-----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, CyQs7HzcM+O/BjzEl1fVzrsVeSJru3guOdiz9pZYeO3VonZa0wYy+DPMIENb3t+b 5ld1ZAs6TbpPOXOadZrsKg== 0000950129-99-004825.txt : 19991109 0000950129-99-004825.hdr.sgml : 19991109 ACCESSION NUMBER: 0000950129-99-004825 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991108 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: 99743315 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 09/30/99 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------- --------- Commission File Number 000-22915. CARRIZO OIL & GAS, INC. (Exact name of registrant as specified in its charter) TEXAS 76-0415919 - ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 14811 ST. MARY'S LANE, SUITE 148, HOUSTON, TEXAS 77079 - ------------------------------------------------ ----- (Address of principal executive offices) (Zip Code) (281) 496-1352 ------------------------------- (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the registrant's common stock, par value $0.01 per share, as of November 3, 1999, the latest practicable date, was 10,375,000. 2 CARRIZO OIL & GAS, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 INDEX
PART I. FINANCIAL INFORMATION PAGE Item 1. Condensed Balance Sheets - As of September 30, 1999 and December 31, 1998 2 Condensed Statements of Operations - For the three-month and nine-month periods ended September 30, 1998 and 1999 3 Condensed Statements of Cash Flows - For the nine-month periods ended September 30, 1998 and 1999 4 Notes to Condensed Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. OTHER INFORMATION Items 1-6. 19 SIGNATURES 21
3 CARRIZO OIL & GAS, INC. CONDENSED BALANCE SHEETS
December 31, September 30, 1998 1999 ------------ ------------ (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,187,656 $ 660,174 Accounts receivable, net of allowance for doubtful accounts of zero and $480,000 at December 31, 1998 and September 30, 1999, respectively 4,227,365 3,521,710 Advances to operators 1,192,079 1,935,217 Other current assets 117,614 114,114 ------------ ------------ Total current assets 6,724,714 6,231,215 PROPERTY AND EQUIPMENT, net (full-cost method of accounting for oil and gas properties) 57,878,191 62,071,437 OTHER ASSETS 385,127 277,181 ------------ ------------ $ 64,988,032 $ 68,579,833 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable, trade $ 7,886,536 $ 3,640,014 Accrued liabilities 2,004,536 1,675,700 Advances for joint operations 387,420 804,504 Current maturities of long-term debt 930,000 16,537,713 ------------ ------------ Total current liabilities 11,208,492 22,657,931 LONG-TERM DEBT (Note 4) 11,126,000 3,613,953 DEFERRED INCOME TAXES -- -- MANDATORILY REDEEMABLE PREFERRED STOCK (10,000,000 shares authorized with 320,110.53 and 342,125.23 issued and outstanding at December 31, 1998 and September 30, 1999, respectively) (Note 5) Issued and outstanding 30,730,695 33,098,326 Dividends payable 720,360 770,087 SHAREHOLDERS' EQUITY: Warrants (Note 5) 300,000 300,000 Common stock (40,000,000 shares authorized with 10,375,000 issued and outstanding at December 31, 1998 and September 30, 1999, respectively) 103,750 103,750 Additional paid-in capital 32,845,727 32,845,727 Retained earnings (deficit) (21,907,082) (24,809,941) Deferred compensation (139,910) -- ------------ ------------ 11,202,485 8,439,536 ------------ ------------ $ 64,988,032 $ 68,579,833 ============ ============
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 For the Nine Months Ended Months Ended September 30, September 30, ---------------------------- ---------------------------- 1998 1999 1998 1999 ----------- ----------- ----------- ----------- OIL AND NATURAL GAS REVENUES $ 1,508,897 $ 2,537,960 $ 5,696,543 $ 6,305,540 COSTS AND EXPENSES: Oil and natural gas operating expenses 732,208 734,482 2,015,017 2,115,027 Depreciation, depletion and amortization 862,998 988,586 2,483,365 2,916,830 General and administrative 661,608 478,090 2,054,240 1,666,089 ----------- ----------- ----------- ----------- Total costs and expenses 2,256,814 2,201,158 6,552,622 6,697,946 ----------- ----------- ----------- ----------- OPERATING INCOME (LOSS) (747,917) 336,802 (856,079) (392,406) OTHER INCOME AND EXPENSES: Interest income 12,150 6,416 285,687 19,780 Interest expense (46,564) (426,841) (49,649) (1,030,620) Capitalized interest 41,062 415,794 41,062 1,016,482 ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES (741,269) 332,171 (578,979) (386,764) INCOME TAXES (246,080) 7,002 (162,551) 21,006 ----------- ----------- ----------- ----------- NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (495,189) 325,169 (416,428) (407,770) CUMULATIVE EFFECT OF CHANGE IN METHOD OF REPORTING COSTS OF START-UP ACTIVITIES (Note 6) -- -- -- 77,731 ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ (495,189) $ 325,169 $ (416,428) $ (485,501) =========== =========== =========== =========== LESS: DIVIDENDS AND ACCRETION ON PREFERRED SHARES (756,595) (822,553) (2,168,533) (2,418,132) ----------- ----------- ----------- ----------- NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $(1,251,784) $ (497,384) $(2,584,961) $(2,903,633) =========== =========== =========== =========== BASIC AND DILUTED LOSS PER COMMON SHARE BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (Note 3) $ (.12) $ (.05) $ (.25) $ (.27) BASIC AND DILUTED LOSS PER COMMON SHARE OF CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (Notes 3 and 6) -- -- -- (.01) ----------- ----------- ----------- ----------- BASIC AND DILUTED LOSS PER COMMON SHARE (Note 3) $ (.12) $ (.05) $ (.25) $ (.28) =========== =========== =========== ===========
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 Nine Months Ended September 30, ------------------------------ 1998 1999 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (416,428) $ (485,501) Adjustment to reconcile net income (loss) to net cash provided by operating activities- Depreciation, depletion and amortization 2,483,365 2,916,830 Deferred income taxes (224,231) -- Cumulative effect of change in accounting principle -- 77,731 Changes in assets and liabilities- Accounts receivable (948,855) 705,655 Other current assets (472,870) 3,500 Other assets (163,519) (215,676) Accounts payable, trade (1,180,837) 46,705 Other accrued liabilities 76,298 88,248 ------------ ------------ Net cash provided by (used in) operating activities (847,077) 3,137,492 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, accrual basis (28,015,811) (6,724,276) Adjustment to cash basis 770,813 (642,560) Advance to operators 392,004 (743,138) ------------ ------------ Net cash used in investing activities (26,852,994) (8,109,974) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of preferred stock 28,810,431 -- Proceeds from long-term debt 7,600,000 4,445,000 Debt repayments (7,950,000) -- ------------ ------------ Net cash provided by financing activities 28,460,431 4,445,000 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 760,360 (527,482) CASH AND CASH EQUIVALENTS, beginning of period 2,674,837 1,187,656 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 3,435,197 $ 660,174 ============ ============ SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid for interest (net of amounts capitalized) $ 8,587 $ 14,138 ============ ============
The accompanying notes are an integral part of these financial statements. -4- 6 CARRIZO OIL & GAS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND PRINCIPLES OF COMBINATION: The condensed financial statements included herein have been prepared by Carrizo Oil & Gas, Inc. (the Company), and are unaudited, except for the balance sheet at December 31, 1998, which has been prepared from the audited financial statements at that date. The financial statements reflect necessary adjustments, all of which were of a recurring nature, and are in the opinion of management necessary for a fair presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The Company believes that the disclosures presented are adequate to allow the information presented not to be misleading. The condensed financial statements included herein should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The Company was formed in 1993 and is the surviving entity after a series of combination transactions (the Combination). The Combination included the following transactions: (a) Carrizo Production, Inc. (a Texas corporation and an affiliated entity with ownership substantially the same as Carrizo), was merged into Carrizo and the outstanding shares of capital stock of Carrizo Production, Inc., were exchanged for an aggregate of 343,000 shares of common stock of Carrizo; (b) Carrizo acquired Encinitas Partners Ltd. (a Texas limited partnership of which Carrizo Production, Inc., served as the general partner) as follows: Carrizo acquired from the shareholders who serve as directors of Carrizo their limited partner interests in Encinitas Partners Ltd. for an aggregate consideration of 468,533 shares of common stock and, on the same date, Encinitas Partners Ltd. was merged into Carrizo and the outstanding limited partner interests in Encinitas Partners Ltd. were exchanged for an aggregate of 860,699 shares of common stock; (c) La Rosa Partners Ltd. (a Texas limited partnership of which Carrizo served as the general partner) was merged into Carrizo and the outstanding limited partner interests in La Rosa Partners Ltd. were exchanged for an aggregate of 48,700 shares of common stock; and (d) Carrizo Partners Ltd. (a Texas limited partnership of which Carrizo served as the general partner) was merged into Carrizo and the outstanding limited partner interests in Carrizo Partners Ltd. were exchanged for an aggregate of 569,068 shares of common stock. Simultaneous with the Combination, the Company completed its initial public offering (the Offering) of 2,875,000 shares of its common stock at a public offering price of $11.00 per share. The Offering provided the Company with proceeds of approximately $28.1 million, net of expenses. The Combination was accounted for as a reorganization of entities as prescribed by Securities and Exchange Commission (SEC) Staff Accounting Bulletin 47 because of the high degree of common ownership among, and the common control of, the combining entities. Accordingly, the accompanying financial statements have been prepared using the historical costs and results of operations of the affiliated entities. There were no significant differences in accounting methods or their application among the combining entities. All intercompany balances have been eliminated. Certain reclassifications have been made to prior period amounts to conform to the current period's financial statement presentation. 2. GOING CONCERN: The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Due principally to depressed oil and gas prices, the Company's operating cash flows have decreased significantly in 1998 and through the second quarter of 1999. The Company projects that, after considering advances and borrowing base adjustments obtained through the third quarter of 1999, and without further increases in borrowing base capacity under its existing revolving credit facility, debt repayments totaling approximately $16,537,713 will be required in the 12 months ending September 30, 2000. The Company raised $2 million in additional financing under its existing credit facility in March 1999; however, proceeds were utilized to fund the Company's ongoing drilling program and for working capital. The Company must find additional oil and gas reserves in order to significantly increase the financing available through its existing revolving credit facility. -5- 7 The Company projects that its cash sources will exceed its planned needs for cash in 1999. Such cash sources include additional borrowings subject to borrowing availability, the Palace agreement, cash flows from currently producing properties along with those nearing completion or pending pipeline hookup and projected net cash flows from wells to be drilled. Cash needs in 1999 include debt requirements, working capital, drilling expenditures, lease bonus payments, geological and geophysical costs on its active exploration projects and cash general and administrative costs. The Company also has specific plans which involve, among other things, cost reductions, hedging activities to lock in higher prices and the drilling of high probability exploration and development prospects that it believes will generate the necessary borrowing capacity and cash flow to fund its 1999 obligations. There are no assurances, however, that the Company will be able to generate cash flows sufficient to pay all of its 1999 obligations as they become due because of the sensitivity of such cash flow projections to factors such as oil and natural gas sales price volatility, production levels, operating cost fluctuations, and other variables inherent in the oil and gas industry. The current uncertainties surrounding the sufficiency of its future cash flows and the lack of firm commitments for additional capital raise substantial doubt about the ability of the Company to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. During the second quarter of 1999, the Company entered into an Exploration Agreement with Palace Exploration Company, an Oklahoma oil & gas company, to drill and, if successful, develop a minimum of 27 of Carrizo's exploration prospects during the nine months ending March 31, 2000. In exchange for earning 50 percent of Carrizo's working interest in each of the prospects, Palace has agreed to pay approximately 71 percent of the drilling costs for such wells. Palace also has the right to participate in certain additional 1999 wells on substantially the same terms, as Carrizo identifies such prospects. The agreement provides that Carrizo will retain control of well operations. Palace has certain termination rights in the event of continued adverse drilling results. The joint exploration program includes wells ranging in expected depths from 5,800 feet to over 14,000 feet. Most of the prospects were internally generated with approximately 90 percent located in South Texas and approximately 10 percent located in South Louisiana. It is anticipated that the total drilling cost of the minimum 27 gross well program will exceed $10 million. As of September 30, 1999 and December 31, 1998, respectively, the Company had $38,331,538 and $37,060,418 of investment in unevaluated properties. In order to fully realize this investment through the exploration and development of these properties, additional capital resources above the amount currently available from the borrowing base, net cash flow from operations and the Exploration Agreement will be necessary to fund such capital expenditures. The Company is continuing to seek additional financing from a variety of sources, including new common or preferred equity investors and additional debt financing. No assurance can be given that additional financing will be available by these or other means on terms acceptable to the Company. Without a continued increase in commodity prices, successful drilling or raising additional capital, the Company anticipates that it will be required to limit or defer its planned oil and gas exploration and development program, which could adversely affect the recoverability and ultimate value of the Company's oil and gas properties. The Company has the ability to control the pace of drilling in projects where it has a 100 percent working interest. In other projects where the Company only has a partial ownership, the Company generally has the right, but not the obligation, to participate for its percentage interest in drilling wells and can decline to participate if it does not have sufficient capital resources at the time such drilling operations commence. The Company may also transfer its right to participate in drilling wells in exchange for cash, a reversionary interest, or some combination thereof or may seek to sell or transfer all or a portion of its interest in undeveloped properties. -6- 8 EARNINGS PER COMMON SHARE: Supplemental earning per share information is provided below:
For the Three Months Ended September 30, 1999 -------------------------------------------------------------------------------------------- Income (Loss) Shares Per-Share Amount 1998 1999 1998 1999 1998 1999 ----------------------------- --------------------------- ----------------------------- Net Income (Loss) $ (495,189) $ 325,169 Less: Dividends and accretion on preferred stock (756,595) (822,553) ----------- ----------- Basic Earnings per Share Net Loss available to common shareholders (1,251,784) (497,384) 10,375,000 10,375,000 $ (0.12) $ (0.05) =========== ========= Stock Options -- -- 28,270 -- ----------- ----------- ----------- ----------- Diluted Earnings per Share Net Income (Loss) available to common shareholders plus assumed conversions $(1,251,784) $ (497,384) 10,403,270 10,375,000 $ (0.12) $ (0.05) =========== =========== =========== =========== =========== =========
For the Nine Months Ended September 30, 1999 -------------------------------------------------------------------------------------------- Income (Loss) Shares Per-Share Amount 1998 1999 1998 1999 1998 1999 --------------------------- --------------------------- ------------------------------- Net Income (loss) before cumulative effect of change in accounting principle $ (416,428) $ (407,770) Less: Dividends and accretion on preferred stock (2,168,533) (2,418,132) ----------- ----------- Basic Earnings per Share before cumulative change in accounting principle Net Loss available to common shareholders (2,584,961) (2,825,902) 10,375,000 10,375,000 $ (0.25) $ (0.27) =========== =========== Stock Options -- -- 76,732 -- ----------- ----------- ---------- ---------- Diluted Earnings per Share before cumulative effect of change in accounting principle Net Loss available to common shareholders plus assumed conversions $(2,584,961) $(2,805,902) 10,451,732 10,375,000 $ (0.25) $ (0.27) =========== =========== ========== ========== =========== =========== Cumulative effect of change in accounting principle $ -- $ (77,731) Basic Earnings per Share of cumulative effect of change in accounting principle Net Loss available to common shareholders $ -- $ (77,731) 10,375,000 10,375,000 $ -- $ (0.01) =========== =========== Stock Options -- -- 76,732 -- ----------- ----------- ---------- ---------- Diluted Earnings per Share before cumulative effect of change in accounting principle Net Loss available to common shareholders plus assumed conversions $ -- $ (77,731) 10,451,732 10,375,000 $ -- $ (0.01) =========== =========== ========== ========== =========== =========== Net Income (loss) $ (416,428) $ (485,501) Less: Dividends and accretion on preferred stock (2,168,533) (2,418,132) ----------- ----------- Basic Earnings per Share Net Loss available to common shareholders (2,584,961) (2,,903,633) 10,375,000 10,375,000 $ (0.25) $ (0.28) =========== =========== Stock Options -- -- 76,732 -- ----------- ----------- ---------- ---------- Diluted Earnings per Share Net Loss available to common shareholders plus assumed conversions $(2,584,961) $(2,903,633) 10,451,732 10,375,000 $ (0.25) $ (0.28) =========== =========== =========== =========== =========== ===========
-7- 9 Net income (loss) per common share has been computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the periods. The Company had outstanding 250,000 and 443,500 stock options and 1,000,000 warrants, during the three months and nine months ended September 30, 1998, respectively, and 852,120 stock options and 1,000,000 warrants during the three months and nine months ended September 30, 1999 which were antidilutive and were not included in the calculation because the exercise price of these instruments exceeded the underlying market value of the options and warrants. 4. FINANCING ARRANGEMENTS: In connection with the Offering, the Company entered into an amended revolving credit agreement with Compass Bank (the "Company Credit Facility"), to provide for a maximum loan amount of $25 million, subject to borrowing base limitations. The maximum loan amount was amended to $10 million in April, 1999. Under the Company Credit Facility, the principal outstanding is due and payable upon maturity in September 2000 with interest due monthly. The Company Credit Facility was amended in September 1998 to provide for a term loan under the facility (the "Term Loan") in addition to the revolving credit facility limited by the Company's borrowing base. The Term Loan was initially due and payable upon maturity in September 1999. The interest rate for borrowings is calculated at a floating rate based on the Compass index rate or LIBOR plus 2 percent. The Company's obligations are secured by certain of its oil and gas properties and cash or cash equivalents included in the borrowing base. The Company Credit Facility matures on June 1, 2000. Under the Company Credit Facility, Compass, in its sole discretion, will make semiannual borrowing base determinations based upon the proved oil and natural gas properties of the Company. Compass may redetermine the borrowing base and the monthly borrowing base reduction at any time and from time to time. The Company may also request borrowing base redeterminations in addition to its required semiannual reviews at the Company's cost. As of September 30, 1999 and December 31, 1998, respectively, the borrowing base was $8,274,539 and $6,076,000. Proceeds from the borrowing base portions of this credit facility have been used to provide funding for exploration and development activity. Substantially all of Carrizo's oil and natural gas property and equipment is pledged as collateral under this facility. At September 30, 1999 and December 31, 1998 borrowings under this facility totaled $7,501,000 and $5,056,000, respectively, with an additional $474,539 and $1,020,000, respectively, available for future borrowings. Borrowings outstanding under the Term Loan portion of the facility were $9,000,000 and $7,000,000 at September 30, 1999 and December 31, 1998, respectively. The facility was also available for letters of credit, two and one of which have been issued for $299,000 and $224,000 at September 30, 1999 and December 31, 1998, respectively. The Term Loan is guaranteed by certain members of the Board of Directors. The Company is subject to certain covenants under the terms of the Company Credit Facility, including, but not limited to, (a) maintenance of specified tangible net worth and (b) maintenance of a ratio of quarterly cash flow (net income plus depreciation and other noncash charges, less noncash income) to quarterly debt service (payments made for principal in connection with the credit facility plus payments made for principal other than in connection with such credit facility) of no less than 1.25 to 1.00. The Company Credit Facility also places restrictions on, among other things, (a) incurring additional indebtedness, loans and liens, (b) changing the nature of business or business structure, (c) selling assets and (d) paying cash dividends. In March 1999, the Company Credit Facility was amended to decrease the required specified tangible net worth covenant. In March 1999, the Company borrowed an additional $2 million on the term loan portion of the Company Credit Facility increasing the total outstanding borrowing under the Term Loan to $9 million. Certain members of the Board of Directors have guaranteed the Term Loan. The maturity date of the Term Loan was amended to provide for repayment in twelve monthly principal installments of $750,000 each beginning January 1, 2000. The Company also received a deferral of certain principal payments due under the borrowing base facility. In October 1999, the principal payments due under the borrowing base facility were amended as follows: $500,000 is due November 15, 1999, $500,000 is due December 15, 1999, and the borrowing base will be reviewed before February 1, 2000. Certain members of the Board of Directors have provided approximately $5 million in collateral primarily in the form of marketable securities to secure the borrowing base facility. In consideration for providing such collateral and to secure an incremental $700,000 advance made under the facility on September 20, 1999, the Company assigned such Directors an aggregate one percent overriding royalty interest proportionately reduced to the Company's interest in the Fondren Letulle #1 and Huebner #1 wells. 5. MANDATORILY REDEEMABLE PREFERRED STOCK: In January 1998, the Company consummated the sale of 300,000 shares of Preferred Stock and Warrants to purchase 1,000,000 shares of Common Stock to affiliates of Enron Corp. The net proceeds received by the Company from -8- 10 this transaction were approximately $28.8 million and were used primarily for oil and natural gas exploration and development activities in Texas and Louisiana and to repay related indebtedness. The Preferred Stock provides for annual cumulative dividends of $9.00 per share, payable quarterly in cash or, at the option of the Company until January 15, 2002, in additional shares of Preferred Stock. The Company expects to continue payment in kind dividends due in 1999. Dividend payments for the nine months ended September 30, 1999 were made by the issuance of an additional 22,508.23 shares of Preferred Stock. As of October 15, 1999 there were 349,794.92 shares of Preferred Stock outstanding. The Preferred Stock is required to be redeemed by the Company (i) on January 8, 2005, or (ii) after a request for redemption from the holders of at least 30,000 shares of the Preferred Stock (or, if fewer than such number of shares of Preferred Stock are outstanding, all of the outstanding shares of Preferred Stock) and the occurrence of the following events: (a) the Company has failed at any point in time to declare and pay any two dividends in the amount then due and payable on or before the date the second of such dividends is due and such dividends remain unpaid at such time, (b) the Company breaches certain other covenants concerning the payment of dividends or other distributions on or redemption or acquisition of shares of its capital stock ranking at parity with or junior to the Preferred Stock, (c) for two consecutive fiscal quarterly periods the quarterly Cash Flow (as defined below) of the Company is less than the amount of the dividends accrued in respect to the Preferred Stock, (d) the Company fails to pay certain amounts due on indebtedness for borrowed money or there has otherwise been an acceleration of such indebtedness for borrowed money, (e) there is a violation of the Shareholders' Agreement that is not waived or (f) the Company sells, leases, exchanges or otherwise disposes of all or substantially all of its property and assets which transaction does not provide for the redemption of the Series A Preferred Stock. "Cash Flow" means net income prior to preferred dividends and accretion (i) plus (to the extent included in net income prior to preferred dividends and accretion) depreciation, depletion and amortization and other non-cash charges and losses on the sale of property (ii) minus non-cash income items and required principal payments on indebtedness for borrowed money with a maturity from the original date of incurrence of such indebtedness of six months or greater (excluding voluntary prepayments and refinancing, but including prepayments (other than in connection with refinancing) which would otherwise be due under such indebtedness within a 60-day period following the date of such prepayment). The Preferred Stock also may be redeemed at the option of the Company at any time in whole or in part. All redemptions are at a price per share, together with dividends accumulated and unpaid to the date of redemption, decreasing over time from an initial rate of $104.50 per share to $100.00 per share. If the Company fails to meet its redemption obligations, the holders of the Preferred Stock will generally have the right, voting separately as a class, to elect additional directors, which in most cases will constitute a majority of the board. The Preferred Stockholder has advised the Company that they disagree with the calculation of Cash Flow (as defined above) for the first quarter of 1999 because they believe that capitalized interest and capitalized geological, geophysical and land costs are "non-cash income" items and as such should be deducted from cash flow for purposes of the Test. The Company believes that these items are neither "non-cash" nor "income" and therefore has advised the Preferred Stockholder that the Company strongly disagrees with the Preferred Stockholders' position regarding the treatment of these items. Based upon the Company's calculation of Cash Flow, which is consistent with prior quarters, for the three months ended September 30, 1999 the Cash Flow was greater than the amount of the dividends accrued with respect to the Preferred Stock for such period, and the Company has advised the Preferred Stockholder that based upon its calculations the Company believes that it has met the Cash flow test for the quarter. The Company has also prepared the Cash Flow test for the quarter ended September 30, 1999 on a basis the Company believes is consistent with the Preferred Stockholders' advice to the Company. Based upon this calculation, the Company believes that it has also met the Cash Flow test for the quarter on this alternative basis. The Company, however, has not been advised by the Preferred Stockholder as to whether or not the Preferred Stockholder concurs with such calculation. There can be no assurance as to whether the Company's Cash Flow for future periods will exceed the amount of the dividends to be accrued with respect to the Preferred Stock. 6. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE: On January 1, 1999 the Company adopted the American Institute of Certified Public Accountants Statement of Position 98-5, which provides guidance on the accounting for start up costs that required the recording of the cumulative effect of a change in accounting principle to write off unamortized organization costs of $77,731. 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In September 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement establishes accounting and reporting standards requiring that every derivative instrument, including certain -9- 11 derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging activities - Deferral of the Effective Date of SFAS No. 133" is effective for fiscal years beginning after September 15, 2000. A Company may also implement the Statement as of the beginning of any fiscal quarter after issuance. Statement No. 133 cannot be applied retroactively. Statement No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1998 and, at the company's election, before January 1, 1999. The Company routinely enters into financial instrument contracts to hedge price risks associated with the sale of crude oil and natural gas. Statement No. 133 amends, modifies and supercedes significantly all of the authoritative literature governing the accounting for and disclosure of derivative financial instruments and hedging activities. As a result, adoption of Statement No. 133 will impact the accounting for and disclosure of the Company's operations. The Company is assessing the impact Statement No. 133 will have on its financial accounting and disclosures and intends to adopt the provisions of such statement in accordance with the requirements provided by the statement. -10- 12 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors that have affected certain aspects of the Company's financial position and results of operations during the periods included in the accompanying unaudited condensed financial statements. This discussion should be read in conjunction with the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the annual financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and the unaudited condensed financial statements included elsewhere herein. Unless otherwise indicated by the context, references herein to "Carrizo" or "Company" mean Carrizo Oil & Gas, Inc., a Texas corporation that is the registrant. GENERAL OVERVIEW The Company began operations in September 1993 and initially focused on the acquisition of producing properties. As a result of the increasing availability of economic onshore 3-D seismic surveys, the Company began to obtain 3-D seismic data and options to lease substantial acreage in 1995 and began to drill its 3-D based prospects in 1996. The Company drilled 53 wells in 1998 and 19 wells through the nine months ended September 30, 1999. The Company originally budgeted to drill a total of 18 to 44 gross wells (4.6 to 17.5 net) in 1999. The Company currently has budgeted to drill 10 to 15 gross wells (1.8 to 3.6 net) for the last three months of 1999, depending upon the availability of capital, cash flow and drilling rigs. Accordingly, depreciation, depletion and amortization, oil and gas operating expenses and production are expected to increase. The Company has typically retained the majority of its interests in shallow, normally pressured prospects and sold a portion of its interests in deeper, overpressured prospects. The Company has primarily grown through the internal development of properties within its exploration project areas, although the Company acquired properties with existing production in the Camp Hill Project in late 1993, the Encinitas Project in early 1995 and the La Rosa Project in 1996. The Company made these acquisitions through the use of limited partnerships with Carrizo or Carrizo Production, Inc. as the general partner. In addition, in November 1998, the Company acquired assets in Wharton County, Texas in the Jones Branch project area for $3,000,000. The Company's revenues, profitability, future growth and ability to borrow funds or obtain additional capital, and the carrying value of its properties are substantially dependent on the success of the Company's exploration program and the prevailing prices of oil and natural gas. It is impossible to predict future oil and natural gas price movements with certainty. Declines in prices received for oil and natural gas may have an adverse effect on the Company's financial condition, liquidity, ability to finance capital expenditures, and results of operations. Lower prices may also impact the amount of reserves that can be produced economically by the Company. Due to the instability of oil and natural gas prices, in 1995 the Company began utilizing, from time to time, certain hedging instruments (e.g., NYMEX futures contracts) for a portion of its oil and gas production to achieve a more predictable cash flow, as well as to reduce the exposure to price fluctuations. The Company's hedging arrangements apply to only a portion of its production, provide only partial price protection against declines in oil and natural gas prices and limit potential gains from future increases in prices. Such hedging arrangements may expose the Company to risk of financial loss in certain circumstances, including instances where production is less than expected, the Company's customers fail to purchase contracted quantities of oil or natural gas, or a sudden unexpected event materially impacts oil or natural gas prices. The Company accounts for all these transactions as hedging activities and, accordingly, gains and losses from hedging activities are included in oil and gas revenues during the period the hedged transactions occur. Historically, gains and losses from hedging activities have not been material. The Company expects that the amount of hedges that it has in place will vary from time to time. The Company entered in hedging transactions covering 426 Mmcf and 1,506 Mmcf at an average price (Houston Ship Channel) of $2.10 and $2.08 resulting in a loss of $198,000 and $166,000 for the three and nine months ended September 30, 1999, respectively. The Company also entered in hedging transactions covering 18,000 Bbls and 21,200 Bbls at an average price of $19.24 and $17.50 resulting in a loss of $49,000 and $105,000 for the three and nine months ended September 30, 1999 respectively. The Company had outstanding hedge positions as of September 30, 1999 and 1998, respectively, covering 604 Mmcf for July 1999 - January 2000, and 1,092 Mmcf for October 1998 - March 1999, at an average price of $2.40 and $2.27 (Houston Ship Channel). The fair market value of the hedge positions as September 30, 1999 is approximately $(87,000). -11- 13 The Company uses the full-cost method of accounting for its oil and gas properties. Under this method, all acquisition, exploration and development costs, including any general and administrative costs that are directly attributable to the Company's acquisition, exploration and development activities, are capitalized in a "full-cost pool" as incurred. The Company records depletion of its full-cost pool using the unit-of-production method. To the extent that such capitalized costs in the full-cost pool (net of depreciation, depletion and amortization and related deferred taxes) exceed the present value (using a 10 percent discount rate) of estimated future net after-tax cash flows from proved oil and gas reserves, such excess costs are charged to operations. A ceiling test write-down was not required for the three months and nine months ended September 30, 1999 and 1998. Once incurred, a write-down of oil and gas properties is not reversible at a later date. RECENT EXPLORATION AGREEMENT During the second quarter of 1999, the Company entered into an Exploration Agreement with Palace Exploration Company, an Oklahoma oil & gas company, to drill and, if successful, develop a minimum of 27 of Carrizo's exploration prospects during the nine months ended March 31, 2000. In exchange for earning 50 percent of Carrizo's working interest in each of the prospects, Palace has agreed to pay approximately 71 percent of the drilling costs for such wells. Palace also has the right to participate in certain additional 1999 wells on substantially the same terms, as Carrizo identifies such prospects. The agreement provides that Carrizo will retain well operations. Palace has certain termination rights in the event of continued adverse drilling results. The joint exploration program includes wells ranging in expected depths from 5,800 feet to over 14,000 feet. Most of the prospects were internally generated with approximately 90 percent located in South Texas and approximately 10 percent located south Louisiana. It is anticipated that the total drilling cost of the minimum 27 gross well program will exceed $10 million. RESULTS OF OPERATIONS Three Months Ended September 30, 1999, Compared to the Three Months Ended September 30, 1998 Oil and natural gas revenues for the three months ended September 30, 1999 increased 68 percent to $2,538,000 from $1,509,000 for the same period in 1998. Production volumes for natural gas during the three months ended September 30, 1999 increased 28 percent to 774,711 from 604,860 for the same period in 1998. Average gas prices increased 28 percent to $2.31 Mcf in the third quarter of 1999 from $1.81 per Mcf in the same period in 1998. Production volumes for oil in the third quarter of 1999 increased 27 percent to 39,676 Bbls from 31,317 Bbls for the same period in 1998. Average oil prices increased 42 percent to $18.88 per barrel in the third quarter of 1999 from $13.31 per barrel in the same period in 1998. The increase in oil production was due primarily to the Jones Branch acquisition during the fourth quarter of 1998 and the completion of the Fondren Letulle #1 and Huebner #1 in the third quarter of 1999. Natural gas production increased primarily as a result of the Jones Branch acquisition and the completion of the Musselman Ranches #2 in the second quarter of 1999 and the completion of the Fondren Letulle #1 and the Huebner #1 in the third quarter of 1999 offset by the natural decline of existing wells. Oil and natural gas revenues include the impact of hedging activities as discussed above under "General Overview." The following table summarizes production volumes, average sales prices and operating revenues for the Company's oil and natural gas operations for the three months ended September 30, 1998 and 1999: -12- 14
1999 Period Compared to 1998 Period ------------------------ September 30 Increase % Increase 1998 1999 (Decrease) (Decrease) ------------ ---------- ---------- ---------- Production volumes- Oil and condensate (Bbls) 31,317 39,676 8,359 27% Natural gas (Mcf) 604,860 774,711 169,851 28% Average sales prices-(1) Oil and condensate (per Bbl) $ 13.31 $ 18.88 $ 5.57 42% Natural gas (per Mcf) 1.81 2.31 .50 28% Operating revenues- Oil and condensate $ 416,767 $ 749,052 $ 332,285 80% Natural gas 1,092,130 1,788,908 696,778 64% ---------- ---------- ---------- Total $1,508,897 $2,537,960 $1,029,063 68% ========== ========== ==========
- ------------------- (1) Includes impact of hedging activities. Oil and natural gas operating expenses for the three months ended September 30, 1999 increased to $734,000 from $732,000 for the same period in 1998 primarily due to the addition of new production offset by a reduction in costs on older producing fields. Operating expenses per equivalent unit decreased to $.73 per Mcfe in the third quarter of 1999 from $.92 per Mcfe in the same period in 1998 as a result of the increase in production of oil and natural gas and cost control measures implemented in certain oil producing fields. Depreciation, depletion and amortization (DD&A) expense for the three months ended September 30, 1999 increased 15 percent to $989,000 from $863,000 for the same period in 1998. This increase was due to increased amortization of deferred loan costs, increased production and additional seismic and drilling costs offset by the lower asset base resulting from the ceiling test write-down in the fourth quarter of 1998. General and administrative expense for the three months ended September 30, 1999 decreased 28 percent to $478,000 from $662,000 for the same period in 1998 primarily as a result of cost control measures implemented in the first quarter of 1999. Interest income for the three months ended September 30, 1999 decreased to $6,000 from $12,000 in the third quarter of 1999 as a result of declining cash balances. Net interest expense for the three months ended September 30, 1999, increased to $11,000 from $6,000 for the same period in 1998. Capitalized interest increased to $416,000 in the third quarter of 1999 from $41,000 in the third quarter of 1998 reflecting higher debt levels in the 1999 quarter. Income before income taxes for the three months ended September 30, 1999 increased to income of $332,000 from a loss of $741,000 in the same period in 1998. Net income for the three months ended September 30, 1999 increased to income of $325,000 from a loss of $495,000 for the same period in 1998 primarily as a result of the factors described above. Nine Months Ended September 30, 1999, Compared to the Nine Months Ended September 30, 1998 Oil and natural gas revenues for the nine months ended September 30, 1999 increased 11 percent to $6,306,000 from $5,697,000 for the same period in 1998. Production volumes for natural gas during the nine months ended September 30, 1999 increased 12 percent to 2,175,673 Mcf from 1,936,029 Mcf for the same period in 1998. Average gas prices decreased 8 percent to $2.07 per Mcf in the first three quarters of 1999 from $2.26 per Mcf in the same period in 1998. Production volumes for oil in the first three quarters of 1999 increased 29 percent to 129,997 Bbls from 101,131 Bbls for the same period in 1998. Average oil prices increased six percent to $13.79 per barrel in the first three quarters of 1999 from $13.02 per barrel in the same period in 1998. The increase in oil production was due primarily to the Jones Branch Acquisition during the fourth quarter of 1998 and the completion of the Fondren Letulle #1 and the Heubner #1 during the third quarter of 1999. Natural gas production increased primarily as a result of Jones Branch acquisition and the completion of the Musselman Ranches #2 and the completion of the Fondren Letulle #1 and the Heubner #1 during the third quarter of 1999 offset by the natural decline of existing wells. Oil and natural gas revenues include the impact of hedging activities as discussed above under "General Overview." -13- 15 The following table summarizes production volumes, average sales prices and operating revenues for the Company's oil and natural gas operations for the nine months ended September 30, 1998 and 1999:
1999 Period Compared to 1998 Period September 30 -------------------------- ------------------------- Increase % Increase 1998 1999 (Decrease) (Decrease) ---------- ---------- ---------- ---------- Production volumes- Oil and condensate (Bbls) 101,131 129,997 28,866 29% Natural gas (Mcf) 1,936,029 2,175,673 239,644 12% Average sales prices-(1) Oil and condensate (per Bbl) $ 13.02 $ 13.79 $ .77 6% Natural gas (per Mcf) 2.26 2.07 (.19) (8)% Operating revenues- Oil and condensate $1,316,453 $1,792,536 $ 476,083 36% Natural gas 4,380,090 4,513,004 132,914 3% ---------- ---------- ---------- Total $5,696,543 $6,305,540 $ 608,997 11% ========== ========== ==========
- ------------------- (2) Includes impact of hedging activities. Oil and natural gas operating expenses for the nine months ended September 30, 1999 increased five percent to $2,115,000 from $2,015,000 for the same period in 1998 primarily due to the addition of new wells offset by a reduction in costs on older producing fields. Operating expenses per equivalent unit decreased to $.72 per Mcfe in the first three quarters of 1999 from $.79 per Mcfe in the same period in 1998 as a result of increased production of natural gas and the implementation of cost control measures in certain oil producing fields during the first quarter of 1999. Depreciation, depletion and amortization (DD&A) expense for the nine months ended September 30, 1999 increased 17 percent to $2,917,000 from $2,483,000 for the same period in 1998. This increase was due to increased amortization of deferred loan costs, increased production and additional seismic and drilling costs offset by the lower asset base resulting from the ceiling test write-down in the fourth quarter of 1998. General and administrative expense for the nine months ended September 30, 1999 decreased 19 percent to $1,666,000 from $2,054,000 for the same period in 1998 primarily as a result of cost control measures implemented in the first quarter of 1999. Interest income for the nine months ended September 30, 1999 decreased to $20,000 from $286,000 in the first three quarters of 1998 as a result of declining cash balances. Net interest expense for the nine months ended September 30, 1999 increased to $14,000 from $9,000 for the same period in 1998. Capitalized interest increased to $1,016,000 in the first three quarters of 1999 from $41,000 in the first three quarters of 1998 reflecting higher debt levels in 1999. Loss before income taxes for the nine months ended September 30, 1999 decreased to a loss of $387,000 from $579,000 for the same period in 1998. Net loss for the nine months ended September 30, 1999 increased to $486,000 from $416,000 for the same period in 1998 primarily as a result of the factors described above and the charge of $78,000 for the cumulative effect of change in method of reporting costs of start-up activities. LIQUIDITY AND CAPITAL RESOURCES Note 2 to the Financial Statements notes that the financial statements have been prepared assuming the Company will continue as a going concern but also notes the uncertainties about the Company's future ability to pay its obligations when they become due and the lack of firm commitments for additional capital raised substantial doubt about the ability of the Company to continue as a going concern. As stated in that note, the financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. See Note 2 in the Notes to the Company's Financial Statements. The Company has made and will be required to make oil and gas capital expenditures substantially in excess of its net cash flow from operations in order to complete the exploration and development of its existing properties. -14- 16 The Company will require additional sources of financing to fund drilling expenditures on properties currently owned by the Company and to fund leasehold costs and geological and geophysical cost on its active exploration projects. Management of the Company continues to seek financing for its capital program from a variety of sources. The Company is seeking common or preferred equity investors. The Company is also seeking additional debt financing. No assurance can be given that the Company will be able to obtain additional financing by these or other means on terms that would be acceptable to the Company. The Company's inability to obtain additional financing would have a material adverse effect on the Company. Without raising additional capital, the Company anticipates that it will be required to limit or defer its planned oil and gas exploration and development program, which could adversely affect the recoverability and ultimate value of the Company's oil and gas properties. The Company may also be required to pursue other financial alternatives, which could include sales of assets or a sale or merger of the Company. The Company's primary sources of liquidity have included proceeds from the Offering and from the sale of shares of Preferred Stock and the Warrants, funds generated by operations, equity capital contributions, borrowings, primarily under revolving credit facilities and the Palace agreement. Cash flows provided by (used in) operations (after changes in working capital) were $(847,000) and $3,137,000 for the nine months ended September 30, 1998 and 1999, respectively. The increase in cash flows provided by operations in 1999 as compared to 1998 was due primarily to enhanced cash management techniques implemented in 1999. The Company originally budgeted capital expenditures in 1999 of approximately $2.2 million to $9.5 million of which $500,000 was expected to be used to fund 3-D seismic surveys and land acquisitions and $1.7 million to $ 9.0 million of which was expected to be used for drilling activities in the Company's project areas. The Company originally budgeted to drill approximately 18 to 44 gross wells (4.6 to 17.8 net) in 1999. The Company has budgeted capital expenditures for the last three months of 1999 of $1.6 to $1.9 million of which $250,000 is expected to be used to fund 3-D seismic surveys and land acquisitions and $1.3 to $1.6 million of which is expected to be used for drilling activities in the Company's project areas. The Company has budgeted to drill approximately 10 to 15 gross wells (1.8 to 3.6 net) in the last three months of 1999. The actual number of wells drilled and capital expended is dependent upon available financing, cash flow and drilling rigs. This decrease in planned drilling activity resulted primarily from the lack of availability of capital resources. The Company has continued to reinvest a substantial portion of its cash flows into increasing its 3-D prospect portfolio, improving its 3-D seismic interpretation technology and funding its drilling program. Oil and gas capital expenditures were $6.7 million for the nine months ended September 30, 1999. The Company's drilling efforts resulted in the successful completion of 31 gross wells (10.3 net) during the year ended December 31, 1998 and 15 gross wells (2.4 net) during the nine months ended September 30, 1999. FINANCING ARRANGEMENTS In connection with the Offering, the Company entered into an amended revolving credit agreement with Compass Bank (the "Company Credit Facility"), to provide for a maximum loan amount of $25 million, subject to borrowing base limitations. The maximum borrowing base loan amount was amended to $10 million in April, 1999. Under the Company Credit Facility, the principal outstanding is due and payable upon maturity in September 2000 with interest due monthly. The Company Credit Facility was amended in September 1998 to provide for a term loan under the facility (the "Term Loan") in addition to the revolving credit facility limited by the Company's borrowing base. The Term Loan was initially due and payable upon maturity in September 1999. The interest rate for borrowings is calculated at a floating rate based on the Compass index rate or LIBOR plus 2 percent. The Company's obligations are secured by certain of its oil and gas properties and cash or cash equivalents included in the borrowing base. The Company Credit Facility matures on June 1, 2000. Under the Company Credit Facility, Compass, in its sole discretion, will make semiannual borrowing base determinations based upon the proved oil and natural gas properties of the Company. Compass may redetermine the borrowing base and the monthly borrowing base reduction at any time and from time to time. The Company may also request borrowing base redeterminations in addition to its required semiannual reviews at the Company's cost. As of September 30, 1999 and December 31, 1998, respectively, the borrowing base was $8,274,539 and $6,076,000. Proceeds from the Borrowing Base portions of this credit facility have been used to provide funding for exploration and development activity. Substantially all of Carrizo's oil and natural gas property and equipment is pledged as -15- 17 collateral under this facility. At September 30, 1999 and December 31, 1998 borrowings under this facility totaled $7,501,000 and $5,056,000, respectively, with and an additional $474,539 and $1,020,000, respectively, available for future borrowings. Borrowings outstanding under the Term Loan portion of the facility were $9,000,000 and $7,000,000 at September 30, 1999 and December 31, 1998, respectively. The facility was also available for letters of credit, two and one of which have been issued for $299,000 and $224,000 at September 30, 1999 and December 31, 1998, respectively. The term loan is guaranteed by certain members of the Board of Directors. The Company is subject to certain covenants under the terms of the Company Credit Facility, including, but not limited to, (a) maintenance of specified tangible net worth and (b) maintenance of a ratio of quarterly cash flow (net income plus depreciation and other noncash charges, less noncash income) to quarterly debt service (payments made for principal in connection with the credit facility plus payments made for principal other than in connection with such credit facility) of no less than 1.25 to 1.00. The Company Credit Facility also places restrictions on, among other things, (a) incurring additional indebtedness, loans and liens, (b) changing the nature of business or business structure, (c) selling assets and (d) paying cash dividends. In March 1999, the Company Credit Facility was amended to decrease the required specified tangible net worth covenant. In March 1999, the Company borrowed an additional $2 million on the term loan portion of the Company Credit Facility increasing the total outstanding borrowing under the Term Loan to $9 million. Certain members of the Board of Directors have guaranteed the Term Loan. The maturity date of the Term Loan was amended to provide for repayment in twelve monthly principal installments of $750,000 each beginning January 1, 2000. The Company also received a deferral of certain principal payments due under the borrowing base facility. In October 1999, the principal payments due under the borrowing base facility were amended as follows: $500,000 is due November 15, 1999, $500,000 is due December 15, 1999, and the borrowing base will be reviewed before February 1, 2000. Certain members of the Board of Directors have provided approximately $5 million in collateral primarily in the form of marketable securities to secure the borrowing base facility. In consideration for providing such collateral and to secure an incremental $700,000 advance made under the facility on September 20, 1999, the Company assigned such Directors an aggregate one percent overriding royalty interest proportionately reduced to the Company's interest in the Fondren Letulle #1 and Huebner #1 wells. In January 1998, the Company consummated the sale of 300,000 shares of Preferred Stock and Warrants to purchase 1,000,000 shares of Common Stock to affiliates of Enron Corp. The net proceeds received by the Company from this transaction were approximately $28.8 million and were used primarily for oil and natural gas exploration and development activities in Texas and Louisiana and to repay related indebtedness. The Preferred Stock provides for annual cumulative dividends of $9.00 per share, payable quarterly in cash or, at the option of the Company until January 15, 2002, in additional shares of Preferred Stock. The Company expects to continue payment in kind dividends due in 1999. Dividend payments for the nine months ended September 30, 1999 were made by the issuance of an additional 22,508.23 shares of Preferred Stock. As of October 15, 1999 there were 349,794.92 shares of Preferred Stock outstanding. The Preferred Stock is required to be redeemed by the Company (i) on January 8, 2005, or (ii) after a request for redemption from the holders of at least 30,000 shares of the Preferred Stock (or, if fewer than such number of shares of Preferred Stock are outstanding, all of the outstanding shares of Preferred Stock) and the occurrence of the following events: (a) the Company has failed at any point in time to declare and pay any two dividends in the amount then due and payable on or before the date the second of such dividends is due and such dividends remain unpaid at such time, (b) the Company breaches certain other covenants concerning the payment of dividends or other distributions on or redemption or acquisition of shares of its capital stock ranking at parity with or junior to the Preferred Stock, (c) for two consecutive fiscal quarterly periods the quarterly Cash Flow (as defined below) of the Company is less than the amount of the dividends accrued in respect to the Preferred Stock, (d) the Company fails to pay certain amounts due on indebtedness for borrowed money or there has otherwise been an acceleration of such indebtedness for borrowed money, (e) there is a violation of the Shareholders' Agreement that is not waived or (f) the Company sells, leases, exchanges or otherwise disposes of all or substantially all of its property and assets which transaction does not provide for the redemption of the Series A Preferred Stock. "Cash Flow" means net income prior to preferred dividends and accretion (i) plus (to the extent included in net income prior to preferred dividends and accretion) depreciation, depletion and amortization and other non-cash charges and losses on the sale of property (ii) minus non-cash income items and required principal payments on indebtedness for borrowed money with a maturity from the original date of incurrence of such indebtedness of six months or greater (excluding voluntary prepayments and refinancing, but including prepayments (other than in connection with refinancing) which would otherwise be due under such indebtedness within a 60-day period following the date of such prepayment). The Preferred Stock also may be redeemed at the option of the Company at any time in whole or in part. All redemptions are at a price per share, together with dividends accumulated and unpaid to the date of -16- 18 redemption, decreasing over time from an initial rate of $104.50 per share to $100.00 per share. If the Company fails to meet its redemption obligations, the holders of the Preferred Stock will generally have the right, voting separately as a class, to elect additional directors, which in most cases will constitute a majority of the board. The Preferred Stockholder has advised the Company that they disagree with the calculation of Cash Flow (as defined above) for the first quarter of 1999 because they believe that capitalized interest and capitalized geological, geophysical and land costs are "non-cash income" items and as such should be deducted from cash flow for purposes of the Test. The Company believes that these items are neither "non-cash" nor "income" and therefore has advised the Preferred Stockholder that the Company strongly disagrees with the Preferred Stockholders' position regarding the treatment of these items. Based upon the Company's calculation of Cash Flow, which is consistent with prior quarters, for the three months ended September 30, 1999 the Cash Flow was greater than the amount of the dividends accrued with respect to the Preferred Stock for such period, and the Company has advised the Preferred Stockholder that based upon its calculations the Company believes that it has met the Cash flow test for the quarter. The Company has also prepared the Cash Flow test for the quarter ended September 30, 1999 on a basis the Company believes is consistent with the Preferred Stockholders' advice to the Company. Based upon this calculation, the Company believes that it has also met the Cash Flow test for the quarter on this alternative basis. The Company, however, has not been advised by the Preferred Stockholder as to whether or not the Preferred Stockholder concurs with such calculation. There can be no assurance as to whether the Company's Cash Flow for future periods will exceed the amount of the dividends to be accrued with respect to the Preferred Stock. EFFECTS OF INFLATION AND CHANGES IN PRICE The Company's results of operations and cash flows are affected by changing oil and gas prices. If the price of oil and gas increases (decreases), there could be a corresponding increase (decrease) in the operating cost that the Company is required to bear for operations, as well as an increase (decrease) in revenues. Inflation has had a minimal effect on the Company. YEAR 2000 The "Year 2000 Issue" is a general term used to refer to certain business implications of the arrival of the new millennium. In simple terms, on January 1, 2000, all computerized systems that use the two-digit convention to identify the applicable year, including both information technology systems and non-information technology systems that use embedded technology, could fail completely or create erroneous data as a result of the system failing to recognize the two digit internal date "00" as representing the year 2000. The Company has completed its initial assessment of Year 2000 compliance of its internal information technology systems, which consist primarily of financial and accounting systems and geological evaluation systems, and does not believe that these systems have any material issues with respect to Year 2000 compliance. The Company's internal information technology systems are all new and widely utilized. Its vendors have advised the Company that all of these systems are either Year 2000 compliant or can be easily upgraded to be Year 2000 compliant. The Company anticipates that its Year 2000 remediation efforts for information technology systems, consisting primarily of software upgrades, will continue through 1999, and anticipates incurring less than $10,000 in connection with these efforts. The Company has not identified any non-information technology systems that use embedded technology on which it relies and which it believes is likely to have a Year 2000 problem; however such assessment is expected to continue through 1999. Like every other business enterprise, the Company is at risk from Year 2000 failures on the part of its major business counterparts, including suppliers and service providers, as well as potential failures in public and private infrastructure services, including electricity, water, gas, transportation and communications. Through communications with industry partners and others, the Company is also evaluating the risk presented by potential Year 2000 non-compliance of third parties. Because such risks vary substantially, companies are being contacted based on the estimated magnitude of the risk posed to the Company by their potential Year 2000 non-compliance. The Company anticipates that these efforts will continue through 1999 and will not result in significant costs to the Company. The Company believes that its most likely worst-case scenario Year 2000 failure would be a shutdown of the pipeline systems into which it markets its natural gas production. Should this occur, the Company would be forced -17- 19 to curtail its production as there is no alternate way to market its production. Revenues would be negatively impacted for the period of the curtailment. While the pipeline operators do not anticipate such an event, there can be no assurance that it will not occur. The Company is not insured for any resulting lost revenues. The Company's assessment of its Year 2000 issues involves many assumptions. There can be no assurance that the Company's assumptions will prove accurate, and actual results could differ significantly from the assumptions. In conducting its Year 2000 compliance efforts, the Company has relied primarily on vendor representations with respect to its internal computerized systems and representations from third parties with which the Company has business relationships and has not independently verified these representations. There can be no assurance that these representations will prove to be accurate. A Year 2000 failure could result in a business disruption that adversely affects the Company's business, financial condition or results of operations. The Company is unlikely to be insured for Year 2000 losses should they occur. Although it is not currently aware of any likely business disruption, the Company is developing contingency plans, such as alternate methods of measuring its natural gas sales volumes, to address Year 2000 failures and expects this work to continue through 1999. -18- 20 PART II. OTHER INFORMATION Item 1 - Legal Proceedings From time to time the Company is a party to various legal proceedings arising in the ordinary course of business. The Company is not currently a party to any litigation that it believes could have a material adverse effect on the financial position of the Company. Item 2 - Changes in Securities and Use of Proceeds None Item 3 - Defaults Upon Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders None Item 5 - Other Information FORWARD LOOKING STATEMENTS The statements contained in all parts of this document, including, but not limited to, those relating to the Company's schedule, targets, estimates or results of future drilling, budgeted wells, increases in wells, budgeted and other future capital expenditures, use of offering proceeds, effects of litigation, expected production or reserves, increases in reserves, acreage working capital requirements, hedging activities, the ability of expected sources of liquidity to implement its business strategy, matters relating to the Palace Agreement, including cost of wells and any effect of that agreement, the effects of the Year 2000 issue and any other statements regarding future operations, financial results, business plans and cash needs and other statements that are not historical facts are forward looking statements. When used in this document, the words "anticipate," "estimate," "expect," "may," "project," "believe" and similar expression are intended to be among the statements that identify forward looking statements. Such statements involve risks and uncertainties, including, but not limited to, those relating to the Company's dependence on its exploratory drilling activities, the volatility of oil and natural gas prices, the need to replace reserves depleted by production, operating risks of oil and natural gas operations, the Company's dependence on its key personnel, factors that affect the Company's ability to manage its growth and achieve its business strategy, risks relating to, limited operating history, technological changes, significant capital requirements of the Company, the potential impact of government regulations, litigation, competition, the uncertainty of reserve information and future net revenue estimates, property acquisition risks and other factors detailed in the Company's Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. -19- 21 Item 6 - Exhibits and Reports on Form 8-K Exhibits Exhibit Number Description - ------- ----------- +2.1 -- Combination Agreement by and among the Company, Carrizo Production, Inc., Encinitas Partners Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A. Webster, S.P. Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of September 6, 1997 (Incorporated herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +3.1 -- Amended and Restated Articles of Incorporation of the Company (Incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. +3.2 -- Statement of Resolution Establishing Series of Shares Designated 9% Series A Preferred Stock (Incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). +3.3 -- Amended and Restated Bylaws of the Company, as amended by Amendment No. 1 (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form 8-A (Registration No. 000-22915). 4.1 -- Seventh Amendment to First Amended, Restated and Combined Loan Agreement by and between Carrizo Oil & Gas, Inc. and Compass Bank dated August 27, 1999. 27.1 -- Financial Data Schedule. + Incorporated herein by reference as indicated. Reports on Form 8-K None -20- 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Carrizo Oil & Gas, Inc. (Registrant) Date: November 8, 1999 By: /s/ S. P. Johnson, IV ----------------------------------------- President and Chief Executive Officer (Principal Executive Officer) Date: November 8, 1999 By: /s/ Frank A. Wojtek ----------------------------------------- Chief Financial Officer (Principal Financial and Accounting Officer) -21- 23 INDEX TO EXHIBITS
Exhibit Number Description - ------- ----------- +2.1 -- Combination Agreement by and among the Company, Carrizo Production, Inc., Encinitas Partners Ltd., La Rosa Partners Ltd., Carrizo Partners Ltd., Paul B. Loyd, Jr., Steven A. Webster, S.P. Johnson IV, Douglas A.P. Hamilton and Frank A. Wojtek dated as of September 6, 1997 (Incorporated herein by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-29187)). +3.1 -- Amended and Restated Articles of Incorporation of the Company (Incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. +3.2 -- Statement of Resolution Establishing Series of Shares Designated 9% Series A Preferred Stock (Incorporated herein by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997). +3.3 -- Amended and Restated Bylaws of the Company, as amended by Amendment No. 1 (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form 8-A (Registration No. 000-22915). 4.1 -- Seventh Amendment to First Amended, Restated and Combined Loan Agreement by and between Carrizo Oil & Gas, Inc. and Compass Bank dated August 27, 1999. 27.1 -- Financial Data Schedule.
+ Incorporated herein by reference as indicated. Reports on Form 8-K None EX-4.1 2 SEVENTH AMENDMENT TO COMBINED LOAN AGREEMENT 1 EXHIBIT 4.1 SEVENTH AMENDMENT TO FIRST AMENDED, RESTATED, AND COMBINED LOAN AGREEMENT BY AND BETWEEN CARRIZO OIL & GAS, INC. AND COMPASS BANK This Seventh Amendment to the Loan Agreement (this "Seventh Amendment") by and between CARRIZO OIL & GAS, INC., a Texas corporation (the "Borrower"), and COMPASS BANK, an Alabama state chartered bank, formerly a Texas chartered bank (the "Bank"), is entered into on this 27th day of August 1999, and shall be effective as of that date for all purposes. W I T N E S S E T H: Borrower and Bank entered into a First Amended, Restated, and Combined Loan Agreement dated August 28, 1997, as amended by the First Amendment thereto dated December 23, 1997, the Second Amendment thereto dated December 30, 1997, the Third Amendment thereto dated July 30, 1998, the Fourth Amendment thereto dated September 24, 1998, the Fifth Amendment thereto dated March 22, 1999 and the Sixth Amendment thereto dated April 23, 1999 (collectively, the "Loan Agreement"). Capitalized terms used, but not defined herein, shall have the meanings prescribed therefor in the Loan Agreement. Borrower has requested that the Loan Agreement be further amended and that the Bank waive Borrower's noncompliance with certain covenants in the Loan Agreement, and the Bank has agreed to such request, subject to the terms and conditions set forth in this Seventh Amendment. NOW, THEREFORE, in consideration of the mutual promises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by Borrower and Bank, and each intending to be legally bound hereby, the parties agree as follows: I. Specific Amendments to Loan Agreement. Article I, Definitions, is hereby amended by adding the following definitions thereto: "Metro Prospect" means those certain Oil and Gas Properties described in Schedule B attached to the Seventh Amendment. "Seventh Amendment" means the Seventh Amendment to this Agreement executed by Borrower and Bank on August 27, 1999. Section 2.09, Mandatory Prepayment of the Notes, is hereby amended by adding the following text at the end of such Section: 1 2 Notwithstanding the foregoing provisions of this Section, however, at the time that each Monthly Borrowing Base Reduction becomes applicable on the first day of each calendar month, Borrower shall contemporaneously prepay so much of the principal of the Note as is necessary to ensure that no Loan Excess results from the application of such Monthly Borrowing Base Reduction. Subsection 2.10(a), Borrowing Base Oil and Gas Properties, is hereby amended by replacing the first sentence of that section with the following text: The Borrowing Base attributable to the Borrowing Base Oil and Gas Properties is established at $3,750,000.00 effective as of August 2, 1999, and continuing until redetermined as set forth herein; provided, however, that the Borrowing Base value attributable to the Borrowing Base Oil and Gas Properties shall be reduced to $300,000.00 at the earlier of: (i) the consummation of the sale by Borrower of the Metro Prospect or (ii) October 1, 1999. The proceeds derived by Borrower from any such sale of the Metro Prospect may be included in the Borrowing Base as Borrowing Base Cash, provided that such proceeds are deposited into an account that has been specifically pledged to Bank pursuant to a Security Instrument that is acceptable to Bank, in its discretion. Subsection 2.10(c), Borrowing Base Securities, is hereby amended by adding the following sentence at the end of that subsection: Notwithstanding the foregoing, the Borrowing Base value attributable to Borrowing Base Securities that are shares of stock in R&B Falcon Corporation shall never exceed at any time $5,000,000.00 in the aggregate. Article III, Conditions, is hereby amended by adding the following Section 3.21. 3.21 Conditions Precedent in Connection with the Seventh Amendment. The Seventh Amendment shall not be binding on the Bank until satisfaction of the following conditions precedent: (a) Receipt of Seventh Amendment and Compliance Certificate. Bank shall have received multiple counterparts of the Seventh Amendment, as requested by Bank, and the Compliance Certificate duly executed by an authorized officer for Borrower. (b) Accuracy of Representations and Warranties and No Event of Default. The representations and warranties contained in Article IV of the Loan Agreement shall be true and correct in all material respects on the date of the Seventh Amendment with the same effect as though such representations and warranties had been made on such date; and no Event of Default shall have occurred and be continuing or will have occurred upon the execution of the Seventh Amendment. 2 3 (c) Legal Matters Satisfactory to Special Counsel to Bank. All legal matters incident to the consummation of the transactions contemplated by the Seventh Amendment shall be satisfactory to the firm of Porter & Hedges, L.L.P., special counsel for Bank. (d) No Material Adverse Change. No material adverse change shall have occurred since the date of this Agreement in the condition, financial or otherwise, of Borrower. Article V, Affirmative Covenants, is hereby amended by adding the following new Sections 5.29 through 5.36: 5.29 Proceeds from Hedging Transactions. Following the occurrence and during the continuation of an Event of Default or Unmatured Event of Default, if and so long as there is then Loan availability under that part of the Revolving Commitment that is supported by the Borrowing Base attributable to the Borrowing Base Oil and Gas properties (in excess of $300,000 of coverage for outstanding Letters of Credit), promptly deliver to Bank one hundred percent (100%) of all proceeds received by Borrower or, if not received, cause to be delivered to Bank all proceeds which Borrower is entitled to receive arising from the early termination of any Hedging Transaction, such proceeds to be applied against the outstanding balance owing on the Notes. 5.30 Hedging Transaction Reports. If and so long as there is then Loan availability under that part of the Revolving Commitment that is supported by the Borrowing Base attributable to the Borrowing Base Oil and Gas properties (in excess of $300,000 of coverage for outstanding Letters of Credit), for each Hedging Transaction to which Borrower is a party, if any, deliver to Bank, on or before the forty-fifth (45th) day after the end of each calendar month, a detailed report setting out Borrower's position as of the end of such calendar month, including, but not limited to, Borrower's settlement payments and receipts during such calendar month and settlement payables and receivables as of the end of such calendar month. 5.31 Aged Accounts Reports. Deliver to Bank, on or before the forty-fifth (45th) day after the end of each calendar month, a detailed aging accounts receivable report and a detailed aging accounts payable report effective as of the end of such calendar month, all such reports to be prepared in accordance with GAAP. 5.32 Production Volume Reports. If and so long as there is then Loan availability under that part of the Revolving Commitment that is supported by the Borrowing Base attributable to the Borrowing Base Oil and Gas Properties (in excess of $300,000 of coverage for outstanding Letters of Credit), deliver to Bank, on or before the forty-fifth (45th) day after the end of each calendar month, a monthly report of oil, gas and liquids production volumes by major field and the total production of all fields during such calendar month. 5.33 Payment of Contract Operators. Pay, within thirty (30) days after the receipt of any billings or sooner if so required by the terms of any applicable operating agreement, all fees, expenses and charges due from Borrower to contract operators (as such term is 3 4 generally understood in the oil and gas industry) for operations provided by contract operators relating to the Borrowing Base Oil and Gas Properties, except any such fees that are diligently being contested in good faith by appropriate proceedings. 5.34 Payment of Royalties. If and so long as there is then Loan availability under that part of the Revolving Commitment that is supported by the Borrowing Base attributable to the Borrowing Base Oil and Gas properties (in excess of $300,000 of coverage for outstanding Letters of Credit), pay, within sixty (60) days after the last day of each calendar month or sooner if so required by any applicable lease or statute, all royalties, overriding royalties, production payments or other payments payable by Borrower to the owners of such interests in the Borrowing Base Oil and Gas Properties with respect to oil and gas produced during such calendar month, unless Borrower has created and maintains a suspense account for separate accounting of any such payments that are payable but not yet due under the terms of the applicable lease and applicable laws. Any such payments made into such suspense account shall be accounted for in accordance with all applicable laws of the state in which the Borrowing Base Property to which such payment relates is located. 5.35 Payment of Royalties Reports. If and so long as there is then Loan availability under that part of the Revolving Commitment that is supported by the Borrowing Base attributable to the Borrowing Base Oil and Gas Properties (in excess of $300,000 of coverage for outstanding Letters of Credit), deliver to Bank, on or before the sixtieth (60th) day after the end of each calendar month, a monthly report of royalties, overriding royalties, production payments or other payments paid by Borrower to the owners of such interests (or into a suspense account as described in Section 5.34) in the Borrowing Base Oil and Gas Properties with respect to oil and gas produced during such calendar. 5.36 Proceeds from Asset Sales. Following the occurrence and during the continuation of an Event of Default or Unmatured Event of Default, promptly deliver to Bank one hundred percent (100%) of all proceeds received by Borrower or, if not received, cause to be delivered to Bank all proceeds which Borrower is entitled to receive arising from any sale of Borrower's assets, such proceeds to be applied against the outstanding balance owing on the Notes; provided that any such sale of assets must be made in compliance with Section 6.06 hereof. Section 6.01, Other Indebtedness, is hereby amended by deleting the word "and" immediately preceding clause (d) and adding the following clause (e) at the end of that Section: and (e) as of the effective date of the Seventh Amendment, the Indebtedness evidenced by those certain vendor notes as specifically described on Schedule A attached to the Seventh Amendment. II. Certain Waivers. Bank hereby waives non-compliance by Borrower with the covenants set forth Section 6.01 of the Loan Agreement, solely to the extent that Borrower was not in compliance with such covenants prior to the execution of the Seventh Amendment as the result of the existence of the Indebtedness evidenced by those certain vendor notes described on Schedule A attached to the Seventh Amendment. 4 5 III. Reaffirmation of Representations and Warranties. To induce Bank to enter into this Seventh Amendment, Borrower hereby reaffirms, as of the date hereof, its representations and warranties contained in Article IV of the Loan Agreement and in all other documents executed pursuant thereto, and additionally represents and warrants as follows: A. The execution and delivery of this Seventh Amendment and the performance by Borrower of its obligations under this Seventh Amendment are within Borrower's power, have been duly authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law or of the articles of incorporation, charter or bylaws of Borrower or of any agreement binding upon Borrower. B. The Loan Agreement as amended by this Seventh Amendment, represents the legal, valid and binding obligations of Borrower, enforceable against Borrower in accordance with its terms, subject as to enforcement only to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally. C. No Event of Default or Unmatured Event of Default has occurred and is continuing as of the date hereof. IV. Defined Terms. Except as amended hereby, terms used herein that are defined in the Loan Agreement shall have the same meanings in this Seventh Amendment. V. Reaffirmation of Loan Agreement. This Seventh Amendment shall be deemed to be an amendment to the Loan Agreement, and the Loan Agreement, as further amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Loan Agreement herein and in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Loan Agreement as amended hereby. VI. Entire Agreement. The Loan Agreement, as hereby further amended, embodies the entire agreement between Borrower and Bank and supersedes all prior proposals, agreements and understandings relating to the subject matter hereof. Borrower certifies that it is relying on no representation, warranty, covenant or agreement except for those set forth in the Loan Agreement as hereby further amended and the other documents previously executed or executed of even date herewith. VII. Governing Law. THIS SEVENTH AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. This Seventh Amendment has been entered into in Harris County, Texas, and it shall be performable for all purposes in Harris County, Texas. Courts within the State of Texas shall have jurisdiction over any and all disputes between Borrower and Bank, whether in law or equity, including, but not limited to, any and all disputes arising out of or relating to this Seventh Amendment or any other Loan Document; and venue in any such dispute whether in federal or state court shall be laid in Harris County, Texas. 5 6 VIII. Severability. Whenever possible each provision of this Seventh Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Seventh Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Seventh Amendment. IX. Execution in Counterparts. Each party hereto acknowledges that this Agreement may be executed in several counterparts by each party at different times and in different locations; that each separate counterpart bearing the signature of any party may be effectively delivered to the other parties by the delivery of an electronic facsimile sent via telecopier; that each party so delivering any such counterpart shall be bound by its facsimile signature thereon; and that the signature pages from counterparts signed by each party may be collated into one or more copies of this agreement, which shall constitute one and the same agreement among all parties hereto. X. Section Captions. Section captions used in this Seventh Amendment are for convenience of reference only, and shall not affect the construction of this Seventh Amendment. XI. Successors and Assigns. This Seventh Amendment shall be binding upon Borrower and Bank and their respective successors and assigns, and shall inure to the benefit of Borrower and Bank, and the respective successors and assigns of Bank. XII. Non-Application of Chapter 346 of Texas Finance Codes. In no event shall Chapter 346 of the Texas Finance Code (which regulates certain revolving loan accounts and revolving tri-party accounts) apply to this Loan Agreement as hereby further amended or any other Loan Documents or the transactions contemplated hereby. XIII. Notice. THIS SEVENTH AMENDMENT TOGETHER WITH THE LOAN AGREEMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 6 7 IN WITNESS WHEREOF, the parties hereto have caused this Seventh Amendment to be duly executed as of the day and year first above written. BANK BORROWER COMPASS BANK CARRIZO OIL & GAS, INC. By: By: -------------------------------- -------------------------------- Kathleen J. Bowen Frank A. Wojtek Vice President Vice President 7 8 SCHEDULE "A" Vendor Notes See attached pages. 8 9 SCHEDULE "B" Metro Prospect Description PROPERTY DESCRIPTION I. WELLS-DEWITT COUNTY, TEXAS
============================================================================================================== WELL NAME PROPERTY INTEREST WORKING NET REVENUE DESCRIPTION HOLDER INTEREST INTEREST PERCENTAGE PERCENTAGE - -------------------------------------------------------------------------------------------------------------- Musselman Rambler Field Carrizo Oil and Gas, Inc. 25.0000 18.2500 Wells (Metro) ==============================================================================================================
II. LEASES-DEWITT COUNTY, TEXAS Oil, Gas and Mineral Lease dated January 21, 1997, between Musselman Ranches, Inc., Jamie B. Musselman, President, Josephine B. Musselman, Paul A. Musselman and wife Dorothy Musselman, and Eleanor G. Musselman, as Lessors, and Allegro Investments, Inc., as lessee, and Memorandum of Lease effective January 21, 1997, between the same parties, recorded in Volume 18, Page 555, Official Records, DeWitt County, Texas. 9 10 COMPLIANCE CERTIFICATE I, Frank A. Wojtek, Vice President of CARRIZO OIL & GAS, INC. (the "Company"), pursuant to Section 3.20 of the First Amended, Restated, and Combined Loan Agreement dated as of August 28, 1997, as amended, by and among COMPASS BANK ("Bank") and the Company (the "Agreement") do hereby certify, as of the date hereof, that to my knowledge: 1. No Event of Default (as defined in the Agreement) has occurred and is continuing, and no Unmatured Event of Default (as defined in the Agreement) has occurred and is continuing; 2. No material adverse change has occurred in the business prospects, financial condition, or the results of operations of the Company since the date of the previous Financial Statements (as defined in the Agreement) provided to Bank; 3. Each of the representations and warranties of the Company contained in Article IV of the Agreement is true and correct in all respects. This certificate is executed this 27th day of August 1999. --------------------------------- Frank A. Wojtek 1 EX-27 3 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 660,174 0 4,001,710 480,000 0 6,231,215 92,502,616 30,431,179 68,579,833 18,906,931 0 33,098,326 0 103,750 8,439,536 68,579,833 6,305,540 6,305,540 2,115,027 6,697,946 0 0 14,138 (386,764) 21,006 (407,770) 0 0 77,731 (485,501) (.28) (.28)
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