<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 JUNE 30, 2000
-------------
[ ] 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 August 8, 2000, the latest practicable date, was
14,028,864.
<PAGE> 2
CARRIZO OIL & GAS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Condensed Balance Sheets
- As of June 30, 2000 and December 31, 1999 2
Condensed Statements of Operations
- For the three-month and six-month periods ended
June 30, 1999 and 2000 3
Condensed Statements of Cash Flows
- For the six-month periods ended June 30, 1999 and
2000 4
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Items 1-6. 17
SIGNATURES 20
</TABLE>
<PAGE> 3
CARRIZO OIL & GAS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 11,345,618 $ 11,631,027
Accounts receivable, net of allowance for doubtful accounts of
$480,000 at December 31, 1999 and June 30, 2000, respectively 4,424,283 4,616,727
Advances to operators 1,266,770 2,153,436
Other current assets 487,398 752,801
------------ ------------
Total current assets 17,524,069 19,153,991
PROPERTY AND EQUIPMENT, net (full-cost method of accounting for
oil and gas properties) 64,336,738 63,431,171
DEFERRED INCOME TAXES 820,252 820,252
OTHER ASSETS 985,315 1,105,341
------------ ------------
$ 83,666,374 $ 84,510,755
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 4,095,567 $ 3,178,605
Accrued liabilities 481,239 420,398
Advances for joint operations 1,066,203 277,634
Current maturities of long-term debt 3,542,742 5,271,082
------------ ------------
Total current liabilities 9,185,751 9,147,719
LONG-TERM DEBT (Note 3) 33,627,265 30,917,702
SHAREHOLDERS' EQUITY:
Warrants (3,010,189 outstanding at December 31, 1999 and June 30, 2000) 765,047 765,047
Common Stock (40,000,000 shares authorized with 14,011,364 issued
and outstanding at December 31, 1999 and June 30, 2000,
respectively) 140,114 140,114
Additional paid-in capital 62,608,343 62,608,343
Accumulated deficit (22,660,146) (19,068,170)
------------ ------------
40,853,358 44,445,334
------------ ------------
$ 83,666,374 $ 84,510,755
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 4
CARRIZO OIL & GAS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OIL AND NATURAL GAS REVENUES $ 1,925,265 $ 5,826,737 $ 3,767,580 $ 10,106,334
COSTS AND EXPENSES:
Oil and natural gas operating expenses 636,840 983,521 1,380,545 1,861,188
Depreciation, depletion and amortization 985,053 1,740,600 1,928,244 3,409,406
General and administrative 480,474 724,157 1,187,999 1,455,283
------------ ------------ ------------ ------------
Total costs and expenses 2,102,367 3,448,278 4,496,788 6,725,877
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (177,102) 2,378,459 (729,208) 3,380,457
OTHER INCOME AND EXPENSES:
Interest income 6,879 110,929 13,364 274,700
Interest expense (343,397) (873,052) (603,779) (1,813,889)
Capitalized interest 340,306 872,692 600,688 1,801,775
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (173,314) 2,489,028 (718,935) 3,643,043
INCOME TAXES 7,002 25,567 14,004 51,067
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (180,316) 2,463,461 (732,939) 3,591,976
CUMULATIVE EFFECT OF CHANGE IN
METHOD OF REPORTING COSTS OF
START-UP ACTIVITIES (Note 6) -- -- 77,731 --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (180,316) $ 2,463,461 $ (810,670) $ 3,591,976
============ ============ ============ ============
LESS: DIVIDENDS AND ACCRETION ON
PREFERRED SHARES (806,736) -- (1,595,579) --
------------ ------------ ------------ ------------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS $ (987,052) $ 2,463,461 $ (2,406,249) $ 3,591,976
============ ============ ============ ============
BASIC INCOME (LOSS) PER COMMON SHARE
BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (Note 2) $ (0.10) $ 0.18 $ (0.22) $ 0.26
BASIC INCOME (LOSS) PER COMMON SHARE
OF CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (Notes 2 and 5) -- -- (0.01) --
------------ ------------ ------------ ------------
BASIC INCOME (LOSS) PER
COMMON SHARE (Note 2) $ (0.10) $ 0.18 $ (0.23) $ 0.26
============ ============ ============ ============
DILUTED INCOME (LOSS) PER COMMON SHARE
BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (Note 2) $ (0.10) $ 0.15 $ (0.22) $ 0.23
DILUTED INCOME (LOSS) PER COMMON SHARE
OF CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (Notes 2 and 5) -- -- (0.01) --
------------ ------------ ------------ ------------
DILUTED INCOME (LOSS) PER COMMON
SHARE (Note 2) $ (0.10) $ 0.15 $ 0.23 $ 0.23
============ ============ ============ ============
</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 Six
Months Ended
June 30,
--------------------------------
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (810,670) $ 3,591,976
Adjustment to reconcile net income (loss)
to net cash provided by operating activities-
Depreciation, depletion and amortization 1,928,244 3,409,406
Discount accretion -- 15,444
Cumulative effect of change in accounting principle 77,731 --
Changes in assets and liabilities-
Accounts receivable 1,139,141 (192,444)
Other assets (89,416) (544,429)
Accounts payable, trade 2,277,632 139,363
Other current liabilities (149,491) (60,841)
------------ ------------
Net cash provided by
operating activities 4,373,171 6,358,475
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, accrual basis (5,327,514) (7,419,966)
Proceeds from sale of Metro Project -- 5,075,127
Adjustment to cash basis (251,031) (450,279)
Advances to operators 131,195 (886,666)
Advances for joint operations (788,569)
------------ ------------
Net cash used in
investing activities (5,447,350) (4,470,353)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 100,000 --
Debt repayments -- (1,602,713)
------------ ------------
Net cash provided by (used in)
financing activities 100,000 (1,602,713)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (974,179) 285,409
CASH AND CASH EQUIVALENTS, beginning of period 1,187,656 11,345,618
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 213,477 $ 11,631,027
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest (net of amounts capitalized) $ 3,085 $ 12,114
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 6
CARRIZO OIL & GAS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. ACCOUNTING POLICIES
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, 1999, 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, 1999.
2. EARNINGS PER COMMON SHARE:
Supplemental earning per share information is provided below:
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
----------------------------------------------------------------------------------------
Income (Loss) Shares Per-Share Amount
1999 2000 1999 2000 1999 2000
------------- ---------- ---------- ---------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (180,316) $2,463,461
Less: Dividends and accretion
on preferred stock (806,736) --
---------- ----------
Basic Earnings per Share
Net income (loss) available to
common shareholders (987,052) 2,463,461 10,375,000 14,011,364 $(0.10) $0.18
====== =====
Stock Options and Warrants -- -- -- 2,077,334
---------- ---------- ---------- ----------
Diluted Earnings per Share Net
Income (loss) available to
common shareholders plus
assumed conversions $ (987,052) $2,463,461 10,375,000 16,088,698 $(0.10) $0.15
========== ========== ========== ========== ====== =====
</TABLE>
-5-
<PAGE> 7
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
-------------------------------------------------------------------------------------------
Income (Loss) Shares Per-Share Amount
1999 2000 1999 2000 1999 2000
----------- ----------- ----------- ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) before
cumulative effect of change
in accounting principle $ (732,939) $ 3,591,976
Less: Dividends and accretion
on preferred stock (1,595,579) --
----------- -----------
Basic Earnings per Share
before cumulative change in
accounting principle
Net income (loss) available to
common shareholders (2,328,518) 3,591,976 10,375,000 14,011,364 $(0.22) $0.26
====== =====
Stock Options and Warrants -- -- -- 1,663,082
----------- ----------- ----------- -----------
Diluted Earnings per Share
before cumulative effect of
change in accounting principle
Net income (loss) available to
common shareholders plus
assumed conversions (2,328,518) 3,591,976 10,375,000 15,674,446 $(0.22) $0.23
=========== =========== =========== =========== ====== =====
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 14,011,364 $(0.01) $ --
====== =====
Stock Options and Warrants -- -- -- 1,663,082
----------- ----------- ----------- -----------
Diluted Earnings per Share before
cumulative effect of change in
accounting principle
Net loss available to common
shareholders plus assumed
conversions $ (77,731) $ -- 10,375,000 15,674,446 $(0.01) $ --
=========== =========== =========== =========== ====== =====
Net Income (loss) $ (810,670) $ 3,591,976
Less: Dividends and accretion
on preferred stock (1,595,579) --
----------- -----------
Basic Earnings per Share
Net income (loss) available to
common shareholders (2,406,249) 3,591,976 10,375,000 14,011,364
$(0.23) $0.26
====== =====
Stock Options and Warrants -- -- -- 1,663,082
----------- ----------- ----------- -----------
Diluted Earnings per Share Net
Income (loss) available to
common shareholders plus
assumed conversions $(2,406,249) $ 3,591,976 10,375,000 15,674,446 $(0.23) $0.23
=========== =========== =========== =========== ====== =====
</TABLE>
-6-
<PAGE> 8
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 443,500 stock options and
1,000,000 warrants, during the three months and six months ended June 30, 1999,
respectively, 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.
3. FINANCING ARRANGEMENTS:
In connection with Carrizo's initial public offering in 1997, Carrizo amended
its existing credit facility with Compass Bank ("Compass"), to provide for a
maximum loan amount of $25 million, subject to borrowing base limitations. Under
this facility, the principal outstanding is due and payable upon maturity in
January 2002, with interest due monthly. This facility was subsequently amended
in September 1998 to provide for a term loan under the facility (the "Term
Loan") in addition to the then existing revolving credit facility limited by the
Company's borrowing base (the "Borrowing Base Facility"). The Borrowing Base
Facility was amended in March, 1999 to provide for a maximum loan amount under
such facility of $10 million. Substantially all of Carrizo's oil and natural gas
property and equipment is pledged as collateral under this facility. The
interest rate for both 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 Borrowing Base Facility and the Term Loan
are referred to collectively as the "Company Credit Facility". Proceeds from the
Borrowing Base portions of this credit facility have been used to provide
funding for exploration and development activity.
Under the Borrowing Base 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 also redetermine the borrowing base
and the monthly borrowing base reduction at any time at its discretion. The
Company may also request borrowing base redeterminations in addition to the
required semiannual reviews at the Company's cost.
At December 31, 1999 and June 30, 2000, amounts outstanding under the Borrowing
Base Facility totaled $5,876,000 and $5,426,000, respectively, with an
additional $1,208,392 and $4,170,000, respectively, available for future
borrowings. The Borrowing Base totaled $7,308,382 and $10,270,000 at December
31, 1999 and June 30, 2000, respectively. The Borrowing Base Facility was also
available for letters of credit, one of which has been issued for $224,000 at
December 31, 1999 and June 30, 2000. Certain members of the Board of Directors
have provided collateral, primarily in the form of marketable securities, to
secure the Borrowing Base Facility. As of August 1, 2000, the aggregate amount
of this collateral was approximately $3.0 million.
The Term Loan was initially due and payable upon maturity in September 1999. The
Company had $7,000,000 outstanding under the Term Loan at December 31, 1998. In
March 1999, the Company borrowed an additional $2 million on the term loan
portion of the Company Credit Facility increasing outstanding borrowings under
the Term Loan to $9 million. In March 1999, the maturity date of the Term Loan
was amended to provide for twelve monthly installments of $750,000 beginning
January 1, 2000. In December 1999, the additional $2 million under the term loan
was repaid with proceeds from the sale of the Subordinated Notes, Common Stock
and Warrants leaving $7,000,000 outstanding at December 31, 1999 and June 30,
2000. The repayment terms were also amended to provide for $1.74 million of
principal due ratably over the last six months of 2000, $2.64 million of
principal due ratably over the first six months of 2001, and the balance due in
July 2001. Certain members of the Board of Directors have guaranteed the Term
Loan.
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, (b) a ratio of quarterly EBITDA (earnings before interest,
taxes, depreciation and amortization) to quarterly debt service of not less than
1.25 to 1.00, and (c) a specified minimum amount of working capital. The Company
Credit Facility also places restrictions on, among other things, (a) incurring
additional indebtedness, guaranties, loans and liens, (b) changing the nature of
business or business structure, (c) selling assets and (d) paying dividends. In
March 1999, the Company Credit Facility was amended to decrease the required
specified tangible net worth covenant.
In November 1999, certain members of the Board of Directors provided a bridge
loan in the amount of $2,000,000 to the Company secured by certain oil and
natural gas properties. This bridge loan bore interest at 14 percent per annum.
Also, in consideration for the bridge loan, the Company assigned to those
members of the Board of Directors an Overriding Royalty Interest in certain of
the Company's producing properties. The bridge loan was repaid from the proceeds
of the sale of Subordinated Notes, Common Stock and Warrants.
-7-
<PAGE> 9
In December 1999, the Company consummated the sale of $22 million principal
amount of 9 percent Senior Subordinated Notes due 2007 (the "Subordinated
Notes") to an investor group led by CB Capital Investors, L.P. which included
certain members of the Board of Directors. The Company also sold Common Stock
and Warrants to this investor group. The Subordinated Notes were sold at a
discount of $688,761, which is being amortized over the life of the notes.
Interest is payable quarterly beginning June 30, 2000. The Company may elect to
increase the amount of the Subordinated Notes for 60 percent of the interest
which would otherwise be payable in cash. The Subordinated Notes were increased
by $606,046 for such interest as of June 30, 2000. Such Senior Subordinated
Notes had a fair market value at June 30, 2000 of approximately $22 million.
The Company is subject to certain covenants under the terms under the
Subordinated Notes securities purchase agreement, including but not limited to,
(a) maintenance of a specified tangible net worth, (b) maintenance of a ratio of
EBITDA (earnings before interest, taxes, depreciation and amortization) to
quarterly Debt Service (as defined in the agreement) of not less than 1.00 to
1.00, and (c) a limitation of its capital expenditures to a specified amount for
the year ended December 31, 2000 and thereafter equal to the Company's EBITDA
for the immediately prior fiscal year.
During 1999, Carrizo restructured certain current accounts payable into vendor
notes, extending the payment dates through 2001. Such notes totaled $1,778,982
at June 30, 2000 and bear interest at rates of 8 percent to 10 percent.
4. INCOME TAXES:
The Company decreased the valuation allowance associated with $2,489,028 and
$3,643,043 of its net operating loss carryforwards for three month and six month
periods ended June 30, 2000 as management has determined that it is more likely
than not that such carryforwards will be utilized based upon the Company's
latest estimate of future taxable income. As a result of this determination, the
Company realized a deferred tax benefit in the amount of $881,660 and $1,311,065
for the three and six months ended June 30, 2000.
5. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
On January 1, 1999 the Company adopted the American Institute of Certified
Public Accountants Statement of Position ("SOP") 98-5, which provides guidance
on the accounting for start-up costs. SOP 98-5 requires that start-up costs be
expensed as incurred. The cumulative effect of this change in accounting
principle to write off unamortized organization costs is $77,731 in 1999.
6. COMMITMENTS AND CONTINGENCIES:
The Company, as one of three plaintiffs, has filed a lawsuit against BNP
Petroleum Corporation, Seiskin Interests, LTD, Pagenergy Company, LLC and Gap
Marketing Company, LLC, as defendants, in the 229th Judicial District Court of
Duval County, Texas, for fraud and breach of contract in connection with an
agreement between plaintiffs and defendants whereby the defendants were
obligated to drill a test well in an area known as the Slick Prospect in Duval
County, Texas. The allegations of the Company in this litigation are that BNP
gave the Company inaccurate and incomplete information on which the Company
relied in making its decision not to participate in the test well and the
prospect, resulting in the loss of the Company's interest in the lease, the test
well and four subsequent wells drilled in the prospect. The Company seeks to
enforce its approximate 23.68% interest in the prospect and seeks damages or
rescission, as well as costs and attorneys' fees. The case was originally filed
in Duval County, Texas on February 25, 2000.
In mid March, 2000, the defendants filed an original answer and certain
counterclaims against plaintiffs, seeking unspecified damages for slander of
title, tortious interference with business relations, bad-faith litigation, and
exemplary damages. The case proceeded to trial before the Court (without a jury)
on June 19, 2000. The trial is currently in recess and is expected to resume on
September 5, 2000. On July 3, 2000, the Company became aware that on June 30,
2000, defendants filed a second amended answer and counterclaim and certain
supplemental responses to requests for disclosure in which they stated that they
were seeking damages in the amount of $33.5 million by virtue of an alleged lost
sale of the subject properties, $17 million in alleged lost profits from other
prospective contracts, and unspecified incidental and consequential damages from
the alleged wrongful suspension of funds under their gas sales contract with the
gas purchaser on the properties, alleged damage to relationships with trade
creditors and financial institutions, including the inability to leverage the
Slick Prospect, and attorneys' fees at prevailing hourly rates in Duval County,
Texas incurred in defending against plaintiffs' claims and for 40% of any
aggregate recovery in prosecuting their counterclaims.
While the Company believes it has sufficient legal defenses to all of the
defendants' counterclaims and intends to vigorously defend itself in this
matter, there can be no assurance that the outcome of any portion of this
litigation will be favorable to the Company. An adverse outcome on the
counterclaims or related matters could have a material adverse effect on the
Company.
The Company has also alleged that BNP Petroleum Corporation, Seiskin Interests,
LTD and Pagenergy Company, LLC breached a contract with the plaintiffs by
obtaining oil and gas leases within an area restricted by that contract. This
breach of contract allegation is the subject of an additional lawsuit by
plaintiffs in the 165th District Court in Harris County, Texas. The Company is
seeking damages as a result of defendants' actions as well as costs and
attorneys' fees.
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 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" and
SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an Amendment of SFAS No. 133" is effective for fiscal years
beginning after June 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 intends
to adopt the provisions of such statement in accordance with the requirements
provided by the statement. Management is currently assessing the financial
statement impact; however, such impact is not determinable at this time.
In March of 2000, the FASB issued Interpretation No. 44 "Accounting for Certain
Transactions involving Stock
-8-
<PAGE> 10
<PAGE> 11
Compensation - an interpretation of APB No. 25" ("the Interpretation") which
clarifies the application of APB 25 for only certain issues associated with
accounting for the issuance or subsequent modifications of stock compensation
and is effective July 1, 2000. For certain modifications, including stock
options repricings made subsequent to December 15, 1998, the Interpretation
requires that variable plan accounting be applied to those modified awards
prospectively from July 1, 2000. On February 17, 2000, Carrizo repriced certain
employee and director stock options covering 358,500 shares of stock with a
weighted average exercise price of $9.13 to a new exercise price of $2.25
through the cancellation of existing options and issuance of new options at
current market prices. This repricing resulted in the recognition of $714,000 of
compensation expense upon adoption of the Interpretation in the third quarter of
2000 which will be recognized in income over the remaining vesting period for
those options through February 2003. Subsequent to the adoption of the
Interpretation, the Company will be required to record the effects of any
further changes in its stock price on the corresponding intrinsic value
recognized on July 1, 2000 of the repriced options in its results of operations
as compensation expense until the repriced options either are exercised or
expire.
-9-
<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, 1999 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 32 wells in 1999 and 20 wells
through the six months ended June 30, 2000. The Company has budgeted to drill up
to 45 gross wells (14.1 net) in 2000; however, in order to drill the expected
number of wells the Company may need to obtain additional financing, and the
actual number of wells drilled will vary depending upon the Company's ability to
obtain this financing, success of drilling programs, and other factors. If the
Company drills the number of wells it has budgeted for 2000, 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, 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. The Company
expects that the amount of hedges that it has in place will vary from time to
time. The Company entered into natural gas hedging transactions covering 240,000
MMbtu and 240,000 MMbtu at an average price (Houston Ship Channel) of $2.60 and
$3.50 resulting in a gain of $32,000 and a loss of $340,000 for the three and
six months ended June 30, 2000, respectively. The Company also entered into oil
hedging transactions covering 39,300 Bbls and 12,200 Bbls at an average price of
$25.54 and $25.45 resulting in a loss of $129,000 and a gain of $1,000 for the
three and six months ended June 30, 2000, respectively. Further, the Company
entered into natural gas hedging transactions covering 420,000 MMbtu and
1,080,000 MMbtu at an average price (Houston Ship Channel) of $1.98 and $2.07
resulting in a loss of $85,000 and a gain of $32,000 for the three and six
months ended June 30, 1999, respectively. The Company had outstanding hedge
positions as of June 30, 2000 and 1999, respectively, covering 600,000 MMbtu for
July-December 2000 and 720,000 MMbtu for July-December 1999 at an average price
of $3.61 and $1.93 (Houston Ship Channel). The Company also had outstanding
hedge
-10-
<PAGE> 13
positions as of June 30, 2000 and 1999, respectively, covering 18,000 Bbls for
July-September 2000 and 36,000 Bbls for July-December 1999 at an average price
of $26.45 and $15.45. The fair market value of the hedge positions as June 30,
2000 is approximately $(533,000).
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. Primarily as a result of depressed oil and natural gas
prices, and the resulting downward reserve quantity revisions, the Company
recorded a ceiling test write-down of $20.3 million in 1998. A ceiling test
write-down was not required for the three months and six months ended June 30,
2000 and 1999. Once incurred, a write-down of oil and gas properties is not
reversible at a later date.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000,
Compared to the Three Months Ended June 30, 1999
Oil and natural gas revenues for the three months ended June 30, 2000 increased
203 percent to $5,827,000 from $1,925,000 for the same period in 1999.
Production volumes for natural gas during the three months ended June 30, 2000
increased 100 percent to 1,396,688 Mcf from 697,268 Mcf for the same period in
1999. Average gas prices increased 60 percent to $3.15 per Mcf in the second
quarter of 2000 from $1.97 per Mcf in the same period in 1999. Production
volumes for oil in the second quarter of 2000 increased 21 percent to 51,430
Bbls from 42,562 Bbls for the same period in 1999. Average oil prices increased
115 percent to $27.72 per barrel in the second quarter of 2000 from $12.92 per
barrel in the same period in 1999. Oil and natural gas production increased
primarily as a result of the commencement of production from the Cabeza Creek
Project wells, additional Matagorda Project wells, the Cedar Point Project well
and higher than anticipated production from wells in which the Company had a
back-in working interest after pay out, 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 June 30, 1999 and 2000:
<TABLE>
<CAPTION>
2000 Period
Compared to 1999 Period
June 30, ---------------------------
--------------------------- Increase % Increase
1999 2000 (Decrease) (Decrease)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Production volumes-
Oil and condensate (Bbls) 42,562 51,430 8,868 21%
Natural gas (Mcf) 697,268 1,396,688 699,420 100%
Average sales prices-(1)
Oil and condensate (per Bbl) $ 12.92 $ 27.72 $ 14.80 115%
Natural gas (per Mcf) 1.97 3.15 1.18 60%
Operating revenues-
Oil and condensate $ 550,047 $1,425,850 $ 875,803 159%
Natural gas 1,375,218 4,400,887 8,025,669 220%
---------- ---------- ----------
Total $1,925,265 $5,826,737 $3,901,472 203%
========== ========== ==========
</TABLE>
----------
(1) Includes impact of hedging activities.
-11-
<PAGE> 14
Oil and natural gas operating expenses for the three months ended June 30, 2000
increased 54 percent to $984,000 from $637,000 for the same period in 1999
primarily due to the additional severance tax on the additional revenue and the
addition of new production offset by a reduction in costs on older producing
fields. Operating expenses per equivalent unit decreased to $.58 per Mcfe in the
second quarter of 2000 from $.67 per Mcfe in the same period in 1999 as a result
of the increase in production of natural gas and cost control measures
implemented in certain oil producing fields.
Depreciation, depletion and amortization (DD&A) expense for the three months
ended June 30, 2000 increased 76 percent to $1,741,000 from $985,000 for the
same period in 1999. 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 and the sale of the Metro Project in the second quarter
of 2000. General and administrative expense for the three months ended June 30,
2000 increased 51 percent to $724,000 from $480,000 for the same period in 1999
primarily as a result of ramp-up of employee expenses based upon the drilling
success in the last twelve months offset by cost control measures implemented in
the first quarter of 1999.
Interest income for the three months ended June 30, 2000 increased to $111,000
from $7,000 in the second quarter of 1999 primarily as a result of the financing
that closed during the fourth quarter of 1999. Net interest expense for the
three months ended June 30, 2000, decreased to zero from $3,000 from in the same
period in 1999. Capitalized interest increased to $873,000 in the second quarter
of 2000 from $340,000 in the second quarter of 1999 primarily as a result of the
financing that closed during the fourth quarter of 1999.
Income before income taxes for the three months ended June 30, 2000 increased to
$2,489,000 from a loss of $173,000 in the same period in 1999. Net income for
the three months ended June 30, 2000 increased to $2,463,000 from a loss of
$180,000 for the same period in 1999 primarily as a result of the factors
described above.
Six Months Ended June 30, 2000,
Compared to the Six Months Ended June 30, 1999
Oil and natural gas revenues for the six months ended June 30, 2000 increased
168 percent to $10,107,000 from $3,768,000 for the same period in 1999.
Production volumes for natural gas during the six months ended June 30, 2000
increased 84 percent to 2,577,304 Mcf from 1,400,962 Mcf for the same period in
1999. Average gas prices increased 47 percent to $2.87 per Mcf in the first half
of 2000 from $1.94 per Mcf in the same period in 1999. Production volumes for
oil in the first half of 2000 increased 15 percent to 104,241 Bbls from 90,321
Bbls for the same period in 1999. Average oil prices increased 126 percent to
$26.11 per barrel in the first half of 2000 from $11.55 per barrel in the same
period in 1999. Oil and natural gas production increased primarily as a result
of the commencement of production from the Cabeza Creek Project wells,
additional Matagorda Project wells, the Cedar Point Project well and higher than
anticipated production from wells in which the Company had a back-in working
interest after payout, 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."
-12-
<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 six
months ended June 30, 1999 and 2000:
<TABLE>
<CAPTION>
2000 Period
Compared to 1999 Period
June 30, -----------------------------
----------------------------- Increase % Increase
1999 2000 (Decrease) (Decrease)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Production volumes-
Oil and condensate (Bbls) 90,321 104,241 13,920 15%
Natural gas (Mcf) 1,400,962 2,577,304 1,176,342 84%
Average sales prices-(1)
Oil and condensate (per Bbl) $ 11.55 $ 26.11 $ 14.57 126%
Natural gas (per Mcf) 1.94 2.87 0.93 47%
Operating revenues-
Oil and condensate $ 1,043,484 $ 2,722,410 $ 1,678,926 161%
Natural gas 2,724,096 7,384,924 4,660,828 171%
----------- ----------- -----------
Total $ 3,767,580 $10,107,334 $ 6,339,754 168%
=========== =========== ===========
</TABLE>
----------
(1) Includes impact of hedging activities.
Oil and natural gas operating expenses for the six months ended June 30, 2000
increased 35 percent to $1,861,000 from $1,381,000 for the same period in 1999
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 $.58
per Mcfe in the first half of 2000 from $.71 per Mcfe in the same period in 1999
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 six months ended
June 30, 2000 increased 77 percent to $3,409,406 from $1,928,000 for the same
period in 1999. This increase was due to increased amortization of deferred loan
costs, additional production and seismic and drilling costs offset by the lower
asset base resulting from the ceiling test write-down in the fourth quarter of
1998 and the sale of the Metro Project in the second quarter of 2000. General
and administrative expense for the six months ended June 30, 2000 increased 22
percent to $1,455,000 from $1,188,000 for the same period in 1999 primarily as a
result of the ramp-up of employee expenses based upon the drilling success
during the second half of 1999 and the first half of 2000, offset by cost
control measures implemented in the first quarter of 1999.
Interest income for the six months ended June 30, 2000 increased to $275,000
from $13,000 in the first half of 1999. Net interest expense for the six months
ended June 30, 2000 increased to $12,000 from $3,000 for the same period in
1999. Capitalized interest increased to $1,802,000 in the first half of 2000
from $601,000 in the first half of 1999 primarily as a result of the financing
that closed during the fourth quarter of 1999.
Income (loss) before income taxes for the six months ended June 30, 2000
increased to income of $3,643,000 from a loss of $719,000 for the same period in
1999. Net income (loss) for the six months ended June 30, 2000 increased to
income of $3,592,000 from a loss of $811,000 for the same period in 1999
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
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 fully explore and develop its existing properties.
While the Company believes that the financing consummated in December 1999
combined with the proceeds from the recent sale of the Company's interest in the
Metro Project Area will provide sufficient capital to carry out the Company's
2000 exploration plan, management of the Company continues to seek financing for
its future capital program from a variety of sources. No assurance can be given
that the Company will be able to obtain additional financing on terms that would
be acceptable to the Company. Without raising additional capital, the Company
anticipates that it could be required to limit or defer its planned oil and gas
exploration and development program subsequent to 2000, which could adversely
affect the recoverability and ultimate value of the Company's oil and gas
properties.
-13-
<PAGE> 16
The Company's primary sources of liquidity have included proceeds from the
initial public offering, from the December 1999 sale of Subordinated Notes,
Common Stock and Warrants, the 1998 sale of shares of Preferred Stock and
Warrants, funds generated by operations, equity capital contributions,
borrowings, primarily under revolving credit facilities and the Palace agreement
and the sale of the Company's interest in the Metro Project Area in June 2000
for approximately $5.1 million.
Cash flows provided by operations (after changes in working capital) were
$4,373,000 and $7,864,000 for the six months ended June 30, 1999 and 2000,
respectively. The increase in cash flows provided by operations in 2000 as
compared to 1999 was due primarily to additional revenue due to higher
production and higher oil and gas prices during the first half of 2000.
The Company has budgeted capital expenditures for the year ended December 31,
2000 of approximately $13.9 million of which $2.3 million is expected to be used
to fund 3-D seismic surveys and land acquisitions and $11.6 million of which is
expected to be used for drilling activities in the Company's project areas. The
Company has budgeted to drill up to approximately 45 gross wells (14.1 net) in
2000. The actual number of wells drilled and capital expended is dependent upon
available financing, cash flow, drilling rigs and other factors.
The Company has continued to reinvest a substantial portion of its cash flows
into increasing its 3-D supported drilling prospect portfolio, improving its 3-D
seismic interpretation technology and funding its drilling program. Oil and gas
capital expenditures were $7.4 million for the six months ended June 30, 2000.
The Company's drilling efforts resulted in the successful completion of 18 gross
wells (3.2 net) during the year ended December 31, 1999 and 13 gross wells (3.9
net) during the six months ended June 30, 2000.
FINANCING ARRANGEMENTS
In connection with Carrizo's initial public offering in 1997, Carrizo entered
into an amended revolving credit facility with Compass Bank (the "Company Credit
Facility"), to provide for a maximum loan amount of $25 million, subject to
borrowing base limitations. The principal outstanding is due and payable in
January 2002, with interest due monthly. The Company Credit Facility was amended
in March 1999 to provide for a maximum loan amount under such facility of $10
million. The interest rate on all revolving credit loans is calculated, at the
Company's option, at a floating rate based on the Compass index rate or LIBOR
plus 2 percent. The Company's obligations are secured by substantially all of
its oil and gas properties and cash or cash equivalents included in the
borrowing base. Certain members of the Board of Directors have provided
collateral, primarily in the form of marketable securities, to secure the
revolving credit loans. As of May 1, 2000, the aggregate amount of this
collateral was approximately $6.6 million.
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 also redetermine the borrowing base
and the monthly borrowing base reduction at any time at its discretion. The
Company may also request borrowing base redeterminations in addition to the
required semiannual reviews at the Company's cost.
In December 1997, the Company Credit Facility was amended to provide for a term
loan of $3 million, bearing interest at the Index Rate. The amount outstanding
under the $3 million term loan as of December 31, 1998 was $3 million, which was
repaid in January 1999.
In September 1998, the Company Credit Facility was further amended to provide
for an additional $7 million term loan bearing interest at the Index Rate, of
which $7 million was borrowed in the fourth quarter of 1998. In March 1999, the
Company Credit Facility was further amended to increase the $7 million term loan
by $2 million. In December 1999, $2 million principal amount of the term loan
was repaid with proceeds from the sale from the Subordinated Notes, Common Stock
and Warrants.
Certain members of the Board of Directors have guaranteed the term loan. As
currently amended pursuant to an amendment dated December 1999, interest on the
term loan is payable monthly, bearing interest at the Index Rate. Unless
preceded by the Term Loan Maturity Date (as defined below), principal payments
on the term loan are not due until June 1, 2000, whereupon the term loan is
repayable in consecutive monthly installments in the amount $290,000 each,
beginning July 1, 2000 through December 1, 2000, and thereafter in the amount of
$440,000, beginning January 1, 2001 until the Term Loan Maturity Date, when the
entire principal balance, plus interest, is payable. Term Loan Maturity Date
means the earlier of: (1) the date of closing of the issuance of additional
equity of the Company, if the net proceeds of such issuance are sufficient to
repay in full the term loan; (2) the date of
-14-
<PAGE> 17
closing of the issuance of convertible subordinated debt of the Company, if the
proceeds of such issuance are sufficient to repay in full the term loan; (3) the
date of repayment of the revolving credit loans and the termination of the
revolving commitment; and (4) July 1, 2001.
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, (b) a ratio of quarterly EBITDA (earnings before interest,
taxes, depreciation and amortization) to quarterly debt service of not less than
1.25 to 1.00, and (c) a specified minimum amount of working capital. The Company
Credit Facility also places restrictions on, among other things, (a) incurring
additional indebtedness, guaranties, loans and liens, (b) changing the nature of
business or business structure, (c) selling assets and (d) paying dividends.
Proceeds of the revolving credit loans have been used to provide funding for
exploration and development activity. At December 31, 1999 and June 30, 2000,
outstanding revolving credit loans totaled $5,876,000 and $5,426,000,
respectively with an additional $1,208,392 and $4,170,000, respectively,
available for future borrowings. The outstanding amount of the term loan was
$7,000,000 at December 31, 1999 and June 30, 2000. The Company Credit Facility
also provides for the issuance of letters of credit, one of which has been
issued for $224,000 at December 31, 1999 and June 30, 2000.
In November 1999, certain members of the Board of Directors provided a bridge
loan in the amount of $2,000,000, to the Company, secured by certain oil and
natural gas properties. This bridge loan bore interest at 14 percent per annum.
Also in consideration for the bridge loan, the Company assigned to Messrs.
Hamilton, Webster, and Loyd an aggregate 1.0 percent overriding royalty interest
("ORRI") in the Huebner #1 and Fondren Letulle #1 wells (combined with the prior
assignment, a 2 percent overriding royalty interest), a .8794 percent ORRI in
Neblett #1 (N. La. Copita), a 1.0466 percent ORRI in STS 104-5 #1, a 1.544
percent ORRI in USX Hematite #1, a 2.0 percent ORRI in Huebner #2 and a 2.0
percent ORRI in Burkhart #1. On December 15, 1999 the bridge loan was repaid in
its entirety with proceeds from the sale of Common Stock, Subordinated Notes and
Warrants. Such overriding royalty interests are limited to the well bore and
proportionately reduced to the Company's working interest in the well.
In December 1999, the Company consummated the sale of $22 million principal
amount of 9 percent Senior Subordinated Notes due 2007 (the "Subordinated
Notes") to an investor group led by CB Capital Investors, L.P. which included
certain members of the Board of Directors. The Subordinated Notes were sold at a
discount of $688,761 which is being amortized over the life of the notes.
Interest is payable quarterly beginning March 31, 2000. The Company may elect,
for a period of five years, to increase the amount of the Subordinated Notes for
up to 60 percent of the interest which would otherwise be payable in cash. The
Subordinated Notes were increased by $606,046 for such interest as of June 30,
2000. Concurrent with the sale of the notes, the Company consummated the sale of
3,636,364 shares of Common Stock at a price of $2.20 per share and Warrants to
purchase up to 2,760,189 shares of the Company's Common Stock at an exercise
price of $2.20 per share. For accounting purposes, the Warrants are valued at
$0.25 per Warrant. The sale was made to an investor group led by CB Capital
Investors, L.P. which included certain members of the Board of Directors. The
Warrants have an exercise price of $2.20 per share and expire in December 2007.
The Company is subject to certain covenants under the terms under the related
Securities Purchase Agreement, including but not limited to, (a) maintenance of
a specified Tangible Net Worth, (b) maintenance of a ratio of EBITDA (earnings
before interest, taxes depreciation and amortization) to quarterly Debt Service
(as defined in the agreement) of not less than 1.00 to 1.00, and (c) limit its
capital expenditures to a specified amount for the year ended December 31, 2000,
and thereafter to an amount equal to the Company's EBITDA for the immediately
prior fiscal year, as well as limits on the Company's ability to (i) incur
indebtedness, (ii) incur or allow liens, (iii) engage in mergers, consolidation,
sales of assets and acquisitions, (iv) declare dividends and effect certain
distributions (including restrictions on distributions upon the Common Stock),
(v) engage in transactions with affiliates (vi) make certain repayments and
prepayments, including any prepayment of the Company's Term Loan, any
subordinated debt, indebtedness that is guaranteed or credit-enhanced by any
affiliate of the Company, and prepayments that effect certain permanent
reductions in revolving credit facilities.
Of the approximately $29,000,000 net proceeds of this financing, $12,060,000 was
used to fund the Enron Repurchase described below and related expenses,
$2,025,000 was used to repay the bridge loan extended to the Company by its
outside directors, $2 million was used to repay a portion of the Compass Term
Loan, $1 million was
-15-
<PAGE> 18
used to repay a portion of the Compass Borrowing Base Facility, and the Company
expects the remaining proceeds to be used to fund the Company's ongoing
exploration and development program and general corporate purposes.
In December 1999, the Company consummated the repurchase of all the outstanding
shares of Preferred Stock and 750,000 Warrants for $12 million. At the same
time, the Company reduced the exercise price of the remaining 250,000 Warrants
from $11.50 per share to $4.00 per share.
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.
-16-
<PAGE> 19
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, except for the litigation
described below.
The Company, as one of three plaintiffs, has filed a lawsuit against BNP
Petroleum Corporation, Seiskin Interests, LTD, Pagenergy Company, LLC and
Gap Marketing Company, LLC, as defendants, in the 229th Judicial District
Court of Duval County, Texas, for fraud and breach of contract in
connection with an agreement between plaintiffs and defendants whereby the
defendants were obligated to drill a test well in an area known as the
Slick Prospect in Duval County, Texas. The allegations of the Company in
this litigation are that BNP gave the Company inaccurate and incomplete
information on which the Company relied in making its decision not to
participate in the test well and the prospect, resulting in the loss of the
Company's interest in the lease, the test well and four subsequent wells
drilled in the prospect. The Company seeks to enforce its approximate
23.68% interest in the prospect and seeks damages or rescission, as well as
costs and attorneys' fees. The case was originally filed in Duval County,
Texas on February 25, 2000.
In mid March, 2000, the defendants filed an original answer and certain
counterclaims against plaintiffs, seeking unspecified damages for slander
of title, tortious interference with business relations, bad-faith
litigation, and exemplary damages. The case proceeded to trial before the
Court (without a jury) on June 19, 2000. The trial is currently in recess
and is expected to resume on September 5, 2000. On July 3, 2000, the
Company became aware that on June 30, 2000, defendants filed a second
amended answer and counterclaim and certain supplemental responses to
requests for disclosure in which they stated that they were seeking damages
in the amount of $33.5 million by virtue of an alleged lost sale of the
subject properties, $17 million in alleged lost profits from other
prospective contracts, and unspecified incidental and consequential damages
from the alleged wrongful suspension of funds under their gas sales
contract with the gas purchaser on the properties, alleged damage to
relationships with trade creditors and financial institutions, including
the inability to leverage the Slick Prospect, and attorneys' fees at
prevailing hourly rates in Duval County, Texas incurred in defending
against plaintiffs' claims and for 40% of any aggregate recovery in
prosecuting their counterclaims.
While the Company believes it has sufficient legal defenses to all of the
defendants' counterclaims and intends to vigorously defend itself in this
matter, there can be no assurance that the outcome of any portion of this
litigation will be favorable to the Company. An adverse outcome on the
counterclaims or related matters could have a material adverse effect on
the Company.
The Company has also alleged that BNP Petroleum Corporation, Seiskin
Interests, LTD and Pagenergy Company, LLC breached a contract with the
plaintiffs by obtaining oil and gas leases within an area restricted by
that contract. This breach of contract allegation is the subject of an
additional lawsuit by plaintiffs in the 165th District Court in Harris
County, Texas. The Company is seeking damages as a result of defendants'
actions as well as costs and attorneys' fees.
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
(A) Annual Meeting of Shareholders on May 19, 2000.
(B) Set forth below are the results of the voting with respect to each
matter acted upon at the meeting (proxy totals in thousands):
<TABLE>
<CAPTION>
Broker
For Against Withheld Abstain Non votes
---------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Election of Directors 12,579,462 9,500
S. P. Johnson IV 12,579,462 9,500
Frank A. Wojtek 12,579,462 9,500
Steven A. Webster 12,579,462 9,500
Douglas A. P. Hamilton 12,579,462 9,500
Paul B. Loyd, Jr. 12,579,462 9,500
Arnold L. Chavkin 12,578,462 10,500
Christopher C. Behrens 12,579,462 9,500
Approval of the Amendment
to the Incentive Plan
increasing the number of
shares of Common Stock
available for issuance
under the Plan. 12,491,637 80,625 16,700
Approval of the Amendment
to the Incentive Plan
allowing Directors to
receive Options when
acting as Independent
Contractors 12,401,811 173,970 13,181
Approval of the Amendment
to the Incentive Plan
clarifying that the Board of
Directors may grant
Options to Directors in
replacement of prior
Option Grants to Directors 12,397,797 178,570 12,595
</TABLE>
-17-
<PAGE> 20
<TABLE>
<S> <C> <C> <C> <C> <C>
Approval of the Issuance of
twenty percent (20%) or
more of the Company's
Common Stock upon the
exercise of certain
previously issued warrants
to purchase Common
Stock of the Company,
which approval is
necessary in order to
comply with the corporate
governance rules of the
NASDAQ National
Market. 10,629,116 45,000 81,140 1,833,706
Approval of the Appointment
of Arthur Andersen L.L.P.
as Independent Public
Accountants for the fiscal
year ending December 31,
2000. 12,573,867 10,400 4,695
</TABLE>
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, 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.
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
-18-
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <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 June 6, 1997
(incorporated herein by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-29187)).
+3.1 -- Amended and Restated Articles of Incorporation of the Company
(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 -- 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) and Amendment No. 2 (incorporated herein by reference to
Exhibit 3.2 to the Company's Current Report on Form 8-K dated
December 15, 1999).
+4.1 -- Ninth Amendment to First Amended, Restated and Combined Loan
Agreement by and between Carrizo Oil & Gas, Inc. and Compass Bank
dated August 27, 1999 (incorporated herein by reference to Exhibit
99.10 to the Company's Current Report on Form 8-K dated December 15,
1999).
10.1 -- Incentive Plan of the Company, amended and restated as of
February 17, 2000.
10.2 -- Amendment to the Employment Agreement between the Company and
S. P. Johnson IV.
10.3 -- Amendment to the Employment Agreement between the Company and
Frank A. Wojtek.
27.1 -- Financial Data Schedule.
</TABLE>
----------
+ Incorporated herein by reference as indicated.
Reports on Form 8-K
The only Current Report on Form 8-K for the quarter ended June 30, 2000
was a report dated July 3, 2000 to report, under Item 5, the status of certain
litigation in the 229th Judicial District Court of Duval County, Texas and the
165th Judicial Court of Harris County, Texas in which the Company is a party.
-19-
<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: August 14, 2000 By: /s/ S. P. Johnson, IV
--------------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2000 By: /s/ Frank A. Wojtek
--------------------------------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
-20-
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <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 June 6, 1997
(Incorporated herein by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-29187)).
+3.1 -- Amended and Restated Articles of Incorporation of the Company
(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).
27.1 -- Financial Data Schedule.
</TABLE>
----------
+ Incorporated herein by reference as indicated.
