<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
<TABLE>
<CAPTION>
<S> <C>
Texas 76-0415919
----- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
14701 ST. MARY'S LANE, SUITE 800, HOUSTON, TEXAS 77079 77079
(Address of principal executive offices) (Zip Code)
</TABLE>
(281) 496-1352
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No
-- --
The number of shares outstanding of the registrant's common stock, par value
$0.01 per share, as of November 3, 2000, the latest practicable date, was
14,053,061.
<PAGE> 2
CARRIZO OIL & GAS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED September 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Condensed Balance Sheets
- As of September 30, 2000 and December 31, 1999 2
Condensed Statements of Operations
- For the three-month and nine-month periods ended
September 30, 1999 and 2000 3
Condensed Statements of Cash Flows
- For the nine-month periods ended September 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. 16
SIGNATURES 20
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<PAGE> 3
CARRIZO OIL & GAS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,345,618 $ 9,438,487
Accounts receivable, net of allowance for doubtful accounts of
$480,000 at December 31, 1999 and September 30, 2000, respectively 4,424,283 6,597,508
Advances to operators 1,266,770 1,955,525
Other current assets 487,398 955,200
------------ ------------
Total current assets 17,524,069 18,946,720
PROPERTY AND EQUIPMENT, net (full-cost method of accounting for 64,336,738 67,212,103
oil and gas properties)
INVESTMENT IN MPC - 1,544,180
DEFERRED INCOME TAXES 820,252 820,252
OTHER ASSETS 985,315 999,846
------------ ------------
$ 83,666,374 $ 89,523,101
============ ============
LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 4,095,567 $ 2,718,280
Accrued liabilities 481,239 2,025,380
Advances for joint operations 1,066,203 24,603
Current maturities of long-term debt 3,542,742 7,605,083
------------ ------------
Total current liabilities 9,185,751 12,373,346
LONG-TERM DEBT 33,627,265 27,723,370
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS EQUITY:
Warrants 765,047 765,047
Common Stock (40,000,000 shares authorized with and 14,011,364 and 14,052,261
issued and outstanding at December 31, 1999 and September 30, 2000,
respectively) 140,114 140,523
Additional paid-in capital 62,608,343 62,694,528
Accumulated deficit (22,660,146) (14,173,713)
------------ ------------
40,853,358 49,426,385
------------ ------------
$ 83,666,374 $ 89,523,101
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 4
CARRIZO OIL & GAS, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
--------------------------- ----------------------------
1999 2000 1999 2000
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
OIL AND NATURAL GAS REVENUES $2,537,960 $8,007,583 $ 6,305,540 $18,113,917
COSTS AND EXPENSES:
Oil and natural gas operating expenses 734,482 1,297,986 2,115,027 3,159,174
Depreciation, depletion and amortization 988,586 2,011,564 2,916,830 5,420,970
General and administrative 478,090 747,383 1,666,089 2,202,666
Stock Option compensation - 657,525 - 657,525
---------- ---------- ----------- -----------
Total costs and expenses 2,201,158 4,714,458 6,697,946 11,440,335
---------- ---------- ----------- -----------
OPERATING INCOME (LOSS) 336,802 3,293,125 (392,406) 6,673,582
OTHER INCOME AND EXPENSES:
Other income, net of related expenses - 1,482,372 - 1,482,372
Interest income 6,416 145,416 19,780 420,116
Interest expense (426,841) (869,873) (1,030,620) (2,683,762)
Capitalized interest 415,794 868,984 1,016,482 2,670,759
---------- ---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 332,171 4,920,024 (386,764) 8,563,067
INCOME TAXES 7,002 25,567 21,006 76,634
---------- ---------- ----------- -----------
NET INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 325,169 4,894,457 (407,770) 8,486,433
CUMULATIVE EFFECT OF CHANGE IN METHOD OF
REPORTING COSTS OF START-UP ACTIVITIES - - 77,731 -
---------- ---------- ----------- -----------
NET INCOME (LOSS) $ 325,169 $4,894,457 $ (485,501) $ 8,486,433
========== ========== =========== ===========
LESS: DIVIDENDS AND ACCRETION ON PREFERRED SHARES (822,553) - (2,418,132) -
---------- ---------- ----------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (497,384) $4,894,457 $(2,903,633) $ 8,486,433
========== ========== =========== ===========
BASIC INCOME (LOSS) PER COMMON SHARE
BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE $ (0.05) $ 0.35 $ (0.27) $ 0.61
BASIC INCOME (LOSS) PER COMMON SHARE
OF CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - - (0.01) -
---------- ---------- ----------- -----------
BASIC INCOME (LOSS) PER COMMON SHARE $ (0.05) $ 0.35 $ (0.28) $ 0.61
========== ========== =========== ===========
DILUTED INCOME (LOSS) PER COMMON SHARE
BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE $ (0.05) $ 0.29 $ (0.27) $ 0.51
DILUTED INCOME (LOSS) PER COMMON SHARE
OF CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - - (0.01) $ -
---------- ---------- ----------- -----------
DILUTED INCOME (LOSS) PER COMMON SHARE $ (0.05) $ 0.29 $ (0.28) $ 0.51
========== ========== =========== ===========
</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 Nine
Months Ended
September 30,
----------------------------
1999 2000
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (485,501) $ 8,486,433
Adjustment to reconcile net income (loss) to net
cash provided by operating activities-
Depreciation, depletion and amortization 2,916,830 5,420,970
Discount accretion - 23,170
Stock option compensation - 657,525
Finders' fee - (1,544,180)
Cumulative effect of change in
accounting principle 77,731 -
Changes in assets and liabilities-
Accounts receivable 705,655 (2,173,225)
Other current assets 3,500 (467,802)
Other assets (215,676) (253,031)
Accounts payable, trade 46,705 (278,654)
Other current liabilities 88,248 886,616
---------- -----------
Net cash provided by
operating activities 3,137,492 10,757,822
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, accrual basis (6,724,276) (13,132,962)
Proceeds from sale of Metro Project - 5,075,127
Adjustment to cash basis (642,560) (186,745)
Advances for joint operations - (1,041,600)
Advances to operators (743,138) (688,755)
---------- -----------
Net cash used in
investing activities (8,109,974) (9,974,935)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 4,445,000 -
Debt repayments - (2,776,612)
Proceeds from sale of common stock - 86,594
---------- -----------
Net cash provided by (used in) financing activities 4,445,000 (2,690,018)
---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (527,482) (1,907,131)
CASH AND CASH EQUIVALENTS, beginning of period 1,187,656 11,345,618
---------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 660,174 $ 9,438,487
========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest (net of amounts capitalized) $ 14,138 $ 13,003
========== ===========
</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.
2. INVESTMENT IN MICHAEL PETROLEUM CORPORATION:
The Company received a finder's fee in the amount of $1,544,180 from affiliates
of Donaldson, Lufkin & Jenrette ("DLJ") in connection with the sale and purchase
of a significant minority shareholder interest in Michael Petroleum Corporation
("MPC"). MPC is a privately - held exploration and production company which
focuses on the prolific gas producing Lobo Trend in South Texas. The minority
shareholder interest in MPC was purchased by entities affiliated with DLJ. The
Company elected to receive the fee in the form of 18,947 shares of common stock,
1.9 percent of the outstanding common shares of MPC, which is accounted for as a
cost basis investment. Steven A. Webster, who is the Chairman of the Board of
the Company, is also a Managing Director of Global Energy Partners Ltd., a
merchant banking affiliate of Donaldson, Lufkin & Jenrette that makes
investments in energy companies, and joined the Board of Directors of MPC in
connection with the transaction.
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<PAGE> 7
3. EARNINGS PER COMMON SHARE:
Supplemental earning per share information is provided below:
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
----------------------------------------------------------------------------------
Income (Loss) Shares Per-Share Amount
------------------------------- ----------------------------- -------------------
1999 2000 1999 2000 1999 2000
-------------- ----------- ------------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 325,169 $4,894,457
Less: Dividends and accretion
on preferred stock (822,553) -
-------------- -------------
Basic Earnings per Share
Net income (loss) available to
common shareholders (497,384) 4,894,457 10,375,000 14,034,913 $(0.05) $ 0.35
======= ========
Stock Options and Warrants - - - 2,949,604
--------------- --------------- -------------- --------------
Diluted Earnings per Share
Net income (loss) available to
common shareholders plus
assumed conversions $ (497,384) $4,894,457 10,375,000 16,984,517 $(0.05) $ 0.29
=============== =============== ============== ============== ======== ==========
For the Nine Months Ended September 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 $ (407,770) $8,486,433
Less: Dividends and accretion
on preferred stock (2,418,132) -
-------------- --------------
Basic Earnings per Share before
cumulative change in
accounting principle
Net income (loss) available to
common shareholders (2,825,902) 8,486,433 10,375,000 14,019,271 $(0.27) $ 0.61
======= ==========
Stock Options and Warrants - - - 2,730,401
-------------- -------------- -------------- --------------
Diluted Earnings per Share before
cumulative effect of change in
accounting principle
Net income (loss) available to common
shareholders plus assumed
conversions $(2,825,902) $8,486,433 10,375,000 16,749,672 $(0.27) $ 0.51
============== ============== ============== ============== ======= ==========
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 14,019,271 $(0.01) $ -
======== ==========
Stock Options and Warrants - - - 2,730,401
-------------- -------------- ------------- -------------
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 16,749,672 $(0.01) $ -
============== ============== ============= ============== ======== ==========
Net income (loss) $ (485,501) $8,486,433
Less: Dividends and accretion
on preferred stock (2,418,132) -
-------------- --------------
Basic Earnings per Share
Net income (loss) available to
common shareholders (2,903,633) 8,486,433 10,375,000 14,019,271 $(0.28) $ 0.61
======== ==========
Stock Options and Warrants - - - 2,730,401
-------------- -------------- ------------- -------------
Diluted Earnings per Share
Net income (loss) available
to common shareholders plus
assumed conversions $(2,903,633) $8,486,433 10,375,000 16,749,672 $(0.28) $ 0.51
============== ============== ============= ============= ======== =========
</TABLE>
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<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.
4. 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 September 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 $135,136, respectively, available for future
borrowings. The Borrowing Base totaled $7,308,382 and $6,685,136 at December 31,
1999 and September 30, 2000, respectively. The Borrowing Base Facility was also
available for letters of credit, one and two of which have been issued for
$224,000 and $1,124,000 at December 31, 1999 and September 30, 2000,
respectively. 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 November 1, 2000, the aggregate amount of this
collateral was approximately $2.6 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 and $6,130,000 outstanding at December 31, 1999
and September 30, 2000, respectively. 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
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<PAGE> 9
60 percent of the interest which would otherwise be payable in cash. The
Subordinated Notes were increased by $911,888 for such interest as of September
30, 2000. Such Senior Subordinated Notes had a fair market value at September
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 $1,475,084
at September 30, 2000 and bear interest at rates of 8 percent to 10 percent.
5. INCOME TAXES:
The Company decreased the valuation allowance associated with $4,920,024 and
$8,563,067 of its net operating loss carryforwards for three month and nine
month periods ended September 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
$1,722,008 and $2,997,006 for the three and nine months ended September 30,
2000 that results in effective rate of zero percent.
6. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
On January 1, 1999 the Company adopted the American Institute of Certified
Public Accountants Statement of Position ("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.
7. 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, but was recessed and rescheduled 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 request 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. In subsequent testimony,
the defendants have verbally alleged $26 million of damages by virtue of the
alleged lost sale of the properties (as opposed to the $33.5 million previously
sought), $7.5 million of damages by virtue of loss of a lease development
opportunity and $100 million of damages by virtue of the loss of a business
opportunity related to BNP's alleged inability to participate in a 3-D seismic
project. The case proceeded to trial on September 5, 2000, at which time the
court agreed to hear the plaintiffs' case against the defendants and rescheduled
the portion of the case relating to the defendants' counterclaims until December
11, 2000. Upon completion of this portion of the case on September 14, 2000, the
court deferred rendering any judgment until the conclusion of the second portion
of the case in December 2000. Based upon the facts presented in the case against
the defendants in September 2000, the plaintiffs have prepared and filed a
motion for summary judgment to dismiss the defendants counterclaims. A hearing
for such motion has been set for November 29, 2000.
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<PAGE> 10
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. In the possible event of an adverse
outcome on the counterclaims or related matters, there would be a material
adverse effect on the Company as the Company would likely be required to post a
bond in the amount of its portion of the counterclaim judgment. Depending on the
amount of such a judgment, there could be no assurance that the Company could
obtain such a bond. In the event of an adverse judgment, the Company would seek
to appeal the judgment and has been advised by counsel that it is likely that
such an adverse judgment would be overturned on appeal.
The Company 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.
During November 2000, the Company entered into a one-year contract with Grey
Wolf, Inc. for utilization of a 1,500 horsepower drilling rig capable of
drilling wells to a depth of approximately 18,000 feet. The contract, which is
expected to commence in late December 2000, provides for a dayrate of $12,000
per day. The rig is expected to be utilized primarily to drill wells in the
Company's focus areas, including the Matagorda Project Area and the Cabeza Creek
Project Area. The contract contains a provision which would allow the Company to
terminate the contract early by tendering payment equal to one-half the dayrate
for the number of days remaining under the term of the contract as of the date
of termination. Steven A. Webster, who is the Chairman of the Board of the
Company, is a member of the board of directors of Grey Wolf, Inc.
8. 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 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. Subsequent to the adoption of
the Interpretation, the Company is required to record the effects of any changes
in its stock price over the remaining vesting period through February 2000 on
the corresponding intrinsic value of the repriced options in its results of
operations as compensation expense until the repriced option either are
exercised or expire. Stock option compensation expense for the three and nine
months ending September 30, 2000 amounted to $657,525.
-9-
<PAGE> 11
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 30 wells
through the nine months ended September 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 420,000
MMbtu and 900,000 MMbtu at an average price (Houston Ship Channel) of $3.65 and
$3.33 resulting in a loss of $306,600 and $614,250 for the three and nine months
ended September 30, 2000, respectively. The Company also entered into oil
hedging transactions covering 18,000 Bbls and 36,000 Bbls at an average price of
$25.54 and $25.45 resulting in a loss of $29,837 and $158,087 for the three and
nine months ended September 30, 2000, respectively. Further, the Company entered
into natural gas hedging transactions covering 426,000 MMbtu and 1,506,000 MMbtu
at an average price (Houston Ship Channel) of $2.10 and $2.08 resulting in a
loss of $198,000 and $166,000 for the three and nine months ended September 30,
1999, respectively. The Company had outstanding hedge positions as of September
30, 2000 and 1999, respectively, covering 1,800,000 MMbtu for October-December
2001 and 604,000 MMbtu for October-January 2000 at an average price of $4.67 and
$2.40 (Houston Ship Channel). The Company also had outstanding hedge positions
as of September 30, 2000 covering 36,400 Bbls for October-March 2001 at an
average price of $30.00. The fair market value of the hedge positions as
September 30, 2000 is a deferred loss of approximately $580,000.
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<PAGE> 12
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 nine months ended September
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 September 30, 2000,
Compared to the Three Months Ended September 30, 1999
Oil and natural gas revenues for the three months ended September 30, 2000
increased 216 percent to $8,008,000 from $2,538,000 for the same period in 1999.
Production volumes for natural gas during the three months ended September 30,
2000 increased 94 percent to 1,501,402 Mcf from 774,711 Mcf for the same period
in 1999. Average gas prices increased 88 percent to $4.34 per Mcf in the third
quarter of 2000 from $2.31 per Mcf in the same period in 1999. Production
volumes for oil in the third quarter of 2000 increased 26 percent to 49,997 Bbls
from 39,676 Bbls for the same period in 1999. Average oil prices increased 58
percent to $29.79 per barrel in the third quarter of 2000 from $18.88 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 North La Copita Project
wells, an additional Matagorda Project well, an additional Cedar Point Project
well and a West Bay Project Well, partially offset by the natural decline of
existing wells. Oil and natural gas revenues include the impact of hedging
activities as discussed above under "General Overview."
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
three months ended September 30, 1999 and 2000:
<TABLE>
<CAPTION>
2000 Period
Compared to 1999 Period
September 30, -----------------------------
------------------------------- Increase % Increase
1999 2000 (Decrease) (Decrease)
--------------- --------------- ---------------- ------------
<S> <C> <C> <C> <C>
Production volumes-
Oil and condensate (Bbls) 39,676 49,997 10,321 26%
Natural gas (Mcf) 774,711 1,501,402 726,691 94%
Average sales prices-(1)
Oil and condensate (per Bbl) $ 18.88 $ 29.79 $ 10.91 58%
Natural gas (per Mcf) 2.31 4.34 2.03 88%
Operating revenues-
Oil and condensate $ 749,052 $1,489,225 $ 740,173 99%
Natural gas 1,788,908 6,518,358 4,729,450 264%
---------- ---------- ----------
Total $2,537,960 $8,007,583 $5,469,623 216%
========== ========== ==========
</TABLE>
(1) Includes impact of hedging activities.
Oil and natural gas operating expenses for the three months ended September 30,
2000 increased 77 percent to $1,298,000 from $734,000 for the same period in
1999 primarily due to the additional severance tax on the additional revenue and
the addition of new production partially offset by a reduction in costs on older
producing fields. Operating expenses per equivalent unit decreased to $.72 per
Mcfe in the third quarter of 2000 from $.73 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 September 30, 2000 increased 103 percent to $2,012,000 from $989,000 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 sale of the Metro Project in
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<PAGE> 13
the second quarter of 2000. General and administrative expense for the three
months ended September 30, 2000 increased 56 percent to $747,000 from $478,000
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. Stock option
compensation expense for the third quarter of 2000 is a non-cash charge
resulting from increase during this period in the stock price underlying the
stock options that were repriced in February 1999.
Other income, net of related expenses for the quarter ended September 30, 2000
consisted of a finder's fee received by the Company in connection with the sale
and purchase of a significant minority shareholder interest in Michael Petroleum
Corporation ("MPC") by Donaldson, Lufkin and Jenette. MPC is a privately - held
exploration and production company, which focuses on the prolific gas producing
Lobo Trend in South Texas. MPC recently emerged from a Chapter 11 financial
restructuring and as of December 31, 1999 had approximately 194 Bcfe of proved
Lobo reserves. The Company elected to receive the fee in the form of 18,947
shares of common stock and as a result received 1.9 percent of the outstanding
common shares of MPC.
Interest income for the three months ended September 30, 2000 increased to
$145,000 from $6,000 in the third 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 September 30, 2000, decreased to $1,000 from $11,000
in the same period in 1999. Capitalized interest increased to $870,000 in the
third quarter of 2000 from $416,000 in the third 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 September 30, 2000
increased to $4,920,000 from $332,000 in the same period in 1999. Net income for
the three months ended September 30, 2000 increased to $4,894,000 from $325,000
for the same period in 1999 primarily as a result of the factors described
above.
Nine months Ended September 30, 2000,
Compared to the Nine months Ended September 30, 1999
Oil and natural gas revenues for the nine months ended September 30, 2000
increased 187 percent to $18,114,000 from $6,306,000 for the same period in
1999. Production volumes for natural gas during the nine months ended September
30, 2000 increased 87 percent to 4,078,706 Mcf from 2,175,673 Mcf for the same
period in 1999. Average gas prices increased 65 percent to $3.41 per Mcf in the
first nine months of 2000 from $2.07 per Mcf in the same period in 1999.
Production volumes for oil in the first nine months of 2000 increased 19 percent
to 154,238 Bbls from 129,997 Bbls for the same period in 1999. Average oil
prices increased 135 percent to $27.30 per barrel in the first nine months of
2000 from $13.79 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 wells, the North La Copita Project wells, the West Bay
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."
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the nine
months ended September 30, 1999 and 2000:
<TABLE>
<CAPTION>
2000 Period
Compared to 1999 Period
-----------------------------
September 30, Increase % Increase
-------------------------------
1999 2000 (Decrease) (Decrease)
--------------- --------------- ---------------- ------------
<S> <C> <C> <C> <C>
Production volumes-
Oil and condensate (Bbls) 129,997 154,238 24,241 19%
Natural gas (Mcf) 2,175,673 4,078,706 1,903,033 87%
Average sales prices-(1)
Oil and condensate (per Bbl) $ 13.79 $ 27.30 $ 13.51 98%
Natural gas (per Mcf) 2.07 3.41 1.34 65%
Operating revenues-
Oil and condensate $ 1,792,536 $4,210,635 $2,418,099 135%
Natural gas 4,513,004 13,903,282 9,390,278 208%
--------------- ----------------- -----------------
Total $ 6,305,540 $18,113,917 $11,808,377 187%
=============== ================= =================
</TABLE>
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<PAGE> 14
------------------
(1) Includes impact of hedging activities.
Oil and natural gas operating expenses for the nine months ended September 30,
2000 increased 49 percent to $3,159,000 from $2,115,000 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
$.63 per Mcfe in the first nine months of 2000 from $.72 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 nine months
ended September 30, 2000 increased 86 percent to $5,421,000 from $2,916,830 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 sale of the Metro Project in the second quarter of 2000. General and
administrative expense for the nine months ended September 30, 2000 increased 32
percent to $2,203,000 from $1,666,000 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 nine months of 2000, offset by cost
control measures implemented in the first quarter of 1999. Stock option
compensation expense for the nine months ended September 30, 2000 is a non-cash
charge resulting from the increase in the stock price underlying the stock
options that were repriced in February 1999.
Other income, net of related expenses for the nine months ended September 30,
2000 consisted of a finder's fee received by the Company in connection with the
sale and purchase of a significant minority shareholder interest in Michael
Petroleum Corporation ("MPC") by Donaldson, Lufkin and Jenette. MPC is a
privately - held exploration and production company, which focuses on the
prolific gas producing Lobo Trend in South Texas. MPC recently emerged from a
Chapter 11 financial restructuring. The Company elected to receive the fee in
the form of 18,947 shares of common stock and as a result received 1.9 percent
of the outstanding common shares of MPC.
Interest income for the nine months ended September 30, 2000 increased to
$420,000 from $20,000 in the first nine months of 1999. Net interest expense for
the nine months ended September 30, 2000 decreased to $13,000 from $12,000 for
the same period in 1999. Capitalized interest increased to $2,671,000 in the
first nine months of 2000 from $1,016,000 in the first nine months of 1999
primarily as a result of the financing that closed during the fourth quarter of
1999.
Income (loss) before income taxes for the nine months ended September 30, 2000
increased to income of $8,563,000 from a loss of $387,000 for the same period in
1999. Net income (loss) for the nine months ended September 30, 2000 increased
to income of $8,486,000 from a loss of $486,000 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.
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
$3,137,000 and $10,758,000 for the nine months ended September 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 nine months of 2000.
The Company has budgeted capital expenditures for the year ended December 31,
2000 of approximately $15.9 million of which $3.3 million is expected to be used
to fund 3-D seismic surveys and land acquisitions and $12.6 million of which is
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<PAGE> 15
expected to be used for drilling activities in the Company's project areas. The
Company has budgeted to drill up to approximately 40 to 45 gross wells (12.6 to
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 $13.1 million for the nine months ended September 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 20 gross wells
(6.5 net) during the nine months ended September 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 November 1, 2000, the aggregate amount of this
collateral was approximately $2.6 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. Principal
payments on the term loan are 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 September 30,
2000, outstanding revolving credit loans totaled $5,876,000 and $5,426,000,
respectively with an additional $1,208,392 and $135,136, respectively, available
for future borrowings. The outstanding amount of the term loan was $7,000,000
and $6,130,000 at December 31, 1999 and September 30, 2000. The Company Credit
Facility also provides for the issuance of letters of credit, one and two of
which have been issued for $224,000 and $1,124,000 at December 31, 1999 and
September 30, 2000.
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<PAGE> 16
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 $911,888 for such interest as of September
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 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.
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<PAGE> 17
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, and
exemplary damages. The case proceeded to trial before the Court
(without a jury) on June 19 2000 after the plaintiffs' were found by
the court to have failed to comply with procedural requirements
regarding the request for a jury. After several days of trial, the case
was recessed and later resumed on September 5, 2000. The court at that
time denied the plaintiffs' motion for mistrial based on the court's
denial of a jury trial. The court also ordered that the defendants'
counterclaims would be the subject of a separate trial that is to
commence on December 11, 2000. The parties proceeded to try issues
related to the plaintiffs' claims on September 5, 2000. All parties
rested on the plaintiffs' claims on September 13, 2000. The court took
the matter under advisement and has not yet announced a ruling.
Defendants filed a second amended answer and counterclaim and certain
supplemental responses to request 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. In subsequent testimony, the defendants have verbally
alleged $26 million of damages by virtue of the alleged lost sale of
the properties (as opposed to the $33.5 million previously sought),
$7.5 million of damages by virtue of loss of a lease development
opportunity and $100 million of damages by virtue of the loss of a
business opportunity related to BNP's alleged inability to participate
in a 3-D seismic project.
A dispositive motion for summary judgment on all of BNP's counterclaims
for monetary damages has been filed and is set for a hearing on
November 29, 2000. If that motion is denied, in whole or in part, the
Company will proceed to trial on the counterclaims on December 11,
2000. 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. In the
possible event of a material adverse outcome on the counterclaims or
related matters, there would be a material adverse effect on the
Company as the Company would likely be required to post a bond in the
amount the judgment (or the portion of the counterclaim judgment for
which it has liability) in order to prevent the defendants from
executing on that judgment. Depending on the amount of such a judgment,
there could be no assurance that the Company could obtain such a bond.
In the event of an adverse judgment, the Company would likely appeal
such judgment and the Company is optimistic about its chances for
success on appeal, should such be necessary.
The Company 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. While this breach of contract allegation is the subject
of an additional lawsuit by plaintiffs in the 165th District Court in
Harris County, Texas. The defendants have taken the position that the
claim must be tried in the Duval County case. The Duval County court
has taken that question under advisement and might rule that the claim
should be included in the December 11, 2000 trial. The Company is
seeking damages as a result of defendants' actions as well as costs and
attorneys' fees.
-16-
<PAGE> 18
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.
-17-
<PAGE> 19
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
<TABLE>
<CAPTION>
<S> <C>
Exhibit
Number Description
-------------- -----------
+2.1 -- Combination Agreement by and among the Company, Carrizo Production, Inc., Encinitas Partners
Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A. Webster, S.P.
Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of 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).
4.2 -- Tenth Amendment to First Amended, Restated and Combined Loan Agreement by and between Carrizo
Oil & Gas, Inc. and Compass Bank dated August 27, 1999.
27.1 -- Financial Data Schedule.
</TABLE>
+ Incorporated herein by reference as indicated.
Reports on Form 8-K
None
-18-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Carrizo Oil & Gas, Inc.
(Registrant)
Date: November 14, 2000 By: /s/S. P. Johnson, IV
--------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2000 By: /s/Frank A. Wojtek
--------------------------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
-19-
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
Exhibit
Number Description
-------------- -----------
+2.1 -- Combination Agreement by and among the Company, Carrizo Production, Inc., Encinitas Partners
Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A. Webster, S.P.
Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of 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).
4.2 -- Tenth Amendment to First Amended, Restated and Combined Loan Agreement by and between Carrizo
Oil & Gas, Inc. and Compass Bank dated August 27, 1999.
27.1 -- Financial Data Schedule.
</TABLE>
+ Incorporated herein by reference as indicated.
Reports on Form 8-K
None
