<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------- ---------
Commission File Number 000-22915.
CARRIZO OIL & GAS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0415919
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
14811 ST. MARY'S LANE, SUITE 148, HOUSTON, TEXAS 77079
- ------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(281) 496-1352
-------------------------------
(Registrant's telephone number)
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
--- ---
The number of shares outstanding of the registrant's common stock, par value
$0.01 per share, as of November 3, 1999, the latest practicable date, was
10,375,000.
<PAGE> 2
CARRIZO OIL & GAS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C> <C>
Item 1. Condensed Balance Sheets
- As of September 30, 1999 and December 31, 1998 2
Condensed Statements of Operations
- For the three-month and nine-month periods ended
September 30, 1998 and 1999 3
Condensed Statements of Cash Flows
- For the nine-month periods ended September 30, 1998
and 1999 4
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Items 1-6. 19
SIGNATURES 21
</TABLE>
<PAGE> 3
CARRIZO OIL & GAS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,187,656 $ 660,174
Accounts receivable, net of allowance for doubtful accounts of zero and
$480,000 at December 31, 1998 and September 30, 1999, respectively 4,227,365 3,521,710
Advances to operators 1,192,079 1,935,217
Other current assets 117,614 114,114
------------ ------------
Total current assets 6,724,714 6,231,215
PROPERTY AND EQUIPMENT, net (full-cost method of accounting for oil and
gas properties) 57,878,191 62,071,437
OTHER ASSETS 385,127 277,181
------------ ------------
$ 64,988,032 $ 68,579,833
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 7,886,536 $ 3,640,014
Accrued liabilities 2,004,536 1,675,700
Advances for joint operations 387,420 804,504
Current maturities of long-term debt 930,000 16,537,713
------------ ------------
Total current liabilities 11,208,492 22,657,931
LONG-TERM DEBT (Note 4) 11,126,000 3,613,953
DEFERRED INCOME TAXES -- --
MANDATORILY REDEEMABLE PREFERRED STOCK (10,000,000 shares
authorized with 320,110.53 and 342,125.23 issued and outstanding at December
31, 1998 and September 30, 1999, respectively) (Note 5)
Issued and outstanding 30,730,695 33,098,326
Dividends payable 720,360 770,087
SHAREHOLDERS' EQUITY:
Warrants (Note 5) 300,000 300,000
Common stock (40,000,000 shares authorized with 10,375,000 issued and
outstanding at December 31, 1998 and September 30, 1999, respectively) 103,750 103,750
Additional paid-in capital 32,845,727 32,845,727
Retained earnings (deficit) (21,907,082) (24,809,941)
Deferred compensation (139,910) --
------------ ------------
11,202,485 8,439,536
------------ ------------
$ 64,988,032 $ 68,579,833
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 4
CARRIZO OIL & GAS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OIL AND NATURAL GAS REVENUES $ 1,508,897 $ 2,537,960 $ 5,696,543 $ 6,305,540
COSTS AND EXPENSES:
Oil and natural gas operating expenses 732,208 734,482 2,015,017 2,115,027
Depreciation, depletion and amortization 862,998 988,586 2,483,365 2,916,830
General and administrative 661,608 478,090 2,054,240 1,666,089
----------- ----------- ----------- -----------
Total costs and expenses 2,256,814 2,201,158 6,552,622 6,697,946
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (747,917) 336,802 (856,079) (392,406)
OTHER INCOME AND EXPENSES:
Interest income 12,150 6,416 285,687 19,780
Interest expense (46,564) (426,841) (49,649) (1,030,620)
Capitalized interest 41,062 415,794 41,062 1,016,482
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (741,269) 332,171 (578,979) (386,764)
INCOME TAXES (246,080) 7,002 (162,551) 21,006
----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (495,189) 325,169 (416,428) (407,770)
CUMULATIVE EFFECT OF CHANGE IN METHOD OF
REPORTING COSTS OF START-UP ACTIVITIES (Note 6)
-- -- -- 77,731
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (495,189) $ 325,169 $ (416,428) $ (485,501)
=========== =========== =========== ===========
LESS: DIVIDENDS AND ACCRETION ON
PREFERRED SHARES
(756,595) (822,553) (2,168,533) (2,418,132)
----------- ----------- ----------- -----------
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $(1,251,784) $ (497,384) $(2,584,961) $(2,903,633)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER COMMON SHARE
BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (Note 3) $ (.12) $ (.05) $ (.25) $ (.27)
BASIC AND DILUTED LOSS PER COMMON SHARE
OF CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (Notes 3 and 6)
-- -- -- (.01)
----------- ----------- ----------- -----------
BASIC AND DILUTED LOSS PER COMMON SHARE
(Note 3) $ (.12) $ (.05) $ (.25) $ (.28)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 5
CARRIZO OIL & GAS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (416,428) $ (485,501)
Adjustment to reconcile net income (loss) to net cash provided by operating
activities-
Depreciation, depletion and amortization 2,483,365 2,916,830
Deferred income taxes (224,231) --
Cumulative effect of change in accounting principle -- 77,731
Changes in assets and liabilities-
Accounts receivable (948,855) 705,655
Other current assets (472,870) 3,500
Other assets (163,519) (215,676)
Accounts payable, trade (1,180,837) 46,705
Other accrued liabilities 76,298 88,248
------------ ------------
Net cash provided by (used in)
operating activities (847,077) 3,137,492
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, accrual basis (28,015,811) (6,724,276)
Adjustment to cash basis 770,813 (642,560)
Advance to operators 392,004 (743,138)
------------ ------------
Net cash used in
investing activities (26,852,994) (8,109,974)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock 28,810,431 --
Proceeds from long-term debt 7,600,000 4,445,000
Debt repayments (7,950,000) --
------------ ------------
Net cash provided by
financing activities 28,460,431 4,445,000
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 760,360 (527,482)
CASH AND CASH EQUIVALENTS, beginning of period 2,674,837 1,187,656
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 3,435,197 $ 660,174
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest (net of amounts capitalized) $ 8,587 $ 14,138
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 6
CARRIZO OIL & GAS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND PRINCIPLES OF COMBINATION:
The condensed financial statements included herein have been prepared by Carrizo
Oil & Gas, Inc. (the Company), and are unaudited, except for the balance sheet
at December 31, 1998, which has been prepared from the audited financial
statements at that date. The financial statements reflect necessary adjustments,
all of which were of a recurring nature, and are in the opinion of management
necessary for a fair presentation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). The Company
believes that the disclosures presented are adequate to allow the information
presented not to be misleading. The condensed financial statements included
herein should be read in conjunction with the audited financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
The Company 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 substantially the same as 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; (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 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.
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.
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.
2. GOING CONCERN:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Due principally to depressed oil and
gas prices, the Company's operating cash flows have decreased significantly in
1998 and through the second quarter of 1999. The Company projects that, after
considering advances and borrowing base adjustments obtained through the third
quarter of 1999, and without further increases in borrowing base capacity under
its existing revolving credit facility, debt repayments totaling approximately
$16,537,713 will be required in the 12 months ending September 30, 2000. The
Company raised $2 million in additional financing under its existing credit
facility in March 1999; however, proceeds were utilized to fund the Company's
ongoing drilling program and for working capital. The Company must find
additional oil and gas reserves in order to significantly increase the financing
available through its existing revolving credit facility.
-5-
<PAGE> 7
The Company projects that its cash sources will exceed its planned needs for
cash in 1999. Such cash sources include additional borrowings subject to
borrowing availability, the Palace agreement, cash flows from currently
producing properties along with those nearing completion or pending pipeline
hookup and projected net cash flows from wells to be drilled. Cash needs in 1999
include debt requirements, working capital, drilling expenditures, lease bonus
payments, geological and geophysical costs on its active exploration projects
and cash general and administrative costs. The Company also has specific plans
which involve, among other things, cost reductions, hedging activities to lock
in higher prices and the drilling of high probability exploration and
development prospects that it believes will generate the necessary borrowing
capacity and cash flow to fund its 1999 obligations. There are no assurances,
however, that the Company will be able to generate cash flows sufficient to pay
all of its 1999 obligations as they become due because of the sensitivity of
such cash flow projections to factors such as oil and natural gas sales price
volatility, production levels, operating cost fluctuations, and other variables
inherent in the oil and gas industry. The current uncertainties surrounding the
sufficiency of its future cash flows and the lack of firm commitments for
additional capital raise substantial doubt about the ability of the Company to
continue as a going concern. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
During the second quarter of 1999, the Company entered into an Exploration
Agreement with Palace Exploration Company, an Oklahoma oil & gas company, to
drill and, if successful, develop a minimum of 27 of Carrizo's exploration
prospects during the nine months ending March 31, 2000. In exchange for earning
50 percent of Carrizo's working interest in each of the prospects, Palace has
agreed to pay approximately 71 percent of the drilling costs for such wells.
Palace also has the right to participate in certain additional 1999 wells on
substantially the same terms, as Carrizo identifies such prospects. The
agreement provides that Carrizo will retain control of well operations. Palace
has certain termination rights in the event of continued adverse drilling
results. The joint exploration program includes wells ranging in expected depths
from 5,800 feet to over 14,000 feet. Most of the prospects were internally
generated with approximately 90 percent located in South Texas and approximately
10 percent located in South Louisiana. It is anticipated that the total drilling
cost of the minimum 27 gross well program will exceed $10 million.
As of September 30, 1999 and December 31, 1998, respectively, the Company had
$38,331,538 and $37,060,418 of investment in unevaluated properties. In order to
fully realize this investment through the exploration and development of these
properties, additional capital resources above the amount currently available
from the borrowing base, net cash flow from operations and the Exploration
Agreement will be necessary to fund such capital expenditures. The Company is
continuing to seek additional financing from a variety of sources, including new
common or preferred equity investors and additional debt financing. No assurance
can be given that additional financing will be available by these or other means
on terms acceptable to the Company. Without a continued increase in commodity
prices, successful drilling or raising additional capital, the Company
anticipates that it will be required to limit or defer its planned oil and gas
exploration and development program, which could adversely affect the
recoverability and ultimate value of the Company's oil and gas properties. The
Company has the ability to control the pace of drilling in projects where it has
a 100 percent working interest. In other projects where the Company only has a
partial ownership, the Company generally has the right, but not the obligation,
to participate for its percentage interest in drilling wells and can decline to
participate if it does not have sufficient capital resources at the time such
drilling operations commence. The Company may also transfer its right to
participate in drilling wells in exchange for cash, a reversionary interest, or
some combination thereof or may seek to sell or transfer all or a portion of its
interest in undeveloped properties.
-6-
<PAGE> 8
EARNINGS PER COMMON SHARE:
Supplemental earning per share information is provided below:
<TABLE>
<CAPTION>
For the Three Months Ended September 30, 1999
--------------------------------------------------------------------------------------------
Income (Loss) Shares Per-Share Amount
1998 1999 1998 1999 1998 1999
----------------------------- --------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income (Loss) $ (495,189) $ 325,169
Less: Dividends and accretion
on preferred stock (756,595) (822,553)
----------- -----------
Basic Earnings per Share
Net Loss available to
common shareholders (1,251,784) (497,384) 10,375,000 10,375,000 $ (0.12) $ (0.05)
=========== =========
Stock Options -- -- 28,270 --
----------- ----------- ----------- -----------
Diluted Earnings per Share Net
Income (Loss) available to
common shareholders plus
assumed conversions $(1,251,784) $ (497,384) 10,403,270 10,375,000 $ (0.12) $ (0.05)
=========== =========== =========== =========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999
--------------------------------------------------------------------------------------------
Income (Loss) Shares Per-Share Amount
1998 1999 1998 1999 1998 1999
--------------------------- --------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income (loss) before
cumulative effect of change in
accounting principle $ (416,428) $ (407,770)
Less: Dividends and accretion on
preferred stock (2,168,533) (2,418,132)
----------- -----------
Basic Earnings per Share before
cumulative change in
accounting principle
Net Loss available to
common shareholders (2,584,961) (2,825,902) 10,375,000 10,375,000 $ (0.25) $ (0.27)
=========== ===========
Stock Options -- -- 76,732 --
----------- ----------- ---------- ----------
Diluted Earnings per Share before
cumulative effect of change in
accounting principle
Net Loss available to common
shareholders plus assumed
conversions $(2,584,961) $(2,805,902) 10,451,732 10,375,000 $ (0.25) $ (0.27)
=========== =========== ========== ========== =========== ===========
Cumulative effect of change in
accounting principle $ -- $ (77,731)
Basic Earnings per Share of
cumulative effect of change in
accounting principle
Net Loss available to common
shareholders $ -- $ (77,731) 10,375,000 10,375,000 $ -- $ (0.01)
=========== ===========
Stock Options -- -- 76,732 --
----------- ----------- ---------- ----------
Diluted Earnings per Share before
cumulative effect of change in
accounting principle
Net Loss available to common
shareholders plus assumed
conversions $ -- $ (77,731) 10,451,732 10,375,000 $ -- $ (0.01)
=========== =========== ========== ========== =========== ===========
Net Income (loss) $ (416,428) $ (485,501)
Less: Dividends and accretion
on preferred stock (2,168,533) (2,418,132)
----------- -----------
Basic Earnings per Share
Net Loss available to common
shareholders (2,584,961) (2,,903,633) 10,375,000 10,375,000 $ (0.25) $ (0.28)
=========== ===========
Stock Options -- -- 76,732 --
----------- ----------- ---------- ----------
Diluted Earnings per Share Net
Loss available to common
shareholders plus assumed
conversions $(2,584,961) $(2,903,633) 10,451,732 10,375,000 $ (0.25) $ (0.28)
=========== =========== =========== =========== =========== ===========
</TABLE>
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<PAGE> 9
Net income (loss) per common share has been computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the periods. The Company had outstanding 250,000 and 443,500 stock
options and 1,000,000 warrants, during the three months and nine months ended
September 30, 1998, respectively, and 852,120 stock options and 1,000,000
warrants during the three months and nine months ended September 30, 1999
which were antidilutive and were not included in the calculation because the
exercise price of these instruments exceeded the underlying market value
of the options and warrants.
4. FINANCING ARRANGEMENTS:
In connection with the Offering, the Company entered into an amended revolving
credit agreement with Compass Bank (the "Company Credit Facility"), to provide
for a maximum loan amount of $25 million, subject to borrowing base limitations.
The maximum loan amount was amended to $10 million in April, 1999. Under the
Company Credit Facility, the principal outstanding is due and payable upon
maturity in September 2000 with interest due monthly. The Company Credit
Facility was amended in September 1998 to provide for a term loan under
the facility (the "Term Loan") in addition to the revolving credit
facility limited by the Company's borrowing base. The Term Loan was initially
due and payable upon maturity in September 1999. 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. The Company Credit Facility matures on June 1, 2000.
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 September 30, 1999 and
December 31, 1998, respectively, the borrowing base was $8,274,539 and
$6,076,000.
Proceeds from the borrowing base portions of this credit facility have been used
to provide funding for exploration and development activity. Substantially all
of Carrizo's oil and natural gas property and equipment is pledged as collateral
under this facility. At September 30, 1999 and December 31, 1998 borrowings
under this facility totaled $7,501,000 and $5,056,000, respectively, with an
additional $474,539 and $1,020,000, respectively, available for future
borrowings. Borrowings outstanding under the Term Loan portion of the facility
were $9,000,000 and $7,000,000 at September 30, 1999 and December 31, 1998,
respectively. The facility was also available for letters of credit, two and one
of which have been issued for $299,000 and $224,000 at September 30, 1999 and
December 31, 1998, respectively. The Term Loan is guaranteed by certain members
of the Board of Directors.
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 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 cash dividends. In March 1999, the
Company Credit Facility was amended to decrease the required specified tangible
net worth covenant.
In March 1999, the Company borrowed an additional $2 million on the term loan
portion of the Company Credit Facility increasing the total outstanding
borrowing under the Term Loan to $9 million. Certain members of the Board of
Directors have guaranteed the Term Loan. The maturity date of the Term Loan was
amended to provide for repayment in twelve monthly principal installments of
$750,000 each beginning January 1, 2000. The Company also received a deferral of
certain principal payments due under the borrowing base facility. In October
1999, the principal payments due under the borrowing base facility were amended
as follows: $500,000 is due November 15, 1999, $500,000 is due December 15,
1999, and the borrowing base will be reviewed before February 1, 2000. Certain
members of the Board of Directors have provided approximately $5 million in
collateral primarily in the form of marketable securities to secure the
borrowing base facility. In consideration for providing such collateral and to
secure an incremental $700,000 advance made under the facility on September 20,
1999, the Company assigned such Directors an aggregate one percent overriding
royalty interest proportionately reduced to the Company's interest in the
Fondren Letulle #1 and Huebner #1 wells.
5. MANDATORILY REDEEMABLE PREFERRED STOCK:
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
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<PAGE> 10
this transaction were approximately $28.8 million and were used primarily for
oil and natural gas exploration and development activities in Texas and
Louisiana and to repay related indebtedness. 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 Company expects to continue payment in kind dividends due
in 1999. Dividend payments for the nine months ended September 30, 1999 were
made by the issuance of an additional 22,508.23 shares of Preferred Stock. As of
October 15, 1999 there were 349,794.92 shares of Preferred Stock outstanding.
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 refinancing, but including prepayments (other than in connection
with refinancing) 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. If the Company fails to meet its
redemption obligations, the holders of the Preferred Stock will generally have
the right, voting separately as a class, to elect additional directors, which in
most cases will constitute a majority of the board.
The Preferred Stockholder has advised the Company that they disagree with the
calculation of Cash Flow (as defined above) for the first quarter of 1999
because they believe that capitalized interest and capitalized geological,
geophysical and land costs are "non-cash income" items and as such should be
deducted from cash flow for purposes of the Test. The Company believes that
these items are neither "non-cash" nor "income" and therefore has advised the
Preferred Stockholder that the Company strongly disagrees with the Preferred
Stockholders' position regarding the treatment of these items. Based upon the
Company's calculation of Cash Flow, which is consistent with prior quarters, for
the three months ended September 30, 1999 the Cash Flow was greater than the
amount of the dividends accrued with respect to the Preferred Stock for such
period, and the Company has advised the Preferred Stockholder that based upon
its calculations the Company believes that it has met the Cash flow test for the
quarter. The Company has also prepared the Cash Flow test for the quarter ended
September 30, 1999 on a basis the Company believes is consistent with the
Preferred Stockholders' advice to the Company. Based upon this calculation, the
Company believes that it has also met the Cash Flow test for the quarter on this
alternative basis. The Company, however, has not been advised by the Preferred
Stockholder as to whether or not the Preferred Stockholder concurs with such
calculation. There can be no assurance as to whether the Company's Cash Flow for
future periods will exceed the amount of the dividends to be accrued with
respect to the Preferred Stock.
6. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
On January 1, 1999 the Company adopted the American Institute of Certified
Public Accountants Statement of Position 98-5, which provides guidance on the
accounting for start up costs that required the recording of the cumulative
effect of a change in accounting principle to write off unamortized organization
costs of $77,731.
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In September 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The Statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain
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<PAGE> 11
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging activities - Deferral of the Effective Date of SFAS No. 133" is
effective for fiscal years beginning after September 15, 2000. A Company may
also implement the Statement as of the beginning of any fiscal quarter after
issuance. Statement No. 133 cannot be applied retroactively. Statement No. 133
must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1998 and, at the company's election,
before January 1, 1999. The Company routinely enters into financial instrument
contracts to hedge price risks associated with the sale of crude oil and natural
gas. Statement No. 133 amends, modifies and supercedes significantly all of the
authoritative literature governing the accounting for and disclosure of
derivative financial instruments and hedging activities. As a result, adoption
of Statement No. 133 will impact the accounting for and disclosure of the
Company's operations. The Company is assessing the impact Statement No. 133 will
have on its financial accounting and disclosures and intends to adopt the
provisions of such statement in accordance with the requirements provided by the
statement.
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<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors that have affected certain aspects of the Company's financial position
and results of operations during the periods included in the accompanying
unaudited condensed financial statements. This discussion should be read in
conjunction with the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the annual financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 and the unaudited condensed financial statements
included elsewhere herein. Unless otherwise indicated by the context, references
herein to "Carrizo" or "Company" mean Carrizo Oil & Gas, Inc., a Texas
corporation that is the registrant.
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 53 wells in 1998 and 19 wells
through the nine months ended September 30, 1999. The Company originally
budgeted to drill a total of 18 to 44 gross wells (4.6 to 17.5 net) in 1999. The
Company currently has budgeted to drill 10 to 15 gross wells (1.8 to 3.6 net)
for the last three months of 1999, depending upon the availability of capital,
cash flow and drilling rigs. Accordingly, 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, overpressured prospects.
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. In addition, in November 1998, the
Company acquired assets in Wharton County, Texas in the Jones Branch project
area for $3,000,000.
The Company's revenues, profitability, future growth and ability to borrow funds
or obtain additional capital, and the carrying value of its properties are
substantially dependent on the success of the Company's exploration program and
the prevailing prices of oil and natural gas. It is impossible to predict future
oil and natural gas price movements with certainty. Declines in prices received
for oil and natural gas may have an adverse effect on the Company's financial
condition, liquidity, ability to finance capital expenditures, and results of
operations. Lower prices may also impact the amount of reserves that can be
produced economically by the Company.
Due to the instability of oil and natural gas prices, in 1995 the Company began
utilizing, from time to time, certain hedging instruments (e.g., NYMEX futures
contracts) for a portion of its oil and gas production to achieve a more
predictable cash flow, as well as to reduce the exposure to price fluctuations.
The Company's hedging arrangements apply to only a portion of its production,
provide only partial price protection against declines in oil and natural gas
prices and limit potential gains from future increases in 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.
The Company accounts for all these transactions as hedging activities and,
accordingly, gains and losses from hedging activities are included in oil and
gas revenues during the period the hedged transactions occur. Historically,
gains and losses from hedging activities have not been material. The Company
expects that the amount of hedges that it has in place will vary from time to
time. The Company entered in hedging transactions covering 426 Mmcf and 1,506
Mmcf at an average price (Houston Ship Channel) of $2.10 and $2.08 resulting in
a loss of $198,000 and $166,000 for the three and nine months ended September
30, 1999, respectively. The Company also entered in hedging transactions
covering 18,000 Bbls and 21,200 Bbls at an average price of $19.24 and $17.50
resulting in a loss of $49,000 and $105,000 for the three and nine months ended
September 30, 1999 respectively. The Company had outstanding hedge positions as
of September 30, 1999 and 1998, respectively, covering 604 Mmcf for July 1999 -
January 2000, and 1,092 Mmcf for October 1998 - March 1999, at an average price
of $2.40 and $2.27 (Houston Ship Channel). The fair market value of the hedge
positions as September 30, 1999 is approximately $(87,000).
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<PAGE> 13
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 percent discount rate) of estimated future net
after-tax cash flows from proved oil and gas reserves, such excess costs are
charged to operations. A ceiling test write-down was not required for the three
months and nine months ended September 30, 1999 and 1998. Once incurred, a
write-down of oil and gas properties is not reversible at a later date.
RECENT EXPLORATION AGREEMENT
During the second quarter of 1999, the Company entered into an Exploration
Agreement with Palace Exploration Company, an Oklahoma oil & gas company, to
drill and, if successful, develop a minimum of 27 of Carrizo's exploration
prospects during the nine months ended March 31, 2000. In exchange for earning
50 percent of Carrizo's working interest in each of the prospects, Palace has
agreed to pay approximately 71 percent of the drilling costs for such wells.
Palace also has the right to participate in certain additional 1999 wells on
substantially the same terms, as Carrizo identifies such prospects. The
agreement provides that Carrizo will retain well operations. Palace has certain
termination rights in the event of continued adverse drilling results. The joint
exploration program includes wells ranging in expected depths from 5,800 feet to
over 14,000 feet. Most of the prospects were internally generated with
approximately 90 percent located in South Texas and approximately 10 percent
located south Louisiana. It is anticipated that the total drilling cost of the
minimum 27 gross well program will exceed $10 million.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999,
Compared to the Three Months Ended September 30, 1998
Oil and natural gas revenues for the three months ended September 30, 1999
increased 68 percent to $2,538,000 from $1,509,000 for the same period in 1998.
Production volumes for natural gas during the three months ended September 30,
1999 increased 28 percent to 774,711 from 604,860 for the same period in 1998.
Average gas prices increased 28 percent to $2.31 Mcf in the third quarter of
1999 from $1.81 per Mcf in the same period in 1998. Production volumes for oil
in the third quarter of 1999 increased 27 percent to 39,676 Bbls from 31,317
Bbls for the same period in 1998. Average oil prices increased 42 percent to
$18.88 per barrel in the third quarter of 1999 from $13.31 per barrel in the
same period in 1998. The increase in oil production was due primarily to the
Jones Branch acquisition during the fourth quarter of 1998 and the completion of
the Fondren Letulle #1 and Huebner #1 in the third quarter of 1999. Natural gas
production increased primarily as a result of the Jones Branch acquisition and
the completion of the Musselman Ranches #2 in the second quarter of 1999 and the
completion of the Fondren Letulle #1 and the Huebner #1 in the third quarter of
1999 offset by the natural decline of existing wells. Oil and natural gas
revenues include the impact of hedging activities as discussed above under
"General Overview."
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
three months ended September 30, 1998 and 1999:
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<PAGE> 14
<TABLE>
<CAPTION>
1999 Period
Compared to 1998 Period
------------------------
September 30 Increase % Increase
1998 1999 (Decrease) (Decrease)
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Production volumes-
Oil and condensate (Bbls) 31,317 39,676 8,359 27%
Natural gas (Mcf) 604,860 774,711 169,851 28%
Average sales prices-(1)
Oil and condensate (per Bbl) $ 13.31 $ 18.88 $ 5.57 42%
Natural gas (per Mcf) 1.81 2.31 .50 28%
Operating revenues-
Oil and condensate $ 416,767 $ 749,052 $ 332,285 80%
Natural gas 1,092,130 1,788,908 696,778 64%
---------- ---------- ----------
Total $1,508,897 $2,537,960 $1,029,063 68%
========== ========== ==========
</TABLE>
- -------------------
(1) Includes impact of hedging activities.
Oil and natural gas operating expenses for the three months ended September 30,
1999 increased to $734,000 from $732,000 for the same period in 1998 primarily
due to the addition of new production offset by a reduction in costs on older
producing fields. Operating expenses per equivalent unit decreased to $.73 per
Mcfe in the third quarter of 1999 from $.92 per Mcfe in the same period in 1998
as a result of the increase in production of oil and natural gas and cost
control measures implemented in certain oil producing fields.
Depreciation, depletion and amortization (DD&A) expense for the three months
ended September 30, 1999 increased 15 percent to $989,000 from $863,000 for the
same period in 1998. This increase was due to increased amortization of deferred
loan costs, increased production and additional seismic and drilling costs
offset by the lower asset base resulting from the ceiling test write-down in the
fourth quarter of 1998. General and administrative expense for the three months
ended September 30, 1999 decreased 28 percent to $478,000 from $662,000 for the
same period in 1998 primarily as a result of cost control measures implemented
in the first quarter of 1999.
Interest income for the three months ended September 30, 1999 decreased to
$6,000 from $12,000 in the third quarter of 1999 as a result of declining cash
balances. Net interest expense for the three months ended September 30, 1999,
increased to $11,000 from $6,000 for the same period in 1998. Capitalized
interest increased to $416,000 in the third quarter of 1999 from $41,000 in the
third quarter of 1998 reflecting higher debt levels in the 1999 quarter.
Income before income taxes for the three months ended September 30, 1999
increased to income of $332,000 from a loss of $741,000 in the same period in
1998. Net income for the three months ended September 30, 1999 increased to
income of $325,000 from a loss of $495,000 for the same period in 1998 primarily
as a result of the factors described above.
Nine Months Ended September 30, 1999,
Compared to the Nine Months Ended September 30, 1998
Oil and natural gas revenues for the nine months ended September 30, 1999
increased 11 percent to $6,306,000 from $5,697,000 for the same period in 1998.
Production volumes for natural gas during the nine months ended September 30,
1999 increased 12 percent to 2,175,673 Mcf from 1,936,029 Mcf for the same
period in 1998. Average gas prices decreased 8 percent to $2.07 per Mcf in the
first three quarters of 1999 from $2.26 per Mcf in the same period in 1998.
Production volumes for oil in the first three quarters of 1999 increased 29
percent to 129,997 Bbls from 101,131 Bbls for the same period in 1998. Average
oil prices increased six percent to $13.79 per barrel in the first three
quarters of 1999 from $13.02 per barrel in the same period in 1998. The increase
in oil production was due primarily to the Jones Branch Acquisition during the
fourth quarter of 1998 and the completion of the Fondren Letulle #1 and the
Heubner #1 during the third quarter of 1999. Natural gas production increased
primarily as a result of Jones Branch acquisition and the completion of the
Musselman Ranches #2 and the completion of the Fondren Letulle #1 and the
Heubner #1 during the third quarter of 1999 offset by the natural decline of
existing wells. Oil and natural gas revenues include the impact of hedging
activities as discussed above under "General Overview."
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<PAGE> 15
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the nine
months ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
1999 Period
Compared to 1998 Period
September 30 --------------------------
------------------------- Increase % Increase
1998 1999 (Decrease) (Decrease)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Production volumes-
Oil and condensate (Bbls) 101,131 129,997 28,866 29%
Natural gas (Mcf) 1,936,029 2,175,673 239,644 12%
Average sales prices-(1)
Oil and condensate (per Bbl) $ 13.02 $ 13.79 $ .77 6%
Natural gas (per Mcf) 2.26 2.07 (.19) (8)%
Operating revenues-
Oil and condensate $1,316,453 $1,792,536 $ 476,083 36%
Natural gas 4,380,090 4,513,004 132,914 3%
---------- ---------- ----------
Total $5,696,543 $6,305,540 $ 608,997 11%
========== ========== ==========
</TABLE>
- -------------------
(2) Includes impact of hedging activities.
Oil and natural gas operating expenses for the nine months ended September 30,
1999 increased five percent to $2,115,000 from $2,015,000 for the same period in
1998 primarily due to the addition of new wells offset by a reduction in costs
on older producing fields. Operating expenses per equivalent unit decreased to
$.72 per Mcfe in the first three quarters of 1999 from $.79 per Mcfe in the same
period in 1998 as a result of increased production of natural gas and the
implementation of cost control measures in certain oil producing fields during
the first quarter of 1999.
Depreciation, depletion and amortization (DD&A) expense for the nine months
ended September 30, 1999 increased 17 percent to $2,917,000 from $2,483,000 for
the same period in 1998. This increase was due to increased amortization of
deferred loan costs, increased production and additional seismic and drilling
costs offset by the lower asset base resulting from the ceiling test write-down
in the fourth quarter of 1998. General and administrative expense for the nine
months ended September 30, 1999 decreased 19 percent to $1,666,000 from
$2,054,000 for the same period in 1998 primarily as a result of cost control
measures implemented in the first quarter of 1999.
Interest income for the nine months ended September 30, 1999 decreased to
$20,000 from $286,000 in the first three quarters of 1998 as a result of
declining cash balances. Net interest expense for the nine months ended
September 30, 1999 increased to $14,000 from $9,000 for the same period in 1998.
Capitalized interest increased to $1,016,000 in the first three quarters of 1999
from $41,000 in the first three quarters of 1998 reflecting higher debt levels
in 1999.
Loss before income taxes for the nine months ended September 30, 1999 decreased
to a loss of $387,000 from $579,000 for the same period in 1998. Net loss for
the nine months ended September 30, 1999 increased to $486,000 from $416,000 for
the same period in 1998 primarily as a result of the factors described above and
the charge of $78,000 for the cumulative effect of change in method of reporting
costs of start-up activities.
LIQUIDITY AND CAPITAL RESOURCES
Note 2 to the Financial Statements notes that the financial statements have been
prepared assuming the Company will continue as a going concern but also notes
the uncertainties about the Company's future ability to pay its obligations when
they become due and the lack of firm commitments for additional capital raised
substantial doubt about the ability of the Company to continue as a going
concern. As stated in that note, the financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern. See Note 2 in the Notes to
the Company's Financial Statements.
The Company has made and will be required to make oil and gas capital
expenditures substantially in excess of its net cash flow from operations in
order to complete the exploration and development of its existing properties.
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<PAGE> 16
The Company will require additional sources of financing to fund drilling
expenditures on properties currently owned by the Company and to fund leasehold
costs and geological and geophysical cost on its active exploration projects.
Management of the Company continues to seek financing for its capital program
from a variety of sources. The Company is seeking common or preferred equity
investors. The Company is also seeking additional debt financing. No assurance
can be given that the Company will be able to obtain additional financing by
these or other means on terms that would be acceptable to the Company. The
Company's inability to obtain additional financing would have a material adverse
effect on the Company. Without raising additional capital, the Company
anticipates that it will be required to limit or defer its planned oil and gas
exploration and development program, which could adversely affect the
recoverability and ultimate value of the Company's oil and gas properties. The
Company may also be required to pursue other financial alternatives, which could
include sales of assets or a sale or merger of the Company.
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, funds
generated by operations, equity capital contributions, borrowings, primarily
under revolving credit facilities and the Palace agreement.
Cash flows provided by (used in) operations (after changes in working capital)
were $(847,000) and $3,137,000 for the nine months ended September 30, 1998 and
1999, respectively. The increase in cash flows provided by operations in 1999 as
compared to 1998 was due primarily to enhanced cash management techniques
implemented in 1999.
The Company originally budgeted capital expenditures in 1999 of approximately
$2.2 million to $9.5 million of which $500,000 was expected to be used to fund
3-D seismic surveys and land acquisitions and $1.7 million to $ 9.0 million of
which was expected to be used for drilling activities in the Company's project
areas. The Company originally budgeted to drill approximately 18 to 44 gross
wells (4.6 to 17.8 net) in 1999. The Company has budgeted capital expenditures
for the last three months of 1999 of $1.6 to $1.9 million of which $250,000 is
expected to be used to fund 3-D seismic surveys and land acquisitions and $1.3
to $1.6 million of which is expected to be used for drilling activities in the
Company's project areas. The Company has budgeted to drill approximately 10 to
15 gross wells (1.8 to 3.6 net) in the last three months of 1999. The actual
number of wells drilled and capital expended is dependent upon available
financing, cash flow and drilling rigs. This decrease in planned drilling
activity resulted primarily from the lack of availability of capital resources.
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 $6.7 million for the nine months ended September 30, 1999. The
Company's drilling efforts resulted in the successful completion of 31 gross
wells (10.3 net) during the year ended December 31, 1998 and 15 gross wells (2.4
net) during the nine months ended September 30, 1999.
FINANCING ARRANGEMENTS
In connection with the Offering, the Company entered into an amended revolving
credit agreement with Compass Bank (the "Company Credit Facility"), to provide
for a maximum loan amount of $25 million, subject to borrowing base limitations.
The maximum borrowing base loan amount was amended to $10 million in April,
1999. Under the Company Credit Facility, the principal outstanding is due and
payable upon maturity in September 2000 with interest due monthly. The Company
Credit Facility was amended in September 1998 to provide for a term loan under
the facility (the "Term Loan") in addition to the revolving credit facility
limited by the Company's borrowing base. The Term Loan was initially due and
payable upon maturity in September 1999. 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. The
Company Credit Facility matures on June 1, 2000.
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 September 30, 1999 and
December 31, 1998, respectively, the borrowing base was $8,274,539 and
$6,076,000.
Proceeds from the Borrowing Base portions of this credit facility have been used
to provide funding for exploration and development activity. Substantially all
of Carrizo's oil and natural gas property and equipment is pledged as
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<PAGE> 17
collateral under this facility. At September 30, 1999 and December 31, 1998
borrowings under this facility totaled $7,501,000 and $5,056,000, respectively,
with and an additional $474,539 and $1,020,000, respectively, available for
future borrowings. Borrowings outstanding under the Term Loan portion of the
facility were $9,000,000 and $7,000,000 at September 30, 1999 and December 31,
1998, respectively. The facility was also available for letters of credit, two
and one of which have been issued for $299,000 and $224,000 at September 30,
1999 and December 31, 1998, respectively. The term loan is guaranteed by certain
members of the Board of Directors.
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 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 cash dividends. In March 1999, the
Company Credit Facility was amended to decrease the required specified tangible
net worth covenant.
In March 1999, the Company borrowed an additional $2 million on the term loan
portion of the Company Credit Facility increasing the total outstanding
borrowing under the Term Loan to $9 million. Certain members of the Board of
Directors have guaranteed the Term Loan. The maturity date of the Term Loan was
amended to provide for repayment in twelve monthly principal installments of
$750,000 each beginning January 1, 2000. The Company also received a deferral of
certain principal payments due under the borrowing base facility. In October
1999, the principal payments due under the borrowing base facility were amended
as follows: $500,000 is due November 15, 1999, $500,000 is due December 15,
1999, and the borrowing base will be reviewed before February 1, 2000. Certain
members of the Board of Directors have provided approximately $5 million in
collateral primarily in the form of marketable securities to secure the
borrowing base facility. In consideration for providing such collateral and to
secure an incremental $700,000 advance made under the facility on September 20,
1999, the Company assigned such Directors an aggregate one percent overriding
royalty interest proportionately reduced to the Company's interest in the
Fondren Letulle #1 and Huebner #1 wells.
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 and were used primarily for oil and natural gas
exploration and development activities in Texas and Louisiana and to repay
related indebtedness. 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
Company expects to continue payment in kind dividends due in 1999. Dividend
payments for the nine months ended September 30, 1999 were made by the issuance
of an additional 22,508.23 shares of Preferred Stock. As of October 15, 1999
there were 349,794.92 shares of Preferred Stock outstanding.
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 refinancing, but including prepayments (other than in connection
with refinancing) 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
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<PAGE> 18
redemption, decreasing over time from an initial rate of $104.50 per share to
$100.00 per share. If the Company fails to meet its redemption obligations, the
holders of the Preferred Stock will generally have the right, voting separately
as a class, to elect additional directors, which in most cases will constitute a
majority of the board.
The Preferred Stockholder has advised the Company that they disagree with the
calculation of Cash Flow (as defined above) for the first quarter of 1999
because they believe that capitalized interest and capitalized geological,
geophysical and land costs are "non-cash income" items and as such should be
deducted from cash flow for purposes of the Test. The Company believes that
these items are neither "non-cash" nor "income" and therefore has advised the
Preferred Stockholder that the Company strongly disagrees with the Preferred
Stockholders' position regarding the treatment of these items. Based upon the
Company's calculation of Cash Flow, which is consistent with prior quarters, for
the three months ended September 30, 1999 the Cash Flow was greater than the
amount of the dividends accrued with respect to the Preferred Stock for such
period, and the Company has advised the Preferred Stockholder that based upon
its calculations the Company believes that it has met the Cash flow test for the
quarter. The Company has also prepared the Cash Flow test for the quarter ended
September 30, 1999 on a basis the Company believes is consistent with the
Preferred Stockholders' advice to the Company. Based upon this calculation, the
Company believes that it has also met the Cash Flow test for the quarter on this
alternative basis. The Company, however, has not been advised by the Preferred
Stockholder as to whether or not the Preferred Stockholder concurs with such
calculation. There can be no assurance as to whether the Company's Cash Flow for
future periods will exceed the amount of the dividends to be accrued with
respect to the Preferred Stock.
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.
YEAR 2000
The "Year 2000 Issue" is a general term used to refer to certain business
implications of the arrival of the new millennium. In simple terms, on January
1, 2000, all computerized systems that use the two-digit convention to identify
the applicable year, including both information technology systems and
non-information technology systems that use embedded technology, could fail
completely or create erroneous data as a result of the system failing to
recognize the two digit internal date "00" as representing the year 2000.
The Company has completed its initial assessment of Year 2000 compliance of its
internal information technology systems, which consist primarily of financial
and accounting systems and geological evaluation systems, and does not believe
that these systems have any material issues with respect to Year 2000
compliance. The Company's internal information technology systems are all new
and widely utilized. Its vendors have advised the Company that all of these
systems are either Year 2000 compliant or can be easily upgraded to be Year 2000
compliant. The Company anticipates that its Year 2000 remediation efforts for
information technology systems, consisting primarily of software upgrades, will
continue through 1999, and anticipates incurring less than $10,000 in connection
with these efforts.
The Company has not identified any non-information technology systems that use
embedded technology on which it relies and which it believes is likely to have a
Year 2000 problem; however such assessment is expected to continue through 1999.
Like every other business enterprise, the Company is at risk from Year 2000
failures on the part of its major business counterparts, including suppliers and
service providers, as well as potential failures in public and private
infrastructure services, including electricity, water, gas, transportation and
communications.
Through communications with industry partners and others, the Company is also
evaluating the risk presented by potential Year 2000 non-compliance of third
parties. Because such risks vary substantially, companies are being contacted
based on the estimated magnitude of the risk posed to the Company by their
potential Year 2000 non-compliance. The Company anticipates that these efforts
will continue through 1999 and will not result in significant costs to the
Company.
The Company believes that its most likely worst-case scenario Year 2000 failure
would be a shutdown of the pipeline systems into which it markets its natural
gas production. Should this occur, the Company would be forced
-17-
<PAGE> 19
to curtail its production as there is no alternate way to market its production.
Revenues would be negatively impacted for the period of the curtailment. While
the pipeline operators do not anticipate such an event, there can be no
assurance that it will not occur. The Company is not insured for any resulting
lost revenues.
The Company's assessment of its Year 2000 issues involves many assumptions.
There can be no assurance that the Company's assumptions will prove accurate,
and actual results could differ significantly from the assumptions. In
conducting its Year 2000 compliance efforts, the Company has relied primarily on
vendor representations with respect to its internal computerized systems and
representations from third parties with which the Company has business
relationships and has not independently verified these representations. There
can be no assurance that these representations will prove to be accurate. A Year
2000 failure could result in a business disruption that adversely affects the
Company's business, financial condition or results of operations. The Company is
unlikely to be insured for Year 2000 losses should they occur. Although it is
not currently aware of any likely business disruption, the Company is developing
contingency plans, such as alternate methods of measuring its natural gas sales
volumes, to address Year 2000 failures and expects this work to continue through
1999.
-18-
<PAGE> 20
PART II. OTHER INFORMATION
Item 1 - 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 2 - Changes in Securities and Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
FORWARD LOOKING STATEMENTS
The statements contained in all parts of this document, including, but
not limited to, those relating to the Company's schedule, targets, estimates or
results of future drilling, budgeted wells, increases in wells, budgeted and
other future capital expenditures, use of offering proceeds, effects of
litigation, 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, matters relating to the
Palace Agreement, including cost of wells and any effect of that agreement, the
effects of the Year 2000 issue 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," "estimate," "expect," "may,"
"project," "believe" and similar expression 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, 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 net revenue estimates, property
acquisition risks and other factors detailed in the Company's Annual Report on
Form 10-K and 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.
-19-
<PAGE> 21
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
Exhibit
Number Description
- ------- -----------
+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 September 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 (Incorporated herein by reference to Exhibit 3.1 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
+3.2 -- Statement of Resolution Establishing Series of Shares
Designated 9% Series A Preferred Stock (Incorporated herein
by reference to Exhibit 3.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997).
+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 -- Seventh Amendment to First Amended, Restated and Combined
Loan Agreement by and between Carrizo Oil & Gas, Inc. and
Compass Bank dated August 27, 1999.
27.1 -- Financial Data Schedule.
+ Incorporated herein by reference as indicated.
Reports on Form 8-K
None
-20-
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Carrizo Oil & Gas, Inc.
(Registrant)
Date: November 8, 1999 By: /s/ S. P. Johnson, IV
-----------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 8, 1999 By: /s/ Frank A. Wojtek
-----------------------------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
-21-
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C> <C>
+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 September 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 (Incorporated herein by reference to Exhibit 3.1 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
+3.2 -- Statement of Resolution Establishing Series of Shares
Designated 9% Series A Preferred Stock (Incorporated herein
by reference to Exhibit 3.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1997).
+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 -- Seventh Amendment to First Amended, Restated and Combined
Loan Agreement by and between Carrizo Oil & Gas, Inc. and
Compass Bank dated August 27, 1999.
27.1 -- Financial Data Schedule.
</TABLE>
+ Incorporated herein by reference as indicated.
Reports on Form 8-K
None
<PAGE> 1
EXHIBIT 4.1
SEVENTH AMENDMENT
TO
FIRST AMENDED, RESTATED, AND COMBINED LOAN AGREEMENT
BY AND BETWEEN CARRIZO OIL & GAS, INC.
AND COMPASS BANK
This Seventh Amendment to the Loan Agreement (this "Seventh Amendment")
by and between CARRIZO OIL & GAS, INC., a Texas corporation (the "Borrower"),
and COMPASS BANK, an Alabama state chartered bank, formerly a Texas chartered
bank (the "Bank"), is entered into on this 27th day of August 1999, 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 Combined
Loan Agreement dated August 28, 1997, as amended by the First Amendment thereto
dated December 23, 1997, the Second Amendment thereto dated December 30, 1997,
the Third Amendment thereto dated July 30, 1998, the Fourth Amendment thereto
dated September 24, 1998, the Fifth Amendment thereto dated March 22, 1999 and
the Sixth Amendment thereto dated April 23, 1999 (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 the Loan Agreement be further amended and
that the Bank waive Borrower's noncompliance with certain covenants in the Loan
Agreement, and the Bank has agreed to such request, subject to the terms and
conditions set forth in this Seventh Amendment.
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, Definitions, is hereby amended by adding the following
definitions thereto:
"Metro Prospect" means those certain Oil and Gas Properties
described in Schedule B attached to the Seventh Amendment.
"Seventh Amendment" means the Seventh Amendment to this
Agreement executed by Borrower and Bank on August 27, 1999.
Section 2.09, Mandatory Prepayment of the Notes, is hereby amended by
adding the following text at the end of such Section:
1
<PAGE> 2
Notwithstanding the foregoing provisions of this Section,
however, at the time that each Monthly Borrowing Base
Reduction becomes applicable on the first day of each calendar
month, Borrower shall contemporaneously prepay so much of the
principal of the Note as is necessary to ensure that no Loan
Excess results from the application of such Monthly Borrowing
Base Reduction.
Subsection 2.10(a), Borrowing Base Oil and Gas Properties, is hereby
amended by replacing the first sentence of that section with the following text:
The Borrowing Base attributable to the Borrowing Base Oil and
Gas Properties is established at $3,750,000.00 effective as of
August 2, 1999, and continuing until redetermined as set forth
herein; provided, however, that the Borrowing Base value
attributable to the Borrowing Base Oil and Gas Properties
shall be reduced to $300,000.00 at the earlier of: (i) the
consummation of the sale by Borrower of the Metro Prospect or
(ii) October 1, 1999. The proceeds derived by Borrower from
any such sale of the Metro Prospect may be included in the
Borrowing Base as Borrowing Base Cash, provided that such
proceeds are deposited into an account that has been
specifically pledged to Bank pursuant to a Security Instrument
that is acceptable to Bank, in its discretion.
Subsection 2.10(c), Borrowing Base Securities, is hereby amended by
adding the following sentence at the end of that subsection:
Notwithstanding the foregoing, the Borrowing Base value
attributable to Borrowing Base Securities that are shares of
stock in R&B Falcon Corporation shall never exceed at any time
$5,000,000.00 in the aggregate.
Article III, Conditions, is hereby amended by adding the following
Section 3.21.
3.21 Conditions Precedent in Connection with the Seventh
Amendment. The Seventh Amendment shall not be binding on the Bank until
satisfaction of the following conditions precedent:
(a) Receipt of Seventh Amendment and Compliance Certificate.
Bank shall have received multiple counterparts of the Seventh
Amendment, as requested by Bank, and the Compliance Certificate duly
executed by an authorized officer for Borrower.
(b) Accuracy of Representations and Warranties and No Event of
Default. The representations and warranties contained in Article IV of
the Loan Agreement shall be true and correct in all material respects
on the date of the Seventh Amendment 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 upon the execution of the Seventh Amendment.
2
<PAGE> 3
(c) Legal Matters Satisfactory to Special Counsel to Bank. All
legal matters incident to the consummation of the transactions
contemplated by the Seventh Amendment shall be satisfactory to the firm
of Porter & Hedges, L.L.P., special counsel for Bank.
(d) 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.
Article V, Affirmative Covenants, is hereby amended by adding the
following new Sections 5.29 through 5.36:
5.29 Proceeds from Hedging Transactions. Following the
occurrence and during the continuation of an Event of Default or
Unmatured Event of Default, if and so long as there is then Loan
availability under that part of the Revolving Commitment that is
supported by the Borrowing Base attributable to the Borrowing Base Oil
and Gas properties (in excess of $300,000 of coverage for outstanding
Letters of Credit), promptly deliver to Bank one hundred percent (100%)
of all proceeds received by Borrower or, if not received, cause to be
delivered to Bank all proceeds which Borrower is entitled to receive
arising from the early termination of any Hedging Transaction, such
proceeds to be applied against the outstanding balance owing on the
Notes.
5.30 Hedging Transaction Reports. If and so long as there is
then Loan availability under that part of the Revolving Commitment that
is supported by the Borrowing Base attributable to the Borrowing Base
Oil and Gas properties (in excess of $300,000 of coverage for
outstanding Letters of Credit), for each Hedging Transaction to which
Borrower is a party, if any, deliver to Bank, on or before the
forty-fifth (45th) day after the end of each calendar month, a detailed
report setting out Borrower's position as of the end of such calendar
month, including, but not limited to, Borrower's settlement payments
and receipts during such calendar month and settlement payables and
receivables as of the end of such calendar month.
5.31 Aged Accounts Reports. Deliver to Bank, on or before the
forty-fifth (45th) day after the end of each calendar month, a detailed
aging accounts receivable report and a detailed aging accounts payable
report effective as of the end of such calendar month, all such reports
to be prepared in accordance with GAAP.
5.32 Production Volume Reports. If and so long as there is
then Loan availability under that part of the Revolving Commitment that
is supported by the Borrowing Base attributable to the Borrowing Base
Oil and Gas Properties (in excess of $300,000 of coverage for
outstanding Letters of Credit), deliver to Bank, on or before the
forty-fifth (45th) day after the end of each calendar month, a monthly
report of oil, gas and liquids production volumes by major field and
the total production of all fields during such calendar month.
5.33 Payment of Contract Operators. Pay, within thirty (30)
days after the receipt of any billings or sooner if so required by the
terms of any applicable operating agreement, all fees, expenses and
charges due from Borrower to contract operators (as such term is
3
<PAGE> 4
generally understood in the oil and gas industry) for operations
provided by contract operators relating to the Borrowing Base Oil and
Gas Properties, except any such fees that are diligently being
contested in good faith by appropriate proceedings.
5.34 Payment of Royalties. If and so long as there is then
Loan availability under that part of the Revolving Commitment that is
supported by the Borrowing Base attributable to the Borrowing Base Oil
and Gas properties (in excess of $300,000 of coverage for outstanding
Letters of Credit), pay, within sixty (60) days after the last day of
each calendar month or sooner if so required by any applicable lease or
statute, all royalties, overriding royalties, production payments or
other payments payable by Borrower to the owners of such interests in
the Borrowing Base Oil and Gas Properties with respect to oil and gas
produced during such calendar month, unless Borrower has created and
maintains a suspense account for separate accounting of any such
payments that are payable but not yet due under the terms of the
applicable lease and applicable laws. Any such payments made into such
suspense account shall be accounted for in accordance with all
applicable laws of the state in which the Borrowing Base Property to
which such payment relates is located.
5.35 Payment of Royalties Reports. If and so long as there is
then Loan availability under that part of the Revolving Commitment that
is supported by the Borrowing Base attributable to the Borrowing Base
Oil and Gas Properties (in excess of $300,000 of coverage for
outstanding Letters of Credit), deliver to Bank, on or before the
sixtieth (60th) day after the end of each calendar month, a monthly
report of royalties, overriding royalties, production payments or other
payments paid by Borrower to the owners of such interests (or into a
suspense account as described in Section 5.34) in the Borrowing Base
Oil and Gas Properties with respect to oil and gas produced during such
calendar.
5.36 Proceeds from Asset Sales. Following the occurrence and
during the continuation of an Event of Default or Unmatured Event of
Default, promptly deliver to Bank one hundred percent (100%) of all
proceeds received by Borrower or, if not received, cause to be
delivered to Bank all proceeds which Borrower is entitled to receive
arising from any sale of Borrower's assets, such proceeds to be applied
against the outstanding balance owing on the Notes; provided that any
such sale of assets must be made in compliance with Section 6.06
hereof.
Section 6.01, Other Indebtedness, is hereby amended by deleting the
word "and" immediately preceding clause (d) and adding the following clause (e)
at the end of that Section:
and (e) as of the effective date of the Seventh Amendment, the
Indebtedness evidenced by those certain vendor notes as
specifically described on Schedule A attached to the Seventh
Amendment.
II. Certain Waivers. Bank hereby waives non-compliance by Borrower
with the covenants set forth Section 6.01 of the Loan Agreement, solely to the
extent that Borrower was not in compliance with such covenants prior to the
execution of the Seventh Amendment as the result of the existence of the
Indebtedness evidenced by those certain vendor notes described on Schedule A
attached to the Seventh Amendment.
4
<PAGE> 5
III. Reaffirmation of Representations and Warranties. To induce
Bank to enter into this Seventh 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 Seventh Amendment and
the performance by Borrower of its obligations under this Seventh
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 articles of
incorporation, charter or bylaws of Borrower or of any agreement
binding upon Borrower.
B. The Loan Agreement as amended by this Seventh 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 in this
Seventh Amendment.
V. Reaffirmation of Loan Agreement. This Seventh 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.
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 SEVENTH 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 Seventh 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 Seventh 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.
5
<PAGE> 6
VIII. Severability. Whenever possible each provision of this Seventh
Amendment shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Seventh 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
Seventh 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 Seventh
Amendment are for convenience of reference only, and shall not affect the
construction of this Seventh Amendment.
XI. Successors and Assigns. This Seventh 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 346 of Texas Finance Codes. In no
event shall Chapter 346 of the Texas Finance Code (which regulates certain
revolving loan accounts and revolving tri-party accounts) apply to this Loan
Agreement as hereby further amended or any other Loan Documents or the
transactions contemplated hereby.
XIII. Notice. THIS SEVENTH 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.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Seventh
Amendment to be duly executed as of the day and year first above written.
BANK BORROWER
COMPASS BANK CARRIZO OIL & GAS, INC.
By: By:
-------------------------------- --------------------------------
Kathleen J. Bowen Frank A. Wojtek
Vice President Vice President
7
<PAGE> 8
SCHEDULE "A"
Vendor Notes
See attached pages.
8
<PAGE> 9
SCHEDULE "B"
Metro Prospect Description
PROPERTY DESCRIPTION
I. WELLS-DEWITT COUNTY, TEXAS
<TABLE>
<CAPTION>
==============================================================================================================
WELL NAME PROPERTY INTEREST WORKING NET REVENUE
DESCRIPTION HOLDER INTEREST INTEREST
PERCENTAGE PERCENTAGE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Musselman Rambler Field Carrizo Oil and Gas, Inc. 25.0000 18.2500
Wells (Metro)
==============================================================================================================
</TABLE>
II. LEASES-DEWITT COUNTY, TEXAS
Oil, Gas and Mineral Lease dated January 21, 1997, between Musselman Ranches,
Inc., Jamie B. Musselman, President, Josephine B. Musselman, Paul A. Musselman
and wife Dorothy Musselman, and Eleanor G. Musselman, as Lessors, and Allegro
Investments, Inc., as lessee, and Memorandum of Lease effective January 21,
1997, between the same parties, recorded in Volume 18, Page 555, Official
Records, DeWitt County, Texas.
9
<PAGE> 10
COMPLIANCE CERTIFICATE
I, Frank A. Wojtek, Vice President of CARRIZO OIL & GAS, INC.
(the "Company"), pursuant to Section 3.20 of the First Amended, Restated, and
Combined Loan Agreement dated as of August 28, 1997, as amended, by and among
COMPASS BANK ("Bank") and the Company (the "Agreement") do hereby certify, as of
the date hereof, that to my knowledge:
1. No Event of Default (as defined in the Agreement) has occurred
and is continuing, and no Unmatured Event of Default (as
defined in the Agreement) has occurred and is continuing;
2. No material adverse change has occurred in the business
prospects, financial condition, or the results of operations
of the Company since the date of the previous Financial
Statements (as defined in the Agreement) provided to Bank;
3. Each of the representations and warranties of the Company
contained in Article IV of the Agreement is true and correct
in all respects.
This certificate is executed this 27th day of August 1999.
---------------------------------
Frank A. Wojtek
1
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 660,174
<SECURITIES> 0
<RECEIVABLES> 4,001,710
<ALLOWANCES> 480,000
<INVENTORY> 0
<CURRENT-ASSETS> 6,231,215
<PP&E> 92,502,616
<DEPRECIATION> 30,431,179
<TOTAL-ASSETS> 68,579,833
<CURRENT-LIABILITIES> 18,906,931
<BONDS> 0
33,098,326
0
<COMMON> 103,750
<OTHER-SE> 8,439,536
<TOTAL-LIABILITY-AND-EQUITY> 68,579,833
<SALES> 6,305,540
<TOTAL-REVENUES> 6,305,540
<CGS> 2,115,027
<TOTAL-COSTS> 6,697,946
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,138
<INCOME-PRETAX> (386,764)
<INCOME-TAX> 21,006
<INCOME-CONTINUING> (407,770)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 77,731
<NET-INCOME> (485,501)
<EPS-BASIC> (.28)
<EPS-DILUTED> (.28)
</TABLE>
