
indenture) of all, or substantially all, the property and assets of
the Corporation, with or without the good will of the Corporation,
whether or not made in the usual and regular course of its business
and whether in a single transaction or series of related transactions,
if such sale, lease, exchange or other disposition would adversely
impact the preferences, rights, powers or privileges of the holders of
the Series A Preferred Stock.
Except as otherwise set forth herein, to the extent that the
holders of the Series A Preferred Stock shall have the right to vote as a class
(alone or together with any other series of stock of the Corporation) pursuant
to the requirements of applicable law on any matter not set forth herein as
requiring the vote of such holders, the approval of such matter shall require
only the vote of the holders of a majority of the Shares entitled to vote
thereon (unless a higher percentage is required by law or the Articles of
Incorporation) or written consent of the holders of a majority of the Shares
entitled so to vote. Without limiting the generality of the foregoing, to the
extent the vote of holders of Series A Preferred Stock is required (pursuant to
provisions of current law or any change thereto) for approval of (1) any plan
of merger, consolidation or exchange for which the TBCA requires a shareholder
vote, (2) any disposition of assets for which the TBCA requires a shareholder
vote, (3) any dissolution of the Corporation for which the TBCA requires a
shareholder vote, and (4) any amendment of the articles of incorporation of the
Corporation for which the TBCA requires a shareholder vote, such vote shall be
(in lieu of any greater vote required by the TBCA) the affirmative vote of the
holders of a majority of the outstanding shares of Series A Preferred Stock
entitled to vote thereon.
(b) If the Corporation fails to redeem the required
number of Series A Preferred Shares (1) on January 8, 2005 as required by
Section 4(b)(i) or (2) on the applicable Redemption Date (as defined herein) as
required by Section 4(b)(ii) (excluding Section 4(b)(ii)(E) and (F)), then the
number of directors constituting the Board of Directors shall, effective as of
the time of election of such additional directors as hereinafter provided and
without further action, be increased by that
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number of directors constituting the Board of Directors plus one additional
director and the holders of shares of Series A Preferred Stock shall have, in
addition to the other voting rights set forth herein, the exclusive right,
voting separately as a single class, to elect the directors of the Corporation
to fill such newly created directorships (the remaining directors to be elected
by other classes of stock entitled to vote therefor) at each meeting of
shareholders held for the purpose of electing directors. Such additional
directors shall continue as directors and such additional voting right shall
continue until such time as the shares of Series A Preferred Stock presented
for redemption and required to be redeemed as provided in Section 4(b)
(excluding Section 4(b)(ii)(E) and (F)) have been redeemed or all necessary
funds have been set aside for payment as provided in Section 6, as the case may
be, at which time (A) such additional directors shall cease to be directors,
(B) such additional voting right of the holders of Series A Preferred Stock
shall terminate and (C) the number of directors constituting the Board of
Directors shall, without further action, be decreased to that number of
directors remaining as directors following the effect of clause (A) above (but
subject to later adjustment in accordance with the Articles of Incorporation
and the Bylaws); provided that this sentence shall not limit the effect of the
preceding sentence upon the failure by the Corporation to redeem the required
number of Series A Preferred Shares upon the occurrence of any subsequent
redemption obligation provided in Section 4(b). The rights under this
subparagraph expire at such time as the Corporation has repurchased or redeemed
all of the outstanding Series A Preferred Stock.
(c) Unless and for so long as holders of Series A
Preferred Stock are entitled to elect directors pursuant to Section 2(b), if
the Corporation fails to redeem the required number of Series A Preferred
Shares on the applicable Redemption Date (as defined herein) as required by
Section 4(b)(ii)(E), then the number of directors constituting the Board of
Directors shall, effective as of the time of election of such additional
directors as hereinafter provided and without further action, be increased by
the number equal to the difference between (i) the whole number nearest to the
quotient of (A) the number of directors then constituting the Board of
Directors (unless such number is less than two, in which case the number of
directors then constituting the Board of Directors shall be deemed to be two
for purposes of this calculation) divided by (B) 0.73 and (ii) the number of
directors then constituting the Board of Directors, and the holders of shares
of Series A Preferred Stock shall have, in addition to the other voting rights
set forth herein, the exclusive right, voting separately as a single class, to
elect the directors of the Corporation to fill such newly created directorships
(the remaining directors to be elected by other classes of stock entitled to
vote therefor) at each meeting of shareholders held for the purpose of electing
directors. Such additional directors shall continue as directors and such
additional voting right shall continue until such time as the shares of Series
A Preferred Stock presented for redemption and required to be redeemed as
provided in Section 4(b)(ii)(E) have been redeemed or all necessary funds have
been set aside for payment as provided in Section 6, as the case may be, at
which time (A) such additional directors shall cease to be directors, (B) such
additional voting right of the holders of Series A Preferred Stock shall
terminate and (C) the number of directors constituting the Board of Directors
shall, without further action, be decreased to that number of directors
remaining as directors following the effect of clause (A) above (but subject to
later adjustment in accordance with the Articles of Incorporation and the
Bylaws); provided that this sentence shall not limit the effect of the
preceding sentence upon the
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failure by the Corporation to redeem the required number of Series A Preferred
Shares upon the occurrence of any subsequent redemption obligation provided in
Section 4(b). The rights under this subparagraph expire at such time as the
Corporation has repurchased or redeemed all of the outstanding Series A
Preferred Stock.
(d) The rights of holders of shares of Series A Preferred
Stock to take any action as provided in this Statement of Resolutions may be
exercised at any annual meeting of shareholders or at a special meeting of
shareholders held for such purpose or at any adjournment thereof, or without a
meeting, without prior notice and without a vote, if a consent or counterpart
consents in writing, setting forth the action so taken, shall be signed by the
holder or holders of Shares having not less than the minimum number of votes
that would be necessary to take such action at a meeting at which the holders
of all Shares entitled to vote on the action were present and voted. Prompt
notice of the taking of the corporate action without a meeting by less than
unanimous written consent shall be given to those holders of Series A Preferred
Shares who did not consent in writing to the action.
For the taking of any action as provided in this Section 2 by
the holders of shares of Series A Preferred Stock or for any action as to which
the holders of Series A Preferred Stock are entitled to vote, each such holder
shall have one vote for each share of such stock standing in its name on the
transfer books of the Corporation as of any record date fixed for such purpose
or, if no such date be fixed, at the close of business on the business day next
preceding the day on which notice is given, or if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.
So long as the right to vote pursuant to Section 2(b) or
Section 2(c) continues (and unless such right has been exercised by written
consent of the minimum number of shares required to take such action), upon the
written request of holders of a majority of the shares of Series A Preferred
Stock outstanding addressed to the Secretary of the Corporation at the
principal office of the Corporation, the Secretary of the Corporation shall
call a special meeting of the holders of shares entitled to vote as provided
herein. Such meeting shall be held within thirty (30) days after delivery of
such request to the Secretary, at the place and upon the notice provided by law
and in the bylaws of the Corporation, as then in effect (the "Bylaws"), for the
holding of meetings of shareholders.
Each director elected by the holders of shares of Series A
Preferred Stock as provided in Section 2(b) or Section 2(c) shall, unless such
director's term shall expire earlier, hold office until the annual meeting of
shareholders next succeeding such director's election or until such director's
successor, if any, is elected and qualified.
In case any vacancy shall occur among the directors elected by
the holders of shares of Series A Preferred Stock as provided in Section 2(b)
or Section 2(c), such vacancy may be filled for the unexpired portion of the
term by majority vote of the remaining directors theretofore elected by such
holders (if there is one or more remaining directors), or each such director's
successor in office. If any such vacancy is not so filled within 20 days after
the creation thereof or if all directors
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so elected by the holders of Series A Preferred Stock shall cease to serve as
directors before their terms shall expire, the holders of the Series A
Preferred Stock then outstanding and entitled to vote for such directors may,
by written consent as herein provided, or at a special meeting of such holders
called as provided herein, elect successors to hold office for the unexpired
term of the directors whose places shall be vacant.
Holders of shares of Series A Preferred Stock wishing to
nominate one or more individuals to stand for election pursuant to Section 2(b)
or Section 2(c) at an annual or special meeting must provide written notice
thereof to the Board of Directors not less than two business days in advance of
the meeting. Directors that are elected by holders of Series A Shares shall be
elected by a plurality of the votes cast by the holders of Shares entitled to
vote in such election at a meeting of holders of such Shares at which a quorum
is present.
Any director elected by the holders of shares of Series A
Preferred Stock may be removed from office with or without cause only by the
vote or written consent of the holders of at least a majority of the
outstanding shares of Series A Preferred Stock. A special meeting of the
holders of shares of Series A Preferred Stock for such purpose may be called in
accordance with the procedures set forth in Section 2(b) or Section 2(c).
3. Dividends. The fifteenth day of January (but not
January 15, 1998), April, July and October on which the Series A Preferred
Stock shall be outstanding shall be deemed to be a "Dividend Due Date" (except
that if any such date is a Saturday, Sunday or legal holiday, then the next
succeeding date that is not a Saturday, Sunday or legal holiday shall be the
Dividend Due Date). The holders of Series A Preferred Shares shall be entitled
to receive, if, when and as declared by the Board of Directors out of funds
legally available therefor, cumulative dividends at the rate of $9.00 per year
on each Series A Preferred Share and no more, calculated on the basis of a year
of 360 days consisting of twelve 30-day months, payable quarterly on each
Dividend Due Date, with respect to the quarterly period ending on the Record
Date (as defined herein) with respect to such Dividend Due Date. Dividends
will be paid, at the option of the Corporation, (i) in cash or (ii) until and
including the January 15, 2002 Dividend Due Date, by issuing additional fully
paid and nonassessable shares of Series A Preferred Stock (or fractions
thereof) at the annual rate of 0.09 of a Share of Series A Preferred Stock on
each Series A Preferred Share. Dividends on each Series A Preferred Share (or
fraction thereof) shall accumulate and be cumulative from and after the date of
initial issuance of Series A Preferred Shares (or in the event of a Share (or
fraction thereof) initially issued after the first issuance of any Shares, from
the immediately preceding Dividend Due Date or, if none, from the date of such
first issuance). The record date for the payment of dividends shall be the
last day of December, March, June or September, as the case may be, immediately
preceding the relevant Dividend Due Date (the "Record Date"). For purposes
hereof, the term "legal holiday" shall mean any day on which banking
institutions are authorized to close in New York, New York or Houston, Texas.
Each fractional share of Series A Preferred Stock outstanding
shall be entitled to a ratably proportionate amount of all dividends accruing
with respect to each outstanding share of
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Series A Preferred Stock pursuant to this Section 3 and all such dividends with
respect to such outstanding fractional shares shall be cumulative and shall
accrue, and shall be payable in the same manner and at such times as provided
for in this Section 3 with respect to dividends on each outstanding share of
Series A Preferred Stock. Each fractional share of Series A Preferred Stock
outstanding shall also be entitled to a ratably proportionate amount of all
distributions made with respect to each outstanding share of Series A Preferred
Stock pursuant to this Section 3, and all such distributions shall be payable
in the same manner and at such times as provided for in this Section 3 with
respect to distributions on each outstanding share of Series A Preferred Stock.
On each Dividend Due Date all dividends which shall be
accumulated on each Series A Preferred Share outstanding on such Dividend Due
Date shall be deemed to become "due". Any dividend which shall not be paid on
the Dividend Due Date on which it shall become due shall be deemed to be "past
due" until such dividend shall be paid or until the Series A Preferred Share
with respect to which such dividend became due shall no longer be outstanding,
whichever is the earlier to occur. If any dividend payable pursuant to this
Section 3 is not paid on the Dividend Due Date therefor, then the amount of
such dividend shall be computed as if the amount thereof had been compounded
quarterly from the date of such Dividend Due Date to the date such dividend is
paid.
When dividends are not paid in full upon all shares of Parity
Stock (including Series A Preferred Stock), all dividends declared upon shares
of Parity Stock will be declared pro rata, subject to either rounding or the
elimination of fractional shares in accordance with Texas law, so that in all
cases the amount of dividends declared per share on the Parity Stock bears to
each other the same ratio that the accumulated dividends per share on the
shares of Parity Stock bear to each other. So long as any Series A Preferred
Shares are outstanding, (i) no dividends in cash, securities or other property
may be declared, paid or set aside for payment or any other distribution made
upon any Junior Stock (other than dividends or distributions in Junior Stock or
dividends of rights to purchase preferred or common stock of the type commonly
known as "poison pill rights"; provided that such poison pill rights shall not
be triggered solely as a result of the exercise of the rights and remedies
under this Statement of Resolution, the Stock Purchase Agreement dated as of
January 8, 1998 by and among the Corporation and Enron Capital & Trade
Resources Corp., a Delaware corporation ("Enron"), and Joint Energy Development
Investments II Limited Partnership, a Delaware limited partnership ("JEDI II"),
the Warrant Certificates dated as of January 8, 1998 issued pursuant to such
Stock Purchase Agreement and/or the Shareholders' Agreement dated as of January
8, 1998 (as it may from time to time be amended) by and among the Company, S.
P. Johnson IV, Frank A. Wojtek, Paul B. Loyd, Jr., Steven A. Webster, Douglas
A. P. Hamilton, DAPHAM Partnership L.P., Douglas A. P. Hamilton 1997 GRAT,
Enron and JEDI II (the "Shareholders' Agreement"), and (ii) except for
redemptions, purchases or acquisitions of Series A Preferred Stock, no Parity
Stock may be (A) redeemed pursuant to a sinking fund or otherwise (unless all
the Parity Stock is redeemed or a pro rata redemption is made from all holders
of Parity Stock, the amount allocable to each series of such Parity Stock being
determined on the basis of the aggregate liquidation preference of the
outstanding shares of each series and the shares of each series are to be
redeemed only on a pro rata basis) or (B) purchased or otherwise acquired for
any consideration by the Corporation; and (iii) no Junior Stock may be redeemed
or acquired for
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consideration except by conversion into or exchange for other Junior Stock;
provided however that the Corporation shall be entitled to pay in cash such sum
as may be required to eliminate fractional shares. "Parity Stock" shall
collectively mean all equity securities of the Corporation which rank on a
parity with the Series A Preferred Stock, as to dividends (when such term is
used with respect to the payment of dividends), as to payments upon redemption
(when such term is used with respect to payments upon redemption) or as to the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation (when such term is used with respect to the distribution of assets
upon liquidation, dissolution or winding up), whether or not the dividend
rates, dividend payment dates or redemption or liquidation prices per share
thereof be different from those of the Series A Preferred Stock, if the holders
of such class of stock and the Series A Preferred Stock shall be entitled to
the receipt of dividends (when such term is used with respect to the payment of
dividends) or of amounts payable upon redemption (when such term is used with
respect to payments upon redemption) or distributable upon liquidation,
dissolution or winding up of the Corporation (when such term is used with
respect to the distribution of assets upon liquidation, dissolution or winding
up), as the case may be, in proportion to their respective amounts of accrued
and unpaid dividends per share or redemption or liquidation prices, without
preference or priority of one over the other. "Junior Stock" shall
collectively mean all equity securities (including the common stock, par value
$.01 per share) of the Corporation which do not have a preference or priority
over the Series A Preferred Stock, as to dividends (when such term is used with
respect to the payment of dividends), as to payments upon redemption (when such
term is used with respect to payments upon redemption) or as to the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation (when such term is used with respect to the distribution of assets
upon liquidation, dissolution or winding up), if the holders of Series A
Preferred Stock shall be entitled to receipt of dividends (when such term is
used with respect to the payment of dividends) or of amounts payable upon
redemption (when such term is used with respect to payments upon redemption) or
distributable upon liquidation, dissolution or winding up of the Corporation
(when such term is used with respect to the distribution of assets upon
liquidation, dissolution or winding up), as the case may be, in preference or
priority to the holders of shares of such stock. "Senior Stock" shall
collectively mean all equity securities of the Corporation which rank prior to
the Series A Preferred Stock, as to dividends (when such term is used with
respect to the payment of dividends), as to payments upon redemption (when such
term is used with respect to payments upon redemption) or as to the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation (when such term is used with respect to the distribution of assets
upon liquidation, dissolution or winding up), if the holders of such class
shall be entitled to the receipt of dividends (when such term is used with
respect to the payment of dividends) or of amounts payable upon redemption
(when such term is used with respect to payments upon redemption) or
distributable upon liquidation, dissolution or winding up of the Corporation
(when such term is used with respect to the distribution of assets upon
liquidation, dissolution or winding up), as the case may be, in preference or
priority to the holders of Series A Preferred Stock.
Any reference to "dividend" or "distribution" in this Section
3 shall not be deemed to include any distribution made in connection with any
liquidation, dissolution or winding up of the
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Corporation, whether voluntary or involuntary, unless such reference
specifically refers to such liquidation, dissolution or winding up of the
Corporation.
4. Redemption.
(a) The Series A Preferred Shares may be redeemed at the
option of the Corporation, upon 30 days' prior written notice, as a whole at
any time or in part from time to time, at a Redemption Price (as set forth in
(i) through (iv) below) per share, together with all dividends accumulated and
unpaid to the Redemption Date (as defined below), as follows:
(i) if the Redemption Date occurs within 12 months of the
date of initial issuance of the Series A Preferred Shares, $104.50 per
share;
(ii) if the Redemption Date occurs after 12 months from
but within 24 months of the date of initial issuance of the Series A
Preferred Shares, $102.25 per share;
(iii) if the Redemption Date occurs after 24 months from
but within 36 months of the date of initial issuance of the Series A
Preferred Shares, $101.125 per share; and
(iv) if the Redemption Date occurs after 36 months from
the date of initial issuance of the Series A Preferred Shares, $100.00
per share.
(b)(i) The Series A Preferred Shares shall be called for
redemption by the Corporation and redeemed on January 8, 2005 at a
Redemption Price per share of $100 plus all dividends accumulated and
unpaid to the Redemption Date.
(ii) The Series A Preferred Shares shall be redeemed by
the Corporation at a Redemption Price (as set forth in (i) through
(iv) of Section 4(a)) per share, together with all dividends
accumulated and unpaid to the Redemption Date, on a Redemption Date
occurring no later than 90 days following a request for redemption by
holders of at least 30,000 of the Series A Preferred Shares (as
adjusted for any stock splits or combinations from the date of initial
issuance, or if fewer than such number of Series A Preferred Shares
are outstanding at such time, then all of the outstanding Series A
Preferred Shares) and the occurrence of one of the following events
(an "Optional Redemption Event"): (A) at any point in time the
Corporation has failed to declare and pay any two dividends in the
amount then due and payable on or before the Dividend Due Date for the
second of such dividends and such dividends remain unpaid at such time
or (B) the Corporation breaches any covenant set forth in the
penultimate paragraph of Section 3 hereof or (C) for two consecutive
fiscal quarterly periods after the initial date of issuance of any
Series A Preferred Stock, the quarterly Cash Flow (as defined below)
of the Corporation is less than the
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amount of the dividends accrued in respect to the Series A Preferred
Stock during such fiscal quarter (provided that solely for purposes of
this provision, notwithstanding anything in this Statement of
Resolution to the contrary, all dividends shall be deemed to be
accrued in cash) or (D) (1) the Corporation shall have failed to pay
more than $50,000 of any obligation on any indebtedness for borrowed
money of more than $1,000,000 when such amount more than $50,000
becomes due and payable and such failure shall continue after the
applicable grace period, if any, granted by the lender for such
indebtedness; or (2) any other event shall occur or condition shall
exist under any indebtedness for borrowed money at a time when the
outstanding principal amount thereunder is at least $1,000,000, if
such event or condition has caused the acceleration of such
indebtedness or (E) there is a violation (which has not been waived)
of Section 2.1 of the Shareholders' Agreement or (F) there occurs by
the Corporation a sale, lease, exchange or other disposition (not
including any pledge, mortgage, deed of trust or trust indenture, but
including any sale, lease, exchange or other disposition in
foreclosure, liquidation or otherwise in any attempt to realize upon
the value of such pledge, mortgage, deed of trust or other trust
indenture) of all, or substantially all, the property and assets, with
or without the good will of the Corporation, whether or not made in
the usual and regular course of its business and whether in a single
transaction or series of related transactions which sale, lease,
exchange or other disposition does not provide for the redemption of
the Series A Preferred Stock (and without limiting the generality of
any other provision hereof, such right to be redeemed constitutes a
preference, right, power and privilege of the holders of the Series A
Preferred Stock); provided, however, that if an Optional Redemption
Event has previously occurred, any subsequent event shall not be
deemed to be an Optional Redemption Event. For purposes hereof, "Cash
Flow" shall mean net income prior to preferred dividends and accretion
(i) plus (to the extent included in net income prior to preferred
dividends and accretion) depreciation, depletion and amortization and
other non-cash charges and losses on the sale of property and (ii)
minus non-cash income items and required principal payments on
indebtedness for borrowed money with a maturity from the original date
of incurrence of such indebtedness of six months or greater (excluding
voluntary prepayments and refinancings, but including prepayments
(other than in connection with refinancings) which would otherwise be
due under such indebtedness within a 60-day period following the date
of such prepayment).
A request for redemption pursuant to this Section 4(b)(ii) may
be made by holders, (1) at any time after such Optional Redemption
Event and not later than 45 days after the Corporation provides notice
to holders of Series A Preferred Shares of such Optional Redemption
Event and (2) on one or more occasions from and after the expiration
of such 45-day period with respect to an Optional Redemption Event
until all Series A Preferred Shares are redeemed, within 30 days
following the date the Corporation files with the Securities and
Exchange Commission its Annual Report on Form 10-K or its Quarterly
Report on Form 10-Q with respect to the first
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<PAGE> 11
six months of its fiscal year, unless the Corporation fails to make
any such filing on or before March 31 with respect to such Annual
Report and August 15 with respect to such Quarterly Report, in which
case a request may be made any time from and after such dates until 30
days following the date the Corporation makes such filing.
(c) For purposes hereof, "Redemption Date" shall mean the
applicable date of any redemption of the Series A Preferred Shares made by the
Corporation pursuant to this Section 4 and "Redemption Price" shall mean the
applicable redemption price per share paid by the Corporation for any
redemption of the Series A Preferred Shares pursuant to this Section 4.
No sinking fund shall be established for the Series A
Preferred Stock.
Notice of any redemption of the Series A Preferred Shares
required to be given by the Corporation shall be mailed by means of certified
mail (return receipt requested), postage paid, addressed to the holders of
record of the Series A Preferred Shares, at their respective addresses then
appearing on the books of the Corporation and last known address (if
different), and transmitted by facsimile to holders of Series A Preferred
Shares that have provided the Corporation with facsimile instructions (at the
facsimile number so provided), at least twenty (20) but not more than sixty
(60) days prior to the Redemption Date, and each such notice shall be deemed
received by the holder of record three days following deposit with the United
States Postal Service. Each notice of redemption shall specify (i) the
Redemption Date that has been selected by the Company (but which must be within
60 days of the date of the mailing of the notice of redemption and in all cases
no later than January 8, 2005), (ii) the Redemption Price, (iii) the place for
payment and for delivering the stock certificate(s) and transfer instrument(s)
in order to collect the Redemption Price (which shall be at a reasonable
location in the United States), (iv) whether all or less than all Series A
Preferred Shares are being redeemed and the total number of Series A Preferred
Shares being redeemed and (v) whether the redemption is pursuant to Section
4(a) or (b) hereof, and if pursuant to Section 4(b)(ii), that the redemption is
pursuant to one or more of clause (A) through (F) thereof. If fewer than all
the outstanding Series A Preferred Shares are to be redeemed pursuant to
Section 4(a), the Corporation will select those to be redeemed as nearly pro
rata as practicable. Failure by the Corporation to give any notice described
in this paragraph, or the formal insufficiency of any such notice, shall not
prejudice or effect the rights of any holders of Series A Preferred Shares to
cause the Corporation to redeem any such shares held by such holder.
The Corporation shall, within five business days of its having
concluded that an Optional Redemption Event has occurred, transmit notice of
such Optional Redemption Event to holders of Series A Preferred Shares, which
notice shall set forth a description of such event. Such notice shall be
mailed by means of certified mail (return receipt requested), postage paid,
addressed to the holders of record of Series A Preferred Shares, at their
respective addresses then appearing on the books of the Corporation and last
known address (if different) and transmitted by facsimile to holders of Series
A Preferred Shares that have provided the Corporation with facsimile
instructions (at the facsimile number so provided). Any request for redemption
given by the holder or holders of the Series A Preferred Shares pursuant to
Section 4(b) shall be mailed by means of certified mail
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<PAGE> 12
(return receipt requested), postage paid, addressed to the Corporation at its
registered office, and transmitted by facsimile to the Corporation (at the
following facsimile number: (281) 496-0884; or such other facsimile number as
the Corporation provides by notice to holders of Series A Preferred Shares).
If any holder of Series A Preferred Shares making such request for redemption
has not received notice of such Optional Redemption Event from the Corporation,
but has concluded that an Optional Redemption Event has occurred, such holder
shall include in such request for redemption a description of such Optional
Redemption Event.
After the Redemption Date for any Series A Preferred Shares,
the holder of such shares shall not be entitled to receive payment of the
Redemption Price for such Shares until such holder shall cause to be delivered
to the place specified in the notice given (which shall be at a reasonable
location in the United States) with respect to such redemption the
certificate(s) representing such Series A Preferred Shares and, if required by
the Corporation, duly endorsed to the Corporation or in blank and accompanied
by instruments of transfer to the Corporation. No interest shall accrue on the
Redemption Price of any Series A Preferred Share after its Redemption Date.
At the close of business on the Redemption Date for any Series
A Preferred Share, such Share shall (provided the Redemption Price of such
Share has been paid or properly provided for in accordance with Section 6) be
deemed to cease to be outstanding and all rights of any person other than the
Corporation in such Share shall be extinguished on the Redemption Date
(including all rights to receive future dividends with respect to such Share)
except for the right to receive the Redemption Price, without interest, for the
Shares in accordance with the provisions of this Section 4, subject to
applicable escheat laws.
Subject to Section 3 hereof, the Corporation shall have the
right at any time to acquire any Series A Preferred Shares from the owner of
such Shares on such terms as may be agreeable to such owner without offering
any other shareholder an equal opportunity to sell his stock to the
Corporation, and no purchase by the Corporation from any shareholder pursuant
to this paragraph shall be deemed to create any right on the part of any other
shareholder to sell any Series A Preferred Stock (or any other stock) to the
Corporation.
(d) Redemption Subject to Applicable Law.
Notwithstanding the redemption rights granted to the holders of Series A
Preferred Shares in this Section 4, the Corporation shall redeem shares of
Series A Preferred Stock only if funds therefor are legally available under the
TBCA, as from time to time amended, which as of the date of this Statement of
Resolution provides that a corporation may effect a redemption only if (i)
after giving effect to the redemption, the corporation would not be insolvent,
(ii) the net assets of the corporation are not less than the amount of the
proposed redemption or (iii) funds are otherwise legally available therefor
under the TBCA. Without limiting the generality of any provision hereof or of
any applicable law, failure to redeem the Series A Preferred Shares in
accordance with the requirements of this Section 4 shall result in the holders
of such Shares having the voting rights specified in Section 2(b) or Section
2(c) and shall result in dividends continuing to accrue on such Shares (and all
other rights and obligations
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<PAGE> 13
continuing as set forth in this Statement of Resolution), and shall result in
the payment of the Redemption Price of such Shares to continue as an obligation
(but not to be deemed to be a debt) of the Corporation.
In the event that the total amount of funds legally available
for redemption of shares of Series A Preferred Stock and any other Parity Stock
is insufficient to redeem the Series A Preferred Shares and any shares of other
Parity Stock that are the subject of a notice of redemption, then the Series A
Preferred Shares and any shares of other Parity Stock shall be redeemed ratably
based on the aggregate redemption amount payable with respect to the shares of
Series A Preferred Stock and any shares of other Parity Stock then redeemable.
If a notice of redemption is given and the Corporation is
unable to redeem the shares of Series A Preferred Stock that are the subject of
such notice of redemption because funds therefor are not legally available to
the Corporation as described above, the obligation of the Corporation to redeem
such shares of Series A Preferred Stock shall continue until the Corporation
redeems such Series A Preferred Stock in accordance with this Section 4(d).
5. Liquidation. In the event of any voluntary or
involuntary dissolution, liquidation or winding up of the Corporation (for the
purposes of this Section 5, a "Liquidation"), before any distribution of assets
shall be made to the holders of any Junior Stock of the Corporation, the holder
of each Series A Preferred Share then outstanding shall be entitled to be paid
out of the assets of the Corporation available for distribution to its
shareholders, an amount equal to the amount set forth below plus all dividends
accumulated and unpaid on such Share on the date fixed for the distribution of
assets of the Corporation to the holders of Series A Preferred Stock:
(A) if the Liquidation occurs within 12 months of the
date of initial issuance of the Series A Preferred Shares, $104.50 per
share;
(B) if the Liquidation occurs after 12 months from but
within 24 months of the date of initial issuance of the Series A
Preferred Shares, $102.25 per share;
(C) if the Liquidation occurs after 24 months from but
within 36 months of the date of initial issuance of the Series A
Preferred Shares, $101.125 per share; and
(D) if the Liquidation occurs after 36 months from the
date of initial issuance of the Series A Preferred Shares, $100.00 per
share.
If upon any Liquidation of the Corporation, the assets
available for distribution to the holders of Series A Preferred Stock and any
Parity Stock issued by the Corporation which shall then be outstanding
(hereinafter in this paragraph called the "Total Amount Available") shall be
insufficient to pay the holders of all outstanding Series A Preferred Stock and
all such Parity Stock the full amounts (including all dividends accumulated and
unpaid) to which they shall be entitled by reason of such Liquidation of the
Corporation, then there shall be paid to the holders of the
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<PAGE> 14
Series A Preferred Stock in connection with such Liquidation of the
Corporation, an amount equal to the product derived by multiplying the Total
Amount Available times a fraction, the numerator of which shall be the full
amount to which the holders of the Series A Preferred Stock shall be entitled
under the terms of the preceding paragraph by reason of such Liquidation of the
Corporation and the denominator of which shall be the total amount which would
have been distributed by reason of such Liquidation of the Corporation with
respect to the Series A Preferred Stock and all Parity Stock then outstanding
had the Corporation possessed sufficient assets to pay the maximum amount which
the holders of all such stock would be entitled to receive in connection with
such Liquidation of the Corporation.
The voluntary sale, conveyance, lease, exchange or transfer of
all or substantially all the property or assets of the Corporation (unless in
connection therewith the Liquidation of the Corporation is specifically
approved) or the share exchange with, or the merger or consolidation of the
Corporation into or with any other corporation, or the merger of any other
corporation into the Corporation, or any purchase or redemption of some or all
of the shares of any class or series of stock of the Corporation, shall not be
deemed to be a Liquidation of the Corporation for the purpose of this Section
5.
The holder of any Series A Preferred Shares shall not be
entitled to receive any payment owed for such Shares under this Section 5 until
such holder shall cause to be delivered to the Corporation at such reasonable
location in the United States as the Corporation may designate the
certificate(s) representing such Series A Preferred Shares and, if required by
the Corporation, duly endorsed to the Corporation or in blank or accompanied by
instruments of transfer to the Corporation or in blank. As in the case of the
Redemption Price, no interest shall accrue on any payment upon liquidation
after the due date thereof, provided that the Corporation has duly provided
therefor in Section 6 below.
After payment of the full amount of the liquidating
distribution, the Series A Preferred Stock will not entitle the holder thereof
to any further participation in any distribution of assets by the Corporation.
6. Payments. In the event a redemption is required
pursuant to Section 4 hereof and payment is not made with respect to the
required number of Series A Preferred Shares 90 days after the Redemption Date
or in the event of a liquidation occurs pursuant to Section 5 hereof and
payment is not made with respect to all Series A Preferred Shares 90 days after
the date fixed for distribution of assets of the Corporation, the Corporation
shall be obligated to deposit funds for the payment of the Redemption Price for
such Series A Preferred Shares pursuant to this Section 6. The Corporation
may, but shall not be obligated to, provide funds for any payment of the
Redemption Price for any Series A Preferred Shares prior to 90 days after the
Redemption Date or any amount distributable with respect to any Series A
Preferred Shares under Section 5 hereof prior to 90 days after the date fixed
for distribution of assets of the Corporation by depositing such funds pursuant
to this Section 6. The Corporation shall make any deposit of funds
contemplated by this Section 6 with a commercial bank or trust company selected
by the Corporation having a capital and surplus
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<PAGE> 15
in excess of $100,000,000 and having its principal place of business in
Houston, Texas, Dallas, Texas or New York, New York, in trust for the benefit
of the holder of such Series A Preferred Shares under arrangements providing
for such funds to be invested, to the greatest extent possible, in securities
issued by the United States Department of Treasury and providing irrevocably
for payment upon delivery of certificate(s) representing such Series A
Preferred Shares and, if required by the Corporation, duly endorsed to the
Corporation or in blank and accompanied by instruments of transfer to the
Corporation. All interest and other income earned by any funds while they
shall be deposited as contemplated by this Section 6 shall be paid to holders
of Series A Preferred Shares receiving payments of funds deposited pursuant to
this Section 6, pro rata based on the number of Series A Preferred Shares then
entitled to receive payment of such funds.
Any payment which may be owed for the payment of the
Redemption Price for any Series A Preferred Shares pursuant to Section 4 or the
payment of any amount distributed with respect to any Series A Preferred Shares
under Section 5 shall be deemed to have been "paid or properly provided for"
upon the earlier to occur of: (i) the date upon which the funds sufficient to
make such payment shall be deposited in a manner contemplated by the preceding
paragraph or (ii) the date upon which a check payable to the person entitled to
receive such payment shall be delivered to such person or mailed to such person
at either the address of such person then appearing on the books of the
Corporation or such other address as the Corporation shall deem reasonable,
provided such check shall provide good funds when presented for payment, and
provided further that in the event any holder of Series A Preferred Shares is
entitled to receive over $3,000,000 as payment of the Redemption Price for such
Shares and such holder has requested payment by wire transfer and provided
payment instructions to the Corporation three days prior to the Redemption
Date, the Corporation shall make such payment by wire transfer in accordance
with such instruction.
7. Status of Reacquired Series A Preferred Shares.
Shares issued and reacquired by the Corporation (including Series A Preferred
Shares that have been redeemed) shall have the status of authorized and
unissued shares of Preferred Stock undesignated as to series, subject to later
issuance.
8. Preemptive Rights. The Series A Preferred Stock is
not entitled to any preemptive or subscription rights in respect of any
securities of the Corporation.
9. Ranking. The Series A Preferred Stock shall rank
senior to the common stock, par value $.01 per share, of the Corporation, and
all other series of the Corporation's Preferred Stock as to the payment of
dividends, as to payments upon redemption and as to the distribution of assets
upon liquidation, dissolution or winding up unless, after the approval under
Section 2(a) has been obtained, the terms of such other series provide
otherwise.
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<PAGE> 16
10. Severability of Provisions. Whenever possible, each
provision hereof shall be interpreted in a manner as to be effective and valid
under applicable law, but if any provision hereof is held to be prohibited by
or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating or otherwise
adversely affecting the remaining provisions hereof.
IN WITNESS WHEREOF, this Statement of Resolution has been
executed by an officer of the Corporation, this 8th day of January, 1998.
CARRIZO OIL & GAS, INC.
By: /s/ S.P. JOHNSON IV
---------------------------------------
S. P. Johnson IV
President and Chief Executive Officer
16
<PAGE> 1
EXHIBIT 4.2
FIRST AMENDMENT
TO
FIRST AMENDED, RESTATED, AND COMBINED LOAN AGREEMENT
BY AND BETWEEN CARRIZO OIL & GAS, INC.
AND COMPASS BANK
This First Amendment to the Loan Agreement (this "First Amendment") by
and between CARRIZO OIL & GAS, INC., a Texas corporation (the "Borrower"), and
COMPASS BANK, a Texas chartered bank (the "Bank"), is entered into on this 23rd
day of December 1997 and shall be effective as of that date for all purposes.
W I T N E S S E T H:
Borrower and Bank entered into a First Amended, Restated, and Amended
Loan Agreement dated August 28, 1997 (the "Loan Agreement"). Capitalized terms
used, but not defined, herein shall have the meanings prescribed therefor in the
Loan Agreement.
Borrower has requested that Bank consent to the transaction described
on Exhibit "A" attached to this Third Amendment, and Bank has agreed to do so
according to the terms set forth herein, which shall be incorporated into the
Loan Agreement.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, and for other good and valuable consideration, the receipt and
sufficiency of which are acknowledged by Borrower and Bank, and each intending
to be legally bound hereby, the parties agree as follows:
I. Specific Amendments to Loan Agreement.
Article I is hereby amended by adding the following definitions
thereto:
"ECT Transaction" means the transaction described on Exhibit
"A" to the First Amendment.
"First Amendment" means the First Amendment to this Agreement
executed by Borrower and Bank on December 23, 1997.
Section 5.19 shall be amended in its entirety, conditioned and
effective upon the closing of the ECT Transaction, to read as follows:
5.19 Tangible Net Worth Requirement. Borrower shall maintain a
total Tangible Net Worth of not less than the greater of: (a)
$50,000,000.00, or (b) the Tangible Net Worth of Borrower as of
December 31, 1997, minus $10,000,000.00; increasing by: (x) fifty
percent (50%) of net income (excluding losses) of Borrower subsequent
to December 31,
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<PAGE> 2
1997, and (y) one hundred percent (100%) of any increases in
shareholders' equity resulting from the sale or issuance of stock in
Borrower subsequent to December 31, 1997. For purposes of this Section,
shareholders' equity shall be deemed to include the consideration paid
to Borrower for its sale of the 300,000 shares of 9% Series A Preferred
Stock, par value $0.01 per share, pursuant to the ECT Transaction, as
well as any consideration paid to Borrower for the exercise of any of
the 1,000,000 warrants that are exercisable for the purchase of
1,000,000 shares of common stock of Carrizo, par value $0.01 per share,
pursuant to the ECT Transaction, but shareholder's equity shall exclude
the value of any such 9% Series A Preferred Stock that is subsequently
redeemed by the issuance of common stock of Borrower.
II. Certain Consents. The Bank has consented, and does hereby consent,
to the ECT Transaction, subject to, and in accordance with, the terms of the
letter agreement between the Bank and Borrower that is attached as Exhibit "A"
to this First Amendment, and Borrower does hereby ratify, adopt, and confirm the
terms and provisions of such letter agreement, which are incorporated herein by
reference, as if set forth in full herein.
III. Reaffirmation of Representations and Warranties. To induce Bank to
enter into this First Amendment, Borrower hereby reaffirms, as of the date
hereof, its representations and warranties contained in Article IV of the Loan
Agreement and in all other documents executed pursuant thereto, and additionally
represents and warrants as follows:
A. The execution and delivery of this First Amendment and the
performance by Borrower of its obligations under this First Amendment
are within Borrower's power, have been duly authorized by all necessary
corporate action, have received all necessary governmental approval (if
any shall be required) , and do not and will not contravene or conflict
with any provision of law or of the charter or by-laws of Borrower or
of any agreement binding upon Borrower.
B. The Loan Agreement as amended by this First Amendment,
represents the legal, valid and binding obligations of Borrower,
enforceable against Borrower in accordance with its terms, subject as
to enforcement only to bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of
creditors' rights generally.
C. No Event of Default or Unmatured Event of Default has
occurred and is continuing as of the date hereof.
IV. Defined Terms. Except as amended hereby, terms used herein that are
defined in the Loan Agreement shall have the same meanings herein.
V. Reaffirmation of Loan Agreement. This First Amendment shall be
deemed to be an amendment to the Loan Agreement, and the Loan Agreement, as
further amended hereby, is hereby ratified, approved and confirmed in each and
every respect. All references to the Loan Agreement
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<PAGE> 3
herein and in any other document, instrument, agreement or writing shall
hereafter be deemed to refer to the Loan Agreement as amended hereby.
VI. Entire Agreement. The Loan Agreement, as hereby further amended,
embodies the entire agreement between Borrower and Bank and supersedes all prior
proposals, agreements and understandings relating to the subject matter hereof.
Borrower certifies that it is relying on no representation, warranty, covenant
or agreement except for those set forth in the Loan Agreement as hereby further
amended and the other documents previously executed or executed of even date
herewith.
VII. Governing Law. THIS FIRST AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE
LAWS OF THE UNITED STATES OF AMERICA. This First Amendment has been entered into
in Harris County, Texas, and it shall be performable for all purposes in Harris
County, Texas. Courts within the State of Texas shall have jurisdiction over any
and all disputes between Borrower and Bank, whether in law or equity, including,
but not limited to, any and all disputes arising out of or relating to this
First Amendment or any other Loan Document; and venue in any such dispute
whether in federal or state court shall be laid in Harris County, Texas.
VIII. Severability. Whenever possible each provision of this First
Amendment shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this First Amendment shall be prohibited
by or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this First Amendment.
IX. Execution in Counterparts. Each party hereto acknowledges that this
Agreement may be executed in several counterparts by each party at different.
times and in different locations; that each separate counterpart bearing the
signature of any party may be effectively delivered to the other parties by the
delivery of an electronic facsimile sent via telecopier; that each party so
delivering any such counterpart shall be bound by its facsimile signature
thereon; and that the signature pages from counterparts signed by each party may
be collated into one or more copies of this agreement, which shall constitute
one and the same agreement among all parties hereto.
X. Section Captions. Section captions used in this First Amendment are
for convenience of reference only, and shall not affect the construction of this
First Amendment.
XI. Successors and Assigns. This First Amendment shall be binding upon
Borrower and Bank and their respective successors and assigns, and shall inure
to the benefit of Borrower and Bank, and the respective successors and assigns
of Bank.
XII. Non-Application of Chapter 15 of Texas Credit Codes. The
provisions of Chapter 15 of the Texas Credit Code (Vernon's Texas Civil
Statutes, Article 5069-15) are specifically
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<PAGE> 4
declared by the parties hereto not to be applicable to the Loan Agreement as
hereby further amended or any of the other Loan Documents or to the transactions
contemplated hereby.
XIII. Notice. THIS FIRST AMENDMENT TOGETHER WITH THE LOAN AGREEMENT,
AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be duly executed as of the day and year first above written.
BANK BORROWER
COMPASS BANK CARRIZO OIL & GAS, INC.
By: /s/ Kathleen J. Bowen By: /s/ Frank A. Wojtek
-------------------------------- --------------------------------
Kathleen J. Bowen Frank A. Wojtek
Vice President Vice President
4
<PAGE> 5
EXHIBIT A
[Letterhead of Compass Bank]
January 6, 1998
Mr. Frank A. Wojtek
Vice President-Finance
Carrizo Oil & Gas, Inc.
14811 St. Mary's Lane, Suite 148
Houston, TX 77079
Re: First Amended, Restated and combined Loan Agreement by and among Carrizo
Oil & Gas, Inc. and Compass Bank dated August 28, 1997 (the "Carrizo Loan
Agreement")
Dear Frank:
Compass Bank ("Compass") understands that Carrizo Oil & Gas, Inc., a Texas
corporation (the "Company"), desires to effect the sale of (i) 300,000 shares of
a newly established series of preferred stock designated as 9% Series A
Preferred Stock, par value $0.01 per share, of the Company (the "Preferred
Stock"), and (ii) 1,000,000 warrants (the "Warrants," and together with the
Preferred Stock, the "Securities") exercisable for the purchase of 1,000,000
shares of the common stock, par value $0.01 per share, of the Company to Enron
Capital & Trade Resources Corp. and Joint Energy Development Investments II
Limited Partnership. Compass further understands that (i) the holders of the
Preferred Stock will be entitled to receive, if, when and as declared by the
Board a f Directors of the Company out of funds legally available therefor,
cumulative dividends at the rate of $9.00 per year on each share of Preferred
Stock, payable quarterly, (ii) additional shares of Preferred Stock may be
issued as payment in kind of such dividends, and (iii) the Preferred Stock is
subject to redemption by the Company at the option of the Company, and at the
option of the holder thereof upon a change of control of the Company, and must
be redeemed upon the occurrence of certain events or on January 8, 2005. A copy
of the Statement of Resolution establishing the terms of the Preferred Stock is
set forth on Annex A hereto.
Compass hereby consents to the issuance of the Securities and waives any
violations of or events of default under the Carrizo Loan Agreement that result
from such issuance. Without limiting the generality of the foregoing
(capitalized terms used but not defined herein have the meaning assigned to them
in the Carrizo Loan Agreement):
<PAGE> 6
A. Compass hereby agrees that, for the purposes of Section 5.07 of the
Carrizo Loan Agreement, the designation of the Preferred Stock and the
issuance and sale of the Securities do not, and will not upon exercise
of the Warrants, constitute a material adverse change in the condition
of the Company.
B. Compass hereby consents, for the purposes of Section 6.07 of the
Carrizo Loan Agreement, which provides that the Company shall not
declare or pay my dividend or make any distribution on, or purchase or
redeem for value any interest in the Company, to any redemption of the
Preferred Stock by the Company and to any payment of dividends on the
Preferred Stock, that may be made in accordance with the terms of the
Preferred Stock as set forth on Annex A hereto, provided that at the
time of the payment of any such dividend or distribution or the
purchase or redemption of any of the Preferred Stock, no Event of
Default has occurred and is continuing and no Event of Default would
result immediately, or would occur solely upon the giving of notice or
the passage of time or both, as the result of the payment of any such
dividend or distribution or the purchase or redemption of such
Preferred Stock.
All other terms and conditions remain the same.
Very truly yours,
COMPASS BANK
By: /s/ Kathleen J. Bowen
--------------------------------
Kathleen J. Bowen
Vice President
<PAGE> 1
EXHIBIT 4.3
SECOND AMENDMENT
TO
FIRST AMENDED, RESTATED, AND COMBINED LOAN AGREEMENT
BY AND BETWEEN CARRIZO OIL & GAS, INC.
AND COMPASS BANK
This Second Amendment to the Loan Agreement (this "Second Amendment")
by and between CARRIZO OIL & GAS, INC., a Texas corporation (the "Borrower"),
and COMPASS BANK, a Texas chartered bank (the "Bank"), is entered into on this
30th day of December 1997, and shall be effective as of that date for all
purposes.
W I T N E S S E T H:
Borrower and Bank entered into a First Amended, Restated, and Amended
Loan Agreement dated August 28, 1997, and a First Amendment thereto dated
December 23, 1997 (collectively, the "Loan Agreement"). Capitalized terms used,
but not defined, herein shall have the meanings prescribed therefor in the Loan
Agreement.
Borrower has requested that Bank provide a term loan to Borrower in the
amount of $3,000,000.00, and Bank has agreed to do so according to the terms set
forth herein, which shall be incorporated into the Loan Agreement.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, and for other good and valuable consideration, the receipt and
sufficiency of which are acknowledged by Borrower and Bank, and each intending
to be legally bound hereby, the parties agree as follows:
I. Specific Amendments to Loan Agreement.
Article I is hereby amended by adding the following definitions
thereto:
"Floating Rate" means: (a) with respect to the Revolving Loan
evidenced by the Note, the Index Rate in effect from time, and (b) with
respect to the Term Loan evidenced by the Term Note, the Index Rate in
effect from time to time plus two percent (2.00%).
"Notes" means, collectively, the Note and the Term Note, and
any extension, renewal, rearrangement of, or substitute for either of
such Notes. All references to the defined term, "Note", if throughout
this Agreement, as it existed prior to the Second Amendment, shall be
construed to refer to both of the Notes, with the exception of the
references to the term, "Note," in the definitions of Floating Rate,
Loan Excess, and Note, and in Sections 2.01 through 2.03, 2.08, 2.09,
3.01, 3.04 and Exhibit "B," all of which shall remain singular and
shall be construed to refer to the Note evidencing the Revolving Loan.
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"Preferred Stock Closing" means the closing of the ECT
Transaction, as defined in the First amendment.
"Revolving Loan (s)" means the Loan (s) made pursuant to
Section 2.01 hereof.
"Second Amendment" means the Second Amendment to this
Agreement executed by Borrower and Bank on December 30, 1997.
"Term Loan" means that certain $3,000,000.00 term loan made or
to be made by Bank to Borrower pursuant to Section 2.18 hereof.
"Term Loan Maturity Date" means April 23, 1998, or the date of
Borrower's Preferred Stock Closing.
"Term Note" means the promissory note in the original face
amount of $3,000,000.00 dated December 30, 1997, made by Borrower
payable to the order of Bank, in substantially the form attached to the
Second Amendment as Exhibit "A," together with all deferrals, renewals,
extensions, amendments, modifications or rearrangements thereof, which
promissory note shall evidence the advances to Borrower by Bank
pursuant to Section 2.18 hereof.
Article II is hereby amended to add the following sections:
2.18 Term Loan. Subject to the terms and conditions and
relying on the representations and warranties contained in this
Agreement, Bank agrees to make the Term Loan to Borrower in a single
advance on or after December 30, 1997.
2.19 The Term Note. The obligation of Borrower to repay the
Term Loan shall be evidenced by the Term Note.
2.20 Repayment of Term Loan. Interest on the Term Note,
calculated as aforesaid in Section 2.04, shall be repaid by Borrower in
monthly installments on the first day of each month following the
advance from Bank to Borrower pursuant to Section 2. 18, through and
including the Term Loan Maturity Date, when the entire unpaid balance
of the Term Note, inclusive of principal and interest, shall be paid in
full.
2.21 Voluntary Prepayment of the Term Note. Borrower shall
have the right and option to prepay, at any time subject to the
contemporaneous payment of the prepayment fee prescribed below, the
entire balance outstanding on the Term Note, together with all accrued,
unpaid interest. No partial prepayments shall be permitted. If Borrower
prepays the indebtedness evidenced by the Term Note prior to the Term
Loan Maturity Date, then as consideration for and as a condition to
such prepayment privilege, Borrower shall simultaneously pay Bank a fee
in the amount of $30,000.00.
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Article III is hereby amended to add the following Section 3.17.
3.1.7 Conditions Precedent in Connection With the Second
Amendment. The obligation of Bank to make the Term Loan referred to in
Section 2.18 of this Agreement is subject to satisfaction of the
following conditions precedent:
(a) Receipt of Term Note, Second Amendment and Certificate of
Compliance. Bank shall have received the Term Note, multiple
counterparts of the Second Amendment, as requested by Bank, and the
Certificate of Compliance duly executed by an authorized officer for
Borrower.
(b) Receipt of Certified Copy of Corporate Proceedings and
Certificate of Incumbency. Bank shall have received from Borrower
copies of the resolutions of its board of directors authorizing the
transactions set forth in the Second Amendment and the execution of the
Second Amendment and the Term Note, such copy or copies to be certified
by the secretary or an assistant secretary as being true and correct
and in full force and effect as of the date of such certificate. In
addition, Bank shall have received from Borrower a certificate of
incumbency signed by the secretary or an assistant secretary setting
forth (a) the names of the officers executing the Second Amendment and
the Term Note (b) the office (s) to which such Persons have been
elected and in which they presently serve and (c) an original specimen
signature of each such person.
(c) Accuracy of Representations and Warranties and No Event of
Default. The representations and warranties contained in Article IV of
this Agreement shall be true and correct in all material respects on
the date of the making of such Term Loan with the same effect as though
such representations and warranties had been made on such date; and no
Event of Default shall have occurred and be continuing or will have
occurred at the completion of the making of such Loan.
(d) Legal Matters Satisfactory to Special Counsel to Bank. All
legal matters incident to the consummation of the transactions
contemplated by the Second Amendment shall be satisfactory to the firm
of Hutcheson & Grundy, L.L.P., special counsel for Bank.
(e) No Material Adverse Change. No material adverse change
shall have occurred since the date of this Agreement in the condition,
financial or otherwise, of Borrower.
(f) Facility Fee. Bank shall have received the balance of the
Facility Fee in the amount of $20,000.00 ($7,000.00 of which has
previously been paid) as provided in that commitment letter attached to
the Summary of Terms and Conditions between Bank and Borrower dated
December 24, 1997.
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Section 5.01 is hereby amended in its entirety as follows:
5.01 Use of Funds. Use the proceeds advanced under the
Revolving Loan to acquire Oil and Gas Properties, conduct developmental
drilling, and use as working capital for other ordinary business
activities of Borrower, and use the proceeds advanced under the Term
Loan to fund the cost of three dimensional seismic data programs,
acquire Oil and Gas Properties, and conduct developmental drilling, and
furnish Bank such evidence as it may reasonably require with respect to
such uses.
II. Reaffirmation of Representations and Warranties. To induce Bank to
enter into this Second Amendment, Borrower hereby reaffirms, as of the date
hereof, its representations and warranties contained in Article IV of the Loan
Agreement and in all other documents executed pursuant thereto, and additionally
represents and warrants as follows:
A. The execution and delivery of this Second Amendment and the
performance by Borrower of its obligations under this Second Amendment
are within Borrower's power, have been duly authorized by all necessary
corporate action, have received all necessary governmental approval (if
any shall be required), and do not and will not contravene or conflict
with any provision of law or of the charter or by-laws of Borrower or
of any agreement binding upon Borrower.
B. The Loan Agreement as amended by this Second Amendment,
represents the legal, valid and binding obligations of Borrower,
enforceable against Borrower in accordance with its terms, subject as
to enforcement only to bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of
creditors' rights generally.
C. No Event of Default or Unmatured Event of Default has
occurred and is continuing as of the date hereof.
III. Defined Terms. Except as amended hereby, terms used herein that
are defined in the Loan Agreement shall have the same meanings herein.
IV. Reaffirmation of Loan Agreement. This Second Amendment shall be
deemed to be an amendment to the Loan Agreement, and the Loan Agreement, as
further amended hereby, is hereby ratified, approved and confirmed in each and
every respect. All references to the Loan Agreement herein and in any other
document, instrument, agreement or writing shall hereafter be deemed to refer to
the Loan Agreement as amended hereby.
V. Entire Agreement. The Loan Agreement, as hereby further amended,
embodies the entire agreement between Borrower and Bank and supersedes all prior
proposals, agreements and understandings relating to the subject matter hereof.
Borrower certifies that it is relying on no representation, warranty, covenant
or agreement except for those set forth in the Loan Agreement
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as hereby further amended and the other documents previously executed or
executed of even date herewith.
VI. Governing Law. THIS SECOND AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE
LAWS OF THE UNITED STATES OF AMERICA. This Second Amendment has been entered
into in Harris County, Texas, and it shall be performable for all purposes in
Harris County, Texas. Courts within the State of Texas shall have jurisdiction
over any and all disputes between Borrower and Bank, whether in law or equity,
including, but not limited to, any and all disputes arising out of or relating
to this Second Amendment or any other Loan Document; and venue in any such
dispute whether in federal or state court shall be laid in Harris County, Texas.
VII. Severability. Whenever possible each provision of this Second
Amendment shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Second Amendment shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Second Amendment.
VIII. Execution in Counterparts. Each party hereto acknowledges that
this Agreement may be executed in several counterparts by each party at
different times and in different locations; that each separate counterpart
bearing the signature of any party may be effectively delivered to the other
parties by the delivery of an electronic facsimile sent via telecopier; that
each party so delivering any such counterpart shall be bound by its facsimile
signature thereon; and that the signature pages from counterparts signed by each
party may be collated into one or more copies of this agreement, which shall
constitute one and the same agreement among all parties hereto.
IX. Section Captions. Section captions used in this Second Amendment
are for convenience of reference only, and shall not affect the construction of
this Second Amendment.
X. Successors and Assigns. This Second Amendment shall be binding upon
Borrower and Bank and their respective successors and assigns, and shall inure
to the benefit of Borrower and Bank, and the respective successors and assigns
of Bank.
XI. Non-Application of Chapter 15 of Texas Credit Codes. The provisions
of Chapter 15 of the Texas Credit Code (Vernon's Texas Civil Statutes, Article
5069-15) are specifically declared by the parties hereto not to be applicable to
the Loan Agreement as hereby further amended or any of the other Loan Documents
or to the transactions contemplated hereby.
XII. Notice. THIS SECOND AMENDMENT TOGETHER WITH THE LOAN AGREEMENT,
AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS
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OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be duly executed as of the day and year first above written.
BANK BORROWER
COMPASS BANK CARRIZO OIL & GAS, INC.
By: /s/ Kathleen J. Bowen By: /s/ Frank A. Wojtek
----------------------------- -----------------------------
Kathleen J. Bowen Frank A. Wojtek
Vice President Vice President
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EXHIBIT "A"
NOTE
$3,000,000.00 Houston, Texas December 30, 1997
On the dates hereinafter prescribed, for value received, CARRIZO OIL &
GAS, INC., a Texas corporation (the "Borrower"), having an address at 14811 St.
Mary's Lane, Suite 148, Houston, Texas 77079, promises to pay to the order of
COMPASS BANK (herein called "Bank"), at its principal offices at 24 Greenway
Plaza, Fourteenth Floor, 'Houston, Harris County, Texas 77046, (i) the principal
amount of THREE MILLION AND NO/100 DOLLARS ($3,000,000.00), and (ii) interest on
the principal balance remaining unpaid from the date of the advance until
maturity at a rate of interest equal to lesser of (a) the "Floating Rate" (as
hereinafter defined), calculated on the basis of a year of 365 or 366 days, as
the case may be, and for the actual number of days elapsed (including the first
day but excluding the last day), or (b) the Maximum Rate (as hereinafter
defined). Any increase or decrease in interest rate resulting from a change in
the Maximum Rate shall be effective immediately when such change becomes
effective, without notice to Borrower, unless Applicable Law (as defined below)
requires that such increase or decrease not be effective until a later time, in
which event such increase or decrease shall be effective at the earliest time
permitted under the provisions of such law.
Notwithstanding the foregoing, if during any period the Floating Rate
exceeds the Maximum Rate, the rate of interest in effect on this Note shall be
limited to the Maximum Rate during each such period, but at all times thereafter
the rate of interest in effect on this Note shall be the Maximum Rate until the
total amount of interest accrued on this Note equals the total amount of
interest which would have accrued hereon if the Floating Rate had at all times
been in effect.
All payments on this Note shall be applied first to accrued interest
and the balance, if any, to principal.
"Floating Rate" means a per annum interest rate equal to the Index Rate
(as defined below) in effect from time to time plus two percent (2.0%), provided
that at such time no Event of Default or Unmatured Event of Default (as defined
in the First Amended, Restated and Combined Loan Agreement dated August 28,
1997, between Borrower and Bank (the "Loan Agreement")) has occurred and is
continuing; then thereafter, "Floating Rate" shall mean a per annum interest
rate equal to the Index Rate in effect from time to time plus five percent (5%).
"Index Rate" means at any time, the prime rate established in The Wall
Street Journal's "Money Rates" or similar table. If multiple prime rates are
quoted in the table, then the highest prime rate will be the Index Rate. In the
event that the prime rate is no longer published by The Wall Street Journal in
the "Money Rates" or similar table, then Bank may select an alternative
published index based upon comparable information as a substitute Index Rate.
Upon the selection of a substitute Index Rate, the applicable interest rate
shall thereafter vary in relation to the substitute
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index. Such substitute index shall be the same index that is generally used as a
substitute by Bank on all Index Rate loans. The Index Rate is eight and one-half
percent (8.50%) as of the date of this Agreement.
"Maximum Rate" means the Maximum Rate of non-usurious interest
permitted from day to day by applicable law, including as to Article 5069-1.04,
Vernon's Texas Revised Civil Statutes Annotated (and as the same may be
incorporated by reference in other Texas statutes), but otherwise without
limitation, that rate based upon the "indicated weekly rate ceiling."
"Applicable Law" means that law in effect from time to time and
applicable to this Note which lawfully permits the charging and collection of
the highest permissible lawful, non-usurious rate of interest on this Note,
including laws of the State of Texas and laws of the United States of America.
It is intended that Article 1.04, Title 79, Revised Civil Statutes of Texas,
1927, as amended (Article 5069-1.04, as amended, Vernon's Texas Civil Statutes)
shall be included in the laws of the State of Texas in determining Applicable
Law; and for the purpose of applying said Article 1.04 to this Note, the
interest ceiling applicable to this Note under said Article 1.04 shall be the
indicated weekly rate ceiling from time to time in effect. Borrower and Bank
hereby agree that Chapter 15 of Subtitle 3, Title 79, Revised Civil Statutes of
Texas, 1925, as amended, shall not apply to this Note or the loan transaction
evidenced by, and referenced in, the Loan Agreement in any manner, including
without limitation, to any account or arrangement evidenced or created by, or
provided for in, this Note.
"Business Day"' shall mean any day on which banks are open for general
banking business in the State of Texas, other than a Saturday, a Sunday, a legal
holiday or any other day on which banks in the State of Texas are required or
authorized by law or executive order to close.
The principal sum of this Note shall be due and payable on or before
the earlier of: (a) the Term Loan Maturity Date, as prescribed in the Loan
Agreement, (b) Borrower's Preferred Stock Closing, as defined in the Loan
Agreement, or (c) Borrower's payment in full of the revolving indebtedness
evidenced by the Note dated August 28, 1997, executed pursuant to the Loan
Agreement; interest to accrue upon the principal sum from time to time owing and
unpaid hereunder shall be due and payable in monthly installments, as it
accrues, with the first such monthly installment of interest hereon being due
and payable on the first day of February 1998, and with such subsequent
installments of interest being due and payable on the first day of each
succeeding month thereafter; provided, however, the final installment of
interest hereunder shall be due and payable not later than the maturity of the
principal sum hereof, howsoever such maturity may be brought about.
When the first (1st) day of a calendar month falls upon a Saturday,
Sunday or legal holiday, the payment of interest and principal, if any, due upon
such date shall be due and payable upon the next succeeding Business Day.
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In no event shall the aggregate of the interest on this Note, plus any
other amounts paid in connection with the loan evidenced by this Note which
would under Applicable Law be deemed "interest," ever exceed the maximum amount
of interest which, under Applicable Law, could be lawfully charged on this Note.
Bank and Borrower specifically intend and agree to limit contractually the
interest payable on this Note to not more than an amount determined at the
Maximum Rate. Therefore, none of the terms of this Note or any other instruments
pertaining to or securing this Note shall ever be construed to create a contract
to pay interest at a rate in excess of the Maximum Rate, and neither Borrower
nor any other party liable herefor shall ever be liable for interest in excess
of that determined at the Maximum Rate, and the provisions of this paragraph
shall control over all provisions of this Note or of any other instruments
pertaining to or securing this Note. If any amount of interest taken or received
by Bank shall be in excess of the maximum amount of interest which, under
Applicable Law, could lawfully have been collected on this Note, then the excess
shall be deemed to have been the result of a mathematical error by the parties
hereto and shall be refunded promptly to Borrower. All amounts paid or agreed to
be paid in connection with the indebtedness evidenced by this Note which would
under Applicable Law be deemed "Interest" shall, to the extent permitted by
Applicable Law, be amortized, prorated, allocated and spread throughout the full
term of this Note.
This Note is secured by all security agreements, collateral
assignments, mortgages and lien instruments executed by Borrower (or by any
other party) in favor of Bank, including those executed simultaneously herewith,
those executed heretofore and those hereafter executed, and including
specifically and without limitation the "Security Instruments" described and
defined in the Loan Agreement.
This Note is issued pursuant to the Loan Agreement. Reference is hereby
made to the Loan Agreement for a statement of the rights and obligations of the
holder of this Note and the duties and obligations of Borrower in relation
thereto; but neither this reference to the Loan Agreement nor any provisions
thereof shall affect or impair the absolute and unconditional obligation of
Borrower to pay any outstanding and unpaid principal of and interest on this
Note when due, in accordance with the terms of the Loan Agreement.
In the event of default in the payment when due of any of the principal
of or any interest on this Note, or in the event of default under the terms of
the Loan Agreement or any of the Security Instruments, or if any event occurs or
condition exists which authorizes the acceleration of the maturity of this Note
under any agreement made by Borrower, Bank (or other holder of this Note) may,
at its option, without presentment or demand or any notice to Borrower or any
other person liable herefor, declare the unpaid principal balance of and accrued
interest on this Note to be immediately due and payable.
If this Note is collected by suit or through the Probate or Bankruptcy
Court, or any judicial proceeding, or if this Note is not paid at maturity,
however such maturity may be brought about, and is placed in the hands of an
attorney for collection, then Borrower agrees to pay reasonable attorneys'
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<PAGE> 10
fees, not to exceed 10% of the full amount of principal and interest owing
hereon at the time this Note is placed in the hands of an attorney.
Borrower and all sureties, endorsers and guarantors of this Note,
including, but not limited to, Guarantor, waive demand, presentment for payment,
notice of nonpayment, protest, notice of protest, notice of intent to accelerate
maturity, notice of acceleration of maturity, and all other notices, filing of
suit and diligence in collecting this Note or enforcing any of the security
herefor, and agree to any substitution, exchange or release of any such security
or the release of any party primarily or secondarily liable hereon and further
agrees that it will not be necessary for Bank, in order to enforce payment of
this Note by them, to first institute suit or exhaust its remedies against any
Borrower or others liable herefor, or to enforce its rights against any security
herefor, and consent to any one or more extensions or postponements of time of
payment of this Note on any terms or any other indulgences with respect hereto,
without notice thereof to any of them. Bank may transfer this Note, and the
rights and privileges of Bank under this Note shall inure to the benefit of
Bank's representatives, successors or assigns.
Executed this 30th day of December 1997.
CARRIZO OIL & GAS, INC.
By: /s/ Frank A. Wojtek
---------------------------
Frank A. Wojtek
Vice President
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Exhibit 10.6
CARRIZO OIL & GAS, INC.
INDEMNIFICATION AGREEMENT
This Agreement ("Agreement") is made and entered into as of
the 4th day of June, 1997, by and between Carrizo Oil & Gas, Inc., a Texas
corporation (the "Corporation"), and ___________________ ("Indemnitee").
RECITALS
A. Highly competent persons are becoming more reluctant
to serve corporations as directors, executive officers or in other capacities
unless they are provided with adequate protection through insurance or adequate
indemnification against inordinate risks of claims and actions against them
arising out of their service to and activities on behalf of the corporation.
B. The Board of Directors of the Corporation (the
"Board") has determined that the inability to attract and retain such persons
would be detrimental to the best interests of the Corporation and its
shareholders and that the Corporation should act to assure such persons that
there will be increased certainty of such protection in the future.
C. The Board has also determined that it is reasonable,
prudent and necessary for the Corporation, in addition to purchasing and
maintaining directors' and officers' liability insurance, contractually to
obligate itself to indemnify such persons to the fullest extent permitted by
applicable law and to provide an arrangement of self-insurance so that they
will serve or continue to serve the Corporation free from undue concern that
they will not be so indemnified.
D. Indemnitee is willing to serve, continue to serve and
on behalf of the Corporation on the condition that he be so indemnified.
E. On June 4, 1997, the Amended and Restated Bylaws of
the Corporation were approved by the Board and by the Corporation's
shareholders which Bylaws provided for indemnification, advancement of
expenses, arrangements of insurance and self-insurance and specifically
authorized the Corporation to enter into indemnification agreements that
contractually provide to indemnitees the benefits of the provisions of Article
V of such Bylaws and that include related provisions and which agreements
facilitate indemnitees' receipt of such benefits and such other indemnification
protections as may be deemed appropriate.
In consideration of the mutual covenants herein contained, the
parties agree as follows:
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ARTICLE I
CERTAIN DEFINITIONS
As used herein, the following words and terms shall have the
following respective meanings (whether singular or plural):
"Change in Control" means a change in control of the
Corporation occurring after the date of this Agreement of a nature that would
be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A (or in response to any similar item on any similar schedule or
form) promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), whether or not the Corporation is then subject to such
reporting requirement; provided, however, that, without limitation, such a
Change in Control shall be deemed to have occurred if at any time after the
date of this Agreement (i) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Corporation representing 40% or more of the combined voting power of the
Corporation's then outstanding securities without the prior approval of at
least two-thirds of the members of the Board of Directors in office immediately
prior to such person attaining such percentage interest; (ii) the Corporation
is a party to a merger, consolidation, share exchange, sale of assets or other
reorganization, or a proxy contest, as a consequence of which members of the
Board of Directors in office immediately prior to such transaction or event
constitute less than a majority of the Board of Directors thereafter or (iii)
during any 15-month period, individuals who at the beginning of such period
constituted the Board of Directors (including for this purpose any new director
whose election or nomination for election by the Corporation's shareholders was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of such period) cease for any reason to
constitute at least a majority of the Board of Directors.
"Claim" means an actual or threatened claim or request for
relief.
"Corporate Status" means the status of a person who is or was
a director, officer, partner, employee, agent or fiduciary of the Corporation
or of any other corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise which such person is or was serving at the
request of the Corporation.
"Disinterested Director" means a director of the Corporation
who is not a named defendant or respondent to the Proceeding or subject to a
Claim in respect of which indemnification is sought by Indemnitee.
"Expenses" means all attorneys' fees, retainers, court costs,
transcript costs, fees of experts, witness fees, travel expenses, duplicating
costs, printing and binding costs, telephone charges, postage, delivery service
fees and all other disbursements or expenses of the types
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customarily incurred in connection with prosecuting, defending, preparing to
prosecute or defend, investigating or being or preparing to be a witness in a
Proceeding.
"Independent Counsel" means a law firm, or a member of a law
firm, that is experienced in matters of corporation law and neither
contemporaneously is, nor in the five years theretofore has been, retained to
represent: (a) the Corporation or Indemnitee in any matter material to either
such party, (b) any other party to the Proceeding giving rise to a claim for
indemnification hereunder or (c) the beneficial owner, directly or indirectly,
of securities of the Corporation representing 40% or more of the combined
voting power of the Corporation's then outstanding voting securities.
Notwithstanding the foregoing, the term "Independent Counsel" shall not include
any person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the
Corporation or Indemnitee in an action to determine Indemnitee's rights under
this Agreement.
"other enterprise" shall include, but shall not be limited to,
an "other entity" as defined in Section 1.01 of the TBCA (including any
amendment that may from time to time be made to such Section.
"person" shall have the meaning ascribed to such term in
Sections 13(d) and 14(d) of the Exchange Act.
"Proceeding" means any threatened, pending or completed
action, suit, arbitration, investigation, administrative hearing or any other
proceeding whether civil, criminal, administrative or investigative (except one
initiated by Indemnitee pursuant to Article VI of this Agreement to enforce his
rights under this Agreement), and any appeal in or related to any such action,
suit, arbitration, investigation, hearing or proceeding and any inquiry or
investigation that could lead to such an action, suit, proceeding or
arbitration.
"TBCA" means the Texas Business Corporation Act and any
successor statute thereto as either of them may from time to time be amended.
ARTICLE II
SERVICES BY INDEMNITEE
Indemnitee agrees to serve as a director of the Corporation.
Indemnitee may from time to time also agree to serve, as the Corporation may
request from time to time, as a director, officer, partner, employee, agent or
fiduciary of either the Corporation or any other corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise in which the
Corporation has an interest. Indemnitee and the Corporation each acknowledge
that they have entered into this Agreement as a means of inducing Indemnitee to
serve the Corporation in such capacities. Indemnitee may at any time and for
any reason resign from such position or positions (subject to any
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other contractual obligation or any obligation imposed by operation of law).
The Corporation shall have no obligation under this Agreement to continue
Indemnitee in any such position or positions.
ARTICLE III
INDEMNIFICATION
Section 3.1. General. The Corporation shall indemnify,
and advance Expenses, to Indemnitee to the fullest extent permitted by
applicable law in effect on the date hereof and to such greater extent as
applicable law may thereafter from time to time permit. The rights of
Indemnitee provided under the preceding sentence shall include, but shall not
be limited to, the right to be indemnified and to have Expenses advanced in all
Proceedings to the fullest extent permitted by Article 2.02-1 of the TBCA. The
provisions set forth in this Agreement are provided in addition to and as a
means of furtherance and implementation of, and not in limitation of, the
obligations expressed in this Article III. No requirement, condition to or
limitation of any right to indemnification under this Article III, or to
advancement of Expenses under Articles III and IV shall in any way limit the
rights of Indemnitee under Section 7.3.
Section 3.2. Additional Indemnity of the Corporation.
Indemnitee shall be entitled to indemnification pursuant to this Section 3.2
if, by reason of his Corporate Status, he is, or is threatened to be made, a
party to any Proceeding (except to the extent limited by Section 3.3).
Pursuant to this Section 3.2, Indemnitee shall be indemnified against Expenses,
judgments, penalties (including excise or similar taxes), fines and amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with such Proceeding or any Claim therein, if (1) he conducted
himself in good faith; (2) he reasonably believed: (a) in the case of conduct
in his official capacity, that his conduct was in the Corporation's best
interest; and (b) in all other cases, that his conduct was at least not opposed
to the Corporation's best interests and, (3) in the case of any criminal
Proceeding, had no reasonable cause to believe his conduct was unlawful.
Nothing in this Section 3.2 shall limit the benefits of Section 3.1 or any
other Section hereunder.
Section 3.3. Limitation on Indemnity. The Indemnification
otherwise available to an Indemnitee under Section 3.2 shall be limited to the
extent set forth in this Section 3.3. In the event that an Indemnitee is found
liable to the Corporation or is found liable on the basis that personal benefit
was improperly received by the Indemnitee whether or not the benefit resulted
from an action taken in Indemnitee's official capacity the Indemnitee shall,
with respect to the Claim in the Proceeding in which such finding is made, be
indemnified only against reasonable Expenses actually incurred by him in
connection with that Claim. Notwithstanding the foregoing, no indemnification
against such Expenses shall be made in respect of any Claim in such Proceeding
as to which Indemnitee shall have been adjudged to be liable for willful or
intentional misconduct in the performance of his duty to the Corporation;
provided, however, that, if applicable law so permits, indemnification against
such Expenses shall nevertheless be made by the Corporation in such event if
and only to the extent that the court in which such Proceeding shall have been
brought or is pending, shall determine.
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ARTICLE IV
EXPENSES
Section 4.1. Expenses of a Party Who Is Wholly or Partly
Successful. Notwithstanding any other provision of this Agreement, Indemnitee
shall be indemnified against all Expenses actually and reasonably incurred by
him in connection with any Proceeding to which Indemnitee is a party by reason
of his Corporate Status and in which Indemnitee is successful, on the merits or
otherwise. In the event that Indemnitee is not wholly successful, on the
merits or otherwise, in a Proceeding but is successful, on the merits or
otherwise, as to any Claim in such Proceeding, the Company shall indemnify
Indemnitee against all Expenses actually and reasonably incurred by him or on
his behalf relating to each Claim. For purposes of this Section 4.1 and
without limitation, the termination of a Claim in a Proceeding by dismissal,
with or without prejudice, shall be deemed to be a successful result as to such
Claim.
Section 4.2. Expenses of a Witness. Notwithstanding any
other provision of this Agreement, to the extent that Indemnitee is, by reason
of his Corporate Status, a witness or otherwise participates in any Proceeding
at a time when he is not named a defendant or respondent in the Proceeding, he
shall be indemnified against all Expenses actually and reasonably incurred by
him or on his behalf in connection therewith.
Section 4.3. Advancement of Expenses. The Corporation
shall pay all reasonable Expenses incurred by or on behalf of Indemnitee in
connection with any Proceeding or Claim, whether brought by the Corporation or
otherwise, in advance of any determination respecting entitlement to
indemnification pursuant to Article V hereof within 10 days after the receipt
by the Corporation of a written request from Indemnitee requesting such payment
or payments from time to time, whether prior to or after final disposition of
such Proceeding or Claim. Such statement or statements shall reasonably
evidence the Expenses incurred by Indemnitee. Indemnitee hereby undertakes and
agrees that he will reimburse and repay the Corporation for any Expenses so
advanced to the extent that it shall ultimately be determined by a court in a
final adjudication from which there is no further right of appeal, that
Indemnitee is not entitled to be indemnified against such Expenses.
ARTICLE V
PROCEDURE FOR DETERMINATION OF ENTITLEMENT
TO INDEMNIFICATION
Section 5.1. Request by Indemnitee. To obtain
indemnification under this Agreement, Indemnitee shall submit to the
Corporation a written request, including therein or therewith such
documentation and information as is reasonably available to Indemnitee and is
reasonably necessary to determine whether and to what extent Indemnitee is
entitled to indemnification. The Secretary or an Assistant Secretary of the
Corporation shall, promptly upon
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receipt of such a request for indemnification, advise the Board in writing that
Indemnitee has requested indemnification.
Section 5.2. Determination of Request. Upon written
request by Indemnitee for indemnification pursuant to the first sentence of
Section 5.1 hereof, a determination, if required by applicable law, with
respect to Indemnitee's entitlement thereto shall be made in the specific case:
(a) if a Change in Control shall have occurred, by Independent Counsel
(selected in accordance with Section 5.3) in a written opinion to the Board, a
copy of which shall be delivered to Indemnitee, unless Indemnitee shall request
that such determination be made in accordance with Article 2.02-1F (1) or (2)
of the TBCA; (b) if a Change in Control shall not have occurred, in accordance
with Article 2.02-1 of the TBCA. If it is so determined that Indemnitee is
entitled to indemnification hereunder, payment to Indemnitee shall be made
within 10 days after such determination. Indemnitee shall cooperate with the
person making such determination with respect to Indemnitee's entitlement to
indemnification, including providing to such person upon reasonable advance
request any documentation or information that is not privileged or otherwise
protected from disclosure and that is reasonably available to Indemnitee and
reasonably necessary to such determination. Any costs or expenses (including
attorneys' fees and disbursements) incurred by Indemnitee in so cooperating
with the person making such determination shall be borne by the Corporation
(irrespective of the determination as to Indemnitee's entitlement to
indemnification) and the Corporation hereby agrees to indemnify and hold
harmless Indemnitee therefrom.
Section 5.3. Independent Counsel. If a Change in Control
shall have occurred and Indemnitee elects that the determination as to
indemnification is to be made by Independent Counsel, the Independent Counsel
shall be selected by Indemnitee, and Indemnitee shall give written notice to
the Corporation within 10 days advising it of the identity of the Independent
Counsel so selected (unless Indemnitee shall request that such selection be
made by the Board, in which event the Corporation shall give written notice to
Indemnitee within 10 days after receipt of Indemnitee's request for
indemnification advising him of the identity of the Independent Counsel so
selected). In either event, Indemnitee or the Corporation, as the case may be,
may, within seven days after such written notice of selection shall have been
given, deliver to the Corporation or to Indemnitee, as the case may be, a
written objection to such selection. Any objection to selection of Independent
Counsel pursuant to this Section 5.3 may be asserted only on the ground that
the Independent Counsel so selected does not meet the requirements of the
definition of "Independent Counsel" in Article I hereof, and the objection
shall set forth with particularity the factual basis of such assertion. If
such written objection is timely made, the Independent Counsel so selected may
not serve as Independent Counsel unless and until a court has determined that
such objection is without merit. In the event of a timely written objection to
a choice of Independent Counsel, the party originally selecting the Independent
Counsel shall have seven days to make an alternate selection of Independent
Counsel and to give written notice of such selection to the other party, after
which time such other party shall have five days to make a written objection to
such alternate selection. If, within 30 days after submission by Indemnitee of
a written request for indemnification pursuant to Section 5.1 hereof, no
Independent Counsel shall have been selected and not objected to, either the
Corporation or Indemnitee may petition a court of competent jurisdiction (the
"Court") for resolution
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<PAGE> 7
of any objection that shall have been made by the Corporation or Indemnitee to
the other's selection of Independent Counsel and/or for the appointment as
Independent Counsel of a person selected by the Court or by such other person
as the Court shall designate, and the person with respect to whom an objection
is so resolved or the person so appointed shall act as Independent Counsel
under Section 5.2 hereof. The Corporation shall pay any and all reasonable
fees and expenses of Independent Counsel incurred by such Independent Counsel
in connection with acting pursuant to Section 5.2, and the Corporation shall
pay all reasonable fees and expenses incident to the procedures of this Section
5.3, regardless of the manner in which such Independent Counsel was selected or
appointed. Upon the due commencement of any judicial proceeding or arbitration
pursuant to Section 6.1(c) of this Agreement, Independent Counsel shall be
discharged and relieved of any further responsibility in such capacity (subject
to the applicable standards of professional conduct then prevailing).
Section 5.4. Presumptions and Effect of Certain
Proceedings.
(a) If a Change in Control shall have occurred, the
Indemnitee shall be presumed (except as otherwise expressly provided in this
Agreement) to be entitled to indemnification under this Agreement upon
submission of a request for indemnification under Section 5.1, and thereafter
the Corporation shall have the burden of proof in overcoming that presumption
in reaching a determination contrary to that presumption. The presumption
shall be used by Independent Counsel (or other person or persons determining
entitlement to indemnification) as a basis for a determination of entitlement
to indemnification unless the Corporation provides information sufficient to
overcome such presumption by clear and convincing evidence or the
investigation, review and analysis of Independent Counsel (or such other person
or persons) convinces him by clear and convincing evidence that the presumption
should not apply.
(b) If the person or persons empowered or selected under
Article V of this Agreement to determine whether Indemnitee is entitled to
indemnification shall not have made a determination within 60 days after
receipt by the Corporation of the request by Indemnitee therefor, the requisite
determination of entitlement to indemnification shall be deemed to have been
made and Indemnitee shall be entitled to such indemnification, absent (i) a
knowing misstatement by Indemnitee of a material fact, or knowing omission of a
material fact necessary to make Indemnitee's statement not materially
misleading, in connection with the request for indemnification, or (ii) a
prohibition of such indemnification under applicable law; provided, however,
that such 60-day period may be extended for a reasonable time, not to exceed an
additional 30 days, if the person making the determination with respect to
entitlement to indemnification in good faith requires such additional time for
the obtaining or evaluating of documentation and/or information relating to
such determination; and provided, further, that the 60-day limitation set forth
in this Section 5.4(b) shall not apply and such period shall be extended as
necessary (i) if within 30 days after receipt by the Corporation of the request
for indemnification under Section 5.1 the Board has resolved to submit such
determination to the shareholders pursuant to Section 5.2(b) of this Agreement
for their consideration at an annual meeting thereof to be held within 90 days
after such receipt and such determination is made thereat, or a special meeting
of shareholders is called within 30 days after such receipt for the purpose of
making such determination, such meeting is held for such purpose
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<PAGE> 8
within 60 days after having been so called and such determination is made
thereat, or (ii) if the determination of entitlement to indemnification is to
be made by Independent Counsel pursuant to Section 5.2(a) of this Agreement, in
which case the applicable period shall be as set forth in Section 6.1(c).
(c) The termination of any Proceeding or of any Claim by
judgment, order, settlement or conviction, or upon a plea of nolo contendere or
its equivalent, shall not (except as otherwise expressly provided in this
Agreement) by itself adversely affect the right of Indemnitee to
indemnification or create a presumption that Indemnitee did conduct himself in
good faith and in a manner that he reasonably believed in the case of conduct
in his official capacity, that was in the best interests of the Corporation or,
in all other cases, that was not opposed to the best interests of the
Corporation or, with respect to any criminal Proceeding, that Indemnitee had
reasonable cause to believe that his conduct was unlawful. Indemnitee shall be
deemed to have been found liable in respect of any Claim only after he shall
have been so adjudged by a court in competent jurisdiction after exhaustion of
all appeals therefrom.
ARTICLE VI
CERTAIN REMEDIES OF INDEMNITEE
Section 6.1. Indemnitee Entitled to Adjudication in an
Appropriate Court. In the event (a) a determination is made pursuant to
Article V that Indemnitee is not entitled to indemnification under this
Agreement; (b) there has been any failure by the Corporation to make timely
payment or advancement of any amounts due hereunder; or (c) the determination
of entitlement to indemnification is to be made by Independent Counsel pursuant
to Section 5.2 and such determination shall not have been made and delivered in
a written opinion within 90 days after (i) such Independent Counsel's being
appointed, (ii) the overruling by the Court of objections to such counsel's
selection or (iii) expiration of all periods for the Corporation or Indemnitee
to object to such counsel's selection, Indemnitee shall be entitled to commence
an action seeking an adjudication in an appropriate court of the State of
Texas, or in any other court of competent jurisdiction, of his entitlement to
such indemnification or advancement of Expenses. Alternatively, Indemnitee, at
his option, may seek an award in arbitration to be conducted by a single
arbitrator pursuant to the rules of the American Arbitration Association.
Indemnitee shall commence such action seeking an adjudication or an award in
arbitration within 180 days following the date on which Indemnitee first has
the right to commence such action pursuant to this Section 6.1, or such right
shall expire. The Corporation agrees not to oppose Indemnitee's right to seek
any such adjudication or award in arbitration.
Section 6.2. Adverse Determination Not to Affect any
Judicial Proceeding. In the event that a determination shall have been made
pursuant to Article V that Indemnitee is not entitled to indemnification, any
judicial proceeding or arbitration commenced pursuant to this Article VI shall
be conducted in all respects as a de novo trial or arbitration on the merits,
and Indemnitee shall not be prejudiced by reason of such initial adverse
determination. In any judicial proceeding or
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<PAGE> 9
arbitration commenced pursuant to this Article VI, the Corporation shall have
the burden of proving that Indemnitee is not entitled to indemnification or
advancement of Expenses, as the case may be.
Section 6.3. Company Bound by Determination Favorable to
Indemnitee in any Judicial Proceeding or Arbitration. If a determination shall
have been made or deemed to have been made pursuant to Article V that
Indemnitee is entitled to indemnification, the Corporation shall be bound by
such determination in any judicial proceeding or arbitration commenced pursuant
to this Article VI, absent a knowing misstatement by Indemnitee of a material
fact, or a knowing omission of a material fact necessary to make a statement by
Indemnitee not materially misleading, in connection with the request for
indemnification.
Section 6.4. Corporation Bound by the Agreement. The
Corporation shall be precluded from asserting in any judicial proceeding or
arbitration commenced pursuant to this Article VI that the procedures and
presumptions of this Agreement are not valid, binding and enforceable and shall
stipulate in any such court or before any such arbitrator that the Corporation
is bound by all the provisions of this Agreement.
Section 6.5. Indemnitee Entitled to Expenses of Judicial
Proceeding. In the event that Indemnitee seeks a judicial adjudication of or
an award in arbitration to enforce his rights under, or to recover damages for
breach of, this Agreement, Indemnitee shall be entitled to recover from the
Corporation, and shall be indemnified by the Corporation against, any and all
expenses (of the types described in the definition of Expenses in Article I)
actually and reasonably incurred by him in such judicial adjudication or
arbitration but only if he prevails therein. If it shall be determined in said
judicial adjudication or arbitration that Indemnitee is entitled to receive
part but not all of the indemnification or advancement of expenses or other
benefit sought, the expenses incurred by Indemnitee in connection with such
judicial adjudication or arbitration shall be reasonably prorated in good faith
by counsel for Indemnitee. Notwithstanding the foregoing, if a Change in
Control shall have occurred, Indemnitee shall be entitled to indemnification
under this Section 6.5 regardless of whether Indemnitee ultimately prevails in
such judicial adjudication or arbitration.
ARTICLE VII
MISCELLANEOUS
Section 7.1. Non-Exclusivity. The rights of Indemnitee to
receive indemnification and advancement of Expenses under this Agreement shall
not be deemed exclusive of any other rights to which Indemnitee may at any time
be entitled under applicable law, the Articles of Incorporation or Bylaws of
the Corporation, any other agreement, vote of shareholders or a resolution of
directors, or otherwise. No amendment or alteration of the Articles of
Incorporation or Bylaws of the Corporation or any provision thereof shall
adversely affect Indemnitee's rights hereunder and such rights shall be in
addition to any rights Indemnitee may have under the Corporation's Articles of
Incorporation, Bylaws and the TBCA or otherwise. To the extent that there is a
change in the TBCA (whether by statute or judicial decision) which allows
greater
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<PAGE> 10
indemnification by agreement than would be afforded currently under the
Corporation's Articles of Incorporation or Bylaws and this Agreement, it is the
intent of the parties hereto that the Indemnitee shall enjoy by virtue of this
Agreement the greater benefit so afforded by such change.
Section 7.2. Insurance and Subrogation.
(a) To the extent that the Corporation maintains an
insurance policy or policies providing liability insurance for directors,
officers, employees, agents or fiduciaries of the Corporation or of any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise that such person serves at the request of the Corporation,
Indemnitee shall be covered by such policy or policies in accordance with its
or their terms to the maximum extent of the coverage available for any such
director, officer, employee, agent or fiduciary under such policy or policies.
(b) In the event of any payment by the Corporation under
this Agreement, the Corporation shall be subrogated to the extent of such
payment to all of the rights of recovery of Indemnitee, who shall execute all
papers required and take all action necessary to secure such rights, including
execution of such documents as are necessary to enable the Corporation to bring
suit to enforce such rights.
(c) The Corporation shall not be liable under this
Agreement to make any payment of amounts otherwise indemnifiable hereunder if
and to the extent that Indemnitee has otherwise actually received such payment
under any Bylaw, insurance policy, contract, agreement or otherwise.
Section 7.3. Self Insurance of the Corporation. The
parties hereto recognize that the Corporation may, but is not required to,
procure or maintain insurance or other similar arrangements, at its expense, to
protect itself and any person, including the Indemnitee, who is or was a
director, officer, employee, agent or fiduciary of the Corporation or who is or
was serving at the request of the Corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise against any expense, liability or loss asserted against or
incurred by such person, in such a capacity or arising out of his status as
such a person, whether or not the Corporation would have the power to indemnify
such person against such expense or liability.
In considering the cost and availability of such insurance,
the Corporation, (through the exercise of the business judgment of its
directors and officers), may from time to time, purchase insurance which
provides for any and all of (i) deductibles, (ii) limits on payments required
to be made by the insurer, or (iii) coverage exclusions and/or coverage which
may not be as comprehensive as that which might otherwise be available to the
Corporation but which otherwise available insurance the officers or directors
of the Corporation determine is inadvisable for the Corporation to purchase
given the cost involved. The purchase of insurance with deductibles, limits on
payments and coverage exclusions will be deemed to be in the best interest of
the Corporation
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<PAGE> 11
but may not be in the best interest of the Indemnitee. As to the Corporation,
purchasing insurance with deductibles, limits on payments and coverage
exclusions is similar to the Corporation's practice of self-insurance in other
areas. In order to protect Indemnitee who would otherwise be more fully or
entirely covered under such policies, the Corporation shall indemnify and hold
Indemnitee harmless to the extent (i) of such deductibles, (ii) of amounts
exceeding payments required to be made by an insurer or (iii) of coverage under
policies of officer's and director's liability insurance that are available,
were available or which became available to the Corporation or which are
generally available to companies comparable to the Corporation but which the
officers or directors of the Corporation determine is inadvisable for the
Corporation to purchase, given the cost involved. The obligation of the
Corporation in the preceding sentence shall be without regard to whether the
Corporation would otherwise be entitled to indemnify such officer or director
under the other provisions of this Agreement, or under any law, agreement, vote
of shareholders or directors or other arrangement. Notwithstanding the
foregoing provisions of this Section 7.3, the Indemnitee shall not be entitled
to indemnification for the results of his conduct that is intentionally adverse
to the interests of the Corporation. Without limiting the generality of any
provision of this Agreement, the procedures in Article V hereof shall, to the
extent applicable, be used for determining entitlement to indemnification under
this Section 7.3. This Agreement is authorized by Section 2.02-1(R) of the
TBCA as in effect on June 4, 1997, and further is intended to establish an
arrangement of self-insurance pursuant to that section.
Section 7.4. Certain Settlement Provisions. The
Corporation shall have no obligation to indemnify Indemnitee under this
Agreement for amounts paid in settlement of a Proceeding or Claim without the
Corporation's prior written consent. The Corporation shall not settle any
Proceeding or Claim in any manner that would impose any fine or other
obligation on Indemnitee without Indemnitee's consent. Neither the Corporation
nor Indemnitee shall unreasonably withhold their consent to any proposed
settlement.
Section 7.5. Exculpation of Directors. If Indemnitee is
or was a director of the Corporation, he shall not in that capacity be liable
to the Corporation or its shareholders for monetary damages for an act or
omission in Indemnitee's capacity as a director, except that Indemnitee's
liability shall not be eliminated or limited for: (a) a breach of Indemnitee's
duty of loyalty to the Corporation or its shareholders; (b) an act or omission
not in good faith that constitutes a breach of duty of the director to the
Corporation or an act or omission that involves intentional misconduct or a
knowing violation of the law; (c) a transaction from which Indemnitee received
an improper benefit, whether or not the benefit resulted from an action taken
within the scope of Indemnitee's office; or (d) an act or omission for which
the liability of Indemnitee is expressly provided for by statute.
Section 7.6. Duration of Agreement. This Agreement shall
continue for so long as Indemnitee serves as a director of the Corporation or
as a director, officer, partner, employee, agent or fiduciary of any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise in which the Corporation has an interest, and thereafter shall
survive until and terminate upon the later to occur of: (a) 20 years after the
date that Indemnitee shall have ceased to
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<PAGE> 12
serve as a director of the Corporation or of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
which Indemnitee served at the request of the Corporation; (b) the final
termination of all pending Proceedings in respect of which Indemnitee is
granted rights of indemnification or advancement of expenses hereunder and of
any proceeding commenced by Indemnitee pursuant to Article VI relating thereto;
or (c) the expiration of all statutes of limitation applicable to possible
Claims arising out of Indemnitee's Corporate Status. This Agreement shall be
binding upon the Corporation and its successors and assigns and shall inure to
the benefit of Indemnitee and his heirs, executors, legal representatives and
administrators.
Section 7.7. Notice by Each Party. Indemnitee agrees to
promptly notify the Corporation in writing upon being served with any summons,
citation, subpoena, complaint, indictment, information or other document or
communication relating to any Proceeding or Claim for which Indemnitee may be
entitled to indemnification or advancement of Expenses hereunder. The
Corporation agrees to promptly notify Indemnitee in writing, as to the pendency
of any Proceeding or Claim which may involve a claim against the Indemnitee for
which Indemnitee may be entitled to indemnification or advancement of Expenses
hereunder.
Section 7.8. Amendment. This Agreement may not be
modified or amended except by a written instrument executed by or on behalf of
each of the parties hereto.
Section 7.9. Waivers. The observance of any term of this
Agreement may be waived (either generally or in a particular instance and
either retroactively or prospectively) by the party entitled to enforce such
term only by a writing signed by the party against which such waiver is to be
asserted. Unless otherwise expressly provided herein, no delay on the part of
any party hereto in exercising any right, power or privilege hereunder shall
operate as a waiver thereof, nor shall any waiver on the part of any party
hereto of any right, power or privilege hereunder operate as a waiver of any
other right, power or privilege hereunder nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or privilege
hereunder.
Section 7.10. Entire Agreement. This Agreement and the
documents expressly referred to herein constitute the entire agreement between
the parties hereto with respect to the matters covered hereby, and any other
prior or contemporaneous oral or written understandings or agreements with
respect to the matters covered hereby are expressly superseded by this
Agreement.
Section 7.11. Severability. If any provision of this
Agreement (including any provision within a single section, paragraph or
sentence) or the application of such provision to any person or circumstance,
shall be judicially declared to be invalid, unenforceable or void, such
decision will not have the effect of invalidating or voiding the remainder of
this Agreement or affect the application of such provision to other persons or
circumstances, and the parties hereto agree that the part or parts of this
Agreement so held to be invalid, unenforceable or void will be deemed to have
been stricken herefrom and the remainder of this Agreement will have the same
force and effectiveness as if such part or parts had never been included
herein; provided, however, that the
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<PAGE> 13
parties shall negotiate in good faith with respect to an equitable modification
of the provision or application thereof declared to be invalid, unenforceable
or void. Any such finding of invalidity or unenforceability shall not prevent
the enforcement of such provision in any other jurisdiction to the maximum
extent permitted by applicable law.
Section 7.12. Notices. Unless otherwise expressly provided
herein, all notices, requests, demands, consents, waivers, instructions,
approvals and other communications hereunder shall be in writing and shall be
deemed to have been duly given if personally delivered to or mailed, certified
mail return receipt requested, first-class postage paid, addressed as follows:
If to the Corporation, to it at:
Carrizo Oil & Gas, Inc.
14811 St. Mary's Lane, Suite 148
Houston, Texas 77079
Attn: Chief Financial Officer
If to Indemnitee, to him at:
-------------------------
or to such other address or to such other individuals as any party shall have
last designated by notice to the other parties. All notices and other
communications given to any party in accordance with the provisions of this
Agreement shall be deemed to have been given when delivered or sent to the
intended recipient thereof in accordance with the provisions of this Section
7.12.
Section 7.13. Governing Law. This Agreement shall be
construed in accordance with and governed by the laws of the State of Texas
without regard to the principles of conflict of laws.
Section 7.14. Headings. The Article and Section headings in
this Agreement are for convenience of reference only, and shall not be deemed
to alter or affect the meaning or interpretation of any provisions hereof.
Section 7.15. Counterparts. This Agreement may be executed
in two or more counterparts, each of which shall be deemed to be an original
and all of which together shall be deemed to be one and the same instrument.
Section 7.16. Certain Persons Not Entitled to
Indemnification. Notwithstanding any other provision of this Agreement,
Indemnitee shall not be entitled to indemnification or advancement of expenses
hereunder with respect to any Proceeding or any Claim therein, brought
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<PAGE> 14
or made by such person against the Corporation, except as specifically provided
in Article V or Article VI hereof.
Section 7.17. Indemnification for Negligence, Gross
Negligence, etc. Without limiting the generality of any other provision
hereunder, it is the express intent of this Agreement that Indemnitee be
indemnified and expenses be advanced regardless of Indemnitee's acts of
negligence, gross negligence, intentional or willful misconduct to the extent
that indemnification and advancement of expenses is allowed pursuant to the
terms of this Agreement.
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered to be effective as of the date first above written.
CARRIZO OIL & GAS, INC.
By:
-----------------------------------------
Name:
Title:
INDEMNITEE
--------------------------------------------
Name:
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<PAGE> 15
Schedule of Indemnification Agreements
The Registrant has entered into an Indemnification Agreement
in the form hereof with each of S.P. Johnson IV, Frank A. Wojtek, Paul B.
Loyd, Jr., Douglas A. P. Hamilton and Steven A. Webster.
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<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement No. 333-35245 on Form S-8.
ARTHUR ANDERSEN LLP
Houston, Texas
March 31, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Registration No. 333-35245; the "Registration Statement")
of Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"), relating to the
1997 Incentive Plan of the Company of information contained in our reserve
report that is summarized as of December 31, 1997 in our summary letter dated
February 26, 1998, relating to the oil and gas reserves and revenue, as of
December 31, 1997, of certain interests of the Company.
We hereby consent to all references to such reports, letters and/or to
this firm in each of the Registration Statement and the Prospectus to which the
Registration Statement relates, and further consent to our being named as an
expert in each of the Registration Statement and the Prospectus to which the
Registration Statement relates.
[Signature of Ryder Scott Company]
Ryder Scott Company Petroleum Engineers
Houston, Texas
March 27, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Registration No. 333-35245; the "Registration Statement")
of Carrizo Oil & Gas, Inc., a Texas corporation (the "Company"), relating to the
1997 Incentive Plan of the Company of information contained in our reserve
report that is summarized as of December 31, 1997 in our summary letter dated
February, 25, 1998, relating to the oil and gas reserves and revenue, as of
December 31, 1997, of certain interests of the Company.
We hereby consent to all references to such reports, letters and/or to
this firm in each of the Registration Statement and the Prospectus to which the
Registration Statement relates, and further consent to our being named as an
expert in each of the Registration Statement and the Prospectus to which the
Registration Statement relates.
[Signature of Fairchild, Ancell & Wells, Inc.]
Fairchild, Ancell & Wells, Inc.
Houston, Texas
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,674,837
<SECURITIES> 0
<RECEIVABLES> 1,794,175
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,236,964
<PP&E> 45,082,833
<DEPRECIATION> 0
<TOTAL-ASSETS> 53,658,435
<CURRENT-LIABILITIES> 10,512,807
<BONDS> 0
0
0
<COMMON> 103,750
<OTHER-SE> 32,791,611
<TOTAL-LIABILITY-AND-EQUITY> 53,658,435
<SALES> 8,711,654
<TOTAL-REVENUES> 8,711,654
<CGS> 2,334,009
<TOTAL-COSTS> 6,282,623
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98,024
<INCOME-PRETAX> 2,331,007
<INCOME-TAX> 2,300,267
<INCOME-CONTINUING> 30,740
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,740
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<PAGE> 1
EXHIBIT 99.1
March 31, 1998
Carrizo Oil & Gas, Inc.
14811 St. Mary's Lane, Suite 148
Houston, Texas 77079
Gentlemen:
At your request, we have prepared an estimate of the reserves,
future production, and income attributable to certain leasehold interests of
Carrizo Oil & Gas, Inc. (Carrizo) as of December 31, 1997. The subject
properties are located in the states of Louisiana and Texas. The income data
were estimated using the Securities and Exchange Commission (SEC) guidelines for
future price and cost parameters.
The estimated reserves and future income amounts presented in
this report are related to hydrocarbon prices. December 1997 hydrocarbon prices
were used in the preparation of this report as required by SEC guidelines;
however, actual future prices may vary significantly from December 1997 prices.
Therefore, volumes of reserves actually recovered and amounts of income actually
received may differ significantly from the estimated quantities presented in
this report. The results of this study are summarized below.
SEC PARAMETERS
Estimated Net Reserves and Income Data
Certain Leasehold Interests of
CARRIZO OIL & GAS, INC.
As of December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proved
----------------------------------------------------
Developed Total
---------------------------------------
Producing Non-Producing Undeveloped Proved
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET REMAINING RESERVES
Oil/Condensate - Barrels 205,067 39,185 228,081 472,333
Plant Products - Barrels 74,769 119,012 0 193,781
Gas - MMCF 4,330 3,806 2,843 10,979
INCOME DATA
Future Gross Revenue $14,218,979 $10,638,011 $9,763,906 $34,620,896
Deductions 3,205,343 2,112,227 2,846,179 8,163,749
----------- ----------- ---------- -----------
Future Net Income (FNI) $11,013,636 $ 8,525,784 $6,917,727 $26,457,147
Discounted FNI @ 10% $ 9,221,567 $ 5,373,375 $4,437,984 $19,032,926
</TABLE>
<PAGE> 2
Carrizo Oil & Gas, Inc.
March 31, 1998
Page 2
Liquid hydrocarbons are expressed in standard 42 gallon
barrels. All gas volumes are sales gas expressed in millions of cubic feet
(MMCF) at the official temperature and pressure bases of the areas in which the
gas reserves are located.
The future gross revenue is after the deduction of production
taxes. The deductions are comprised of the normal direct costs of operating the
wells, ad valorem taxes, recompletion costs, development costs, and certain
abandonment costs net of salvage. The future net income is before the deduction
of state and federal income taxes and general administrative overhead, and has
not been adjusted for outstanding loans that may exist nor does it include any
adjustment for cash on hand or undistributed income. No attempt was made to
quantify or otherwise account for any accumulated gas production imbalances that
may exist. Gas reserves account for approximately 73 percent and liquid
hydrocarbon reserves account for the remaining 27 percent of total future gross
revenue from proved reserves.
RESERVES INCLUDED IN THIS REPORT
The proved reserves included herein conform to the definition
as set forth in the Securities and Exchange Commission's Regulation S-X Part
210.4-10 (a) as clarified by subsequent Commission Staff Accounting Bulletins.
The definition of proved reserves is included in the section entitled
"Definitions of Reserves" which is attached with this report.
The proved developed non-producing reserves included herein
are comprised of shut-in and behind pipe categories. The various reserve status
categories are defined in the section entitled "Reserve Status Categories (SEC)"
which is attached with this report.
ESTIMATES OF RESERVES
In general, the reserves included herein were predominantly
estimated by the volumetric method due to the limited production history of the
wells considered in this study. However, performance methods were used in
certain cases where characteristics of the data indicated this method was more
appropriate in our opinion. The reserves estimated by the performance method
utilized extrapolations of various historical data in those cases where such
data were definitive. Reserves were estimated by the volumetric method in those
cases where there were inadequate historical performance data to establish a
definitive trend or where the use of production performance data as a basis for
the reserve estimates was considered to be inappropriate.
The reserves included in this report are estimates only and
should not be construed as being exact quantities. They may or may not be
actually recovered, and if recovered, the revenues therefrom and the actual
costs related thereto could be more or less than the estimated amounts.
Moreover, estimates of reserves may increase or decrease as a result of future
operations.
FUTURE PRODUCTION RATES
Initial production rates are based on the current producing
rates for those wells now on production. Test data and other related information
were used to estimate the anticipated initial production rates for those wells
or locations which are not currently producing. If no production decline trend
has been established, future production rates were held constant, or adjusted
for the effects of curtailment where appropriate, until a decline in ability to
produce was anticipated. An estimated rate of decline was then applied to
depletion of the reserves. If a decline trend has been established, this
<PAGE> 3
Carrizo Oil & Gas, Inc.
March 31, 1998
Page 3
trend was used as the basis for estimating future production rates. For reserves
not yet on production, sales were estimated to commence at an anticipated date
furnished by Carrizo.
In general, we estimate that future gas production rates
limited by allowables or marketing conditions will continue to be the same as
the average rate for the latest available 12 months of actual production until
such time that the well or wells are incapable of producing at this rate. The
well or wells were then projected to decline at their decreasing delivery
capacity rate. Our general policy on estimates of future gas production rates is
adjusted when necessary to reflect actual gas market conditions in specific
cases.
The future production rates from wells now on production may
be more or less than estimated because of changes in market demand or allowables
set by regulatory bodies. Wells or locations which are not currently producing
may start producing earlier or later than anticipated in our estimates of their
future production rates.
HYDROCARBON PRICES
Carrizo furnished us with prices in effect at December 31,
1997 and these prices were held constant except for known and determinable
escalations. In accordance with Securities and Exchange Commission guidelines,
changes in liquid and gas prices subsequent to December 31, 1997 were not taken
into account in this report. Future prices used in this report are discussed in
more detail in the section entitled "Hydrocarbon Pricing Parameters" which is
attached with this report.
COSTS
Operating costs for the leases and wells in this report are
based on the operating expense reports of Carrizo and include only those costs
directly applicable to the leases or wells. When applicable, the operating costs
include a portion of general and administrative costs allocated directly to the
leases and wells under terms of operating agreements. No deduction was made for
indirect costs such as general administration and overhead expenses, loan
repayments, interest expenses, and exploration and development prepayments that
are not charged directly to the leases or wells.
Development costs were furnished to us by Carrizo and are
based on authorizations for expenditure for the proposed work or actual costs
for similar projects. The estimated net cost of abandonment after salvage was
included for properties where abandonment costs net of salvage are significant.
At the request of Carrizo, their estimate of zero abandonment costs after
salvage value for onshore properties was used in this report. Ryder Scott has
not performed a detailed study of the abandonment costs nor the salvage value
and makes no warranty for Carrizo's estimate.
Current costs were held constant throughout the life of the
properties.
GENERAL
While it may reasonably be anticipated that the future prices
received for the sale of production and the operating costs and other costs
relating to such production may also increase or decrease from existing levels,
such changes were, in accordance with rules adopted by the SEC, omitted from
consideration in making this evaluation.
<PAGE> 4
Carrizo Oil & Gas, Inc.
March 31, 1998
Page 4
The estimates of reserves presented herein were based upon a
detailed study of the properties in which Carrizo owns an interest; however, we
have not made any field examination of the properties. No consideration was
given in this report to potential environmental liabilities which may exist nor
were any costs included for potential liability to restore and clean up damages,
if any, caused by past operating practices. Carrizo has informed us that they
have furnished us all of the accounts, records, geological and engineering data,
and reports and other data required for this investigation. The ownership
interests, prices, and other factual data furnished by Carrizo were accepted
without independent verification. The estimates presented in this report are
based on data available through November 1997.
Neither we nor any of our employees have any interest in the
subject properties and neither the employment to make this study nor the
compensation is contingent on our estimates of reserves and future income for
the subject properties.
This report was prepared for the exclusive use and sole
benefit of Carrizo Oil & Gas, Inc. The data, work papers, and maps used in this
report are available for examination by authorized parties in our offices.
Please contact us if we can be of further service.
Very truly yours,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Michael F. Stell, P.E.
Vice President
MFS/ag
<PAGE> 5
DEFINITIONS OF RESERVES
PROVED RESERVES (SEC DEFINITION)
Proved reserves of crude oil, condensate, natural gas, and natural gas
liquids are estimated quantities that geological and engineering data
demonstrate with reasonable certainty to be recoverable in the future from known
reservoirs under existing operating conditions, i.e., prices and costs as of the
date the estimate is made. Prices include consideration of changes in existing
prices provided only by contractual arrangements, but not on escalation based on
future conditions.
Reservoirs are considered proved if economic producibility is supported
by either actual production or conclusive formation test. In certain instances,
proved reserves are assigned on the basis of a combination of core analysis and
electrical and other type logs which indicate the reservoirs are analogous to
reservoirs in the same field which are producing or have demonstrated the
ability to produce on a formation test. The area of a reservoir considered
proved includes (1) that portion delineated by drilling and defined by fluid
contacts, if any, and (2) the adjoining portions not yet drilled that can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of data on fluid contacts, the
lowest known structural occurrence of hydrocarbons controls the lower proved
limit of the reservoir.
Reserves that can be produced economically through the application of
improved recovery techniques are included in the proved classification when
these qualifications are met: (1) successful testing by a pilot project or the
operation of an installed program in the reservoir provides support for the
engineering analysis on which the project or program was based, and (2) it is
reasonably certain the project will proceed. Improved recovery includes all
methods for supplementing natural reservoir forces and energy, or otherwise
increasing ultimate recovery from a reservoir, including (1) pressure
maintenance, (2) cycling, and (3) secondary recovery in its original sense.
Improved recovery also includes the enhanced recovery methods of thermal,
chemical flooding, and the use of miscible and immiscible displacement fluids.
Proved natural gas reserves are comprised of non-associated, associated
and dissolved gas. An appropriate reduction in gas reserves has been made for
the expected removal of natural gas liquids, for lease and plant fuel, and for
the exclusion of non-hydrocarbon gases if they occur in significant quantities
and are removed prior to sale. Estimates of proved reserves do not include crude
oil, natural gas, or natural gas liquids being held in underground or surface
storage.
Proved reserves are estimates of hydrocarbons to be recovered from a
given date forward. They may be revised as hydrocarbons are produced and
additional data become available.
<PAGE> 6
RESERVE STATUS CATEGORIES (SEC)
Reserve status categories define the development and producing status
of wells and/or reservoirs.
PROVED DEVELOPED
Proved developed oil and gas reserves are reserves that can be expected
to be recovered through existing wells with existing equipment and operating
methods. Additional oil and gas expected to be obtained through the application
of fluid injection or other improved recovery techniques for supplementing the
natural forces and mechanisms of primary recovery should be included as "proved
developed reserves" only after testing by a pilot project or after the operation
of an installed program has confirmed through production response that increased
recovery will be achieved.
Developed reserves may be subcategorized as producing or non-producing
using the SPE/WPC Definitions:
Producing
Reserves sub-categorized as producing are expected to be recovered from
completion intervals which are open and producing at the time of the
estimate. Improved recovery reserves are considered producing only after
the improved recovery project is in operation.
Non-Producing
Reserves sub-categorized as non-producing include shut-in and behind pipe
reserves. Shut-in reserves are expected to be recovered from (1)
completion intervals which are open at the time of the estimate but which
have not started producing, (2) wells which were shut-in for market
conditions or pipeline connections, or (3) wells not capable of
production for mechanical reasons. Behind pipe reserves are expected to
be recovered from zones in existing wells, which will require additional
completion work or future recompletion prior to the start of production.
PROVED UNDEVELOPED
Proved undeveloped oil and gas reserves are reserves that are expected
to be recovered from new wells on undrilled acreage, or from existing wells
where a relatively major expenditure is required for recompletion. Reserves on
undrilled acreage shall be limited to those drilling units offsetting productive
units that are reasonably certain of production when drilled. Proved reserves
for other undrilled units can be claimed only where it can be demonstrated with
reasonable certainty that there is continuity of production from the existing
productive formation. Estimates for proved undeveloped reserves are attributable
to any acreage for which an application of fluid injection or other improved
technique is contemplated, only when such techniques have been proved effective
by actual tests in the area and in the same reservoir.
<PAGE> 7
HYDROCARBON PRICING PARAMETERS
SECURITIES AND EXCHANGE COMMISSION PARAMETERS
OIL AND CONDENSATE
Carrizo furnished us with oil and condensate prices in effect
at December 31, 1997 and these prices were held constant to depletion of the
properties. In accordance with Securities and Exchange Commission guidelines,
changes in liquid prices subsequent to December 31, 1997 were not considered in
this report.
PLANT PRODUCTS
Carrizo furnished us with plant product prices in effect at
December 31, 1997 and these prices were held constant to depletion of the
properties.
GAS
Carrizo furnished us with gas prices in effect at December 31,
1997 and with its forecasts of future gas prices which take into account SEC
guidelines, current spot market prices, contract prices, and fixed and
determinable price escalations where applicable. In accordance with SEC
guidelines, the future gas prices used in this report make no allowances for
future gas price increases which may occur as a result of inflation nor do they
make any allowance for seasonal variations in gas prices which may cause future
yearly average gas prices to be somewhat lower than December 31, 1997 gas
prices. For gas sold under contract, the contract gas price including fixed and
determinable escalations, exclusive of inflation adjustments, was used until the
contract expires and then was adjusted to the current market price for the area
and held at this adjusted price to depletion of the reserves.
<PAGE> 1
EXHIBIT 99.2
February 25, 1998
Carrizo Oil & Gas, Inc.
14811 St. Mary's Lane, Suite 148
Houston, Texas 77079
Re: Reserves Evaluation to the Interests of Carrizo Oil & Gas Corp. Heavy Oil
Properties, Anderson County, Texas
Gentlemen:
Fairchild, Ancell & Wells, Inc. (FAW) has performed an engineering evaluation to
estimate proved reserves and future cash flows from heavy oil (steamflood)
properties to the interests of Carrizo Oil & Gas Corporation in Anderson County,
Texas. This evaluation was authorized by Mr. S.P. Johnson IV, President of
Carrizo Oil & Gas Corporation (Carrizo). Projections of the anticipated future
annual oil production and future cash flows have also been prepared utilizing
property development schedules provided by Carrizo. The reserves and future cash
flows to the evaluated interests were based on economic parameters and operating
conditions considered applicable and are pursuant to the financial reporting
requirements of the Securities and Exchange Commission (SEC). December, 1997
hydrocarbon prices were used in the preparation of this report and current costs
were held constant throughout the life of the properties.
The results of the study are summarized below.
SUMMARY
ESTIMATED PROVED RESERVES AND FUTURE CASH FLOWS
CAMP HILL FIELD ANDERSON COUNTY, TEXAS
TO THE INTERESTS OF CARRIZO OIL & GAS CORP.
EFFECTIVE 1/1/98
<TABLE>
<CAPTION>
Future
Cash Flows (Before NPI) (M$)
Net ---------------------------------------
Reserves Mbbls Undiscounted Discounted at 10%
-------------- ------------ -----------------
<S> <C> <C> <C>
Proved Producing 901.5 5,218.8 3,993.5
Proved Undeveloped 3,795.8 7,759.5 3,135.4
Total Proved 4,697.3 12,978.3 7,128.9
</TABLE>
<PAGE> 2
Carrizo Oil & Gas, Inc. Page 2
February 23, 1998
FUTURE CASH FLOW -- TOTAL PROJECT BY YEAR
(AFTER NET PROFITS INTEREST)
<TABLE>
<CAPTION>
Future
Cash Flows (M$)
--------------------------------------
Year Undiscounted Discounted at 10%
---- ------------ -----------------
<S> <C> <C>
1998 157.9 150.6
1999 1,555.8 1,348.6
2000 997.6 786.1
2001 926.4 663.7
2002 1,141.1 743.1
2003 964.9 571.2
2004 1,276.7 687.1
2005 1,257.0 615.0
2006 595.2 264.7
2007 516.2 208.7
2008 1,372.3 504.5
2009 1,148.4 383.8
2010 358.4 108.9
2011 8.1 2.2
TOTAL 12,276.2 7,038.2
</TABLE>
The estimated reserves and future cash flows shown in this report are for proved
developed producing and proved undeveloped reserves. Our estimates do not
include any value which might be attributed to interests in undeveloped acreage
beyond those tracts for which reserves have been assigned.
In performance of this evaluation, we have relied upon information furnished by
Carrizo with respect to property interests owned, production from such
properties, current costs of operation and development, current prices for
production, agreements relating to current and future operations and sale of
production. With respect to the technical files supplied by Carrizo, we have
accepted the authenticity and sufficiency of the data contained therein.
Future cash flow is presented after deducting production taxes and after
deducting future capital costs and operating expenses, but before consideration
of Federal income taxes. The future cash flow has been discounted at an annual
rate of 10 percent to determine its "present worth." The present worth is shown
to indicate the effect of time on the value of money and should not be construed
as being the fair market value of the properties Our estimates of future revenue
do not include any salvage value for the lease and well equipment nor the costs
of abandoning the properties.
Fairchild, Ancell & Wells, Inc. expresses no opinion as to the fair market value
of the evaluated properties.
<PAGE> 3
Carrizo Oil & Gas, Inc. Page 3
February 23, 1998
The reserves included in this report are estimates only and should not be
construed as being exact quantities. They may or may not be actually recovered,
and if recovered, the revenues therefrom and the actual costs related thereto
could be more or less than the estimated amounts. Because of governmental
policies and uncertainties of supply and demand, the actual sales rates and the
prices actually received for the reserves along with the costs incurred in
recovering such reserves may vary from those assumptions included in this
report. Also, estimates of reserves may increase or decrease as a result of
future operations.
In evaluating the information at our disposal concerning this report, we have
excluded from our consideration all matters as to which legal or accounting,
rather than engineering, interpretation may be controlling. As in all aspects of
oil and gas evaluation, there are uncertainties inherent in the interpretation
of engineering data and, therefore, our conclusions necessarily represent only
informed professional judgments.
The titles to the properties have not been examined by Fairchild, Ancell &
Wells, Inc. nor has the actual degree or type of interest owned been
independently confirmed. We are independent petroleum engineers and geologists;
we do not own an interest in these properties and are not employed on a
contingent basis. Basic geologic and field performance data together with our
engineering work sheets are maintained on file in our office and are available
for review.
It has been a pleasure to serve you by preparing this engineering evaluation.
Yours very truly,
Fairchild, Ancell & Wells, Inc.
