<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 MARCH 31, 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 May 10, 2000, the latest practicable date, was 14,011,364
<PAGE> 2
CARRIZO OIL & GAS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
INDEX
<TABLE>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Condensed Balance Sheets
- As of March 31, 2000 and December 31, 1999 2
Condensed Statements of Operations
- For the three-month periods ended March 31, 1999
and 2000 3
Condensed Statements of Cash Flows
- For the three-month periods ended March 31, 1999
and 2000 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, March 31,
1999 2000
-------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,345,618 $ 8,634,426
Accounts receivable, net of allowance for doubtful accounts of
$480,000 at December 31, 1999 and March 31, 2000 4,424,283 5,425,876
Advances to operators 1,266,770 1,001,141
Other current assets 487,398 521,666
-------------- ------------
Total current assets 17,524,069 15,583,109
PROPERTY AND EQUIPMENT, net (full-cost method of accounting for
oil and gas properties) 64,336,738 67,698,972
DEFERRED INCOME TAXES 820,252 820,252
OTHER ASSETS 985,315 1,105,969
-------------- ------------
$ 83,666,374 $ 85,208,302
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 4,095,567 $ 3,619,929
Accrued liabilities 481,239 495,586
Advances for joint operations 1,066,203 1,937,080
Current maturities of long-term debt 3,542,742 4,515,557
-------------- ------------
Total current liabilities 9,185,751 10,568,152
LONG-TERM DEBT (Note 3) 33,627,265 32,658,277
SHAREHOLDERS' EQUITY:
Warrants (3,010,189 outstanding at December 31, 1999 and March 31, 2000) 765,047 765,047
Common stock (40,000,000 shares authorized with 14,011,364 issued and
outstanding at December 31, 1999 and March 31, 2000) 140,114 140,114
Additional paid-in capital 62,608,343 62,608,343
Accumulated deficit (22,660,146) (21,531,631)
-------------- ------------
40,853,358 41,981,873
-------------- ------------
$ 83,666,374 $ 85,208,302
============== ============
</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
Months Ended
March 31,
--------------------------
1999 2000
----------- -----------
<S> <C> <C>
OIL AND NATURAL GAS REVENUES $ 1,842,314 $ 4,279,597
COSTS AND EXPENSES:
Oil and natural gas operating expenses 743,704 877,667
Depreciation, depletion and amortization 943,191 1,668,806
General and administrative 707,525 731,126
----------- -----------
Total costs and expenses 2,394,420 3,277,599
----------- -----------
OPERATING INCOME (LOSS) (552,106) 1,001,998
OTHER INCOME AND EXPENSES:
Interest income 6,485 163,771
Interest expense (260,382) (881,986)
Interest expense, related parties -- (58,850)
Capitalized interest 260,382 929,082
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (545,621) 1,154,015
INCOME TAXES (Note 4) 7,002 25,500
----------- -----------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (552,623) 1,128,515
CUMULATIVE EFFECT OF CHANGE IN METHOD OF
REPORTING COSTS OF START-UP ACTIVITIES (Note 5) 77,731 --
----------- -----------
NET INCOME (LOSS) $ (630,354) $ 1,128,515
=========== ===========
LESS: DIVIDENDS AND ACCRETION ON PREFERRED SHARES (788,843) --
----------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $(1,419,197) $ 1,128,515
=========== ===========
BASIC EARNINGS (LOSS) PER COMMON SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (Note 2) $ (0.13) $ 0.08
BASIC EARNINGS (LOSS) PER COMMON SHARE OF CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (Notes 2 and 5) $ (0.01) $ --
----------- -----------
BASIC EARNINGS (LOSS) PER COMMON SHARE (Note 2) $ (0.14) $ 0.08
=========== ===========
DILUTED EARNINGS (LOSS) PER COMMON SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (Note 2) $ (0.13) $ 0.08
DILUTED EARNINGS (LOSS) PER COMMON SHARE OF CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (Note 2 and 5) $ (0.01) $ --
----------- -----------
DILUTED EARNINGS (LOSS) PER COMMON SHARE (Note 2) $ (0.14) $ 0.08
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
CARRIZO OIL & GAS, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31,
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (630,354) $ 1,128,515
Adjustment to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation, depletion and amortization 943,191 1,668,806
Discount accretion -- 7,720
Cumulative effect of change in accounting principle 77,731 --
Changes in assets and liabilities-
Accounts receivable 300,136 (1,001,593)
Other assets (86,378) (234,422)
Accounts payable, trade (1,119,729) 384,461
Other current liabilities (44,015) 14,347
------------ ------------
Net cash provided by (used in) operating activities (559,418) 1,967,834
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, accrual basis (1,935,933) (4,951,540)
Adjustment to cash basis 169,302 (555,820)
Advance to operators 355,980 265,629
Advances for joint operations -- 870,877
------------ ------------
Net cash used in
investing activities (1,410,651) (4,370,854)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,616,850 --
Debt repayments -- (308,172)
------------ ------------
Net cash provided by (used in)
financing activities 2,616,850 (308,172)
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 646,781 (2,711,192)
CASH AND CASH EQUIVALENTS, beginning of period 1,187,656 11,345,618
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,834,437 $ 8,634,426
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest (net of amounts capitalized) $ -- $ 11,754
============ ============
</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. 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.
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<PAGE> 7
2. EARNINGS PER COMMON SHARE:
Supplemental earning per share information is provided below:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------------------------------------------------
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 $ (552,623) $ 1,128,515
Less: Dividends and accretion on preferred stock (788,843) --
----------- -----------
Basic Earnings per Share before cumulative
change in accounting principle
Net income (loss) available to
common shareholders (1,341,466) 1,128,515 10,375,000 14,011,364 $ (0.13) $ 0.08
======== ========
Stock Options and Warrants -- -- -- 875,281
----------- ----------- ----------- -----------
Diluted Earnings per Share before cumulative
effect of change in accounting principle
Net income (loss) available to common
shareholders plus assumed conversions $ 1,341,466 $ 1,128,515 10,375,000 14,886,645 $ (0.13) $ 0.08
=========== =========== =========== =========== ======== ========
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 -- -- -- 875,281
----------- ----------- ----------- -----------
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 14,886,645 $ (0.01) $ --
=========== =========== =========== =========== ======== ========
Net income (loss) $ (630,354) $ 1,128,515
Less: Dividends and accretion on preferred stock (788,843) --
----------- -----------
Basic Earnings per Share
Net income (loss) available to
common shareholders (1,419,197) 1,128,515 10,375,000 14,011,364 $ (0.14) $ 0.08
======== ========
Stock Options and Warrants -- -- -- 875,281
----------- ----------- ----------- -----------
Diluted Earnings per Share
Net income (loss) available to common
shareholders plus assumed conversions $(1,419,197) $ 1,128,515 10,375,000 14,886,645 $ (0.14) $ 0.08
=========== =========== =========== =========== ======== ========
</TABLE>
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 665,620 and 236,120 stock
options and 1,000,000 and 250,000 warrants during the three months ended March
31, 1999 and 2000, 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.
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<PAGE> 8
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 March 31, 2000, amounts outstanding under the Borrowing
Base Facility totaled $5,876,000, with an additional $1,208,392 and $2,122,416,
respectively, available for future borrowings. The Borrowing Base totaled
$7,308,382 and $8,222,416 at December 31, 1999 and March 31, 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 March 31, 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
May 1, 2000, the aggregate amount of this collateral was approximately $6.6
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 March 31,
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.
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 March 31, 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 $353,100 for such interest as of March 31, 2000. Such Senior Subordinated
Notes had a fair market value at March 31, 2000 of approximately $22 million.
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<PAGE> 9
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 $2,606,291
at March 31, 2000 and bear interest at rates of 8 percent to 10 percent.
4. INCOME TAXES:
In the first quarter of 2000, the Company decreased the valuation allowance
associated with $1,154,015 of its net operating loss carryforwards as management
has determined that it is more likely than not that such carryforwards will be
utilized based upon the Company's latest estimates of future taxable income. As
a result of this determination, the Company realized a deferred tax benefit in
the amount of $403,905 for the three months ended March 31, 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. 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" 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 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 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 408,500
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 may result in
the recognition of compensation expense upon adoption of the Interpretation in
the third quarter of 2000. Subsequent to the adoption of the Interpretation, the
Company will be required to record the effects of the changes in its stock price
on the corresponding intrinsic value of the repriced options in its results of
operations as compensation expense. The amount of compensation expense, if any,
which will be recognized upon adoption on July 1, 2000 cannot be determined
until that time.
-8-
<PAGE> 10
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 11 wells
through the three months ended March 31, 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, weather delays 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 utilizes, 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 660,000 MMBtu at an average
price (Houston Ship Channel) of $2.60 and $2.13 resulting in a gain of $32,000
and $117,000 for the three months ended March 31, 2000 and 1999, respectively.
The Company also entered into oil hedging transactions covering 39,300 Bbls at
an average price of $25.54 resulting in a loss of $129,000 for the three months
ended March 31, 2000. The Company had outstanding natural gas hedge positions as
of March 31, 2000 and 1999, respectively, covering 360,000 MMBtu for April-July
2000, and 1,080,000 MMBtu for April-December 1999, at an average price of $2.69
and $1.93 (Houston Ship Channel). The Company also had outstanding oil hedge
positions as of March 31, 2000 and 1999, respectively, covering 12,200 Bbls and
54,000 Bbls for April - May 2000 and April - December 1999 at an average price
of $25.45 and $15.45. The fair market value of the hedge positions as March 31,
2000 is approximately $(140,000).
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,
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<PAGE> 11
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 ended March 31,
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 March 31, 2000,
Compared to the Three Months Ended March 31, 1999
Oil and natural gas revenues for the three months ended March 31, 2000 increased
132 percent to $4,280,000 from $1,842,000 for the same period in 1999.
Production volumes for natural gas during the three months ended March 31, 2000
increased 68 percent to 1,180,616 from 703,694 for the same period in 1999.
Average gas prices increased 32 percent to $2.53 per Mcf in the first quarter of
2000 from $1.92 per Mcf in the same period in 1999. Production volumes for oil
in the first quarter of 2000 increased 11 percent to 52,811 Bbls from 47,759
Bbls for the same period in 1999. Average oil prices increased 137 percent to
$24.53 per barrel in the first quarter of 2000 from $10.33 per barrel in the
same period in 1999. The increase in oil production was due primarily to the
commencement of production from the Matagorda Project wells in the second half
of 1999. Natural gas production increased primarily as a result of the
commencement of production from the Matagorda Project wells, the Cedar Point
Project Area well and the North La Copita well in the second half 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 March 31, 1999 and 2000:
<TABLE>
<CAPTION>
2000 Period
Compared to 1999 Period
March 31, ----------------------------
----------------------- Increase % Increase
1999 2000 (Decrease) (Decrease)
---------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Production volumes -
Oil and condensate (Bbls) 47,759 52,811 5,052 11%
Natural gas (Mcf) 703,694 1,180,616 476,922 68%
Average sales prices - (1)
Oil and condensate (per Bbls) $ 10.33 $ 24.53 $ 14.20 137%
Natural gas (per Mcf) 1.92 2.53 0.61 32%
Operating revenues -
Oil and condensate $ 493,436 $ 1,295,560 $ 802,124 163%
Natural gas 1,348,878 2,984,037 1,635,159 121%
---------- ----------- ------------
Total $1,842,314 $ 4,279,597 $ 2,437,283 132%
========== =========== ============
</TABLE>
- ------------------
(1) Includes impact of hedging activities.
Oil and natural gas operating expenses for the three months ended March 31, 2000
increased 18 percent to $878,000 from $744,000 for the same period in 1999
primarily due to the addition of new production offset by a reduction in costs
on older producing fields. Operating expenses per equivalent unit decreased 22
percent to $.59 per Mcfe in the first quarter of 2000 from $.75 per Mcfe in the
same period in 1999 primarily as a result of the addition of new wells with high
production rates and cost control measures implemented in certain oil producing
fields offset by decreased production of natural gas as wells naturally decline.
Depreciation, depletion and amortization (DD&A) expense for the three months
ended March 31, 2000 increased 77 percent to $1,669,000 from $943,000 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 1999. General and administrative expense for the three months
ended March 31, 2000 increased three percent
-10-
<PAGE> 12
to $731,000 from $707,000 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 offset by cost control measures implemented in the first
quarter of 1999.
Interest income for the three months ended March 31, 2000 increased to $164,000
from $6,000 in the first 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 March 31, 2000, increased to $12,000 from none for the same
period in 1999. Capitalized interest increased to $929,000 in the first quarter
of 2000 from $260,000 in the first 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 March 31, 2000 increased
to income of $1,154,000 from a loss of $546,000 in the same period in 1999. Net
income for the three months ended March 31, 2000 increased to income of
$1,129,000 from a loss of $630,000 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
in the first quarter of 1999.
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 complete the exploration and development of its existing properties.
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 costs on its active exploration projects.
While the Company believes that the financing consummated in December 1999 will
provide sufficient capital to carry out the Company's 2000 exploration plan,
management of the Company continues to seek financing for its 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. The Company's inability to obtain additional financing could 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 subsequent to 2000, which could
adversely affect the recoverability and ultimate value of the Company's oil and
gas properties.
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.
Cash flows provided by (used in) operations (after changes in working capital)
were $(559,000) and $1,968,000 for the three months ended March 31, 1999 and
2000, respectively. The increase in cash flows provided by operations in 2000 as
compared to 1999 was due primarily to additional revenue during the first
quarter 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 $5.0 million for the three months ended March 31,
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 7 gross wells
(2.7 net) during the three months ended March 31, 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,
-11-
<PAGE> 13
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 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 March 31, 2000,
outstanding revolving credit loans totaled $5,876,000, with an additional
$1,208,392 and $2,122,416, respectively, available for future borrowings. The
outstanding amount of the term loan was $7,000,000 at December 31, 1999 and
March 31, 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 March 31, 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 $353,100 for such interest as of March 31,
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.
-12-
<PAGE> 14
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 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.
-13-
<PAGE> 15
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, 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
<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).
</TABLE>
-14-
<PAGE> 16
<TABLE>
<S> <C> <C>
+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).
27.1 -- Financial Data Schedule.
</TABLE>
+ Incorporated herein by reference as indicated.
Reports on Form 8-K
None
-15-
<PAGE> 17
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: May 15, 2000 By: /s/ S. P. Johnson, IV
--------------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2000 By: /s/ Frank A. Wojtek
--------------------------------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
-16-
<PAGE> 18
<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 -- 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 references
to Exhibit 99.10 to the Company's Current Report on Form 8-K
dated December 15, 1999).
27.1 -- Financial Data Schedule.
</TABLE>
+ Incorporated herein by reference as indicated.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,634,426
<SECURITIES> 0
<RECEIVABLES> 5,425,876
<ALLOWANCES> 480,000
<INVENTORY> 0
<CURRENT-ASSETS> 15,583,109
<PP&E> 67,698,972
<DEPRECIATION> 33,290,045
<TOTAL-ASSETS> 85,208,302
<CURRENT-LIABILITIES> 10,568,152
<BONDS> 0
0
0
<COMMON> 140,114
<OTHER-SE> 41,841,759
<TOTAL-LIABILITY-AND-EQUITY> 85,208,302
<SALES> 4,279,597
<TOTAL-REVENUES> 4,279,597
<CGS> 0
<TOTAL-COSTS> 3,277,599
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,754
<INCOME-PRETAX> 1,154,015
<INCOME-TAX> 25,500
<INCOME-CONTINUING> 1,128,515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,128,515
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
