-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IIy4c9f/0/nWYBY6ogn+fj7mBIfsHTYcPQCfI0h8qgXwqFKQnAdH0tKP/4cdES4S zuCCjO0MbzxUJqGxbiTpLw== 0000950129-00-002424.txt : 20000516 0000950129-00-002424.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950129-00-002424 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARRIZO OIL & GAS INC CENTRAL INDEX KEY: 0001040593 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760415919 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-29187-87 FILM NUMBER: 631621 BUSINESS ADDRESS: STREET 1: 14811 ST MARYS LANE STREET 2: STE 148 CITY: HOUSTON STATE: TX ZIP: 77079 BUSINESS PHONE: 2814961352 MAIL ADDRESS: STREET 1: CARRIZO OIL & GAS INC STREET 2: 14811 ST MARYS LANE STE 148 CITY: HOUSTON STATE: TX ZIP: 77079 10-Q 1 CARRIZO OIL & GAS, INC. - DATED MARCH 31, 2000 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 2 CARRIZO OIL & GAS, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 INDEX PART I. FINANCIAL INFORMATION PAGE 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
3 CARRIZO OIL & GAS, INC. CONDENSED BALANCE SHEETS
December 31, March 31, 1999 2000 -------------- ------------ (Unaudited) 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 ============== ============
The accompanying notes are an integral part of these financial statements. -2- 4 CARRIZO OIL & GAS, INC. UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, -------------------------- 1999 2000 ----------- ----------- 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 =========== ===========
The accompanying notes are an integral part of these financial statements. -3- 5 CARRIZO OIL & GAS, INC. UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, ---------------------------- 1999 2000 ------------ ------------ 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 ============ ============
The accompanying notes are an integral part of these financial statements. -4- 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. -5- 7 2. EARNINGS PER COMMON SHARE: Supplemental earning per share information is provided below:
For the Three Months Ended March 31, ----------------------------------------------------------------------------- Income (Loss) Shares Per-Share Amount -------------------------- ------------------------- -------------------- 1999 2000 1999 2000 1999 2000 ----------- ----------- ----------- ----------- -------- -------- 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 =========== =========== =========== =========== ======== ========
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. -6- 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. -7- 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- 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, -9- 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:
2000 Period Compared to 1999 Period March 31, ---------------------------- ----------------------- Increase % Increase 1999 2000 (Decrease) (Decrease) ---------- ----------- ------------ -------------- 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% ========== =========== ============
- ------------------ (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- 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- 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- 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- 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
Exhibit Number Description ------- ----------- +2.1 -- Combination Agreement by and among the Company, Carrizo Production, Inc., Encinitas Partners Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A. Webster, S.P. Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of September 6, 1997 (incorporated herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +3.1 -- Amended and Restated Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997).
-14- 16 +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.
+ Incorporated herein by reference as indicated. Reports on Form 8-K None -15- 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- 18
Exhibit Number Description ------- ----------- +2.1 -- Combination Agreement by and among the Company, Carrizo Production, Inc., Encinitas Partners Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A. Webster, S.P. Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of September 6, 1997 (Incorporated herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +3.1 -- Amended and Restated Articles of Incorporation of the Company (Incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. +3.2 -- 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.
+ Incorporated herein by reference as indicated. EX-27.1 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 8,634,426 0 5,425,876 480,000 0 15,583,109 67,698,972 33,290,045 85,208,302 10,568,152 0 0 0 140,114 41,841,759 85,208,302 4,279,597 4,279,597 0 3,277,599 0 0 11,754 1,154,015 25,500 1,128,515 0 0 0 1,128,515 .08 .08
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